Table of Contents I. Introduction A. Authority B. Background 1. Current Standards 2. History of Standards Rulemaking for Air Cleaners II. Proposed Standards A. Benefits and Burdens of TSLs Considered for Air Cleaners Standards B. Annualized Benefits and Costs of the Adopted Standards III. Public Participation A. Submission of Comments B. Public Meeting IV. Procedural Issues and Regulatory Review A. Review Under the Regulatory Flexibility Act 1. Description of Reasons Why Action Is Being Considered 2. Objectives of, and Legal Basis for, Rule 3. Description on Estimated Number of Small Entities Regulated 4. Description and Estimate of Compliance Requirements Including Differences in Cost, if Any, for Different Groups of Small Entities 5. Duplication, Overlap, and Conflict with Other Rules and Regulations 6. Significant Alternatives to the Rule V. Approval of the Office of the Secretary I. Introduction

The following section briefly discusses the statutory authority underlying this proposed rule, as well as some of the relevant historical background related to the establishment of standards for air cleaners.

The Energy Policy and Conservation Act, as amended (“EPCA”), 1 grants the U.S. Department of Energy (“DOE”) authority to prescribe an energy conservation standard for any type (or class) of covered products of a type specified in 42 U.S.C. 6292(a)(20) if the requirements of 42 U.S.C. 6295(o) and 42 U.S.C. 6295(p) are met and the Secretary determines that—

(A) The average per household energy use within the United States by products of such type (or class) exceeded 150 kWh (or its Btu equivalent) for any 12-month period ending before such determination;

(B) The aggregate household energy use within the United States by products of such type (or class) exceeded 4,200,000,000 kWh (or its Btu equivalent) for any such 12-month period;

(C) Substantial improvement in the energy efficiency of products of such type (or class) is technologically feasible; and

(D) The application of a labeling rule under 42 U.S.C. 6294 to such type (or class) is not likely to be sufficient to induce manufacturers to produce, and consumers and other persons to purchase, covered products of such type (or class) which achieve the maximum energy efficiency which is technologically feasible and economically justified. (42 U.S.C. 6295( l )(1))

DOE has determined that air cleaners meet the four criteria outlined in 42 U.S.C. 6295(l)(1) for prescribing energy conservation standards for newly covered products. First, in a final determination published on July 15, 2022 (“July 2022 Final Determination”), DOE noted that the U.S. Environmental Protection Agency's (“EPA's”) ENERGY STAR database  2 includes a range of portable configurations of air cleaners with an average annual energy consumption of 299 kWh, which exceeded the 150 kWh threshold. 87 FR 42297, 42305. DOE further noted that the average energy consumption of non-ENERGY STAR qualified models is likely higher. Id. EPCA specifies that the term “energy use” means the quantity of energy directly consumed by a consumer product at point of use determined in accordance with test procedures under 42 U.S.C. 6293 (42 U.S.C. 6291(4)) Although the values of annual energy consumption discussed in the July 2022 Final Determination were obtained prior to the establishment of the DOE air cleaners test procedure, they were measured using substantively the same methodology as in the newly established test procedure. Therefore, DOE has determined that for a 12-month period ending before its determination for this notice of proposed rulemaking (“NOPR”), the average per household energy use within the United States by air cleaners exceeded 150 kWh.

DOE has also determined that 21.8 million households in the United States use at least one air cleaner (see chapter 10 of the direct final rule technical support document (“TSD”) available in the docket for this rulemaking). Based on an average annual energy consumption per unit of at least 299 kWh, as measured by the DOE test procedure for air cleaners, the aggregate household energy use within the United States by air cleaners was at least 6,518,000,000 kWh, which exceeded 4,200,000,000 kWh (or its Btu equivalent) for the 12-month period ending before the determination in this NOPR. Further, DOE has determined that substantial energy improvement in the energy efficiency of air cleaners is technologically feasible (see chapter 5 of the direct final rule TSD available in the docket for this rulemaking.), and has determined that the application of a labeling rule under 42 U.S.C. 6294 to air cleaners is not likely to be sufficient to induce manufacturers to produce, and consumers and other persons to purchase, air cleaners that achieve the maximum energy efficiency which is technologically feasible and economically justified (see chapter 17 of the direct final rule TSD available in the docket for this rulemaking.). 3

The energy conservation program under EPCA consists essentially of four parts: (1) testing, (2) labeling, (3) the establishment of Federal energy conservation standards, and (4) certification and enforcement procedures. Relevant provisions of EPCA specifically include definitions (42 U.S.C. 6291), test procedures (42 U.S.C. 6293), labeling provisions (42 U.S.C. 6294), energy conservation standards (42 U.S.C. 6295), and the authority to require information and reports from manufacturers (42 U.S.C. 6296).

Federal energy efficiency requirements for covered products established under EPCA generally supersede State laws and regulations concerning energy conservation testing, labeling, and standards. (42 U.S.C. 6297(a)-(c)) DOE may, however, grant waivers of Federal preemption for particular State laws or regulations, in accordance with the procedures and other provisions set forth under EPCA. ( See 42 U.S.C. 6297(d))

Subject to certain criteria and conditions, DOE is required to develop test procedures to measure the energy efficiency, energy use, or estimated annual operating cost of each covered product. (42 U.S.C. 6295(o)(3)(A) and 42 U.S.C. 6295(r)) Manufacturers of covered products must use the prescribed DOE test procedure as the basis for certifying to DOE that their products comply with the applicable energy conservation standards adopted under EPCA and when making representations to the public regarding the energy use or efficiency of those products. (42 U.S.C. 6293(c) and 42 U.S.C. 6295(s)) Similarly, DOE must use these test procedures to determine whether the products comply with standards adopted pursuant to EPCA. (42 U.S.C. 6295(s)) The DOE test procedures for air cleaners appear at title 10 of the Code of Federal Regulations (“CFR”) part 430, subpart B, appendix FF (“appendix FF”).

DOE must follow specific statutory criteria for prescribing new or amended standards for covered products, including air cleaners. Any new or amended standard for a covered product must be designed to achieve the maximum improvement in energy efficiency that the Secretary of Energy determines is technologically feasible and economically justified. (42 U.S.C. 6295(o)(2)(A) and 42 U.S.C. 6295(o)(3)(B)) Furthermore, DOE may not adopt any standard that would not result in the significant conservation of energy. (42 U.S.C. 6295(o)(3)) Moreover, DOE may not prescribe a standard: (1) for certain products, including air cleaners, if no test procedure has been established for the product, or (2) if DOE determines by rule that the standard is not technologically feasible or economically justified. (42 U.S.C. 6295(o)(3)(A)-(B)) In deciding whether a proposed standard is economically justified, DOE must determine whether the benefits of the standard exceed its burdens. (42 U.S.C. 6295(o)(2)(B)(i)) DOE must make this determination after receiving comments on the proposed standard, and by considering, to the greatest extent practicable, the following seven statutory factors:

(42 U.S.C. 6295(o)(2)(B)(i)(I)-(VII))

Further, EPCA establishes a rebuttable presumption that a standard is economically justified if the Secretary finds that the additional cost to the consumer of purchasing a product complying with an energy conservation standard level will be less than three times the value of the energy savings during the first year that the consumer will receive as a result of the standard, as calculated under the applicable test procedure. (42 U.S.C. 6295(o)(2)(B)(iii))

EPCA also contains what is known as an “anti-backsliding” provision, which prevents the Secretary from prescribing any amended standard that either increases the maximum allowable energy use or decreases the minimum required energy efficiency of a covered product. (42 U.S.C. 6295(o)(1)) Also, the Secretary may not prescribe an amended or new standard if interested persons have established by a preponderance of the evidence that the standard is likely to result in the unavailability in the United States in any covered product type (or class) of performance characteristics (including reliability), features, sizes, capacities, and volumes that are substantially the same as those generally available in the United States. (42 U.S.C. 6295(o)(4))

Additionally, EPCA specifies requirements when promulgating an energy conservation standard for a covered product that has two or more subcategories. DOE must specify a different standard level for a type or class of product that has the same function or intended use, if DOE determines that products within such group: (A) consume a different kind of energy from that consumed by other covered products within such type (or class); or (B) have a capacity or other performance-related feature which other products within such type (or class) do not have and such feature justifies a higher or lower standard. (42 U.S.C. 6295(q)(1)) In determining whether a performance-related feature justifies a different standard for a group of products, DOE must consider such factors as the utility to the consumer of the feature and other factors DOE deems appropriate. Id. Any rule prescribing such a standard must include an explanation of the basis on which such higher or lower level was established. (42 U.S.C. 6295(q)(2))

Additionally, pursuant to the amendments contained in the Energy Independence and Security Act of 2007 (“EISA 2007”), Public Law 110-140, any final rule for new or amended energy conservation standards promulgated after July 1, 2010, is required to address standby mode and off mode energy use. (42 U.S.C. 6295(gg)(3)) Specifically, when DOE adopts a standard for a covered product after that date, it must, if justified by the criteria for adoption of standards under EPCA (42 U.S.C. 6295(o)), incorporate standby mode and off mode energy use into a single standard, or, if that is not feasible, adopt a separate standard for such energy use for that product. (42 U.S.C. 6295(gg)(3)(A)-(B)) DOE's current test procedures for air cleaners address standby mode and off mode energy use, through the integrated energy factor (“IEF”) metric. IEF includes annual energy consumption in standby mode as part of the annual energy consumption parameter and DOE is proposing standards for air cleaners based on IEF; therefore, the standards in this NOPR account for standby mode of an air cleaner.

Finally, EISA 2007 amended EPCA, in relevant part, to grant DOE authority to issue a final rule (hereinafter referred to as a “direct final rule”) establishing an energy conservation standard on receipt of a statement submitted jointly by interested persons that are fairly representative of relevant points of view (including representatives of manufacturers of covered products, States, and efficiency advocates), as determined by the Secretary, that contains recommendations with respect to an energy or water conservation standard that are in accordance with the provisions of 42 U.S.C. 6295(o). (42 U.S.C. 6295(p)(4))

A NOPR that proposes an identical energy efficiency standard must be published simultaneously with the direct final rule, and DOE must provide a public comment period of at least 110 days on this proposal. (42 U.S.C. 6295(p)(4)(A)-(B)) Based on the comments received during this period, the direct final rule will either become effective, or DOE will withdraw it not later than 120 days after its issuance if (1) one or more adverse comments is received, and (2) DOE determines that those comments, when viewed in light of the rulemaking record related to the direct final rule, may provide a reasonable basis for withdrawal of the direct final rule under 42 U.S.C. 6295(o). (42 U.S.C. 6295(p)(4)(C)) Receipt of an alternative joint recommendation may also trigger a DOE withdrawal of the direct final rule in the same manner. Id. After withdrawing a direct final rule, DOE must proceed with the notice of proposed rulemaking published simultaneously with the direct final rule and publish in the Federal Register the reasons why the direct final rule was withdrawn. Id.

Air cleaners are not currently subject to energy conservation standards.

DOE has not previously conducted an energy conservation standards rulemaking for air cleaners. On January 25, 2022, DOE published a request for information (“January 2022 RFI”), seeking comments on potential test procedure and energy conservation standards for air cleaners. 87 FR 3702. In the January 2022 RFI, DOE requested information to aid in the development of the technical and economic analyses to support energy conservation standards for air cleaners, should they be warranted. 87 FR 3702, 3705.

DOE determined in the July 2022 Final Determination that coverage of air cleaners is necessary or appropriate to carry out the purposes of EPCA; the average U.S. household energy use for air cleaners is likely to exceed 100 kWh/yr; and thus, air cleaners qualify as a “covered product” under EPCA. 87 FR 42297.

On August 23, 2022, groups representing manufacturers, energy and environmental advocates, and consumer groups, hereinafter referred to as “the Joint Stakeholders,”  4 submitted a “Joint Statement of Joint Stakeholder Proposal On Recommended Energy Conservation Standards And Test Procedure For Consumer Room Air Cleaners” (“Joint Proposal”), 5 which urged DOE to publish final rules adopting the consumer room air cleaner test procedure and standards and compliance dates contained in the Joint Proposal, as soon as possible, but not later than December 31, 2022. (Joint Stakeholders, No. 16 at p. 1) The Joint Proposal also recommended that DOE adopt the Association of Home Appliance Manufacturers' (“AHAM's”) industry standard, AHAM AC-7-2022, “Energy Test Method for Consumer Room Air Cleaners,” as the DOE test procedure. ( Id. at p. 6) In regards to energy conservation standards, the Joint Proposal specified two-tiered Tier 1 and Tier 2 standard levels, as shown in Table I.1, for conventional room air cleaners with proposed compliance dates of December 31, 2023, and December 31, 2025, respectively. ( Id. at p. 9)

The Tier 1 standards are equivalent to the state standards established by the States of Maryland, Nevada, and New Jersey, and the District of Columbia. ( Id. at p. 9) Tier 2 standards are equivalent to the voluntary standards specified in EPA's ENERGY STAR Version 2.0 Room Air Cleaners Specification, Rev. May 2022, (“ENERGY STAR V. 2.0”) and those adopted by the State of Washington. ( Id. ) While the standards established by the States and those specified in ENERGY STAR V. 2.0 are based on smoke clean air delivery rate (“CADR”) and include only active mode energy consumption in the calculation of the CADR per watt (“CADR/W”) metric, the Joint Stakeholders presented data to show that there is a strong relationship between the PM 2.5 CADR calculation, which is the metric specified in appendix FF, and the measured smoke and dust CADR values. ( Id. at p. 6) Additionally, DOE compared the IEF metric, calculated using PM 2.5 CADR and annual energy consumption in active mode and standby mode, to the smoke CADR/W metric, calculated using smoke CADR and active mode power consumption, using the ENERGY STAR database, and found a strong relationship between IEF and the CADR/W metric specified in ENERGY STAR V. 2.0 and the State standards. The Joint Stakeholders stated that the Tier 1 and Tier 2 standards are estimated to save 1.9 quads of FFC energy nationally over 30 years of sales. ( Id. at p. 9)

After carefully considering the consensus recommendations for establishing energy conservation standards for air cleaners submitted by the Joint Stakeholders, DOE has determined that these recommendations are in accordance with the statutory requirements of 42 U.S.C. 6295(p)(4) for the issuance of a direct final rule.

More specifically, these recommendations comprise a statement submitted by interested persons who are fairly representative of relevant points of view on this matter. In appendix A to subpart C of 10 CFR part 430 (“appendix A”), DOE explained that to be “fairly representative of relevant points of view,” the group submitting a joint statement must, where appropriate, include larger concerns and small business in the regulated industry/manufacturer community, energy advocates, energy utilities, consumers, and States. However, it will be necessary to evaluate the meaning of “fairly representative” on a case-by-case basis, subject to the circumstances of a particular rulemaking, to determine whether fewer or additional parties must be part of a joint statement in order to be “fairly representative of relevant points of view.” Section 10 of appendix A. In reaching this determination, DOE took into consideration the fact that the Joint Stakeholders consist of representatives of manufacturers of the covered product at issue, a state corporation, and efficiency advocates—all of which are groups specifically identified by Congress as relevant parties to any consensus recommendation. (42 U.S.C. 6295(p)(4)(A)) As delineated previously, the Joint Proposal was signed and submitted by a broad cross-section of interests, including the trade association representing small and large manufacturers who produce the subject products, consumer groups, climate and health advocates, and energy-efficiency advocacy organizations, each of which signed the Joint Proposal on behalf of their respective manufacturers and efficiency advocacy organizations, which includes consumer groups, utilities, and a state corporation. Moreover, DOE does not read the statute as requiring a statement submitted by all interested parties before the Department may proceed with issuance of a direct final rule, nor does appendix A require the statement be submitted by all interested parties listed in the appendix. By explicit language of the statute, the Secretary has the discretion to determine when a joint recommendation for an energy or water conservation standard has met the requirement for representativeness ( i.e., “as determined by the Secretary”). Id.

DOE also evaluated whether the recommendation satisfies 42 U.S.C. 6295(o), as applicable. In making this determination, DOE conducted an analysis to evaluate whether the potential energy conservation standards under consideration achieve the maximum improvement in energy efficiency that is technologically feasible and economically justified and result in significant energy conservation. The evaluation is the same comprehensive approach that DOE typically conducts whenever it considers potential energy conservation standards for a given type of product or equipment.

Upon review, the Secretary determined that the Joint Proposal comports with the standard-setting criteria set forth under 42 U.S.C. 6295(p)(4)(A). Accordingly, the consensus-recommended efficiency levels were included as the “recommended TSL” for air cleaners.

In sum, as the relevant criteria under 42 U.S.C. 6295(p)(4) have been satisfied, the Secretary has determined that it is appropriate to adopt the consensus-recommended new energy conservation standards for air cleaners through the issuance of a direct final rule. As a result, DOE has published a direct final rule establishing energy conservation standards for air cleaners elsewhere in this Federal Register .

If DOE receives adverse comments that may provide a reasonable basis for withdrawal and withdraws the direct final rule, DOE will consider those comments and any other comments received in determining how to proceed with this proposed rule.

For further background information on these proposed standards and the supporting analyses, please see the direct final rule published elsewhere in this Federal Register . That document includes additional discussion on the EPCA requirements for promulgation of the energy conservation standards, the history of the standards rulemakings establishing such standards, as well as information on the test procedures used to measure the energy efficiency of air cleaners. The document also contains in-depth discussion of the analyses conducted in support of this proposed rulemaking, the methodologies DOE used in conducting those analyses, and the analytical results.

When considering new or amended energy conservation standards, the standards that DOE adopts for any type (or class) of covered product must be designed to achieve the maximum improvement in energy efficiency that the Secretary determines is technologically feasible and economically justified. (42 U.S.C. 6295(o)(2)(A)) In determining whether a standard is economically justified, the Secretary must determine whether the benefits of the standard exceed its burdens by, to the greatest extent practicable, considering the seven statutory factors discussed previously. (42 U.S.C. 6295(o)(2)(B)(i)) The new or amended standard must also result in significant conservation of energy. (42 U.S.C. 6295(o)(3)(B))

DOE considered the impacts of standards for air cleaners at each trial standard level (“TSL”), beginning with the maximum technologically feasible (“max-tech”) level, to determine whether that level was economically justified. Where the max-tech level was not justified, DOE then considered the next most efficient level and undertook the same evaluation until it reached the highest efficiency level that is both technologically feasible and economically justified and saves a significant amount of energy. DOE refers to this process as the “walk-down” analysis.

To aid the reader as DOE discusses the benefits and/or burdens of each TSL, tables in this section present a summary of the results of DOE's quantitative analysis for each TSL. In addition to the quantitative results presented in the tables, DOE also considers other burdens and benefits that affect economic justification. These include the impacts on identifiable subgroups of consumers who may be disproportionately affected by a national standard and impacts on employment.

DOE also notes that the economics literature provides a wide-ranging discussion of how consumers trade off upfront costs and energy savings in the absence of government intervention. Much of this literature attempts to explain why consumers appear to undervalue energy efficiency improvements. There is evidence that consumers undervalue future energy savings as a result of (1) a lack of information; (2) a lack of sufficient salience of the long-term or aggregate benefits; (3) a lack of sufficient savings to warrant delaying or altering purchases; (4) excessive focus on the short term, in the form of inconsistent weighting of future energy cost savings relative to available returns on other investments; (5) computational or other difficulties associated with the evaluation of relevant tradeoffs; and (6) a divergence in incentives (for example, between renters and owners, or builders and purchasers). Having less than perfect foresight and a high degree of uncertainty about the future, consumers may trade off these types of investments at a higher than expected rate between current consumption and uncertain future energy cost savings.

In DOE's current regulatory analysis, potential changes in the benefits and costs of a regulation due to changes in consumer purchase decisions are included in two ways. First, if consumers forgo the purchase of a product in the standards case, this decreases sales for product manufacturers, and the impact on manufacturers attributed to lost revenue is included in the MIA. Second, DOE accounts for energy savings attributable only to products actually used by consumers in the standards case; if a standard decreases the number of products purchased by consumers, this decreases the potential energy savings from an energy conservation standard. DOE provides estimates of shipments and changes in the volume of product purchases in chapter 9 of the direct final rule TSD available in the docket for this proposed rulemaking. However, DOE's current analysis does not explicitly control for heterogeneity in consumer preferences, preferences across subcategories of products or specific features, or consumer price sensitivity variation according to household income. 6

While DOE is not prepared at present to provide a fuller quantifiable framework for estimating the benefits and costs of changes in consumer purchase decisions due to an energy conservation standard, DOE is committed to developing a framework that can support empirical quantitative tools for improved assessment of the consumer welfare impacts of appliance standards. DOE has posted a paper that discusses the issue of consumer welfare impacts of appliance energy conservation standards, and potential enhancements to the methodology by which these impacts are defined and estimated in the regulatory process. 7

DOE welcomes comments on how to more fully assess the potential impact of energy conservation standards on consumer choice and how to quantify this impact in its regulatory analysis in future rulemakings.

Table II.1 and Table II.2 summarize the quantitative impacts estimated for each TSL for air cleaners. The national impacts are measured over the lifetime of air cleaners purchased in the analysis period that begins in the anticipated year of compliance with standards (2024-2057 for TSL3 and 2028-2057 for the other TSLs). The energy savings, emissions reductions, and value of emissions reductions refer to full-fuel-cycle (“FFC”) results. The efficiency levels contained in each TSL are described in section V.A of the direct final rule published elsewhere in this Federal Register .

DOE first considered TSL 5, which represents the max-tech efficiency levels for all the three product classes. Specifically, for all three product classes, DOE's expected design path for TSL 5 (which represents EL 4 for all product classes) incorporates cylindrical shaped filters and brushless direct current (“BLDC”) motors with an optimized motor-filter relationship. In particular, the cylindrical filter, which reduces the pressure drop across the filter because it allows for a larger surface area for the same volume of filter material, optimized with the size of the BLDC motor provides the improvement in efficiency at TSL 5 compared to TSL 4. TSL 5 would save an estimated 4.59 quads of energy, an amount DOE considers significant. Under TSL 5, the net present value (“NPV”) of consumer benefit would be −$1.9 billion using a discount rate of 7 percent, and −$4.5 billion using a discount rate of 3 percent.

The cumulative emissions reductions at TSL 5 are 145.7 million metric tons (“Mt”) of carbon dioxide (“CO 2 ”), 60.4 thousand tons of sulfur dioxide (“SO 2 ”), 231.0 thousand tons of nitrogen oxides(“NO X ”), 0.4 tons of mercury (“Hg”), 1,046.1 thousand tons of methane (“CH 4 ”), and 1.4 thousand tons of nitrous oxide(“N 2 O”). The estimated monetary value of the climate benefits from reduced greenhouse gas (“GHG”) emissions (associated with the average social cost of GHG (“SC-GHG”) at a 3-percent discount rate) at TSL 5 is $6.9 billion. The estimated monetary value of the health benefits from reduced SO 2 and NO X emissions at TSL 5 is $4.2 billion using a 7-percent discount rate and $11.6 billion using a 3-percent discount rate.

Using a 7-percent discount rate for consumer benefits and costs, health benefits from reduced SO 2 and NO X emissions, and the 3-percent discount rate case for climate benefits from reduced GHG emissions, the estimated total NPV at TSL 5 is $9.2 billion. Using a 3-percent discount rate for all benefits and costs, the estimated total NPV at TSL 5 is $14.0 billion. The estimated total NPV is provided for additional information, however, DOE primarily relies upon the NPV of consumer benefits when determining whether a standard level is economically justified.

At TSL 5, the average life-cycle cost (“LCC”) impact is a loss of $87 for Product Class 1 (10 ≤ PM 2.5 CADR < 100), an average LCC savings of $11 for Product Class 2 (100 ≤ PM 2.5 CADR < 150), and an average LCC savings of $20 for Product Class 3 (PM 2.5 CADR ≥ 150). The simple payback period cannot be calculated for Product Class 1 due to the max-tech EL not being cost effective compared to the baseline EL, and is 1.6 years for Product Class 2 and 0.3 years for Product Class 3. The fraction of consumers experiencing a net LCC cost is 94 percent for Product Class 1, 54 percent for Product Class 2 and 56 percent for Product Class 3.

For the low-income consumer group, the average LCC impact is a loss of $97 for Product Class 1, an average LCC loss of $9 for Product Class 2, and an average LCC loss of $7 for Product Class 3. The simple payback period cannot be calculated for Product Class 1 due to a higher annual operating cost for the selected EL than the cost for baseline units, and is 2.7 years and 0.5 years for Product Class 2 and Product Class 3, respectively. The fraction of low-income consumers experiencing a net LCC cost is 95 percent for Product Class 1, 64 percent for Product Class 2 and 67 percent for Product Class 3.

At TSL 5, the projected change in industry net present value (“INPV”) ranges from a decrease of $171.5 million to an increase of $8.1 million, which corresponds to a decrease of 11.0 percent and an increase of 0.5 percent, respectively. DOE estimates that industry may need to invest $145.2 million to comply with standards set at TSL 5.

At TSL 5, compliant models are typically designed to house a cylindrical filter, and the cabinets of these units are also typically cylindrical in shape. The move to cylindrical designs would require investment in new designs and new production tooling for most of the industry, as only 3 percent of units shipped meet TSL 5 today. Manufacturers would need to invest in both updated designs and updated cabinet tooling. The vast majority of product is made from injection molded plastic and DOE expects the need for new injection molding dies to drive conversion cost for the industry.

The Secretary concludes that at TSL 5 for air cleaners, the benefits of energy savings, emission reductions, and the estimated monetary value of the emissions reductions would be outweighed by the economic burden on many consumers (negative LCC savings of Product Class 1, a majority of consumers with net costs for all three product classes, and negative NPV of consumer benefits), and the capital conversion costs and profit margin impacts that could result in reductions in INPV for manufacturers.

DOE next considered TSL 4, which represents the second highest efficiency levels. TSL 4 comprises EL 3 for all three product classes. Specifically, DOE's expected design path for TSL 4 incorporates many of the same technologies and design strategies as described for TSL 5. At TSL 4, all three product classes would incorporate cylindrical shaped filters and BLDC motors without an optimized motor-filter relationship. The cylindrical filter, which reduces the pressure drop across the filter because it allows for a larger surface area for the same volume of filter material, provides the improvement in efficiency at TSL 4 compared to TSL 3 which utilizes rectangular shaped filters and less efficient motor designs. TSL 4 would save an estimated 4.05 quads of energy, an amount DOE considers significant. Under TSL 4, the NPV of consumer benefit would be −$3.4 billion using a discount rate of 7 percent, and −$8.4 billion using a discount rate of 3 percent.

The cumulative emissions reductions at TSL 4 are 128.5 Mt of CO 2 , 53.2 thousand tons of SO 2 , 203.7 thousand tons of NO X , 0.3 tons of Hg, 922.8 thousand tons of CH 4 , and 1.2 thousand tons of N 2 O. The estimated monetary value of the climate benefits from reduced GHG emissions (associated with the average SC-GHG at a 3-percent discount rate) at TSL 4 is $6.1 billion. The estimated monetary value of the health benefits from reduced SO 2 and NO X emissions at TSL 4 is $3.7 billion using a 7-percent discount rate and $10.2 billion using a 3-percent discount rate.

Using a 7-percent discount rate for consumer benefits and costs, health benefits from reduced SO 2 and NO X emissions, and the 3-percent discount rate case for climate benefits from reduced GHG emissions, the estimated total NPV at TSL 4 is $6.4 billion. Using a 3-percent discount rate for all benefits and costs, the estimated total NPV at TSL 4 is $7.9 billion. The estimated total NPV is provided for additional information, however DOE primarily relies upon the NPV of consumer benefits when determining whether a standard level is economically justified.

At TSL 4, the average LCC impact is a loss of $87 for Product Class 1, an average LCC loss of $60 for Product Class 2 and an average savings of $29 for Product Class 3. The simple payback period cannot be calculated for Product Class 1 and Product Class 2 due to the higher annual operating cost compared to the baseline units, and is 0.3 years for Product Class 3. The fraction of consumers experiencing a net LCC cost is 88 percent for Product Class 1, 75 percent for Product Class 2 and 50 percent for Product Class 3.

For the low-income consumer group, the average LCC impact is an average loss of $95 for Product Class 1, an average LCC loss of $78 for Product Class 2 and an average savings of $2 for Product Class 3. The simple payback period cannot be calculated for Product Class 1 and Product Class 2 due to a higher annual operating cost for the selected EL than the cost for baseline units, and is 0.4 years for Product Class 3. The fraction of low-income consumers experiencing a net LCC cost is 89 percent for Product Class 1, 82 percent for Product Class 2 and 61 percent for Product Class 3.

At TSL 4, the projected change in INPV ranges from a decrease of $143.7 million to a decrease of $30.2 million, which correspond to decreases of 9.2 percent and 1.9 percent, respectively. Industry conversion costs could reach $136.6 million at this TSL.

At TSL 4, compliant models are typically designed to house a cylindrical filter, and the cabinets of these units are also typically cylindrical in shape—much like TSL 5. Again, the major driver of impacts to manufacturers is the move to cylindrical designs, requiring redesign of products and investment in new production tooling for most of the industry, as only 7 percent of sales meet TSL 4 today.

Based upon the above considerations, the Secretary concludes that at TSL 4 for air cleaners, the benefits of energy savings, emission reductions, and the estimated monetary value of the health benefits and climate benefits from emissions reductions would be outweighed by negative LCC savings for Product Class 1 and Product Class 2, the high percentage of consumers with net costs for all product classes, negative NPV of consumer benefits, and the capital conversion costs and profit margin impacts that could result in reductions in INPV for manufacturers. Consequently, the Secretary has tentatively concluded that TSL 4 is not economically justified.

DOE then considered the recommended TSL (TSL3), which represents the Joint Proposal with EL 1 (Tier 1) going into effect in 2024 (compliance date December 31, 2023) and EL 2 (Tier 2) going into effect in 2026 (compliance date December 31, 2025). EL 1 comprises the lowest EL considered which aligns with the standards established by the States of Maryland, Nevada, and New Jersey, and the District of Columbia. EL 2 comprises the current ENERGY STAR V. 2.0 level and the standard adopted by the State of Washington. DOE's design path for TSL 3, which includes both EL 1 and EL 2 for all three product classes, includes rectangular shaped filters and either shaded-pole motors (“SPM”) or permanent split capacitor motors (“PSC”). Specifically, for Product Class 1, the Tier 1 standard, which is represented by EL 1, includes a rectangular filter and SPM motor with an optimized motor-filter relationship while the Tier 2 standard, which is represented by EL 2, includes a rectangular filter and PSC motor, which is generally more efficient than an SPM motor. For Product Class 2 and Product Class 3, the Tier 1 standard, which is represented by EL 1, includes a rectangular filter and PSC motor while the Tier 2 standard, which is represented by EL 2, also includes a rectangular filter and PSC motor but with an optimized motor-filter relationship, which improves the efficiency of EL 2 over EL 1. TSL 3 would save an estimated 1.80 quads of energy, an amount DOE considers significant. Under TSL 3, the NPV of consumer benefit would be $13.7 billion using a discount rate of 7 percent, and $5.8 billion using a discount rate of 3 percent.

The cumulative emissions reductions at the recommended TSL are 57.7 Mt of CO 2 , 24.2 thousand tons of SO 2 , 91.2 thousand tons of NO X , 0.2 tons of Hg, 411.4 thousand tons of CH 4 , and 0.6 thousand tons of N 2 O. The estimated monetary value of the climate benefits from reduced GHG emissions (associated with the average SC-GHG at a 3-percent discount rate) at the recommended TSL is $2.8 billion. The estimated monetary value of the health benefits from reduced SO 2 and NO X emissions at the recommended TSL is $1.8 billion using a 7-percent discount rate and $4.7 billion using a 3-percent discount rate.

Using a 7-percent discount rate for consumer benefits and costs, health benefits from reduced SO 2 and NO X emissions, and the 3-percent discount rate case for climate benefits from reduced GHG emissions, the estimated total NPV at the recommended TSL is $10.3 billion. Using a 3-percent discount rate for all benefits and costs, the estimated total NPV at TSL 3 is $21.1 billion. The estimated total NPV is provided for additional information, however DOE primarily relies upon the NPV of consumer benefits when determining whether a standard level is economically justified.

At the recommended TSL with the two-tier approach, the average LCC impacts are average savings of $18 and $12 for Product Class 1, $38 and $50 for Product Class 2, and $105 and $94 for Product Class 3, for Tier 1 and Tier 2 respectively. The simple payback periods are below 1.4 years for the two tiers of Product Class 1, below 0.5 years for the two tiers of Product Class 2, and 0.1 for the two tiers of Product Class 3. The fraction of consumers experiencing a net LCC cost is below 6 percent for the two tiers of all three product classes.

For the low-income consumer group, the average LCC impact is a savings of $17 and $10 for the two tiers of Product Class 1, $34 and $44 for the two tiers of Product Class 2, and $85 and $76 for the two tiers of Product Class 3. The simple payback periods for the two-tier approach are 1.2 years for Tier 1 and 1.9 years for Tier 2 for Product Class 1, are 0.6 years and 0.7 years for Tier 1 and Tier 2 respectively for Product Class 2, and is 0.2 years for both tiers of Product Class 3. The fraction of low-income consumers experiencing a net LCC cost is 10 percent for Tier 2 of Product Class 1, and 0 percent for Tier 1 of Product Class 1 and all other tiers of the other product classes.

At the recommended TSL, the projected change in INPV ranges from a decrease of $66.7 million to a decrease of $40.7 million, which correspond to decreases of 4.3 percent and 2.6 percent, respectively. Industry conversion costs could reach $57.3 million at this TSL.

A sizeable portion of the market, approximately 40 percent, can currently meet the Tier 2 level. Additionally, a substantial portion of existing models can be updated to meet Tier 2 through optimization and improved components rather than a full product redesign. In particular, manufacturers may be able to leverage their existing cabinet designs, reducing the level of investment necessitated by the standard.

An even larger portion of the market, approximately 76 percent, can meet the Tier 1 level today. Efficiency improvements to meet Tier 1 are achievable by improving the motor or by optimizing the motor-filter relationship, typically by reducing the restriction of airflow (and therefore, the pressure drop across the filter) by increasing the surface area of the filter, reducing filter thickness, and/or increasing air inlet/outlet size. Manufacturers may be able to leverage their existing cabinet designs, reducing the level of investment necessitated by the standard.

After considering the analysis and weighing the benefits and burdens, the Secretary has concluded that at a standard set at the recommended TSL for air cleaners would be economically justified. At this TSL, the average LCC savings for all three product classes are positive. Only an estimated 6 percent of Product Class 1 consumers experience a net cost. No Product Class 2 and Product Class 3 consumers would experience net cost based on the estimates. The FFC national energy savings are significant and the NPV of consumer benefits is positive using both a 3-percent and 7-percent discount rate. At the recommended TSL, the NPV of consumer benefits, even measured at the more conservative discount rate of 7 percent, is over 84 times higher than the maximum estimated manufacturers' loss in INPV. The standard levels at the recommended TSL are economically justified even without weighing the estimated monetary value of emissions reductions. When those emissions reductions are included—representing $2.8 billion in climate benefits (associated with the average SC-GHG at a 3-percent discount rate), and $4.7 billion (using a 3-percent discount rate) or $1.8 billion (using a 7-percent discount rate) in health benefits—the rationale becomes stronger still.

As stated, DOE conducts the walk-down analysis to determine the TSL that represents the maximum improvement in energy efficiency that is technologically feasible and economically justified as required under EPCA. Although DOE has not conducted a comparative analysis to select the new energy conservation standards, DOE notes that as compared to TSL 4 and TSL 5, TSL 3 has positive LCC savings for all selected standards levels, a shorter payback period, smaller percentages of consumers experiencing a net cost, a lower maximum decrease in INPV, and lower manufacturer conversion costs.

Although DOE considered new standard levels for air cleaners by grouping the efficiency levels for each product class into TSLs, DOE analyzes and evaluates all possible ELs for each product class in its analysis. For all three product classes, the adopted standard levels represent units with rectangular filter shape with a PSC motor at EL 1 and an optimized motor-filter relationship at EL 2. Additionally, for all three product classes the adopted standard levels represent the maximum energy savings that does not result in a large percentage of consumers experiencing a net LCC cost. TSL 3 would also realize an additional 0.07 quads FFC energy savings compared to TSL 2, which selects the same standard levels but with a later compliance date. The efficiency levels at the specified standard levels result in positive LCC savings for all three product classes, significantly reduce the number of consumers experiencing a net cost, and reduce the decrease in INPV and conversion costs to the point where DOE has concluded these levels are economically justified, as discussed for TSL 3 in the preceding paragraphs.

Therefore, based on the previous considerations, DOE adopts the energy conservation standards for air cleaners at the recommended TSL. The new energy conservation standards for air cleaners, which are expressed in IEF using PM 2.5 CADR/W, are shown in Table II.3.

Table of Contents I. Introduction II. Discussion of the Proposed Rule A. Review Factors B. Discussion of DOE Analysis of PEF and New Approach C. Responses to Comments Received on the NRDC and Sierra Club Petition for Rulemaking D. Alternative Approaches for Calculation of PEF III. Procedural Issues and Regulatory Review IV. Public Participation V. Approval of the Office of the Secretary I. Introduction

In an effort to conserve energy through improvements in the energy efficiency of motor vehicles, Congress, in 1975, passed the Energy Policy and Conservation Act (EPCA), Public Law 94-163. Title III of EPCA amended the Motor Vehicle Information and Cost Savings Act (15 U.S.C. 1901 et seq. ) (the Motor Vehicle Act) by mandating fuel economy standards for automobiles produced in, or imported into, the United States. This legislation, as amended, requires that every manufacturer meet applicable specified corporate average fuel economy (CAFE) standards for their fleets of light-duty vehicles under 8,500 lbs. that the manufacturer manufactures in any model year. 1 The Secretary of Transportation (through the National Highway Traffic Safety Administration, or NHTSA) is responsible for prescribing the CAFE standards and enforcing the penalties for failure to meet these standards. (49 U.S.C. 32902). The Administrator of the Environmental Protection Agency (EPA) is responsible for calculating a manufacturer's CAFE value. (49 U.S.C. 32902 and 32904)

On January 7, 1980, President Carter signed the Chrysler Corporation Loan Guarantee Act of 1979 (Pub. L. 96-185). Section 18 of the Chrysler Corporation Loan Guarantee Act of 1979 added a new paragraph (2) to section 13(c) of the Electric and Hybrid Vehicle Research, Development, and Demonstration Act of 1976 (Pub. L. 94-413). Part of the new section 13(c) added paragraph (a)(3) to section 503 of the Motor Vehicle Act. That subsection, now codified at 49 U.S.C. 32904(a)(2), provides that, if a manufacturer manufactures an electric vehicle, 2 the Administrator of EPA must include in the calculation of average fuel economy the equivalent petroleum-based fuel economy values determined by the Secretary of Energy for various classes of electric vehicles. (49 U.S.C. 32904(a)(2)(B)) The Secretary of Energy must review those values each year and determine and propose necessary revisions based on the following factors:

Section 18 of the Chrysler Corporation Loan Guarantee Act of 1979 further amended the Electric and Hybrid Vehicle Research, Development and Demonstration Act of 1976 by adding a new paragraph (3) to section 13(c) that directed the Secretary of Energy, in consultation with the Secretary of Transportation and the Administrator of the Environmental Protection Agency, to conduct a seven-year evaluation program of the inclusion of electric vehicles in the calculation of average fuel economy. In May 1980, as required by section 503(a)(3) of the Motor Vehicle Act, DOE proposed a method of calculating the petroleum-equivalent fuel economy of electric vehicles utilizing a “petroleum equivalency factor” or “PEF” in a new 10 CFR part 474 on May 21, 1980. 45 FR 34008. The rule was finalized on April 21, 1981, and effective May 21, 1981. 46 FR 22747. The seven-year evaluation program was completed in 1987, and the calculation of the annual petroleum equivalency factors was not extended past 1987.

DOE published a proposed rule for a permanent PEF for use in calculating petroleum-equivalent fuel economy values of electric vehicles on February 4, 1994 (59 FR 5336) and obtained oral and written comments from interested parties. Following consideration of comments, DOE's own internal re-examination of the assumptions underlying the proposed rule, and existing regulations for other classes of alternative fuel vehicles, DOE decided to modify the PEF calculation approach proposed in 1994. The 1994 proposed rule was withdrawn, and DOE proposed a modified approach in a July 14, 1999, notice of proposed rulemaking (1999 NOPR). 64 FR 37905. DOE published a final rule on June 12, 2000, amending 10 CFR part 474 (June 2000 Final Rule). 65 FR 36985. The PEF adopted by DOE in the 2000 Final Rule is based, in part, on the existing regulatory approach at 49 U.S.C. 32905, which provides procedures determining the petroleum-equivalent fuel economy of non-EV alternative fueled vehicles. 3 The calculation procedure converts the measured electrical energy consumption of an electric vehicle into a raw gasoline-equivalent fuel economy value, and then divides this value by 0.15 to arrive at a final petroleum-equivalent fuel economy value which may then be included in the calculation of the manufacturer's corporate average fuel economy. 65 FR 36985, 36987. DOE also included a provision for DOE to review part 474 five years after the date of publication of the June 2000 Final Rule to determine whether any updates and/or revisions are necessary. See 10 CFR 474.5. DOE has not updated part 474 since the June 2000 Final Rule.

On October 22, 2021, DOE received a petition for rulemaking from the Natural Resources Defense Council (NRDC) and Sierra Club (Petitioners) requesting that DOE update its regulations at 10 CFR part 474. In their petition, the Petitioners propose that DOE should update its regulations for calculating the PEF for electric vehicles. Petitioners assert that the data underlying the current regulation are outdated, resulting in higher imputed values of fuel economy for electric vehicles. The Petitioners assert that with this higher imputed value, a smaller number of Evs enable fleetwide compliance at lower real-world average fuel economy across an automaker's overall fleet. The Petitioners assert that the PEF should be based upon statutory factors at 49 U.S.C 32904, rather than the existing regulatory approach based upon 49 U.S.C. 32905. The Petitioners requested that DOE review the PEF calculation and approach and work with NHTSA to ensure PEF regulations support the goals of the CAFE program (as described by the Petitioners). DOE published notice of receipt of the petition on December 29, 2021 and solicited comment on the petition and whether DOE should proceed with a rulemaking. 86 FR 73992. DOE received 10 comments on the petition from interested stakeholders.

In light of the petition and supporting comments, and for reasons discussed later in this document, DOE grants the petition from NRDC and Sierra Club and is undertaking this proposed rulemaking to update part 474. DOE agrees with the Petitioners that the inputs upon which the calculations and PEF values in current part 474 are based are outdated, and the technology and market penetration of electric vehicles has significantly changed since part 474 was last updated in the 2000 Final Rule. As discussed further in section II of this document, DOE is proposing to update part 474 and the PEF values to reflect these changes in accordance with the statutory factors in 49 U.S.C. 32904(a)(2)(B).

In accordance with 49 U.S.C. 32904, DOE has reviewed the current PEF value and approach in 10 CFR part 474. DOE's approach used to calculate the current PEF value is described in the June 2000 Final Rule. 65 FR 36987-36988. As discussed previously, in reviewing the PEF value, DOE must consider four factors, as enumerated in 49 U.S.C. 32904:

DOE reviewed the methodology used to develop the current PEF value and its approach in light of these factors and has tentatively concluded that some inputs should be updated to reflect more recent data, and that some components of the derived PEF value are not relevant to today's vehicles. DOE addresses its consideration of the statutory factors and DOE's conclusions in the following sections.

In the June 2000 Final Rule, DOE established a methodology to measure the energy consumption of an EV in terms of gallons of gasoline based upon the electricity consumption quantified by using the Highway Fuel Economy Driving Schedule (HFEDS) and Urban Dynamometer Driving Schedule (UDDS) test cycles established by EPA at 40 CFR parts 86 and 600. See 10 CFR 474.3 and 474.4. Obtaining the value of electric efficiency (measured in Watt-hours per mile) is critical to translating the electrical energy efficiency of the EV into a petroleum-equivalent fuel economy using the PEF equation. See, e.g., Example 1 of appendix A in 10 CFR part 474. DOE is proposing not to amend the testing requirements and use of the resulting value in the PEF equation. DOE believes the current methodology provides an accurate measure of the electrical energy efficiency of the relevant EV during typical use and is appropriately utilized in the PEF equation. DOE requests comment on its proposal not to amend the testing methodology under 10 CFR 474.4 and use of the resulting value for purposes of the PEF equation.

Additionally, the June 2000 Final Rule incorporated an accessory factor into the PEF calculation. This factor was added to the PEF calculation to account for petroleum-fueled on-board accessories, such as cabin heaters, defrosters, or air-conditioning. These accessories were envisioned as an approach to avoid low energy-density and/or low power-density limitations of battery technology at the time. 4 No EVs currently produced include such accessories, nor are future EVs likely to include them. Petroleum-fueled on-board accessories are distinct from gasoline consumption in plug-in hybrid electric vehicles, which are rated for fuel economy separately for charge-depleting and charge-sustaining modes of operation, with a fuel economy weighted according to the expected percentage of driving attributed to each mode. In this NOPR, DOE proposes to set this factor equal to 1.00 in its calculation. DOE may adjust this factor in the future if market conditions merit updates. DOE requests comment on its proposal to set the accessory factor at 1.00.

To compare electricity and gasoline on an equivalent basis it is necessary to consider the full energy-cycle energy efficiency from the point of primary energy production through end-use to power a vehicle for both gasoline and electricity. This approach is necessary because electricity is generated upstream of the vehicle and stored onboard whereas conventional vehicles convert fuel to useful energy onboard the vehicle. Assessing the full energy cycle of electricity and conventional fuel requires a holistic approach to address energy conservation when energy losses occur at different stages of an energy cycle for different energy products and fuels, such as electricity and gasoline. In the June 2000 Final Rule, DOE included a term for expressing the relative energy efficiency of the full energy cycles of gasoline and electricity, the gasoline-equivalent energy content of electricity factor, which included factors to account for average fossil-fuel electricity generation efficiency, average electricity transmission efficiency, and petroleum refining and distribution efficiency. 65 FR 36987.

DOE agrees with the Petitioners that the inputs to account for the generation and transmission efficiency factor should be updated to reflect the most recent data. Therefore, DOE is proposing to update the inputs for generation and transmission efficiencies and relative grid mix projections to account for updated data and recent policy changes. Further description of DOE's proposed changes may be found in section II.B of this document. DOE requests comment on its proposal concerning the generation and transmission efficiency factor.

In handling the consideration of scarcity of resources, DOE focuses on the primary energy sources used to power conventional, hybrid-electric, and battery-electric vehicles—such as crude oil, natural gas, fissile nuclear material, sunlight, water, and wind—and considers their potential scarcity implications. Some energy sources are mined or otherwise produced (crude oil, natural gas, coal, uranium); others, such as sunlight and wind, are captured passively. Some sources are finite with energy resource depletion as a societal concern ( e.g., the fossil resources). Other primary energy sources are renewable and are not subject to resource depletion ( e.g., solar or wind energy). Yet other primary energy sources, such as uranium, are naturally abundant on a global basis, though not necessarily abundant domestically. 5

In the 1999 NOPR and June 2000 Final Rule, DOE concluded that scarcity did not appear to be a concern and should not be a guiding factor in the PEF at that time. DOE arrived at this conclusion after conducting research on the issue based on comments received on the 1994 NOPR that were critical of DOE's prior consideration of scarcity. 64 FR 37907. In the 1994 NOPR, DOE included a scarcity factor as an intermediate factor that used a complex approach to quantify the relative scarcity and value of all fuels used to generate electricity in the United States. This proposed scarcity factor was based on estimates of the U.S. share of world reserves of fossil fuels and estimated rates of depletion of world reserves. The scarcity factor was derived by determining the U.S. percent and numeric share of the world reserve market and calculating the rate at which the United States is depleting each fuel source's reserves. These values were then normalized to obtain the relative scarcity value for each fuel source. 59 FR 5338-5339. Nevertheless, DOE re-examined the scarcity issue in response to these comments, which led to DOE's removal of the scarcity factor from the 1999 NOPR and June 2000 Final Rule.

While DOE did not expressly incorporate scarcity in the 1999 NOPR and the June 2000 Final Rule, DOE added the current 1.0/0.15 fuel-content factor, in part, to help address scarcity issues by rewarding electric vehicles' benefits to the Nation relative to petroleum-fueled vehicles, in a manner consistent with the regulatory treatment of other types of alternative fueled vehicles and the authorizing legislation. Id. at 65 FR 36988. DOE explained that it chose the 1.0/0.15 ratio for the fuel-content factor (1) for consistency with existing regulatory and statutory procedures for alternative fuel vehicles under 49 U.S.C. 32905, (2) to provide similar treatment of all types of alternative fueled vehicles, and (3) for simplicity and ease of use in calculating the PEF. In the July 1999 NOPR, DOE examined 49 U.S.C. 32905, which prescribes procedures for determining the petroleum-equivalent fuel economy of non-EV alternative fueled vehicles. DOE noted that two of the most common light-duty liquid alternative fuels at that time were M85 (85 percent methanol and 15 percent unleaded gasoline by volume) and E85 (85 percent ethanol and 15 percent unleaded gasoline by volume). 6 Under section 32905, the petroleum equivalent fuel economy of E85 and M85 powered vehicles is determined by dividing the measured fuel economy value by 0.15. DOE also noted that section 32905 extends this approach to gaseous fueled vehicles ( e.g., compressed natural gas), whereby a conversion factor is applied, and the resulting figure divided by 0.15 to obtain the petroleum equivalent fuel economy. DOE commented in the July 1999 NOPR that the true energy efficiency of both liquid and gaseous fueled alternative fuel vehicles is intentionally and substantially overstated by the methods specified in section 32905, since only 15 percent of their actual energy consumption is accounted for in determining their petroleum-equivalent fuel economy, and that the use of the 0.15 factor for both vehicle types provides a similar regulatory treatment to both types of alternative fuel vehicles. DOE then determined to include the 1.0/0.15 factor into its PEF calculation, noting that this would be the most equitable approach among alternative fuel vehicles and that all alternative fuel types help the Nation avoid having all its transportation “eggs” in the petroleum “basket.” Id. DOE noted, however, that EVs would still enjoy favorable regulatory treatment under DOE's proposal because EVs are exempt from caps on the amount alternative fuel vehicles are allowed to contribute to raising a manufacturer's overall fleet fuel economy. Id. at 65 FR 36989.

Consistent with the requirements of section 32904, in this proposed rule, DOE has considered the need of the United States to conserve all forms of energy and the relative scarcity and value to the United States of all fuel used to generate electricity. 7 DOE recognizes the need of the nation to conserve all forms of energy, and more specifically, finite resources such as fossil fuels, including petroleum consumed by ICE vehicles. Supply and demand of fossil fuels can change rapidly and be subject to market constraints. In contrast, DOE notes that current and future sources of electricity generation are and will be in relative abundance, most notably due to recent market and policy changes ( e.g., the Infrastructure Investment and Jobs Act (Pub. L. 117-58) and the Inflation Reduction Act (117-169)) resulting in, and likely to further result in, growth and reliance on renewable sources of electricity generation which are not subject to resource depletion like fossil fuels. 8 See section II.B of this document for further discussion of these policy changes. DOE has preliminarily determined that there is a need to conserve finite energy resources, such as petroleum, given their limited nature and susceptibility to changing market constraints. Oil and petroleum fuels are a global market, and the nation is exposed to fluctuations in that global market. That the United States may produce more petroleum in a given period does not in and of itself protect the nation from the exposures it faces on the global market. Accordingly, the nation must conserve petroleum to guard against the exposures it faces in the global market. Moreover, DOE believes the current and future addition of renewable generation sources onto the grid allows for greater conservation of the finite resources, as renewable generation replaces those sources on the grid for use in electrified end uses, such as EVs. In this proposed rule, DOE is proposing changes to the PEF calculation (described more in this section) to address the need of the nation to conserve energy and the relative scarcity of fuels used to generate electricity consistent with these determinations.

As part of its review of the need to conserve all forms of energy and relative scarcity of fuels used to generate electricity, DOE reconsidered the inclusion of the fuel-content factor in the PEF equation and determined that the fuel-content factor is no longer warranted in deriving the PEF value. As noted previously, DOE added the current 1.0/0.15 fuel-content factor, in part, to help address scarcity issues by rewarding electric vehicles' benefits to the Nation relative to petroleum-fueled vehicles, in a manner consistent with the treatment of other types of alternative fueled vehicles. For the following reasons DOE believes the fuel content factor no longer accurately addresses the need to conserve energy and relative scarcity issues and is no longer appropriate for use in the PEF derivation:

• The fuel content factor does not accurately represent current EV technology or market penetration.

With the fuel content factor, the current PEF value is not representative of current EV technology, capabilities, and market penetration, and leads to overvaluation of EVs in determining CAFE fleet compliance that is not related to their actual fuel saving capabilities. Since the 2000 Final Rule, EV technology has matured substantially and the market share of EVs is now significant and growing. For example, sales of both plug-in hybrid-electric vehicles (PHEVs) and battery-electric vehicles (BEVs) combined in the United States have increased significantly in the past decade (from 18,000 per year in 2011 to over 600,000 per year in 2021), 9 while there have also been significant advances in driving range and available charging infrastructure. 10 Over the past 20 years, electrification technology for light-duty vehicles has seen significant advances in performance, efficiency, and cost reduction. Twenty years ago, battery electric vehicles were not generally available for mass-market sale in all U.S. markets, with models being limited to a handful of low-production vehicles generally only offered in California (such as the Toyota RAV4 EV, Chevrolet S-10 EV, and Ford Ranger EV) to meet state ZEV regulations, 11 or the GM EV-1, which could only be leased in select markets. Vehicles of this era were capable of less than 100 miles of range  12 and charging power was typically limited to 6.6kW  13 to 8kW. 14 Sales volumes were low, with the first-generation RAV4 EV selling a total of 328 units over six years of production. 15 Battery technology has improved significantly from early lead-acid and nickel-based chemistries, seeing energy density improve by more than four times, from 28 Wh/kg  16 to nearly 120 Wh/kg, 17 and pack costs reduced by 90% since 2008. 18 Vehicles with DC fast charging capability have begun to penetrate the market at an increasing rate, 19 with charge power levels of 150kW+ being common. 20 Recent trends in market penetration of plug-in electric vehicles (PHEVs and BEVs) suggest that demand for these vehicles is rapidly increasing, with monthly sales reaching 7.4% of all light-duty sales, 21 and with 32 BEV models available across eight manufacturers in September of 2022, 22 14 with a range of 300 miles or greater. 23

As zero-emission transportation policies have begun to be implemented across the world, some U.S. states have taken action to transition the light-duty vehicle fleet to zero-emissions technologies. In 2022, California finalized the Advanced Clean Cars II rule  24 that will require all new light-duty vehicles sold in the state to be zero-emission by 2035, with New York, Massachusetts, and Washington state following suit. Internationally, countries that have set a target of 100 percent light-duty zero-emission vehicle sales by 2035 represent at least 25 percent of today's global light-duty vehicle market, 25 and in late 2022 the European Union approved a measure to phase out sales of internal combustion engine (ICE) passenger vehicles in its 27 member countries by 2035. 26

Additionally, recent Federal policy changes such as the Inflation Reduction Act  27 and the Infrastructure Investment and Jobs Act  28 provide significant incentives for EVs and other alternative fueled vehicles (as well as additional sources of non-petroleum energy) that make the current fuel-content factor redundant for purposes of incentivizing manufacture of such vehicles and conserving the energy resources of the nation. 29

Over the past several years, automakers have increasingly incorporated a higher degree of electrification in their vehicle powertrains. All indications are that this trend will accelerate in the future. The diversity of partially- and fully-electrified vehicle offerings is increasing, 30 with combined offerings of PHEVs and BEVs nearly doubling from 31 models in 2016 to 60 models in 2021  31 and expected to double again between 2022 and 2024. 32 Recent announcements from GM, 33 VW, 34 Honda, 35 Ford, 36 and Stellantis, 37 further attest to the trend of increasing electrification.

As used in the PEF value determination, the fuel content factor is not representative of this current EV technology nor current market penetration, but is instead based upon the fuel content of non-EV alternative fuel vehicles, which have significantly different technologies and penetration in the current market. As described more below in this section, counter to the need of the nation to conserve energy, including the fuel content factor in the PEF determination can lead to increased petroleum consumption. Moreover, as noted throughout this document, incentives for EV production and EV infrastructure have changed markedly since 2000, and DOE believes that treating EVs similarly to other alternative fuel vehicles in DOE's PEF rule is no longer appropriate.

• The fuel content factor allows for continued production of inefficient ICE vehicles, thereby encouraging increased petroleum usage.

Applying the current PEF value and equation to EVs results in miles per gallon equivalent ratings significantly higher than a similar ICE vehicle. For example, applying the PEF to the current EV version of the Kia Niro results in a rating of 394.3 miles per gallon equivalent. The Hyundai Kona, a very similar ICE vehicle, 38 is rated at 41.2 miles per gallon.

This approach demonstrates how the current PEF value leads to overvaluation of EVs in determining fleetwide CAFE compliance, which allows manufacturers to maintain less efficient ICE vehicles in their fleet by utilizing a few EV models to comply with the CAFE standards. As noted in the Petition, “excessively high imputed fuel economy values for EVs means that a relatively small number of EVs [could] mathematically guarantee compliance without meaningful improvements in the real-world average fuel economy of automakers' overall fleets.” 86 FR 73995. This runs counter to the need of the nation to conserve energy, particularly petroleum. Encouraging adoption of EVs can reduce petroleum consumption but giving too much credit for that adoption can lead to increased net petroleum use because it enables lower fuel economy among conventional vehicles, which represent by far the majority of vehicles sold. Moreover, contrary to the original intent behind the fuel content factor, “excessively high imputed fuel economy values for EVs” can also act as a disincentive to manufacturers to produce additional EVs if manufacturers can achieve CAFE compliance with a relatively small number of EVs.

As DOE stated in the 1999 NOPR, the “true energy efficiency of both liquid and gaseous fueled alternative fuel vehicles is intentionally and substantially overstated by the methods specified in 49 U.S.C. 32905” ( i.e., the 1.0/015 fuel content factor). With current EV technology, using those same methods for the PEF calculation overstates the PEF value and encourages increased consumption of petroleum, which is counter to the need of the nation to conserve energy.

• The current fuel content factor lacks legal support.

The basis for the current fuel content factor is attached to statutory provisions not pertinent to EVs. As noted, the 1.0/0.15 fuel content factor is based on that same factor for non-EV alternative fuel vehicles under section 32905. Section 32905 does not apply that factor to EVs, nor do the relevant provisions of section 32904. Accordingly, while DOE sought to treat EVs the same as other alternative fuel vehicles by using the same fuel content factor in the 2000 Final Rule, there is no basis in 32905 or 32904 to do so. While DOE could potentially utilize a fuel content factor under the four factors of section 32904, that is not the basis for the current 1.0/0.15 fuel content factor.

For the foregoing reasons, DOE proposes to remove this factor from the PEF determination. DOE requests comment on its treatment of the need of the Nation to conserve energy and relative scarcity and value of fuels. DOE requests comment on its proposal to remove the fuel-content factor from its derivation of the PEF value.

In the June 2000 Final Rule, DOE established a driving pattern factor to account for the statutory criterion in 49 U.S.C. 32904(a)(2)(B)(iv). The purpose of the driving pattern factor is to recognize the fact that electric vehicles may be used differently than gasoline vehicles, primarily due to their shorter range and longer “refueling” times. However, then-existing EPA regulations did not make driving-pattern-based adjustments to the fuel economy of various classes of gasoline vehicles when calculating a manufacturer's CAFE value, even though gasoline-powered vehicles are also used in a large variety of different ways. 64 FR 37908. Therefore, DOE set the driving pattern factor at 1.00 because it believed that EVs offer capabilities like those of conventional gasoline-powered vehicles. 65 FR 36987.

DOE continues to believe that current EVs are equivalently capable vehicles that are likely to be used similarly to gasoline-powered or hybrid-electric vehicles. In addition, the deployment of a national charging network, enabled by the DOT's National Electric Vehicle Infrastructure program along with additional private investment, will help meet the President's goal of 500,000 chargers  39 and ensure vehicles can match the utility and driving demands of an ICE vehicle. Therefore, DOE is not proposing a change to the driving pattern factor and proposes to continue setting this factor at 1.00. DOE may adjust this factor in the future if market conditions merit updates. 40

DOE requests comment on its proposal to keep the driving pattern factor at a value of 1.00.

To compare electricity and gasoline on an equivalent basis, DOE considers the full energy-cycle energy efficiency from the point of primary energy production through end-use to power a vehicle for both gasoline and electricity. DOE does not consider the conversion efficiency from primary energy to electricity for renewable energy sources. 41 That is, renewable energy sources are treated as effectively 100% efficient. For fossil and nuclear energy, DOE considers the energy required to mine or otherwise produce the primary energy as part of the life-cycle energy. However, in this analysis, DOE treats nuclear electricity generation as effectively 100% efficient—that is, DOE does not use the thermal efficiency of steam to electricity in nuclear power plants—because like solar and wind, there is no practical, aggregate resource-availability limitation for nuclear materials. On the other hand, fossil energy sources used to generate electricity are large but finite and are non-renewable. DOE considers the combustion efficiency of electric generation as part of the full energy lifecycle. Renewable gaseous fuel burned for electricity, though expected to be a small contributor to renewable electricity, are treated similarly to fossil natural gas with respect to combustion efficiency.

Energy conversion and transmission efficiencies are derived from Argonne National Laboratory's GREET model ( https://greet.anl.gov ). The GREET® (Greenhouse gases, Regulated Emissions, and Energy use in Technologies) model has been developed by Argonne National Laboratory with the support of DOE. GREET is a life-cycle analysis tool, structured to systematically examine the energy and environmental effects of a wide variety of transportation fuels and vehicle technologies in major transportation sectors ( i.e., road, air, marine, and rail) and other end-use sectors, and energy systems. Development of GREET has been supported by multiple offices of DOE, DOT, and other agencies over the past 28 years. It is a widely used life-cycle analysis model for vehicle technologies and transportation fuels and has more than 50,000 registered GREET users worldwide. It has been used in regulation development and evaluation by DOE, EPA, DOT, and California Air Resources Board. Conversion and transmission efficiency values from GREET have been incorporated into a spreadsheet-based PEF calculation tool that implements the calculation and allows use of various projections of electric generation. (The PEF calculation tool is included in the docket for this rule.)

After setting the driving pattern and accessory factors to 1.00 and removing the fuel-content factor as described previously, the remaining PEF equation is simply the gasoline-equivalent energy content of electricity on a full life-cycle basis. The units of the PEF remain the same (Wh/gal-equivalent) and the CAFE calculation would be conducted as before.

Although DOE will conduct the required annual reviews, consistent with 42 U.S.C. 32904(a)(2)(B) (discussed more in following sections), the Department does not anticipate that the result of that review will be particularly significant at least as compared to the revisions proposed today. The primary factor that would change the PEF calculation is a change in projected grid mix. However, DOE believes the grid mix projections that DOE has considered in this proposed rule provide the best projections available, and DOE believes it unlikely that grid mix projections would deviate so significantly from the projected values as to result in significant changes in the PEF value in a given year, particularly for the dates for which this proposed rule would take effect ( i.e., model years 2027-2031).

DOE is proposing that the new PEF take effect with model year 2027 vehicles. NHTSA's next CAFE regulation is expected to cover the model years 2027-2031. 42 The proposed PEF value would be the applicable PEF for calculating electric vehicle fuel economy in those model years, 43 subject to DOE's annual reviews. In order to calculate a PEF usable in the next CAFE regulation, DOE calculations consider a forward-looking approach based on projections for the electricity generation grid in the future. As such, the average of the annually calculated value of the PEF, based on calendar-year projections for the electric grid, 44 will be applied for model years 2027 through 2031 over the entire CAFE compliance period. Having a fixed value for the CAFE standards period improves the ability of DOT to determine CAFE standards that are “the maximum feasible average fuel economy level” and provides greater certainty to stakeholders from year to year. DOE requests comment on this approach.

An important variable impacting the value of the PEF under the new approach is the mix of electricity sources. DOE considered numerous projections available in 2022 and selected the projection model 2021 Electrification 95 by 2050, Standard Scenario, from the National Renewable Energy Laboratory (NREL), 45 in which the United States achieves 95% renewable generation of electricity by 2050 and increasing electrification economy-wide. 46 This projection accounts for the anticipated improvements in generation efficiency of electricity generating units. Transmission efficiency is not expected to improve over this time and thus remain constant in this projection. DOE selected this projection to better account for recent policy changes with respect to renewable energy penetration and electrification, such as the Inflation Reduction Act  47 and the Infrastructure Investment and Jobs Act. 48 DOE believes the NREL 95 by 2050 model provides a projection more representative of the likely future grid mix after these recent policy changes become impactful, particularly with the likelihood that these changes will result in a substantial addition of renewable resources onto the grid.

DOE also considered several scenarios from the Annual Energy Outlook (AEO) 2022 as developed by the Energy Information Administration (EIA)— i.e., the reference case and the low-renewables-cost case. While DOE generally regards AEO as one of the best available projections for future grid mix and energy prices, the AEO 2022 cases (prepared in early 2022) are not representative of more recent policy changes ( e.g., the Inflation Reduction Act), and therefore do not fully address DOE's current expectations for the development of the grid due to subsequent developments. DOE notes that the PEF value using the AEO 2022 model is fairly close to the proposed PEF value using the NREL 95 by 2050 projection. 49 Ultimately, this proposed rule uses the 95 by 2050 model because DOE believes it is more representative of the most recent policy changes affecting grid mix projections, particularly the likely addition of more renewables into the grid mix in the near term. DOE is aware that AEO 2023 is expected to be published in the Spring of 2023 and may be more reflective of recent policy changes than AEO 2022. DOE will consider AEO 2023 for possible use in the final PEF rule.

DOE also considered more renewable-aggressive grid mixes, such as the NREL Standard Scenarios 2021 Electrification 95 by 2035 scenario. However, DOE determined that the NREL 95 by 2035 scenario is a slight outlier for the MY2027-2031 period DOE is targeting in this proposed rule, primarily given lack of lead time (despite recently created statutory incentives) for grid mix improvements, and also given DOE's analysis suggesting that a PEF value using the 95 by 2035 scenario would be 10-15 percent higher than the PEF value using any of the other grid projection scenarios considered. These facts indicated to DOE that a more conservative approach (that still accounted for recent policy changes) would be more appropriate in this time frame, and thus, DOE chose the NREL 95 by 2050 scenario for the grid mix assumptions on which the current proposal is based. DOE notes that DOE will review the PEF value annually and can adjust the grid mix inputs if renewable generation increases at a faster or slower pace than DOE anticipates, although the agency does not anticipate that the result of that annual review will be particularly significant—at least as compared to the revisions proposed today.

DOE requests comment on its selection of grid mix forecast and welcomes comments on alternative forecasts for the electricity grid mix.

In consideration of all factors in the analysis and those described above, the proposed PEF for the anticipated period 2027-2031 is 23,160 Wh/gal. The following discussion describes how DOE arrived at this value.

For a process, GREET defines efficiency as the ratio of energy product output(s) to energy input(s) (including energy in both processing fuels and feedstock). The energy outputs and inputs for facilities (such as electric power plants and petroleum refineries) are obtained from agency statistics such as EIA and EPA databases. The reciprocal of efficiency is defined as the energy intensity of this process. Using efficiency factors developed for the GREET model, DOE determined that crude oil production and transportation has an efficiency of 93.96%, that gasoline refining has an efficiency of 87.01%, and that gasoline transportation and distribution has an energy efficiency of 99.52%. 50 Multiplying these three terms to get an overall well-to-tank efficiency of 81.36%. That is, the total energy, including the energy used to produce, transport, and distribute gasoline and the energy content of gasoline is 1/0.8136 = 1.2291 times greater than the useable energy in the final product.

For electricity, using the Electrification 95 by 2050 projection model described previously, DOE calculates an annual PEF value. As discussed previously, DOE is proposing to retain the PEF value for the period covered by the applicable CAFE standard, the most recent of which covers 2027 to 2031. To simplify compliance with the CAFE standard, DOE takes an average value of the PEF over the covered period to apply for the entire period. DOE will review the PEF annually to determine if updates are needed based on changes to the grid mix and/or market conditions for EVs. DOE requests comment on this approach.

The following table shows the relative forecast generation share of the grid mix for nine different fuels in 2029  51 using the Electrification 95 by 2050 projection model. The fraction of electricity generated by source under the projection is labeled the Generation Share, efficiencies for production and generation for each source are listed, and the required input of that source of energy to produce that amount of electricity is labeled Energy Input Required. Energy Input Required is calculated as:

The sum of the Generation Shares is 1.0. Summing the Energy Input Required yields the total required energy given the generation mix, as a fraction of energy generated. Thus, the table indicates that for every 1.0 units of output energy as electricity, 1.702 units of input energy are required (averaged across generation mix), for an electricity efficiency of 58.75% at the plant gate ( i.e., 1/1.702 = 0.5875). This is further multiplied by the electricity transmission and distribution efficiency of 95.14%, yielding a total electricity efficiency of 55.89%, meaning that one Watt-hour of electricity delivered to the user requires roughly 1.7892 Wh of primary energy (1/.5589 = 1.7892).

The energy content of a gallon of gasoline is 115,000 British Thermal Units (Btu). With a standard conversion factor of 3.412 Btu/Wh, the same gallon of gasoline can be said to have an energy content of 33,705 Wh. By a similar calculation as was used for full-cycle electricity, delivering one gallon of gasoline to a consumer requires starting with 22.91% more energy. Thus, a gallon of gasoline is equivalent to 141,347 Btu over a full fuel cycle.

The PEF can then be calculated as the ratio of full-cycle efficiencies of gasoline and electricity: (141,347 Btu/gal)/(6.105 Btu/Wh) = 23,153 Wh/gal. 54

The value of the PEF will be annually reviewed and updated, if needed, based on changes in the various factors impacting it. 49 U.S.C. 32904(B). At this time, DOE intends to keep the factor stable over the period of the standard setting years, unless there is a compelling reason to change the factor as a result of this review. DOE does not anticipate that the result of that review will be particularly significant, at least as compared to the revisions proposed today. The primary factor that would change the PEF calculation is changes to the projected grid mix. However, DOE believes the grid mix projections considered in this proposed rule provide the best projections available at the time of drafting, and DOE believes it unlikely that grid mix projections would deviate so significantly from the projected values as to result in significant changes in the PEF value in a given year, particularly for the years affected by this proposed rule ( i.e., model years 2027-2031). DOE requests comment on other considerations for DOE's review of the PEF value.

To this end, DOE is also proposing to delete section 10 CFR 474.5. Section 474.5 currently states that DOE will review part 474 every five years to determine whether any updates and/or revisions are necessary, and publish notice of DOE's review, findings, and any resulting adjustments to part 474 in the Federal Register . DOE will review the PEF value annually, subject to its statutory requirements, and should DOE determine a change may be needed to the PEF value, DOE will engage in the rulemaking process to revise part 474. DOE also intends to seek stakeholder input for its annual reviews through available methods ( e.g., requests for information). If a stakeholder believes the PEF value should be changed in a given year, stakeholders may always petition DOE to address such change. DOE requests comment on its proposal to delete § 474.5.

To demonstrate the PEF calculation in accordance with 10 CFR part 474 ( i.e., the PEF value divided by the combined energy consumption value) and provide a real-world example, DOE considered how the fuel economy of different powertrains would compare, using both the current PEF value of 82,049 Wh/gal and the proposed PEF value of 23,160 Wh/gal for the CAFE regulatory period of 2027-2031 (using data from 2022 vehicle models). DOE compared the rated fuel economy for five BEVs and five PHEVs to their most-comparable internal combustion engine vehicle (ICEV) and hybrid electric vehicles (HEV). The table below shows the unadjusted, combined fuel economy for each vehicle. As shown in the table, BEVs would still have a fuel economy much greater than conventional gasoline-fueled vehicles for CAFE calculations. In all cases, the fuel economy across powertrains rises from ICEV to HEV to PHEV to BEV. In the left column, the vehicles being compared on a given row are identified. The column headings indicate which vehicle listed in the left column is intended, and for plug-in vehicles, under which PEF value the MPG-eq was calculated.

This section summarizes the comments received on DOE's December 28, 2021, request for public comments on the 2021 NRDC and Sierra Club petition.

The Alliance for Automotive Innovation (Auto Innovators) requested that DOE take careful consideration in determining whether to grant the petition to update the PEF for electric vehicles. Auto Innovators noted that the PEF is included in the calculation of the maximum feasible standards for fleet-average fuel economy. Therefore, Auto Innovators requested that the PEF be updated in concert with CAFE standards, with a lead-time of at least 18 months. Auto Innovators also requested that the docket supporting the prior PEF rulemaking be made available for electronic public viewing.

In general, Auto Innovators requested an increase in the PEF if it is changed, counter to the requests of other commenters. Auto Innovators noted that EPA greenhouse gas (GHG) standards treat electric vehicles as having zero tailpipe emissions, 55 due to their lack of tailpipe emissions. For greater harmonization between the EPA GHG standards and the NHTSA CAFE standards, Auto Innovators suggests a higher PEF that would result in fuel economy approaching an equivalent to a zero-tailpipe emission value. Auto Innovators asserts that inclusion of a fuel content factor is within DOE's “statutory considerations.” Auto Innovators noted that updating factors relating to electricity generation and transmission while maintaining the fuel content factor of 6.67 (or 1.0/0.15) would increase the overall PEF value.

Auto Innovators stated that Congress's intent has been to incentivize the use of alternative fuel vehicles. They suggest that an increased value for the PEF would result in higher sales of electric vehicles that would substitute for petroleum-fueled vehicles, as automakers would have a greater regulatory incentive to sell the electric vehicles.

As noted previously, the Department agrees that values for electricity generation and transmission efficiencies, along with petroleum refining and transportation, should be updated, which would increase the value defined as the gasoline-equivalent energy content of electricity in the June 2000 rulemaking. However, DOE is proposing to remove the fuel-content factor from the PEF calculation because it artificially inflates the PEF value such that the current PEF value is not reflective of current EV efficiency or market penetration. While DOE could potentially include a fuel-content factor under one or more factors of section 32904(a)(2)(B), DOE does not believe a fuel-content factor is necessary to include in the PEF calculation at this time. While the reasons for including the factor in the 2000 Final Rule may have been compelling at that time, DOE believes they no longer justify inclusion of the fuel-content factor because of current EV technology and market penetration. This is particularly true in light of recent policy changes, such as the Inflation Reduction Act, that greatly incentivize the production and use of EVs and growth of EV infrastructure ( e.g., charging stations), enabled both by the Bipartisan Infrastructure Law investment of $7.5B along with private investment to support the President's goal of a national charging network of 500,000 chargers. 56 These policy changes will act as a far greater incentive for EVs than the fuel-content factor, while continued inclusion of the fuel-content factor to artificially inflate the PEF could hinder continued increases in combustion engine fuel economies under the CAFE standards. Moreover, DOE notes that the EPA regulations for greenhouse gases are separate from the DOT regulations for fuel economy, and while it may be desirable for the two sets of regulations to be harmonized with each other to the extent appropriate for regulatory simplification, the regulations ultimately have different purposes.

With respect to the effective date of the proposed PEF changes, DOE notes that 49 U.S.C. 32904(a)(2)(b) requires DOE to review and propose necessary revisions to the PEF annually. While an immediate update of the PEF would be possible, DOE agrees that this would lead to a sudden change in the compliance determination under the CAFE standards. Such a quick change in the compliance determination could be problematic given the lead times necessary for manufacturers in creating CAFE compliant models. DOE notes that the Auto Innovators' suggested lead time of 18 months before the model year for which CAFE standards are prescribed is based upon the requirements of 49 U.S.C. 32902(a). Section 32904(a)(2) does not contain a requirement for a similar compliance lead time. Nevertheless, DOE is establishing the PEF consistent with the period covered by the next round of CAFE standards for the reasons stated above.

Additionally, in response to the Auto Innovators request, DOE has included the prior rulemaking docket (EE-RM-99-PEF) in the docket for this NOPR.

The American Biogas Council supports granting the petition to update the PEF for electric vehicles. Specifically, the American Biogas Council urges the DOE review the PEF annually and propose necessary revisions based on the latest available data.

The agency agrees with the assessment of the American Biogas Council that update and continual review is important. The agency believes that the approach to reviewing the PEF described above balances the lead time necessary for automakers to plan their automotive fleets with the latest available data.

The American Council for an Energy-Efficient Economy (ACEEE) supports granting the petition to update the PEF for electric vehicles. ACEEE believes the inclusion of the fuel-content factor (6.67 multiplier—or 1.0/0.15) in the PEF is unacceptable. ACEEE notes that DOE should consider how to factor renewable electricity generation into the calculation of grid generation efficiency, and how to incorporate carbon intensity and the time of day in which EVs are charged and the resultant effect on energy sourcing into the PEF, if this is appropriate. ACEEE also notes that the national average for electricity consumption may not be appropriate. Additionally, ACEEE urges DOE to propose necessary revisions based on the latest available data, and to consider how changes in grid composition and technology have changed and may change in the near future.

The Department agrees with ACEEE's assessment that updating and continual PEF review is important. DOE is proposing to consider updated values for the lifecycle energy consumption of both electricity and petroleum and is proposing an updated value for the PEF that does not include a fuel-content factor of 6.67. Moreover, DOE's proposed methodology considers renewable energy generation as 100 percent efficient, while also utilizing a grid projection scenario that better accounts for the likely increase in renewable generation placed on the grid due to recent policy changes such as the Inflation Reduction Act. DOE also notes that the national average electrical generation and transmission efficiencies is a factor specified in section 32904. 42 U.S.C. 32904(a)(2)(B)(ii). While DOE acknowledges that charging times of EVs may impact the grid mix in a given region, DOE has used national grid mix projections based on the factor in section 32904. Therefore, DOE has not incorporated carbon intensity or effects on energy sourcing based on the time of day during which EVs are likely to be charged. DOE believes such considerations may introduce complexity into the PEF methodology that could create confusion and uncertainty for stakeholders, particularly during DOE's annual review process. Moreover, ACEEE did not provide or point to any information that might inform the inclusion of such considerations into the PEF methodology. However, DOE welcomes comments and information that could allow for the clear and consistent use of considerations such as carbon intensity and charging time of day in the PEF methodology.

The American Petroleum Institute supports granting the petition to update the PEF for electric vehicles. The American Petroleum Institute requests that DOE update the PEF based on the latest available data. Specifically, the American Petroleum Institute suggests that the calculation of the PEF should not include a fuel content factor and should be updated with a well-to-wheels lifecycle analysis, considering both the energy and greenhouse gas (GHG) impacts of electric and conventional vehicles.

As described previously, DOE agrees with eliminating the fuel-content factor. In this NOPR, the agency uses a lifecycle approach for electricity and petroleum as the primary regulatory option for the PEF. The preferred lifecycle approach is one that is based on total energy content, including upstream energy usage, and based on updated input data. DOE's PEF methodology does not explicitly account for lifecycle GHGs. As discussed in section D.3 of this document DOE explored a GHG-related alternative, but ultimately determined not to use such alternative. Further, as discussed previously, DOE must base the PEF value on the factors of section 32904(a)(2), which do not explicitly reference GHGs or lifecycle GHGs. DOE requests comment and information on inclusion of lifecycle GHG emissions in the PEF calculation methodology and data in support of using such an approach.

The International Council on Clean Transportation (ICCT) supports updating values used to calculate the PEF for electric vehicles. ICCT suggests that DOE use the latest values for electricity generation efficiency, transmission and distribution loss, petroleum refining, and distribution efficiency. Additionally, ICCT suggests that DOE consider electricity generation sources other than fossil fuels.

The Department agrees with the ICCT on the need to use values that represent today's electricity and petroleum markets. As suggested, DOE uses values derived from the GREET model by Argonne National Laboratory for many of the inputs noted. As non-fossil fuels now comprise approximately 40% of the national electricity generation  57 and are forecast to have higher market penetration in the future, DOE also considers all sources of electricity in determining electricity generation efficiency, rather than only using fossil fuels.

NRDC and Sierra Club submitted public comments supplementing their initial petition for rulemaking and reiterating their request to the petition for rulemaking to update the PEF for electric vehicles. In this comment, they note that the input values determining the PEF are out of date and that DOE has the obligation to review these values over time. NRDC and Sierra Club claim that maintaining a fuel content factor undermines the goals of the CAFE program and that the existence of the fuel content factor is inconsistent with statute.

The agency agrees that the input values for determining PEF are out of date and should be updated. While DOE recognizes that a fuel-content factor is not specified in section 32904 as it is in section 32905, DOE believes that such a factor could be considered within one of the four enumerated factors in section 32904(a)(2)(B). As suggested in the June 2000 Final Rule, the fuel content factor can be taken to, in part, represent the requirement to consider “the relative scarcity and value to the United States of all fuel used to generate electricity” (49 U.S.C. 32904(a)(2)(iii)). However, as noted above, DOE proposes an updated methodology where the fuel content factor is no longer included in the PEF calculation.

In their mathematical examples of the impacts of various PEF factors, NRDC and Sierra Club suggest that 33,705 Wh/gallon could be used as the appropriate value for the PEF, as this is the energy content contained in one gallon of gasoline used in the Monroney window sticker for consumer understanding. However, use of this value neglects upstream inefficiencies of gasoline refining and distribution and of electricity generation and transmission. Accordingly, DOE is proposing the PEF value of 23,160 Wh/gal.

Tesla supports granting the petition to update the PEF for electric vehicles. Tesla supports stringent CAFE standards for light-duty vehicles for efficiency gains.

For the reasons described previously, DOE is proposing an updated PEF value which is more reflective of current EV technology and market penetration.

The States of California, Delaware, Hawaii, Illinois, Maine, Maryland, Michigan, Minnesota, Nevada, New York, Oregon, Rhode Island, and Vermont; the Commonwealth of Pennsylvania; the District of Columbia; and the Cities of Los Angeles, New York, and Oakland (collectively, “the governments”) support granting the petition to update the PEF for electric vehicles. The governments note that the current PEF undermines the congressional intent of the CAFE program to conserve energy and incentivize production of electric vehicles. The governments' request that DOE reevaluate the expression of the need to conserve energy and the relative scarcity and value of fuel used for electricity in the PEF, replacing the existing fuel-content factor. The governments also note that data are available to inform DOE's consideration of the use of electric vehicles compared to petroleum-fueled vehicles.

The agency agrees with the governments on the need for updated inputs in the PEF methodology and has addressed those updates in this proposed rule. DOE notes that different metrics for considering scarcity and value were evaluated in order to develop DOE's preferred approach for the PEF. DOE acknowledges that there is considerably more data available today regarding the increased use and evolving technology surrounding EVs. These changes are reflected, in part, by DOE's removal of the fuel-content factor and update of grid mix projections reflective of recent policy changes. However, as previously noted, DOE is maintaining the driving pattern factor at 1.00 because DOE continues to believe that current EVs are fully capable vehicles which are likely to be used similarly to gasoline-powered or hybrid-electric vehicles. DOE also notes that with the proposed lower value for PEF, there is little incentive for an automaker to develop an electric vehicle that would not be used in a manner consistent with conventional gasoline-fueled vehicles in order to maximize its average fuel economy.

Members of the public can comment without being publicly identified. Two comments were received this way. Each of the commenters requested that DOE grant the petitioners' request to update the PEF and use updated values as appropriate.

The Department agrees with the commenters on the need for updated values and appreciates the input of the public in the regulatory rulemaking process.

Section II.C of this document presents the DOE rationale for the selection of 23,160 Wh/gal as the updated value of the PEF for CAFE calculations for the 2027-2031 CAFE regulatory period. DOE considered other approaches to determining the PEF value based upon the four factors enumerated in section 32904, particularly the transmission and generation efficiency factor and the scarcity factor. DOE briefly describes below the alternative approaches it considered.

A calculation for PEF similar to that proposed but based on the generation mix in 2020 yields a PEF of 20,136 Wh/gal, about 13% lower than the proposed value of 23,160 Wh/gal. 58 DOE views this value as an appropriate comparison of the relative energy today, but notes that a typical vehicle sold today will be expected to be on the road for well over a decade, at which point the PEF value would not account for improvements in overall grid efficiency as the grid decarbonizes. In particular, in the latter part of this decade, during which the revised PEF is expected to apply, the grid mix is likely to be significantly different from today's grid mix. In contrast, the proposed PEF value and DOE's proposed review approach would better account for the electricity generation mix of models sold throughout the CAFE compliance period and over the course of the vehicle's useful life. Accordingly, DOE did not pursue the approach based on current generation mix.

As the renewables that are on the grid are not scarce in the same way as physical combustion fuels, DOE considered an approach which only accounts for fossil fuel in the calculation of the electrical grid efficiency, ignoring the electricity generated by renewable and nuclear sources. This is different than the proposed approach, which includes current and projected renewable generation in the projected grid mixes used in DOE's methodology. See section II.B of this document.

In 2020, fossil fuel combustion supplied 60% of U.S. electricity. Following the same methodology in section II.C of this document, the PEF value would be 25,702 Wh/gal based on the 2020 grid, and 34,020 Wh/gal, averaged from 2027-2031. However, as the electric grid decarbonizes, this metric would rapidly increase and present a problem of artificially amplifying the PEF value like the current PEF value. With a highly renewable grid, automakers would be able to use electric vehicles in their fleet to improve their average fuel economy rather than improving the fuel economy of conventional gasoline-fueled vehicles, leading to a likely increase in national fuel consumption, counter to the goals of both EPCA and the CAFE program. Accordingly, DOE did not pursue this approach based on fossil energy consumption.

It is the policy of the Biden Administration to confront the global climate crisis and exert leadership in addressing climate change impacts. See Executive Order 14008, 86 FR 7619 (Feb. 1, 2021) (“Tackling the Climate Crisis at Home and Abroad”). This can be accomplished in part by reducing emissions of greenhouse gases. As most electricity-related emissions are from fossil fuel combustion, the greenhouse gas equivalent approach that DOE considered is very similar to the approach based on fossil energy consumption. Like that approach, DOE does not consider this to be an ideal approach as the PEF value would eventually diverge from the actual generation mix as the grid decarbonized. Moreover, this approach also deviates from the approach of the CAFE standards, which are designed to maximize feasible average fuel economy, while EPA regulates emissions of greenhouse gases from light-duty vehicles.

For purposes of this proposal, DOE considered energy scarcity to be a matter of primary energy availability. Scarcity can then be measured in terms of proved reserves, which is a measure of working inventory. By comparing total annual consumption with the quantity of proved reserves, we can estimate the number of years of each energy source available in the United States, comparing electricity sources with petroleum. Using the NREL Electrification 95 by 2050 projection, DOE calculates a PEF value of 105,039 Wh/gallon over the 2027-2031 regulatory period using this approach. This number is much higher than the proposed PEF, owing to the relative scarcity of domestically produced oil, at 6.1 years, compared to other fuels used to generate electricity. 59 Such a high value for the PEF—28% higher than the current level—would likely increase total petroleum usage, as automakers could produce less efficient gasoline-fueled vehicles and still meet CAFE standards by selling a small number of EVs.

Using proved reserves of resources also has significant drawbacks that make them unsuitable for use in calculating the PEF. First, future reserves are very difficult to predict as they are subject to commodity price fluctuations. Second, proved reserves change over relatively small timeframes, 60 making this a source of regulatory uncertainty for automakers. Further, the amount of proved reserves are ill-defined for renewable energy. Therefore, DOE did not pursue this alternative.

Executive Order (“E.O.”) 12866, “Regulatory Planning and Review,” 58 FR 51735 (Oct. 4, 1993), as supplemented and reaffirmed by E.O. 13563, “Improving Regulation and Regulatory Review,” 76 FR 3821 (Jan. 21, 2011), requires agencies, to the extent permitted by law, to (1) propose or adopt a regulation only upon a reasoned determination that its benefits justify its costs (recognizing that some benefits and costs are difficult to quantify); (2) tailor regulations to impose the least burden on society, consistent with obtaining regulatory objectives, taking into account, among other things, and to the extent practicable, the costs of cumulative regulations; (3) select, in choosing among alternative regulatory approaches, those approaches that maximize net benefits (including potential economic, environmental, public health and safety, and other advantages; distributive impacts; and equity); (4) to the extent feasible, specify performance objectives, rather than specifying the behavior or manner of compliance that regulated entities must adopt; and (5) identify and assess available alternatives to direct regulation, including providing economic incentives to encourage the desired behavior, such as user fees or marketable permits, or providing information upon which choices can be made by the public. DOE emphasizes as well that E.O. 13563 requires agencies to use the best available techniques to quantify anticipated present and future benefits and costs as accurately as possible. In its guidance, the Office of Information and Regulatory Affairs (“OIRA”) within the Office of Management and Budget (OMB) has emphasized that such techniques may include identifying changing future compliance costs that might result from technological innovation or anticipated behavioral changes. For the reasons stated in the preamble, this proposed regulatory action is consistent with these principles.

Section 6(a) of E.O. 12866 also requires agencies to submit “significant regulatory actions” to the OIRA for review. OIRA has determined that this proposed action constitutes a significant regulatory action within the scope of section 3(f)(1) of E.O. 12866. Accordingly, pursuant to section 6(a)(3)(C) of E.O. 12866, Accordingly, this action was subject to review by OIRA.

The Regulatory Flexibility Act (5 U.S.C. 601 et seq. ) requires the preparation of an initial regulatory flexibility analysis (IRFA) for any rule that by law must be proposed for public comment, unless the agency certifies that the rule, if promulgated, will not have a significant economic impact on a substantial number of small entities. As required by E.O. 13272, Proper Consideration of Small Entities in Agency Rulemaking, 67 FR 53461 (Aug. 16, 2002), DOE published procedures and policies on February 19, 2003, to ensure that the potential impacts of its rules on small entities are properly considered during the rulemaking process. (68 FR 7990). The Department has made its procedures and policies available on the Office of General Counsel's website: www.energy.gov/gc/office-general-counsel .

The proposed rule would revise DOE's regulations on electric vehicles regarding procedures for calculating a value for the petroleum-equivalent fuel economy of (EVs for use in the CAFE program administered by DOT. While the PEF value is an important part of the CAFE compliance calculation, its use and the weight given to it are determined by NHTSA's implementation of the CAFE standards program. Moreover, the downstream effects, including effects on small manufacturers, are ultimately determined by NHTSA's implementation of the CAFE program. Because this proposed rule would not directly regulate small entities but instead only amends a factor used to calculate compliance with DOT's CAFE standards, DOE certifies that this proposed rule would not have a significant economic impact on a substantial number of small entities, and, therefore, no regulatory flexibility analysis is required. 61 Mid-Tex Elec. Co-Op, Inc. v. F.E.R.C., 773 F.2d 327 (1985). The method for earning credits applies equally across manufacturers and does not place small entities at a significant competitive disadvantage. Accordingly, DOE did not prepare an IRFA for this proposed rulemaking. DOE's certification and supporting statement of factual basis will be provided to the Chief Counsel for Advocacy of the Small Business Administration for review under 5 U.S.C. 605(b).

The proposed rule would impose no new information or record keeping requirements. Accordingly, OMB clearance is not required under the Paperwork Reduction Act. (44 U.S.C. 3501 et seq ).

DOE is analyzing this proposed regulation in accordance with the National Environmental Policy Act of 1969 (“NEPA”) and DOE's NEPA implementing regulations (10 CFR part 1021). DOE's regulations include a categorical exclusion for amending an existing rule or regulation that does not change the environmental effect of the rule or regulation being amended. 10 CFR part 1021, subpart D, appendix A5. DOE anticipates that this rulemaking qualifies for categorical exclusion A5 because it is a rulemaking that is amending an existing rule or regulation that does not change the environmental effect of the rule or regulation being amended, no extraordinary circumstances exist that require further environmental analysis, and it otherwise meets the requirements for application of a categorical exclusion. See 10 CFR 1021.410. While the PEF value is an important aspect of the CAFE compliance calculation, in and of itself DOE's rulemaking to set the PEF value does not result in environmental effects. The use of and the weight given to the PEF value are determined by NHTSA, and any environmental effects would be from NHTSA's implementation of the CAFE standards program. Thus, DOE concludes that this action does not result in an environmental effect. DOE will complete its NEPA review before issuing the final rule.

Executive Order 13132, “Federalism,” 64 FR 43255 (Aug. 10, 1999), imposes certain requirements on agencies formulating and implementing policies or regulations that preempt State law or that have federalism implications. The Executive order requires agencies to examine the constitutional and statutory authority supporting any action that would limit the policymaking discretion of the States and to carefully assess the necessity for such actions. The E.O. also requires agencies to have an accountable process to ensure meaningful and timely input by State and local officials in the development of regulatory policies that have federalism implications. On March 14, 2000, DOE published a statement of policy describing the intergovernmental consultation process it will follow in the development of such regulations. ( See 65 FR 13735.) DOE examined this proposed rule and determined that it would not preempt State law and 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. No further action is required by E.O. 13132.

With respect to the review of existing regulations and the promulgation of new regulations, section 3(a) of E.O. 12988, “Civil Justice Reform,” 61 FR 4729 (Feb. 7, 1996), imposes on Federal agencies the general duty to adhere to the following requirements: (1) eliminate drafting errors and ambiguity; (2) write regulations to minimize litigation; and (3) provide a clear legal standard for affected conduct, rather than a general standard and promote simplification and burden reduction. Section 3(b) of E.O. 12988 specifically requires that executive agencies make every reasonable effort to ensure that the regulation: (1) clearly specifies its preemptive effect, if any; (2) clearly specifies any effect on existing Federal law or regulation; (3) provides a clear legal standard for affected conduct, while promoting simplification and burden reduction; (4) specifies its retroactive effect, if any; (5) adequately defines key terms; and (6) addresses other important issues affecting clarity and general draftsmanship under any guidelines issued by the Attorney General. Section 3(c) of E.O. 12988 requires executive agencies to review regulations in light of applicable standards in section 3(a) and section 3(b) to determine whether they are met, or it is unreasonable to meet one or more of them. DOE has completed the required review and determined that, to the extent permitted by law, the proposed rule would meet the relevant standards of E.O. 12988.

Title II of the Unfunded Mandates Reform Act of 1995 (UMRA) (Pub. L. 104-4) requires each Federal agency to assess the effects of Federal regulatory actions on State, local, and tribal governments and the private sector. For a proposed regulatory action likely to result in a rule that may cause the expenditure by State, local, and tribal governments, in the aggregate, or by the private sector of $100 million or more in any one year (adjusted annually for inflation), section 202 of UMRA requires a Federal agency to publish a written statement that estimates the resulting costs, benefits, and other effects on the national economy. (2 U.S.C. 1532(a) and (b)). The section of UMRA also requires a Federal agency to develop an effective process to permit timely input by elected officers of State, local, and tribal governments on a proposed “significant intergovernmental mandate” and requires an agency plan for giving notice and opportunity for timely input to potentially affected small governments before establishing any requirements that might significantly or uniquely affect small governments. On March 18, 1997, DOE published a statement of policy on its process for intergovernmental consultation under UMRA (62 FR 12820) (also available at www.energy.gov/gc/office-general-counsel ). This proposed rule contains neither an intergovernmental mandate nor a mandate that may result in the expenditure of $100 million or more in any year by State, local, and tribal governments, in the aggregate, or by the private sector, so these requirements under the Unfunded Mandates Reform Act do not apply.

Section 654 of the Treasury and General Government Appropriations Act of 1999 (Pub. L. 105-277) requires Federal agencies to issue a Family Policymaking Assessment for any rule that may affect family well-being. This proposed rule would not have any impact on the autonomy or integrity of the family as an institution. Accordingly, DOE has concluded that it is not necessary to prepare a Family Policymaking Assessment.

DOE has determined, under E.O. 12630, “Governmental Actions and Interference with Constitutionally Protected Property Rights,” 53 FR 8859 (Mar. 18, 1988), that this proposed rule would not result in any takings which might require compensation under the Fifth Amendment to the United States Constitution.

Section 515 of the Treasury and General Government Appropriations Act, 2001 (44 U.S.C. 3516, note) provides for agencies to review most disseminations of information to the public under guidelines established by each agency pursuant to general guidelines issued by OMB. OMB's guidelines were published at 67 FR 8452 (February 22, 2002), and DOE's guidelines were published at 67 FR 62446 (October 7, 2002). DOE has reviewed the proposed rule under the OMB and DOE guidelines and has concluded that it is consistent with applicable policies in those guidelines.

Executive Order 13211, “Actions Concerning Regulations That Significantly Affect Energy Supply, Distribution, or Use,” 66 FR 28355 (May 22, 2001), requires Federal agencies to prepare and submit to OIRA, a Statement of Energy Effects for any proposed significant energy action. A “significant energy action” is defined as any action by an agency that promulgated or is expected to lead to promulgation of a final rule, and that: (1) is a significant regulatory action under E.O. 12866, or any successor order; and (2) is likely to have a significant adverse effect on the supply, distribution, or use of energy, or (3) is designated by the Administrator of OIRA as a significant energy action. For any proposed significant energy action, the agency must give a detailed statement of any adverse effects on energy supply, distribution, or use should the proposal be implemented, and of reasonable alternatives to the action and their expected benefits on energy supply, distribution, and use. The proposed rule would amend a factor used to calculate compliance with DOT's CAFE standards but does not meet the second criterion. Additionally, OIRA has not designated this proposed rule as a significant energy action. Accordingly, the requirements of E.O. 13211 do not apply.

DOE will accept comments, data, and information regarding this proposed rule on or before the date provided in the DATES section at the beginning of this proposed rule. Interested parties may submit comments, data, and other information using any of the methods described in the ADDRESSES section at the beginning of this document.

Submitting comments via www.regulations.gov. The www.regulations.gov web page will require you to provide your name and contact information. Your contact information will be viewable to DOE General Counsel staff only. Your contact information will not be publicly viewable except for your first and last names, organization name (if any), and submitter representative name (if any). If your comment is not processed properly because of technical difficulties, DOE will use this information to contact you. If DOE cannot read your comment due to technical difficulties and cannot contact you for clarification, DOE may not be able to consider your comment.

However, your contact information will be publicly viewable if you include it in the comment itself or in any documents attached to your comment. Any information that you do not want to be publicly viewable should not be included in your comment, nor in any document attached to your comment. Otherwise, persons viewing comments will see only first and last names, organization names, correspondence containing comments, and any documents submitted with the comments.

Do not submit to www.regulations.gov information the disclosure of which is restricted by statute, such as trade secrets and commercial or financial information (hereinafter referred to as Confidential Business Information (CBI)). Comments submitted through www.regulations.gov cannot be claimed as CBI. Comments received through the website will waive any CBI claims for the information submitted. For information on submitting CBI, see the Confidential Business Information section below.

DOE processes submissions made through www.regulations.gov before posting. Normally, comments will be posted within a few days of being submitted. However, if large volumes of comments are being processed simultaneously, your comment may not be viewable for up to several weeks. Please keep the comment tracking number that www.regulations.gov provides after you have successfully uploaded your comment.

Submitting comments via email, hand delivery/courier, or postal mail. Comments and documents submitted via email, hand delivery/courier, or postal mail also will be posted to www.regulations.gov . If you do not want your personal contact information to be publicly viewable, do not include it in your comment or any accompanying documents. Instead, provide your contact information in a cover letter. Include your first and last names, email address, telephone number, and optional mailing address. The cover letter will not be publicly viewable if it does not include any comments.

Include contact information each time you submit comments, data, documents, and other information to DOE. If you submit via postal mail or hand delivery/courier, please provide all items on a CD, if feasible, in which case it is not necessary to submit printed copies. No telefacsimiles (faxes) will be accepted.

Comments, data, and other information submitted to DOE electronically should be provided in PDF (preferred), Microsoft Word or Excel, WordPerfect, or text (ASCII) file format. Provide documents that are written in English, and that are free of any defects or viruses. Documents should not contain special characters or any form of encryption and, if possible, they should carry the electronic signature of the author.

Campaign form letters. Please submit campaign form letters by the originating organization in batches of between 50 to 500 form letters per PDF or as one form letter with a list of supporters' names compiled into one or more PDFs. This reduces comment processing and posting time.

Confidential Business Information. Pursuant to 10 CFR 1004.11, any person submitting information that he or she believes to be confidential and exempt by law from public disclosure should submit via email, postal mail, or hand delivery/courier two well-marked copies: One copy of the document marked “confidential” including all the information believed to be confidential, and one copy of the document marked “non-confidential” that deletes the information believed to be confidential. Submit these documents via email or on a CD, if feasible. DOE will make its own determination about the confidential status of the information and will treat it according to its determination.

It is DOE's policy that all comments, including any personal information provided in the comments, may be included in the public docket, without change and as received, except for information deemed to be exempt from public disclosure.

The Secretary of Energy has approved publication of this Notice of proposed rulemaking and request for comment.

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

For the reasons stated in the preamble, DOE is proposing to amend part 474 of Chapter II of Title 10 of the Code of Federal Regulations as set forth below:

Comments Invited

The FAA invites you to send any written relevant data, views, or arguments about this proposal. Send your comments to an address listed under ADDRESSES . Include “Docket No. FAA-2023-0669; Project Identifier MCAI-2022-01238-T” at the beginning of your comments. The most helpful comments reference a specific portion of the proposal, explain the reason for any recommended change, and include supporting data. The FAA will consider all comments received by the closing date and may amend this proposal because of those comments.

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

CBI is commercial or financial information that is both customarily and actually treated as private by its owner. Under the Freedom of Information Act (FOIA) (5 U.S.C. 552), CBI is exempt from public disclosure. If your comments responsive to this NPRM contain commercial or financial information that is customarily treated as private, that you actually treat as private, and that is relevant or responsive to this NPRM, it is important that you clearly designate the submitted comments as CBI. Please mark each page of your submission containing CBI as “PROPIN.” The FAA will treat such marked submissions as confidential under the FOIA, and they will not be placed in the public docket of this NPRM. Submissions containing CBI should be sent to Vladimir Ulyanov, Aerospace Engineer, Large Aircraft Section, FAA, International Validation Branch, 2200 South 216th St., Des Moines, WA 98198; telephone 206-231-3229; email vladimir.ulyanov@faa.gov. Any commentary that the FAA receives which is not specifically designated as CBI will be placed in the public docket for this rulemaking.

The FAA issued AD 2006-10-13, Amendment 39-14597 (71 FR 28250, May 16, 2006) (AD 2006-10-13), for all Airbus SAS Model A330-223, -321, -322, and -323 airplanes. AD 2006-10-13 was prompted by MCAI originated by the Direction Générale de l'Aviation Civile (DGAC), which is the former airworthiness authority for France. DGAC issued French airworthiness directive F-2004-028 R2, dated October 26, 2005 (DGAC France AD F-2004-028 R2), to correct an unsafe condition identified as cracking of the LAPF firewall.

AD 2006-10-13 requires repetitive detailed inspections for cracking of the LAPF firewall, and corrective actions if necessary. AD 2006-10-13 also provides an optional terminating action for the repetitive inspections. The FAA issued AD 2006-10-13 to address cracking of the LAPF firewall, which could reduce the effectiveness of the firewall and result in an uncontrolled engine fire.

Since the FAA issued AD 2006-10-13, EASA, which is the Technical Agent for the Member States of the European Union superseded DGAC France AD F-2004-028 R2 and issued EASA AD 2022-0190, dated September 14, 2022 (EASA AD 2022-0190) (referred to after this as the MCAI), to correct an unsafe condition on certain Airbus SAS Model A330-223, A330-321, A330-322, and A330-323 airplanes. The MCAI states that since DGAC France AD F-2004-028 R2 was issued, Airbus designed an updated LAPF, the installation of which also constitutes terminating action for the repetitive inspections required by DGAC France AD F-2004-028 R2. EASA AD 2022-0190 retains the requirements of DGAC France AD F-2004-028 R2, and includes reference to an additional optional terminating action modification. EASA AD 2022-0190 also excludes airplanes on which the optional terminating action was embodied in production from its applicability.

In AD 2006-10-13, the FAA included requirements related to crack lengths greater than 1.5 inches or to multiple cracks with a combined length greater than or equal to 1.5 inches, as well as a requirement to repair before further flight if a crack is greater than 1.5 inches long or if multiple cracks are found with a combined length of greater than 1.5 inches. AD 2006-10-13 also omitted a requirement to stop-drill the crack or cracks and apply sealant before further flight for cracks that extended to greater than 1.2 inches long but less than or equal to 1.5 inches long. The FAA has since determined that this AD should match DGAC France AD F-2004-028 R2 and EASA AD 2022-1190 and require actions (including stop-drilling any cracks and applying sealant) based on any crack length being less than or equal to 30.48mm (1.2 inches) or greater than or equal to 30.48mm (1.2 inches). The FAA has determined that the stop-drilling and sealant application are adequate to address any cracks and maintain the fire safety and capability of the firewall until the required LAPF firewall repair is done as specified in EASA AD 2022-1190. This proposed AD would include a grace period for airplanes to switch to the new proposed requirements.

The FAA is proposing this AD to address the unsafe condition on these products. You may examine the MCAI in the AD docket at regulations.gov under Docket No. FAA-2023-0669.

Although this proposed AD does not explicitly restate the requirements of AD 2006-10-13, this proposed AD would retain certain of the requirements of AD 2006-10-13. Those requirements are referenced in EASA AD 2022-0190, which, in turn, is referenced in paragraph (g) of this proposed AD.

EASA AD 2022-0190 specifies procedures for repetitively inspecting each LAPF firewall for cracks, and performing corrective actions, including stop-drilling the crack and applying sealants, and repairing the LAPF firewall. EASA AD 2022-0190 also specifies terminating actions for the repetitive inspections, including modifying and reidentifying the LAPF or replacing the LAPF with an LAPF having part number 72A100-713. 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, it has notified the FAA of the unsafe condition described in the MCAI referenced above. The FAA is issuing this NPRM after determining that the unsafe condition described previously is likely to exist or develop in other products of the same type design.

This proposed AD would retain certain requirements of AD 2006-10-13. This proposed AD would require accomplishing the actions specified in EASA AD 2022-0190 described previously, except for any differences identified as exceptions in the regulatory text of this proposed AD.

In the FAA's ongoing efforts to improve the efficiency of the AD process, the FAA developed a process to use some civil aviation authority (CAA) ADs as the primary source of information for compliance with requirements for corresponding FAA ADs. The FAA has been coordinating this process with manufacturers and CAAs. As a result, the FAA proposes to incorporate EASA AD 2022-0190 by reference in the FAA final rule. This proposed AD would, therefore, require compliance with EASA AD 2022-0190 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 EASA AD 2022-0190 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 EASA AD 2022-0190. Service information required by EASA AD 2022-0190 for compliance will be available at regulations.gov under Docket No. FAA-2023-0669 after the FAA final rule is published.

The FAA estimates that this AD, if adopted as proposed, would affect 41 airplanes of U.S. registry. The FAA estimates the following costs to comply with this proposed AD:

Comments Invited

The FAA invites you to send any written relevant data, views, or arguments about this proposal. Send your comments to an address listed under ADDRESSES . Include “Docket No. FAA-2023-0667; Project Identifier MCAI-2022-00735-A” at the beginning of your comments. The most helpful comments reference a specific portion of the proposal, explain the reason for any recommended change, and include supporting data. The FAA will consider all comments received by the closing date and may amend the proposal because of those comments.

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

CBI is commercial or financial information that is both customarily and actually treated as private by its owner. Under the Freedom of Information Act (FOIA) (5 U.S.C. 552), CBI is exempt from public disclosure. If your comments responsive to this NPRM contain commercial or financial information that is customarily treated as private, that you actually treat as private, and that is relevant or responsive to this NPRM, it is important that you clearly designate the submitted comments as CBI. Please mark each page of your submission containing CBI as “PROPIN.” The FAA will treat such marked submissions as confidential under the FOIA, and they will not be placed in the public docket of this NPRM. Submissions containing CBI should be sent to Doug Rudolph, Aviation Safety Engineer, General Aviation & Rotorcraft Section, International Validation Branch, FAA, 901 Locust, Room 301, Kansas City, MO 64106. Any commentary that the FAA receives which is not specifically designated as CBI will be placed in the public docket for this rulemaking.

The FAA issued AD 2022-19-03, Amendment 39-22172 (87 FR 57809, September 22, 2022), (AD 2022-19-03), for all Pilatus Model PC-12, PC-12/45, PC-12/47, and PC-12/47E airplanes. AD 2022-19-03 was prompted by MCAI originated by EASA, which is the Technical Agent for the Member States of the European Union. EASA issued AD 2021-0214, dated September 17, 2021 (EASA AD 2021-0214). The unsafe condition in EASA AD 2021-0214 is failure of MLG actuator bottom attachment bolts and failure to accomplish a new life limit for the rudder bellcrank. This prompted the FAA to issue AD 2022-19-03.

AD 2022-19-03 requires incorporating new revisions to the ALS of the existing AMM or ICA to establish a 5-year life limit for certain MLG actuator bottom attachment bolts and new life limits for the rudder bellcrank. The FAA issued AD 2022-19-03 to prevent MLG collapse during all phases of airplane operations, including take-off and landing and also to prevent rudder bellcrank failure, which could lead to loss of airplane control.

Since the FAA issued AD 2022-19-03, EASA superseded EASA AD 2021-0214 and issued EASA AD 2022-0103, dated June 9, 2022 (EASA AD 2022-0103) (referred to after this as the MCAI), for all Pilatus Model PC-12, PC-12/45, PC-12/47, and PC-12/47E airplanes. The MCAI states that new or more restrictive tasks and limitations have been developed. These new or more restrictive airworthiness limitations include repetitive inspections for cracks in the lower main spar connection of the horizontal stabilizer. The FAA is issuing this AD to address failure of certain parts, which could result in loss of airplane control. Additionally, the actions required to address the unsafe condition in AD 2022-19-03 are included in “the applicable ALS,” as defined in EASA AD 2022-0103. You may examine the MCAI in the AD docket at regulations.gov under Docket No. FAA-2023-0667.

EASA AD 2022-0103 requires certain actions and associated thresholds and intervals, including life limits and maintenance tasks. EASA AD 2022-0103 also requires doing corrective actions if any discrepancy (as defined in the applicable ALS) is found during accomplishment of any task required by paragraph (1) of EASA AD 2022-0103 and revising the approved aircraft maintenance program (AMP) by incorporating the limitations, tasks, and associated thresholds and intervals described in “the applicable ALS” as defined in EASA AD 2022-0103. 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 ADDRESSES .

These products have been approved by the aviation authority of another country and are approved for operation in the United States. Pursuant to the FAA's bilateral agreement with the State of Design Authority, it has notified the FAA of the unsafe condition described in the MCAI described above. The FAA is issuing this NPRM after determining that the unsafe condition described previously is likely to exist or develop in other products of the same type design.

This proposed AD would retain none of the requirements of AD 2022-19-03. This proposed AD would require revising the ALS of the existing AMM or ICA for your airplane as specified in EASA AD 2022-0103, described previously, except as discussed under “Differences Between this Proposed AD and EASA AD 2022-0103.” The owner/operator (pilot) holding at least a private pilot certificate may revise the ALS of the existing AMM or ICA for your airplane, and performance of this incorporation must be entered into the aircraft records showing compliance with this AD in accordance with 14 CFR 43.9(a) and 14 CFR 91.417(a)(2)(v). The record must be maintained as required by 14 CFR 91.417, 121.380, or 135.439.

In the FAA's ongoing efforts to improve the efficiency of the AD process, the FAA developed a process to use some civil aviation authority (CAA) ADs as the primary source of information for compliance with requirements for corresponding FAA ADs. The FAA has been coordinating this process with manufacturers and CAAs. As a result, the FAA proposes to incorporate EASA AD 2022-0103 by reference in the FAA final rule. Service information required by the EASA AD for compliance will be available at regulations.gov by searching for and locating Docket No. FAA-2023-0667 after the FAA final rule is published.

Paragraph (2) of EASA AD 2022-0103 requires corrective actions in accordance with the applicable Pilatus maintenance documentation or contacting Pilatus for approved instructions and accomplishing those instructions accordingly. Paragraph (3) of EASA AD 2022-0103 requires revising the approved AMP. Paragraph (4) of EASA AD 2022-0103 provides credit for performing actions in accordance with previous revisions of the Pilatus AMM. Paragraph (5) of EASA AD 2022-0103 explains that after revision of the approved AMP, it is not necessary to record accomplishment of individual actions for demonstration of AD compliance. This proposed AD would not require compliance with paragraphs (2) through (5) of EASA AD 2022-0103.

The FAA estimates that this AD, if adopted as proposed, would affect 1,030 airplanes of U.S. registry. Labor rates are estimated at $85 per work-hour. Based on these numbers, the FAA estimates that revising the ALS of the existing AMM or ICA for your airplane would require about 1 work-hour for an estimated cost on U.S. operators of $87,550 or $85 per airplane.

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

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

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

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

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

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

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

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

Authority for This Rulemaking

The FAA's authority to issue rules regarding aviation safety is found in Title 49 of the United States Code. Subtitle I, Section 106 describes the authority of the FAA Administrator. Subtitle VII, Aviation Programs, describes in more detail the scope of the agency's authority. This rulemaking is promulgated under the authority described in Subtitle VII, Part A, Subpart I, Section 40103. Under that section, the FAA is charged with prescribing regulations to assign the use of the airspace necessary to ensure the safety of aircraft and the efficient use of airspace. This regulation is within the scope of that authority as it would modify the airway structure as necessary to preserve the safe and efficient flow of air traffic within the National Airspace System.

The FAA invites interested persons to participate in this rulemaking by submitting written comments, data, or views. Comments are specifically invited on the overall regulatory, aeronautical, economic, environmental, and energy-related aspects of the proposal. The most helpful comments reference a specific portion of the proposal, explain the reason for any recommended change, and include supporting data. To ensure the docket does not contain duplicate comments, commenters should submit only one time if comments are filed electronically, or commenters should send only one copy of written comments if comments are filed in writing.

The FAA will file in the docket all comments it receives, as well as a report summarizing each substantive public contact with FAA personnel concerning this proposed rulemaking. Before acting on this proposal, the FAA will consider all comments it receives on or before the closing date for comments. The FAA will consider comments filed after the comment period has closed if it is possible to do so without incurring expense or delay. The FAA may change this proposal in light of the comments it receives.

Privacy: In accordance with 5 U.S.C. 553(c), DOT solicits comments from the public to better inform its rulemaking process. DOT posts these comments, without edit, including any personal information the commenter provides, to www.regulations.gov, as described in the system of records notice (DOT/ALL-14 FDMS), which can be reviewed at www.dot.gov/privacy.

An electronic copy of this document may be downloaded through the internet at www.regulations.gov. Recently published rulemaking documents can also be accessed through the FAA's web page at www.faa.gov/air_traffic/publications/airspace_amendments/.

You may review the public docket containing the proposal, any comments received and any final disposition in person in the Dockets Operations office (see ADDRESSES section for address, phone number, and hours of operations). An informal docket may also be examined during normal business hours at the office of the Western Service Center, Federal Aviation Administration, 2200 South 216th St., Des Moines, WA 98198.

VOR Federal Airways are published in paragraph 6010 of FAA Order JO 7400.11, Airspace Designations and Reporting Points, which is incorporated by reference in 14 CFR 71.1 on an annual basis. This document proposes to amend the current version of that order, FAA Order JO 7400.11G, dated August 19, 2022 and effective September 15, 2022. These updates would be published in the next update to FAA Order JO 7400.11. That order is publicly available as listed in the ADDRESSES section of this document.

FAA Order JO 7400.11G lists Class A, B, C, D, and E airspace areas, air traffic service routes, and reporting points.

FAA proposes to extend V-388 westward from the Paradise VORTAC to the Seal Beach VORTAC following the standard route to enhance safety. The standard routing used by air traffic control (ATC) and issued to aircraft flying between the Paradise VORTAC and the Seal Beach VORTAC is from the Paradise VORTAC northwest along the Paradise VORTAC 285°(T)/270°(M) radial to the DOWDD Fix, then southwest along the Pomona, CA, VORTAC 202°(T)/187°(M) radial to the AHEIM Fix, then westward to the Seal Beach VORTAC. The airspace in which this extension would transition is highly congested and equally complex. To mitigate potential safety risks while maintaining the highest level of efficiency as possible, the controlling ATC facilities have devised specific traffic flows and utilize the standard routing noted previously. This extension of V-388 would overlap the routing issued to aircraft today, reduce ATC and pilot computer entries, simplify ATC clearances, and reduce the workload of pilots and aviators thus enhancing aviation safety as a whole.

The FAA is proposing an amendment to 14 CFR part 71 to extend V-388 westward beyond the Paradise, CA, VORTAC to the Seal Beach, CA, VORTAC. This action would incorporate the standard routing used by ATC into the VOR Federal airways enroute structure to preserve the safe and efficient flow of air traffic in southern CA. The proposed extension is described below.

V-388: V-388 currently extends between the Paradise, CA, VORTAC and the Palm Springs, CA, VORTAC. The FAA proposes to extend the airway westward from the Paradise, CA, VORTAC to the Seal Beach, CA, VORTAC. The proposed extension would extend from the Paradise VORTAC to the intersection of the Paradise VORTAC 285°(T)/270°(M) and Pomona, CA, VORTAC 202°(T)/187°(M) radials (DOWDD Fix), then to the intersection of the Pomona, CA, VORTAC 202°(T)/187°(M) and Seal Beach, CA, VORTAC 073°(T)/058°(M) radials (AHEIM Fix), then to the Seal Beach, CA, VORTAC. As amended, the airway would extend between the Seal Beach VORTAC and the Palm Springs VORTAC.

Existing NAVAID radials in the V-388 description below are unchanged and stated in degrees True north. New intersection NAVAID radials are stated in degrees True north (T)/Magnetic north (M).

VOR Federal airways are published in paragraph 6010(a) of FAA Order JO 7400.11G, dated August 19, 2022, and effective September 15, 2022, which is incorporated by reference in 14 CFR 71.1. The V-388 airway action listed in this document would be published subsequently in FAA Order JO 7400.11.

FAA Order JO 7400.11, Airspace Designations and Reporting Points, is published yearly and effective on September 15.

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

This proposal will be subject to an environmental analysis in accordance with FAA Order 1050.1F, “Environmental Impacts: Policies and Procedures” prior to any FAA final regulatory action.

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

Background

This document contains proposed additions to 26 CFR part 1 (Income Tax Regulations) under section 6011 of the Internal Revenue Code (Code) regarding transactions identified as listed transactions and transactions of interest for purposes of section 6011.

Section 6011(a) generally provides that, when required by regulations prescribed by the Secretary of the Treasury or her delegate (Secretary), “any person made liable for any tax imposed by this title, or with respect to the collection thereof, shall make a return or statement according to the forms and regulations prescribed by the Secretary. Every person required to make a return or statement shall include therein the information required by such forms or regulations.”

On February 28, 2000, the Treasury Department and the IRS issued a series of temporary regulations (TD 8877; TD 8876; TD 8875) and cross-referencing notices of proposed rulemaking (REG-103735-00; REG-110311-98; REG-103736-00) under sections 6011, 6111, and 6112. The temporary regulations and cross-referencing notices of proposed rulemaking were published in the Federal Register (65 FR 11205, 65 FR 11269; 65 FR 11215, 65 FR 11272; 65 FR 11211, 65 FR 11271) on March 2, 2000 (2000 Temporary Regulations). The 2000 Temporary Regulations were modified several times before March 4, 2003, the date on which the Treasury Department and the IRS, after providing notice and opportunity for public comment and considering the comments received, published final regulations (TD 9046) in the Federal Register (68 FR 10161) under sections 6011, 6111, and 6112 (2003 Final Regulations). The 2000 Temporary Regulations and 2003 Final Regulations consistently provided that reportable transactions include listed transactions and that a listed transaction is a transaction that is the same as or substantially similar to one of the types of transactions that the IRS has determined to be a tax avoidance transaction and has identified by notice, regulation, or other form of published guidance as a listed transaction.

Following the 2003 promulgation of § 1.6011-4, Congress passed the American Jobs Creation Act of 2004 (AJCA), Public Law 108-357, 118 Stat. 1418 (October 22, 2004), which added sections 6707A, 6662A, and 6501(c)(10) to the Code, and revised sections 6111, 6112, 6707, and 6708 of the Code. See sections 811-812 and 814-817 of the AJCA. The AJCA's legislative history explains that Congress incorporated in the statute the method that the Treasury Department and the IRS had been using to identify reportable transactions, and provided incentives, via penalties, to encourage taxpayer compliance with the new disclosure reporting obligations. As the Committee on Ways and Means explained in its report accompanying H.R. 4520, which became the AJCA:

In Footnote 232 of the House Report, the Committee on Ways and Means notes that the statutory definitions of “reportable transaction” and “listed transaction” were intended to incorporate the pre-AJCA regulatory definitions while providing the Secretary with leeway to make changes to those definitions:

Section 6707A(c)(1) defines a “reportable transaction” as “any transaction with respect to which information is required to be included with a return or statement because, as determined under regulations prescribed under section 6011, such transaction is of a type which the Secretary determines as having a potential for tax avoidance or evasion.” A “listed transaction” is defined by section 6707A(c)(2) as “a reportable transaction which is the same as, or substantially similar to, a transaction specifically identified by the Secretary as a tax avoidance transaction for purposes of section 6011.”

Section 6111(a), as revised by the AJCA, provides that each material advisor with respect to any reportable transaction must make a return setting forth (1) information identifying and describing the transaction, (2) information describing any potential tax benefits expected to result from the transaction, and (3) such other information as the Secretary may prescribe. Such return must be filed not later than the date specified by the Secretary. Section 6111(b)(2) provides that a reportable transaction has the meaning given to such term by section 6707A(c).

Section 6112(a), as revised by the AJCA, provides that each material advisor with respect to any reportable transaction (as defined in section 6707A(c)) must (whether or not required to file a return under section 6111 with respect to such transaction) maintain a list (1) identifying each person with respect to whom such advisor acted as a material advisor, and (2) containing such other information as the Secretary may by regulations require.

On November 2, 2006, the Treasury Department and the IRS published a notice of proposed rulemaking (REG-103038-05) in the Federal Register (71 FR 64488) under section 6011 (November 2006 Transaction of Interest (TOI) Regulations) proposing to add a new category of reportable transaction requiring disclosure under section 6011. The preamble to the November 2006 TOI Regulations (71 FR 64488) explains that these transactions, referred to as transactions of interest, are transactions that the Treasury Department and the IRS believe have the potential for tax avoidance or evasion, but for which the Treasury Department and the IRS lack enough information to determine whether the transaction should be identified as a listed transaction. The November 2006 TOI Regulations proposed that transactions of interest would be identified by the IRS via notice, regulation, or other form of published guidance.

On the same date that the November 2006 TOI Regulations were published, the Treasury Department and the IRS also published two separate notices of proposed rulemaking (REG-103039-05; REG-103043-05) in the Federal Register (71 FR 64496, 71 FR 64501) under sections 6111 and 6112, respectively (November 2006 Regulations). The November 2006 Regulations proposed to modify the then-existing regulations relating to the disclosure of reportable transactions by material advisors under section 6111, and the list maintenance requirements of material advisors with respect to reportable transactions under section 6112, in part, to account for the changes made by the AJCA and, in part, to make corresponding updates to the material advisor rules to account for the treatment of transactions of interest as reportable transactions as proposed by the November 2006 TOI Regulations.

After providing notice and opportunity for public comment and considering the comments received, on August 3, 2007, the Treasury Department and the IRS published the November 2006 Regulations and the November 2006 TOI Regulations as final regulations (TD 9350, TD 9351, and TD 9352) in the Federal Register (72 FR 43146, 72 FR 43157, and 72 FR 43154) under sections 6011, 6111, and 6112.

Section 1.6011-4(a) provides that every taxpayer that has participated in a reportable transaction within the meaning of § 1.6011-4(b) and who is required to file a tax return must file a disclosure statement within the time prescribed in § 1.6011-4(e).

Sections 1.6011-4(d) and (e) provide that the disclosure statement—Form 8886, Reportable Transaction Disclosure Statement (or successor form)—must be attached to the taxpayer's tax return for each taxable year for which a taxpayer participates in a reportable transaction. A copy of the disclosure statement must be sent to IRS's Office of Tax Shelter Analysis (OTSA) at the same time that any disclosure statement is first filed by the taxpayer pertaining to a particular reportable transaction.

Reportable transactions include listed transactions, confidential transactions, transactions with contractual protection, loss transactions, and transactions of interest. See § 1.6011-4(b)(2) through (6). Consistent with the definitions previously provided in the 2000 Temporary Regulations and later in the 2003 Final Regulations, as promulgated in 2007, § 1.6011-4(b)(2) continues to define a “listed transaction” as a transaction that is the same as or substantially similar to one of the types of transactions that the IRS has determined to be a tax avoidance transaction and identified by notice, regulation, or other form of published guidance as a listed transaction. Section 1.6011-4(b)(6) defines a “transaction of interest” as a transaction that is the same as or substantially similar to one of the types of transactions that the IRS has identified by notice, regulation, or other form of published guidance as a transaction of interest.

Section 1.6011-4(c)(4) provides that a transaction is “substantially similar” if it is expected to obtain the same or similar types of tax consequences and is either factually similar or based on the same or similar tax strategy. Receipt of an opinion regarding the tax consequences of the transaction is not relevant to the determination of whether the transaction is the same as or substantially similar to another transaction. Further, the term substantially similar must be broadly construed in favor of disclosure. For example, a transaction may be substantially similar to a listed transaction or a transaction of interest even though it may involve different entities or use different Code provisions.

Section 1.6011-4(c)(3)(i)(A) provides that a taxpayer has participated in a listed transaction if the taxpayer's tax return reflects tax consequences or a tax strategy described in the published guidance that lists the transaction under § 1.6011-4(b)(2). Published guidance also may identify other types or classes of persons that will be treated as participants in a listed transaction. Published guidance may identify types or classes of persons that will not be treated as participants in a listed transaction. Section 1.6011-4(c)(3)(i)(E) provides that a taxpayer has participated in a transaction of interest if the taxpayer is one of the types or classes of persons identified as participants in the transaction in the published guidance describing the transaction of interest.

Section 1.6011-4(e)(2)(i) provides that if a transaction becomes a listed transaction or a transaction of interest after the filing of a taxpayer's tax return reflecting the taxpayer's participation in the transaction and before the end of the period of limitations for assessment for any taxable year in which the taxpayer participated in the transaction, then a disclosure statement must be filed with OTSA within 90 calendar days after the date on which the transaction becomes a listed transaction or transaction of interest. This requirement extends to an amended return and exists regardless of whether the taxpayer participated in the transaction in the year the transaction became a listed transaction or transaction of interest. The Commissioner of Internal Revenue may also determine the time for disclosure of listed transactions and transactions of interest in the published guidance identifying the transaction.

Participants required to disclose these transactions under § 1.6011-4 who fail to do so are subject to penalties under section 6707A. Section 6707A(b) provides that the amount of the penalty is 75 percent of the decrease in tax shown on the return as a result of the reportable transaction (or which would have resulted from such transaction if such transaction were respected for Federal tax purposes), subject to minimum and maximum penalty amounts. The minimum penalty amount is $5,000 in the case of a natural person and $10,000 in any other case. For listed transactions, the maximum penalty amount is $100,000 in the case of a natural person and $200,000 in any other case. For other reportable transactions, including transactions of interest, the maximum penalty is $10,000 in the case of a natural person and $50,000 in any other case.

Additional penalties may also apply. In general, section 6662A imposes a 20 percent accuracy-related penalty on any understatement (as defined in section 6662A(b)(1)) attributable to an adequately disclosed reportable transaction. If the taxpayer had a requirement to disclose participation in the reportable transaction but did not adequately disclose the transaction in accordance with the regulations under section 6011, the taxpayer is subject to an increased penalty rate equal to 30 percent of the understatement. See section 6662A(c). Section 6662A(b)(2) provides that section 6662A applies to any item which is attributable to any listed transaction and any reportable transaction (other than a listed transaction) if a significant purpose of such transaction is the avoidance or evasion of Federal income tax.

Participants required to disclose listed transactions who fail to do so are also subject to an extended period of limitations under section 6501(c)(10). That section provides that the time for assessment of any tax with respect to the transaction shall not expire before the date that is one year after the earlier of the date the participant discloses the transaction or the date a material advisor discloses the participation pursuant to a written request under section 6112(b)(1)(A).

Section 301.6111-3(a) of the Procedure and Administration Regulations provides that each material advisor with respect to any reportable transaction, as defined in § 1.6011-4(b), must file a return as described in § 301.6111-3(d) by the date described in § 301.6111-3(e).

Section 301.6111-3(b)(1) provides that a person is a material advisor with respect to a transaction if the person provides any material aid, assistance, or advice with respect to organizing, managing, promoting, selling, implementing, insuring, or carrying out any reportable transaction, and directly or indirectly derives gross income in excess of the threshold amount as defined in § 301.6111-3(b)(3) for the material aid, assistance, or advice. Under § 301.6111-3(b)(2)(i) and (ii), a person provides material aid, assistance, or advice if the person provides a tax statement, which is any statement (including another person's statement), oral or written, that relates to a tax aspect of a transaction that causes the transaction to be a reportable transaction as defined in § 1.6011-4(b)(2) through (7).

Material advisors must disclose transactions on Form 8918, Material Advisor Disclosure Statement (or successor form), as provided in § 301.6111-3(d) and (e). Section 301.6111-3(e) provides that the material advisor's disclosure statement for a reportable transaction must be filed with OTSA by the last day of the month that follows the end of the calendar quarter in which the advisor becomes a material advisor with respect to a reportable transaction or in which the circumstances necessitating an amended disclosure statement occur. A person may become a material advisor with respect to transactions that are later identified as listed transactions or transactions of interest. See § 301.6111-3(b)(4). The disclosure statement must be sent to OTSA at the address provided in the Instructions for Form 8918 (or successor form).

Section 301.6111-3(d)(2) provides that the IRS will issue to a material advisor a reportable transaction number with respect to the disclosed reportable transaction. Receipt of a reportable transaction number does not indicate that the disclosure statement is complete, nor does it indicate that the transaction has been reviewed, examined, or approved by the IRS. Material advisors must provide the reportable transaction number to all taxpayers and material advisors for whom the material advisor acts as a material advisor as defined in § 301.6111-3(b). The reportable transaction number must be provided at the time the transaction is entered into, or, if the transaction is entered into prior to the material advisor receiving the reportable transaction number, within 60 calendar days from the date the reportable transaction number is mailed to the material advisor.

Additionally, material advisors must prepare and maintain lists identifying each person with respect to whom the advisor acted as a material advisor with respect to the reportable transaction in accordance with § 301.6112-1(b) and furnish such lists to the IRS in accordance with § 301.6112-1(e).

Section 6707(a) provides that a material advisor who fails to file a timely disclosure, or files an incomplete or false disclosure statement, is subject to a penalty. Pursuant to section 6707(b)(2), for listed transactions, the penalty is the greater of (A) $200,000, or (B) 50 percent of the gross income derived by such person with respect to aid, assistance, or advice which is provided with respect to the listed transaction before the date the return is filed under section 6111. Pursuant to section 6707(b)(1), the penalty for other reportable transactions, including transactions of interest, is $50,000.

A material advisor may also be subject to a penalty under section 6708 for failing to maintain a list under section 6112(a) and failing to make the list available upon written request to the Secretary in accordance with section 6112(b) within 20 business days after the date of such request. Section 6708(a) provides that the penalty is $10,000 per day for each day of the failure after the 20th day. However, no penalty will be imposed with respect to the failure on any day if such failure is due to reasonable cause.

As enacted by section 1024 of the Tax Reform Act of 1986, Public Law 99-514, 100 Stat. 2085, 2405 (October 22, 1986), section 831(a) generally imposes tax on the taxable income (determined under the special rules for calculating taxable income of insurance companies in part II of subchapter L of chapter 1 of the Code) of every insurance company other than a life insurance company (nonlife insurance company), for each taxable year computed as provided in section 11 of the Code. However, certain small nonlife insurance companies may elect to be subject to the alternative tax imposed by section 831(b).

Upon election by an eligible nonlife insurance company (eligible electing company) to be taxed under section 831(b), in lieu of the tax otherwise imposed by section 831(a), section 831(b) imposes tax on the company's income computed by multiplying the taxable investment income of the eligible electing company (determined under section 834 of the Code) for the taxable year by the rates provided in section 11(b) of the Code. Premium income of a nonlife insurance company is included in taxable income under section 831(a), but not taxable investment income under section 834. Thus, an eligible electing company pays no tax on premium income for taxable years for which its election is in effect.

Congress enacted section 333 of the Protecting Americans from Tax Hikes Act of 2015 (PATH Act), div. Q. of Public Law 114-113, 129 Stat. 2242, 3040 (December 18, 2015), to both tighten and expand the requirements for qualifying under section 831(b), effective for taxable years beginning after December 31, 2016. As amended by the PATH Act, section 831(b) requires an eligible electing company to be an insurance company (within the meaning of section 816(a) of the Code) having net written premiums or, if greater, direct written premiums, for the taxable year not exceeding $2.2 million as adjusted for inflation (net written premium limitation) and to meet the diversification requirements of section 831(b)(2)(B). The last sentence of section 831(b)(2)(A) provides that an election under section 831(b) applies to the taxable year for which it is made and all subsequent taxable years for which the net written premium limitation and the diversification requirements are met and may be revoked only with the Secretary's consent. In addition, section 831(d) requires every eligible electing company that has a section 831(b) election in effect to furnish to the Secretary “at such time and in such manner as the Secretary shall prescribe such information for such taxable year as the Secretary may require with respect to” the diversification requirements of section 831(b)(2)(B).

On November 21, 2016, the Treasury Department and the IRS published Notice 2016-66, 2016-47 I.R.B 745, which identified certain micro-captive transactions as transactions of interest. On January 17, 2017, the IRS published Notice 2017-08, 2017-3 I.R.B. 423, which modified Notice 2016-66 by providing for an extension of time for participants and material advisors to file their disclosures.

Notice 2016-66 alerted taxpayers and their representatives pursuant to § 1.6011-4(b)(6) and for purposes of § 1.6011-4(b)(6) and sections 6111 and 6112, that the Treasury Department and the IRS identified as transactions of interest certain micro-captive transactions in which a taxpayer attempts to reduce the aggregate taxable income of the taxpayer, related persons, or both, using contracts that the parties treat as insurance contracts and a related company that the parties treat as an insurance company. Notice 2016-66 also alerted persons involved with the identified transactions that certain responsibilities may arise from their involvement.

Notice 2016-66 describes the following micro-captive transaction as a transaction of interest: (1) a company that the parties treat as an insurance company (Captive) elects to exclude premiums from taxable income under section 831(b); (2) at least 20 percent of the voting power or value of the outstanding stock of Captive is directly or indirectly owned by the insured entity (Insured), owners of Insured, or persons related to Insured or its owners (20-percent relationship factor); and (3) either or both of the following apply: (i) Captive has at any time during a defined Computation Period (referred to as the Notice Computation Period) directly or indirectly made available as financing, or otherwise conveyed or agreed to make available or convey, to certain related persons in a transaction that did not result in taxable income or gain to the recipient any portion of the payments treated as premiums, such as through a guarantee, a loan, or other transfer of Captive's capital (financing factor), or (ii) the amount of liabilities incurred by Captive for insured losses and claim administration expenses during the Notice Computation Period is less than 70 percent of the amount equal to premiums earned by Captive during that period less policyholder dividends paid by Captive during that period (70-percent loss ratio factor).

Notice 2016-66 defines the Notice Computation Period as the most recent five taxable years of Captive or, if Captive has been in existence for less than five taxable years, the entire period of Captive's existence. For purposes of the preceding sentence, if Captive has been in existence for less than five taxable years and Captive is a successor to one or more Captives created or availed of in connection with a transaction described in the notice, taxable years of such predecessor entities are treated as taxable years of Captive. A short taxable year is treated as a taxable year.

Notice 2016-66 also provides that the arrangement is not treated as a transaction of interest if the micro-captive arrangement provides insurance for employee compensation or benefits and the arrangement is one for which the Employee Benefits Security Administration of the U.S. Department of Labor has issued a Prohibited Transaction Exemption. A Prohibited Transaction Exemption may be granted by the U.S. Department of Labor on an individual basis or may fall under the class exemption for captives. The Prohibited Transaction Exemption procedures are published as final regulations in the Federal Register (76 FR 66637). The Department of Labor's proposed amendments to the Prohibited Transaction Exemption procedures were published on March 15, 2022, in the Federal Register (87 FR 14722).

Notice 2016-66 requires disclosure of the information specified in § 1.6011-4(d) and the Instructions to Form 8886 (or successor form), which includes identifying and describing the transaction in sufficient detail for the IRS to be able to understand the tax structure of the reportable transaction and identity of all parties involved in the transaction. Notice 2016-66 provides that for all participants, describing the transaction in sufficient detail includes, but is not limited to, describing on Form 8886 (or successor form) when and how the taxpayer became aware of the transaction. The notice further provides that for Captive, describing the transaction in sufficient detail includes, but is not limited to, describing the following on Form 8886 (or successor form): (1) whether Captive is reporting because (i) the 70-percent loss ratio factor is met for the taxable year; (ii) the financing factor is met for the taxable year; or (iii) both (i) and (ii); (2) under what authority Captive is chartered; (3) all the type(s) of coverage provided by Captive during the year or years of participation (if disclosure pertains to multiple years); (4) how the amounts treated as premiums for coverage provided by Captive during the year or years of participation (if disclosure pertains to multiple years) were determined, including the name and contact information of any actuary or underwriter who assisted in these determinations; (5) any claims paid by Captive during the year or years of participation (if disclosure pertains to multiple years), and the amount of, and reason for, any reserves reported by Captive on the annual statement; and (6) the assets held by Captive during the year or years of participation (if disclosure pertains to multiple years).

Comments submitted in response to Notice 2016-66 were carefully considered in the development of these proposed regulations. Although the Administrative Procedure Act (APA), 5 U.S.C. 551-559, does not require a response to those comments, the comments are described here in an effort to assist taxpayers in understanding the provisions of the proposed regulations described in the Explanation of Provisions section.

First, some commenters suggested that changes to the Form 1120-PC, U.S. Property and Casualty Insurance Company Income Tax Return, would be better suited to capture the information sought by Notice 2016-66. Other commenters indicated that the information sought could be readily obtained from the existing Forms 1120-PC being filed, so any additional reporting would be unnecessarily duplicative and burdensome. However, changes to the Form 1120-PC would at a minimum impact all nonlife insurance companies that make section 831(b) elections, not only participants in the micro-captive transactions described in the proposed regulations. Also, some of the requested information is not readily available from filed Forms 1120-PC, such as the descriptions of the types of coverages provided by a Captive and the name and contact information of any actuary or underwriter who assisted Captive in the determination of amounts treated as premiums. Additionally, limiting the collection of information to only those entities filing the Form 1120-PC would be insufficient to gather relevant information, as information regarding Insureds and promoters of the transactions would not be included.

Second, commenters also suggested that the reporting requirements under Notice 2016-66 are contrary to Congressional intent in enacting section 333 of the PATH Act, which, as noted earlier, effective for taxable years beginning after December 31, 2016, modified the section 831(b) eligibility rules for a property and casualty insurance company to elect to be taxed only on taxable investment income. The provision increased the limit on net written premiums (or, if greater, direct written premiums) from $1,200,000 to $2,200,000 and indexed that amount for inflation. The provision also added diversification requirements to the eligibility rules. However, nothing in the statutory language or legislative history of the PATH Act suggests that Congress intended to provide the benefits of section 831(b) to companies that do not qualify as insurance companies for Federal income tax purposes. As exemplified by the transactions described in Avrahami v. Commissioner, 149 T.C. 144 (2017), Syzygy Insurance Co., Inc. v. Commissioner, T.C. Memo. 2019-34, and Caylor Land & Development, Inc. v. Commissioner, T.C. Memo. 2021-30, some companies claiming the benefits of section 831(b) do not meet these basic eligibility requirements for such treatment. See also Reserve Mechanical Corp. v. Commissioner, 34 F.4th 881 (10th Cir. 2022) (concluding company filing as a tax-exempt entity under section 501(c)(15) did not qualify as an insurance company for Federal income tax purposes using similar analysis). The proposed regulations, like Notice 2016-66, would apply to entities that claim the benefits of section 831(b) when certain factors indicate that they do not or may not qualify as insurance companies for Federal income tax purposes.

Third, other commenters indicated that the reporting requirements were unduly burdensome, as well as duplicative, because the information sought could be readily obtained from a smaller subgroup of the participants in a transaction. However, the reporting and recordkeeping required for reportable transactions from each participant ensure that the Service can identify all of the participants of a particular transaction and that all participants are aware of their participation in a reportable transaction. Nevertheless, the proposed regulations significantly narrow the information sought from participants compared to that required by Notice 2016-66 and provide a disclosure safe harbor to a significant number of participants, thereby reducing the burden in reporting to the maximum extent consistent with sound tax administration. See proposed § 1.6011-10(e)(2) and (f) and proposed § 1.6011-11(e)(2) and (f).

Fourth, additional commenters on Notice 2016-66 expressed concerns regarding certain arrangements in which a service provider, automobile dealer, lender, or retailer (Seller) sells insurance contracts to its customers in connection with the products or services being sold (Consumer Coverage). These commenters recommended that such Consumer Coverage arrangements be excepted from the disclosure requirements. The proposed regulations provide a limited exception for certain participants in Consumer Coverage arrangements. See proposed §§ 1.6011-10(d)(2) and 1.6011-11(d)(2).

Finally, commenters argued that the 20-percent relationship factor and the 70-percent loss ratio factor described in sections 2.01(d) and 2.01(e)(2) of Notice 2016-66, respectively, are overly broad and arbitrary. However, the Treasury Department and the IRS have determined that the factors are objective and reasonably determined based on existing statutory provisions and available industry data. The 20-percent relationship factor was based on the diversification requirements established by section 333 of the PATH Act. While one part of the PATH Act diversification requirements is based on the percentage of premiums from related insureds, requiring that no more than 20 percent of net written premiums (or if greater, direct written premiums) for a taxable year is attributable to any one policyholder, the 20-percent threshold in Notice 2016-66 is based on concentration of ownership of stock in a Captive when Insured or Insured's owner owns Captive's stock or is related to Captive's owner. Both requirements are based on a lack of diversification and identify a threshold at which a lack of diversification may facilitate abuse.

Similarly, the 70-percent loss ratio factor was informed by, but is less burdensome than, the 85 percent medical loss ratio test enacted by Congress in section 833(c)(5) of the Code for Blue Cross and Blue Shield organizations and other health insurers that are entitled to certain tax benefits that are not available to other nonlife insurance companies, as well as the medical loss ratio computed under section 2718(b) of the Public Health Service Act, 42 U.S.C. 300gg-18. The loss ratio factor in Notice 2016-66 compares claims and expenses to premiums charged in a manner similar to the medical loss ratio test in section 833(c)(5) of the Code and the medical loss ratio computed under section 2718(b) of the Public Health Service Act. However, the medical loss ratio has a narrower focus than the Notice 2016-66 loss ratio factor and is computed as a percentage of the total premium revenue (excluding Federal and State taxes and licensing or regulatory fees) an issuer expends (1) on reimbursement for clinical services provided to enrollees under such coverage and (2) for activities that improve health care quality of enrollees.

The Treasury Department and IRS also considered data from the National Association of Insurance Commissioners (NAIC) in determining the applicable loss ratio factor. NAIC, in its 2021 Annual Property & Casualty and Title Insurance Industries Report (2021 NAIC P&C Report), indicated that annual loss ratios for property and casualty companies averaged 72.5 percent for that year. See Insurance Industry Snapshots and Analysis Reports ((July 21, 2022), https://content.naic.org/cipr_topics/topic_insurance_industry_snapshots_and_analysis_reports.htm (last visited April 3, 2023). The 2021 NAIC P&C Report is “produced from insurer statutory filings and represent[s] approximately 99% of all insurers expected to file the NAIC Financial Data Repository.” Id. The single-year average loss ratio for property and casualty companies ranged between 67.2 and 76.2 percent per year from 2012 to 2021. See U.S. Property & Casualty and Title Insurance Industries—2021 Full Year Results (2022), https://content.naic.org/sites/default/files/inline-files/2021%20Annual%20Property%20%26%20Casualty%20and%20Title%20Insurance%20Industry%20Report.pdf (last visited April 3, 2023).

Commenters indicated that some Captives electing the alternative tax under section 831(b) have loss ratios that fall below the industry-wide average during a given year of operation and suggested that the loss ratio in Notice 2016-66 is set too high. However, the average loss ratio reported by the NAIC and the loss ratio factor in Notice 2016-66 are computed differently and are not directly comparable. First, the average loss ratio reported by the NAIC reflects the ratio of net losses incurred and loss expenses incurred to net premiums earned, without adjustment for policyholder dividends paid, whereas Captive's loss ratio factor under Notice 2016-66 subtracts policyholder dividends paid from premiums earned by Captive. This means that, for an entity that pays policyholder dividends, the loss ratio factor under Notice 2016-66 would be higher than its NAIC loss ratio. Second, the loss ratio factor in Notice 2016-66 reflects the ratio of insured losses and claims administration expenses during the Notice Computation Period, which may be as long as five years. By contrast, the average loss ratio reported by the NAIC is a single-year average. Accordingly, even Captives electing the alternative tax under section 831(b) that have loss ratios that fall below the industry-wide average for property and casualty companies in any particular year may not have loss ratio factors that cause a transaction to be described in Notice 2016-66 or the proposed regulations. The Treasury Department and the IRS therefore view the average loss ratio data reported by the NAIC as supportive of the loss ratio factors provided in Notice 2016-66 and in these proposed regulations. See proposed §§ 1.6011-10(c)(2) and 1.6011-11(c).

Despite commenters' objections to the 20-percent relationship factor and 70-percent loss ratio factor, the commenters did not identify different factors or industry-wide standards for small insurers that would distinguish abusive from non-abusive transactions or provide examples of non-abusive transactions for which disclosure was required as a result of these factors. These objective factors in Notice 2016-66 have been effective in identifying transactions for which disclosure should be required and are reasonable given existing statutory provisions and available industry data.

To better ensure non-abusive transactions are not required to be reported under the proposed regulations, however, the proposed regulations lower the loss ratio factor for both the micro-captive transactions identified in proposed § 1.6011-10(a) as listed transactions (Micro-captive Listed Transactions) and the micro-captive transactions identified in proposed § 1.6011-11(a) as transactions of interest (Micro-captive Transactions of Interest) from 70 percent to 65 percent. See proposed §§ 1.6011-10(c)(2) and 1.6011-11(c). Additionally, the computation period used to determine the loss ratio factor is extended from a Notice Computation Period of up to five taxable years to a computation period of up to nine taxable years (referred to as the Transaction of Interest Computation Period) for the Micro-captive Transaction of Interest. See proposed § 1.6011-11(b)(2). For the Micro-captive Listed Transaction, the computation period used to determine the loss ratio factor (referred to as the Loss Ratio Factor Computation Period) is ten taxable years. See proposed § 1.6011-10(b)(2)(ii).

For the foregoing reasons, the IRS intends to challenge the purported tax benefits from transactions identified in proposed § 1.6011-10(c) as listed transactions, and the IRS may challenge the purported tax benefits from transactions identified in proposed § 1.6011-11(c) as transactions of interest. The IRS may also challenge the purported tax benefits from these transactions based on the economic substance, business purpose, or other rules or doctrines if applicable based on the facts of a particular case.

On March 3, 2022, the Sixth Circuit issued an order in Mann Construction v. United States, 27 F.4th 1138, 1147 (6th Cir. 2022), holding that Notice 2007-83, 2007-2 C.B. 960, which identified certain trust arrangements claiming to be welfare benefit funds and involving cash value life insurance policies as listed transactions, violated the APA, because the notice was issued without following the notice-and-comment procedures required by section 553 of the APA. The Sixth Circuit concluded that Congress did not clearly express an intent to override the notice-and-comment procedures required by section 553 of the APA when it enacted the AJCA. 27 F.4th at 1148. The Sixth Circuit reversed the decision of the district court, which held that Congress had authorized the IRS to identify listed transactions without notice and comment. See Mann Construction, Inc. v. United States, 539 F.Supp.3d 745, 763 (E.D. Mich. 2021).

In CIC Services, LLC v. IRS, the United States District Court for the Eastern District of Tennessee, which is located in the Sixth Circuit, viewed the analysis in Mann Construction as controlling and vacated Notice 2016-66, holding that the IRS failed to comply with the APA's notice-and-comment procedures. The Court also held that the IRS acted arbitrarily and capriciously based on the administrative record. CIC Services, LLC v. IRS, 2022 WL 985619 (E.D. Tenn. March 21, 2022), as modified by 2022 WL 2078036 (E.D. Tenn. June 2, 2022); see also Green Valley Investors, LLC, et al. v. Commissioner, 159 T.C. No. 5 (Nov. 9, 2022) (relying on Mann Construction in holding that Notice 2017-10, 2017-4 I.R.B. 544 (identifying certain syndicated conservation easements as listed transactions) was improperly issued because it was issued without following the APA's notice-and-comment procedures); Green Rock, LLC v. IRS, No. 2:21-cv-01320-ACA, 2023 U.S. Dist. LEXIS 17670 (N.D. Ala. Feb. 2, 2023) (holding that notice and comment procedures were required before issuance of Notice 2017-10).

In light of the decision by the district court in CIC Services, the IRS will not enforce the disclosure requirements or penalties that are dependent upon the procedural validity of Notice 2016-66. Thus, the Treasury Department and the IRS are issuing these proposed regulations to identify certain micro-captive transactions as Micro-captive Transactions of Interest. In addition, this document obsoletes Notice 2016-66 (as modified by Notice 2017-08). The obsoletion of the notice, however, has no effect on the merits of the tax benefits claimed from the transactions themselves and related litigation, or income tax examinations and promoter investigations relating to micro-captive transactions.

The Treasury Department and the IRS disagree with the Sixth Circuit's decision in Mann Construction and the Tax Court's decision in Green Valley and are continuing to defend the validity of notices identifying transactions as listed transactions in circuits other than the Sixth Circuit. However, to help allow for consistent enforcement throughout the nation, the Treasury Department and the IRS are proposing to identify certain other micro-captive transactions as Micro-captive Listed Transactions by regulation.

This section generally describes the micro-captive transactions that are the focus of the proposed regulations and why the Micro-captive Listed Transactions are abusive and the Micro-captive Transactions of Interest have the potential for abuse. This section also describes the proposed regulations identifying Micro-captive Listed Transactions and Micro-captive Transactions of Interest.

The Treasury Department and the IRS are aware of a micro-captive transaction, in which a taxpayer attempts to reduce the aggregate taxable income of the taxpayer, persons related to the taxpayer, or both, using contracts that the parties treat as insurance contracts and a related Captive. In some cases, Captive enters into a contract with a related entity that the parties treat as an insurance contract. In other cases, Captive and a related entity enter into separate contracts with one or more unrelated intermediaries. For example, the related entity and an intermediary may enter into a contract that the parties treat as an insurance contract, and Captive may then enter into a separate contract with the intermediary that the parties treat as a reinsurance contract covering the “risks” under the contract between the related entity and the intermediary. Each entity that makes payments to an intermediary or Captive under these contracts treats the payments as insurance premiums that are within the scope of § 1.162-1(a) and deducts the payments as ordinary and necessary business expenses under section 162. Captive treats the payments received from the related entity or intermediary under a contract treated as an insurance contract or reinsurance contract as premiums for insurance coverage.

Captive asserts that it is taxable as a nonlife insurance company under the Code and, if it is not a domestic corporation, makes an election under section 953(d) of the Code to be treated as a domestic corporation for purposes of the Code. Captive makes an election under section 831(b) to be taxed only on taxable investment income (defined in section 834). Captive accordingly excludes from the computation of its taxable income the payments received from the related entity or intermediary treated as premiums. For each taxable year in which the micro-captive transaction is in effect, the transaction is structured so that Captive does not have net premiums written (or, if greater, direct premiums written) that exceed the statutory limit. For taxable years beginning after December 31, 2016, the statutory limit is $2,200,000, adjusted annually for inflation ($2,650,000 for taxable years beginning in 2023).

Since the publication of Notice 2016-66, examinations of taxpayers and promoters and information received through disclosures filed in response to Notice 2016-66 have clarified the Treasury Department's and the IRS's understanding of micro-captive transactions, including the scope of participation. Further, in the three section 831(b) micro-captive cases decided on their merits since the publication of Notice 2016-66, the U.S. Tax Court held that the micro-captive transactions at issue did not meet the requirements for treatment as insurance for Federal income tax purposes. See Avrahami v. Commissioner, 149 T.C. at 144; Syzygy v. Commissioner, T.C. Memo. 2019-34; and Caylor v. Commissioner, T.C. Memo. 2021-30; see also Reserve Mechanical Corp. v. Commissioner, 34 F.4th at 881 (concluding transactions entered into by company filing as a tax-exempt entity under section 501(c)(15) did not meet the requirements for treatment as insurance for Federal income tax purposes using similar analysis). Taking into account only the years in issue in these decisions, the information included in the Court's opinions indicates that the transactions at issue had the elements that would require disclosure under Notice 2016-66. Accordingly, the Treasury Department and the IRS have determined that certain micro-captive transactions are abusive tax avoidance transactions and certain other micro-captive transactions have the potential for tax avoidance or evasion.

As further discussed in sections B.1. through B.3. of this Explanation of Provisions, the Treasury Department and the IRS have determined that two categories of micro-captive transactions, described in proposed § 1.6011-10(c)(1) and (c)(2), are tax avoidance transactions, and thus propose to identify such transactions as listed transactions. The transactions in both categories involve related parties, including a Captive, at least 20 percent of the voting power or the value of the outstanding stock or equity interest of which is owned, directly or indirectly, by an Insured, an Owner, or persons Related to an Insured or an Owner. See proposed § 1.6011-10(b)(1)(iii). The first category of these transactions is identified by the presence of a financing factor, described in proposed § 1.6011-10(c)(1). The second category of these transactions is identified by a loss ratio factor that falls below 65 percent based on a Loss Ratio Computation Period of ten taxable years, as described in proposed § 1.6011-10(c)(2). The proposed regulations therefore identify transactions that are the same as, or substantially similar to, the Micro-captive Listed Transaction described in proposed § 1.6011-10(a) as listed transactions for purposes of § 1.6011-4. As noted previously, a transaction is “substantially similar” if it is expected to obtain the same or similar types of tax consequences and is either factually similar or based on the same or similar tax strategy, even though it may involve different entities or use different Code provisions.

As further discussed in section B.1. and B.3. of this Explanation of Provisions, the Treasury Department and the IRS have also determined that a third category of micro-captive transactions, described in proposed § 1.6011-11(c), has a potential for tax avoidance or evasion, and thus propose to identify such transactions as transactions of interest. This category of micro-captive transactions also involves related parties as described in proposed § 1.6011-10(b)(1)(iii) and is identified by the presence of a loss ratio factor that falls below 65 percent over a shorter Transaction of Interest Computation Period, generally because Captives involved have been in operation for a shorter period of time. With respect to this third category of transactions, the Treasury Department and the IRS require more information to determine if the transactions are being used for tax avoidance or evasion. The proposed regulations therefore identify transactions that are the same as, or substantially similar to, the Micro-captive Transaction of Interest described in proposed § 1.6011-11(a) as transactions of interest for purposes of § 1.6011-4(b)(6).

In Micro-captive Listed Transactions and Micro-captive Transactions of Interest, related parties claim the Federal income tax benefits of treating the contracts as insurance (or reinsurance) contracts. Insured deducts premiums paid to Captive under section 162, while the related Captive excludes the premium income from its taxable income by electing under section 831(b) to be taxed only on its taxable investment income.

Neither the Code nor the regulations thereunder define the terms “insurance” or “insurance contract.” The Supreme Court has explained that for an arrangement to constitute insurance for federal income tax purposes, both risk shifting and risk distribution must be present. Helvering v. Le Gierse, 312 U.S. 531 (1941). The risk transferred must be risk of economic loss. Allied Fidelity Corp. v. Commissioner, 572 F.2d 1190, 1193 (7th Cir. 1978). The risk must contemplate the fortuitous occurrence of a stated contingency, Commissioner v. Treganowen, 183 F.2d 288, 290-91 (2d Cir. 1950), and must not be merely an investment or business risk. Rev. Rul. 2007-17, 2007-2 C.B. 127. In addition, the arrangement must constitute insurance in the commonly accepted sense. See, e.g., Rent-A-Center, Inc. v. Commissioner, 142 T.C. 1, 10-13 (2014).

In many micro-captive transactions, however, the manner in which the contracts are interpreted, administered, and applied is inconsistent with arm's length transactions and sound business practices. Captive typically does not behave as an insurance company commonly would, indicating that Captive is not issuing insurance contracts and the transaction does not constitute insurance for Federal income tax purposes. For example, Captive may fail to adequately distribute risk or fail to employ actuarial techniques to establish premium rates that appropriately reflect the risk of loss and costs of conducting an insurance business. Captive may also use its premium income for purposes other than administering and paying claims under the contract(s), including routing funds that have not been taxed to the Insured or a person related to the Insured or its owners. A micro-captive transaction may share other characteristics with the purported insurance transactions considered by the Tax Court in Avrahami, Syzygy, and Caylor, or with the transactions considered in other cases in which the courts determined the transactions were not insurance for Federal income tax purposes. See, e.g., Reserve Mechanical Corp. v. Commissioner, 34 F.4th 881 (10th Cir. 2022). The net effect of participating in this transaction is that the Insured claims a tax deduction for transferring amounts treated as premiums to Captive, which is owned by parties related to Insured, and Captive is not taxed on the corresponding income.

If the transaction does not constitute insurance, Insured is not entitled to deduct under section 162 as a trade or business expense the amount treated as an insurance premium. In addition, if Captive does not actually provide insurance, it does not qualify as an insurance company and its elections to be taxed only on its taxable investment income under section 831(b) and to be treated as a domestic insurance company under section 953(d) are invalid.

These proposed regulations inform taxpayers that participate in transactions described in proposed §§ 1.6011-10(c) and 1.6011-11(c), and substantially similar transactions, and persons who act as material advisors with respect to these transactions, and substantially similar transactions, that they must disclose in accordance with the rules provided in § 1.6011-4(a) and section 6111(a), respectively. Material advisors must also maintain lists as required by section 6112.

As previously noted, the IRS intends to challenge the claimed tax benefits from Micro-captive Listed Transactions, and may challenge the claimed tax benefits from Micro-captive Transactions of Interest. Examinations of these micro-captive transactions may result in adjustments including full disallowance of claimed micro-captive insurance premium deductions, inclusion in income of amounts received by Captive, imposition of withholding tax liability under section 1461 of the Code for failing to deduct and withhold tax on payments made to a foreign Captive, imposition of a 20 percent or 40 percent penalty for lack of economic substance under section 6662(b)(6) or (i)(1) of the Code, which may not be avoided by a reasonable cause exception, and imposition of other applicable taxes and penalties.

Proposed § 1.6011-10(a) provides that transactions that are the same as, or substantially similar to, transactions described in proposed § 1.6011-10(c) are identified as listed transactions for purposes of § 1.6011-4(b)(2), except as provided in proposed § 1.6011-10(d). Proposed § 1.6011-10(b) provides definitions of terms used to describe Micro-captive Listed Transactions, including Captive, Financing Computation Period, Loss Ratio Computation Period, Contract, Insured, Intermediary, Recipient, and Related. In particular, Captive is defined as an entity that elects under section 831(b) to be taxed as an insurance company only on its taxable investment income; issues a Contract to an Insured, reinsures a Contract of an Insured issued by an Intermediary, or both; and has at least 20 percent of its assets or voting power or the value of its outstanding stock or equity interests directly or indirectly, individually or collectively, owned by an Insured, an Owner, or persons Related to an Insured or Owner. The term Related is defined in proposed § 1.6011-10(b)(8) by reference to sections 267(b), 707(b), 2701(b)(2)(C), and 2704(c)(2). The definition incorporates the constructive ownership rules in those sections. Proposed § 1.6011-10(b) also provides the rules for persons that hold derivatives and for the treatment of beneficiaries of trusts and estates. The treatment of beneficiaries of trusts in proposed § 1.6011-10(b) does not affect the application of Subpart E of Subchapter J of Chapter 1 of Subtitle A, which provides rules concerning when a grantor or another person is treated as the owner of a portion of that trust.

A transaction is described in proposed § 1.6011-10(c) if it is described in proposed § 1.6011-10(c)(1), or (c)(2), or both. Proposed § 1.6011-10(c)(1) describes transactions that involve a Captive that, at any time during the Financing Computation Period, directly or indirectly made available as financing or otherwise conveyed or agreed to make available or convey to a Recipient, in a transaction that did not result in taxable income or gain to the Recipient, any portion of the payments under the Contract, such as through a guarantee, a loan, or other transfer of Captive's capital, including such financings or conveyances made prior to the Financing Computation Period that remain outstanding as of the taxable year in which disclosure is required. Any amounts that a Captive made available as financing or otherwise conveyed or agreed to make available or convey to a Recipient are presumed to be portions of the payments under the Contract to the extent such amounts when conveyed or made available are in excess of Captive's cumulative after-tax net investment earnings minus any outstanding financings or conveyances. See section B.2. of this Explanation of Provisions. The Financing Computation Period is the most recent five taxable years of Captive, or all taxable years of Captive, if Captive has been in existence for less than five taxable years. For purposes of determining the Financing Computation Period, each short taxable year is a separate taxable year and taxable years of predecessor entities are treated as taxable years of Captive.

Proposed § 1.6011-10(c)(2) describes transactions that involve a Captive for which the amount of liabilities incurred for insured losses and claim administration expenses during a Loss Ratio Computation Period is less than 65 percent of the amount equal to premiums earned by Captive during the Loss Ratio Computation Period less policyholder dividends paid by Captive during the Loss Ratio Computation Period. See section B.3. of this Explanation of Provisions. The Loss Ratio Computation Period is the most recent ten taxable years of Captive, each short taxable year is a separate taxable year, and the taxable years of predecessor entities are treated as taxable years of Captive. Proposed § 1.6011-10(c)(2) does not apply to any Captive that has been in existence for less than ten taxable years, including taxable years of predecessor entities.

Proposed § 1.6011-10(d) provides that a transaction described in proposed § 1.6011-10(c) is not classified as a listed transaction if the transaction (1) provides insurance for employee compensation or benefits and is one for which the Employee Benefits Security Administration of the U.S. Department of Labor has issued a Prohibited Transaction Exemption, or (2) is a Consumer Coverage reinsurance arrangement described in proposed § 1.6011-10(d)(2). See section B.6. of this Explanation of Provisions.

Proposed § 1.6011-10(e)(1) provides the rules for determining who is a participant in a listed transaction described in proposed § 1.6011-10(a). Proposed § 1.6011-10(e)(2) provides a safe harbor from the disclosure requirements for certain persons. See section B.5. of this Explanation of Provisions.

Proposed § 1.6011-10(f) describes information that participants must provide to satisfy the disclosure requirements of § 1.6011-4(d). See section B.4. of this Explanation of Provisions.

Proposed § 1.6011-10(g) provides the applicability date for the proposed regulations.

Proposed § 1.6011-11(a) provides that transactions that are the same as, or substantially similar to, transactions described in proposed § 1.6011-11(c) are identified as transactions of interest for purposes of § 1.6011-4(b)(6), except as provided in proposed § 1.6011-11(d). Proposed § 1.6011-11(b) provides definitions of terms used to describe Micro-captive Transactions of Interest by reference to the relevant definitions in proposed § 1.6011-10(b), except for the definition of the computation period. Proposed § 1.6011-11(b)(2) defines the Transaction of Interest Computation Period for Micro-captive Transactions of Interest as the most recent nine taxable years, or the entire period of Captive's existence if Captive has been in existence for less than nine taxable years. For this purpose, each short taxable year is a separate taxable year, and the taxable years of predecessor entities are treated as taxable years of Captive.

A transaction is described in proposed § 1.6011-11(c) if it involves the issuance of a Contract to an Insured by a Captive, or the reinsurance by a Captive of a Contract issued to an Insured by an Intermediary, and involves a Captive for which the amount of liabilities incurred for insured losses and claim administration expenses during the Transaction of Interest Computation Period is less than 65 percent of the amount equal to premiums earned by Captive during the Transaction of Interest Computation Period less policyholder dividends paid by Captive during the Transaction of Interest Computation Period. See section B.3. of this Explanation of Provisions.

Proposed § 1.6011-11(d) provides that a transaction described in proposed § 1.6011-11(c) is not classified as a “transaction of interest” if the transaction (1) provides insurance for employee compensation or benefits and is one for which the Employee Benefits Security Administration of the U.S. Department of Labor has issued a Prohibited Transaction Exemption, or (2) is a Consumer Coverage reinsurance arrangement described in proposed § 1.6011-11(d)(2). See section B.6. of this Explanation of Provisions. Additionally, proposed § 1.6011-11(d)(3) provides that a transaction described in proposed § 1.6011-11(c) is not classified as a “transaction of interest” if the transaction is identified as a “listed transaction” in proposed § 1.6011-10(a). Under proposed § 1.6011-11(d)(3), a transaction that would (but for that subsection) be identified as both a “listed transaction” under proposed § 1.6011-10 and a “transaction of interest” under proposed § 1.6011-11, is identified as a “listed transaction” only, and participants in the transaction must disclose it as such. Material advisors that are uncertain about whether the transaction they are required to disclose should be reported as a Micro-captive Listed Transaction or as a Micro-captive Transaction of Interest should disclose the transaction as a Micro-captive Listed Transaction, and will not be required to disclose the transaction a second time if it is determined later that the transaction should have been disclosed as a Micro-captive Transaction of Interest.

Proposed § 1.6011-11(e)(1) provides the rules for determining who is a participant in a transaction of interest described in proposed § 1.6011-11(a). Proposed § 1.6011-11(e)(2) provides a safe harbor from the disclosure requirements for certain persons. See section B.5. of this Explanation of Provisions.

Proposed § 1.6011-11(f) describes information that participants must provide to satisfy the disclosure requirements of § 1.6011-4(d) by reference to the information described in proposed § 1.6011-10(f). See section B.4. of this Explanation of Provisions.

Proposed § 1.6011-11(g) provides the applicability date for the proposed regulations.

Examinations of taxpayers and promoters and information received through disclosures filed in response to Notice 2016-66 have clarified the Treasury Department's and the IRS's understanding of micro-captive transactions, including the scope of participation. Based on such information, the Treasury Department and the IRS have determined that certain changes to the micro-captive transaction identified in Notice 2016-66 are appropriate for the proposed regulations. The transactions described in proposed § 1.6011-10 and proposed § 1.6011-11 share common features with the micro-captive transactions described in Notice 2016-66, but with modifications to the scope of the 20-percent relationship factor and the factors used to distinguish between listed transactions, transactions of interest, and transactions that are not reportable transactions under the proposed regulations.

The Treasury Department and the IRS are aware that some promoters have structured transactions in which Insureds, Owners, or persons Related to an Insured or an Owner do not have a direct or indirect interest in Captive's voting power or value of its outstanding stock or equity interests, but have a relationship with Captive that provides substantially similar benefits and risks. For example, Captive may issue various types of instruments representing rights to all or a portion of the assets held by Captive but not rights to the voting power or equity interests in Captive. All equity interests and voting stock are held by individuals or entities related to the promoter, not the taxpayers. The promoters thereby seek to avoid the 20 percent related interest in the voting stock or equity interests in Captive necessary for a transaction to be described in Notice 2016-66. The proposed regulations expand the scope of the definition of Captive to clarify that derivatives and interests in the assets of Captive are taken into account. See proposed §§ 1.6011-10(b)(1)(A)-(C) and 1.6011-11(b)(1).

Transactions in which the financing factor is met based on a computation period of Captive's most recent five taxable years (or all years of Captive's existence if Captive has been in existence for less than five taxable years), referred to as the Financing Computation Period in the proposed regulations, are identified as transactions of interest in Notice 2016-66 but are identified as listed transactions in the proposed regulations. See proposed § 1.6011-10(c)(1). Presence of the financing factor in related party micro-captive insurance transactions indicates tax avoidance and abuse of Captive's status as a section 831(b)-electing insurance company.

Notice 2016-66 identifies transactions in which the loss ratio factor is less than 70 percent based on a Notice Computation Period of Captive's most recent five taxable years (or all years of Captive's existence if it has been in existence for less than five taxable years) as transactions of interest. The proposed regulations, however, identify as listed transactions those transactions in which the loss ratio factor is less than 65 percent for a computation period extended to Captive's most recent ten taxable years (referred to as the Loss Ratio Computation Period). See proposed § 1.6011-10(c)(2). Further, the proposed regulations identify transactions in which the loss ratio factor is less than 65 percent based on a Transaction of Interest Computation Period consisting of Captive's most recent nine taxable years (or all years of Captive's existence if Captive has been in existence for less than nine taxable years) as transactions of interest. See proposed § 1.6011-11(c).

Regarding the reduction of the loss ratio threshold from 70 percent to 65 percent, the Treasury Department and the IRS are not aware of any non-abusive transactions for which disclosure was required under Notice 2016-66 as a result of the 70-percent loss ratio factor set forth therein. Nevertheless, for purposes of the proposed regulations and to ensure that disclosure is not required for non-abusive transactions, the Treasury Department and the IRS are lowering the applicable loss ratio factor to 65 percent. See proposed §§ 1.6011-10(c)(2) and 1.6011-11(c). The loss ratio factor helps to identify transactions involving circumstances inconsistent with insurance in the commonly accepted sense, including excessive pricing of premiums and artificially low or nonexistent claims activity. The primary purpose of premium pricing is to ensure funds are available should a claim arise. The pricing of premiums should naturally reflect the economic reality of insurance operations. Pricing premiums far in excess of what is reasonably needed to fund insurance operations results in a lower loss ratio and is a strong indicator of abuse. Any Captives that would be required to disclose as a result of the loss ratio factor may consider paying policyholder dividends to increase the loss ratio and eliminate the need to disclose.

The Treasury Department and the IRS are considering whether a combined ratio may be a better indicator for distinguishing abusive transactions from other captive transactions. A combined ratio is “an indication of the profitability of an insurance company, calculated by adding the loss and expense ratios.” NAIC Glossary of Insurance Terms, https://content.naic.org/consumer_glossary#C (last visited April 3, 2023). The 2021 NAIC P&C Report provides that the combined ratios for property and casualty insurance companies ranged from 96 percent to 103.9 percent over the ten-year period from 2012 to 2021, for a ten-year average of approximately 99.5 percent. See U.S. Property & Casualty and Title Insurance Industries—2021 Full Year Results (2022), https://content.naic.org/sites/default/files/inline-files/2021%20Annual%20Property%20%26%20Casualty%20and%20Title%20Insurance%20Industry%20Report.pdf (last visited April 3, 2023). The combined ratio would compare losses incurred, plus loss adjustment expenses incurred and other underwriting expenses incurred by Captive during the relevant computation period to Captive's earned premiums, less policyholder dividends, for the relevant computation period. For this purpose, Captive's other underwriting expenses incurred would equal Captive's expenses incurred in carrying on an insurance business, other than loss adjustment expenses and investment-related expenses. Transactions in which Captive's combined ratio is less than a certain percentage for a Loss Ratio Computation Period of the most recent ten taxable years of Captive would be identified as listed transactions. Transactions in which Captive's combined ratio is less than a certain percentage for a Transaction of Interest Computation Period of the most recent nine taxable years (or all years of Captive's existence if it has been in existence for less than nine taxable years) would be identified as transactions of interest. The Treasury Department and the IRS invite comments on whether a combined ratio would better distinguish abusive transactions than the proposed loss ratio factor, and if so, what combined ratio threshold would be most effective in distinguishing abusive transactions.

Regarding the computation periods for the loss ratio factor, the Treasury Department and the IRS understand that it is possible that a Captive with a loss history of fewer than ten taxable years could have a loss ratio that falls below 65 percent solely because Captive provides coverage for low frequency, high severity losses and Insureds purchasing policies from such Captive do not incur such losses in every year. In recognition of this fact, the proposed regulations categorize transactions as either transactions of interest or listed transactions based on the length of the computation period on which the loss ratio is based. The Notice Computation Period used by Notice 2016-66 to identify transactions of interest based on a loss ratio factor was five taxable years, and it has been more than five years since Notice 2016-66 was published. The Treasury Department and the IRS have determined that extending the computation period by five years to a Loss Ratio Computation Period of ten taxable years (doubling the Notice Computation Period) allows Captives significant time to develop a reasonable loss history that supports the use of Captive for legitimate insurance purposes, and a loss ratio that remains below 65 percent for a Loss Ratio Computation Period of ten taxable years indicates a tax avoidance transaction. Accordingly, the proposed regulations identify transactions in which the loss ratio is less than 65 percent based on an extended Loss Ratio Computation Period of Captive's most recent ten taxable years as listed transactions. See proposed § 1.6011-10(b)(2).

However, the Treasury Department and the IRS also have determined that related party transactions in which the loss ratio is less than 65 percent over a shorter period of time have a potential for tax avoidance or evasion. The proposed regulations therefore identify transactions in which Captive has a loss ratio of less than 65 percent based on a Transaction of Interest Computation Period of Captive's most recent nine taxable years (or all years of Captive's existence if it has been in existence for less than nine taxable years) as transactions of interest, provided such transactions are not otherwise characterized as listed transactions (that is, due to the presence of the financing factor described in proposed § 1.6011-10(c)(1) or due to having a loss ratio factor of less than 65 percent based on a Loss Ratio Computation Period of Captive's most recent ten taxable years). See proposed § 1.6011-11(c) and (d)(3). Identification of these transactions as transactions of interest will permit the Treasury Department and the IRS to gather more information to determine if these transactions are being used for tax avoidance or evasion.

The proposed regulations significantly reduce the information required to be reported by Captives under § 1.6011-4(d) as compared to Notice 2016-66. See proposed §§ 1.6011-10(f) and 1.6011-11(f). Unlike Notice 2016-66, the proposed regulations do not require Captive participants to identify which factors of the proposed regulations apply, state under what authority Captive is chartered, describe how amounts treated as premiums for coverage provided by Captive were determined, provide the amounts of reserves reported by Captive on its annual statement, or describe the assets held by Captive. The proposed regulations do, however, require Captive to identify the types of policies issued or reinsured, the amounts treated as premiums written, the name and contact information of actuaries and underwriters involved, and the total amount of claims paid by Captive. Additionally, proposed §§ 1.6011-10(b)(1) and 1.6011-11(b)(1) include a 20-percent relationship test in the definition of Captive, and the proposed regulations require Captive participants to identify the name and percentage of interest held directly or indirectly by each person whose interest in Captive meets the 20 percent threshold or is taken into account in meeting the 20 percent threshold under proposed § 1.6011-10(b)(1)(iii). Also, the proposed regulations require each Insured (as defined in proposed §§ 1.6011-10(b)(4) and 1.6011-11(b)(4)) subject to the disclosure requirements set forth in § 1.6011-4(d) to provide the amounts treated by Insured as insurance premiums for coverage provided to Insured, directly or indirectly, by Captive.

The Treasury Department and the IRS believe that it is now feasible to generally limit the persons from whom reporting would be required under the proposed regulations to Captive, Insured, and material advisors to the transaction. Accordingly, the proposed regulations provide that any person who, solely by reason of their direct or indirect ownership interest in Insured, is subject to the disclosure requirements set forth in § 1.6011-4 as a participant in a Micro-captive Listed Transaction or a Micro-captive Transaction of Interest, is not required under § 1.6011-4 to file a disclosure statement with respect to that transaction provided that person receives written or electronic acknowledgment that Insured has or will comply with its separate disclosure obligation under § 1.6011-4(a) with respect to the transaction. See proposed §§ 1.6011-10(e)(2) and 1.6011-11(e)(2). The acknowledgment can be a copy of the Form 8886, Reportable Transaction Disclosure Statement (or successor form), filed (or to be filed) by Insured and must be received by Owner prior to the time set forth in § 1.6011-4(e) in which Owner would otherwise be required to provide disclosure. See proposed §§ 1.6011-10(e)(2) and 1.6011-11(e)(2). However, the receipt of an acknowledgment that Insured has or will comply with its disclosure obligation does not relieve the Owners of Insured of their disclosure obligations if Insured fails to disclose the transaction in a timely manner.

The proposed regulations provide a limited exception from classification as a Micro-captive Listed Transaction or Micro-captive Transaction of Interest for certain Consumer Coverage reinsurance arrangements. See proposed §§ 1.6011-10(d)(2) and 1.6011-11(d)(2). In Consumer Coverage arrangements, a “Seller” (that is, a service provider, automobile dealer, lender, or retailer) sells products or services to “Unrelated Customers” (that is, customers who do not own an interest in and are not wholly or partially owned by Seller, an owner of Seller, or individuals or entities related (within the meaning of one or more of sections 267(b), 707(b), 2701(b)(2)(C), or 2704(c)(2)) to Seller or owners of Seller). An Unrelated Customer may also purchase an insurance contract in connection with those products or services (Consumer Coverage contract). The Consumer Coverage contract generally provides coverage for repair or replacement costs if the product breaks down or is lost, stolen, or damaged; coverage for the customer's payment obligations if the customer dies or becomes disabled or unemployed; coverage for the difference between all or a portion of the value of the product and the amount owed on the product's financing, including a lease, if the product suffers a covered peril; or a combination of one or more of the foregoing types of coverage.

An entity related to or affiliated with Seller may issue or reinsure the Consumer Coverage contracts. In some arrangements, the Consumer Coverage contracts name an unrelated third party, which may be referred to as a “Fronting Company,” as the provider of the coverage, and an entity related to or affiliated with Seller reinsures the Consumer Coverage contracts. In other arrangements, the Consumer Coverage contracts may name an entity related to or affiliated with Seller as the provider of the coverage. In these arrangements, an unrelated third party may reinsure the contracts and may also then retrocede risk under the contracts to the entity related to or affiliated with Seller. The parties may treat the entity related to or affiliated with Seller as an insurance company that elects under section 831(b) (and section 953(d) if the corporation is foreign) to exclude premium payments from taxable income.

As a general matter, participation in this type of reinsurance arrangement is neither a Micro-captive Listed Transaction nor a Micro-captive Transaction of Interest because the insured is not sufficiently related to the insurer or any reinsurer. Generally, the Consumer Coverage contracts insure Unrelated Customers of Seller, and Unrelated Customers, their owners, and persons related to Unrelated Customers or their owners do not directly or indirectly own at least 20 percent of the voting power or value of the outstanding stock of any entity issuing or reinsuring the Consumer Coverage contract. However, the 20-percent relationship factor in proposed §§ 1.6011-10(b)(1) and 1.6011-11(b)(1) may be met in some of these reinsurance arrangements. For instance, in “dealer obligor” arrangements in which the Seller would be legally required to pay a claim under certain conditions, such as a total loss of the covered product within a certain time frame, the Seller could potentially be considered an Insured under a Contract issued or reinsured by a Captive, and thus be required to disclose.

The Treasury Department and the IRS have determined that a limited exception for taxpayers in Consumer Coverage arrangements is appropriate, provided commissions paid for Consumer Coverage contracts issued or reinsured by the Seller's Captive are comparable to the commissions paid for Consumer Coverage contracts covering Seller's products or services that are not issued or reinsured by the Seller's Captive. See proposed §§ 1.6011-10(d)(2) and 1.6011-11(d)(2).

Participants required to disclose these transactions under § 1.6011-4 who fail to do so are subject to penalties under section 6707A. Participants required to disclose the listed transactions under § 1.6011-4 who fail to do so are also subject to an extended period of limitations under section 6501(c)(10). Material advisors required to disclose these transactions under section 6111 who fail to do so are subject to the penalty under section 6707. Material advisors required to maintain lists of investors under section 6112 who fail to do so (or who fail to provide such lists when requested by the IRS) are subject to the penalty under section 6708(a). In addition, the IRS may impose other penalties on persons involved in these transactions or substantially similar transactions, including accuracy-related penalties under section 6662 or section 6662A, the section 6694 penalty for understatements of a taxpayer's liability by a tax return preparer, the section 6700 penalty for promoting abusive tax shelters, and the section 6701 penalty for aiding and abetting understatement of a tax liability.

Taxpayers who have filed a tax return (including an amended return (or Administrative Adjustment Request (AAR) for certain partnerships)) reflecting their participation in these transactions prior to the date the Treasury decision adopting these regulations as final regulations is published in the Federal Register and who have not otherwise finalized a settlement agreement with the Internal Revenue Service with respect to the transaction must disclose the transactions as provided in § 1.6011-4(d) and (e) provided that the period of limitations for assessment of tax, including any applicable extensions, for any taxable year in which the taxpayer participated in the transaction has not ended on or before the date the Treasury decision adopting these regulations as final regulations is published in the Federal Register .

In addition, material advisors have disclosure requirements with regard to transactions occurring in prior years. However, notwithstanding § 301.6111-3(b)(4)(i) and (iii), material advisors are required to disclose only if they have made a tax statement on or after six years before the date of the Treasury decision adopting these regulations as final regulations is published in the Federal Register .

A participant in a transaction that is a Micro-captive Listed Transaction must file a disclosure statement with OTSA when required to do so under § 1.6011-4(e), regardless of whether the participant has previously disclosed the transaction to OTSA pursuant to Notice 2016-66. A participant in a transaction that is a Micro-captive Transaction of Interest that has previously filed a disclosure statement with OTSA pursuant to Notice 2016-66 will be treated as having made the disclosure pursuant to the final regulations for taxable years for which the taxpayer filed returns before the final regulations are published in the Federal Register . However, if a taxpayer described in the preceding sentence participates in the Micro-captive Transaction of Interest in a taxable year for which the taxpayer files a return on or after the date the final regulations are published in the Federal Register , the taxpayer must file a disclosure statement with OTSA at the same time the taxpayer files their return for the first such taxable year.

A material advisor with respect to a transaction that is a Micro-captive Listed Transaction or Micro-captive Transaction of Interest must file a disclosure statement with OTSA when required to do so under § 301.6111-3(e), regardless of whether the material advisor has previously disclosed the transaction to OTSA pursuant to Notice 2016-66.

The Treasury Department and the IRS recognize that some taxpayers may have filed tax returns taking the position that they were entitled to the purported tax benefits of the types of transactions described in these proposed regulations. Because the IRS will take the position that taxpayers are not entitled to the purported tax benefits of the listed transactions described in the proposed regulations, and may take such a position with respect to the transactions of interest described in the proposed regulations, taxpayers should consider filing amended returns or AARs for certain partnerships and ensure that their transactions are disclosed properly. Taxpayers filing an amended individual return should write “Microcaptive” at the top of the first page of the amended return and mail the amended return to: Internal Revenue Service, 2970 Market Street, Philadelphia, PA 19104.

Taxpayers filing amended business returns on paper should write “Microcaptive” at the top of the first page of the amended return and mail to the address listed in the instructions for the amended return. Taxpayers filing amended business returns electronically should include “Microcaptive” when explaining the reason for the changes.

Proposed § 1.6011-10(a) would identify certain micro-captive transactions described in proposed § 1.6011-10(c) as listed transactions effective as of the date of publication in the Federal Register of a Treasury decision adopting these regulations as final regulations. Similarly, proposed § 1.6011-11(a) would identify certain micro-captive transactions described in proposed § 1.6011-11(c) as transactions of interest as of the date of publication in the Federal Register of a Treasury decision adopting these regulations as final regulations.

This document obsoletes Notice 2016-66 (2016-47 I.R.B. 745), as modified by Notice 2017-08 (2017-3 I.R.B. 423), as of April 11, 2023.

The proposed regulations are not subject to review under section 6(b) of Executive Order 12866 pursuant to the Memorandum of Agreement (April 11, 2018) between the Treasury Department and the Office of Management and Budget (OMB) regarding the review of tax regulations.

The collection of information contained in these proposed regulations is reflected in the collection of information for Forms 8886 and 8918 that have been reviewed and approved by OMB in accordance with the Paperwork Reduction Act (44 U.S.C. 3507(c)) under control numbers 1545-1800 and 1545-0865. Any disclosures with respect to the safe harbor for owners as provided in §§ 1.6011-10(e)(2) and 1.6011-11(e)(2) are in the nature of an acknowledgment per 5 CFR 1320.3(h)(1), and therefore do not constitute a collection of information under the Paperwork Reduction Act.

To the extent there is a change in burden as a result of these regulations, the change in burden will be reflected in the updated burden estimates for the Forms 8886 and 8918. The requirement to maintain records to substantiate information on Forms 8886 and 8918 is already contained in the burden associated with the control numbers for the forms and is unchanged.

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

The Secretary of the Treasury hereby certifies that the proposed regulations will not have a significant economic impact on a substantial number of small entities pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6).

As previously explained, the basis for these proposed regulations is Notice 2016-66, 2016-47 I.R.B. 745 (as modified by Notice 2017-08, 2017-3 I.R.B. 423). The following chart sets forth the gross receipts of respondents to Notice 2016-66, based on data for tax year 2020:

This chart shows that the majority of respondents reported gross receipts under $5 million. Even assuming that these respondents constitute a substantial number of small entities, the proposed regulations will not have a significant economic impact on these entities because the proposed regulations implement sections 6111 and 6112 and § 1.6011-4 by specifying the manner in which and time at which an identified Micro-captive Listed Transaction or Micro-captive Transaction of Interest must be reported. Accordingly, because the regulations are limited in scope to time and manner of information reporting and definitional information, the economic impact of the proposal is expected to be minimal.

Further, the Treasury Department and the IRS expect that the reporting burden is low; the information sought is necessary for regular annual return preparation and ordinary recordkeeping. The estimated burden for any taxpayer required to file Form 8886 is approximately 10 hours, 16 minutes for recordkeeping, 4 hours, 50 minutes for learning about the law or the form, and 6 hours, 25 minutes for preparing, copying, assembling, and sending the form to the IRS. The IRS's Research, Applied Analytics, and Statistics division estimates that the appropriate wage rate for this set of taxpayers is $77.50 (2020 dollars) per hour. Thus, it is estimated that a respondent will incur costs of approximately $1,667.27 per filing. Disclosures received to date by the Treasury Department and the IRS in response to the reporting requirements of Notice 2016-66 indicate that this small amount will not pose any significant economic impact for those taxpayers now required to disclose under the proposed regulations.

For the reasons stated, a regulatory flexibility analysis under the Regulatory Flexibility Act is not required. The Treasury Department and the IRS invite comments on the impact of the proposed regulations on small entities. Pursuant to section 7805(f) of the Code, this notice of proposed rulemaking has been submitted to the Chief Counsel for the Office of Advocacy of the Small Business Administration for comment on its impact on small business.

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

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

Before these proposed amendments to the regulations are adopted as final regulations, consideration will be given to any comments that are submitted timely to the IRS as prescribed in the preamble under the ADDRESSES section. The Treasury Department and the IRS request comments on all aspects of the proposed regulations. The Treasury Department and the IRS specifically request comments on the following:

1. What are the specific and objective metrics, factors, or standards, if any, that, if reported, would allow for the IRS to better identify and distinguish abusive micro-captive transactions from other micro-captive transactions?

2. With respect to proposed §§ 1.6011-10(c)(2) and 1.6011-11(c), whether the loss ratio described therein, which compares “the amount of liabilities incurred by Captive for insured losses and claim administration expenses during the [applicable] Computation Period” to the “premiums earned by Captive during the [applicable] Computation Period less policyholder dividends paid by Captive during the [applicable] Computation Period”, should be replaced by a combined ratio, which compares “losses incurred, plus loss adjustment expenses incurred and other underwriting expenses incurred by Captive during the [applicable] Computation Period” to “Captive's earned premiums, less policyholder dividends, for the [applicable] Computation Period”, and if so, what percentage would be an effective threshold for purposes of identifying abusive transactions. For this purpose, Captive's “other underwriting expenses incurred” would equal Captive's expenses incurred in carrying on an insurance business, other than loss adjustment expenses and investment-related expenses.

3. With respect to the percentage of premiums retained as commissions for contracts as described at proposed §§ 1.6011-10(d)(2) and 1.6011-11(d)(2), what, if any, are the specific metrics, factors, or standards that, if reported, would allow for the IRS to better identify and distinguish abusive micro-captive transactions of this type from other such micro-captive transactions?

Any comments submitted will be made available at https://www.regulations.gov or upon request.

A public hearing is scheduled to be held by teleconference on July 19, 2023, beginning at 10:00 a.m. ET unless no outlines are received by June 12, 2023.

The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who wish to comment by telephone at the hearing must submit written or electronic comments and an outline of the topics to be discussed as well as the time to be devoted to each topic by June 12, 2023 as prescribed in the preamble under the ADDRESSES section.

A period of ten minutes will be allocated to each person for making comments. After the deadline for receiving outlines has passed, the IRS will prepare an agenda containing the schedule of speakers. Copies of the agenda will be made available at https://www.regulations.gov, search IRS and REG-109309-22. Copies of the agenda will also be available by emailing a request to publichearings@irs.gov. Please put “REG-109309-22 Agenda Request” in the subject line of the email.

Announcement 2020-4, 2020-17 I.R.B. 667 (April 20, 2020), provides that until further notice, public hearings conducted by the IRS will be held telephonically. Any telephonic hearing will be made accessible to people with disabilities.

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

The principal author of these proposed regulations is Elizabeth M. Hill, Office of Associate Chief Counsel (Financial Institutions & Products). However, other personnel from the Treasury Department and the IRS participated in the development of these regulations.

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

Background

This document contains proposed amendments to the Regulations on Procedure and Administration (26 CFR part 301) under section 6751(b) of the Internal Revenue Code (Code). No regulations have previously been issued under section 6751.

Section 6751 was added to the Code by section 3306 of the Internal Revenue Service Restructuring and Reform Act of 1998 (1998 Act), Public Law 105-206, 112 Stat. 685, 744 (1998). Section 6751(a) sets forth the content of penalty notices. Section 6751(b) provides procedural requirements for the Secretary of the Treasury or her delegate (Secretary) to assess certain penalties, including additions to tax or additional amounts under the Code. See section 6751(c).

Section 6751(b)(1), as added by the 1998 Act, provides that “[n]o penalty under this title shall be assessed unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination or such higher level official as the Secretary may designate.” As an exception to this rule, section 6751(b)(2), as added by the 1998 Act, provides that section 6751(b)(1) “shall not apply to—(A) any addition to tax under section 6651, 6654, or 6655 [of the Code]; or (B) any other penalty automatically calculated through electronic means.”

The report of the United States Senate Committee on Finance regarding the 1998 Act (1998 Senate Finance Committee Report) provides that Congress enacted section 6751(b)(1) because of its concern that, “[i]n some cases, penalties may be imposed without supervisory approval.” S. Rep. No. 105-174, at 65 (1998), 1998-3 C.B. 537, 601. The report further states that “[t]he Committee believes that penalties should only be imposed where appropriate and not as a bargaining chip.” Id. The report provides that, to achieve this goal, section 6751(b)(1) “requires the specific approval of IRS management to assess all non-computer generated penalties unless excepted.”

Section 212 of the Taxpayer Certainty and Disaster Tax Relief Act of 2020, which was enacted as Division EE of the Consolidated Appropriations Act, 2021, Public Law 116-260, 134 Stat. 1182, 3067 (2020), expanded the list of penalties in section 6751(b)(2)(A) excepted from the supervisory approval requirement of section 6751(b)(1) by revising the end of section 6751(b)(2)(A) to read “6654, 6655, or 6662 (but only with respect to an addition to tax by reason of subsection (b)(9) thereof);” (relating to the addition to tax under section 6662(b)(9) of the Code with regard to the special charitable contribution deduction under section 170(p) of the Code for taxable years of individuals beginning in 2021). Section 605 of Division T of the Consolidated Appropriations Act, 2023, Public Law 117-328, 136 Stat. 4459, 5395 (2022), further amended section 6751(b)(2)(A) by striking “subsection (b)(9)” and inserting “paragraph (9) or (10) of subsection (b).” Section 6662(b)(10) imposes an accuracy-related penalty on underpayments attributable to any disallowance of a deduction by reason of section 170(h)(7).

In 2016, a United States Tax Court (Tax Court) majority read section 6751(b)(1)'s silence about when supervisory approval is required to mean that no specific timing requirement exists and, thus, the approval need only be obtained at some time, but no particular time, prior to assessment. Graev v. Commissioner, 147 T.C. 460, 477-81 (2016), superseded by 149 T.C. 485 (2017).

The United States Court of Appeals for the Second Circuit (Second Circuit) rejected the Graev court's interpretation of section 6751(b)(1), finding ambiguity in the statute's phrase “initial determination of such assessment.” Chai v. Commissioner, 851 F.3d 190, 218-19 (2d Cir. 2017). The Second Circuit held that, with respect to penalties subject to deficiency procedures, section 6751(b)(1) requires written approval of the initial penalty determination no later than the date the IRS issues the notice of deficiency (or files an answer or amended answer asserting such penalty). Id. at 221. The Second Circuit reasoned that for supervisory approval to be given force, it must be obtained when the supervisor has the discretion to give or withhold it, and, for penalties determined in a notice of deficiency, this discretion no longer exists upon the issuance of the notice. Id. at 220. In Graev III, 149 T.C. 485 (2017), the Tax Court reversed its earlier interpretation of section 6751(b) and followed Chai. Since then, the Tax Court has imposed increasingly earlier deadlines by which supervisory approval of the initial penalty determination must be obtained to be considered timely under the statute, formulating tests that are difficult for IRS employees to apply.

In Clay v. Commissioner, 152 T.C. 223, 249-50 (2019), the Tax Court held that supervisory approval of penalties was too late where it was obtained before the IRS issued a notice of deficiency but after the revenue agent sent the petitioner a “30-day letter” proposing penalties and giving the petitioner an opportunity to request an administrative appeal. In Belair Woods, LLC v. Commissioner, 154 T.C. 1, 13 (2020), the Tax Court held that supervisory approval must be obtained before the IRS sends a notice that “formally communicates to the taxpayer, the [IRS] Examination Division's unequivocal decision to assert a penalty.” In subsequent cases, the Tax Court has held that supervisory approval must be obtained before the first communication to the taxpayer that demonstrates that an initial determination has been made. See, e.g., Beland v. Commissioner, 156 T.C. 80 (2021); Kroner v. Commissioner, T.C. Memo. 2020-73, rev'd 48 F. 4th 1272 (11th Cir. 2022); Carter v. Commissioner, T.C. Memo. 2020-21, rev'd 2022 WL 4232170 (11th Cir. Sept. 14, 2022). The Tax Court has applied this timing rule to penalties subject to pre-assessment review in the Tax Court, as well as to assessable penalties.

Recently the United States Court of Appeals for the Ninth Circuit (Ninth Circuit), the United States Court of Appeals for the Tenth Circuit (Tenth Circuit), and the United States Court of Appeals for the Eleventh Circuit (Eleventh Circuit) reversed the Tax Court's “formal communication” timing rule, noting that it has no basis in the text of the statute. Laidlaw's Harley Davidson Sales, Inc. v. Commissioner, 29 F.4th 1066 (9th Cir. 2022), reh'g en banc denied, No. 20-73420 (9th Cir. July 14, 2022); Minemyer v. Commissioner, Nos. 21-9006 & 21-9007, 2023 WL 314832 (10th Cir. Jan. 19, 2023); Kroner v. Commissioner, 48 F. 4th 1272 (11th Cir. 2022). In Laidlaw's, the Ninth Circuit held that the statute requires approval before the assessment of a penalty or, if earlier, before the relevant supervisor loses discretion whether to approve the penalty assessment, and noted that “[t]he statute does not make any reference to the communication of a proposed penalty to the taxpayer, much less a `formal' communication.” Laidlaw's, 29 F. 4th at 1072. In Minemyer, the Tenth Circuit, in an unpublished opinion, held that the statute requires approval before the IRS issues a notice of deficiency asserting a penalty. Minemyer, 2023 WL 314832 at *4-5. In Kroner, the Eleventh Circuit held that the statute only requires approval before assessment, finding that a deadline of assessment is “consistent with the meaning of the phrase `initial determination of such assessment,' . . . . reflects the absence of any express timing requirement in the statute . . . [and] is a workable reading in light of the statute's purpose.” Kroner, 48 F.4th at 1276. The Tax Court has continued to use its “formal communication” timing rule subsequent to Laidlaw's and Kroner. See, e.g., Simpson v. Commissioner, T.C. Memo 2023-4; Castro v. Commissioner, T.C. Memo. 2022-120.

Recent cases have also addressed other issues under section 6751(b)(1), including (but not limited to) clarification as to who is an immediate supervisor, see, e.g., Sand Investment Co. v. Commissioner, 157 T.C. 136 (2021); what constitutes personal, written approval, see, e.g., PBBM-Rose Hill, Ltd. v. Commissioner, 900 F.3d 193 (5th Cir. 2018); whether particular Code sections impose a “penalty” subject to section 6751(b)(1), see, e.g., Grajales v. Commissioner, 156 T.C. 55 (2021), aff'd 2022 WL 3640274 (2d Cir. 2022); and what constitutes a penalty “automatically calculated through electronic means.” See, e.g., Walquist v. Commissioner, 152 T.C. 61 (2019).

The Treasury Department and the IRS have concluded that it is in the interest of sound tax administration to have clear and uniform regulatory standards regarding the penalty approval requirements under section 6751(b). In the absence of such regulatory standards, caselaw has developed rules for the application of section 6751(b). Such judicial holdings are subject to unanticipated but frequent change, making it difficult for IRS employees to apply them in a consistent manner. The difficulty in applying or anticipating how courts will construe these rules has resulted in otherwise appropriate penalties on taxpayers not being sustained and has undermined the efficacy of these penalties as a tool to enhance voluntary compliance by taxpayers. In addition, the evolving standards regarding interpretations of section 6751(b) have served to increase litigation, which consumes significant government resources. The recent Ninth Circuit and Eleventh Circuit rulings also create a different test to satisfy the requirements of section 6751(b) in cases appealable to those circuits as opposed to other cases that come before the Tax Court. See Laidlaw's Harley Davidson Sales, 29 F.4th at 1066; Kroner v. Commissioner, 48 F. 4th at 1276. The proposed regulations are intended to clarify the application of section 6751(b) in a manner that is consistent with the statute and its legislative history, has nationwide uniformity, is administrable for the IRS, and is easily understood by taxpayers.

The proposed regulations would adopt three rules regarding the timing of supervisory approval of penalties under section 6751(b) that are based on objective and clear standards. One rule addresses penalties that are included in a pre-assessment notice that is subject to the Tax Court's review, such as a statutory notice of deficiency. One rule is for penalties that the IRS raises in an answer, amended answer, or amendment to the answer to a Tax Court petition. And one rule is for penalties assessed without prior opportunity for review by the Tax Court.

Proposed § 301.6751(b)-1(c) provides that, for penalties that are included in a pre-assessment notice issued to a taxpayer that provides the basis for jurisdiction in the Tax Court upon timely petition, supervisory approval may be obtained at any time before the notice is issued by the IRS. Section 6751(b) clearly provides that there be supervisory approval before the assessment of a penalty and contains no express requirement that the “written approval be obtained at any particular time prior to assessment.” Chai, 851 F.3d at 218. Courts have noted that there is ambiguity in the statutory phrase “initial determination of such assessment [of the penalty]” that a supervisor must approve. See, e.g., Chai, 851 F.3d at 218-19 (noting that since an “assessment” is the formal recording of a taxpayer's tax liability, one can determine a deficiency and whether to make an assessment, but one cannot “determine” an assessment); Roth v. Commissioner, 922 F.3d 1126, 1132 (10th Cir. 2019) (“[W]e agree with the Second Circuit that the plain language of § 6751(b) is ambiguous. . . .”). But courts have not agreed that an ambiguity about what constitutes an initial determination provides an opportunity to craft a deadline for approval of an initial determination from the statute's legislative history. Compare Chai, 851 F.3d at 219 with Laidlaw's Harley Davidson Sales, 29 F.4th at 1072. Instead, courts have agreed that a supervisor can approve a penalty only at a time that the supervisor has discretion to give or withhold approval. See, e.g., Chai, 851 F.3d at 220; Laidlaw's Harley Davidson Sales, 29 F.4th at 1074; Cf., Kroner, 48 F. 4th at 1276, n.1 (holding that approval is required before assessment but declining to address whether the supervisor must have discretion at the time of approval because it was undisputed in that case that the supervisor did).

Prior to the Second Circuit's ruling in Chai, the Tax Court interpreted section 6751(b) merely to require supervisory approval prior to assessment, which is the only definitive deadline provided in the statute and which, for penalties determined in a notice of deficiency, occurs after the opportunity for Tax Court review of a penalty. See Graev v. Commissioner, 147 T.C. 460 (2016), superseded by 149 T.C. 485 (2017). The Treasury Department and the IRS acknowledge that approval of a penalty after the IRS issues a notice subject to Tax Court review is counter to the statutory scheme for Tax Court review. Once a taxpayer petitions to the Tax Court a notice that includes a penalty, section 6215(a) of the Code directs that the Tax Court decides whether the penalty will be assessed. In that case, a supervisor no longer has discretion that will control. Further, as a practical matter, the IRS has no general process for supervisory approval of a penalty after issuing a pre-assessment notice to a taxpayer subject to review by the Tax Court that includes the penalty, such as a notice of deficiency. If a taxpayer does not timely petition the Tax Court, the IRS will simply assess any penalty determined in the notice. Therefore, the Treasury Department and the IRS conclude that a penalty appearing in a pre-assessment notice issued to a taxpayer subject to Tax Court review should be subject to supervisory approval before the notice is issued. This interpretation is consistent with the Second Circuit's holding in Chai and provides for penalty review while the IRS still has discretion regarding penalties. See also Laidlaw's Harley Davidson Sales, 29 F.4th at 1074 (“Accordingly, we hold that § 6751(b)(1) requires written supervisory approval before the assessment of the penalty or, if earlier, before the relevant supervisor loses discretion whether to approve the penalty assessment.”).

The proposed regulations do not require written approval of an initial determination of a penalty that is subsequently included in a pre-assessment notice subject to review by the Tax Court by any deadline earlier than the issuance of the notice to the taxpayer. As already mentioned, no language in the statute imposes any such earlier deadline, and the statutory scheme for assessing such penalties does not deprive a supervisor of discretion to approve an initial determination before the issuance of a pre-assessment notice subject to review by the Tax Court.

The Treasury Department and the IRS have concluded that an earlier deadline for approval of an initial determination of a penalty would not best serve the legislative purpose of section 6751(b). The lack of any deadline in the statute other than the deadline that approval must come before assessment indicates that Congress did not intend an earlier deadline. No earlier deadline is mentioned in the legislative history. To create earlier deadlines, the caselaw relies on a single statement in the limited legislative history that “[t]he Committee believes that penalties should only be imposed where appropriate and not as a bargaining chip.” See Belair Woods, 154 T.C. at 7 (citing S. Rep. No. 105-174, at 65 (1998)). But the earlier deadlines created by the Tax Court do not ensure that penalties are only imposed where appropriate.

First, the supervisory approval deadlines the Tax Court has created are unclear in application. One formulation sets the deadline for approval to occur before the IRS “formally communicates to the taxpayer, the Examination Division's unequivocal decision to assert a penalty.” Belair Woods, 154 T.C. at 13. Prior to assessment, it is unclear what constitutes this unequivocal decision other than a notice that gives the taxpayer the right to petition the Tax Court. For any notice before the right to petition the Tax Court, the taxpayer is free to present more evidence or arguments to the Examination Division as to why a penalty should not apply, which could lead the IRS supervisor charged with approving an initial determination to conclude that a penalty should not be asserted.

Second, if the “Examination Division's unequivocal decision to assert a penalty,” id., means that the Examination Division was finished with its work and could or would not change its mind upon receiving further information, there is no harm in delaying approval in writing until sometime after that moment. There would be no possibility of a change to the penalty during the period after the Examination Division has completed its work. The Tax Court's imposition of an approval deadline immediately after the Examination Division has completed its work rather than sometime later would do nothing to prevent an attempt to bargain because the Examination Division could not consider a bargain if it has already completed its work

Third, none of the deadlines the Tax Court has imposed actually ensure that penalties could never be used as a bargaining chip because each formulation of what constitutes an “initial determination” has been tied to a written communication. Although it would violate longstanding IRS Policy Statements and would contradict the Internal Revenue Manual's (IRM) instructions, in theory a penalty could be used as a bargaining chip if conveyed orally, and the deadlines the Tax Court has created do not come into play without written communication. As a result, the Tax Court opinions imposing deadlines are not effective to prevent bargaining.

Fourth, the courts' struggles to determine a consistent deadline has undermined the legislative purpose that penalties be imposed “where appropriate.” S. Rep. No. 105-714 at 65. The Tax Court has found no evidence that an IRS employee actually attempted to use a penalty as a bargaining chip in any of the cases in which it invalidated a penalty for section 6751(b) noncompliance. Instead, the Tax Court has consistently removed penalties when IRS employees simply obtained written supervisory approval after deadlines the Tax Court created and applied retroactively without any indication that the penalty was improper. See, e.g., Kroner, T.C. Memo. 2020-73, rev'd 48 F. 4th 1272 (11th Cir. 2022); Carter, T.C. Memo. 2020-21, rev'd 2022 WL 4232170 (11th Cir. Sept. 14, 2022). In one case, the Tax Court explicitly noted that imposition of the penalty would be proper but for the IRS's failure to obtain written supervisory approval by the deadline created by the Tax Court. See Becker v. Commissioner, T.C. Memo. 2018-69 (stating that “Mr. Becker's fraud is evident” and that, but for section 6751(b) compliance, the court's analysis “would normally lead to a holding that sustains the Commissioner's civil fraud penalty determinations . . .”).

In contrast, by allowing a supervisor to approve the initial determination of a penalty up until the time the IRS issues a pre-assessment notice subject to review by the Tax Court, the proposed rule ensures that penalties are “only [ ] imposed where appropriate.” S. Rep. No. 105-714 at 65. With this deadline, the supervisor has the opportunity to consider a taxpayer's defense against a penalty, if applicable, and decide whether to approve the penalty. If the facts of the case suggest that a penalty should have been considered but none is imposed, the supervisor's later review would allow the supervisor to question why none was recommended. Furthermore, this bright-line rule relieves supervisors from having to predict whether approval at a certain point will be too early or too late, thereby risking that an otherwise appropriate penalty may not be upheld by a court. Pre-assessment notices that provide a basis for Tax Court jurisdiction are well known to supervisors, and the proposed rule will be clear in application to both IRS employees and taxpayers.

Finally, the rule in proposed § 301.6751(b)-1(c) is consistent with longstanding IRS Policy Statements. Penalty Policy Statement 20-1 has, since 2004, included the following direction to IRS employees:

“The [IRS] will demonstrate the fairness of the tax system to all taxpayers by:

a. Providing every taxpayer against whom the [IRS] proposes to assess penalties with a reasonable opportunity to provide evidence that the penalty should not apply;

b. Giving full and fair consideration to evidence in favor of not imposing the penalty, even after the [IRS]'s initial consideration supports imposition of a penalty; and

c. Determining penalties when a full and fair consideration of the facts and the law support doing so.

Proposed § 301.6751(b)-1(d) provides that, for penalties raised in the Tax Court after a petition, supervisory approval may be obtained at any time prior to the Commissioner requesting that the court determine the penalty. The proposed rule gives full effect to the language in both sections 6214 and 6751(b)(1) because once a penalty is raised, the Tax Court decision will control whether it is assessed. Section 6214(a) permits the Commissioner to raise penalties in an answer or amended answer that were not included in a notice that provides the basis for Tax Court jurisdiction upon timely petition. The proposed rule allows the exercise of this statutory grant of independent judgment by the IRS Office of Chief Counsel (Counsel) attorney, while maintaining the intent of Congress that penalties be imposed only where appropriate, and with meaningful supervisory review. Any concern about a Counsel attorney using penalties raised in an answer or amended answer as a bargaining chip is mitigated by the requirement in proposed § 301.6751(b)-1(d) for supervisory approval within Counsel before the answer or amended answer is filed. Moreover, by raising a penalty on answer, amended answer, or amendment to the answer to, the Commissioner will likely bear the burden of proof at trial regarding the application of the penalty, thus reducing further the possibility that Counsel will attempt to use a penalty as a bargaining chip in a docketed case. See Tax Court Rule 142. Furthermore, Tax Court Rule 33(b) provides that signature of counsel on a pleading constitutes a certificate by the signer that the pleading is not interposed for any improper purpose, thus diminishing the potential for abuse. No case has found that a penalty raised on answer, amended answer, or amendment to the answer was untimely under section 6751(b).

Proposed § 301.6751(b)-1(b) provides that supervisory approval for penalties that are not subject to pre-assessment review in the Tax Court may be obtained at any time prior to assessment. This includes penalties that could have been included in a pre-assessment notice that provides the basis for Tax Court jurisdiction upon timely petition, but which were not included in such a notice because the taxpayer agreed to their immediate assessment.

Unlike penalties subject to deficiency procedures before assessment, there is no Tax Court or potential Tax Court decision that would make approval of an immediately assessable penalty by an IRS supervisor meaningless. Instead, consistent with the language of section 6751(b), supervisory approval can be made at any time before assessment without causing any tension in the statutory scheme for assessing penalties.

The proposed rule is also consistent with congressional intent that penalties not be used as a bargaining chip. Most penalties not subject to pre-assessment review in the Tax Court cannot be used as a bargaining chip because they are not in addition to a tax liability. Rather, the penalty is the sole liability at issue.

Proposed § 301.6751(b)-1(a)(2) provides a list of penalties excepted from the requirements of section 6751(b). Proposed § 301.6751(b)-1(a)(2) excepts those penalties listed in section 6751(b)(2)(A), along with penalties imposed under section 6673 of the Code. Penalties under section 6673 are imposed at the discretion of the court and are designed to deter bad behavior in litigation and conserve judicial resources. Section 6673 penalties are not determined by the Commissioner, and the applicable Federal court may impose them regardless of whether the Commissioner moves for their imposition. The proposed rule excepts penalties under section 6673 from the requirements of section 6751(b)(1) because section 6751(b)(1) was not intended as a mechanism to restrain Federal courts. This rule is consistent with the Tax Court's holding in Williams v. Commissioner, 151 T.C. 1 (2018).

Section 6751(b)(1) requires approval by “the immediate supervisor” of the individual who makes the initial penalty determination, or such higher level official as the Secretary may designate. The statute does not define the term immediate supervisor. The 1998 Senate Finance Committee Report only provides that section 6751(b) requires the approval of “IRS management.” In Sand Investment, the Tax Court held that for purposes of section 6751(b) the “immediate supervisor” is the individual who directly supervises the examining agent's work in an examination. In the Tax Court's view, the legislative history of section 6751(b) supports the conclusion that the person with the greatest familiarity with the facts and legal issues presented by the case is the immediate supervisor. 157 T.C. at 142.

Proposed § 301.6751(b)-1(a)(3)(iii) defines the term “immediate supervisor” as any individual with responsibility to approve another individual's proposal of penalties without the proposal being subject to an intermediary's approval. The proposed rule does not limit the term immediate supervisor to a single individual. To limit the term to a single individual within the IRS would restrict section 6751(b)(1) in a way that does not reflect how the IRS operates and would invite unwarranted disputes about which specific individual was most appropriate in situations where multiple individuals could fairly be considered an “immediate supervisor.” Instead, the term is better understood to refer to any person who, as part of their job, directly approves a penalty proposed by another. This includes acting supervisors operating under a proper delegation of authority. This approach is consistent with the intent of Congress to prevent IRS examining agents from operating alone. The proposed rule further ensures that the person giving the approval has appropriate supervisory responsibility with respect to the penalty.

Proposed § 301.6751(b)-1(a)(4) designates as a higher level official authorized to approve an initial penalty determination for purposes of section 6751(b)(1) any person who has been directed via the IRM or other assigned job duties to approve another individual's proposal of penalties before they are included in a notice prerequisite to Tax Court jurisdiction, an answer to a Tax Court petition, or are assessed without need for such inclusion. Proposed § 301.6751(b)-1(a)(3)(iv) defines a higher level official as any person designated as such under proposed § 301.6751(b)-1(a)(4).

With respect to “higher level officials” who may provide penalty approval in lieu of the immediate supervisor, the statute does not specify whether the official needs to be at a “higher level” than the individual making the initial penalty determination, or at a higher level than that individual's supervisor. Read in light of the statute's legislative purpose and the structure and operations of the IRS, it is appropriate to understand that term as referring to an official at a higher level than the individual making the initial penalty determination. To do otherwise would be to exclude a large group of individuals the IRS has assigned to review proposed penalties. This approach is consistent with the legislative history and allows IRS employees to operate within the scope of their assigned duties.

To be able to identify which supervisor should approve an initial penalty determination, it must be clear which individual made the “initial determination of [a penalty] assessment.” Proposed § 301.6751(b)-1(a)(3)(ii) provides that the individual who first proposes a penalty is the individual who section 6751(b)(1) references as the individual making the initial determination of a penalty assessment. Proposed § 301.6751(b)-1(a)(3)(ii) also provides that a proposal includes those made either to a taxpayer or to the individual's supervisor or a designated higher level official. This approach will allow for easy identification of the appropriate supervisor or higher level official. Proposed § 301.6751(b)-1(a)(3)(ii) also makes clear that the assessment of a penalty must be attributable to an individual's proposal for that individual to be considered as the individual who made the “initial determination of such assessment.” If a proposal of a penalty is not tied to an ultimate assessment, then it should not be treated as the “initial determination of such assessment.” This approach allows the IRS the flexibility to pursue penalties when new information is received that alters earlier thinking on whether a penalty is appropriate. It also allows for more than one set of an individual employee and supervisor to exercise independent judgment about whether a penalty should be assessed. This situation is illustrated by an example in proposed § 301.6751(b)-1(e)(4).

Section 6751(b)(1) requires that the immediate supervisor “personally approve (in writing)” the initial determination to assert a penalty. Proposed § 301.6751(b)-1(a)(3)(v) provides that “personally approved (in writing)” means any writing, including in electronic form, that is made by the writer to signify the writer's assent and that reflects that it was intended as approval. The proposed rule reflects a straightforward, plain language interpretation of the term, and is consistent with the legislative history's requirement that “specific approval” be given. The plain language of the statute requires only personal approval in writing, not any particular form of signature or even any signature at all. The plain language of the statute also contains no requirement that the writing contain the supervisor's substantive analysis, nor does the statute require the supervisor to follow any specific procedure in determining whether to approve the penalty. Thus, for example, a supervisor's signature on a cover memorandum or a letter transmitting a report containing penalties is sufficient approval of the penalties contained in the report. The proposed rule is consistent with existing caselaw on this issue. See PBBM-Rose Hill, 900 F.3d at 213; Deyo v. Commissioner, 296 Fed. Appx. 157 (2d Cir. 2008); Thompson v. Commissioner, T.C. Memo. 2022-80; Raifman v. Commissioner, T.C. Memo. 2018-101.

Section 6751(b)(2) exempts from the penalty approval requirements penalties under sections 6651, 6654, 6655, 6662(b)(9), and 6662(b)(10) and “any other penalty automatically calculated through electronic means.” The term is not defined in the statute and the legislative history only provides that approval is required of “all non-computer generated penalties.”

Proposed § 301.6751(b)-1(a)(3)(vi) provides that a penalty is “automatically calculated through electronic means” if it is proposed by an IRS computer program without human involvement. Proposed § 301.6751(b)-1(a)(3)(vi) provides that a penalty is no longer considered “automatically calculated through electronic means” if a taxpayer responds to a computer-generated notice proposing a penalty and challenges the penalty or the amount of tax to which the penalty is attributable, and an IRS employee works the case.

Current IRS computer software, including but not limited to the Automated Correspondence Exam (ACE) program using Report Generation Software (RGS) and the Automated Underreporter (AUR) program, is capable of automatically proposing certain penalties to taxpayers without the involvement of an IRS examiner. Penalties that can be proposed in this way are then assessed without review by an IRS examiner. Requiring supervisory approval for these penalties would disrupt the automated process of determining a penalty and would not square with the statutory text requiring approval by the immediate supervisor of the “individual” making an initial penalty determination.

When an IRS computer program sends a taxpayer a notice proposing a penalty and the taxpayer responds to that notice, an IRS examiner often considers the taxpayer's response. If the taxpayer's response questions the validity of the penalty or the adjustments to which the penalty relates, and an examiner considers the response, any subsequent assessment of the penalty would not be based solely on the automatic calculation of the penalty by the computer program. Instead, it would be at least partially based on a choice made by an IRS employee as to whether the penalty is appropriate. Therefore, the exception for penalties automatically calculated through electronic means does not apply, and supervisory approval is required in that situation. This rule is consistent with the Tax Court's holding in Walquist, 152 T.C. at 73.

The proposed rules are proposed to apply to penalties assessed on or after the date of publication of the Treasury decision adopting the proposed rules as final regulations in the Federal Register .

It has been determined that this notice of proposed rulemaking is not subject to review under section 6(b) of Executive Order 12866 pursuant to the Memorandum of Agreement (April 11, 2018) between the Treasury Department and the Office of Management and Budget regarding review of tax regulations.

Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), it is hereby certified that this regulation will not have a significant economic impact on a substantial number of small entities. This certification is based on this regulation imposing no obligations on small entities and the effectiveness of the regulation in having supervisors ensure that penalties for violations of other provisions of tax law are appropriate and not used as a bargaining chip. Because only appropriate penalties will apply with the proper application of this regulation, the proposed regulations do not impose a significant economic impact on a substantial number of small entities.

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

Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) requires that agencies assess anticipated costs and benefits and take certain other actions before issuing a final rule that includes any Federal mandate that may result in expenditures in any one year by a State, local, or Tribal government, in the aggregate, or by the private sector, of $100 million in 1995 dollars, updated annually for inflation. 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 (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. These proposed regulations do not have federalism implications and do 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 www.regulations.gov or upon request.

A public hearing will be scheduled if requested in writing by any person who timely submits electronic or written comments. Requests for a public hearing also are encouraged to be made electronically. If a public hearing is scheduled, notice of the date and time for the public hearing will be published in the Federal Register . Announcement 2020-4, 2020-17 I.R.B 1, provides that, until further notice, public hearings conducted by the IRS will be held telephonically. Any telephonic hearing will be made accessible to people with disabilities.

The principal author of these regulations is David Bergman of the Office of the Associate Chief Counsel (Procedure and Administration). However, other personnel from the Treasury Department and the IRS participated in their development.

Accordingly, the Treasury Department and the IRS propose to amend 26 CFR part 301 as follows:

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

Table 1 lists the document addressed by this proposal with the dates that it was adopted by the local air agency and submitted by the California Air Resources Board (CARB).

The EPA determined that the negative declarations portion of the 2017 RACT SIP met the SIP submittal completeness criteria in 40 CFR part 51, Appendix V on April 11, 2018. 1 The EPA determined that the remaining elements of the 2017 RACT SIP met the completeness criteria on August 23, 2018. 2