On August 23, 2024, DHS published a correction to the final rule titled Classification for Victims of Severe Forms of Trafficking in persons; Eligibility for “T” Nonimmigrant Status. 89 FR 68081. The correction included amendatory instruction 5 in the first column of page 68083. A typographical error in that instruction caused the Office of the Federal Register to replace the whole of paragraph (a) with the text on page 68083. DHS did not intend to do that. Rather, DHS intended to correct only the introductory text of paragraph (a). This document fixes that typographical error.

This correction is applicable as if DHS had included this change in the final rule that published on April 30, 2024. That rule had an effective date of August 28, 2024. Accordingly, the correction is applicable as of August 28, 2024, at 12 a.m. Eastern Time. This correction does not change how DHS will apply the final rule, i.e., DHS will apply the corrected final rule to applications pending on, or filed on or after, August 28, 2024, except the bona fide determination provisions which DHS will generally only apply to applications filed on or after August 28, 2024.

Section 553(b) of the Administrative Procedure Act (APA) generally requires agencies to publish a notice of proposed rulemaking in the Federal Register to provide a period for public comment before the provisions of a rule take effect. 5 U.S.C. 553(b). In addition, section 553(d) of the APA requires agencies to delay the effective date of final rules by a minimum of 30 days after the date of their publication in the Federal Register . 5 U.S.C. 553(d). Both of these requirements can be waived if an agency finds, for good cause, that the notice and comment process and/or delayed effective date is impracticable, unnecessary, or contrary to the public interest, and incorporates a statement of the finding and the reasons therefore in the notice. 5 U.S.C. 553(b)(B), (d)(3).

DHS believes there is good cause for publishing this document without prior notice and opportunity for public comment and with an effective date of less than 30 days because DHS finds that such procedures are unnecessary. This document corrects a typographical error in the regulatory text and does not make any substantive changes. This document merely conforms an erroneous portion of the final rule to the agency's clearly expressed contemporaneous intent.

Accordingly, 8 CFR part 214 is corrected by making the following correcting amendments:

The Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015 (the 2015 Act) amended the Federal Civil Penalties Inflation Adjustment Act of 1990 (the Inflation Adjustment Act)  1 to improve the effectiveness of civil monetary penalties and to maintain their deterrent effect. The Inflation Adjustment Act provides for the regular evaluation of CMPs and requires FCSIC, and every other Federal agency with authority to impose CMPs, to ensure that CMPs continue to maintain their deterrent values. 2

FCSIC must enact regulations that annually adjust its CMPs pursuant to the inflation adjustment formula of the amended Inflation Adjustment Act and rounded using a method prescribed by the Inflation Adjustment Act. The new amounts are applicable to penalties assessed on or after January 15, 2025, for conduct occurring on or after November 2, 2015. Agencies do not have discretion in choosing whether to adjust a CMP, by how much to adjust a CMP, or the methods used to determine the adjustment.

First, section 5.65(c) of the Farm Credit Act, as amended (Act), provides that any insured Farm Credit System bank that willfully fails or refuses to file any certified statement or pay any required premium shall be subject to a penalty of not more than $100 for each day that such violations continue, which penalty FCSIC may recover for its use. 3 Second, section 5.65(d) of the Act provides that, except with the prior written consent of the Farm Credit Administration, it shall be unlawful for any person convicted of any criminal offense involving dishonesty or a breach of trust to serve as a director, officer, or employee of any System institution. 4 For each willful violation of section 5.65(d), the institution involved shall be subject to a penalty of not more than $100 for each day during which the violation continues, which FCSIC may recover for its use.

FCSIC's current § 1411.1 provides that FCSIC can impose a maximum penalty of $257 per day for a violation under section 5.65(c) and (d) of the Act.

The 2015 Act requires agencies to make annual adjustments for inflation. Annual inflation adjustments are based on the percent change between the October Consumer Price Index for all Urban Consumers (CPI-U) preceding the date of the adjustment, and the prior year's October CPI-U. Consumer Price Index (CPI-U) for the month of October 2024, not seasonally adjusted, the cost-of-living adjustment multiplier for 2025 is 1.02598. 5 Multiplying 1.02598 times the current penalty amount of $257, after rounding to the nearest dollar as required by the 2015 Act, results in a new penalty amount of $264.

In accordance with the 2015 Act, Federal agencies shall adjust civil monetary penalties “notwithstanding” section 553 of the Administrative Procedures Act. This means that public procedure generally required for agency rulemaking—notice, an opportunity for comment, and a delay in effective date—is not required for agencies to issue regulations implementing the annual adjustment.

For the reasons stated in the preamble, part 1411 of chapter XIV, title 12 of the Code of Federal Regulations is amended as follows:

The FAA invites you to send any written data, views, or arguments about this final rule. Send your comments to an address listed under the ADDRESSES section. Include “Docket No. FAA-2024-2551; Project Identifier MCAI-2024-00346-T” at the beginning of your comments. The most helpful comments reference a specific portion of the final rule, 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 final rule 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 final rule.

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 AD 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 AD, 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 AD. Submissions containing CBI should be sent to Krista Greer, Aviation Safety Engineer, FAA, 2200 South 216th Street, Des Moines, WA 98198; phone: 206-231-3221; email: krista.greer@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 2023-23-10, Amendment 39-22612 (88 FR 83817, December 1, 2023) (AD 2023-23-10), for all Embraer S.A. Model ERJ 190-300 airplanes. AD 2023-23-10 was prompted by an MCAI originated by ANAC, which is the aviation authority for Brazil. ANAC issued AD 2023-06-01, effective June 16, 2023 (ANAC AD 2023-06-01), to correct an unsafe condition.

AD 2023-23-10 required repetitive inspections of the press-fitted bushings of the wing ailerons for migration and broken sealant, measurements of the distance between the aileron surfaces and hinge fittings, functional checks of the backlash of the wing aileron control system, and all applicable related investigative and corrective actions, which is incorporated by reference. The FAA issued AD 2023-23-10 to address a limit cycle oscillation phenomenon, which could expose the surrounding structure and systems to unacceptable vibration levels and reduce the airplane controllability.

Since the FAA issued AD 2023-23-10, ANAC superseded ANAC AD 2023-06-01 and issued ANAC AD 2023-06-01R1, effective June 17, 2024 (ANAC AD 2023-06-01R1) (also referred to as the MCAI), to correct an unsafe condition for all Embraer S.A. Model ERJ 190-300 airplanes. The MCAI states that the compliance paragraph was changed. The changes clarify that discrepancies found during any inspection must be corrected immediately, without any additional intervening actions.

The FAA is issuing this AD to address wear on the wing hinge bearing assembly of the aileron surfaces that could lead to excessive backlash. If not addressed, this backlash could result in a limit cycle oscillation phenomenon exposing the surrounding structure and systems to unacceptable vibration levels and reducing the airplane controllability. You may examine the MCAI in the AD docket at regulations.gov under Docket No. FAA-2024-2551.

Although this AD does not explicitly restate the requirements of AD 2023-06-01, this AD retains all of the requirements of AD 2023-06-01. Those requirements are referenced in ANAC AD 2023-06-01R1, which, in turn, is referenced in paragraph (g) of this AD.

ANAC AD 2023-06-01R1 specifies procedures for repetitive general visual inspections of the press-fitted bushings of the left-hand (LH) and right-hand (RH) wing ailerons for migration and broken sealant; repetitive detailed inspections to measure the distance between the LH and RH wing aileron surfaces and hinge fittings; repetitive functional checks of the backlash of the LH and RH wing aileron control system; and applicable related investigative and corrective actions. The related investigative actions include a detailed inspection of the torque values of the attachment parts on the LH and RH wing aileron surfaces; a general visual inspection of the press-fitted bushings on the LH and RH aileron surfaces, as applicable, for damage ( i.e., elongation, scratches, and nicks) and rotation or migration ( i.e., gap between the bushing flange and lug, or broken sealant around the bushing); a general visual inspection of the sliding bushings of the LH and RH aileron surfaces, as applicable, for damage ( i.e., scratches, steps, and dents) and migration of the press-fitted bushing pair; a detailed inspection to measure the outer diameter of the sliding bushings; a detailed inspection to check the inner diameter of the press-fitted bushings of certain aileron fittings; measurement of the outer diameters of the mating sliding bushing and bolt shank; and an operational check of the aileron control system, or a rigging procedure and deflection check, as applicable. The corrective actions include retorquing the nuts and installing cotter pins on the bolts and nuts of the attachment parts on the LH and RH wing aileron surfaces, and replacing the bearings and press-fitted and sliding bushings. 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 this State of Design Authority, it has notified the FAA of the unsafe condition described in the MCAI referenced above. The FAA is issuing this AD after determining that the unsafe condition described previously is likely to exist or develop on other products of the same type design.

This AD requires accomplishing the actions specified in ANAC AD 2023-06-01R1 described previously, except for any differences identified as exceptions in the regulatory text of this AD.

In the FAA's ongoing efforts to improve the efficiency of the AD process, the FAA 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, ANAC AD 2023-06-01R1 is incorporated by reference in this AD. This AD requires compliance with ANAC AD 2023-06-01R1 in its entirety through that incorporation, except for any differences identified as exceptions in the regulatory text of this AD. Material required by ANAC AD 2023-06-01R1 for compliance will be available at regulations.gov under Docket No. FAA-2024-2551 after this AD is published.

Section 553(b) of the Administrative Procedure Act (APA) (5 U.S.C. 551 et seq. ) authorizes agencies to dispense with notice and comment procedures for rules when the agency, for “good cause,” finds that those procedures are “impracticable, unnecessary, or contrary to the public interest.” Under this section, an agency, upon finding good cause, may issue a final rule without providing notice and seeking comment prior to issuance. Further, section 553(d) of the APA authorizes agencies to make rules effective in less than thirty days, upon a finding of good cause.

There are currently no domestic operators of these products. Accordingly, notice and opportunity for prior public comment are unnecessary, pursuant to 5 U.S.C. 553(b). In addition, for the foregoing reasons, the FAA finds that good cause exists pursuant to 5 U.S.C. 553(d) for making this amendment effective in less than 30 days.

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

Currently, there are no affected U.S.-registered airplanes. For any affected airplane that is imported and placed on the U.S. Register in the future, the FAA provides the following cost estimates to comply with this AD:

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

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

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

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

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

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

(2) Will not affect intrastate aviation in Alaska.

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

The FAA invites you to send any written data, views, or arguments about this final rule. Send your comments to an address listed under the ADDRESSES section. Include “Docket No. FAA-2024-2550; Project Identifier MCAI-2024-00345-T” at the beginning of your comments. The most helpful comments reference a specific portion of the final rule, 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 final rule 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 final rule.

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 AD 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 AD, 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 AD. Submissions containing CBI should be sent to Krista Greer, Aviation Safety Engineer, FAA, 2200 South 216th Street, Des Moines, WA 98198; phone: 206-231-3221; email: krista.greer@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 2023-23-09, Amendment 39-22611 (88 FR 89286, December 27, 2023) (AD 2023-23-09), for all Embraer S.A. Model ERJ 190-400 airplanes. AD 2023-23-09 was prompted by an MCAI originated by ANAC, which is the aviation authority for Brazil. ANAC issued AD 2023-05-02R1, dated June 17, 2024 (ANAC AD 2023-05-02R1), to correct an unsafe condition.

AD 2023-23-09 required repetitive inspections of the press-fitted bushings of the wing ailerons for migration and broken sealant, measurements of the distance between the aileron surfaces and hinge fittings, functional checks of the backlash of the wing aileron control system, and all applicable related investigative and corrective actions, as specified in ANAC AD 2023-05-02, effective May 18, 2023, which was incorporated by reference in FAA AD 2023-23-09. The FAA issued AD 2023-23-09 to address a limit cycle oscillation phenomenon, which could expose the surrounding structure and systems to unacceptable vibration levels and reduce airplane controllability.

Since the FAA issued AD 2023-23-09, ANAC superseded ANAC AD 2023-05-02 and issued ANAC AD 2023-05-02R1, effective June 17, 2024 (ANAC AD 2023-05-02R1) (also referred to as the MCAI), to correct an unsafe condition for all Embraer S.A. Model ERJ 190-400 airplanes. The MCAI states that the compliance paragraph was changed. The changes clarify that discrepancies found during any inspection must be corrected immediately, without any additional intervening actions.

The FAA is issuing this AD to address wear on the wing hinge bearing assembly of the aileron surfaces that could lead to excessive backlash. If not addressed, this backlash could result in a limit cycle oscillation phenomenon exposing the surrounding structure and systems to unacceptable vibration levels and reducing airplane controllability. You may examine the MCAI in the AD docket at regulations.gov under Docket No. FAA-2024-2550.

Although this AD does not explicitly restate the requirements of AD 2023-05-02, this AD retains all of the requirements of AD 2023-05-02. Those requirements are referenced in ANAC AD 2023-05-02R1, which, in turn, is referenced in paragraph (g) of this AD.

ANAC AD 2023-05-02R1 specifies procedures for repetitive general visual inspections of the press-fitted bushings of the left-hand (LH) and right-hand (RH) wing ailerons for migration and broken sealant; repetitive detailed inspections to measure the distance between the LH and RH wing aileron surfaces and hinge fittings; repetitive functional checks of the backlash of the LH and RH wing aileron control system; and applicable related investigative and corrective actions. The related investigative actions include a detailed inspection of the torque values of the attachment parts on the LH and RH wing aileron surfaces; a general visual inspection of the press-fitted bushings on the LH and RH aileron surfaces, as applicable, for damage ( i.e., elongation, scratches, and nicks) and rotation or migration ( i.e., gap between the bushing flange and lug, or broken sealant around the bushing); a general visual inspection of the sliding bushings of the LH and RH aileron surfaces, as applicable, for damage ( i.e., scratches, steps, and dents) and migration of the press-fitted bushing pair; a detailed inspection to measure the outer diameter of the sliding bushings; a detailed inspection to check the inner diameter of the press-fitted bushings of certain aileron fittings; measurement of the outer diameters of the mating sliding bushing and bolt shank; and an operational check of the aileron control system, or a rigging procedure and deflection check, as applicable. The corrective actions include retorquing the nuts and installing cotter pins on the bolts and nuts of the attachment parts on the LH and RH wing aileron surfaces and replacing the bearings and press-fitted and sliding bushings. 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 this State of Design Authority, it has notified the FAA of the unsafe condition described in the MCAI referenced above. The FAA is issuing this AD after determining that the unsafe condition described previously is likely to exist or develop on other products of the same type design.

This AD requires accomplishing the actions specified in ANAC AD 2023-05-02R1 described previously, except for any differences identified as exceptions in the regulatory text of this AD.

In the FAA's ongoing efforts to improve the efficiency of the AD process, the FAA 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, ANAC AD 2023-05-02R1 is incorporated by reference in this AD. This AD requires compliance with ANAC AD 2023-05-02R1 in its entirety through that incorporation, except for any differences identified as exceptions in the regulatory text of this AD. Material required by ANAC AD 2023-05-02R1 for compliance will be available at regulations.gov under Docket No. FAA-2024-2550 after this AD is published.

Section 553(b) of the Administrative Procedure Act (APA) (5 U.S.C. 551 et seq. ) authorizes agencies to dispense with notice and comment procedures for rules when the agency, for “good cause,” finds that those procedures are “impracticable, unnecessary, or contrary to the public interest.” Under this section, an agency, upon finding good cause, may issue a final rule without providing notice and seeking comment prior to issuance. Further, section 553(d) of the APA authorizes agencies to make rules effective in less than thirty days, upon a finding of good cause.

There are currently no domestic operators of these products. Accordingly, notice and opportunity for prior public comment are unnecessary, pursuant to 5 U.S.C. 553(b). In addition, for the foregoing reasons, the FAA finds that good cause exists pursuant to 5 U.S.C. 553(d) for making this amendment effective in less than 30 days.

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

Currently, there are no affected U.S.-registered airplanes. For any affected airplane that is imported and placed on the U.S. Register in the future, the FAA provides the following cost estimates to comply with this AD:

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

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

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

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

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

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

(2) Will not affect intrastate aviation in Alaska.

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

1. In this final rule, the Federal Energy Regulatory Commission (Commission) is complying with its statutory obligation to amend the civil monetary penalties provided by law for matters within the agency's jurisdiction.

2. The Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015 (2015 Adjustment Act), 1 which further amended the Federal Civil Penalties Inflation Adjustment Act of 1990 (1990 Adjustment Act), 2 required the head of each Federal agency to issue a rule by July 2016 adjusting for inflation each “civil monetary penalty” provided by law within the agency's jurisdiction and to make further inflation adjustments on an annual basis every January 15 thereafter. 3

3. The 2015 Adjustment Act defines a civil monetary penalty as any penalty, fine, or other sanction that: (A)(i) is for a specific monetary amount as provided by Federal law; or (ii) has a maximum amount provided for by Federal law; (B) is assessed or enforced by an agency pursuant to Federal law; and (C) is assessed or enforced pursuant to an administrative proceeding or a civil action in the federal courts. 4 This definition applies to the maximum civil penalties that may be imposed under the Federal Power Act (FPA), 5 the Natural Gas Act (NGA), 6 the Natural Gas Policy Act of 1978 (NGPA), 7 and the Interstate Commerce Act (ICA). 8

4. Under the 2015 Adjustment Act, the first step for such adjustment of a civil monetary penalty for inflation requires determining the percentage by which the U.S. Department of Labor's Consumer Price Index for all-urban consumers (CPI-U) for October of the preceding year exceeds the CPI-U for October of the year before that. 9 The CPI-U for October 2024 exceeded the CPI-U for October 2023 by 2.598 percent. 10

5. The second step requires multiplying the CPI-U percentage increase by the applicable existing maximum civil monetary penalty. 11 This step results in a base penalty increase amount.

6. The third step requires rounding the base penalty increase amount to the nearest dollar and adding that amount to the base penalty to calculate the new adjusted maximum civil monetary penalty. 12

7. Under the 2015 Adjustment Act, an agency is directed to use the maximum civil monetary penalty applicable at the time of assessment of a civil penalty, regardless of the date on which the violation occurred. 13

8. The adjustments that the Commission is required to make pursuant to the 2015 Adjustment Act are reflected in the following table:

9. Congress directed that agencies issue final rules to adjust their maximum civil monetary penalties notwithstanding the requirements of the Administrative Procedure Act (APA). 14 Because the Commission is required by law to undertake these inflation adjustments notwithstanding the notice and comment requirements that otherwise would apply pursuant to the APA, and because the Commission lacks discretion with respect to the method and amount of the adjustments, prior notice and comment would be impractical, unnecessary, and contrary to the public interest.

10. The Regulatory Flexibility Act, as amended, requires agencies to certify that rules promulgated under their authority will not have a significant economic impact on a substantial number of small businesses. 15 The requirements of the Regulatory Flexibility Act apply only to rules promulgated following notice and comment. 16 The requirements of the Regulatory Flexibility Act do not apply to this rulemaking because the Commission is issuing this final rule without notice and comment.

11. This rule does not require the collection of information. The Commission is therefore not required to submit this rule for review to the Office of Management and Budget pursuant to the Paperwork Reduction Act of 1995. 17

12. In addition to publishing the full text of this document in the Federal Register , the Commission provides all interested persons an opportunity to view and print the contents of this document via the internet through the Commission's Home Page ( https://www.ferc.gov ).

13. From the Commission's Home Page on the internet, this information is available on eLibrary. The full text of this document is available on eLibrary in PDF and Microsoft Word format for viewing, printing, and downloading. To access this document in eLibrary, type the docket number (excluding the last three digits) in the docket number field.

14. User assistance is available for eLibrary and the Commission's website during normal business hours from the Commission's Online Support at (202) 502-6652 (toll free at 1-866-208-3676) or email at ferconlinesupport@ferc.gov, or the Public Reference Room at (202) 502-8371, TTY (202) 502-8659, or email at public.referenceroom@ferc.gov.

15. For the same reasons the Commission has determined that public notice and comment are unnecessary, impractical, and contrary to the public interest, the Commission finds good cause to adopt an effective date that is less than 30 days after the date of publication in the Federal Register pursuant to the APA, 18 and therefore, the regulation is effective upon publication in the Federal Register .

16. The Commission has determined, with the concurrence of the Administrator of the Office of Information and Regulatory Affairs of the Office of Management and Budget, that this rule is not a “major rule” as defined in section 351 of the Small Business Regulatory Enforcement Fairness Act of 1996. This final rule is being submitted to the Senate, House, and Government Accountability Office.

In consideration of the foregoing, the Commission amends parts 250 and 385, chapter I, title 18, Code of Federal Regulations as follows:

This document, the notice of proposed rulemaking (NPRM), all comments received, and all supporting material may be viewed online at www.regulations.gov using the docket number listed above. Electronic retrieval assistance and guidelines are available on the website. It is available 24 hours each day, 365 days each year. An electronic copy of this document may also be downloaded from the Office of Federal Register's website at www.federalregister.gov and the U.S. Government Publishing Office's website at www.GovInfo.gov.

FHWA is required, by statute, to ensure that all projects funded under title 23 of the United States Code (U.S.C.) (Federal-aid projects) use only steel, iron, and manufactured products that are produced in the United States. 23 U.S.C. 313. FHWA refers to these requirements as “Buy America” requirements. In other words, FHWA's Buy America requirement for manufactured products mandates that all such products used on Federal-aid projects must be “produced in the United States.” 23 U.S.C. 313. The Buy America requirement for manufactured products has existed in some form since the enactment of the Surface Transportation Assistance Act of 1978 (1978 STAA), Public Law 95-599 (1978), with those requirements being modified close to their current form by section 165 of the Surface Transportation Assistance Act of 1982 (1982 STAA), Public Law 97-424 (1983).

In 1983, following the passage of the 1982 STAA, FHWA determined that it would be in the public interest to waive the Buy America requirements for manufactured products, with that waiver known as the Manufactured Products General Waiver. See 48 FR 1946 (Jan. 17, 1983); 48 FR 53099 (Nov. 25, 1983). Under the Manufactured Products General Waiver, manufactured products that were permanently incorporated into Federal-aid projects did not need to be produced domestically, apart from predominantly iron or steel components of manufactured products.

Through this rule, FHWA is establishing specific dates on which the Manufactured Products General Waiver will be terminated and is amending its Buy America regulation at 23 CFR 635.410 to establish standards regarding Buy America requirements that will apply to manufactured products on Federal-aid projects. These standards are substantially similar to those established by OMB that apply to manufactured products subject to BABA. 1 This means that to be considered “produced in the United States” and therefore Buy America-compliant, manufactured products must be manufactured in the United States (“final assembly requirement”) and have greater than 55 percent of the manufactured product's components, by cost, be mined, produced, or manufactured in the United States (“55 percent requirement”).

Under this final rule, a manufactured product is defined as an article, material, or supply that has been processed into a specific form and shape, or combined with other articles, materials, or supplies to create a product with different properties than the individual articles, materials, or supplies. If, however, an article, material, or supply meets this definition but could also be classified as an iron or steel product, excluded material, or other product category as specified by law or in 2 CFR part 184, that article, material, or supply is not a manufactured product. Further, mixtures of excluded materials delivered to a work site without final form for incorporation into a project are also not manufactured products. For the purpose of this rule, an article, material, or supply is generally only subject to one set of requirements. For example, a manufactured product is only subject to FHWA's Buy America requirements for manufactured products in § 635.410(c), meaning that the product must meet the final assembly and 55 percent requirements. An iron or steel product, on the other hand, must meet FHWA's existing Buy America requirements for iron and steel in § 635.410(b), generally requiring that all manufacturing processes, including application of a coating, for these materials must occur in the United States. See 23 CFR 635.410(b)(1)(ii).

Pursuant to § 635.410(c)(2)(i), however, precast concrete products that are classified as manufactured products must have their predominantly iron or steel components meet FHWA's Buy America requirements for iron and steel. 2 Similarly, pursuant to § 635.410(c)(2)(ii), the cabinets or other enclosures of intelligent transportation systems (ITS) and other electronic hardware systems that are installed in the highway right of way or other real property and classified as manufactured products must comply with FHWA's Buy America requirements for iron and steel if the cabinet or enclosure is predominantly iron or steel. These specified manufactured products must also comply with FHWA's Buy America requirements for manufactured products. However, the predominantly iron or steel components for precast concrete and the predominantly iron or steel cabinet or enclosure for ITS and other electronic hardware systems will be considered for the purpose of the 55 percent content requirement.

The requirements established in this rule are substantially similar to those proposed in the NPRM. 89 FR 17789 (March 12, 2024). FHWA notes, however, that the final assembly requirement will become effective for Federal-aid projects obligated on or after October 1, 2025. The Manufactured Products General Waiver will remain in place until this date. In addition, unlike the NPRM, the 55 percent requirement will subsequently become effective for Federal-aid projects obligated on or after October 1, 2026. This means that, to be Buy America-compliant, for Federal-aid projects obligated on or after October 1, 2026, all manufactured products permanently incorporated into the project must both be manufactured in the United States and have the cost of the components of the manufactured product that are mined, produced, or manufactured in the United States be greater than 55 percent of the total cost of all components of the manufactured product.

The regulatory impact analysis (RIA) prepared for this final rule pursuant to Executive Order (E.O.) 12866, as amended by E.O. 14094, is available in the rulemaking docket. The RIA estimates the costs and benefits associated with establishing Buy America requirements for manufactured products. The RIA discusses anticipated benefits of the rule qualitatively, as they could not be quantified. Expected benefits include protecting and expanding domestic manufacturing, increasing supply chain resiliency, and increasing consistency in applying domestic content procurement preferences for manufactured products between FHWA and other Federal agencies that are subject to the requirements of BABA. Expected costs of this rule relate to increased material costs for manufactured products used in Federal-aid highway construction projects, project delay, and the administrative costs to FHWA and recipients of FHWA financial assistance. FHWA is able to quantify only increased material costs and the administrative costs to FHWA and recipients of FHWA financial assistance. FHWA estimates the increased material costs for manufactured products permanently incorporated into Federal-aid projects to range from $41 million to $980 million per year. FHWA further estimates an additional $167,000 per year in increased FHWA administrative costs and an additional $22 million per year in increased administrative costs to recipients of FHWA financial assistance. FHWA estimates the 10-year cost of this rule to range from $545 million to $8,466 million at a 2 percent discount, with annualized costs of $61 million to $942 million.

FHWA's Buy America requirements were first established in 1978 by section 401 of the 1978 STAA, which imposed a Buy America requirement to certain unmanufactured and manufactured articles, materials, and supplies. Following enactment of the 1978 STAA, FHWA issued an emergency rule to implement the Buy America requirement of section 401; that rule temporarily waived the provisions of section 401 to all products and materials other than structural steel. See 43 FR 53717 (Nov. 17, 1978).

In 1980, following the issuance of that emergency rule, FHWA issued an NPRM to establish regulations implementing section 401 of the 1978 STAA. 45 FR 77455 (Nov. 24, 1980). In that NPRM, FHWA proposed to extend the coverage of Buy America requirements to all steel construction materials used in highway construction projects, while excluding all other materials and products from being subject to Buy America. 45 FR 77455. Prior to the 1980 rulemaking being finalized, Congress enacted the 1982 STAA, which instituted new Buy America requirements that are similar to those that exist today. Section 165(a) established Buy America requirements for all steel, cement, 3 and manufactured products used on Federal-aid projects, requiring that they be produced in the United States. 4 In 2005, Congress codified the current Buy America requirements for steel, iron, and manufactured products at 23 U.S.C. 313, and those Buy America requirements remain in effect today. 5

In late 1983, FHWA issued its final rule implementing section 165 of the 1982 STAA, creating its current Buy America regulations at 23 CFR 635.410. 6 48 FR 53099 (Nov. 25, 1983). In this rule, FHWA found that a waiver of Buy America requirements for manufactured products was in the public interest, thereby creating the Manufactured Products General Waiver. 48 FR 53102. FHWA stated that product manufacturers did not generally express approval of applying Buy America requirements to manufactured products. Id. at 53101. For those that did, FHWA stated that they were primarily opposed to unfair foreign trade practices. Id. Rather than apply Buy America requirements for manufactured products to remedy this concern, FHWA stated that unfair practices could be instead addressed through import laws. Id. at 53102. Further, FHWA determined that it was not the intent of Congress in enacting the 1982 STAA for FHWA to apply a Buy America requirement to manufactured products; FHWA noted that it had consistently waived manufactured products from coverage under Buy America laws and Congress did not specifically direct a change in that policy by enacting the 1982 STAA. Id. at 53101-02. FHWA thus interpreted that to mean that not all manufactured products had to be covered by the Buy America requirements of section 165. Id. Finally, FHWA stated that materials and products other than steel, cement, asphalt, and natural materials comprised a small percent of the highway construction program; that other manufactured products were minimally used and there would be little economic effect to applying Buy America requirements to them; and that it would be difficult and administratively burdensome to identify the various materials comprising manufactured products and trace their origin. Id. at 53102.

On November 15, 2021, the President signed the BIL (Pub. L. 117-58) into law. The BIL includes BABA, which expands the coverage and application of domestic content procurement preferences in Federal financial assistance programs for infrastructure. BIL, div. G sections 70901-70927. Among other requirements, BABA mandates that all iron, steel, manufactured products, and construction materials used in projects supported by funds made available for a Federal financial assistance program for infrastructure be produced in the United States. BABA section 70914. The BABA, however, provides that this mandate applies to iron, steel, manufactured products, and construction materials only to the extent that a domestic content procurement preference that meets the requirements of section 70914 does not already apply. BABA section 70917(a)-(b). As FHWA has an existing statutory Buy America requirement for steel, iron, and manufactured products at 23 U.S.C. 313, BABA's savings provision results in FHWA applying its existing Buy America requirements under 23 U.S.C. 313 to iron, steel, and manufactured products, not the requirements of BABA. FHWA does, however, apply BABA's domestic content procurement preference to construction materials.

Under BABA, all manufactured products must be “produced in the United States.” BABA section 70914. For manufactured products, BABA defines “produced in the United States” to mean that (1) the manufactured product was manufactured in the United States and (2) the cost of the components of the manufactured product that are mined, produced, or manufactured in the United States is greater than 55 percent of all components of the manufactured product, unless another standard for determining the minimum amount of domestic content of the manufactured product has been established under applicable law or regulation. BABA section 70912(6)(B).

The BABA also expresses a general policy preference against general applicability waivers like the Manufactured Products General Waiver. For example, section 70913(c) of BABA requires Federal Agencies to identify “deficient programs,” which includes programs subject to general applicability waivers. Section 70914(d) of BABA also requires Federal Agencies to review existing general applicability waivers by publishing in the Federal Register a document that: (i) describes the justification for the general applicability waiver; and (ii) requests public comments on the need for the waiver. Following consideration of comments received, BABA then requires Federal Agencies to publish in the Federal Register a determination on whether to continue or discontinue the general applicability waiver. BABA section 70914(d)(2)(B). On March 17, 2023, FHWA initiated the review required by section 70914(d) of BABA for the Manufactured Products General Waiver, publishing in the Federal Register at 88 FR 16517 a notice and request for comments on the waiver (“2023 RFC”).

On August 23, 2023, at 88 FR 57750, OMB revised its guidance in title 2 of the CFR to add a new part 184 that provides additional guidance on implementing BABA. 7 Part 184 includes definitions for key terms, including iron or steel products, predominantly of iron or steel or a combination of both, manufactured products, component, and manufacturer. 2 CFR 184.3. In line with section 70912(6)(B) of BABA, 2 CFR 184.3 states that a manufactured product is “produced in the United States” if the product was manufactured in the United States and the cost of components of the manufactured product that are mined, produced, or manufactured in the United States is greater than 55 percent of the total cost of all components of the manufactured product, unless another standard that meets or exceeds this standard has been established under applicable law or regulation for determining the minimum amount of domestic content of the manufactured product. Part 184 also provides guidance for determining the cost of components of manufactured products. Pursuant to 2 CFR 184.5, in determining whether the cost of components for manufactured products is greater than 55 percent of the total cost of all components, there are two standards depending on the origin of the component. For components purchased by the manufacturer, the cost of the component is the acquisition cost, including transportation costs to the place of incorporation into the manufactured product (whether or not such costs are paid to a domestic firm) and any applicable duty (whether or not a duty-free entry certificate is issued). 2 CFR 184.5(a). For components manufactured by the manufacturer, the cost of the component is all costs associated with the manufacture of the component, including transportation costs described in 2 CFR 184.5(a), plus allocable overhead costs, but excluding profit and any costs associated with the manufacture of the manufactured product. 2 CFR 184.5(b).

Part 184 also states that an article, material, or supply should be classified as only either an iron or steel product, manufactured product, construction material, or section 70917(c) material, that the classification must be made based on the status of the material at the time it is brought to the work site for incorporation into an infrastructure project, and that the material must meet the Buy America standards for only the single category in which it is classified. 2 CFR 184.4(e) and (f). Part 184 defines a section 70917(c) material as cement and cementitious materials; aggregates such as stone, sand, or gravel; or aggregate binding agents or additives. 2 CFR 184.3. These materials are named section 70917(c) materials in 2 CFR part 184 because they are referred to in section 70917(c) of BABA.

As stated earlier, part 184 does not, by its own terms, apply to FHWA's Buy America requirements for steel, iron, and manufactured products; it applies only to FHWA's domestic content procurement preference for construction materials. 2 CFR 184.2(a). Part 184 does, however, apply to all Federal financial assistance programs for infrastructure that are administered by Federal agencies that did not have a domestic content procurement preference for steel, iron, and manufactured products meeting or exceeding BABA's requirements.

On October 25, 2023, OMB issued memorandum M-24-02, “Implementation Guidance on Application of Buy America Preference in Federal Financial Assistance Programs for Infrastructure” (“OMB Implementation Guidance”). 8 Section VI of the Implementation Guidance warns against overly broad waivers, stating that they “undermine market signals designed to boost domestic supply chains, particularly for key articles, materials, and supplies in critical supply chains,” and that “[w]aivers that are overly broad will tend to undermine domestic preference policies.” Section VI also states that public interest waivers of domestic content procurement preferences “must be used judiciously and construed to ensure the maximum utilization of goods, products, and materials produced in the United States.”

Based on the comments received to the 2023 RFC, and after considering the President's policy, as embodied E.O. 14005, “Ensuring the Future is Made in All of America by All of America's Workers,” to maximize the use of goods, products, and materials produced in the United States; the intent of Congress, as expressed in BABA's preference against general applicability waivers; the purpose and goals of domestic content procurement preferences and waivers; and FHWA's original rationale for issuing the Manufactured Products General Waiver, FHWA proposed to discontinue the Manufactured Products General Waiver and proposed regulatory standards for applying Buy America to manufactured products should the waiver be discontinued. 89 FR 17789 (Mar. 12, 2024). 9

In proposing to discontinue the Manufactured Products General Waiver, FHWA noted that the intent of Congress, as expressed in sections 70933 and 70935 of BABA, and the President's policy for the Federal Government, as expressed in section 1 of E.O. 14005, is that Federal agencies should use terms and conditions in Federal financial assistance awards to maximize the use of goods, products, and materials produced in the United States, which would not be consistent with continuing the Manufactured Products General Waiver. Id. at 17795. FHWA also noted that continuing the waiver would undermine the purposes that domestic content procurement preferences, such as FHWA's Buy America requirement, are intended to serve. Id. Further, FHWA considered the Implementation Guidance's policy on waivers, that they should not be overly broad in order to ensure that they appropriately convey market signals on where the domestic supply chain can be bolstered and that they should be time-limited to ensure that, once available, Buy America-compliant materials can receive appropriate consideration for inclusion in federally funded projects. Id. Again, FHWA noted that the Manufactured Products General Waiver was inconsistent with these principles. Id.

FHWA further observed that the Manufactured Products General Waiver was overly broad, disincentivizing manufacturers from domestically producing manufactured products by broadly covering all products, even those that are or could be produced domestically. Id. at 17795-96. Finally, FHWA noted that the waiver fails to provide domestic manufacturers with knowledge of the current gaps in the domestic manufacturing sector by covering all manufactured products, failing to provide market signals that distinguish between manufactured products that are domestically produced and those that are not. Id. at 17796. FHWA observed that this lack of clarity hinders manufacturers who wish to enter the market from understanding the competitive landscape, again disincentivizing them from attempting to provide domestic manufactured products on Federal-aid projects. Id. FHWA stated its belief that, in line with OMB's Implementation Guidance, waivers should aim to proactively encourage domestic manufacturing by providing clear market signals about which markets domestic manufacturers can enter with the reasonable expectation that their products could adequately compete for use on Federal-aid projects. Id.

Accordingly, in the NPRM, FHWA stated its belief that the Manufactured Products General Waiver is overly broad, no longer in line with the purpose of domestic content procurement preferences and waivers, and therefore no longer in the public interest. Id. FHWA thus proposed to discontinue the Manufactured Products General Waiver. Id.

In the NPRM, FHWA acknowledged that discontinuing the Manufactured Products General Waiver and applying Buy America requirements to manufactured products may result in cost increases, project delays, and product unavailability if not done carefully. Id. To mitigate this concern, FHWA stated that it would consider proposing targeted waivers. Id. Accordingly, FHWA published a Request for Information (RFI), seeking specific and detailed information on what products are not and cannot be produced in the United States in the near future. Id. at 17796-97. FHWA stated in the NPRM that, based on the information received from this RFI, it would propose time-limited and targeted waivers covering domestically unavailable products if it would be appropriate to do so. Id. at 17797.

FHWA also stated that were the Manufactured Products General Waiver to be rescinded, manufactured products would fall under the coverage of DOT's “Waiver of Buy America Requirements for De Minimis Costs and Small Grants” (“De Minimis and Small Grants Waiver”). 88 FR 55817 (Aug. 16, 2023). The De Minimis Costs and Small Grants Waiver would then waive the application of FHWA's Buy America requirements for manufactured products under a single financial assistance award for which (1) the total value of non-compliant products is no more than the lesser of $1 million or 5 percent of total applicable costs  10 for the project (“departmental de minimis waiver”); or (2) the total amount of Federal financial assistance applied to the project, through awards or subawards, is below $500,000 (“small grants waiver”). 88 FR 55820.

At the same time as FHWA proposed discontinuing the Manufactured Products General Waiver, the NPRM proposed adopting standards that would define, per the language in 23 U.S.C. 313, when a manufactured product is “produced in the United States.” Id. In doing so, FHWA recognized that while it had the discretion to define Buy America requirements for manufactured products, those standards would have to meet or exceed those under BABA. 11 Id. To minimize burden and ensure consistency with other Federal agencies implementing BABA, FHWA proposed to adopt standards closely similar to those under BABA. Id. Thus, FHWA proposed to adopt the definition of when a manufactured product is “produced in the United States” that is found in section 70912(6)(B) of BABA. Id. FHWA proposed to replace current § 635.410(c), which discusses the process for requesting a Buy America waiver and the procedures FHWA will take to respond to that request, with a new paragraph that would discuss these Buy America requirements for manufactured products. Id. at 17799.

Further, FHWA proposed to replace mentions of “steel or iron materials” and “steel and iron materials” in § 635.410(b) with the single phrase of “iron or steel products,” which FHWA proposed to define at § 635.410(c)(1)(ii). FHWA did not otherwise propose to modify the application of the current Buy America requirements to steel and iron in § 635.410(b).

FHWA received 136 comments to the NPRM and 41 comments to the RFI from State departments of transportation (State DOTs), local governments, manufacturers, associations, and individual citizens. FHWA first discusses comments on the proposal to rescind the Manufactured Products General Waiver.

Many commenters to the NPRM and RFI expressed their opinion on whether FHWA should finalize its proposal to discontinue the Manufactured Products General Waiver. While many of these comments are similar to those submitted to the 2023 RFC and discussed in the NPRM, FHWA summarizes them below.

Generally, commenters in favor of recission argued that doing so would have positive economic impacts. These commenters argued that rescinding the waiver would stimulate economic growth, create and protect American jobs, and restore America's manufacturing base. Commenters in favor of rescinding the waiver also stated that doing so would fortify America's domestic supply chains, increasing national security by minimizing dependence on foreign sources and preventing supply chain shocks due to foreign pressures. Such commenters argued that fortifying domestic supply chains may even curb the rising cost of materials.

Those in favor of rescission further argued that doing so is important to domestic manufacturers and workers, ensuring that taxpayer funds go to U.S. businesses. FHWA received comments from manufacturers stating that they produce manufactured products domestically but have to compete with cheaper foreign products on Federal-aid projects. Commenters stated that, contrary to the current situation, rescinding the waiver would provide domestic manufacturers and workers the first opportunity to supply products on Federal-aid projects. Commenters, particularly manufacturers, also argued that rescinding the waiver would both incentivize domestic manufacturers to onshore production and incentivize current domestic manufacturers and manufacturers who might onshore in the near future to increase their domestic manufacturing capacity. Commenters also indicated that manufacturers may be waiting for regulatory certainty before increasing domestic capacity.

Other commenters espoused their belief in the benefits of domestically produced products themselves, stating they are of higher quality and manufactured with improved labor and environmental standards versus foreign products. Commenters further argued that domestic manufacturing is likely to spur innovation and the development of new technologies.

Commenters in favor of rescission further pressed that the Manufactured Products General Waiver is inconsistent with the Administration's priorities, the clear text of 23 U.S.C. 313, and the congressional intent of BABA. With respect to BABA, such commenters argued that the findings in section 70911, the requirement in section 70914 to apply requirements to manufactured products, the definition of “deficient programs” in sections 70912 and 70913(c), and the requirement for Federal agencies to review existing waivers of general applicability in section 70914(d) all indicated congressional disapproval of existing waivers of general applicability like the Manufactured Products General Waiver.

Finally, commenters in favor of rescinding the Manufactured Products General Waiver argued that it is inconsistent with the purpose of waivers of domestic content procurement preferences. Such commenters stated that waivers of domestic content procurement preferences should be transparent, targeted, time-limited, and used only when necessary; these commenters argued that the Manufactured Products General Waiver is inapposite to these principles as it covers all manufactured products for an indeterminate period of time. Commenters continued that the overbroad nature of the Manufactured Products General Waiver makes the current supply of domestic products unclear, disincentivizing manufacturers from attempting to produce manufactured products domestically.

Some commenters in favor of continuing the Manufactured Products General Waiver expressed opposition to domestic content procurement preferences entirely, stating that they run counter to free trade agreements and negatively affect the economies of countries that use them.

For those specifically suggesting that FHWA maintain the Manufactured Products General Waiver, many argued that there will be an insufficient number of Buy America-compliant manufactured products, either because of a lack of current supply or because the current supply would be insufficient given the increased demand for compliant products that would result if the waiver were rescinded. Some commenters suggested that some products and components may never be able to be produced domestically, due, for example, to a lack of domestic raw materials or prohibitive environmental regulations.

In comments to the NPRM and RFI, commenters expressed particular concern over the domestic availability of certain products, as listed below.

FHWA notes, however, that some products commenters described as being unavailable domestically were described by others as being available. FHWA also notes that it has not made any determinations on whether these items would be considered manufactured products under the standards promulgated in this final rule, and that some could be classified as iron or steel products or construction materials, or as components of manufactured products, rather than manufactured products themselves. FHWA discusses how to determine the classification of a single item below in the analysis of § 635.410(c)(2).

Commenters also argued that rescinding the waiver would increase the cost of manufactured products and the cost of the projects using them. Commenters generally stated that this cost increase would be caused by reducing the supply of manufactured products that could be used on Federal-aid projects by removing the ability to use foreign products. Commenters also indicated that costs may increase if imposing Buy America requirements for manufactured products limited the number of compliant manufacturers to the point where monopolies for certain products formed. Commenters also argued that foreign products are, on average, less costly than domestically produced products, noting that, otherwise, domestic products would already be used in Federal-aid projects and Buy America requirements would be unnecessary. Further, commenters argued that the imposition of Buy America requirements on manufactured products may incentivize manufacturers to use more expensive domestic components to ensure that their products meet the 55 percent requirement. Certain commenters also stated that project costs would increase from higher bid prices due to contractors pricing the risk of not procuring compliant manufactured products into their bids. Other commenters raised concern that project costs may increase because there would be fewer bidders, as some contractors may not place bids if they are unsure about procuring compliant products.

Commenters also raised concerns about the increased costs that imposing Buy America requirements on manufactured products may cause to contractors and manufacturers. Commenters stated that costs to contractors could increase from a lack of compliant products, producing delays that could result in increased incidental costs and the costs of repeated demobilization and mobilization. Similarly, commenters also raised concern over the imposition of penalties related to contract administration if contractors were unable to acquire compliant products. Other commenters stated that the imposition of requirements would require manufacturers to redevelop, redesign, and resource their products, all of which trigger increased costs.

Commenters also questioned whether the new requirements would increase the amount of domestically manufactured products at all. Such commenters contended that manufactured products make up a minor portion of the total material cost of Federal-aid projects, which they alleged indicated that the market for any Buy America-compliant manufactured products may be too small to incentivize onshoring. In addition, these commenters argued that products that would be Buy America-compliant may not be competitive in the global market, further reducing the incentive for manufacturers who compete internationally to onshore production. In short, these commenters stated that manufactured products are not used in Federal-aid projects in large enough quantities to justify the additional costs that they alleged would be triggered by imposing Buy America requirements on manufactured products.

In addition, commenters in favor of retaining the Manufactured Products General Waiver argued that removing the waiver and imposing Buy America requirements on manufactured products may cause project delay or cancellation. Such commenters argued that reducing the supply of products that could be used on Federal-aid projects is likely to create material shortages. If a Buy America-compliant product is unavailable, commenters warned that contracting agencies would need to either acquire a waiver to procure a non-compliant product, which would require time and cost to try to procure; wait for the product to be produced domestically; or redesign the project. Commenters also noted the delay in developing projects that would result from the time needed for contracting agencies to modify contract specifications and bid documents, for contractors to prepare bids based on the new requirements, and for manufacturers to produce sufficient amounts of compliant products.

Commenters also raised concerns that imposing Buy America requirements on manufactured products may hinder the ability of contracting agencies and contractors to change project design or scope quickly, given the inability to turn to foreign products. Similarly, manufacturers presented concerns that imposing requirements would prevent them from being able to quickly switch to foreign suppliers if required by circumstances.

Overall, many commenters opposing removing the Manufactured Products General Waiver and imposing Buy America requirements on manufactured products argued that doing so would result in fewer projects or projects of lesser quality. These commenters alleged that by making projects more costly and causing increased project delays and potential cancellations, imposing Buy America requirements on manufactured products would result in contracting agencies being able to complete fewer projects. This would then eliminate the benefits such projects would otherwise bring, such as safety, quality of life, sustainability, resiliency, and economic development improvements. Commenters also argued that imposing requirements may result in modifications to projects that would reduce their benefits, stating that contracting agencies and contractors may attempt to avoid using manufactured products on projects to avoid triggering the new requirements. In addition, commenters complained that imposing Buy America requirements on manufactured products would exacerbate the current obstacles facing the construction industry, such as the unavailability of certain products, supply chain disruptions, inflation and other price increases, and labor shortages.

Another common criticism raised by commenters involved the administrative burden of ensuring compliance with new requirements. Commenters protested the time and difficulty they thought would be needed to trace the origin and cost of components, particularly on smaller companies and disadvantaged business enterprises. Commenters also raised concerns that it may be laborious to identify the cost and origin of components as manufacturers may not know this information, have an incentive to provide this information, or want to provide detailed and potentially proprietary information on their products. These commenters further argued that this process of identifying components would be unduly burdensome when purchasing products from third parties. Commenters also raised the concern that, because the proposed Buy America standards require that more than 55 percent of components, by cost, must be produced in the United States, the fluctuation in the cost of components may result in sudden changes to whether a product is compliant. Other commenters raised concerns over the administrative burden to test and reevaluate new, compliant products. In general, commenters argued that these concerns are particularly heightened because parties are still adjusting to the burden caused by the addition of BABA's construction material requirements.

A different set of concerns was raised by commenters who procure manufactured products for both Federal-aid projects and other projects. In general, many of these commenters stated that their process was to procure manufactured products in large quantities to be used for later projects, some of which may be federally funded but some of which might not be. Such commenters stated that imposing Buy America requirements on manufactured products would likely require them to procure products on a project-specific basis, which would increase costs and cycle times; purchase only Buy America-compliant products, which may result in the compatibility concerns described below; or maintain inventories of both Buy America-compliant and non-compliant products. These commenters stated that this last option would result in more variability, necessitating increased training and knowledge to complete common maintenance, repair, and replacement functions and to manage infrastructure. Commenters also expressed concern that procuring compliant and non-compliant products would require more physical space to house and segregate the products.

Those in favor of retaining the Manufactured Products General Waiver also expressed concern that domestic components and products will not be compatible with currently used components, products, and systems. These commenters warned that a lack of compatibility between existing non-compliant components, products, and systems and compliant components and products may necessitate the complete replacement of products or systems when a component or product has to be replaced. Commenters also argued that imposing requirements on manufactured products may prevent entities from using specialized products that are necessary to meet regulatory requirements or required specifications if such products are not domestically produced.

Other commenters that were in favor of maintaining the Manufactured Products General Waiver, contrary to those in favor of rescinding the waiver, argued that foreign products may be of higher quality than domestic products, have a track record of quality that domestic products lack, be more technologically advanced or innovative, or have reduced environmental impacts. Commenters raised particular concerns that, in order to meet the proposed Buy America requirements, manufacturers may opt to incorporate lower-quality domestic components into their products. Commenters warned that imposing requirements on manufactured products may also stifle economic development of manufacturers, leading to job loss.

Finally, commenters argued that the problems with imposing Buy America requirements to manufactured products would not be solved through the application of the De Minimis and Small Grants waiver. These commenters stated that projects procuring manufactured products may not be covered by the De Minimis and Small Grants waiver because the project heavily involves the procurement of manufactured products or the procurement of manufactured products is itself the focus of the project, or because the project simply is of too large a scale. Commenters also criticized the burden needed to track the costs of materials for purpose of the departmental de minimis waiver, particularly for utilities.

FHWA again notes that many of the comments received to the NPRM reflect the same concerns commenters made in response to the 2023 RFC. As stated in the NPRM, FHWA does not believe they reflect justified reasons to continue the Manufactured Products General Waiver without change. In general, these comments do not reflect concern over rescinding the Manufactured Products General Waiver entirely, but the effect such rescission may have on specific products or categories of products if rescission of the waiver results in them not being domestically produced in sufficient quantities. For instance, FHWA does not believe that commenters claiming that there will not be sufficient numbers of Buy America-compliant products justifies retaining the waiver; it, instead, calls for manufacturers, recipients of FHWA financial assistance, and FHWA to work together to identify the products that are not in fact domestically manufactured in sufficient amounts and for FHWA to issue waivers for those products. As described in more detail in section V, below, FHWA intends to mitigate this concern by phasing in the requirements of this rule, analyzing which products and categories of products may require waivers, and issuing waivers if appropriate.

To take another example, while FHWA understands that some Buy America-compliant manufactured components and products will not be compatible with existing components, products, and systems, FHWA does not find this a sufficient reason to continue the Manufactured Products General Waiver in its entirety, given that the Manufactured Products General Waiver sweeps much more broadly than just products that are replacing existing products and systems. This may be a reason to consider granting a product-specific waiver, but FHWA does not believe it justifies maintaining the Manufactured Product General Waiver's coverage of unrelated products. Similarly, FHWA does not believe that the fact that some entities may use specialized products or that some specific products may be preferred by entities justifies retaining the Manufactured Product General Waiver for unrelated products; they, at best, are reasons for considering waivers for specific products when these specific occurrences arise.

Similarly, many commenters argued that because domestic manufacturers will not spring up to provide Buy America-compliant products and components, removing the Manufactured Products General Waiver will result in negative consequences, such as higher costs, reduced flexibility, and potential project delays and cancellations. FHWA does not believe that this concern justifies maintaining the Manufactured Products General Waiver; it suggests that were domestic manufacturers not to emerge, FHWA should consider issuing waivers for products of limited domestic availability. Again, as described in more detail in section V, FHWA believes it important to first consider the impacts of this final rule on manufacturers before issuing any waivers. As provided in E.O. 14005 and section 70911 of BABA concerning the benefits of Buy America in general, this rule will provide a powerful incentive for manufacturers to onshore production that does not currently exist under the Manufactured Products General Waiver. During the transition period before the new Buy America requirements for manufactured products become effective, FHWA will be able to more fully analyze the extent of this onshoring. In the event that a market for some manufactured products does not develop, FHWA will be able to identify those products and consider waivers accordingly.

Overall, FHWA does not believe that these arguments answer FHWA's concern, discussed in the NPRM, that the Manufactured Products General Waiver is overly broad and no longer in line with the purpose of domestic content procurement preferences and waivers. Instead, they suggest either that commenters believe that no categories of manufactured products will ever be domestically produced in sufficient quantities or that commenters believe that the overbroad nature of the Manufactured Products General Waiver is justified because of the issues that specific products or categories of products may face when complying with Buy America requirements.

Based on comments from manufacturers who currently produce domestic products and who stated that they would increase capacity if the waiver were rescinded, FHWA believes that at least some manufactured products will be domestically produced in sufficient quantities. Further, FHWA does not believe that continuing the overbroad Manufactured Products General Waiver is necessary because of the difficulties some products or categories of products may face in complying with Buy America requirements. FHWA understands the concern that some products may not be domestically available; FHWA further believes this concern is heightened for certain ITS and other electronic products, utility products, and products used in railroad work. As stated in the NPRM, however, FHWA believes that the more preferable approach is to issue waivers, as appropriate, for those products and categories of products. In this way, such targeted waivers can provide manufacturers with insight into market demand that can trigger investments into domestic manufacturing in specific products, which cannot happen under the Manufactured Products General Waiver. FHWA believes that this approach can ensure that manufactured products needed for Federal-aid projects are available while also providing an opportunity to domestic manufacturers who can provide manufactured products to these projects where a waiver is not needed. FHWA discusses its intended process for implementing such waivers, where necessary, in section IV.

FHWA does recognize that some concerns over removing the Manufactured Products General Waiver and imposing Buy America requirements on manufactured products apply regardless of whether domestic manufacturers ever produce sufficient amounts of domestic products. These include concerns that imposing such requirements is contrary to free trade agreements; that imposing Buy America requirements will inherently increase the cost of all products that are not currently compliant and require manufacturers to redevelop, redesign, and resource their products; that projects may be delayed as parties modify contract specifications and bid documents and contractors prepare bids; and the administrative burden of imposing new requirements.

Some of these concerns inherently reflect the fact that FHWA is imposing new Buy America requirements on Federal-aid projects. For instance, FHWA believes it apparent that many manufacturers will have to shift to making products compliant with requirements that would otherwise not exist; that contract specifications and bid documents will have to be changed to include new requirements, and that contractors will need time to prepare bids after considering the new requirements; and that the new requirements will pose administrative burden on those responsible with complying with them. FHWA acknowledges the burden that such activities could place on affected parties, but FHWA believes that the overall public interest in the policies behind Buy America (as described in E.O. 14005 and section 70911 of BABA) is better served by considering these issues when determining the date on which to first apply the new Buy America requirements as well as the need for potential future waivers rather than whether to rescind the Manufactured Products General Waiver and impose Buy America requirements at all. Were these concerns sufficient to continue the Manufactured Products General Waiver, the waiver would seemingly be required to remain in effect indefinitely, even if there were sufficient sources of all manufactured products used on Federal-aid projects. FHWA does not believe this can be a sensible outcome. FHWA believes that the better approach is to allow for time for affected parties to set up processes to handle the change in regulatory requirements, which FHWA intends to do by implementing the final assembly and 55 percent requirements over time, as described in more detail below in section V.

FHWA also acknowledges, as explained in more detail in the RIA, that rescinding the Manufactured Products General Waiver and applying Buy America requirements to manufactured products may lead to an increase in cost in some products. While the price of products and components may increase, FHWA believes that this is the natural result of achieving the goal of increasing domestic manufacturing, as stated in E.O. 14005 and BABA. 12 Were domestic products available at the same or a lower price than foreign products, FHWA would expect contracting agencies to purchase domestic products even if no Buy America requirements existed, creating a domestic supply of manufactured products. The fact that commenters indicated that this is not the case demonstrates that contracting agencies procure foreign products because they are less expensive than domestic alternatives. The imposition of domestic content procurement preferences should thus be expected to increase the cost of procuring the projects covered by those preferences. For manufactured products where manufactures onshore production of Buy America-compliant products, FHWA expects that the increase of the cost of the products will occur alongside the creation of domestic manufacturing jobs. For manufactured products where manufacturers elect not to onshore production, FHWA intends to issue waivers to allow for the continued use of lower-priced foreign products, reducing or eliminating any burden from cost increases. While FHWA cannot determine at this point the extent to which manufacturers will onshore specific products, FHWA believes that this rulemaking will either have no effect on the cost of products or result in both increases in product costs and in increases in domestic manufacturing jobs.

FHWA also acknowledges commenters who expressed opposition to Buy America requirements on the grounds that such requirements are counter to free trade agreements. Many free trade agreements, such as the United States-Mexico-Canada Agreement (USMCA), expressly exempt grants, loans, cooperative agreements, and other forms of Federal financial assistance from coverage. Other trade agreements, such as the World Trade Organization Agreement on Government Procurement, specifically exclude highway and mass transit projects from coverage. To the extent that FHWA's Buy America requirements would conflict with a trade agreement, FHWA believes that specific situation may justify a waiver of the requirements; FHWA does not believe that it would justify a waiver of Buy America requirements to all manufactured products. 13

Finally, FHWA again notes that, once Buy America requirements apply to manufactured products, such products may be exempted by the De Minimis and Small Grants waiver. FHWA acknowledges that the De Minimis and Small Grants waiver will not exempt all manufactured products from Buy America requirements, as that was not the intention of the De Minimis and Small Grants waiver. As stated in the NPRM, the purpose of that waiver is to prevent the recission of the Manufactured Products General Waiver from affecting “small projects and projects using limited amounts of manufactured products.” Id. at 17797.

In conclusion, after a careful review of all the comments received to the 2023 RFC and NPRM, FHWA believes that the Manufactured Products General Waiver is no longer in the public interest and is rescinding it for all recipients of FHWA financial assistance. As discussed in more detail in section V, FHWA recognizes that some products and categories of products may not be currently domestically produced in sufficient amounts. Rather than continue the Manufactured Products General Waiver, FHWA intends to analyze which products and categories of products may require waivers, and issue waivers where appropriate.

FHWA next discusses general issues raised by commenters regarding the final rule. Section V then includes a discussion of specific regulatory provisions of the final rule.

Comment: In the NPRM, FHWA proposed to rescind the Manufactured Products General Waiver and, at the same time, issue time-limited and targeted waivers covering any manufactured products that FHWA determines are not currently produced in the United States and might not be able to be produced in the United States in the near future. Some commenters argued that FHWA should rescind the Manufactured Products General Waiver only when these time-limited and targeted waivers are in place. Others stated that FHWA should institute a delayed effective date for the rescission of the Manufactured Products General Waiver in general, and then set later effective dates for the application of Buy America requirements to particular products. Still other commenters argued for a different model, stating that FHWA should apply Buy America requirements to specific manufactured products based on their availability. Under this approach, FHWA would not set an effective date for the final rule upfront but rather gradually narrow the scope of the Manufactured Products General Waiver as FHWA removes specific manufactured products from its coverage as they become domestically available; FHWA would thus only fully rescind the waiver when suppliers could demonstrate the ability to provide Buy America-compliant versions of all manufactured products used on Federal-aid projects. Other commenters suggested that FHWA should proceed with a stepped approach, first identifying products that are Buy America-compliant and applying Buy America requirements to them, then identifying products that are manufactured in the United States and applying the final assembly requirement to them, and finally identifying products that are manufactured in the United States and meet the 55 percent requirement and apply both the manufactured and 55 percent requirements to them. Other approaches raised by commenters include that FHWA should rescind the waiver for products only when there is a clear basis for expecting the emergence of U.S. sources, that FHWA should prioritize industry use cases and applications that are high value in national security where necessary investments are made domestically, and that FHWA should allow contracting agencies to continue to use existing systems and product sources while requiring them to study and develop a transition plan towards procuring Buy America-compliant products.

FHWA Response: After reviewing the comments, FHWA concludes that the best approach is a transition to the final assembly and 55 percent requirements for Federal-aid projects. FHWA believes that this approach is similar to the approach discussed in the NPRM, where FHWA proposed to issue waivers at the same time as it would rescind the Manufactured Products General Waiver.

While the NPRM indicated that FHWA would issue waivers at the same time as it issued a final rule, FHWA believes, after analyzing the comments received, that it is not necessary to issue waivers at this time. Based on comments received, FHWA recognizes that there are both domestic manufacturers of products used in Federal-aid projects and products for which there are no domestic manufacturers at the moment. For the latter group, FHWA does not believe it necessary to issue waivers at this time, as FHWA believes doing so will negatively affect onshoring that would otherwise be incentivized by the promulgation of this final rule. FHWA believes that by stating that it will impose the final assembly requirement on October 1, 2025, and the 55 percent requirement on October 1, 2026, manufacturers will be incentivized to begin onshoring production.

FHWA does not believe that it is sensible to continue to apply the Manufactured Products General Waiver but only remove products from its coverage when it is shown that those products are domestically produced in sufficient amounts. Under this approach suggested by many commenters, Buy America requirements would not apply to manufactured products until a domestic market for those products has emerged. FHWA, however, does not believe it reasonable to apply Buy America requirements, which are designed to incentivize domestic production, only after domestic production has been established. In addition, it is unclear if domestic markets for manufactured products would ever develop in this scenario; commenters did not provide sufficient evidence that manufacturers would onshore production if there were no immediate incentive to do so. FHWA finds it equally likely in such a scenario that the majority of manufacturers would elect not to onshore and that the Manufactured Products General Waiver would apply indefinitely for some products. That is not FHWA's intention; while there may be some manufactured products that require time-limited, targeted waivers, FHWA believes that those waivers should be granted when the incentive of Buy America requirements has failed to function, not when manufacturers have chosen to continue producing products abroad because FHWA has actively chosen to weaken that incentive.

FHWA disagrees with commenters that it should only apply the final assembly and the 55 percent requirement to products when they are shown to meet them. For the same reasons stated above, FHWA believes that doing so removes the incentive for manufacturers to comply with the requirements. FHWA believes that Buy America requirements should apply to all manufactured products unless it can be shown that the specific products or categories of products require a waiver based on the conditions in 23 U.S.C. 313(b).

Comments: In the NPRM, FHWA sought comment on whether a transition period would be needed for its proposed Buy America requirements for manufactured products. This transition period would provide time between the publication of the final rule and the date on which the Buy America requirements for manufactured products would come into effect, requiring them to be produced in the United States. If commenters believed such a period was necessary, FHWA requested comment on what commenters believed the effective date of the proposed Buy America requirements should be.

A small number of commenters argued that FHWA should not provide any sort of transition period, and that the proposed Buy America requirements should be effective immediately when the final rule became effective. These commenters argued that the Manufactured Products General Waiver was in effect for over 40 years, so it was necessary to act expediently to avoid continuing what these commenters viewed as its negative effects. These commenters also stated that BABA was enacted in November 2021, so affected parties had time to prepare for the imposition of Buy America requirements to manufactured products. Finally, these commenters argued that affected parties had additional time to prepare for the imposition of Buy America requirements to manufactured products as DOT and other Federal agencies employed various phase-in waivers for BABA's requirements.

Other commenters suggested that FHWA provide a transition period for the imposition of Buy America requirements for all manufactured products, with commenters presenting various lengths that they believed were appropriate. Two commenters suggested a period of 180 days, one commenter suggested a transition period of 6 months, one commenter suggested a period of 9 months, four commenters suggested a period of 1 year, one commenter suggested a period of 1 year after FHWA puts in place any product-specific waivers, six commenters suggested a period of 18 months, one commenter suggested a period of between 18 and 24 months, one commenter suggested a period of 2 years, one commenter suggested a period of 2 years for Federal awards obligated after the effective date of the final rule, one commenter suggested a period of 30 months, seven commenters suggested a period of 3 years, one commenter suggested a period of 38 months, one commenter suggested a period of 4 years, and two commenters suggested a period of 5 years. 14 In addition, one commenter suggested that the Manufactured Product General Waiver should be continued for at least a few more years and another suggested that FHWA should delay implementation of any requirements for 3 to 5 years. 15

Commenters gave various reasons for why they believed a transition period was necessary. These include that DOT imposed a phase-in period for BABA's construction material requirements;  16 that other Federal agencies imposed a phase-in period for BABA's requirements; the time required for FHWA to formulate, review, and approve any product-specific waivers, including the time for FHWA to determine which products used on Federal-aid projects are BABA-compliant and conduct market research on those that are not; the time required for FHWA to provide any guidance on the new requirements; the time required for manufacturers, contractors, and contracting agencies to determine if the products they manufacture and use are compliant with the new requirements; the time for manufacturers, contractors, and contracting agencies to update and modify their current Buy America processes, including the time to set up systems for compliance, train personnel and other stakeholders on the new requirements and processes, rewrite standard specifications, materials lists, and bid documents, and modify any guidance documents; the time for manufacturers to onshore domestic production of manufactured products and components, including the time for manufacturers to exit long-term leases, contracts, and other obligations manufacturers might have overseas, establish domestic manufacturing sites and supply chains, redesign products, test and certify products; the time for manufacturers to produce a sufficient amount of compliant products to have on hand; the time for project designers to incorporate the new Buy America requirements into future projects; the time for affected parties to understand and process how the new requirements will impact the design, construction, and costs of future projects; the time for contracting agencies to test and approve newly designed manufactured products; the time for contracting agencies and contractors to identify new vendors and adjust any product occurs; the time for affected parties to consume their stock of existing manufactured products and retire existing contractual agreements; and the time for contracting agencies and contractors to stockpile materials.

FHWA Response: After reviewing the comments received, FHWA believes that a transition period is necessary for the reasons identified by commenters to implement the new Buy America requirements, and FHWA thus disagrees with commenters arguing against the imposition of any such period. While FHWA understands the urgency some commenters feel to rescind the Manufactured Products General Waiver, FHWA believes it must do so with consideration of the issues raised by commenters to ensure that affected parties are ready to apply Buy America requirements to manufactured products used on Federal-aid projects. Further, FHWA does not believe that the fact that BABA was enacted in November 2021 and that other Federal agencies have imposed phase-in waivers for its requirements justifies not having a transition period for the imposition of FHWA's Buy America requirements. While BABA was enacted in November 2021, FHWA has been consistent in stating that, due to section 70917(a)-(b), BABA's manufactured product requirements do not apply to Federal-aid projects. 17 FHWA thus does not believe it reasonable to now state that contracting agencies, contractors, and manufacturers should have been preparing for the implementation of Buy America requirements on manufactured products on Federal-aid projects because BABA applied a domestic content procurement preference to manufactured products on projects funded by other agencies. 18 Similarly, FHWA does not find it reasonable to believe that contracting agencies, contractors, and manufacturers should have been preparing for the implementation of Buy America requirements on manufactured products on Federal-aid projects during transitional waivers granted by other agencies for other programs.

In determining the appropriate time to apply the new Buy America requirements, FHWA carefully reviewed the different periods suggested and the reasoning behind them. Based on this review, FHWA believes that it is appropriate to have a longer transition period for the 55 percent requirement than the final assembly requirement, given that many of the reasons provided by commenters for why a transition period is needed do not apply or apply with less force to the imposition of the final assembly requirement. For instance, determining whether a product is manufactured in the United States is much simpler and clearer than determining whether more than 55 percent of its components, by cost, are produced in the United States. Similarly, FHWA expects the time for manufacturers to shift production to be compliant with the final assembly requirement to be much less than the time needed to be compliant with the 55 percent requirement, which requires shifting supply chains and component manufacturing to the United States. Further, FHWA does not believe that a manufacturer's decision to shift manufacturing products from overseas to the United States will impact the product itself to the same degree as changing the source of the product's components; thus, FHWA does not believe that requiring products to be manufactured in the United States will result in the same effects to project development that the 55 percent requirement may.

At the same time, FHWA recognizes that even imposing this final assembly requirement will require contracting agencies, contractors, and manufacturers to devote time to modifying their processes to account for this new requirement. FHWA acknowledges that these parties may be required to update standard specifications, material lists, and bid documents; modify guidance documents; and identify new vendors that can provide products meeting the final assembly requirements. After considering the range of transition periods suggested by commenters and the reasoning behind those dates, FHWA believes it appropriate to apply the final assembly requirement for Federal-aid projects on October 1, 2025. While this is on the lower end of the range of dates suggested by commenters, FHWA notes that commenters suggested ranges for the transition periods of both the final assembly and 55 percent requirements. As FHWA believes that many of the concerns raised by commenters reflect more heavily concerns with implementing the 55 percent requirement, FHWA believes that a choice on the lower end of the suggested range is appropriate. Based on the comments received, FHWA believes that this will provide time for contracting agencies, contractors, and manufacturers to be prepared for the imposition of the final assembly requirement with minimal disruption to the construction of Federal-aid projects. Simultaneously, FHWA believes that this date will provide an incentive for manufacturers to begin moving final assembly of manufactured products to the United States.

At the same time, FHWA recognizes that some manufacturers may not ultimately move final assembly of their products to the United States and that domestic companies may not emerge that manufacture certain products in the United States. For that reason, from the effective date of this rule to October 1, 2025, FHWA will monitor the status of the domestic market of manufactured products that can comply with the final assembly requirement. Based on FHWA's analysis, FHWA may choose to delay the start date for the final assembly requirement by issuing a temporary waiver of the final assembly requirement for manufactured products if more time is needed to onshore domestic production; however, FHWA maintains that it is important for this rulemaking to send out a clear market signal to begin that process of onshoring, even if it takes longer than FHWA currently expects. While commenters suggested a shorter transition period before imposing the final assembly requirement may be possible, such a shorter period may not provide FHWA time to properly monitor changes in the market and adjust accordingly.

FHWA believes that a longer transition period is necessary before imposing the 55 percent requirement. Based on the range of comments received on the preferred duration of a transition period, from 6 months to 5 years, FHWA finds it reasonable to begin the 55 percent requirement for Federal-aid projects on October 1, 2026. At this point, starting on October 1, 2026, manufactured products permanently incorporated into Federal-aid projects will need to comply with both the final assembly and 55 percent requirements. FHWA believes that a transition period ending on September 30, 2026, for the 55 percent requirement, which also serves as a transition period for the full imposition of FHWA's Buy America requirements for manufactured products, reflects the general middle ground of dates suggested by commenters. FHWA believes that a shorter transition period may not give contracting agencies, contractors, and manufacturers time to adjust to the new requirements. Conversely, FHWA believes that a longer transition period may not send the proper market signals to manufacturers to incentivize them to begin onshoring as soon as they are able to. FHWA believes that the transition period should reflect the minimum amount of time for affected parties to ready themselves for the new requirements. While some parties may desire a longer timeframe, FHWA believes that transition period through September 30, 2026, before imposing the 55 percent requirement provides this minimum amount of time.

FHWA nonetheless will monitor the status of the domestic market and the progress contracting agencies, contractors, and manufacturers are making to ready themselves for the imposition of the 55 percent requirement. FHWA may modify the start date of the 55 percent requirement based on information received by issuing a temporary, time-limited waiver of its Buy America requirements for manufactured products. In addition, prior to imposing the 55 percent requirement, FHWA intends to continue to perform market research, analyzing the effects issuance of this final rule has on the domestic market for manufactured products and listening to affected parties, including any parties requesting prospective waivers of the 55 percent requirement. Based on that research and considering the comments to the RFI and any future RFIs, FHWA may propose targeted waivers covering products that do not meet the 55 percent requirement prior to those requirements taking effect.

As discussed in more detail below, the start date for the final assembly and 55 percent requirements being promulgated in this final rule means that all Federal-aid projects obligated on or after those dates are subject to the applicable requirements.

FHWA emphasizes that while the final assembly requirement does not begin until October 1, 2025, and the 55 percent requirement does not begin until October 1, 2026, the other regulatory changes in this final rule become operative for all Federal-aid projects obligated on or after March 17, 2025. This means that for all Federal-aid projects obligated on or after March 17, 2025, all iron or steel products, as defined in § 635.410(c)(1)(iii), must comply with FHWA's Buy America requirements for steel and iron in § 635.410(b). This also means that, for all Federal-aid projects obligated on or after March 17, 2025, per § 635.410(c)(2), articles, materials, and supplies should be classified as an iron or steel product, a manufactured product, or another product as specified by law or in 2 CFR part 184; an article, material, or supply must not be considered to fall into multiple categories. In other words, starting for all Federal-aid projects obligated on or after March 17, 2025, all iron or steel products must comply only with § 635.410(b) and all manufactured products must comply only with § 635.410(c), with the final assembly and 55 percent requirements taking effect later.

In addition, for Federal-aid projects obligated on or after October 1, 2025, manufactured products must comply with the final assembly requirement, and for Federal-aid projects obligated on or after October 1, 2026, manufactured products must generally comply with both the final assembly and 55 percent requirements.

As stated in the NPRM, FHWA does not intend for these new Buy America requirements to supplant current FHWA waivers that cover specific manufactured products. See 89 FR 17798. As noted in the NPRM, FHWA's Buy America requirements for manufactured products are substantively similar to those in FHWA's Electric Vehicle (EV) Charger Waiver, which waives FHWA's Buy America requirements to EV chargers under certain circumstances. 19 Specifically, the EV Charger Waiver waives FHWA's Buy America requirements for EV chargers manufactured on or after March 23, 2023, and before July 1, 2024, if final assembly of the charger occurs in the United States and installation of the charger began by October 1, 2024. The EV Charger Waiver further waives FHWA's Buy America requirements for EV chargers manufactured on or after July 1, 2024, if final assembly of the charger occurs in the United States and more than 55 percent of the charger's components, by cost, are manufactured in the United States. For all EV chargers covered by the waiver, if the charger's housing is predominantly iron or steel, it is not covered by the EV Charger Waiver and that housing must meet FHWA's existing Buy America requirements for steel and iron.

Presently, EV chargers covered by the EV Charger Waiver should either have already begun installation or be compliant with both the final assembly and 55 percent requirements. FHWA does not intend for its imposition of Buy America requirements to all manufactured products through this rulemaking to require EV chargers that have already begun installation to be pulled out of the ground, nor to set less stringent Buy America requirements on EV chargers than those that already exist under the EV Charger Waiver. FHWA therefore intends the EV Charger Waiver to continue to apply to EV chargers procured in FHWA funded projects, not the requirements and transition period set in this final rule. FHWA nonetheless notes that, for projects obligated on or after October 1, 2026, the requirements that apply to EV chargers and those that apply to other manufactured products will effectively be the same.

In addition, besides manufactured products covered by existing FHWA waivers, per § 635.410(c)(2)(i) and (ii), precast concrete products classified as manufactured products using the definition in § 635.410(c)(1)(iv) and ITS and other electronic hardware systems that are installed in the highway right of way or other real property and classified as manufactured products using the definition in § 635.410(c)(1)(iv) are subject to requirements on a different timeline than other manufactured products. For precast concrete products classified as manufactured products, components of the precast concrete products that consist wholly or predominantly of iron or steel or a combination of both, as defined in § 635.410(c)(1)(vi), must continue to comply with FHWA's existing Buy America requirements for iron and steel at § 635.410(b) in every Federal-aid project. Precast concrete products will then have to additionally comply with the final assembly requirement and the 55 percent requirement for Federal-aid projects obligated on or after October 1, 2026. This same timeframe applies to the application of the requirements in § 635.410(c)(2)(ii). The cabinets or other enclosures of ITS and other electronic hardware systems that are installed in the highway right of way or other real property and classified as manufactured products per § 635.410(c)(1)(iv) that consist predominantly of iron or steel or a combination of both, as defined in § 635.410(c)(1)(vi), must continue to comply with FHWA's existing Buy America requirements for iron and steel at § 635.410(b) in all projects. The systems must then additionally comply with the final assembly requirement for Federal-aid projects obligated on or after October 1, 2025, and the 55 percent requirement for Federal-aid projects obligated on or after October 1, 2026.

FHWA discusses the requirements in § 635.410(c)(2)(i) and (ii) in more detail below. FHWA notes that the specified steel and iron components of these products should currently be compliant with FHWA's existing Buy America requirements for iron and steel if they are used on Federal-aid. FHWA is therefore continuing its existing requirements for these products and components without break, and FHWA is not adding any additional requirements in this respect.

Comments: In the NPRM, FHWA sought comment on whether there should be a buffer period for certain projects that are in development that have not had Federal awards obligated or authorized but have relied on the Manufactured Products General Waiver in project development. FHWA notes that this is distinct from the question regarding the transition period for the new Buy America requirements. The issue of the effect of rescission on projects in development concerns which projects, at the start of imposition of the final assembly requirement and later the 55 percent requirement, are subject to those requirements based on their developmental status at the time.

Commenters presented various views regarding what they believed was the appropriate point in project development to apply the new Buy America requirements for manufactured products. Some commenters suggested that the requirements should not apply to projects in the design stage at the time the requirements become effective; these commenters argued that doing so would avoid costly redesigns that delay construction and allow project designers to begin designing projects knowing which requirements would apply to those projects.

Other commenters argued that the requirements should not apply to projects that have already gone out for advertisement or already solicited applications. Such commenters stated that this approach enables bidders and applicants to estimate project costs more accurately and prevents those costs from exceeding application estimates; in addition, these commenters stated that if price is a factor in award selection, this approach avoids reopening advertisements and solicitations and delaying awards. Commenters also stated that this would enable bidders and applicants to evaluate the domestic availability of manufactured products before responding to advertisements or solicitations, allowing the project to avoid delays that might occur if awarded contractors had to search for compliant products or potentially redesign the project. Commenters presented similar reasons for why any new requirements should not apply to projects that have already opened bidding when the new requirements become effective. One commenter argued that the requirements should not apply to projects that have been put out to bid or are put to bid within one year of final agency action, stating that this would allow contracting agencies to rely on the Manufactured Products General Waiver for projects already in the developmental process and avoid the loss of time and money that would occur if they had to be redesigned or rebid.

Still other commenters argued that any new Buy America requirements for manufactured products should not apply to projects already obligated or authorized at the time the requirements become effective; such commenters stated that this would allow projects to be completed on time without significant cost changes and allow contracting agencies to include appropriate language in their contracts.

Various commenters also suggested that the new Buy America requirements for manufactured products should not apply to projects already in the procurement phase to prevent unnecessary delays; that they should not apply to contracts already executed; that they should not apply to products already purchased prior to the final rule's effective date; that they should not apply to material procurement contracts for at least eighteen months after the final rule is issued; and that they should not apply to products purchased prior to the start dates of the requirements, provided that they are installed at least twelve months after delivery as parties may have acquired non-compliant products with long lead times.

Finally, some commenters argued that any new requirements should not apply to projects at any stage in the project development process at the time the new requirements become effective. Commenters favoring this broad approach stated that it would avoid the loss of time and money that would occur if projects had to be redesigned or rebid.

FHWA Response: After carefully reviewing the comments received, FHWA believes that the most appropriate choice is to have the new Buy America requirements for manufactured products apply to all Federal-aid projects obligated after the start dates of the requirements. 20 This means that Federal-aid projects must comply with the final assembly requirement if obligated on or after October 1, 2025, and must comply with both the final assembly and 55 percent requirements if obligated on or after October 1, 2026. Federal-aid projects that have already obligated FHWA financial assistance before October 1, 2025, do not need to comply with the final assembly or 55 percent requirements. FHWA believes that the point of obligation represents a clear point after which Federal requirements, including Buy America, apply to a project. By applying FHWA's requirements at the point of obligation, FHWA also believes this aligns with the date on which Federal requirements, including FHWA's requirements, are generally triggered for a project. This is in contrast to more nebulous points suggested by commenters, such as the start of project development or design. While FHWA recognizes that some Federal-aid projects may be currently being designed based on the existing Manufactured Products General Waiver, FHWA believes that delaying the start dates of the Buy America requirements on manufactured products will allow changes to be made to those projects, if necessary, during the transition period to minimize disruption.

Similarly, for Federal-aid projects using advance construction (AC), FHWA believes that the new Buy America requirements for manufactured products should become effective for Federal-aid projects where FHWA approves the AC designation by the applicable start date. 21 This means that for Federal-aid projects where FHWA approves the AC designation on or after October 1, 2025, the project must comply with the final assembly requirement. For Federal-aid projects where FHWA approves the AC designation on or after October 1, 2026, the project must comply with the final assembly and 55 percent requirements. For Federal-aid projects where FHWA approves the AC designation on or after October 1, 2025, but before October 1, 2026, the project must comply with the final assembly requirement but does not need to comply with the 55 percent requirement.

Per 23 U.S.C. 115(a)(2), a project proceeding under AC must generally be in accordance with all procedures and requirements applicable to the project. FHWA accordingly believes that, before requesting AC approval, a State DOT should be aware that the approval for the project will require the project to proceed in accordance with the Federal procedures and requirements generally applicable to the project, including Buy America requirements for manufactured products. In addition, FHWA believes that the date of AC approval represents a clear point that makes clear to all affected parties which requirements apply to a given project.

Comments: In the NPRM, FHWA also requested comment on the appropriate buffer period, if any, for alternate project delivery methods. These alternative delivery methods are where contracts are awarded and work is authorized and obligated in phases, such as with design-build. Under this delivery method, FHWA may, for instance, obligate funds for the design phase of a project and then later obligate funds for the construction phase of a project.

Commenters presented various arguments as to when any new Buy America requirements for manufactured products should take effect for projects using alternate delivery methods. Some commenters suggested that the requirements should not apply to the physical construction phase if FHWA financial assistance is obligated before the effective date of the new requirements or, similarly, that the requirements should only apply to new awards issued prior to the design and development phase. Other commenters relatedly suggested that the requirements should not apply to projects that have been initiated before the final rule's effective date, using the earliest obligation date for any phase of the project to serve as the date of initiation. Such commenters argued that this would allow projects to continue to rely on the Manufactured Products General Waiver when the project's estimates, designs, and scope have been prepared based on that waiver. Commenters stated that this would also prevent retroactive adjustments after contractors or consultants have been selected, which could otherwise cause delays, and avoid requirements from changing when a project advances from preconstruction to construction. Other commenters suggested that requirements should not apply to projects that have issued a Request for Qualifications (RFQ), stating that this would prevent wasting efforts taken by funding recipients to develop a cost estimate in advance of issuing the RFQ and ensure that the project is delivered as initially envisioned. Other commenters suggested that the new Buy America requirements for manufactured products should not apply to projects using alternate delivery methods when those projects have already entered the procurement phase or should be determined at the contracting officer's discretion.

FHWA Response: FHWA has carefully analyzed the comments regarding alternate delivery methods. FHWA believes that the new Buy America requirements for manufactured products should apply to all Federal-aid projects where a contract providing for both the preconstruction (such as preliminary design under a design-build contract) and construction phases is in place, but the construction phase has not been obligated by the time of this final rule's start dates. In other words, for Federal-aid projects using alternate delivery methods, if the construction phase of the project is obligated on or after October 1, 2025, the project must comply with the final assembly requirement, even if funds have been obligated for preconstruction phases prior to October 1, 2025. Similarly, if the construction phase for a Federal-aid project using alternate delivery methods is obligated on or after October 1, 2026, the project must comply with the final assembly and 55 percent requirements, even if funds have been obligated for preconstruction phases prior to this date.

While FHWA understands the opinion expressed by commenters to allow projects that have been obligated funds for preconstruction work to continue to rely on the Manufactured Products General Waiver if such obligation occurs prior to this rule's start dates, FHWA believes that the focus point should be on the obligation of funds for construction. In addition, FHWA generally believes that the transition period in this final rule should allow many Federal-aid projects currently in design to proceed to construction by the time the new requirements become effective. For Federal-aid projects that do not, the delayed start dates for the requirements will provide the necessary time for changes to occur to prepare for the imposition of the new requirements. FHWA has concerns that allowing Federal-aid projects to be covered by the Manufactured Products General Waiver if they are in preconstruction stages when the final assembly and 55 percent requirements become effective may be used to delay the full application of the new Buy America requirements for manufactured products, allowing foreign products to be purchased even when domestic ones are available. FHWA does not intend to disrupt the progress of projects but also does not intend to continue to allow the Manufactured Products General Waiver continue longer than needed; FHWA believes that allowing Federal-aid projects that have FHWA financial assistance obligated for construction before the start dates of this final rule provides an appropriate middle ground.

Comments: In the NPRM, FHWA stated that it was not proposing any required method of compliance to ease the burden that tracking the origin and cost of components may pose. FHWA requested comment on any specific provisions that it should consider in easing the administrative burden in demonstrating compliance with the Buy America requirements for manufactured products.

Many commenters nonetheless indicated that they desired FHWA to specifically clarify what constitutes compliance, such as what level of detail is required to prove compliance and what penalties FHWA could bring about in cases of noncompliance. These commenters further suggested that FHWA should clearly state who is responsible for tracking and providing information on the compliance of manufactured products. One commenter, however, agreed with FHWA that not prescribing any specific method of compliance will ease administrative burden.

Commenters desiring FHWA to clarify a specific method of compliance suggested various possible methods. One commenter suggested that FHWA should allow recipients of FHWA financial assistance to rely on a fair inference that a manufactured product meets Buy America requirements, such as by relying on a certification, absent material evidence to the contrary. Other suggested that FHWA should clarify that a certification from a contractor or manufacturer would demonstrate compliance. Some commenters also suggested that FHWA itself should provide certification forms. Other commenters went further, suggesting that FHWA should itself certify manufactured products as compliant or develop a list of manufactured products that are compliant with its standards. Finally, some commenters stated that once a product in a product line is certified as compliant, that certification should cover other products from that product line for a certain period of time.

FHWA Response: After analyzing the comments received on this topic, FHWA believes that commenters did not indicate that they desired FHWA to prescribe a specific form of compliance but rather sought clarification on what might constitute compliance. While not prescribing any form of compliance, FHWA believes that the manufacturer will be in the best position to certify that a specific product meets these requirements. FHWA notes, however, that recipients of FHWA financial assistance are ultimately responsible for compliance with FHWA's Buy America requirements. FHWA therefore believes that the recipient is in the best position to determine the best form of any certification.

Due to the nature of the Buy America requirements for manufactured products, each product's compliance must be determined individually. Given that the compliance of products might change, FHWA does not believe that it is in a position to certify compliance or have a list of compliant products; a product from one product line may be compliant at one point and that same product may then become non-compliant later in a different product line based on choices made by the manufacturer. Any certification from FHWA would only provide a brief snapshot of a specific manufactured product, which would be minimally helpful for other parties seeking to procure similar products. FHWA instead believes that it is more appropriate for parties to consult with product manufacturers, who are in the best position to provide current information on the compliance of their products.

In determining the proper remedy for resolving an after-the-fact discovery of the incorporation of noncompliant manufactured products, FHWA intends to follow the same process as it does for determining the remedy for a discovery of the incorporation of noncompliant iron or steel. FHWA will review relevant information to determine the appropriate resolution, which may include removing the noncompliant products, making the noncompliant products non-participating, or determining that all project costs are ineligible. 22

Comments: In the NPRM, FHWA noted that 23 U.S.C. 313(h) requires FHWA's Buy America requirements to apply to all contracts that are eligible for FHWA assistance, regardless of the funding source for the specific contracts, if any contract within the scope of a finding, determination, or decision under the National Environmental Policy Act (NEPA) is funded with amounts made available to carry out title 23, U.S.C. In the NPRM, FHWA stated that because of this provision, were FHWA to rescind the Manufactured Products General Waiver and impose Buy America requirements for manufactured products, those Buy America requirements would apply to all contracts eligible for FHWA financial assistance for a project carried out within the scope of the applicable finding, determination, or decision under NEPA so long as one contract for the project is funded with amounts made available to carry out title 23, U.S.C.

Commenters expressed confusion over the scope of FHWA's Buy America requirements under 23 U.S.C. 313(h) versus BABA's domestic content procurement preferences. For instance, commenters suggested that certain manufactured products are not used in infrastructure projects or are not integral to the construction of an infrastructure project and therefore should not be covered by any Buy America requirements. Commenters representing utility companies in particular argued that FHWA's Buy America requirements for manufactured products should not apply to utility relocations, stating that the utility relocation is not an infrastructure project, that the utility company does not receive any Federal funds for the relocation but is only reimbursed for its costs, and that the involvement of the utility company in the project is involuntary.

Other commenters, particularly those involved in the electric vehicle (EV) charging industry, expressed confusion over how 23 U.S.C. 313(h) functions if the NEPA determination is a categorical exclusion (CE). These commenters suggested that 23 U.S.C. 313(h) would require them to seek a NEPA determination on a project's scope, even though the project is an approved CE, to determine the applicability of Buy America requirements.

FHWA Response: FHWA wishes to clarify that 23 U.S.C. 313(h) represents a unique Buy America provision that is exclusive to FHWA. This provision applies to FHWA's Buy America statute, not other domestic content procurement preferences, such as those in BABA; thus, FHWA's Buy America requirements will be different from those applied by other Federal agencies.

Under 23 U.S.C. 313(h), FHWA's Buy America requirements, including its Buy America requirement for manufactured products, apply not just to the Federal-aid project itself but also to contracts under the scope of the applicable NEPA finding, determination, or decision. This means that a manufactured product does not need to be integral to the Federal-aid project itself to be subject to FHWA's Buy America requirements. For instance, with respect to FHWA's existing Buy America requirements for iron and steel, FHWA has long made clear that 23 U.S.C. 313(h) requires that all utility work eligible for FHWA financial assistance must meet its Buy America requirements for iron and steel, even if FHWA does not fund the utility work. 23 Given that 23 U.S.C. 313(h) applies to manufactured products to the same extent as it does to iron and steel, FHWA thus believes that it is clear that these new requirements will similarly apply to all utility work eligible for FHWA financial assistance. In other words, a manufactured product must comply with the Buy America requirements if it is permanently incorporated into the Federal-aid project or if it is permanently incorporated as part of work done under a contract within the scope of the applicable NEPA finding, determination, or decision of a Federal-aid project and is eligible for FHWA financial assistance. FHWA discusses the issue of permanent incorporation in more detail below when discussing the introductory text to § 635.410(c).

With respect to commenters raising concerns about the applicability of CEs to 23 U.S.C. 313(h), FHWA notes that a CE is a form of a NEPA finding, determination, or decision. FHWA would not require or believe it necessary for a party to seek a further NEPA determination after obtaining an approved CE solely for the purpose of determining the extent of Buy America requirements under 23 U.S.C. 313(h). The CE itself would dictate the scope; all contracts eligible for FHWA financial assistance under the scope of the CE would need to comply with FHWA's Buy America requirements if one such contract received Federal-aid funding.

Comments: FHWA proposed to remove the word “State” in existing § 635.410(b)(2) and (3) and (d) and replace it with the word “recipient.” FHWA also proposed to use the word “recipient” throughout § 635.410(c). One commenter requested that FHWA provide a definition of the word “recipient,” stating that it was unclear whether this term referred to the contracting agency, contractor, manufacturer, or a combination of such entities.

FHWA Response: For the purpose of the final rule, the word “recipient” in § 635.410(b), which discusses FHWA's Buy America requirements for iron and steel, refers to the recipient of FHWA financial assistance. The change to “recipient” in § 635.410(b) and (d) from “State” is simply meant to reflect that rather than providing funds to States, FHWA also provides discretionary grant funds directly to other entities, such as local governments and metropolitan planning organizations. In addition, FHWA notes that its current Buy America requirements apply to Territorial governments, who receive funding from FHWA through the Territorial Highway Program under 23 U.S.C. 165(c). The definition of “State” for purposes of § 635.410 does not include such Territories, even though such Territories are subject to the same Buy America requirements as States. See 23 CFR 635.403(f); 23 U.S.C. 101(a)(28). In making this change, FHWA does not intend to change the existing practice as it currently applies to States.

Comments: FHWA proposed to maintain its existing Buy America requirements for steel and iron found in § 635.410(b), with the only change being replacing references to “steel and iron materials” and “steel or iron materials” with the phrase “iron or steel products.” FHWA further proposed to define “iron or steel products” in § 635.410(c)(1)(iii). This change was meant to create a distinction between the category of iron and steel materials and manufactured products that may contain iron and steel. FHWA discusses the effect of this change in further detail when discussing § 635.410(c)(2) below.

With respect to the requirements in § 635.410(b), FHWA received several comments on § 635.410(b)(4), which allows for a de minimis amount of foreign iron and steel to be used in Federal-aid projects. Under this provision, foreign iron and steel can be used in a Buy America-compliant project if the cost of such materials does not exceed 0.1 percent of the total contract cost or $2,500, whichever is greater. Commenters expressed confusion over how this de minimis provision would apply to manufactured products and how it is connected with the departmental de minimis waiver. Other commenters suggested changes to the de minimis provision in § 635.410(b)(4), such as by setting a total contract cost above the current $2,500 figure. Other commenters argued that FHWA should codify the departmental de minimis waiver in the regulatory text, similar to how the de minimis provision is currently codified at § 635.410(b)(4).

In addition, one commenter stated that the proposed language in § 635.410(b)(1)(ii), that all manufacturing processes for iron or steel products must occur in the United States, could suggest that all manufacturing processes for components of the products that are not made of iron or steel must be domestically produced. This commenter suggested modifying the language to state that “if iron or steel products are to be used, all manufacturing processes of the iron or steel components, including application of a coating, for these materials must occur in the United States.”

FHWA Response: FHWA is clarifying that § 635.410(b)(4) only applies to iron or steel products; it does not apply to materials properly classified as manufactured products under § 635.410(c)(1)(iv). The de minimis provision applicable to manufactured products is found in the departmental de minimis waiver. Other comments discussing changes to existing § 635.410(b)(4) or codifying the departmental de minimis waiver in § 635.410 are beyond the scope of this rulemaking.

With respect to changes made to § 635.410(b)(1)(ii), FHWA notes that the current language states that all manufacturing processes for steel or iron materials must occur in the United States. FHWA does not intend for its change in language, from “steel or iron materials” to “iron or steel products” to change the scope of the requirements in § 635.410(b)(1)(ii) with respect to the category of iron or steel products. The intent is for FHWA's current Buy America steel and iron requirements, codified in § 635.410(b), to continue to apply to all steel and iron in a product classified as an iron or steel product. The only functional change FHWA is making in § 635.410(b)(1)(ii) is to distinguish between iron or steel products and manufactured products that contain iron and steel. FHWA also notes that the language used in § 635.410(b)(1)(ii) substantially mirrors the language used in 2 CFR 184.3 to determine when an iron or steel product is manufactured in the United States.

Comments: In the NPRM, FHWA proposed to replace the current § 635.410(c), which discusses the process for requesting Buy America waivers and the procedures FHWA will take to respond to that request, with a new paragraph detailing FHWA's Buy America requirements for manufactured products.

FHWA received multiple comments expressing concern with removing existing § 635.410(c). Commenters stated their reservations with this approach, arguing that it appeared FHWA was removing the ability for recipients of FHWA financial assistance to request Buy America waivers. These commenters also indicated that FHWA should codify its waiver process in its Buy America regulation, similar to how it is done by OMB in 2 CFR 184.7. Other commenters also expressed dissatisfaction with FHWA's current Buy America waiver process and suggested what they viewed as potential solutions.

FHWA Response: FHWA did not intend for removing current § 635.410(c) to remove the ability for recipients of FHWA financial assistance to request Buy America waivers. The authority for recipients to request waivers is found in 23 U.S.C. 313(b), and FHWA is not altering, nor could it alter, that ability through this rule. As stated in the NPRM, FHWA made the choice to remove existing § 635.410(c) because the current provision is out of date and does not reflect FHWA's current statutory requirements regarding waivers, FHWA's current organizational structure, or FHWA's current procedure for processing waivers. FHWA believes that recipients of FHWA financial assistance understand the current Buy America waiver process and therefore does not believe that codifying this process is necessary.

FHWA also notes that comments on modifying its current waiver process are out of the scope of this rulemaking.

Comments: In § 635.410(c), FHWA proposed to state that manufactured products used and permanently incorporated in Federal-aid highway construction projects must be produced in the United States. Commenters, particularly those representing the utility industry, questioned what it meant for a manufactured product to be permanently incorporated into a Federal-aid project. These commenters argued that utility infrastructure that is being relocated, replaced, or modified does not become a permanent part of the Federal-aid project because it is being relocated, replaced, or modified only to accommodate project construction. Other commenters also suggested that FHWA should clarify that its Buy America requirements do not apply to existing in-use equipment.

FHWA Response: FHWA chose the language used in § 635.410(c) for FHWA's Buy America requirements for manufactured products to align with the language currently in § 635.410(b)(1)(i) regarding FHWA's Buy America requirements for steel and iron. FHWA intends for the standard for permanent incorporation of manufactured products to be the same as FHWA currently uses to determine whether steel and iron is permanently incorporated. In other words, FHWA would apply its Buy America requirements to iron, steel, and manufactured products permanently incorporated into Federal-aid projects. The requirements do not apply to steel, iron, or manufactured products used on a temporary basis on Federal-aid projects, meaning when contract specifications provide that the iron, steel, and manufactured products used on the project either must be removed at the end of the project or may be removed at the contractor's convenience. FHWA believes that continuation of this current policy, along with the discussion of 23 U.S.C. 313(h) above, should provide the necessary guidance on whether the relocation, replacement, or modification of utilities constitutes permanent incorporation of the products. In short, any contract or agreement involving utility work that uses any amount of Federal-aid Highway Program funding must comply with FHWA's Buy America requirements, including the new requirement for manufactured products. 24

In terms of applicability of the Buy America requirements to manufactured products to existing in-use equipment, FHWA also notes that the final assembly requirement will apply to all Federal-aid projects obligated on or after October 1, 2025, and the 55 percent requirement will apply to all Federal-aid projects obligated on or after October 1, 2026. Where FHWA's Buy America requirements for manufactured products apply, all permanently incorporated manufactured products must be produced in the United States.

Comments: In the NPRM, FHWA defined “excluded materials” as “section 70917(c) materials as defined in 2 CFR 184.3.” Under 2 CFR 184.3, “section 70917(c) materials” are defined as “cement and cementitious materials; aggregates such as stone, sand, or gravel; or aggregate binding agents or additives.” Commenters suggested that FHWA should, instead of cross-referencing to 2 CFR 184.3, provide a definition of the terms “aggregates,” “aggregate binding agents,” and “additives” in the regulatory text of § 635.410.

FHWA Response: As noted in the NPRM, section 70917(c) of BABA does not explicitly comment on whether excluded materials could be considered manufactured products. By providing a definition of excluded materials and then stating in the definition of manufactured products that excluded materials cannot be manufactured products, FHWA seeks to make clear, in alignment with 2 CFR part 184, that excluded materials are not, standing alone, manufactured products. As stated in more detail below when discussing § 635.410(c)(1)(iv), FHWA believes that excluded materials may nonetheless constitute components of manufactured products when combined with other materials, including other excluded materials, to create a manufactured product. In other words, excluded materials may be standalone materials, and this not subject to FHWA's Buy America requirements for manufactured products, or components of manufactured products, and thus the manufactured product would be subject to the final assembly and 55 percent requirement. For manufactured products containing excluded materials as components, the excluded material must be considered in determining whether the manufactured product has more than 55 percent of its components, by cost, produced in the United States.

In terms of determining whether an excluded material is itself not a manufactured product, FHWA views an aggregate as a broad category of particulate matter, such as stone, sand, or gravel. FHWA views aggregate binding agents as materials used to bind together small aggregates, and FHWA views additives as materials added to other materials to improve their properties. FHWA, however, does not believe that a definition more specific than this is necessary for the purpose of this rulemaking; FHWA doubts that aggregates, aggregate binding agents, or additives will generally be considered standalone manufactured products. If such outlier cases occur, FHWA believes they are more appropriately dealt with on a case-by-case basis or through the issuance of future guidance.

Comments: In the NPRM, FHWA defined “iron or steel products” as articles, materials, or supplies that consist wholly or predominantly of iron or steel or a combination of both. FHWA further defined “predominantly of iron or steel or a combination of both” as a material where the cost of the iron and steel content exceeds 50 percent of the total cost of all its components. Both of these definitions mirror the definitions of the terms in 2 CFR part 184.

Commenters raised concerns regarding the difficulty in evaluating the steel and iron content of products to determine whether those products would be considered manufactured products, and subject to the new Buy America requirements for manufactured products, or iron or steel products, and subject to the existing Buy America requirements for iron and steel. These commenters suggested that it may be difficult for recipients of FHWA financial assistance to determine the cost of the iron and steel content of a product. One commenter suggested that FHWA allow recipients to use another metric, such as weight percentage, to determine how to classify a product, arguing that determining the weight of iron and steel in a product is easier to determine than the cost of the iron and steel.

FHWA Response: FHWA believes that adopting a definition that distinguishes between iron or steel products and manufactured products that contain iron or steel is important to allow contracting agencies, contractors, and manufacturers to understand which requirements apply to a given material. FHWA acknowledges that recipients of FHWA financial assistance may need to consult with manufacturers to determine the cost of a product's iron or steel content. FHWA, however, believes that using the standard proposed, which is the standard under BABA and 2 CFR part 184, provides a single standard that applies to iron or steel products across Federal agencies; this is important to provide certainty to contracting agencies, contractors, and manufacturers regarding the requirements that apply to a given material no matter the Federal agency that is funding the procurement of the material.

Comments: In the NPRM, FHWA proposed to define a manufactured product as an article, material, or supply that has been processed into a specific form and shape, or combined with other articles, materials, or supplies to create a product with different properties than the individual articles, materials, or supplies. FHWA noted, however, that if an item is classified as an iron or steel product, an excluded material, or other product category as specified by law or in 2 CFR part 184, it should not be classified as a manufactured product.

Commenters expressed confusion about what materials should be classified as manufactured products, with one commenter requesting FHWA to clarify whether FHWA's definition meant that a manufactured product included all permanent materials or products incorporated into a project outside of the categories specifically listed in the definition. Other commenters requested for FHWA to specifically state that certain materials are not manufactured products and therefore not subject to FHWA's Buy America requirements. One commenter requested clarity on the meaning of FHWA's statement in the preamble to the NPRM that “products brought to the work site in an unprocessed or minimally processed state, such as topsoil, compost, and seed, would not be considered manufactured products” and that “non-manufactured or raw materials mixed off of the work site with other non-manufactured or raw materials of similar types would not necessarily result in the mixed material brought to the work site being classified as a manufactured product if it remains in an unprocessed or minimally processed state, such as minimally-processed fill dirt.”

Other commenters requested that FHWA provide clarity on distinguishing between manufactured products and construction materials. Certain commenters requested that FHWA specifically classify specific products as either a manufactured product or a construction material. Commenters in particular raised concerns over how to classify construction materials that have articles, materials, supplies, or binding agents added to them, as the definition of “construction material” in 2 CFR 184.3 states that minor additions of articles, materials, supplies, or binding agents to a construction material do not change the categorization of the combined material as a construction material. Such commenters requested that FHWA define when a construction material has minor additions and should be classified as a construction material versus when a construction material has non-minor additions and should be classified as a manufactured product. One commenter requested that FHWA provide a list of manufactured products that include construction materials that have undergone non-minor additions for this purpose. Other commenters requested that FHWA clearly state that a product that is a combination of two construction materials should be classified as a manufactured product, not a construction material.

FHWA Response: The definition of “manufactured product” has two steps. First, to be a manufactured product, the material must either (1) be processed into a specific form and shape; or (2) combined with other articles, materials, or supplies to create a product with different properties than the individual articles, materials, or supplies. Like OMB, FHWA finds it necessary to have a positive definition for what constitutes a “manufactured product.” For example, FHWA would not classify a raw material as a manufactured product because it is not manufactured under FHWA's meaning of the term. Raw materials are not (1) processed into a specific form and shape; or (2) combined with other articles, materials, or supplies to create a product with different properties than the individual articles, materials, or supplies.

In terms of determining whether a material is processed into a specific form and shape, FHWA wishes to make clear that some materials, like raw materials, are not processed into a specific form and shape. Alternatively, some products may exist in such a minimally processed state that they should not be considered “processed into a specific form and shape,” such as topsoil, which should not be considered a manufactured product.

For the purpose of determining whether a material is combined with other articles, materials, or supplies to create a product with different properties than the individual articles, materials, or supplies, FHWA clarifies that some materials may be combined with other materials but produce a product that lacks different properties than the individual materials. For example, a mixture of raw materials in an unprocessed or minimally processed state, such as minimally processed fill dirt, should not be classified as a manufactured product because the fill dirt does not have different properties than its individual components.

In short, some materials may not be classified as a manufactured product under this first step. A material properly classified as a manufactured product under this first step is then analyzed under the second step of the definition. Under this second step, a material is excluded from classification as a manufactured product if it could also be classified as an iron or steel product, an excluded material, or other product category as specified by law or in 2 CFR part 184. Except for a specific subset of products discussed in § 635.410(c)(2)(i) and (ii), below, FHWA intends for materials to be classified as only one category of material and, based on that classification, only subject to one set of requirements, as applicable to the classification.

FHWA recognizes that without this second step, certain materials could be viewed as both manufactured products under the first step and as another category, which would make it unclear what requirements applied to that material. For instance, a material could be considered a manufactured product under the first step of the definition but also contain such a high amount of iron and steel to be considered an iron or steel product, such as might be the case for some vehicles. This second step makes clear that such a material is properly classified as an iron or steel product and subject to FHWA's Buy America requirements for iron and steel under § 635.410(b), not FHWA's Buy America requirements for manufactured products under § 635.410(c). 25 Similarly, a material that falls under the definition of an excluded material could also be considered a manufactured product under the first step of the definition of “manufactured product,” such as cement. Again, in such a case, such a material would be properly classified as an excluded material, not a manufactured product. As excluded materials are not subject to any Buy America requirements standing alone, such a material would not have any domestic content procurement preference placed on it. To use another example, certain materials classified as construction materials under 2 CFR 184.3 could also be considered a manufactured product under the first step of the definition of “manufactured product,” such as fiber optic cable. Once more, such a material is properly classified as a construction material and is subject to BABA's construction material requirements under 2 CFR part 184, not FHWA's Buy America requirements for manufactured products.

FHWA acknowledges that, to determine whether a material should be classified as a construction material or manufactured product during this step two, parties need to understand the definition of what constitutes a construction material in 2 CFR 184.3. Per 2 CFR 184.3, a construction material is an article, material, or supply that consists of only one of the following eight items: non-ferrous metals; plastic and polymer-based products (including polyvinylchloride, composite building materials, and polymers used in fiber optic cables); glass (including optic glass); fiber optic cable (including drop cable); optical fiber; lumber; engineered wood; or drywall. In addition, these eight materials may have minor additions of articles, materials, supplies, or binding agents added to them and remain properly categorized as a construction material. In discussing minor additions in 2 CFR part 184, OMB did not provide a specific definition but instead stated that “Federal agencies should exercise reasonable discretion in applying this term within their respective Federal financial assistance programs for infrastructure.” 88 FR 57767. FHWA does not believe that this rulemaking, which concerns FHWA's requirements for manufactured products under 23 U.S.C. 313, is the proper place to define what constitutes non-minor additions for the purpose of determining whether a material should be considered a construction material; if necessary, FHWA would instead seek to do so through additional guidance.

FHWA notes that a material properly classified as a manufactured product under this two-step definition may include components that, on their own, would be categorized as iron or steel products, excluded materials, construction materials, or other categories of products. FHWA emphasizes that it is the classification of the material itself that determines whether it is a manufactured product versus an iron or steel product, excluded material, or construction material. For example, a traffic light may contain iron and steel components and glass, a construction material, as a component. In determining how to classify the traffic light, the first step is to determine whether the traffic light is processed into a specific form and shape or combined with other articles, materials, or supplies to create a product with different properties than the individual articles, materials, or supplies. The second step is to determine whether the traffic light itself should be classified as an iron or steel product, excluded material, or other product category as specified by law or in 2 CFR part 184. The fact that components of the traffic light might be iron or steel products or construction materials may be relevant to determining the proper classification of the traffic light; for example, if the iron or steel components represent more than 50 percent of the cost of all the traffic light's components, the traffic light should be classified as an iron or steel product. It is important to note, however, that merely containing such iron or steel components and construction materials as components does not mean that the traffic light is automatically classified as an iron or steel product or a construction material. This determination must be made by looking at the specific definition applicable to each category of material.

If a material meets the definition of a manufactured product under the first step and is not excluded under the second step, it is properly classified as a manufactured product, unless it is a mixture of excluded materials delivered to a work site without final form for incorporation into a project, as discussed below in the analysis of § 635.410(c)(1)(iv). FHWA reiterates, however, that a material properly classified as a manufactured product is only subject to FHWA's Buy America requirements for manufactured products if the material is permanently incorporated into a Federal-aid project.

FHWA believes that this guidance should allow contracting agencies, contractors, and manufacturers to properly determine the proper classification of articles, materials, and supplies.

Comments: Under FHWA's definition of a manufactured product, discussed in detail above, an excluded material, by itself, should not be classified as a manufactured product. FHWA stated in the NPRM, however, in alignment with 2 CFR part 184, that excluded materials may constitute a component of a manufactured product when combined with other materials, including other excluded materials. If a manufactured product contains components that are excluded materials, those excluded materials must be considered in determining whether 55 percent of the product's components, by cost, are produced in the United States. FHWA once again, notes, however, that mixtures of excluded materials delivered to a work site without final form for incorporation into a project are not considered manufactured products; comments on this topic are discussed in detail below.

Some commenters expressed opposition to having a combination of excluded materials be classified as a manufactured product. Others expressed opposition to applying a Buy America requirement to excluded materials in any form. One commenter requested that FHWA should make it clear in the final rule that excluded materials do not have a Buy America requirement placed on them.

FHWA Response: FHWA clarifies that, consistent with 2 CFR part 184, an individual item listed in section 70917(c) of BABA that is brought to the work site for permanent incorporation into a Federal-aid project should be classified as an excluded material and not subject to a Buy America requirement. For example, cement brought to the work site for permanent incorporation into a Federal-aid project is not subject to FHWA's Buy America requirements. If the individual excluded material is combined with another excluded material, such as cement combined with aggregates, that combined material should be considered to be a manufactured product, assuming that it means the definition of a manufactured product in § 635.410(c)(1)(iv). In this case, each excluded material (the cement and aggregates) is a component of the manufactured product and must be considered when determining whether 55 percent of the components, by cost, of the product are produced in the United States. On the other hand, an excluded material combined with the same excluded material would remain an excluded material and not be subject to FHWA's Buy America requirements. In short, a Buy America preference may apply to excluded materials as a component of a manufactured product; it cannot apply to an excluded material standing alone.

FHWA agrees with OMB that the language in section 70917(c) of BABA indicates that Congress did not intend for excluded materials to be considered construction materials and did not intend excluded materials, standing alone, to be classified as manufactured products. See 88 FR 57771-73. In addition, FHWA agrees with OMB that section 70917(c) does not prevent excluded materials from being components of manufactured products and considered the same as any other component of a manufactured product. See id. at 57772. FHWA further believes that it is useful to align the treatment of excluded materials under FHWA's Buy America requirements with the requirements of these materials under 2 CFR part 184 where appropriate. FHWA believes that this promotes uniformity for contracting agencies, contractors, and manufacturers operating between different Federal Agency programs and will allow for these entities to build up a greater amount of experience with these requirements.

Comments: In the definition of manufactured product, FHWA stated that: “If an item is classified as an iron or steel product, an excluded material, or other product category as specified by law or in 2 CFR part 184, then it is not a manufactured product.” Many commenters suggested that FHWA should remove the reference to “other product category as specified . . . in 2 CFR part 184” and instead just list the specific construction materials referenced in 2 CFR part 184.

FHWA Response: Pursuant to section 70915(b) of BABA, OMB is given the authority to determine which construction materials are covered by BABA's requirements and to define the manufacturing processes that must occur in the United States for those construction materials. As stated above, except for specific products, described in more detail in the discussion of § 635.410(c)(2)(i) and (ii), below, FHWA believes that materials should be classified as only one category of material and, based on that classification, be subject to only one set of requirements, as applicable to the classification. The purpose of referring to “other product category as specified by law or in 2 CFR part 184” is to make clear that products that could be classified as both another category and a manufactured product should not be considered manufactured products and are not subject to FHWA's Buy America requirements for manufactured products. Thus, items classified as construction materials by OMB are not properly classified as manufactured products and are not subject to FHWA's Buy America requirements for manufactured products. Given that OMB has the authority to define construction materials and thereby impose BABA's construction material requirements on them, FHWA does not find it appropriate to separately list construction materials in its own regulation.

Comments: In the definition of manufactured products in the NPRM, FHWA stated that “[m]ixtures of concrete or asphalt delivered to a job site without final form for incorporation into a project are not a manufactured product.” Many commenters stated that FHWA should clarify that this exception should apply to all mixtures of excluded materials, not just mixtures of concrete or asphalt. Other commenters suggested that FHWA should reference a “work site” instead of a “job site,” given that § 635.410(c)(2) stated that classification of a material should occur based on its status at the time it is brought to the work site for incorporation into an infrastructure project. Still other commenters disagreed, stating that FHWA should clarify that the exemption should apply to mixtures delivered to or proximate to a work site. Finally, some commenters opposed treating mixtures of concrete or asphalt without final form from those that are in a settled form, contesting that there is no reason to treat the two differently.

FHWA Response: In the preamble to 2 CFR part 184, OMB stated: “In the case of section 70917(c) materials, OMB clarifies . . . to the extent that section 70917(c) materials were only combined as an unsettled mixture without final form when reaching the work site, such as in the case of wet concrete or hot mix asphalt, the unsettled mixture should not be considered a manufactured product.” 88 FR 57772. In the NPRM, FHWA stated its agreement with OMB on this topic and that FHWA intended for its proposed regulations to have the same reach as 2 CFR part 184 in this respect.

FHWA disagrees with commenters suggesting that settled mixtures of excluded materials should not be considered manufactured products like FHWA proposed for unsettled mixtures of excluded materials. FHWA agrees with OMB that unsettled mixtures are not processed into a specific shape or form like settled mixtures. Id. While settled mixtures may have different properties than individual excluded materials, FHWA agrees with OMB that it is more appropriate to only treat excluded materials that have set or dried into a particular shape or form prior to reaching the work site as manufactured products. FHWA also notes that aligning its Buy America requirements with the BABA requirements in 2 CFR part 184 will promote uniformity and allow contracting agencies, contractors, and manufacturers that work with different Federal agencies a greater ability to increase their knowledge of how these requirements work.

FHWA does agree with commenters that the language in the final rule should better reflect the intent of OMB. For this reason, FHWA believes it appropriate to modify its regulatory text to make clear that this exception applies to all mixtures of excluded materials without final form. FHWA also agrees that it is appropriate to reference a “work site” instead of a “job site,” given that is the language used by OMB and the language included in § 635.410(c)(2). FHWA intends the use of “work site” in § 635.410(c)(1)(iv) to mirror the use of “work site” in § 635.410(c)(2). Thus, the work site is generally the location of the infrastructure project at which the mixture will be incorporated; however, there may be circumstances where it is more appropriate for the work site to be considered to be broader than the location of the infrastructure project. As the definition of the work site will depend on the specific project and material being delivered, FHWA does not believe it necessary to state that the mixtures can be delivered proximate to a work site.

Comments: In the NPRM, FHWA defined when a manufactured product was “produced in the United States” and thereby when a manufactured product would be compliant with FHWA's Buy America requirements. FHWA proposed to adopt the definition of “produced in the United States” found in section 70912(6)(B) of BABA, which would require a manufactured product be manufactured in the United States and the cost of components of the manufactured product that are mined, produced, or manufactured in the United States be greater than 55 percent of the total cost of all components of the manufactured product. FHWA stated in the NPRM that it believed it was required by BABA to adopt general standards that meet or exceed those under BABA. Further, FHWA stated in the NPRM that it was proposing to choose requirements similar to BABA's manufactured product requirements to minimize the burden placed on contracting agencies, contractors, and manufacturers. FHWA also stated that aligning its Buy America requirements for manufactured products with those applicable to manufactured products under BABA would provide consistency between the two regimes.

Some commenters noted the benefit of aligning FHWA's Buy America requirements for manufactured products with BABA's domestic content procurement preference for manufactured products, with one manufacturer stating that similar standards would enable it to use the same compliant products in projects subject to BABA and FHWA's Buy America statute. Other commenters suggested various other methods for FHWA to determine when a manufactured product is “produced in the United States.” One commenter stated that the requirements should vary based on product or product type. Others suggested that FHWA should allow products to be sourced from countries for which the United States has trade agreements. One commenter argued that FHWA should remove the 55 percent requirement altogether.

Other commenters sought clarification over how to determine whether a manufactured product was produced in the United States under FHWA's proposed standards. Commenters questioned how to determine when a product was manufactured in the United States for the purpose of the final assembly requirement. Commenters also sought clarification on how to determine if a component was mined, produced, or manufactured in the United States for the purpose of meeting the 55 percent requirement.

FHWA Response: FHWA believes its Buy America requirements for manufactured products must meet or exceed those under BABA pursuant to section 70917(a) and (b) of BABA, that choosing requirements meeting BABA's is the minimally burdensome option, and that doing so allows for the benefit of consistency between projects subject to FHWA's Buy America requirements and those subject to BABA.

With respect to what it means for a product to be manufactured in the United States, and what it means for a component to be mined, produced, or manufactured in the United States, FHWA intends for the requirements to reflect the same principles found in BABA and the Federal Acquisition Regulation (FAR). FHWA intends to issue further guidance on these topics in the future. FHWA notes, however, that the manufactured and 55 percent requirements apply to the manufactured product itself, not the components of a manufactured product. For example, a component of a manufactured product does not need more than 55 percent of its components—the subcomponents of the manufactured product -by cost, to be mined, produced, or manufactured in the United States.

Comments: In the NPRM, FHWA proposed for an article, material, or supply to only be classified as an iron or steel product, a manufactured product, or other products as specified by law or in 2 CFR part 184. FHWA further proposed that an iron or steel product must meet FHWA's existing Buy America requirements for iron and steel in § 635.410(b). Finally, FHWA proposed that, except as otherwise provided in § 635.410(c)(2)(i) and (ii), an article, material, or supply should not be considered to fall into multiple categories.

Several commenters expressed confusion about what it meant for a material to meet the requirements of § 635.410(b). Others expressed confusion over whether the rule would require that predominantly iron and steel components of manufactured products be compliant with § 635.410(b).

Commenters representing the iron and steel industry expressed opposition to not requiring predominantly iron or steel components of manufactured products to be subject to FHWA's Buy America requirements for iron and steel. These commenters stated that this would be contrary to longstanding FHWA practice. They further stated their belief that not requiring predominantly iron or steel components of manufactured products to meet FHWA's Buy America requirements for steel and iron would be in conflict with BABA's savings provision, arguing that, pursuant to the savings provision in section 70917(a) and (b) of BABA, BABA cannot be used to modify an agency's existing requirements that meet or exceed BABA's. These commenters argued that BABA's savings provision does not merely allow FHWA to preserve its existing Buy America policies but explicitly preserves such policies. Commenters also argued that they believed changing Buy America policies is in conflict with BABA's intent to expand the application of Buy America requirements.

Commenters further argued that legislative history demonstrates that Congress intended the 1982 STAA to cover all steel products, including steel components of manufactured products. Commenters also pointed to a statement in the Federal Register notice where FHWA instituted the Manufactured Products General Waiver which they believed indicated that FHWA acknowledged Congress' intent in expanding Buy America coverage to include all steel products. At the time, FHWA stated: “Congressional concern that Federal money spent to improve highways should also aid U.S. industry is apparent in the first sentence of Section 165, which requires the Secretary of Transportation to ensure that funds authorized for Federal-aid highway projects would only buy U.S.-made steel. The FHWA therefore has expended the Buy America rule to include all steel products.” See 48 FR 53102. Finally, commenters opposed to FHWA changing current policy argued that doing so would harm the domestic steel and iron industry and would allow foreign steel and iron to be used, which they stated was unfairly traded and higher-emitting.

Other commenters, however, argued for removing the policy of applying FHWA's Buy America requirements to predominantly iron and steel to iron and steel components of manufactured products. These commenters stated that the current policy is creating a burden on contracting agencies, contractors, and manufacturers, as well as marketplace confusion as FHWA's policy does not apply to projects subject to BABA. One commenter stated that the history of iron and steel of components is not generally tracked, making compliance with the current policy difficult.

FHWA Response: FHWA does not intend for its Buy America requirements on manufactured products to substantially modify its existing Buy America requirements for iron and steel, codified at § 635.410(b). For manufactured products containing sufficient amounts of iron and steel, by cost, to be classified as “iron or steel products” under the definition in § 635.410(c)(1)(iii), FHWA believes that those products are properly subject to FHWA's existing Buy America requirements for iron and steel. Accordingly, FHWA is making clear in § 635.410(c)(2) that such iron or steel products remain covered by FHWA's existing Buy America requirements for iron and steel in § 635.410(b). Under these requirements, pursuant to § 635.410(b)(1)(ii), all manufacturing processes of the iron or steel product, including application of a coating, must generally occur in the United States. 26

FHWA, however, is making clear what products are subject to its existing steel and iron requirements and what are subject to its new manufactured product requirements. Except for the specific products and components discussed below, FHWA believes that manufactured products containing predominantly iron or steel components should not be subject to both FHWA's existing steel and iron requirements and its new manufactured product requirements. In other words, for Federal-aid projects, predominantly iron or steel components of a product classified as a manufactured product do not need to comply with FHWA's Buy America requirements for iron and steel; the manufactured product itself only needs to comply with FHWA's Buy America requirements for manufactured products. FHWA believes that, with the imposition of Buy America requirements for manufactured products, it is generally unnecessary to continue to apply Buy America requirements to predominantly iron and steel components of those manufactured products. Manufacturers may continue to use domestically manufactured iron and steel components for the purpose of meeting the 55 percent requirements, and FHWA expects manufacturers of products with more costly iron and steel components to continue to do so. FHWA is not, however, imposing a requirement that predominantly iron and steel components, no matter the value, must be domestically manufactured. FHWA believes, however, that for iron and steel components of lesser costs, it would be unduly burdensome to require tracking the origin and cost of these components as well as other components that are higher priced, which would be necessary to meet the 55 percent requirements. 27

Further, requiring all predominantly iron and steel components to be domestically produced would create discrepancies between FHWA's Buy America requirements and BABA's requirements, which FHWA seeks to avoid when not justified. Under BABA, an article, material, or supply should not be considered to fall into multiple categories and must meet the specific Buy America preference for only the single category in which it is classified. See 2 CFR 184.4(e) and (f). Maintaining FHWA's current policy would result in some materials being BABA-compliant but not Buy America-compliant. As stated below in the discussion of § 635.410(c)(2)(i) and (ii), FHWA believes that there may be some products and components for which the continued application of this policy may be justified, and the departure from BABA's requirements, based on the circumstances surrounding the manufacture of the products and components. FHWA does not believe that the same rationale exists for all predominantly steel and iron components, no matter what size or what cost, in all manufactured products.

FHWA does not believe that requiring manufactured products containing predominantly iron and steel components to generally be subject to only FHWA's Buy America requirements for manufactured products is contrary to BABA's savings provision in section 70917(a) and (b) of BABA. Section 70917(a) of BABA states that BABA “shall apply to a Federal financial assistance program for infrastructure only to the extent that a domestic content procurement preference as described in section 70914 does not already apply to iron, steel, manufactured products, and construction materials.” Section 70917(b) states that nothing in BABA “affects a domestic content procurement preference for a Federal financial assistance program for infrastructure that is in effect and that meets the requirements of section 70914.” FHWA interprets these provisions to mean that BABA only applies to FHWA's programs only to the extent that a domestic content procurement preference for iron, steel, manufactured products, and construction materials meeting or exceeding the requirements of section 70914 does not already exist. Further, FHWA interprets section 70917(b) to mean that, where a domestic content procurement preference for iron, steel, manufactured products, and construction materials meeting or exceeding the requirements of section 70914 does exist, BABA has no effect on such domestic content procurement preferences.

FHWA also disagrees that the legislative history of the 1982 STAA demonstrates that Congress intended the 1982 STAA to cover all steel components of manufactured products.

Similarly, FHWA finds commenters' reference to FHWA's statement in the Federal Register notice that created the Manufactured Products General Waiver as failing to indicate congressional intent to apply Buy America requirements for steel to all steel components. In that statement, FHWA said that congressional intent in section 165 of the 1982 STAA indicated that its Buy America requirements for steel should extend to all steel products. See 48 FR 53102. At the time, FHWA was referencing the fact that it had previously applied its Buy America requirements for steel to only structural steel when implementing section 401 of the 1978 STAA, and that it was then applying its Buy America requirements for steel to all steel products.

Finally, FHWA believes that the effects of this rule on the domestic iron and steel industries will be minimal. Currently, predominantly iron and steel components of manufactured products used on Federal-aid projects are required to be produced domestically. FHWA believes it likely that, where such components represent a large cost of the manufactured product, manufacturers will continue to use such domestically produced components. Doing so will allow manufacturers to more easily satisfy the 55 percent requirement, while requiring minimal changes to product design. For less expensive iron and steel components, FHWA believes that manufacturers should have the option to replace them in their products with foreign components. FHWA agrees with commenters that tracing the origin of the iron and steel for these minor components is burdensome and, given their cost, does not provide sufficient value to the iron and steel industry to justify these burdens.

Comments: In the NPRM, FHWA proposed the classification of an article, material, or supply into a specific category to be based on its status at the time it is brought to the work site for incorporation into an infrastructure project; this classification would then determine which requirements, if any, the article, material, or supply would be subject to. In addition, FHWA proposed to state that the work site is generally the location of the infrastructure project at which the iron or steel product or manufactured product will be incorporated.

Many commenters expressed confusion over how to distinguish between a component of a manufactured product and the manufactured product itself. Commenters were particularly concerned when components for a product were brought to the work site separately, with commenters expressing confusion over the fact that a material may be seemingly classified differently depending on whether its components are assembled on or away from the work site. Some commenters wondered whether bringing components separately to a work site and assembling them there would result in the components constituting a kit for a manufactured product versus separate manufactured products. In contrast, other commenters stated that FHWA should not adopt a principle that components can be brought to a work site separately but still be considered a kit and classified as a single manufactured product; such commenters stated there is no authority in title 23, U.S.C. for FHWA to adopt such a principle. Commenters similarly argued that FHWA should not adopt a method for classification that would allow a system to be classified as a single manufactured product; however, other commenters pushed for the opposite. Finally, some commenters argued that FHWA should not base classification on the status of a product when it is brought to the work site at all but instead on the status of a product when it is procured.

FHWA Response: FHWA believes that it is essential to set a point at which an article, material, or supply is classified into a specific category—whether that be an iron or steel product, a manufactured product, or any category specified in law such as a construction material—or not classified into any category. For manufactured products, this point is especially important to distinguish between the manufactured product itself and its components. FHWA believes that the point chosen by OMB, when the product is brought to the work site, appropriately allows for distinguishing among systems, which would be comprised of multiple manufactured products with Buy America requirements applied to each; manufactured products; and components. FHWA is concerned that alternative points of classification may lead to diluting the Buy America requirements. For instance, allowing for classification at the point a material is incorporated into a project may result in multiple manufactured products, iron or steel materials, and construction materials being combined together and classified as one single manufactured product. In particular, this kind of classification could result in iron and steel products generally being considered components of manufactured products, thereby functionally eliminating FHWA's longstanding requirement that all iron and steel products must be produced in the United States. FHWA further notes that were it to choose a different point, that could result in certain materials being classified differently under FHWA's Buy America requirements versus under 2 CFR part 184; this, in turn, may lead to multiple, different requirements applying to the same material. To ensure uniformity, FHWA believes it appropriate to classify materials at the same point as is done by Federal agencies subject to BABA.

FHWA recognizes, however, that certain manufactured products may be acquired for incorporation into an infrastructure project from a single manufacturer or supplier as separate components, which are then assembled together to form a single product at the work site. FHWA refers to such products as “kits.” FHWA, in alignment with OMB, believes that these kits should be classified as a single manufactured product; the individual components of the kit should not, in other words, be classified as separate manufactured products when they are brought to the work site. 28 FHWA believes that this approach avoids a situation where contractors are incentivized to assemble a kit offsite and then bring the finished product to the work site, even if it is inefficient to do so. FHWA further disagrees with commenters suggesting that this notion of kits is prohibited by title 23, U.S.C. Again, FHWA is not suggesting that multiple manufactured products can be brought to the work site, assembled into one system or finished project, and then only be subject to FHWA's Buy America requirements for manufactured products. FHWA is merely reflecting the notion, echoed by commenters, that while the point of classification is important to prevent the classification system from being abused to dilute the stringency of Buy America requirements, it should also not result in the same product being classified differently purely by the location where it is assembled.

FHWA notes that the concept of kits has similarities with the idea of classifying a product based on its status at the time of procurement. FHWA emphasizes, however, that a kit represents a single product purchased from a single manufacturer or supplier. FHWA believes that classifying a product based on its status at the time of procurement may allow for the classification of entire systems as a single manufactured product, which would dilute the stringency of the Buy America requirements and not be in concert with classification under 2 CFR part 184.

Comments: In the NPRM, as stated above, FHWA proposed to generally require that iron or steel materials only comply with FHWA's existing Buy America requirements for iron and steel found in § 635.410(b) and that manufactured products only comply with FHWA's manufactured product requirements found in § 635.410(c). In § 635.410(c)(2)(i), however, FHWA proposed to require precast concrete products that are classified as manufactured products to have all predominantly iron or steel components comply with FHWA's existing Buy America requirements for iron and steel. Similarly, in § 635.410(c)(2)(ii), FHWA proposed to require the cabins or other enclosures of ITS and other electronic hardware systems installed in the highway right of way or other real property and classified as manufactured products, if predominantly iron or steel, to comply with FHWA's existing Buy America requirements for iron and steel.

Multiple commenters expressed opposition to the separate requirements placed on these specific manufactured products in § 635.410(c)(2)(i) and (ii). These commenters argued that such separate requirements prevented uniformity of FHWA's Buy America requirements to all manufactured products and uniformity with BABA's requirements for manufactured products. Commenters also argued that manufacturers do not know the ultimate owner of items when manufacturing and shipping them. Thus, commenters argued that these separate requirements created risks of non-compliance if a contractor purchases a product that is BABA-compliant but not compliant with § 635.410(c)(2)(i) or (ii), as the contractor may not know whether the product needs to be BABA-compliant versus FHWA-compliant when purchasing the product or may receive the wrong version of the product from the manufacturer. Another commenter argued that manufacturers would merely shift from using iron and steel to other materials where possible to avoid these requirements.

Commenters representing the iron and steel industry argued that there is no distinction between iron and steel in the specific products referenced in § 635.410(c)(2)(i) and (ii) and the iron and steel in the components of other manufactured products. These commenters argued that there is no reason to require the iron and steel in the specific products referenced in § 635.410(c)(2)(i) and (ii) to be domestically produced but not the iron and steel in other products. Finally, commenters sought clarification over the definition of “intelligent transportation systems and other electronic hardware systems” found in § 635.410(c)(2)(ii).

FHWA Response: FHWA generally believes that a single material, if classified as an iron or steel product, should only be subject to its Buy America requirements for iron and steel in § 635.410(b); if classified as a manufactured product, FHWA generally believes the product should only be subject to its Buy America requirements for manufactured products in § 635.410(c). FHWA also believes, however, that iron or steel components of precast concrete and iron or steel enclosures of ITS and other electronic hardware systems installed in the highway right of way or other real represent unique situations justifying FHWA to generally apply its Buy America requirements for manufactured products to the products as a whole and its Buy America requirements for iron and steel to specific components.

As stated in the NPRM, FHWA believes that the products referenced in § 635.410(c)(2)(i) and (ii) are regularly used in highway construction projects and that manufacturers have formed longstanding supply chains to incorporate Buy America-compliant iron or steel components into them. FHWA believes that these products are currently used extensively in Federal-aid projects, where, currently, all their predominantly iron and steel components are required to comply with FHWA's Buy America requirements for iron and steel. FHWA further believes that the iron and steel in the precast concrete and the iron and steel in the enclosures of ITS and other electronic hardware systems represent a significant portion of the value of those manufactured products. 29 FHWA thus believes that the requirements of § 635.410(c)(2)(i) and (ii) will have a limited impact on the manufacture of these specifically-referenced products. While FHWA acknowledges that the requirements that apply to these products are distinct from those that apply to other manufactured products under FHWA's Buy America regulation and BABA, FHWA believes this is justified by the significant market for these products solely within FHWA's funding programs. FHWA therefore believes that manufacturers of these products will be incentivized to produce products compliant with these unique requirements in sufficient amounts and that contractors should be able to determine whether any particular product is compliant with FHWA's regulations.

FHWA emphasizes that the specific requirements of § 635.410(c)(2)(i) and (ii) apply only to the specifically referenced products and components. While FHWA understands that the iron and steel in these products is similar to the iron and steel in all manufactured products, FHWA believes that the specific nature of these products, as stated above, justifies different requirements from other manufactured products.

With respect to “intelligent transportation systems and other electronic hardware systems,” FHWA clarifies that its requirements in § 635.410(c)(2)(ii) apply to the cabinets or other enclosures of the physical electronic hardware system, or other physical ITS, if (1) the system is classified as a manufactured product under § 635.410(c)(1)(iv); (2) the system is installed in the highway right of way or other real property; and (3) the cabinets or other enclosures of such system consists wholly or predominantly of iron or steel or a combination of both. Where the requirements of § 635.410(c)(2)(ii) do apply, the cabinet or other enclosure must comply with FHWA's existing Buy America requirements for iron and steel, meaning that all iron and steel of the cabinet or other enclosure must be domestically produced.

Finally, for the components specified in § 635.410(c)(2)(ii), FHWA is modifying a reference from components that are “manufactured predominantly or iron or steel or a combination of both” to components that “consist wholly or predominantly of iron or steel or a combination of both.” FHWA does not intend this to be a substantive change but instead to mirror the language used in the definition of “iron or steel products.” Through this change, FHWA seeks to make clear that the determination of whether components of precast concrete products or the cabinets or other enclosures of intelligent transportation systems and other electronic hardware systems that are installed in the highway right of way or other real property should be determined as iron or steel products and subject to FHWA's Buy America requirements for iron and steel should be based on the same definition that iron or steel products are subject to generally.

Comments: In § 635.410(c)(3), FHWA proposed to determine whether the cost of components for manufactured products is greater than 55 percent of the total cost of all components through the same method as used under 2 CFR 184.5 for projects subject to BABA. Per 2 CFR 184.5(a), the cost of a component purchased by the manufacturer is the acquisition cost, including transportation costs to the place of incorporation into the manufactured product (whether or not such costs are paid to a domestic firm), and any applicable duty (whether or not a duty-free entry certificate is issued). For components manufactured by the manufacturer, 2 CFR 184.5(b) the cost of a component is all costs associated with the manufacture of the component, including transportation costs as described in 2 CFR 184.5(a), plus allocable overhead costs, but excluding profit; the cost of such components also does not include any costs associated with the manufacture of the manufactured product. FHWA copied this definition verbatim into proposed § 635.410(c)(3).

Some commenters disagreed with FHWA's approach to determining the cost of components entirely, requesting that FHWA should allow additional costs to factor into the cost of any component, including the cost of domestic manufacturing, the cost of software and firmware, the value added at each manufacturing stage, the cost of the intellectual property, and the cost of the research and development for the product. One commenter argued that the cost of components should be determined at the overall system level.

Other commenters sought clarification on FHWA's proposed definition. Commenters expressed confusion over what were allowable manufacturing costs for the component versus unallowable manufacturing costs for the manufactured product. Others sought clarification over what FHWA meant by allocable overhead costs.

FHWA Response: FHWA disagrees with commenters suggesting that FHWA depart from the standard used in 2 CFR 184.5 to determine the cost of components. FHWA believes that uniformity with BABA's requirements is important and beneficial where appropriate to ensure that manufactured products are compliant under FHWA's Buy America statute and BABA and to allow for contracting agencies, contractors, and manufacturers to build up a greater amount of experience with these requirements.

FHWA notes that § 635.410(c)(3)(ii) differentiates between costs associated with the manufacture of a component, which are to be considered in determining the cost of the component, and costs associated with the manufacture of the manufactured product, which are not. Costs associated with the manufacture of the manufactured product itself, outside of the cost to manufacture a component, should not be considered in valuing the component. For example, the cost of assembling the component into the manufactured product is a cost of manufacturing the manufactured product, not a cost of manufacturing the component.

Finally, FHWA is correcting an error in the proposed regulatory text, where § 635.410(c)(3)(ii) made reference to “paragraph (a) of this section.” That reference is from 2 CFR 184.5(b) and refers to 2 CFR 184.5(a). FHWA is thereby correcting the reference to § 635.410(c)(3)(i) to properly align with 2 CFR part 184.

The OMB has determined that this rulemaking is a significant regulatory action within the meaning of E.O. 12866, as amended by E.O. 14094.

A more detailed discussion of the economic analysis associated with this rulemaking can be found in the RIA, which is available on the docket. The RIA estimates the costs and benefits associated with imposing Buy America requirements to manufactured products. The expected benefits of this rule relate to protecting and expanding domestic manufacturing, increasing the resiliency of supply chains, and increasing consistency in applying domestic content procurement preferences for manufactured products between FHWA and other Federal agencies that are subject to BABA's requirements. None of these benefits have been quantified.

The costs of this rule relate to increased material costs for manufactured products used in highway construction projects, administrative costs to FHWA and recipients of FHWA financial assistance, and potential delays in project delivery. FHWA estimates that total costs associated with this rule, between FY 2026 and FY 2035, will range from $545 million to $8,466 million at a 2 percent discount rate. The estimated increase in material costs for manufactured products ranges from $41 million to $980 million per year. Much of the wide range of uncertainty surrounding the estimates stems from the difficulty of estimating (1) the fraction of inputs to highway construction that are manufactured products; (2) the fraction of manufactured products that are currently domestically supplied but fail to meet the 55 percent requirement; and (3) the likely price premiums for purchasing manufactured products that would be compliant with this rule, compared to non-compliant manufactured products currently used in highway construction. FHWA further estimates an additional $167,000 per year in increased FHWA administrative costs to cover the salary and employer-provided benefits of an additional Federal employee to help administer the Buy America program. We also estimate an additional $22 million per year in administrative costs to recipients of FHWA financial assistance related to verifying product compliance. Those costs do not include additional administrative costs related to setting up systems to track compliance or applying for any project-specific waivers that may be necessary based on specific circumstances.

The 10-year discounted totals of these costs are provided in the table below at a 2 percent discount rate. The rest of the costs could not be quantified with the information available.

Annualized costs are $61 million to $942 million per year at a 2 percent discount rate, $60 million to $932 million per year at a 3 percent discount rate, and $58 million to $890 million per year at a 7 percent discount rate.

FHWA has responded to comments made regarding the preliminary regulatory impact analysis in the RIA. This rule will not adversely affect in a material way the economy, any sector of the economy, productivity, competition, jobs, the environment, public health or safety, or State, local, territorial, or Tribal governments or communities. These changes do not create a serious inconsistency with any other agency's action or materially alter the budgetary impact of any entitlements, grants, user fees, or loan programs.

In compliance with the Regulatory Flexibility Act (Pub. L. 96-354, 5 U.S.C. 601-612), FHWA has evaluated the effects of this rule on small entities and has determined that it is not anticipated to have a significant economic impact on a substantial number of small entities. This rule would impose Buy America requirements for manufactured products on recipients of FHWA financial assistance, including States, local governments, and other grant recipients. These recipients are primarily States, who receive apportioned funding from FHWA, and who are not included in the definition of small entity set forth in 5 U.S.C. 601.

FHWA believes the projected impact on small entities that utilize FHWA funding would be negligible. This final rule will require such small entities to purchase manufactured products that are manufactured in the United States and have the cost of components that are mined, produced, or manufactured in the United States be greater than 55 percent of the total cost of all components of the manufactured product under contracts subject to FHWA's Buy America requirements. FHWA acknowledges that some Buy America-compliant manufactured products may be more expensive than manufactured products that are non-compliant. Thus, this final rule may result in increased project costs. To the extent this rule requires expenditures by State, local governments, and other grant recipients on Federal-aid projects, they are reimbursable. In addition, to the extent that small governmental jurisdictions expend additional funds to purchase Buy America-compliant manufactured products, based on FHWA's regulatory impact analysis, FHWA does not believe that any additional expenditure would be economically significant.

FHWA recognizes that small businesses, as defined by 5 U.S.C. 601(3), who are also considered small entities, may be affected indirectly by this final rule when they seek to provide manufactured products to recipients of FHWA financial assistance who are subject to the new Buy America requirements. For small businesses not currently compliant with FHWA's Buy America requirements for manufactured products who wish to provide Buy America-compliant products, they may need to change manufacturing processes or component suppliers. Small entities that may be impacted indirectly by a rulemaking, however, are not subject to analysis under the Regulatory Flexibility Act. See Mid-Tex Electric Cooperative, Inc. v. Federal Energy Regulatory Commission, 773 F.2d 327 (D.C. Cir. 1985).

Therefore, FHWA certifies that the action would not have a significant economic impact on a substantial number of small entities.

This rule does not impose unfunded mandates as defined by the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4, 109 Stat. 48). Section 202(a) of the Unfunded Mandates Reform Act of 1995 requires Federal agencies to prepare a written statement, which includes estimates of anticipated impacts, before proposing “any rule that includes any Federal mandate that may result in the expenditure by State, local, and Tribal governments, in the aggregate, or by the private sector, of $100 million or more (adjusted annually for inflation) in any one year.” The current threshold after adjustment for inflation is $177 million, using the most current (2022) Implicit Price Deflator for the Gross Domestic Product. The definition of “Federal mandate” in the Unfunded Mandates Reform Act excludes financial assistance of the type in which State, local, or Tribal governments have authority to adjust their participation in the program in accordance with changes made in the program by the Federal Government. The Federal-aid highway program permits this type of flexibility.

The E.O. 13132 requires agencies to ensure meaningful and timely input by State and local officials in the development of regulatory policies that may 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. FHWA has analyzed this rule in accordance with the principles and criteria contained in E.O. 13132. FHWA has determined that this rule would not have sufficient federalism implications to warrant the preparation of a federalism assessment. FHWA has also determined that this rule would not preempt any State law or State regulation or affect the States' ability to discharge traditional State governmental functions.

Under the Paperwork Reduction Act of 1995 (PRA) (44 U.S.C. 3501, et seq. ), Federal Agencies must obtain approval from OMB for each collection of information they conduct, sponsor, or require through regulations. FHWA has determined that this rule does not contain collection of information requirements for the purposes of the PRA.

FHWA has analyzed this rule pursuant to the NEPA and has determined that it is categorically excluded under 23 CFR 771.117(c)(2), which applies to the promulgation of rules, regulations, and directives. Categorically excluded actions meet the criteria for categorical exclusions under the Council on Environmental Quality regulations and under 23 CFR 771.117(a) and normally do not require any further NEPA approvals by FHWA. This rule will establish Buy America requirements for manufactured products. FHWA does not anticipate any adverse environmental impacts from this final rule, and no unusual circumstances are present under 23 CFR 771.117(b).

FHWA has analyzed this rule in accordance with the principles and criteria contained in E.O. 13175, “Consultation and Coordination with Indian Tribal Governments.” FHWA does not believe that the final rule would have substantial direct effects on one or more Indian Tribes, would not impose substantial direct compliance costs on Indian Tribal governments, and would not preempt Tribal laws. Therefore, a Tribal summary impact statement is not required.

The E.O. 12898 requires that each Federal Agency make achieving environmental justice part of its mission by identifying and addressing, as appropriate, disproportionately high and adverse human health or environmental effects of its programs, policies, and activities on minorities and low-income populations. FHWA has determined that this rule does not raise any environmental justice issues.

A RIN is assigned to each regulatory action listed in the Unified Agenda of Federal Regulations. The Regulatory Information Service Center publishes the Unified Agenda in the spring and fall of each year. The RIN contained in the heading of this document can be used to cross reference this action with the Unified Agenda.

For the reasons stated in the preamble, FHWA amends title 23, Code of Federal Regulations, part 635, as set forth below:

This document amends the Income Tax Regulations (26 CFR part 1) by adding final regulations under section 6011 of the Internal Revenue Code (Code). The document adds § 1.6011-18 to identify certain partnership related-party basis adjustment transactions and substantially similar transactions as transactions of interest, a type of reportable transaction (final regulations). These regulations are issued pursuant to the authority conferred on the Secretary of the Treasury or her delegate (Secretary) under the following provisions of the Code.

Section 6001 of the Code provides an express delegation of authority to the Secretary of the Treasury or her delegate (Secretary), requiring every taxpayer to keep the records, render the statements, make the returns, and comply with the rules and regulations that the Secretary deems necessary to demonstrate tax liability, as prescribed, either by notice served or by regulations.

Section 6011(a) provides an express grant of regulatory authority for the Secretary to prescribe regulations requiring any person who is liable for any tax imposed by the Code, or with respect to the collection thereof, to make a return or statement according to the forms and regulations prescribed by the Secretary. Section 6011(a) adds that every person who is required to make a return or statement must include the information required by forms or regulations.

In addition, section 6707A(c)(1) of the Code defines the term “reportable transaction” for purposes of imposing penalties under section 6707A(a) relating to persons who fail to include on any return or statement any information with respect to a reportable transaction that is required under section 6011 to be included with such return or statement. In doing so, it provides an express delegation of authority to the Secretary, stating that, “[t]he term 'reportable transaction' means 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.”

Section 6111(a) provides an express grant of regulatory authority for the Secretary to require that each material advisor with respect to any reportable transaction make a return setting forth any information as the Secretary may prescribe. Such return must be filed not later than the date specified by the Secretary.

Finally, section 7805(a) of the Code authorizes the Secretary to “prescribe all needful rules and regulations for the enforcement of [the Code], including all rules and regulations as may be necessary by reason of any alteration of law in relation to internal revenue.”

Under subchapter K of chapter 1 of the Code (subchapter K), a distribution by a partnership of the partnership's property (partnership property) or a transfer of an interest in a partnership (partnership interest) may result in an adjustment to the basis of the distributed property, partnership property, or both. A key factor is whether an election made by the partnership in accordance with regulations prescribed by the Secretary under section 754 of the Code (section 754 election) is in effect.

Section 754 provides that if a section 754 election is in effect for a partnership, the basis of its partnership property will be adjusted, in the case of a distribution of property, in the manner provided by section 734 of the Code, and in the case of a transfer of a partnership interest, in the manner provided in section 743 of the Code. Unless a section 754 election is revoked in accordance with the regulations under section 754, the section 754 election applies to all distributions of property by the partnership and to all transfers of interests in the partnership in the taxable year for which the section 754 election was properly made and all subsequent taxable years.

In the case of a distribution of partnership property to a partner by a partnership for which a section 754 election is in effect, or with respect to which there is a substantial basis reduction as described in section 734(d), the distribution may result in an adjustment to the basis of the partnership's remaining property (remaining partnership property) under section 734(b). A distribution of partnership property may also result in an adjustment to the basis of the distributed property under section 732(a), (b), or (d) of the Code.

If a partnership interest is transferred by sale or exchange or on the death of a partner, and the partnership either has a section 754 election in effect or has a substantial built-in loss with respect to the transfer of the partnership interest as described in section 743(d), the transfer may result in an adjustment to the basis of partnership property under section 743(b) with respect to the transferee partner.

Section 732 applies to determine a distributee partner's basis in distributed property other than money. In the case of a distribution of partnership property other than in liquidation of the distributee partner's partnership interest (current distribution), and except as provided under section 732(a)(2), section 732(a)(1) provides that the distributee partner's basis in distributed property (other than money) is equal to the partnership's adjusted basis in the distributed property immediately before the distribution. Under section 732(a)(2), however, a distributee partner's basis in distributed property is limited to the adjusted basis of the distributee partner's partnership interest reduced by any money distributed to such partner in the same transaction.

In the case of a distribution of partnership property in liquidation of the distributee partner's partnership interest (liquidating distribution), section 732(b) provides that the distributee partner's basis in distributed property (other than money) is equal to the adjusted basis of the distributee partner's partnership interest reduced by any money distributed to such partner in the same transaction.

In the case of a distribution of more than one property from a partnership, the basis of the distributed properties to which section 732(a)(2) and (b) apply must be allocated among the distributed properties under the rules of section 732(c). Section 732(d) through (f) provide additional rules applicable to certain distributed property. See also §§ 1.732-1 through 1.732-3.

In the case of a distribution of property by a partnership for which a section 754 election is in effect, and for which either the distributee partner recognizes gain or loss on the distribution, or for which the basis of the distributed property in the distributee partner's hands, as determined under section 732, differs from the partnership's adjusted basis in the distributed property immediately before the distribution, section 734(b) requires the partnership to increase or decrease (as applicable) the basis of its remaining partnership property. Also, in the case of a distribution of property by a partnership that results in a substantial basis reduction under section 734(d), the basis of remaining partnership property must be adjusted under section 734(b), even if no section 754 election is in effect for the partnership.

Section 734(b)(1) requires a partnership to increase the basis of its remaining partnership property if a distribution of partnership property by the partnership results in the distributee partner recognizing gain under section 731(a)(1) of the Code, or if property (other than money) to which section 732(a)(2) or (b) applies is distributed to the distributee partner and the property's adjusted basis to the partnership immediately before the distribution is greater than the distributee partner's basis in the distributed property as determined under section 732. Section 731(a)(1) requires a distributee partner to recognize gain in a current or liquidating distribution to the extent that any money distributed to that partner in the distribution exceeds the adjusted basis of that partner's partnership interest immediately before the distribution. The amount of the basis increase to the partnership's remaining property under section 734(b)(1) following a distribution of partnership property to a partner is equal to the amount of gain recognized by the distributee partner in the distribution under section 731(a)(1), and the excess of the partnership's adjusted basis in the distributed property immediately before the distribution, over the distributee partner's basis in the distributed property as determined under section 732.

Section 734(b)(2) requires a partnership to decrease the basis of its remaining property if a distribution of property by the partnership results in the distributee partner recognizing loss under section 731(a)(2), or if property (other than money) is distributed to the distributee partner in a distribution to which section 732(b) applies and the property's adjusted basis to the partnership immediately before the distribution is less than the distributee partner's basis in the distributed property as determined under section 732. Under section 731(a)(2), a distributee partner may recognize a loss in a liquidating distribution of that partner's interest in the partnership to the extent that such partner received in the distribution only money, unrealized receivables described in section 751(c) of the Code, or inventory items described in section 751(d). In such a case, the distributee partner is required to recognize a loss to the extent that such partner's adjusted basis in the partnership interest exceeds the sum of any money distributed to that partner in the distribution and the basis to the distributee partner (determined under section 732) of any unrealized receivables or inventory items received by that partner in the distribution. The amount of the basis decrease to the partnership's remaining property under section 734(b)(2) following a distribution of partnership property to a partner is equal to the amount of loss recognized by the distributee partner in the distribution under section 731(a)(2), and the excess of the distributee partner's basis in the distributed property as determined under section 732, over the partnership's adjusted basis in the distributed property immediately before the distribution.

A partnership for which no section 754 election is in effect is subject to a mandatory basis adjustment under section 734(b)(2) if there is a substantial basis reduction with respect to a distribution of partnership property. Under section 734(d), a substantial basis reduction with respect to a distribution of partnership property occurs if the sum of the amount of loss recognized to the distributee partner on the distribution, plus any increase in basis in the distributed property to the distributee partner under section 732(b), exceeds $250,000.

Generally, if a partnership interest is transferred in a sale or exchange or on the death of a partner, the transferee partner's basis in the transferred partnership interest is determined under section 742 of the Code and the basis of partnership property is determined under section 743(a). Section 742 provides that the transferee partner's basis in a partnership interest acquired other than by contribution is determined under part II of subchapter O of chapter 1 of the Code, beginning at section 1011 of the Code and following. Thus, for example, a transferee partner's basis in a partnership interest acquired by purchase generally is the transferee partner's cost basis under section 1012 of the Code. Section 743(a) provides that, in the case of a transfer of a partnership interest by sale or exchange or on the death of a partner, the basis of partnership property is not adjusted unless either a section 754 election is in effect for the partnership, or the partnership has a substantial built-in loss with respect to the transfer of the partnership interest.

Under section 743(b), in the case of a transfer of a partnership interest by sale or exchange or on the death of a partner, a partnership for which a section 754 election is in effect or that has a substantial built-in loss with respect to the transfer of the partnership interest must increase or decrease (as applicable) the adjusted basis of partnership property with respect to the transferee partner.

Section 743(b)(1) provides that the adjusted basis of partnership property is increased by the excess of the transferee partner's basis in the transferred partnership interest, over the transferee partner's proportionate share of the adjusted basis of partnership property.

Section 743(b)(2) provides that the adjusted basis of partnership property is decreased by the excess of the transferee partner's proportionate share of the adjusted basis of partnership property, over the transferee partner's basis in the transferred partnership interest.

A partnership for which no section 754 election is in effect is subject to a mandatory basis adjustment under section 743(b) with respect to a transfer of a partnership interest if the partnership has a substantial built-in loss with respect to the transfer of the partnership interest. Under section 743(d)(1), a partnership has a substantial built-in loss with respect to a transfer of an interest in the partnership if either the partnership's adjusted basis in its property exceeds the fair market value of such property by more than $250,000, or the transferee partner would be allocated a loss of more than $250,000 if the partnership assets were sold for cash equal to their fair market value immediately after the transfer.

The flush language at the end of section 743(b) provides that, under regulations prescribed by the Secretary, a basis adjustment under section 743(b) is an adjustment to the basis of partnership property with respect to the transferee partner only. See generally § 1.743-1. The transferee partner's proportionate share of the partnership's adjusted basis in its property generally is determined in accordance with the transferee partner's interest in the partnership's previously taxed capital (including the transferee partner's share of partnership liabilities) under § 1.743-1(d).

In the case of a transferee partner who acquired all or part of the partner's partnership interest by a transfer with respect to which no section 754 election was in effect for the partnership, and to whom a distribution of property (other than money) is made with respect to the transferred interest within two years, section 732(d) and the regulations thereunder allow the partner to make an election to treat as the adjusted basis of the distributed property the adjusted basis such property would have if the adjustment under section 743(b) were in effect with respect to the partnership property.

Under § 1.732-1(d)(4), the special basis adjustment under section 732(d) is required to apply to a distribution of property to a partner who acquired all or part of the partner's partnership interest by a transfer from a partnership for which no section 754 election is in effect for the taxable year of such transfer, whether or not the distribution is made within two years of such transfer, if at the time the partnership interest was transferred, (i) the fair market value of all partnership property (other than money) exceeded 110 percent of its adjusted basis to the partnership, (ii) an allocation of basis under section 732(c) upon a liquidation of the transferee partner's interest in the partnership immediately after the transfer of such interest would have resulted in a shift of basis from property not subject to an allowance for depreciation, depletion, or amortization to property subject to such an allowance, and (iii) a basis adjustment under section 743(b) would change the basis to the transferee partner of the property actually distributed.

Section 734(c) states that a basis adjustment under section 734(b) is allocated among partnership properties under the rules of section 755 of the Code. Section 743(c) states that a basis adjustment under section 743(b) is allocated among partnership properties under the rules of section 755.

Section 755(a) generally requires basis adjustments under section 734(b) or section 743(b) to be allocated in a manner that has the effect of reducing the difference between the fair market value and the adjusted basis of partnership properties or in any other manner permitted by regulations prescribed by the Secretary. In addition, section 755(b) requires these basis adjustments to be allocated to partnership property of a like character or to subsequently acquired partnership property of a like character if such property is not available or has insufficient basis at the time of the basis adjustment (because a decrease in the adjusted basis of the property would reduce the basis of such property below zero). Section 755(c) provides a special rule that prohibits allocating a basis decrease under section 734(b) to the stock of a corporation that is a partner of the partnership (or that is related to a partner in the partnership within the meaning of section 267(b) of the Code or section 707(b)(1) of the Code).

A partner's adjusted basis in its partnership interest commonly is referred to as the partner's “outside basis” in its partnership interest. A partnership's adjusted basis in its property commonly is referred to as the “inside basis” of the partnership's property. Each partner has a share of inside basis.

On June 18, 2024, the Department of the Treasury (Treasury Department) and the IRS published a notice of proposed rulemaking (REG-124593-23) in the Federal Register (89 FR 51476) containing proposed regulations under section 6011 (proposed regulations). 1 The proposed regulations would have added § 1.6011-18 identifying certain partnership related-party basis adjustment transactions as “transactions of interest” for purposes of sections 6011, 6111, and 6112 and § 1.6011-4(b)(6). The provisions of the proposed regulations are explained in greater detail in the preamble to the proposed regulations.

The Treasury Department and the IRS received written comments in response to the proposed regulations. The comments are available for public inspection at www.regulations.gov or upon request. A public hearing on the proposed regulations was conducted in person and telephonically on September 17, 2024, during which two presenters provided comments. After full consideration of the comments received, these final regulations adopt the proposed regulations with modifications in response to the comments as described in the Summary of Comments and Explanation of Revisions.

This Summary of Comments and Explanation of Revisions summarizes the comments received in response to the proposed regulations, and describes and responds to comments concerning: (1) transactions of interest generally, (2) the usefulness and burden of reporting the transactions of interest identified by the proposed regulations, (3) the specific transactions of interest identified by the proposed regulations, (4) the proposed $5 million threshold amount for reporting (proposed $5 million threshold amount), (5) the relatedness standard, (6) substantially similar transactions, and (7) participation in a transaction of interest identified by the proposed regulations. In general, as described herein, the final regulations adopt several commenters' suggestions, which limit the scope of the transactions identified by the proposed regulations in an effort to exclude from additional reporting certain common business transactions that do not meet large economic thresholds.

Comments merely summarizing the statute or proposed regulations, recommending revisions to the Code, addressing unrelated issues, or recommending changes to IRS forms or procedures are generally not addressed in this Summary of Comments and Explanation of Revisions or adopted in these final regulations. Additionally, this Treasury decision does not address comments addressing the issues and rules specific to Notice 2024-54, 2024-28 IRB 24, which the Treasury Department and the IRS continue to consider. Unless otherwise indicated in this Summary of Comments and Explanation of Revisions, provisions of the proposed regulations with respect to which no comments were received are adopted without substantive change.

Section 1.6011-4(e)(2)(i) requires a taxpayer to report a transaction entered into prior to the publication of guidance identifying the transaction as a transaction of interest after the filing of the taxpayer's tax return (including an amended return) reflecting the taxpayer's participation in the transaction of interest (later identified transaction) if the statute of limitations for assessment of tax is still open when the transaction becomes a transaction of interest. Under § 1.6011-4(e)(2)(i), taxpayers are generally required to report a later identified transaction by filing a disclosure statement with the Office of Tax Shelter Analysis (OTSA) within 90 calendar days after the date on which a transaction becomes a transaction of interest.

Some commenters asserted that taxpayers should not be required to report later identified transactions because taxpayers were not on notice that certain partnership related-party basis adjustment transactions would be identified as transactions of interest. These commenters asserted that certain of the transactions identified in the proposed regulations are typical business transactions for which taxpayers would not have known to keep records. Two commenters requested that the required time for filing a disclosure statement with the OTSA should be expanded to one year. Another commenter recommended that the final regulations apply prospectively to transactions of interest that occur in taxable years beginning on or after the date of the final regulations.

Although the reporting required by § 1.6011-4(e)(2)(i) may apply to transactions undertaken before the identification of the transactions as transactions of interest, the disclosure obligation is prospective rather than retroactive, since it arises only when the transaction becomes a transaction of interest after the final regulations are published in the Federal Register . Additionally, taxpayers have been on notice since the issuance of the proposed regulations that reporting of partnership related-party basis adjustment transactions may soon be required. Nevertheless, given the additional time that taxpayers may need to identify and prepare disclosures for already-completed transactions, § 1.6011-18(h)(1) provides an extension of time of 90 additional calendar days after the date specified in § 1.6011-4(e)(2)(i) for taxpayers to meet their obligations to disclose to the OTSA their participation in such later identified transactions.

The proposed regulations provided no special rules for material advisors. One commenter requested that the final regulations add an “actual knowledge” qualifier for material advisors such that advisors would be required to disclose and list only those transactions described by the proposed regulations that would be reportable based on their actual knowledge. The rules for material advisors under sections 6111 and 6112, and the corresponding regulations under §§ 301.6111-3 and 301.6112-1 of the Procedure and Administration Regulations (26 CFR part 301), which apply to all transactions of interest, do not have a knowledge qualifier. After consideration of this comment, the Treasury Department and the IRS have determined that adding a knowledge qualifier for this transaction of interest is not warranted. Accordingly, this comment is not adopted in the final regulations.

One commenter requested that the final regulations apply reporting requirements for material advisors only prospectively for transactions of interest that occur in taxable years beginning on or after the date of the final regulations, or, alternatively, that material advisors be permitted to report transactions of interest to the OTSA within one year as opposed to by the last day of the month following the end of the calendar quarter in which the final regulations are published. Section 301.6111-3 sets forth the requirements for disclosures from material advisors. In particular, § 301.6111-3(e) provides that a material advisor's disclosure statement must be filed with the OTSA by the last day of the month that follows the end of the calendar quarter in which the advisor became a material advisor with respect to the transaction. Section 301.6111-3(b)(4)(iii) provides that for a transaction that was not a reportable transaction but is identified as a transaction of interest in published guidance after the occurrence of the events described in § 301.6111-3(b)(4)(i), the person will be treated as becoming a material advisor on the date the transaction is identified as a transaction of interest. Additionally, material advisors have been on notice since the issuance of the proposed regulations that reporting of partnership related-party basis shifting transactions may soon be required. However, given the additional time that may be needed for material advisors to identify and prepare disclosures for already-completed transactions, § 1.6011-18(h)(2) provides an extension of 90 additional calendar days after the date specified in § 301.6111-3(e) for material advisors to meet their disclosure obligations.

One commenter stated that the Treasury Department and the IRS already have sufficient information to determine that the transactions identified by the proposed regulations are abusive and thus the proposed regulations are unnecessary. 2 This commenter stated that the Treasury Department and the IRS have already concluded that the transactions identified in the proposed regulations are abusive through IRS positions taken in litigation and the issuance of Rev. Rul. 2024-14, 2024-28 IRB 18 (advising taxpayers that the IRS would challenge certain partnership related-party basis adjustment transactions under the codified economic substance doctrine in section 7701(o) of the Code). The commenter also asserted that transactions of interest are reserved for transactions that have the potential for tax avoidance, but that the Treasury Department and the IRS failed to articulate a rational connection between “the facts found and the choice made.” Another commenter suggested that the proposed regulations relied on the application of Rev. Rul. 2024-14, implying that the proposed regulations cannot have effect if the IRS does not prevail in pending litigation.

The Treasury Department and the IRS do not agree with these comments. The final regulations identify certain partnership related-party basis adjustment transactions as transactions of interest under § 1.6011-4(b)(6), rather than as listed transactions under § 1.6011-4(b)(2). This is because the Treasury Department and the IRS have determined that these transactions have the potential for tax avoidance through the IRS's examination of certain transactions that are abusive but are not aware of the entire universe of partnership related-party basis adjustment transactions and whether every transaction is per se abusive. As explained in the preamble to the proposed regulations, the Treasury Department and the IRS have become aware of related persons using partnerships to engage in transactions that inappropriately exploit the basis adjustment provisions of subchapter K applicable to distributions of partnership property or transfers of partnership interests and wish to gather additional information. This awareness results from the IRS's examination of various partnership transactions involving related parties in which basis in distributed property or partnership property is shifted in a manner that results in significant tax benefits attributable to the basis shift for the related parties but with little or no tax or economic cost (abusive partnership related-party basis adjustment transactions), thus artificially generating (or regenerating) Federal income tax benefits that results in significant tax savings without a corresponding economic outlay. The transactions identified as transactions of interest in these final regulations have the potential for tax avoidance because they share certain indicia with these abusive partnership related-party transactions. Rev. Rul. 2024-14 contains several examples of abusive transactions discovered by the IRS, and the legal analysis it contains is independent of the requirement to disclose the transactions described in these regulations as transactions of interest. In other words, the issuance of a revenue ruling does not preclude further scrutiny of partnership related-party basis adjustment transactions by identifying those transactions as transactions of interest. Similarly, pending litigation is irrelevant to the identification of these transactions as transactions of interest. Accordingly, the final regulations do not adopt these comments.

A few commenters questioned why the Treasury Department and the IRS need to identify certain partnership related-party basis adjustment transactions as transactions of interest if these transactions are already disclosed as part of the Form 1120, U.S. Corporation Income Tax Return, or Form 1065, U.S. Return of Partnership Income. These commenters generally contended that existing reporting requirements already accomplish the objectives of the proposed regulations and that adding these transactions as transactions of interest is therefore unnecessary. One commenter recommended that instead of identifying the transactions described in the proposed regulations as transactions of interest, the Form 1065 should be modified to ask questions to determine whether partnership related-party basis adjustment transactions occurred during the taxable year.

The Forms 1120 and 1065, including statements or schedules required to be attached thereto, are filed as a part of a taxpayer's tax return and do not include all the information contained on Form 8886, Reportable Transaction Disclosure Statement. The Forms 1120 and 1065 also do not alert the OTSA to the taxpayer's participation in a transaction of interest, nor does the filing of a tax return result in disclosure and other obligations of material advisors to the transaction. Moreover, the purpose of the reporting requirements for a transaction of interest is to allow the OTSA and the IRS to learn detailed information about the identified transaction using limited resources, and without having to distill information obtained through annual filing requirements or to open taxpayer examinations. Accordingly, these comments are not adopted in the final regulations.

Several commenters asserted that complying with the reporting requirements for the transactions identified by the proposed regulations would be unduly burdensome and result in excessive costs for small businesses. One commenter asserted that the proposed regulations stray from Congressional intent of simplicity by subjecting family business owners and their advisors to substantial reporting obligations and penalties. Another commenter asserted that the proposed regulations would result in many protective disclosures that the Treasury Department and the IRS could not handle.

The impact on taxpayers who engage in legitimate business transactions with related parties resulting in positive partnership basis adjustments that meet the increased threshold amounts in these final regulations (applicable threshold amounts) discussed in Part IV of this Summary of Comments and Explanation of Revisions, or who may decide they need to file a protective disclosure, is far outweighed by the benefit of requiring disclosure for the identified transactions, which have the potential for tax avoidance. Combatting abusive tax avoidance is a priority for the Federal Government and partnership transactions that shift basis among related parties without a corresponding economic or tax impact have the potential for tax avoidance. Moreover, the identification of the transactions described in these final regulations should not impact small business owners. If a taxpayer is engaging in one or more of the complex transactions identified by these final regulations with a related party that results in positive basis adjustments in a single taxable year that exceed the applicable threshold amounts of $10 million or more (or $25 million for later identified transactions), the taxpayer is not likely a small business owner and the reporting obligations outlined in these final regulations should not be unduly burdensome. Accordingly, these comments are not adopted in the final regulations.

A few commenters suggested that the proposed regulations be withdrawn, stating that they are overbroad. One commenter suggested that due to the number of their recommendations, the proposed regulations should be reproposed. Another commenter suggested that the proposed regulations be withdrawn and reproposed after the forthcoming proposed regulations described in Notice 2024-54 are finalized. The final regulations are narrowly tailored to identify transactions in which taxpayers may be exploiting the mechanical basis adjustment provisions in subchapter K to produce significant tax benefits with little to no economic cost to the partners. Taxpayers are able to engage in these transactions because the parties are related. In most cases, these transactions would not likely occur between partners negotiating on an arm's length basis. The purpose of the final regulations is to determine the ways in which related taxpayers are inappropriately shifting basis using the provisions of subchapter K, how they are creating opportunities to engage in transactions that generate inappropriate basis shifts (for example, how inside-outside basis disparities are being created), and the economic impact of the Federal income tax consequences created by the basis shifting transactions (for example, the extent to which gain is reduced or cost recovery is increased). It is in the interest of sound tax administration to gather this information now. As disclosures pursuant to this regulation will inform the Treasury Department and the IRS on transactions for which further examination or further guidance may be warranted, it does not make sense to withdraw the proposed regulations and wait to repropose them until the forthcoming regulations described in Notice 2024-54 are both proposed and finalized. Moreover, these final regulations are separate from, and do not rely on, the forthcoming proposed regulations described in Notice 2024-54. The comments to these proposed regulations have been helpful and have allowed the Treasury Department and the IRS to make several modifications in response to comments that limit the scope of the rules, as described in this Summary of Comments and Explanation of Revisions.

The proposed regulations would have identified four kinds of partnership related-party basis adjustment transactions as transactions of interest. A basis adjustment transaction under proposed § 1.6011-18(c)(1)(i) would occur if a partnership distributes property to a person who is a related partner in a current or liquidating distribution, the partnership increases the basis of one or more of its remaining properties under section 734(b) and (c), and a proposed $5 million threshold amount is met (section 734(b) TOI). A basis adjustment transaction under proposed § 1.6011-18(c)(1)(ii) would occur if a partnership distributes property to a partner who is related to one or more partners in liquidation of a partnership interest (or in complete liquidation of the partnership), the basis of one or more distributed properties is increased under section 732(b) and (c), and a proposed $5 million threshold amount is met (section 732(b) TOI). A basis adjustment transaction under proposed § 1.6011-18(c)(1)(iii) would occur if a partnership distributes property to a partner who is related to one or more partners, the basis of one or more distributed properties is increased under section 732(d), the related partner acquired all or a part of its interest in the partnership in a transaction that would have been a transaction described in proposed § 1.6011-18(c)(2) if the partnership had a section 754 election in effect for the year of transfer, and a proposed $5 million threshold amount is met (section 732(d) TOI). A basis adjustment transaction under proposed § 1.6011-18(c)(2) would occur if a partner transfers an interest in the partnership to a related transferee or to a person who is related to one or more existing partners in a nonrecognition transaction (as defined in proposed § 1.6011-18(b)(6)), the basis of one or more partnership properties is increased under section 743(b)(1) and (c), and a proposed $5 million threshold amount is met (section 743(b) TOI).

One commenter recommended requiring reporting only for transactions with defined indicators of potential tax avoidance or evasion, rather than the involvement of a related or tax-indifferent party, but did not suggest other indicators or explain how the current indicators are insufficient. The Treasury Department and the IRS have made modifications to the proposed regulations as described herein to better target the identification of transactions for which reporting is required.

One commenter recommended excluding transactions identified as a basis adjustment transaction of interest in cases in which (1) basis is shifted between assets of like character (that is, capital asset to capital asset or ordinary income asset to ordinary income asset), (2) basis is shifted from non-recoverable property to non-recoverable property or the basis adjustment does not provide a shorter recovery period, and (3) the property receiving the basis increase is not sold within two years of the basis increase. The Treasury Department and the IRS agree that a basis shift to a like-kind asset that has the same or a longer recovery period than the asset to which the basis was shifted from presents less risk of tax avoidance. However, the Treasury Department and the IRS do not agree that it would be appropriate in such circumstances to require reporting only if the property is disposed of within two years after the basis increase as there is still a potential for abuse if the property is disposed of after two years. A two-year rule would allow related taxpayers to increase the basis in property in anticipation of a future sale and would exclude transactions that present significant risks of tax avoidance. Accordingly, it is in the interest of sound tax administration to identify certain partnership related-party basis adjustment transactions as transactions of interest in the year of the basis shift and the commenter's recommendation is not adopted in the final regulations.

A few commenters recommended including an intent requirement for the transactions identified by the proposed regulations as transactions of interest. One commenter recommended that taxpayers that are unaware of or have no reason to know that a transaction identified by the proposed regulations is reportable be excused from disclosure. Another commenter recommended including a subjective test for intent and providing safe harbors and exceptions for business separations and succession-planning transactions.

Including an intent requirement for the transactions identified by the proposed regulations would introduce a subjective element, which is inconsistent with the IRS's need to gather additional information on the identified transactions to ascertain their potential for tax avoidance. Including an intent requirement in these regulations would also frustrate the IRS's ability to determine which of the basis adjustment transactions are impermissible tax avoidance transactions and to effectively and efficiently address the tax avoidance. Moreover, the general transaction of interest reporting requirements under section 6011 do not include a knowledge component; taxpayers are required to report the tax consequences of their transactions identified as transactions of interest regardless of whether they are aware of the reporting requirements. As further described in Parts III.A.4 and III.E of this Summary of Comments and Explanation of Revisions, it is not appropriate to incorporate an exception or safe harbor for business separations or succession-planning transactions into the final regulations as these transactions are no less likely to be structured to avoid tax, and thus may also have the potential for tax avoidance. Accordingly, these comments are not adopted in the final regulations.

One commenter recommended excluding certain basis-adjustment transactions that cure inside-outside basis disparities created by section 734(b) adjustments, section 704(c) methods, contributions, distributions, and revaluations. Another commenter recommended that the final regulations consider common reasons why an inside-outside basis disparity might arise, such as transaction costs required to be capitalized to outside basis, certain income exclusions related to foreign corporations owned through a partnership, or the use of various section 704(c) methods. This commenter recommended that certain acquisitions of partnership businesses that may involve or create related-partner relationships, including distributions of lower-tier partnership interests to an upper-tier partnership and liquidations of blocker subsidiaries, be excluded as transactions of interest. Another commenter requested that the final regulations exclude partnership-incorporation transactions, including transactions described in Rev. Rul. 84-111, 1984-2 C.B. 88, Situation 2 (assets-up incorporation) and Situation 3 (interests-over incorporation). A few commenters requested that the final regulations exclude from the transactions identified as section 732(b) TOIs and section 734(b) TOIs any basis adjustments resulting from an actual or deemed distribution in the case of a partnership merger or division done for commercial reasons, such as to allow a partial sale and continuation of certain investments held by a private equity or other investment fund.

In response to comments received on the proposed regulations, these final regulations adopt several suggestions to limit the scope of the transactions identified by the proposed regulations to exclude from reporting common business transactions that do not meet large, economic thresholds. However, providing a blanket exclusion for certain transactions that may be common business transactions under specific circumstances, but may also have the potential for tax avoidance, would defeat the purpose of identifying the transactions as transactions of interest. For example, a partnership merger or division involving related parties may be undertaken with the intent to increase the basis of an asset that is subsequently disposed of in a recognition transaction or to increase cost recovery deductions. Moreover, one of the purposes of the final regulations is to gather additional information on how taxpayers are creating opportunities to shift basis between related parties using the provisions of subchapter K (for example, information related to how inside-outside basis disparities are being created). Providing an exclusion from reporting for transactions that cure inside-outside disparities created through certain section 704(c) methods, contributions, adjustments, distributions or revaluations would nullify most of the disclosures required by the final regulations as these are the techniques used to create opportunities for partnership related-party basis shifting. For these reasons, the commenters' suggestions for exclusions of certain transactions are not adopted in the final regulations.

One commenter expressed concern that publicly traded partnerships within the meaning of section 7704 of the Code (PTPs) are unable to identify the buyers and sellers of interests therein, making it impossible to determine whether a transfer is made between related parties. This commenter stated that PTPs frequently engage in transactions that result in section 743(b) adjustments as part of normal public trading and capital-markets transactions and that the final regulations should add carveouts for transactions of PTPs. At a minimum, the commenter recommended that the final regulations implement an ownership threshold for related partners of five percent or more of the PTP to allow such persons to be identified by disclosures required to be made to the U.S. Securities and Exchange Commission. Another commenter recommended that basis adjustments resulting from an acquisition of a unit in a PTP, including as part of any redemption of publicly traded units by the PTP, should be excluded from the transactions identified as transactions of interest.

The Treasury Department and the IRS agree that due to PTPs having a large number of PTP unitholders that are not related partners within the meaning of the final regulations, and the unlikelihood that unrelated PTP unitholders would engage in the transactions identified as transactions of interest in the final regulations, it is appropriate to exclude basis adjustments involving a transfer of or a distribution with respect to partnership interests in a PTP, except basis adjustments resulting from certain material transactions involving partnership interests held by related partners in a PTP. Accordingly, the final regulations provide that in the case of a PTP, a participating partner means a partner of the PTP but only to the extent that the partner engages in a private transfer (as described in § 1.7704-1(e)), redemption and repurchase agreement (as described in § 1.7704-1(f)), or private placement (as described in § 1.7704-1(h)) of a partnership interest with a related partner and the transaction is not otherwise excluded as a transaction of interest described in the final regulations.

One commenter requested that the final regulations clarify that cash is not included as “property” for purposes of a section 734(b) TOI and thus positive basis adjustments resulting from a distribution of cash be excluded from transactions identified as transactions of interest. Another commenter asked for clarification that cash distributions in excess of basis that result in positive basis adjustments under section 734(b) are identified as transactions of interest only to the extent that the distributions are made to a tax-indifferent party.

As a general matter, the text of section 734 makes no distinction between cash and other partnership property. A cash distribution to a related partner could be treated as a section 734(b) TOI to the extent that any basis increases generated under section 734(b)(1) exceed the gain recognized under section 731(a)(1) (or otherwise) with respect to which any tax imposed under subtitle A of the Code (subtitle A) is required to be paid by the related partners. However, the Treasury Department and the IRS note that if gain is recognized on a distribution of cash that results in a basis adjustment under section 734(b)(1)(A) and tax imposed under subtitle A is required to be paid on such gain by any of the related partners, that portion of the basis adjustment would not be counted towards the overall applicable threshold amount in determining whether disclosure of a transaction of interest is required.

A few commenters recommended excluding from a section 743(b) TOI transactions in which a party purchases a partnership interest in an arm's-length transaction, receives a basis adjustment under section 743(b), then transfers the partnership interest to a related person in a nonrecognition transaction (for example, a transfer to a corporation under section 351(a) or to a partnership under section 721(a)) that causes a re-computation and re-allocation of the section 743(b) adjustment for the benefit of the related-party transferee. Under the proposed regulations, assuming the proposed $5 million threshold amount was met, such a transaction would be reportable if the nonrecognition transfer to the related transferee results in a positive basis increase.

The Treasury Department and the IRS agree that a positive section 743(b) basis adjustment acquired through an arm's-length transaction (for example, a transaction that would not be a reportable transaction under these final regulations, without regard to the six-year lookback period) to which a related transferee succeeds should not be a reportable transaction, except to the extent of any additional positive basis adjustment resulting from the nonrecognition transfer. This is because if the original section 743(b) adjustment was acquired through an arm's length transaction that would not be reportable under the final regulations, a corresponding amount of gain should have been recognized and tax imposed under subtitle A should have been paid by the original transferor. Thus, a subsequent nonrecognition transfer by the original transferee that results in the same section 743(b) adjustment has little potential for tax abuse. Accordingly, the final regulations provide that if a partner receives an interest in a partnership from a person in a recognition transaction (first transfer) and the basis of one or more partnership properties is increased under section 743(b)(1) and (c), and subsequently the partner (transferor) transfers the partnership interest to a person related to the transferor (transferee) in a nonrecognition transaction (subsequent transfer), the subsequent transfer is a transaction of interest only if the transferee's basis adjustment under section 743(b)(1) and (c) resulting from the subsequent transfer exceeds the amount of the transferor's remaining basis adjustment that is attributable to the transferred partnership interest (excess amount), and the applicable threshold amount is met. The final regulations further provide that only the excess amount is counted towards the applicable threshold amount and that a transferor's remaining basis adjustment is equal to the amount of the transferor's basis adjustment under section 743(b)(1) and (c) resulting from the first transfer as adjusted under section 1016(a)(2) to reflect any recovery of the basis adjustment or as otherwise adjusted prior to the subsequent transfer.

Many commenters recommended excluding transfers between unrelated parties from a section 743(b) TOI if the transferee is related to one or more existing partners. Several of these commenters recommended that the transaction identified by proposed § 1.6011-18(c)(2) should be limited to transfers between related transferors and transferees. The Treasury Department and the IRS agree with this suggestion as transfers between related parties have a clear potential for tax avoidance whereas transfers between unrelated parties if the transferee is related to one or more existing partners may be much harder to structure to achieve the desired tax avoidance. Additionally, an unrelated transferor may not have reason to know that a transferee is related to one or more existing partners. Accordingly, the definition of “related partner” in § 1.6011-18(b)(9) in the final regulations provides that in the case of a section 743(b) TOI, a related partner means a transferor and transferee of a partnership interest that are related to each other immediately before or immediately after a section 743(b) TOI. The definition in the final regulations does not include a transferee that is unrelated to a transferor but is related to one or more of the partners in the partnership.

For purposes of a section 743(b) TOI, proposed § 1.6011-18(b)(2) would have defined a nonrecognition transaction as defined in section 7701(a)(45)—that is, any disposition of property in a transaction in which gain or loss is not recognized in whole or in part for purposes of subtitle A—other than a transfer on the death of a partner.

One commenter requested clarification that a step up in basis that results from the transfer of an interest on the death of a partner is not a transaction of interest. Another commenter requested clarification that the following transactions are “transfers on the death of a partner” excluded from the definition of a nonrecognition transaction under the final regulations: (1) any deemed transfer to what had been a grantor trust, including an intentionally defective grantor trust; and (2) a transfer on the death of a beneficiary of a trust that is a partner. This same commenter requested clarification that a “transfer on the death of a partner” is neither a “nonrecognition transaction,” nor a “recognition transaction” as defined in the proposed regulations. Section 1.6011-18(c)(4) of the final regulations clarifies that transfers on the death of a partner are not identified as transactions of interest or as substantially similar transactions. Section 1.6011-18(b)(13) of the final regulations also provides that the term “transfer on the death of a partner” means a transfer of a partnership interest from a partner to the partner's estate or a deemed transfer from a grantor trust owned by the partner to a trust that becomes a separate entity for Federal income tax purposes by reason of the partner's death.

One commenter recommended excluding distributions of partnership property to transferees of an interest in a partnership owned (or deemed owned) by a decedent at the time of death that occur during the administration of the decedent's estate, or a trust created by the decedent. This commenter also recommended excluding transfers of partnership interests owned (or deemed owned) by a decedent that occur during the administration of the decedent's estate or by a trust that was created by the decedent. Although not specifically stated in the commenter's letter, presumably, both of the commenter's recommendations would not be relevant in cases in which a section 754 election was made at the time of the decedent's death because there would be no disparity between the outside basis in the decedent's partnership interest and its share of inside basis in the partnership's properties. The Treasury Department and the IRS agree that transfers of partnership interests resulting from the death of a partner should be excluded from the transactions identified as transactions of interest and thus these transfers are not identified as such by the final regulations. However, if a section 754 election is not made for the taxable year that includes the death of the partner, subsequent transactions that generate positive basis adjustments, such as distributions of partnership property to the estate or transfers of partnership interests to beneficiaries that may resolve an inside-outside basis disparity created by a step-up to the basis of the decedent's partnership interest upon death, will be included as transactions of interest, provided that the applicable threshold amount is met. The Treasury Department and the IRS appreciate that a section 754 election, once made, is irrevocable without seeking permission from the IRS, and that a section 754 election at the time of a partner's death may require the partnership to maintain a separate set of calculations of the transferee beneficiaries' distributive shares of partnership items that reflect the section 743(b) adjustment. But making a section 754 election at the time of death would be the mechanism by which to avoid the reporting requirements imposed by the regulations (assuming the applicable threshold amount is met). Providing an exception to reporting for transactions that result in basis adjustments because a section 754 election was not made on the death of a partner due to potential administrative burdens would result in additional requests for reporting exceptions in other fact patterns in which a section 754 election was not made on an original transaction due to potential administrative burdens, and a subsequent nonrecognition transaction results in a basis adjustment that would otherwise be reportable. Including such exceptions in the final regulations would defeat the purpose of identifying the transactions of interest, as there may be circumstances in which the lack of a section 754 election was part of a strategy to generate more beneficial results using a transaction identified as a transaction of interest by the regulations. Thus, these final regulations do not exclude transactions in which a basis increase arises because a section 754 election was not made for a transaction that would have provided a basis adjustment to offset an inside-outside basis disparity. The Treasury Department and the IRS note that relief under §§ 301.9100-1 through 301.9100-3 may be available for section 754 elections should a partnership fail to make the election in the time prescribed by the Code and regulations.

Under proposed § 1.6011-18(c)(3), a partnership related-party basis adjustment transaction would have included those transactions in which the total basis increases from all transactions described in proposed § 1.6011-18(c)(1) or (2), (d)(1) or (2) engaged in by the same partner or partnership during the taxable year (without netting for any basis adjustment that results in a basis decrease in the same transaction or another transaction), reduced by the gain recognized, if any, on which tax imposed under subtitle A is required to be paid by any of the related parties to the transaction, equal or exceed $5 million. Accordingly, a transaction of a partner or partnership described in proposed § 1.6011-18(c)(1) or (2) that resulted in a basis increase of less than $5 million during the taxable year would have been a transaction of interest under proposed § 1.6011-18(a) if, in the same taxable year, the partner or partnership participated in another transaction or transactions described in proposed § 1.6011-18(c)(1) or (2) and, in the aggregate, the transactions resulted in a basis increase that equals or exceeds $5 million, without regard to any basis decrease resulting from the transactions and after reducing the resulting aggregate amount by the gain recognized, if any, on which tax imposed under subtitle A is required to be paid by any of the related parties to the transactions.

Many commenters recommended increasing the proposed $5 million threshold amount, asserting that the $5 million threshold was too low, particularly considering the aggregation requirement, and would catch common business transactions. Several commenters recommended increasing the proposed $5 million threshold amount to an amount between $10 million and $100 million. One commenter recommended making the threshold amount $10 million for transactions of interest occurring after the applicability date of these final regulations and $50 million for transactions of interest occurring before that date.

The Treasury Department and the IRS have determined that increasing the proposed $5 million threshold amount is appropriate to reduce the administrative burden imposed on taxpayers. The purpose of these final regulations is to learn more about partnership related-party basis adjustment transactions and the Treasury Department and the IRS are conscious of overburdening taxpayers in that pursuit. Accordingly, the final regulations provide that, in the case of related-party basis adjustment transactions occurring within the six-year lookback period described in § 1.6011-18(c)(3)(ii), the applicable threshold amount is $25 million. For related-party basis adjustment transactions occurring after the six-year lookback period, the final regulations provide an applicable threshold amount of $10 million. In each case, the applicable threshold amount is met for a taxable year if the sum of all related-party basis increases (as determined under Part IV.B. of this Summary of Comments and Explanation of Revisions) resulting from all transactions described in the final regulations of a participant during the taxable year (without netting for any downward basis adjustment in the same transaction or another transaction) exceeds by at least the applicable threshold amount the gain recognized from such transactions, if any, on which tax imposed under subtitle A is required to be paid by any of the related partners (or tax-indifferent party) who are a party to such transactions. If the applicable threshold amount is met for a taxable year, all transactions of the participant described in the final regulations for the taxable year are reportable as transactions of interest regardless of whether an individual transaction meets the applicable threshold amount.

Commenters also recommended changing how the threshold amount is calculated. A few commenters recommended allowing basis increases to be offset by basis decreases for purposes of determining whether the threshold amount has been reached. Another commenter recommended taking basis increases into account only to the extent that corresponding basis decreases are borne by related parties. The same commenter recommended exempting transactions from the proposed regulations for which only a small portion (for example, 10 percent) of an overall basis decrease impacts parties related to those with corresponding basis increases, or vice versa. One commenter recommended that if its recommendation to limit reporting to the year of the transaction of interest is not adopted, that the threshold amount look to net taxable income—that is, reporting should be required only if the tax benefit reduced taxable income by the threshold amount. This commenter also suggested eliminating aggregation of basis increases. Another commenter recommended using a threshold amount that is not related to basis (for example, the book value of distributed property).

The Treasury Department and the IRS agree that the calculation of the applicable threshold amount for purposes of section 734(b) TOIs should include only related partners' shares of basis increases and not the shares of unrelated parties, who can negotiate transactions at arm's length to protect their interests. The Treasury Department and the IRS also agree that the calculation of the applicable threshold amount for purposes of section 732(b) TOIs should exclude basis increases that correspond to basis decreases borne by unrelated partners (other than tax-indifferent parties) as basis decreases borne by unrelated partners should be negotiated at arm's length unless the unrelated partner is a tax-indifferent party. Accordingly, § 1.6011-18(c)(3)(iii) of the final regulations provide that in the case of a section 734(b) TOI, other than a substantially similar transaction described in § 1.6011-18(d)(1), for determining whether the applicable threshold amount is met for a taxable year, a basis increase is an increase to the adjusted basis of the partnership's property under section 734(b)(1) and (c) only to the extent of each related partner's share of the basis increase. Section 1.6011-18(c)(3)(iv) of the final regulations provides that in the case of a section 732(b) TOI, other than a substantially similar transaction described in § 1.6011-18(d)(1), for determining whether the applicable threshold amount is met for a taxable year, a basis increase is an increase to the basis of property distributed to one of the related partners under section 732(b) or (c), but excluding the amount of any basis increase that corresponds to a decrease to the basis of property distributed to unrelated partners (other than tax-indifferent parties) under section 732(b) and (c) or to unrelated partners' (other than tax-indifferent parties') shares of a corresponding decrease to the basis of the partnership's remaining property under section 734(b)(2) and (c). In the case of a substantially similar transaction described in § 1.6011-18 (d)(1), for purposes of determining whether the applicable threshold amount is met for a taxable year, a basis increase is an increase to the basis of property distributed to one of the partners under section 732(b) or (c) only to the extent of a corresponding decrease to the basis of property distributed to a tax-indifferent party under section 732(b) and (c) or to one or more tax-indifferent party's shares of a corresponding decrease to the basis of the partnership's remaining property under section 734(b)(2) and (c). For purposes of all of these rules, a partner's share of a basis decrease is determined immediately after the distribution under rules similar to the rules of § 1.197-2(h)(12)(iv)(D).

The Treasury Department and the IRS do not agree, however, that additional changes to the calculation of the applicable threshold amount, such as eliminating aggregation, calculating the applicable threshold amount based on increases to taxable income, or using an economic threshold that is based on book amounts, are appropriate in light of the modifications made. If aggregation were eliminated from the calculation of the applicable threshold amount, taxpayers would be incentivized to separate transactions described in the final regulations into multiple transactions that result in positive basis adjustments in an amount below the applicable threshold amount to avoid reporting obligations. Incentivizing such behavior would defeat the purpose of the final regulations, which is to gather information on partnership related-party basis adjustment transactions. Additionally, calculating the applicable threshold amount based on taxable income or book amounts would introduce unnecessary complexity for both taxpayers and the IRS in identifying the transactions described in the final regulations. The calculation of the applicable threshold amount in the final regulations represents an appropriate methodology for quantifying the magnitude of partnership related-party basis adjustment transactions a taxpayer engages in for a taxable year. As described in Part IV.A of this Summary of Comments and Explanation of Revisions, the increases to the threshold amount made by these final regulations should also address concerns that the applicable threshold amount is overly inclusive.

Finally, one commenter requested clarification that substantially similar transactions are subject to the threshold amount. The Treasury Department and the IRS clarify that a transaction cannot be a substantially similar transaction if the applicable threshold amount is not met. As described in part VI of this Summary of Comments and Explanation of Revisions, transactions would be “substantially similar” transactions if they are (1) expected to obtain the same or similar types of tax consequences as the transactions described in the final regulations, (2) factually similar or based on the same or similar tax strategy, and (3) the applicable threshold amount is met.

Proposed § 1.6011-18(b)(8) would have defined “related” as having a relationship described in section 267(b) (without regard to section 267(c)(3)) or section 707(b)(1). Proposed § 1.6011-18(b)(9) would have defined “related partners” as partners of a partnership that are related in the following manner—(i) in a transaction described in proposed § 1.6011-18(c)(1), the partnership has two or more direct or indirect partners that are related to each other within the meaning of proposed § 1.6011-18(b)(8), or (ii) in a transaction described in proposed § 1.6011-18(c)(2), the transferor of a partnership interest is related to the transferee, or the transferee is related to one or more of the partners in the partnership, within the meaning of proposed § 1.6011-18(b)(8). Under the proposed regulations, this relatedness requirement would have been met if the requisite relatedness exists either immediately before or immediately after a partnership related-party basis adjustment transaction described in proposed § 1.6011-18(c)(1) or (2).

Several commenters recommended changes to the relatedness requirement, stating that it was overbroad and difficult to comply with as partnerships and partners may not be able to identify their related parties. One commenter recommended importing concepts found in section 1563(a)(2) of the Code (related to brother-sister controlled groups of corporations) that would limit the definition of related partnerships by taking into account common ownership of capital or profits interests in the partnerships only to the extent that such ownership is identical with respect to each partnership.

In the case of transactions of interest involving section 734(b) or section 732(b) or (d), one commenter recommended requiring related partners to own 80 percent or more of the capital or profits interests of the partnership. Similarly, another commenter recommended that for all purposes of the final regulations, reporting should be required only if related parties own 80 percent or more of the capital or profits of a participating partnership. This commenter also recommended that the standard for relatedness be modified by substituting “80 percent” for “50 percent” in the relevant relationships defined within sections 267(b) or section 707(b)(1).

The Treasury Department and the IRS appreciate that the standard of relatedness used in the proposed regulations, combined with the scope of the transactions identified as transactions of interest, the proposed $5 million threshold amount, and the proposed definition of participation could result in administrative burdens on partnerships and their partners. The final regulations address these burdens by limiting the scope of the transactions identified, increasing the applicable threshold amounts, and limiting the application of the subsequent realization of tax benefit rule as described in Part VII.A. of this Summary of Comments and Explanation of Revisions. For example, in response to comments requesting that the standard of relatedness be narrowed, in the case of a section 734(b), 732(b) or 732(d) TOI, the final regulations provide that only directly related partners (and not also indirectly related partners) are considered in determining whether partners are related within the meaning of § 1.6011-18(b)(8) of the final regulation.

The final regulations do not adopt the additional changes to the standard of relatedness recommended by commenters because the Treasury Department and the IRS are concerned that counting only identical ownership as between related partnerships, or requiring related partners to own 80 percent or more of the capital or profits interests in a partnership, would more easily permit partnership structures with only marginally different ownership, including through the use of accommodation parties, to avoid such higher ownership thresholds without substantially affecting the partners' economics. Likewise, the Treasury Department and the IRS are concerned that increasing the relatedness standard from 50 percent to 80 percent could allow taxpayers to structure their affairs to stay below an 80-percent-relatedness standard, while simultaneously engaging in abusive partnership related-party basis adjustment transactions. Adding an ownership threshold or increasing the relatedness standard would frustrate the purpose of identifying the transactions described in the proposed regulations as transactions of interest. Accordingly, the commenters' recommendations are not adopted in the final regulations.

A commenter recommended excluding transactions between family members from those defined as transactions of interest and focusing instead on transactions involving controlled corporations described in section 267(f). The commenter noted that if relatedness is determined immediately before or after a transaction, parties undergoing divorce may be subject to these rules even though they have competing interests and will not be related after the divorce. Another commenter recommended excluding brothers and sisters from a person's family for purposes of determining relatedness, stating that, in the commenter's experience, siblings often have a contentious business relationship and are less likely to engage in transactions that confer large, gratuitous economic or tax benefits to one another. The Treasury Department and the IRS do not agree that familial relationships, including sibling relationships, should be excluded from the definition of relatedness. Family members, including siblings, often work in concert in ways that arm's-length parties do not. For those reasons, Congress included these familial relationships as part of the limitation rules in sections 267 and 707(b). Additionally, section 1041 of the Code is intended to address transfers of property between spouses incident to divorce. For these reasons, the final regulations retain familial relationships, including sibling relationships, in the definition of relatedness.

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. For purposes of proposed § 1.6011-18, transactions would be “substantially similar” transactions if the transactions are substantially similar within the meaning of § 1.6011-4(c)(4)—that is, if they are expected to obtain the same or similar types of tax consequences and are either factually similar or based on the same or similar tax strategy. Proposed § 1.6011-18(a) would have provided that substantially similar transactions include, but are not limited to, the transactions described in proposed § 1.6011-18(d).

Some commenters recommended clarifying or narrowing the definition of “substantially similar” transactions generally. Several commenters noted that the broad definition of “substantially similar transactions” in § 1.6011-4 increases uncertainty and compliance costs. Suggestions to amend § 1.6011-4, including that provision's definition of a “substantially similar” transaction, are outside the scope of these final regulations. As a result, the commenters' suggestions are not adopted in the final regulations.

Under proposed § 1.6011-18(d)(1), a transaction would have been substantially similar to a transaction described in proposed § 1.6011-18(c) if the transaction is a basis adjustment transaction described in proposed § 1.6011-18(c)(1) or (2), except that it does not involve related partners and one or more partners of the partnership is a tax-indifferent party. Under proposed § 1.6011-18(b)(11), a tax-indifferent party would have meant a person that is either not liable for Federal income tax because of its tax-exempt or, in certain cases, foreign status, or to which gain from a transaction described in proposed § 1.6011-18(c) would not result in Federal income tax liability for the person's taxable year within which such gain is recognized (for example, because the taxpayer has a net operating loss carryforward or capital loss carryforward).

Two commenters recommended eliminating transactions involving tax-indifferent parties from those identified as transactions of interest. Many commenters noted that partners and partnerships may be unaware that a person engaging in a transaction identified by the proposed regulations is a tax-indifferent party. Some commenters requested clarification to the definition of tax-indifferent party, such as whether it includes direct or indirect partners that are exempt from Federal income tax under section 115 of the Code (relating to the income of State, territorial, or local governments), entities treated as partnerships or S corporations for Federal tax purposes, or a person that, due to tax attributes or for other reasons, is subject to tax on only part of its income. One commenter requested confirmation that the definition of a tax-indifferent party does not include a party with a capital loss carryover. The commenter raised that a capital loss carryover may be unrelated to a partner's partnership interest and unknown by other partners, particularly if the partner is unrelated.

One commenter recommended limiting the rule to situations in which the tax-indifferent party knows or has reason to know of the tax benefits arising in connection with its participation in a basis-adjustment transaction and that the other partners that are party to the transaction know of the partner's tax-indifferent status. One commenter recommended an exception for taxpayers who do not have knowledge or reason to know that its transaction is reportable because a person that is a party to the transaction is tax-indifferent. Another commenter recommended modifying the tax-indifferent party rule to apply only to situations in which the taxpayer knowingly participates in the transaction to which the tax-indifferent party facilitates a basis step-up.

Eliminating the tax-indifferent party rule would frustrate the purpose of identifying substantially similar transactions to the identified transactions of interest that use tax-indifferent parties instead of related parties to achieve the same economic or tax results. Accordingly, the Treasury Department and the IRS decline to eliminate the tax-indifferent party rule entirely in the final regulations. However, in response to these comments, the Treasury Department and the IRS have determined that certain changes to the scope of transactions of interest involving tax-indifferent parties are appropriate.

Accordingly, the final regulations include a knowledge element in the definition of a tax-indifferent party. Section 1.6011-18(b)(12) of the final regulations provides that a tax-indifferent party means a person that is either not liable for Federal income tax by reason of its tax-exempt or, in certain cases, foreign status, or to which any gain, or portion of any gain, that would have resulted from a section 732(b) TOI or a section 734(b) TOI if the property subject to a basis decrease in such transaction were sold immediately after such transaction, would not result in Federal income tax liability for the person's taxable year within which such gain would have been recognized, and whose status as a tax-indifferent party is known or should be known to any other person that participates in the transaction or to a partner in a partnership that participates in such a transaction. Thus, a tax-indifferent party would include a person that is partially taxable, for example, due to tax attributes, to the extent that the person's status as a tax-indifferent party is known or should be known by any other person participating in the transaction or to a partner in a partnership that participates in such a transaction. Because partnerships or S corporations are generally not liable for tax, and because the tax status of their partners or shareholders could be diverse, the final regulations also provide that partnerships or S corporations are not tax-indifferent parties except in cases in which a principal purpose of the use of the partnership or S corporation is to avoid tax-indifferent party status.

Additionally, the final regulations limit the scope of a substantially similar transaction with a tax-indifferent party under § 1.6011-18(d)(1) by limiting the calculation of the applicable threshold amount to basis increases that correspond to a basis decrease to the tax-indifferent party for sections 732 and 734 TOIs. See Part IV.B. of this Summary of Comments and Explanation of Revisions. These modifications are intended to address concerns that the tax-indifferent party rules in the proposed regulations were overbroad.

The final regulations also clarify that a transaction with a tax-indifferent party includes a transaction in which the tax-indifferent party facilities the increase in the basis of partnership property in a section 732 TOI by having a share of a corresponding decrease to the basis of partnership property.

Proposed § 1.6011-18(d)(2) would have defined as a substantially similar transaction a transaction in which a partner transfers the partner's partnership interest in a recognition transaction to a related transferee or to a person related to one or more existing partners, and the proposed $5 million threshold amount was met. Proposed § 1.6011-18(b)(6) would have defined a “recognition transaction” as a transaction other than a nonrecognition transaction.

One commenter requested clarification that proposed § 1.6011-18(d)(2) applies only to transfers between related parties, meaning the transferor and transferee must be related. The Treasury Department and the IRS agree with this comment and have made clarifying changes to confirm that the rule in § 1.6011-18(d)(2) does not apply to transfers of partnership interests between persons that are not related.

Under proposed § 1.6011-18(e)(2)-(4), a participating partnership, participating partner, or related subsequent transferee would have participated in a transaction of interest in any taxable year in which it participates in a transaction described in proposed § 1.6011-18(c). Additionally, under proposed § 1.6011-18(e)(5), a participating partnership, participating partner, or related subsequent transferee would have participated in a transaction of interest in any taxable year in which its tax return reflected the tax consequences of a basis increase resulting from a transaction described in proposed § 1.6011-18(c) (subsequent realization of tax benefit rule). Therefore, under the proposed regulations, as a result of the subsequent realization of tax benefit rule, a transaction described in proposed § 1.6011-18(c) that occurred many years ago could require reporting if a taxpayer's tax return in an open tax year reflected the tax consequences (such as cost-recovery deductions) arising from the transaction of interest.

Several commenters recommended eliminating the retroactive effect of the subsequent realization of tax benefit rule. These commenters stated that complying with the rule would be burdensome given that it could require taxpayers and their advisors to reconstruct transactions and their resulting tax consequences from many years ago. Commenters asserted that, in many cases, taxpayers and their advisors will not have sufficient information to comply with the rule.

Several commenters recommended that the proposed regulations apply prospectively to transactions that occur in taxable years beginning on or after the date the final regulations are adopted, whereas one commenter recommended applying the proposed regulations solely to transactions effected on or after January 1, 2023. One commenter recommended applying the subsequent realization of tax benefit rule only to partnership related-party basis adjustment transactions that occur within partnership tax years that remain open under the period of limitations set forth in section 6235 of the Code. Section 6235 provides rules on the period of limitations for making adjustments with respect to partnerships subject to the Centralized Partnership Audit Regime under the Bipartisan Budget Act of 2015 (BBA partnerships). Under section 6235(a)(1), the time for the IRS to make an adjustment for a taxable year of a BBA partnership generally is the later of the date which is three years after the latest of (1) the date on which the partnership return for the taxable year was filed, (2) the return due date for the taxable year, or (3) the date on which the partnership filed an administrative adjustment request under section 6227 of the Code with respect to the taxable year. In the case of a BBA partnership that makes a substantial omission of gross income within the meaning of section 6501(e)(1), section 6235(c)(2) provides that the period of limitations on making adjustments is six years instead of three years.

The Treasury Department and the IRS do not agree with eliminating all reporting that would occur under the subsequent realization of tax benefit rule as this would defeat the purpose of providing the IRS with information regarding transactions with tax consequences occurring over more than one taxable year. However, the Treasury Department and the IRS agree that it is appropriate to limit the retroactive information effect of the subsequent realization of tax benefit rule because of administrative concerns with compliance for transactions that would meet the elements of § 1.6011-18(c) and (d) except that they occurred many years ago.

In determining the appropriate limitation for the subsequent realization of tax benefit rule, limiting the look back period to the prior six years as recommended by one commenter allows the IRS to preserve its ability to assess tax in cases in which the statute of limitations for assessment of tax is six years pursuant to section 6501(e) or section 6235(c)(2). In addition, a six-year lookback period aligns with the requirement under § 301.6112-1(b)(2) that material advisors of transactions of interests maintain lists of advisees, but not if the person entered into the transaction more than six years from the date the transaction was identified as a transaction of interest under published guidance. Accordingly, the final regulations adopt a six-year lookback period for required disclosures. Under the final regulations at § 1.6011-18(f)(2), for a taxable year described in § 1.6011-4(e)(2)(i), a participant must provide the information described in the final regulations only if the transaction of interest occurred within the six-year lookback period. Section 1.6011-18(b)(11) of the final regulations provides that the six-year lookback period means the seventy-two months immediately preceding the first month of the taxpayer's most recent taxable year that began before January 14, 2025. The final regulations include examples demonstrating the six-year lookback period rule.

Several commenters recommended requiring reporting only in the taxable year the transaction of interest occurs and eliminating the subsequent realization of tax benefit rule. These commenters asserted that reporting only in the year in which the transaction of interest first arises would reduce compliance burdens and costs for taxpayers and limit the potential for missed reporting. One commenter suggested adopting a one-time disclosure mechanism like that adopted in Form 1065, Schedule B, questions 11 and 12 for the “drop and swap” or “swap and drop” transactions to which section 1031 of the Code applies. Another commenter recommended requiring reporting only at the partnership level to avoid duplicative reporting. Reporting by all participants in any taxable year in which the participant's tax return reflects the tax consequences of a basis increase resulting from a transaction of interest is the most appropriate for tax compliance and administration. Accordingly, the commenters' recommendations are not adopted in the final regulations.

The collection of information contained in these final regulations is reflected in the collection of information for Form 8886 and Form 8918, Material Advisor Disclosure Statement, that have been reviewed and approved by the Office of Management and Budget (OMB) in accordance with the Paperwork Reduction Act (44 U.S.C. 3507(c)) under control numbers 1545-1800 and 1545-0865.

To the extent there is a change in burden as a result of these final 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 number for the forms and remains 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 OMB control number.

The Regulatory Flexibility Act (RFA) (5 U.S.C. chapter 6) requires agencies to “prepare and make available for public comment an initial regulatory flexibility analysis,” which will “describe the impact of the rule on small entities.” Section 605(b) of the RFA allows an agency to certify a rule if the rulemaking is not expected to have a significant economic impact on a substantial number of small entities.

The Secretary of the Treasury hereby certifies that these final regulations will not have a significant economic impact on a substantial number of small entities pursuant to the RFA. This certification is based on IRS data that estimates the percentage of partnerships that would have been required to file a disclosure statement under the proposed regulations and those that may be required to file a disclosure statement under the final regulations.

The IRS's Research, Applied Analytics, and Statistics division (RAAS) provided data that indicated the percentage of partnerships with gross receipts or sales of $25 million or less that might have been subject to the disclosure obligations under the proposed regulations because of a basis adjustment under section 743(b) of more than $5 million during the taxable year. In addition, RAAS provided data that indicated the percentage of partnerships with gross receipts or sales of $25 million or more that might have been subject to the disclosure obligations under the proposed regulations because of a basis adjustment under section 743(b) of more than $5 million during the taxable year. The data suggested that of all partnerships with related parties and a basis adjustment under section 743(b) of more than $5 million during the taxable year, approximately two-thirds of the partnerships would have gross receipts or sales of $25 million or less and approximately one-third would have gross receipts or sales of $25 million or more. The Treasury Department and the IRS determined that the data did not indicate that the proposed regulations would have a significant economic impact on a substantial number of small entities because not all partnerships with gross receipts or sales of $25 million or less are considered small businesses, 3 and the data did not provide information on whether the partnerships with gross receipts or sale of $25 million or less were part of larger enterprises.

As discussed in Part II of the Summary of Comments and Explanation of Revisions, several commenters stated that the scope of the proposed regulations would be overbroad and the number of entities that would be subject to disclosure was underestimated. In addition, commenters asserted that taxpayers would be subject to substantial costs for complying with the proposed regulations because compliance required reviewing transactions from prior taxable years to determine whether a continuing tax benefit was attributable to a transaction identified as a transaction of interest under the proposed regulations. These comments are addressed in Parts II and VII of the Summary of Comments and Explanation of Revisions.

One commenter asserted that the Treasury Department and the IRS underestimated the likely cost of complying with the proposed regulations. Specifically, the commenter asserted that the likely wage of tax preparers and costs of due diligence, as well as the number of parties affected by each transaction of interest were underestimated.

As indicated in the Summary of Comments and Explanation of Revisions, the final regulations include changes that should significantly limit the total number of entities and more specifically, small businesses, subject to the disclosure obligations. Most significantly, the applicable threshold amount is increased from $5 million to $10 million; the period for reporting under § 1.6011-4(e)(2)(i) is limited to a six-year lookback period and the applicable threshold amount for the six-year lookback period is $25 million; in the case of a section 734(b) TOI, the applicable threshold amount is determined by generally only taking into account only the amount of the basis increase shared by related partners; in the case of a section 732(b) TOI, the applicable threshold amount is determined by generally only taking into account only the amount of the basis increase that corresponds to a basis decrease shared by the related partners.

In addition, more recent data from the IRS indicates that, in the case of partnerships with gross assets of less than $25 million that reported basis adjustments under section 734(b) or section 743(b) for the taxable year, the average basis adjustment was less than the applicable threshold amount of $10 million or more in the final regulations. Thus, the Treasury Department and the IRS anticipate that many partnerships with gross assets of less than $25 million should not be subject to the disclosure obligations under the final regulations. Further, the data indicates that partnerships with gross assets of more than $25 million that reported basis adjustments under section 734(b) or section 743(b) for the taxable year that met the applicable threshold amount of $10 million or more in the final regulations represent less than one percent of all partnerships that filed tax returns for the taxable year. Accordingly, as a result of the changes made to the final regulations in response to comments received on the proposed regulations, the disclosure obligations in the final regulations should affect a low percentage of partnerships and most of those partnerships will be partnerships with less than $25 million of gross assets.

The final regulations should not have a significant economic impact on small entities subject to the reporting requirements of the final regulations because the final regulations merely implement sections 6011, 6111 and 6112 and § 1.6011-4 by specifying the manner in which and the time at which a transaction identified as a transaction of interest in the final regulations must be reported. Accordingly, because the final regulations will be limited in scope to time and manner of information reporting, their economic impact is expected to be minimal. The Treasury Department and the IRS expect that the reporting burden is low because 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.

RAAS estimated that the appropriate wage rate for complying with the proposed regulations is $102.00 (2022 dollars) per hour. Thus, it was estimated that persons required to comply with the proposed regulations would have incurred costs totaling approximately $2,194.70 per filing. One commenter indicated that this per hour dollar amount is too small and that a better estimate is approximately $177.29 per hour or approximately $3,814.69 per filing (subject to the taxpayer potentially seeking specialists with a higher hourly fee to comply with the proposed regulations). Either of these amounts is small in comparison to an aggregate basis increase of $10 million or more as the result of a transaction identified as a transaction of interest under the final regulations. Thus, the relatively small cost to comply with the final regulations will not pose any significant economic impact to any small entities that would be subject to the final regulations.

For the reasons stated, a regulatory flexibility analysis under the RFA is not required. Pursuant to section 7805(f) of the Code, the proposed rule preceding this rulemaking was submitted to the Chief Counsel for the Office of Advocacy of the Small Business Administration for comment on its impact on small business, and no comments were received.

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

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

Pursuant to the Congressional Review Act (5 U.S.C. 801 et seq. ), the Office of Information and Regulatory Affairs has designated this rule as not a “major rule,” as defined by 5 U.S.C. 804(2).

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

The authors of these regulations are Elizabeth Zanet and Cameron Williamson, Office of the Associate Chief Counsel (Passthroughs and Special Industries). However, other personnel from the Treasury Department and the IRS participated in their development.

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

Authority

These final regulations are issued under the express delegation of authority under section 7805 of the Internal Revenue Code (Code). Section 7805(a) directs the Secretary of the Treasury or her delegate to prescribe all needful rules and regulations for the enforcement of that section and others in the Code, including all rules and regulations as may be necessary by reason of any alteration of law in relation to internal revenue.

On August 14, 2019, the Department of the Treasury (Treasury Department) and the Internal Revenue Service (IRS) published proposed regulations (REG-130700-14) under section 861 of the Code in the Federal Register (84 FR 40317) (the proposed regulations). The Treasury Department and the IRS received written comments on the proposed regulations, and a public hearing was held on February 11, 2020. All written comments received in response to the proposed regulations are available at www.regulations.gov or upon request. Terms used but not defined in this preamble have the meaning provided in these final regulations.

These regulations (the final regulations) extend the classification rules in existing § 1.861-18 to transfers of digital content other than computer programs and clarify the source of income for certain transfers of digital content. The final regulations also clarify the classification of transactions involving on-demand network access to computing and other similar resources.

The final regulations retain the overall approach of the proposed regulations, with certain revisions discussed in the preamble. The preamble also discusses comments received in response to the solicitation of comments in the notice of proposed rulemaking.

Section 1.861-18(b)(1), as in effect before this Treasury decision, described four transactions involving computer programs: the transfer of a copyright right, the transfer of a copyrighted article, the provision of services for the development or modification of a computer program, and the provision of know-how relating to the development of a computer program. Section 1.861-18(b)(2) required any transaction that consisted of more than one of the transactions described in § 1.861-18(b)(1) to be treated as separate transactions, unless a transaction was de minimis, in which case it would be treated as part of another transaction. The proposed regulations generally retained the four types of transactions (with the expansions described in Part II.A of this Summary of Comments and Explanation of Revisions) and preserved the de minimis rule, but for clarification purposes, § 1.861-18(b)(2) was proposed to be modified by introducing the term “arrangement” and providing that multiple transactions in an arrangement generally must be characterized separately.

Proposed § 1.861-19(b) defined a cloud transaction as a transaction through which a person obtains on-demand network access to computer hardware, digital content (as defined in proposed § 1.861-18(a)(3)), or other similar resources, other than on-demand network access that is de minimis taking into account the overall arrangement and the surrounding facts and circumstances. Similar to proposed § 1.861-18(b)(2), proposed § 1.861-19(c)(3) required separate classification of each transaction comprising an arrangement, except that any transaction that was de minimis would be treated as part of another transaction rather than being classified separately.

Comments recommended replacing these rules in proposed §§ 1.861-18(b)(1) and (b)(2), and 1.861-19(c)(3), with a predominant character rule, such that a transaction consisting of more than one category of transactions described in proposed § 1.861-18(b)(1), or a transaction consisting of one or more categories of transactions described in both proposed §§ 1.861-18(b)(1) and 1.861-19(b), would be characterized as only one of those categories of digital content transactions or as a cloud transaction in accordance with the predominant character of that transaction. As an example of a mixed transaction that would be difficult to characterize under the proposed regulations, comments pointed to video game business models where the customer purchases a copy of the game but primarily plays the video game online with other players. As another example, comments pointed to software antivirus programs that include code that executes on the user's equipment as well as code that is deployed in the cloud to detect and capture viruses before they reach the user's equipment. The comments argued that the predominant character rule would avoid the difficult and burdensome task of determining whether an element is de minimis in the context of the overall transaction and allocating income from the transaction among the non-de minimis categories as if they were separate transactions. The comments also argued that a de minimis standard is imprecise, and a predominant character rule that compares components of a transaction to determine which component is predominant would be much more administrable. Furthermore, one comment suggested that a predominant character standard would better align with existing Treasury regulations and other authorities, for instance, § 1.954-1(e)(3), which provides for a predominant character approach in the subpart F context. Finally, the comments noted confusion arising from the use of the term “transaction” to mean two different things in the same provision under proposed § 1.861-18(b)(2), and also recommended removing the term “arrangement” on the grounds that the term was unclear, particularly because it was not defined and rarely appears in other tax rules.

The comments recommended that the predominant character of a transaction be determined based on the facts and circumstances. Comments suggested that the relevant facts may include the overall commercial purpose, the taxpayer's treatment for non-tax purposes, the relative cost of each component (including the cost of maintaining online and offline components), and a comparison of unit prices for components sold separately. Comments suggested that the facts and circumstances should provide at least a reasonable basis for determining the predominant character of the transaction.

Further, the comments suggested defining a transaction based on the facts and circumstances or as an agreement entered into in the ordinary course. Several comments suggested that relevant factors for determining the scope of a transaction could include the availability of separate pricing, the use of separate stock keeping units (“SKUs”), and the taxpayer's definition for non-tax purposes.

The final regulations adopt these comments, in part. The final regulations replace the de minimis rule and the concept of an arrangement with a predominant character rule, which applies to both digital content transactions and cloud transactions. The Treasury Department and the IRS agree that, for purposes of the final regulations, a transaction with multiple elements (including de minimis elements) should be characterized based on the predominant character of the transaction. Predominant character rules also exist in other regulations for international provisions of the Code, such as foreign-derived intangible income and subpart F, and thus are familiar to taxpayers. See §§ 1.250(b)-3(d) and 1.954-1(e)(3). Further, in many business models that include both online and offline functionality it may be difficult to bifurcate a single transaction into a digital content transaction and a cloud transaction. The Treasury Department and the IRS expect that bifurcation will remain difficult and may increase in difficulty as business models and technology evolve. Therefore, § 1.861-18(b)(2) of the final regulations provides that, taking into account the overall transaction and the surrounding facts and circumstances, a transaction that has multiple elements, one or more of which would be a digital content transaction if considered separately, is classified in its entirety as a digital content transaction under one of the categories described in § 1.861-18(b)(1) if the predominant character of the transaction is described in one of the categories in that paragraph. Section 1.861-19(c)(2) of the final regulations provides a corresponding rule for transactions that have multiple elements, one or more of which is a cloud transaction. Further, the references to “de minimis” and “arrangement” are also removed in § 1.861-19(a) of the final regulations so that the final regulations define a cloud transaction as a transaction through which a person obtains on-demand network access to computer hardware, digital content (as defined in § 1.861-18(a)(2)), or other similar resources.

The final regulations define a digital content transaction as a transaction that constitutes a transfer of digital content or the provision of modification or development services or of know-how with respect to digital content. See § 1.861-18(b)(1). The final regulations do not, however, define the term transaction. The Treasury Department and the IRS have concluded that it is not necessary to introduce a specialized definition in these regulations because the concept is already well-established under general tax principles, case law, and existing administrative guidance.

Section 1.861-18(b)(3) of the final regulations (cross-referenced in § 1.861-19(c)(2)) provides a general rule and a special rule for determining the predominant character of a transaction that contains multiple elements, one or more of which would be a digital content transaction or a cloud transaction if considered separately. Under the general rule, the predominant character is determined by the primary benefit or value received by the customer. If that information is not reasonably ascertainable, the special rule provides that the predominant character is determined by the primary benefit or value received by a typical customer in a substantially similar transaction, which is determined by data on how a typical customer uses or accesses the digital content. If data on how a typical customer uses or accesses the digital content is not available, then all factors indicative of the primary benefit or value received by a typical customer must be examined, including how the transaction is marketed, the relative development costs of each element of the transaction, and the relative price paid in an uncontrolled transaction for one or more elements compared to the total contract price of the transaction in question.

One comment requested guidance on “streaming” and “temporary downloading” transactions. The comment expressed the view that whether a customer can download digital content should not determine whether a transaction is characterized as a service or a lease. The comment noted that when a customer's rights are limited to downloading and viewing a discrete item of digital content, such as a movie, for a limited time, the transaction would be treated as a lease of digital content. However, if the customer can access and download as many movies as desired from a catalog of thousands of movies for a monthly fee, and once the subscription ends access to the downloaded movies ends, the transaction would be treated as a cloud transaction and classified as a service according to the comment. The comment suggested that the characterization of these two transactions should not depend on whether the content is actually downloaded by any particular customer.

Another comment asserted that on-demand access to digital content should not be treated differently than temporary downloads of digital content because the two transactions are functionally equivalent in that both provide temporary access to digital content. The comment observed that the decision to provide on-demand access or temporary downloads of digital content is typically driven by the nature of the technology involved (for example, the memory capacity of a user's computer or the download speeds available), and generally has no bearing on the economic substance of the transaction.

Where the provider chooses whether to offer either temporary downloads or streaming the Treasury Department and the IRS disagree that these two types of transactions should be treated the same. A fundamental requirement of a digital content transaction, unlike a cloud transaction involving digital content, is that there must be a transfer of digital content to the customer. This distinction between property and services transactions has been in place since the original issuance of § 1.861-18 in 1998 and applying it consistently provides a degree of certainty for an otherwise factual case-by-case determination.

When a customer downloads digital content, there is a transfer of a copy of that digital content to the customer and the customer must use its own device to host the copy of content for viewing or listening, for example. In contrast, when a customer streams digital content, there is no transfer of digital content. Instead, the customer receives access to the digital content through the provider's servers. Especially for large file-size content, performing the hosting function in order to allow the customer continuous access places a higher burden on the provider. Similarly, for a temporary download, the customer must have sufficient storage on its device for the temporary download that is not necessary in a streaming transaction. There are also differences in how the customer may experience the digital content. For example, once a customer downloads digital content, the customer is able to access the content regardless of whether the customer is connected to the internet and could thus watch a downloaded movie or read a downloaded book when the customer is unable to connect to the internet. In these ways, there are fundamental differences in character between a temporary download and streaming that warrant different characterization and sourcing rules for each type of transaction. Where the customer may choose whether to temporarily download or stream content, the predominant character rule in the final regulations would apply to characterize the transaction. See § 1.861-19(d)(7) (Example 7) and (d)(9) (Example 9) of the final regulations.

Section 1.861-18, as in effect before this Treasury decision, applied only to computer programs. The proposed regulations expanded the scope of § 1.861-18 to apply to transactions involving “digital content,” defined as “a computer program or any other content in digital format that is either protected by copyright law or no longer protected by copyright law solely due to the passage of time.”

Several comments recommended broadening the definition of digital content to encompass content not protected by copyright law that is transferred electronically and is similar to copyrightable content, such as consumer or user data, text files of recipes, government-produced documents, and sets of font and typefaces. One comment suggested expansion to any property in digital format in which a person has a right or interest, including any property bought and sold in real marketplaces, in virtual marketplaces and in in-game economies. These comments generally suggested that transfers of this non-copyrightable digital property are economically and functionally equivalent to the transfer of digital content and that characterization of the transfers should be treated the same. One comment asserted that such content may be subject to other forms of intellectual property protection such as contractual restrictions and non-disclosure agreements, such that transfers of that content are functionally similar to transfers of digital content.

The final regulations do not broaden the definition of digital content beyond content protectable by copyright law. Section 1.861-18, as in effect before this Treasury decision, generally followed copyright law, and the Treasury Department and the IRS are of the view that it is appropriate to continue to apply this longstanding copyright law framework. This framework is not workable for non-copyrightable content given that the legal rights associated with such content generally are not the same as those associated with content protectable by copyright law. For example, in a digital transfer of property that is not protected by copyright law, the transferee may (unless otherwise restricted, such as by contract) have the unfettered ability to make and distribute copies to the public, to prepare derivative works, or to publicly display or publicly perform the property. As a result, if the framework of § 1.861-18 were applied to the transaction, such a transfer would generally be characterized as a license or sale of a copyright right, regardless of whether the transferee intends to exploit those abilities or whether those powers have any value or relevance in the context of the transaction. Therefore, the existing framework could result in a classification at odds with the economics and reality of the transaction. Further, where non-copyrightable digital property is transferred subject to contractual or other restrictions, those restrictions may not fit cleanly within the existing framework and may require a different analysis to determine the correct characterization. Accordingly, including non-copyrightable content would require a different set of rules that are beyond the scope of § 1.861-18.

One comment noted that under the proposed regulations, an online database that allows customers on-demand access to a collection of non- copyrightable content such as recipes or court opinions is a cloud transaction. See § 1.861-19(d)(8) (Example 8). This is because the definition of a cloud transaction in proposed § 1.861-19(b) refers to on-demand network access to computer hardware, digital content, or “other similar resources.” The comment suggested that the inclusion of “other similar resources” in the definition of cloud transaction may provide a road map for expanding the definition of digital content in proposed § 1.861-18. The Treasury Department and the IRS disagree. The cloud transaction definition includes access to non-copyrightable content because curation of such content is a common business model that, unlike the framework of § 1.861-18, does not depend on whether the content is copyrightable because there is no transfer to the customer.

The final regulations therefore do not adopt these comments and continue to characterize digital content transactions based on the distinction between a transfer of a copyrighted article and a transfer of copyright rights, which depends on whether the customer receives copyright rights as part of the transfer. The Treasury Department and the IRS may, however, consider these comments for possible future guidance specific to types of digital property that are not protectable by copyright law. The final regulations do provide, however, that digital content includes content that is not protected by copyright law solely because the creator dedicated the content to the public domain. The regulations include this refinement because monetization of such content generally also involves digital content that is protected by copyright law and therefore fits within the framework of § 1.861-18. See § 1.861-18(a)(2).

Section 1.861-18(b)(1)(iv), as in effect before this Treasury decision, provided that one of the categories of transactions relating to computer programs was “[t]he provision of know-how relating to computer programming techniques.” Section 1.861-18(e) provided that the provision of information with respect to computer programs will be treated as the provision of know-how for purposes of § 1.861-18 only if the information (1) relates to computer programming techniques; (2) is furnished under conditions preventing unauthorized disclosure, specifically contracted for between the parties; and (3) is considered property subject to trade secret protection. The proposed regulations would modify § 1.861-18(b)(1)(iv) and (e)(1) by replacing “computer programming techniques” with “development of digital content,” but would not otherwise change § 1.861-18(b)(1)(iv) and (e)(1).

One comment asked for confirmation that the changes to § 1.861-18(b)(1)(iv) and (e)(1) would not change the scope of § 1.861-18(b)(1)(iv), and that § 1.861-18(b)(1)(iv) in the final regulations describes only know-how transferred under terms that constitute a license for United States Federal tax purposes. The Treasury Department and the IRS confirm that § 1.861-18(b)(1)(iv) in the proposed and final regulations is intended to describe the same type of know-how covered by § 1.861-18(b)(1)(iv) as in effect before this Treasury decision, except that know-how may relate to any development of digital content and not merely computer programming techniques. The Treasury Department and the IRS have determined that § 1.861-18(b)(1)(iv) and (e)(1) are sufficiently clear in this regard and that additional guidance on the treatment of such know-how is unnecessary.

Section 1.861-18(c)(2)(ii), as in effect before this Treasury decision, provided that one of the copyright rights referred to in that paragraph was the right to prepare derivative computer programs based upon a copyrighted computer program. The proposed regulations would replace the references to computer programs with references to digital content but would not otherwise change § 1.861-18(c)(2)(ii). One comment recommended that the right to prepare derivative digital content based upon digital content should be treated as a copyright right only if it is coupled with the right to distribute the derivative digital content to the public. The comment expressed the belief that this change would be consistent with one of the underlying policies of these regulations, which is to treat as a license a transaction in which the transferee exercises a copyright right to exploit the rights in the market, and to treat as a sale or lease a transaction in which the transferee consumes the digital content. The comment also suggested that this change would address the ambiguity in copyright law as to what modifications of a copyrighted work are necessary to create a derivative work, and whether, for example, rights to modify software during installation or customization would constitute rights to create a derivative work.

The final regulations do not adopt this comment. The preamble to Treasury Decision 8785 (which promulgated § 1.861-18 in 1998) stated in response to similar comments to the proposed regulations (REG-251520-96) that were finalized in Treasury Decision 8785 that the right to make copies (which must be coupled with the right to distribute the copies to the public to constitute a copyright right under the regulations, despite such a requirement not being present under copyright law) is treated differently from the other copyright rights in the context of the regulations because of the unique characteristics of computer programs, including the ease with which computer programs can be copied. However, as explained in that preamble, it is generally consistent with copyright law to treat as a copyright right a non-de minimis right to make a derivative work, regardless of whether it is coupled with the right to distribute to the public, and there is no sufficiently unique aspect of digital content that would compel a different result for purposes of § 1.861-18. The Treasury Department and the IRS continue to be of the view that that the right to make a derivative work without further rights to distribute to the public should be treated as a copyright right and that the unique characteristics of digital content do not compel a different result. However, the predominant character rule in § 1.861-18(b)(2) and (3) of the final regulations (discussed in Part I.A of this Summary of Comments and Explanation of Revisions) should alleviate concerns about minor customization rights causing what would otherwise be a transfer of digital content to be treated as a license of a copyright right. See § 1.861-18(h)(18) (Example 18) of the final regulations.

Section 1.861-18(c)(2), as in effect before this Treasury decision, designated as copyright rights the right to make a public performance of a computer program and the right to display a computer program to the public. The proposed regulations would replace the references to computer programs with references to digital content, and also provide exceptions for the right to publicly perform or publicly display digital content for the purpose of advertising the sale of the digital content performed or displayed. Proposed § 1.861-18(c)(2)(iii) and (iv). The preamble to the proposed regulations used an example of rights provided to a video game retailer that allow the retailer to display screenshots of a video game on television commercials promoting the game, and noted that these rights, on their own, would not be significant. Two comments agreed with the addition of the regulatory language and one of the comments suggested that the preamble example be included in the regulatory text.

The final regulations retain the exceptions for the public performance or public display of digital content for the purpose of advertising the sale of the digital content performed or displayed. See § 1.861-18(c)(2)(iii) and (iv). The Treasury Department and the IRS have determined, however, that the language of the regulation is sufficiently clear without an example and therefore the final regulations do not include the example in the regulatory text.

One comment questioned whether the transfer of the right to use software or other digital content for a cloud transaction should be treated as the transfer of a copyright right. The comment included an example wherein A, a domestic corporation, transfers computer software to B, a foreign affiliate. B also gets the right to use the software to provide software-as-a-service transactions, but does not get the right to sell copies of the software or make derivative works. The comment stated that it appears that a copyright right has been transferred in this scenario, but that it is not clear which of the enumerated copyright rights is transferred. The comment recommend that the final regulations allow taxpayers to elect to characterize this type of transaction as a transfer of a copyright right.

The Treasury Department and the IRS agree that a transfer of digital content accompanied by the right to use the digital content to provide a cloud transaction will generally result in the transfer of the right to either publicly display or publicly perform the digital content, depending on the type of digital content and specific rights transferred. To display a work means to show a copy of it, either directly or by means of a film, slide, television image, or any other device or process or, in the case of a motion picture or other audiovisual work, to show individual images nonsequentially. 17 U.S.C. 101. To perform a work means to recite, render, play, dance, or act it, either directly or by means of any device or process or, in the case of a motion picture or other audiovisual work, to show its images in any sequence or to make the sounds accompanying it more audible. Id. Further, 17 U.S.C. 101 includes a “transmit clause” that provides that to publicly display or perform a work means, in relevant part, to transmit or otherwise communicate a performance or display of the work to the public, by means of any device or process, whether the members of the public capable of receiving the performance or display receive it in the same place or in separate places and at the same time or at different times. Reading these provisions of 17 U.S.C. 101, the Treasury Department and the IRS have concluded that the use of digital content to provide a cloud transaction should be treated as the exercise of a copyright right under both copyright law and the final regulations. See American Broadcasting Companies, Inc. v. Aereo, Inc., 573 U.S. 431 (2014) (holding that capture of broadcast copyrighted content and retransmission to subscribers who stream the content to their personal devices was a public performance of a copyrighted work under the transmit clause of 17 U.S.C. 101). However, whether the transferred right is a right to display or a right to perform will depend on the type of digital content, the type of copyright obtained, and the manner in which the digital content is used in the cloud transaction. Due to the factual nature of these issues and the important role of copyright law in those determinations, the final regulations do not specify which copyright right has been transferred when digital content is transferred for use in a cloud transaction.

Several comments requested new examples describing common business models or modifications to examples provided in the proposed regulations. In response to these comments, the final regulations contain several new examples and make certain modifications to the examples in the proposed regulations. In addition, pre-existing examples that were in effect before the issuance of this Treasury decision have been modified to follow the same analytical structure as the examples added by the final regulations.

One comment requested an example of a wholesaler of computer software buying and selling a limited number of product keys. A product key is a specific software-based key for a computer program that certifies the copy of the program is original. Instead of using physical media such as a CD or DVD to install software onto a computer or other electronic device, a user can enter a product key to download the software and then install it from their computer's hard drive. A customer that purchases software through electronic channels often receives a link to download and a product key to activate the software. The comment asserted that an underlying principle of these regulations is to treat economically similar income equally, regardless of whether the income is earned through electronic means or through more conventional channels of commerce, and therefore the income earned by a wholesaler of product keys for software should be treated the same as a wholesaler of physical copies of software. The Treasury Department and the IRS agree that § 1.861-18 does not characterize otherwise similar transactions differently solely because one transaction was effected through electronic means and the other was not. See § 1.861-18(g)(2) of the final regulations. In response to the comment, a new example added in the final regulations, § 1.861-18(h)(24) (Example 24), addresses a business model in which a video game copyright owner transfers product keys to retailers, and then the retailers transfer those keys to customers. Based on the facts in the example, the transfer of product keys to the retailers is characterized as a sale of copyrighted articles, and the transfer of product keys from the retailers to customers is also classified as the sale of copyrighted articles.

Two comments asked for an example addressing a business model in which an operator of a platform offers for download digital content (for example, video games or electronic books) as an agent of the digital content developers. The platform operator receives the copyright right to make and sell digital copies of the digital content, but this right is granted only so that the platform operator can act in its capacity as an agent facilitating sales of the digital content between digital content developers and customers. As such, the comments asserted that the transaction between the platform operator and digital content developers should not be treated as the transfer of copyright rights. One of these comments also suggested several clarifying changes to proposed § 1.861-18(h)(19) (Example 19) to distinguish the business model described in that example, which involves a licensed reseller that utilizes an online platform, from the agency platform operator described in the comment.

The Treasury Department and the IRS recognize that an agency platform operator business model exists, and therefore the final regulations include a new example at § 1.861-18(h)(20) (Example 20) that describes a scenario in which a platform operator offers applications for sale as an agent of the application developers. The facts in Example 20 assume that the platform operator acts as an agent of the application developers under general tax principles and concludes that the characterization of the transaction between the platform operator and application developers is not a digital content transaction nor a cloud transaction. Whether a taxpayer is acting as an agent on behalf of another taxpayer is determined under general tax principles and that determination is outside the scope of these final regulations. Additionally, § 1.861-18(h)(19) (Example 19) of the final regulations contains certain changes to the facts in the proposed regulations that are intended to distinguish the licensed reseller platform operator business model described in that example from the agency platform operator model described in Example 20, namely that the primary benefit or value that the distributor (Corp A) receives in the transaction in Example 19 is the right to reproduce and distribute an unlimited number of copies of the book.

One comment recommended adding an example describing a business model in which a video game that can be played on a particular game console or a computer is sold in physical copies through retailers, or digitally through the game console's store or through an internet store for a one-time fee. The game's core functionality is accessed online and, if played on the game console, requires paying an annual or monthly subscription fee to the console maker which grants the customer access to the online functionality of the console, thereby allowing the customer to play the online component of the video game (and all other video games) on the console. This fee is charged by the console maker for purposes of using the console online, so if the game is played on a computer, there is no additional fee to access the online content. The example in the comment concluded that the purchase of the console version of the video game, whether from a retailer, the game console store, or the internet store, is a cloud transaction because most customers purchase the game primarily to enjoy the online functionality. This comment also recommended another similar example, except the core functionality of the video game is offline content, and therefore the purchase of the video game is the sale of a copyrighted article.

The comment underscores the fact that there are many different business models and types of transactions in the video game industry. The determination of the character of each transaction will necessarily be fact-specific based on the rights obtained by the customer and, if relevant, the predominant character of the transaction. However, to address certain aspects of these scenarios, a new example at § 1.861-18(h)(24) (Example 24) of the final regulations describes the purchase of a video game for a one-time fee that has online and offline functionality, and that does not require paying a periodic subscription fee that is specific to that game to access the online content. Additionally, a new example at § 1.861-19(d)(11) (Example 11) of the final regulations describes the purchase of a video game for a one-time fee whose primary functionality is online and requires paying a monthly fee to the game developer to access the online content specific to the game. The examples conclude in both cases that, under the facts presented, a customer's purchase of a game has the predominant character of a sale of a copyrighted article. Neither example introduces additional complexity by describing a separate subscription fee that the customer must pay to a console maker to enable the online functionality of the console for all games played on that console. The Treasury Department and the IRS have concluded that such a fee would not be relevant to determining the character of transactions specific to the game itself under the final regulations. Such a fee is more akin to the monthly amount that a customer may pay to an internet service provider for internet access to play games online in general, because the fee is not specific to the game and is instead required to enable online functionality on a device that has other functions.

One comment recommended changes to the facts in § 1.861-18(h)(19) through (21) (Examples 19 through 21) of the proposed regulations, which contained a restriction on the transfer of the digital content by limiting the number of devices onto which the customer could download the content. Specifically, the comment recommended modernizing these examples by replacing the “limited number of devices” restriction with more general background that explains that the user agreement and the conditions and features of the provider's website and applications adequately restrict the end-user's ability to lend or otherwise transfer the digital content. In § 1.861-18(h)(19) and (21) (Examples 19 and 21) of the final regulations, the restriction on the number of devices is removed, and facts were added to make clear that no copyright rights were granted. Proposed § 1.861-18(h)(20) (Example 20), which discussed a business that offered end-users membership to a catalog of copyrighted music and required the end-users to download the songs, was removed from the final regulations because the Treasury Department and the IRS determined the facts described in the example were unrealistic.

Proposed § 1.861-19(c)(1) would provide that a cloud transaction is classified solely as either a lease of property or the provision of services, based on all relevant factors. Proposed § 1.861-19(c)(2) would enumerate a non-exhaustive list of potentially relevant factors, most of which come from section 7701(e) of the Code. The preamble to the proposed regulations requested comments as to whether the classification as either a lease or a service was correct, or whether cloud transactions are more properly classified in another category of income. The preamble also requested comments on realistic examples of cloud transactions that would be treated as leases under proposed § 1.861-19.

Several comments recommended that all cloud transactions be classified as services because the commentators could not identify any realistic cloud transaction that could be classified as a lease. One comment requested that the final regulations include an example of a cloud transaction that would be treated as a lease, but did not suggest a scenario in which a cloud transaction would be a lease. Alternatively, the comments recommended that the final regulations include a rebuttable presumption that all cloud transactions are classified as services.

In the absence of a rule stating all cloud transactions are services, several comments expressed concerns with, and suggested modifications to, certain factors listed in proposed § 1.861-19(c)(2). For example, some comments suggested that certain factors were not relevant for cloud transactions, or would generally weigh towards a lease characterization, but that overall, a cloud transaction should still be classified as the provision of services. Comments also recommended clarifying the treatment as services of related party data hosting transactions that involve cost-plus payments from a company under common control with the hosting company.

One comment suggested adding an example that commonly exists in practice that is similar to proposed § 1.861-19(d)(2) (Example 2), involving the provision of designated servers to the customer, but with a shifted focus to analyze the access that a remote user may have to data and software on those servers.

Two comments expressed concerns that the proposed regulations may be used to characterize transactions of infrastructure providers, such as real estate investment trusts, who lease and otherwise make available real property and other infrastructure to cloud providers and similar tenants. These comments were concerned that the proposed regulations referenced the section 7701(e) factors to determine whether a cloud transaction was a service or a lease, and that these interpretations could affect the interpretation of the section 7701(e) factors in the context of non-cloud transactions.

The final regulations treat all cloud transactions solely as the provision of services and remove the section 7701(e) and other factors listed in the proposed regulations. Like the comments, the Treasury Department and the IRS could not identify a transaction that satisfies the definition of a cloud transaction that would be properly classified as a lease. Further, the Treasury Department and the IRS would expect future business models that meet the definition of a cloud transaction to constitute services rather than leases or other types of transactions. The services classification is appropriate because in a typical business model that includes a cloud transaction, the cloud provider retains economic control and possession over the relevant property (such as servers, software, or digital content, depending on the transaction) and the cloud transaction meets other hallmarks of a service transaction such as the provider having the ability to determine the specific property used to provide the cloud transaction and to replace such property with similar property. Note, however, that business models may include transactions involving computer hardware, such as a server, that is located at the customer's premises, and such a transaction may fall outside the definition of a cloud transaction (for example, because there is no on-demand network access provided in that transaction) and would therefore be classified under section 7701(e) and general tax principles. The Treasury Department and the IRS have also concluded that a more definite rule for characterization based on the definition of a cloud transaction will allow for better compliance and tax administration than the factors test in the proposed regulations. Because the final regulations classify all cloud transactions as the provision of services, examples applying the factors from the proposed regulations to determine whether a cloud transaction is a service or a lease have been removed (and no example concluding that the cloud transaction is a lease has been added).

Finally, one comment recommended expanding the characterization of cloud transactions to include licenses for transactions in which non-de minimis copyright rights are transferred. The comment described an example where an owner of digital content (a movie) streams that digital content to a movie theater and grants the movie theater the right to show the streamed content to customers. The comment concluded that the transaction between the content owner and the movie theater is a license. The comment expressed the belief that the manner in which digital content and accompanying public display or performance rights are delivered should not alone change the character of a transaction from a license to a service or lease.

The final regulations do not adopt this comment. In the scenario posited by the comment, the movie theater would be much more likely to download or otherwise obtain a copy of the movie than to stream the movie simultaneously with displaying the movie to customers, given the possibility of buffering or other technology issues that might occur while streaming and negatively impact the movie theater's customers. However, a somewhat similar scenario could occur if a bar or similar establishment streams music, sporting events, or other content as entertainment for customers eating or drinking at the establishment. While the agreement with the streaming service may grant the bar the right to perform or to display the streamed content to its customers, if there is no transfer of digital content (that is, no option to download of digital content), the transaction falls outside the digital content rules in § 1.861-18 and may be properly characterized as a cloud transaction. Whether there is a transfer of a copyright right that is not described in § 1.861-18(c)(2) would depend on copyright law. As described in Part I.B of this Summary of Comments and Explanation of Revisions, a fundamental requirement for a digital content transaction such as a license of copyright rights, as opposed to a cloud transaction involving digital content, is that the former involves a transfer of the digital content to the customer. If, however, the theater or the bar has the choice to download or stream the content, then § 1.861-18, including the predominant character rule, would apply to the transaction.

One comment suggested that the final regulations explicitly include as cloud transactions certain common cloud-based business models, namely: (1) advertising models where customers obtain “free” services and advertisers pay for access to those customers; (2) marketplace sites and apps that function as sales agents; (3) gig-economy sites and apps that put service providers and customers together; (4) job recruiting sites and apps that find candidates for employers; (5) travel sites and apps that act like sales agents for hotels, flights, etc.; and (6) game sites that allow users access to a range of games for a subscription price.

The final regulations do not adopt this comment, though some similar examples are included in § 1.861-18(h). Although each of the comment's suggested scenarios include services or goods accessed through the internet, whether each scenario is a cloud transaction (as defined by § 1.861-19(b)) is fact-specific and cannot be determined solely on the basis of the type of offering provided. Section 1.861-19(b) defines a cloud transaction as a transaction through which a person obtains on-demand network access to computer hardware, digital content (as defined in § 1.861-18(a)(2)), or other similar resources. The first scenario, involving customers' “free” access to content that is funded by advertising, is similar to § 1.861-18(h)(22) (Example 22) of the final regulations. The example addresses the transfer of content to the platform by content creators (a digital content transaction) and the access to the content by customers (a cloud transaction). However, the example does not address the transaction between the advertisers and the platform because while the ads are viewable online, the advertising services are likely not cloud transactions because there is likely no on-demand network access to computer hardware, digital content, or similar resources provided by the platform to the advertisers (though specific fact patterns may differ). The second scenario, involving marketplace sites and apps that function as sales agents, may result in a transaction that has a digital content transaction element and a cloud transaction element if the marketplace site or app is used to transfer digital content to customers. See § 1.861-18(h)(20) (Example 20). Similarly, the sixth scenario, involving game sites allowing access to a range of games for a subscription price, may require a predominant character analysis to determine whether the primary benefit to the customer (or a typical customer) is the download of games or access to play the games online. See § 1.861-18(h)(24) (Example 24). In the remaining scenarios proposed by the comment, the website or app may provide a service, but it is likely that the service would not be a cloud transaction because the recipient of the service does not receive on-demand network access to computer hardware, digital content, or similar resources. The framework of the final regulations should be applied to the facts of each specific transaction rather than making generalizations about broad categories of content offerings.

Many comments requested modifications to the examples provided in proposed § 1.861-19, or new examples describing common business models. In response to these comments, the final regulations contain several new examples and make certain modifications to the pre-existing examples. The final regulations also remove examples illustrating the proposed regulations' application of factors to distinguish between the characterization of a cloud transaction as a service or a lease because the final regulations characterize all cloud transactions as services.

Proposed § 1.861-19(d)(11) (Example 11) would describe a scenario in which a taxpayer operates an online database of industry-specific materials that utilizes a proprietary search engine. Certain materials in the database constitute digital content. The example concluded that the taxpayer's provision of on-demand access to its computer hardware and software is a cloud transaction. One comment requested clarification that the characterization of this transaction would not be different if the online database contained no copyrightable materials. In the final regulations, the analysis of this example (which has been redesignated § 1.861-19(d)(8) (Example 8)) explains that the cloud transaction is access to the search engine and online database, rather than online access to the digital content, and therefore the conclusion that the transaction is a cloud transaction would not change if none of the content in the database was copyrightable. This conclusion is consistent with § 1.861-19(b)'s definition of a cloud transaction as a transaction through which a person obtains on-demand network access to computer hardware, digital content (as defined in § 1.861-18(a)(2)), or other similar resources. In this case, the content accessed would be an “other similar resource.”

Two comments expressed concern that certain jurisdictions around the world treat income earned by a reseller of services, such as software-as-a-service, as royalties subject to withholding. These comments asked for an example in the final regulations addressing a reseller of services that concludes the reseller's income is services income. In response to these comments, section 1.861-19(d)(10) (Example 10) of the final regulations addresses a reseller of software-as-a-service and concludes the transaction between the reseller and its customers is a cloud transaction classified as the provision of services.

Proposed § 1.861-19(d)(9) (Example 9) would describe a scenario in which a taxpayer maintains a catalogue of videos and music that it streams to customers in exchange for a monthly fee. To better reflect current and developing business practices, comments recommended adding a fact to this example that customers have the ability to download the digital content for offline viewing, and that such ability is de minimis in the context of the overall transaction. Proposed § 1.861-19(d)(9) (Example 9) is redesignated § 1.861-19(d)(7) (Example 7) of the final regulations, and the ability to download the digital content has been added to the facts in the example. As discussed in Part I.A of this Summary of Comments and Explanation of Revisions, a predominant character rule in the final regulations replaced the de minimis rule in the proposed regulations. Under the facts described in Example 7 of the final regulations, the predominant character of the transaction is a cloud transaction.

Section 1.861-18(f)(2), as in effect before this Treasury decision, provided that income from sales of copyrighted articles is sourced under sections 861(a)(6), 862(a)(6), 863, 865(a), (b), (c), or (e), as appropriate. Proposed § 1.861-18(f)(2)(ii) would provide that when a copyrighted article is sold and transferred through an electronic medium, the sale is deemed to have occurred at the location of download or installation onto the end-user's device used to access the digital content for purposes of § 1.861-7(c). If information about the location of download or installation was not available, proposed § 1.861-18(f)(2)(ii) would provide that the sale is deemed to have occurred at the location of the customer, as determined based on the taxpayer's recorded sales data for business or financial reporting purposes.

Comments observed practical challenges with applying a rule based on the location of download or installation, including that: (i) data privacy laws may prevent taxpayers from collecting or retaining this information, (ii) internet Protocol (IP) addresses may be unreliable because virtual private networks may obscure an end-user's IP address, (iii) it would be burdensome and expensive for taxpayers to collect new data on the location of download or installation, (iv) there may be difficulties in determining the location of download or installation onto an end-user's device when software is sold through multi-level distribution channels, and (v) it may be difficult to identify the end-user. One comment suggested that the final regulations provide examples that illustrate the application of the download test in various circumstances.

Instead of endorsing the proposed rule, most comments addressing this topic recommended a rule that uses the billing address of the first unrelated purchaser to determine the location of the sale. Some comments observed that the billing address of the purchaser is information sellers already collect and is a more reliable indicator of where the purchaser will use the digital content. Several comments suggested that taxpayers be permitted to elect to use the location of download or installation instead of the billing address of the purchaser if the taxpayer has access to that information. Some comments recommended permitting taxpayers to elect to use the location of actual use of the digital content, such as when an employer purchases digital content that is used by an employee not located in the same jurisdiction as the employer.

Finally, another comment recommended that the rule in § 1.861-7(c) (which provides that the place of sale is the place where the rights, title, and interest of the seller in the property are transferred to the buyer (the title passage rule)) should be retained for purposes of sourcing sales of copyrighted articles transferred through an electronic medium.

The final regulations adopt these comments in part. Consistent with the proposed regulations, § 1.861-18(f)(2)(ii) of the final regulations moves away from the “title passage” rule for sales of copyrighted articles transferred through an electronic medium. One reason for the change is that the title passage rule allowed taxpayers to artificially elect the source of income from sales of copyrighted articles through an electronic medium using contractual terms that had no real-world impact due to the nature of digital content. A digital download is an almost instantaneous transfer that occurs with limited risk of loss; even when a file is corrupted in the download or installation process, a noncorrupted copy can be provided to the customer at virtually no cost to the seller, and the precise location of the corruption is typically not relevant. In contrast, a contractual agreement as to when and where title passes for physical property moved through physical distribution chains has real-world impact because the property may be lost or become damaged in transit and the location of title passage determines whether the seller or buyer bears the burden of that loss. Because the nature of the supply chain means that the seller retains risk of loss until a successful download, § 1.861-18(f)(2)(ii) treats the sale as having occurred at the customer's location, using the customer's billing address as a proxy. The Treasury Department and IRS generally agree that a billing address is more administrable than the location of download or installation as a suitable proxy for the place of sale of electronically transferred copyrighted articles (subject to the anti-abuse rule discussed below).

The Treasury Department and IRS disagree, however, that the billing address of a subsequent unrelated purchaser of the same copyrighted article should be the general rule for sales between related parties, given the focus of the statutory sourcing provisions on place of sale. See sections 861 through 865. It would also be complex and potentially inaccurate to attempt to determine whether every sale is intended for a related or unrelated purchaser. Therefore, § 1.861-18(f)(2)(ii) of the final regulations provides that when a copyrighted article is sold and transferred through an electronic medium, the sale is deemed to have occurred at the location of the billing address of the purchaser for purposes of § 1.861-7(c), regardless of whether that purchaser is a related or unrelated party. This billing address rule also resolves the issue raised by comments regarding who the end-user is in certain transactions because the sourcing rule is based on the immediate purchaser in the transaction. See § 1.861-18(h)(25) (Example 25).

The final regulations also do not provide for an election to treat the sale of a copyrighted article as occurring at the location of download or installation. As noted earlier in this part, one of the reasons for moving away from “title passage” for sales of copyrighted articles transferred through an electronic medium was that it allowed sellers the ability to artificially elect the source of the income. Consistent with this concern about electivity, the final regulations provide a single, administrable rule that applies to all sales (subject to the anti-abuse rule).

The final regulations also add a new anti-abuse rule for any case in which the sales transaction is arranged in a particular manner for a principal purpose of tax avoidance. See § 1.861-18(f)(2)(ii) and (h)(26) (Example 26). In such cases, the foregoing billing address rule will not be applied, and instead all relevant facts and circumstances of the transaction will be considered to treat the sale as having occurred where the substance of the transaction occurred. This anti-abuse rule replaces the anti-abuse rule in § 1.861-7(c) with respect to sales of copyrighted articles sold and transferred through an electronic medium.

Finally, several comments asked for clarification that this source rule applies solely for purposes of the title passage rule of § 1.861-7(c). The Treasury Department and the IRS have concluded that these comments were already addressed in proposed § 1.861-18(f)(2)(ii) by the language that limited application of the rule “for purposes of § 1.861-7(c),” and the final regulations retain this language.

Some comments recommended allowing taxpayers to elect to apply a billing address source rule for sales of digital content where section 863(b) may otherwise apply. Section 863(b) provides, in part, that the gains, profits, and income from the sale or exchange of inventory property produced (in whole or in part) by the taxpayer within the United States and sold or exchanged without the United States, or produced (in whole or in part) by the taxpayer without the United States and sold or exchanged within the United States, shall be allocated and apportioned between sources within and without the United States solely on the basis of the production activities with respect to the property.

The final regulations do not adopt the comment recommending allowing taxpayers to elect to apply a billing address source rule for sales of digital content where section 863(b) would apply. When section 863(b) applies, property produced and sold by a taxpayer must be sourced “solely on the basis of the production activities with respect to the property.” There is nothing to suggest that the billing address of the customer is relevant to this statutory rule based on place of production, and so the final regulations do not adopt this comment.

One comment supported the location of download or installation rule for determining the place of sale for copyrighted articles, and recommended the final regulations explicitly adopt a uniform rule for sourcing income from sales, leases, and licenses of digital content based on the location of the end-user. The comment also recommended allowing taxpayers to rely on recorded sales data to determine the location of the end-user for purposes of determining place of use for leases and licenses of digital content.

The final regulations do not adopt this comment. Section 1.861-18(f)(2)(ii) clarifies how the place of sale of digital content is determined for purposes of sections 861 through 865. Those sections contain different rules for determining the source of income from leases and licenses, for which the place of transfer is not the relevant statutory rule (generally, the determination is based on where the property subject to the lease or license is used, or where the possessor of the interest has the right to use the property). See sections 861(a)(4), 862(a)(4). Section 1.861-18(f)(2)(ii) looks to the customer's billing address for purposes of determining the place of sale for purposes of § 1.861-7(c). While that may sometimes also be the location in which the digital content is used, that is not necessarily the case. For example, where copyright rights are transferred in a transaction that is classified as a license, the copyright rights may be used in multiple locations, and not just the location of the customer's billing address. Similarly, not all income from sales is sourced to the place where the sale occurred. In those cases, the statute provides the relevant determination, such as the place of production in section 863(b) or the residence of the seller in section 865(a). The location of download or installation is not necessarily indicative of any of those things, and the Treasury Department and the IRS only intend for the rule in § 1.861-18(f)(2)(ii) to be used to determine the place where the sale occurred for purposes of statutory sourcing rules that rely on that determination. Therefore, § 1.861-18(f)(2)(ii) of the final regulations is not extended to provide a sourcing rule for all sales, licenses, and leases of digital content.

Finally, a comment suggested that the regulations clarify that a license of copyright rights from a copyright owner to a distributor is sourced under section 861(a)(4) or 862(a)(4). Because § 1.861-18(f)(2), as in effect before this Treasury decision, already provides that income derived from licensing copyright rights is sourced under section 861(a)(4) or 862(a)(4), no changes have been made in response to this comment.

Proposed § 1.861-19 would not provide a source rule for cloud transactions. As such, the proposed regulations indicated that existing law, regulations, and IRS guidance regarding sourcing services and leases would apply to sourcing cloud transactions. Numerous comments were received regarding whether a specific source rule for cloud transactions would be appropriate and several of these comments included suggestions for such a rule.

The Treasury Department and the IRS are of the view that that there would be benefits for taxpayer compliance and administrability if gross income from cloud transactions were sourced using a uniform rule. Thus, the Treasury Department and the IRS are issuing proposed regulations (REG-107420-24) published elsewhere in this same issue of the Federal Register that provide rules for determining the source of gross income from a cloud transaction.

The proposed regulations would have removed Examples 4 and 5 from § 1.937-3(e). Section 937 provides residence and source rules involving territories. Examples 4 and 5 of § 1.937-3(e) relate to the sourcing of income from digital content transactions and cloud transactions, respectively. One comment suggested that the proposal to remove Example 5 was premature because the proposed regulations did not include a source rule for cloud transactions. The final regulations do not accept this comment. As discussed in Part IV.B of this Summary of Comments and Explanation of Revisions, the Treasury Department and the IRS are issuing a companion notice of proposed rulemaking addressing the source of income from cloud transactions concurrent with these final regulations. Therefore, to avoid potentially inconsistent inferences, the final regulations remove both Examples 4 and 5 of § 1.937-3(e).

The preamble to Treasury Decision 8785, which promulgated § 1.861-18 in 1998, stated that the Treasury Department and the IRS were considering whether to issue guidance regarding whether transactions in copyrighted articles are transactions in tangible property, and whether transactions in copyright rights are transactions in intangible property, in each case for purposes of section 482. The proposed regulations did not contain further guidance on this topic.

One comment to the proposed regulations recommended that the Treasury Department and the IRS reconsider this matter and issue guidance on this topic because the characterization of a transfer of digital content as tangible or intangible property is important for purposes of sections 250, 367(d), and 482. The Treasury Department and IRS have determined that guidance on whether the categories of transactions in § 1.861-18 are considered tangible or intangible property for purposes of such Code sections is outside the scope of these regulations.

One comment suggested that section 904 should be amended as it relates to certain sales income earned by U.S. residents to prevent “cross-crediting” of high-taxed income and zero- or low-taxed income within the same foreign tax credit basket under section 904(d)(1). The comment noted that such “cross-crediting” results in the U.S. partially or fully bearing the cost of the high tax rates in some foreign jurisdictions because a credit related to the high-taxed income may offset U.S. tax on the income from low-tax jurisdictions. Amendments to section 904 are outside the scope of this Treasury Decision.

Two comments suggested changes to the regulations under section 250 pertaining to foreign-derived intangible income (FDII). One comment requested that the Treasury Department and the IRS introduce a rule under § 1.250(b)-4 stating that intangible property used in providing a service that is a cloud transaction within the meaning of § 1.861-19 is, for purposes of section 250, used at the location of the employees engaged in, and tangible property used in, providing the cloud transaction service. That comment also suggested adding a de minimis rule under § 1.250(b)-4 providing that any de minimis use of intangible property is disregarded in a cloud transaction. A second comment noted that the characterization of a cloud transaction would impact whether income is eligible for the FDII deduction because there are different rules for establishing “foreign use” for services and lease transactions. That comment also suggested that the “foreign use” rule for intangible property should replicate the rule governing foreign use of general property. These comments are outside the scope of this Treasury Decision, but were considered in finalizing the section 250 regulations. See T.D. 9901 (85 FR 43042, July 15, 2020).

Section 1.861-18, as in effect before this Treasury decision, applied only to certain listed international provisions of the Code. When § 1.861-18 was promulgated in 1998, the preamble stated that the Treasury Department and the IRS were considering whether the principles of § 1.861-18 should apply to other provisions of the Code. The proposed regulations retained the scope of § 1.861-18 by applying only to certain listed international provisions of the Code, although additional sections of the Code were added to the scope of the proposed regulations due to changes in law between 1998 and the date of the proposed regulations. Proposed § 1.861-19 would also apply only to the same listed international provisions of the Code.

The Treasury Department and the IRS received comments recommending expanding the scope of the final regulations to apply for all purposes of the Code, particularly with respect to § 1.861-18 for which all comments received on this topic recommended expansion to all purposes of the Code. Multiple comments expressed that the framework of the proposed regulations provides sensible rules and certainty with respect to transactions involving digital content. One comment also expressed concern that limiting the scope of the final regulations to only international provisions of the Code could lead to the same transaction being characterized differently depending on which Code section was applied. Another comment expressed the belief that both taxpayers and the IRS will utilize the guidance in the final regulations by analogy even if the final regulations apply only to international provisions of the Code, and that it would be better to make it clear that the final regulations apply to all provisions of the Code so that taxpayers and the IRS will not have to go through the rigors of trying to convince the other party that the final regulations are relevant in a particular case.

Unlike § 1.861-18, some comments recommended that § 1.861-19 not be applied beyond the scope provided in the proposed regulations. These comments expressed concern that the preamble to § 1.861-19 referenced section 7701(e) (pertaining to the treatment of certain contracts as leases rather than service contracts), and recommended against any guidance providing that section 7701(e) could apply throughout the Code, including Subchapter M. One comment explained that the extent to which the provision of services affects the definition of “rents from real property” for real estate investment trust purposes is addressed not only in Subchapter M and the regulations thereunder, but also in numerous items of IRS sub-regulatory guidance and private letter rulings specifically interpreting Subchapter M. The comments recommended adding an explicit disclaimer in the preamble and the text of the final regulations that any purported interpretation and application of section 7701(e) principles in the final regulations do not apply outside the intended scope of the final regulations, and therefore do not apply to lease-versus-service determinations under other provisions of chapter 1 of the Code. As discussed under Part III.A of this Summary of Comments and Explanation of Revisions, the final regulations treat all cloud transactions as the provision of services, and accordingly remove the section 7701(e) factors from the regulatory text.

More broadly, the Treasury Department and the IRS continue to study issues related to applying the final regulations to all provisions of the Code. Concurrently with the issuance of the final regulations, the Treasury Department and the IRS are issuing a Notice (Notice 2025-6) requesting comments regarding issues to consider in deciding whether to apply the characterization rules in §§ 1.861-18 and 1.861-19, as amended and added, respectively, by the final regulations to all provisions of the Code.

The proposed regulations would treat a change in method of accounting that a taxpayer made in order to comply with the proposed regulations as a change initiated by the taxpayer. Accordingly, the change in method of accounting would have to be implemented under the rules of § 1.446-1(e) and the applicable administrative procedures that govern voluntary changes in method of accounting under section 446(e).

Two comments suggested that if a taxpayer must change its method of accounting in order to comply with the final regulations, then such change should be eligible for automatic consent.

The final regulations do not adopt these comments. The Treasury Department and the IRS generally do not anticipate taxpayers needing to change methods of accounting as a result of the final regulations. Additionally, in light of the aforementioned Notice requesting comments on applying the characterization rules in §§ 1.861-18 and 1.861-19, as amended and added, respectively, by the final regulations for all purposes of the Code, the Treasury Department and IRS have determined that it is important to ensure that any accounting method changes due to these regulations are consistent with the appropriate treatment of the transactions at issue under all appropriate Code or regulation sections.

The proposed regulations were proposed to apply to transactions entered into pursuant to contracts entered into in taxable years beginning on or after the date of publication of final regulations.

Comments recommended the final regulations apply to transactions entered into in taxable years beginning on or after the date that final regulations are published, regardless of the date of the contracts pursuant to which such transactions were entered into. One comment noted that it would be difficult to trace particular transactions to contracts that were entered into in taxable years that begin on or after the date of publication of final regulations. Other comments noted that the proposed applicability date may result in different rules applying to similar transactions of the same taxpayer long after these regulations are finalized.

One comment suggested allowing taxpayers to elect application of the final regulations to taxable years ending after the date of publication of the proposed regulations. Another comment recommended that taxpayers be allowed to elect to apply the final regulations to transactions taking place before the effective date of the final regulations.

In response to these comments, the final regulations generally apply to taxable years beginning on or after the date of publication of this Treasury decision in the Federal Register . However, taxpayers may elect to apply all of the rules of the final regulations to taxable years beginning on or after August 14, 2019 and all subsequent taxable years as long as all related persons (within the meaning of sections 267(b) and 707(b)) also apply all of the rules of the final regulations to taxable years beginning on or after August 14, 2019 and all subsequent taxable years, the period of limitations on assessment for each taxable year of the taxpayer and all related parties (within the meaning of sections 267(b) and 707(b)) is open under section 6501, and the taxpayer would not be required under this section to change its method of accounting as a result of such election.

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

The Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) (PRA) generally requires that a Federal agency obtain the approval of the Office of Management and Budget (OMB) before collecting information from the public, whether such collection of information is mandatory, voluntary, or required to obtain or retain a benefit. An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a valid control number assigned by the Office of Management and Budget.

The collections of information in these final regulations contain reporting and recordkeeping requirements that are necessary to ensure the correct classification of digital content transactions and cloud transactions. The collections will be used by the IRS for tax compliance purposes.

The final regulation mentions a reporting requirement where a taxpayer may be required to change its method of accounting. For PRA purposes, Form 3115, Application for Change in Accounting Method, is already approved by OMB under Control Numbers 1545-0047 for tax-exempt entities, 1545-0074 for individuals, 1545-0123 for business filers and 1545-0092 for trust and estate filers.

The recordkeeping requirements include that entities keep records of their transactions to substantiate the transaction classification. These recordkeeping requirements are considered general tax records under § 1.6001-1(e). For PRA purposes, general tax records are already approved by OMB under 1545-0047 for tax-exempt entities, 1545-0074 for individuals, 1545-0123 for business filers and 1545-0092 for trust and estate filers.

These final regulations are not creating new information collections or changing information collections already approved by OMB.

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

Although data are not readily available to estimate the number of small entities that would be affected by the final regulations, the Treasury Department and the IRS project that any economic impact of the regulations would be minimal for businesses regardless of size. These final regulations generally provide clarification of definitions regarding how transactions are classified, and thus are not expected to have an impact on burden for large or small businesses. The Treasury Department and the IRS project that any economic impact would be small because current industry practice is generally consistent with the principles underlying the final regulations.

Pursuant to section 7805(f) of the Code, the proposed regulations (REG-130700-14) preceding these final regulations were submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on the impact on small businesses and no comments were received.

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

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

The principal authors of these final regulations are Christopher E. Fulle and Michelle L. Ng of the Office of the Associate Chief Counsel (International). However, other personnel from the Treasury Department and the IRS participated in their development.

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

This document contains amendments to 26 CFR parts 1 and 301 (the “final regulations”) under sections 1503(d) and 7701 of the Internal Revenue Code (the “Code”). The final regulations are issued pursuant to the express delegations of authority under section 7805(a), which authorizes the Secretary of the Treasury (the “Secretary”) to “prescribe all needful rules and regulations for the enforcement” of the Code, section 1503(d)(2)(B), which authorizes the Secretary to provide exceptions to the term “dual consolidated loss,” and section 1503(d)(3), which authorizes the Secretary to address losses of “separate units.”

On December 11, 2023, the Department of Treasury (“Treasury Department”) and the IRS released Notice 2023-80, 2023-52 IRB 1583, which, among other things, described the interaction of the DCL rules with model rules published by the OECD/G20 Inclusive Framework on BEPS (the “GloBE Model Rules”)  1 and requested comments on such interaction. The notice also announced limited transition relief from the application of the DCL rules to the GloBE Model Rules for “legacy DCLs,” which in general are DCLs incurred before the effective date of the GloBE Model Rules.

On August 7, 2024, the Treasury Department and the IRS published proposed regulations (REG-105128-23) in the Federal Register (89 FR 64750) under sections 1502, 1503(d), and 7701 of the Code, with a correction published in the Federal Register on September 3, 2024 (89 FR 71214) (the “2024 proposed regulations”), that would address certain issues arising under the DCL rules. In general, the 2024 proposed regulations would clarify how the DCL rules interact with the intercompany transaction rules in § 1.1502-13, modify how items arising from stock ownership are taken into account when computing the amount of a DCL, and address the application of the DCL rules to foreign taxes that are based on the GloBE Model Rules. The 2024 proposed regulations also included disregarded payment loss (“DPL”) rules, under which domestic corporations would be required to include amounts in income in certain cases involving disregarded payments. Further, the 2024 proposed regulations included an anti-avoidance rule applicable for both DCL and DPL purposes.

This document finalizes certain rules from the 2024 proposed regulations. These rules and related comments received in response to the 2024 proposed regulations are discussed in the Summary of Comments and Explanation of Revisions section of this preamble. All comments are available at https://www.regulations.gov or upon request. A public hearing was held on the 2024 proposed regulations on November 22, 2024, but the speaker requesting to testify did not attend the hearing. The Treasury Department and the IRS intend to finalize, in future guidance, the remaining rules from the 2024 proposed regulations.

This document also announces additional transition relief for the application of the DCL rules to foreign taxes that are based on the GloBE Model Rules. This relief is discussed in the Additional Transition Relief with respect to the GloBE Model Rules section of this preamble.

This document finalizes the rules from the 2024 proposed regulations that relate to DPLs, including portions that are also relevant for DCLs, such as the anti-avoidance rule and the deemed ordering rule. The document retains the basic approach and structure of these rules, with certain revisions.

Part II of the Summary of Comments and Explanation of Revisions summarizes the DPL rules, including the purposes and general approach of the rules under the 2024 proposed regulations, and discusses related comments and revisions. Part III discusses comments and revisions related to rules applicable to both DCLs and DPLs. Part IV discusses applicability dates of the final regulations.

The DPL rules are a component of the entity classification regulations under §§ 301.7701-1 through 301.7701-3 (the “check-the-box regulations”). The check-the-box regulations were intended to bring simplicity and administrability to entity classifications under section 7701. They permit certain business entities to be classified for U.S. tax purposes as entities disregarded as separate from their owners. The classification may be determined either pursuant to default rules or by election. However, the application of these regulations to foreign entities, particularly where a foreign entity is treated as a disregarded entity, has led to unintended tax consequences, including avoidance of international provisions of the Code. The purpose of the DPL rules is to prevent certain arrangements involving disregarded entity classifications from avoiding the DCL rules.

As an example, when a domestic corporation borrows from a bank and on-lends the loan proceeds to its foreign disregarded entity, the single economic borrowing could give rise to deductions under both U.S. tax law (for interest payments to the bank) and foreign tax law (for interest payments to the domestic corporation). As a result, if the U.S. deduction is used to offset U.S. income that is not subject to foreign tax, and the foreign tax deduction generates a foreign loss that is used to offset foreign income that is not subject to U.S. tax (for example under a consolidation regime), then the single economic borrowing would give rise to a double deduction outcome. Such double deduction outcome, however, would not be addressed by the existing DCL rules because the loss of the disregarded entity would not be recognized for U.S. tax purposes. Conversely, if the disregarded entity's interest payments were regarded for U.S. tax purposes (for example, if the arrangement involved direct financing of the disregarded entity by the bank), the loss would be subject to the existing DCL rules. This avoidance of the DCL rules is an unintended consequence of the check- the-box regulations which, as noted above, were issued for the simplification and administrability of entity classification determinations.

The DPL rules are intended to address these concerns by (i) tracking whether certain payments involving a disregarded entity and its owner give rise to potential double deduction outcomes, and (ii) neutralizing any resulting double deduction outcome through an income inclusion similar to the one that that the owner would have had with respect to the payments had the payments been regarded for U.S. tax purposes (that is, had the classification as a disregarded entity under the check-the-box regulations not been taken into account). As revised under the final regulations, the DPL rules also treat the income inclusion as giving rise to a deduction, the use of which is suspended until the entity takes into account certain disregarded income, with the result that the rules are consistent with what would have occurred if certain disregarded payments were regarded for U.S. tax purposes (as discussed in part II.F of the Summary of Comments and Explanation of Revisions). In this way, the check-the-box regulations continue to permit certain entities to be disregarded for U.S. tax purposes (including by election), but such classifications are subject to new (targeted) rules that prevent the classifications from giving rise to avoidance of the DCL rules. Alternative approaches to addressing these concerns would include more broadly restricting disregarded entity classifications (for example, by requiring a foreign entity to be classified as an association for U.S. tax purposes if the entity is a foreign tax resident, or classifying single-owner foreign entities as associations in all cases).

Under the 2024 proposed regulations, the DPL rules would apply with respect to a domestic corporation and a disregarded entity of the domestic corporation (or a disregarded entity in which the domestic corporation indirectly owns an interest) if transactions involving the entity and domestic corporation are deductible under a foreign tax law, such as where the entity is a tax resident of a foreign country. See proposed § 301.7701-3(c)(4). In these cases, the 2024 proposed regulations described the domestic corporation as consenting to such application of the DPL rules (generally by reason of the entity's check-the-box election) and generally referred to the disregarded entity and the domestic corporation as a disregarded payment entity (“DPE”) and specified domestic owner, respectively. See proposed §§ 1.1503(d)-1(d)(1) and 301.7701-3(c)(4). This document retains the nomenclature of the 2024 proposed regulations, with certain simplifications or other modifications, such as referring to a specified domestic owner as a DPE owner and eliminating references to consent (discussed in part II.B.2 of the Summary of Comments and Explanation of Revisions). 2

Under the proposed DPL rules, the DPE owner would monitor whether the DPE incurs a DPL or derives disregarded payment income (“DPI”). See proposed § 1.1503(d)-1(d)(1). A DPL or DPI would be determined by taking into account only certain items under the relevant foreign tax law (generally interest or royalties) that are not regarded for U.S. tax purposes. See proposed § 1.1503(d)-1(d)(6)(ii). The DPE would have a DPL to the extent that, under the foreign tax law, its deductions for such items exceed its income from such items, and it would have DPI to the extent the reverse is true. See id. Under the 2024 proposed regulations, a DPE's cumulative amounts of DPL and DPI would be tracked in the DPE's “DPL cumulative register” through negative and positive adjustments, respectively, to the register. See proposed § 1.1503(d)-1(d)(5)(ii).

In the case of a DPL, the DPE owner generally would disclose the DPL on an initial certification statement and file annual certifications for a 60-month period affirming that the DPL has not been put to a foreign use. See proposed § 1.1503(d)-1(d)(1). A failure to comply with this certification requirement, or a foreign use of the DPL within the certification period (each, a “triggering event”), would require the DPE owner to include in gross income the DPL inclusion amount. See proposed § 1.1503(d)-1(d)(1) and (3). The DPL inclusion amount would be equal to the amount of the DPL, reduced by the positive balance (if any) in the DPL cumulative register. See proposed § 1.1503(d)-1(d)(2) through (5). Requiring the DPL inclusion amount in the year of the triggering event (rather than the year in which the DPL is incurred) would be consistent with the approach under the current DCL rules and avoids any administrative or compliance burdens that could result by instead requiring taxpayers to extend the statute of limitations and amend tax returns upon a triggering event of the DPL.

Comments asserted that the DPL rules do not reflect a proper exercise of the Treasury Department and the IRS's rulemaking authority for a variety of reasons. Some comments claimed that Congress has not expressed a concern with deduction/no inclusion outcomes arising from disregarded payments because those types of outcomes are not explicitly described in sections 245A(e), 267A, or 1503(d), the Code's anti-hybrid provisions. These comments asserted that the DPL rules in effect implement the recommendations from the OECD reports  3 relating to disregarded payments but noted that Congress has not adopted those recommendations—whereas Congress did adopt other OECD recommendations in enacting sections 245A(e) and 267A. The comments accordingly argued that the 2024 proposed regulations inappropriately circumvent Congress by implementing OECD policies that Congress has rejected.

Other comments asserted that the DPL rules have no basis in section 1503(d), because section 1503(d) operates by disallowing a domestic corporation's net operating loss. These comments contended that the DPL rules go beyond what section 1503(d) permits because they impose an income inclusion (rather than deny a loss) based on disregarded transactions that cannot give rise to a net operating loss (which is computed by reference to regarded items only). Comments similarly argued that section 7701 provides no basis for the DPL rules because section 7701 pertains to an entity's tax classification and does not authorize income inclusions. One comment also contended that the Treasury Department and the IRS cannot rely on section 7805(a)'s general grant of rulemaking authority for the DPL rules because section 7805(a) authorizes the Secretary to issue regulations “for the enforcement” of the Code, and, according to the comment, the DPL rules do not relate to any Code provision.

Another set of comments argued that the DPL rules are arbitrary and capricious. According to the comments, the DPL rules address the erosion of foreign tax bases and thus are not in furtherance of any recognized U.S. tax policy, which, one comment stated, has historically permitted taxpayers to reduce their foreign tax liability. One comment further argued that taxpayers have a reliance interest on the certainty afforded by the check-the-box regulations, which, according to the comment, Congress has impliedly endorsed by leaving the regulations undisturbed since their issuance in 1996. The comment stated that the Treasury Department and the IRS cannot upset those reliance interests by adding the DPL rules to the check-the-box regime and asserted that changes to the regime to address hybridity-related concerns should not be made absent direction from Congress. The comment referred to Notice 98-11, 1998-1 C.B. 433, and the temporary and proposed regulations issued under the notice that treated a disregarded entity that engaged in certain transactions as a foreign corporation for purposes of subpart F of the Code. The Senate Finance Committee proposed a six-month moratorium on implementing the regulations to provide Congress time to consider the issues. See S. Rept. 105-174, at 107-110 (1998).

The Treasury Department and the IRS disagree with these comments. The DPL rules prevent certain disregarded entity classifications from giving rise to avoidance of the DCL rules (as discussed in part II.A of the Summary of Comments and Explanation of Revisions). Because these classifications arise under the check-the-box regulations, revising the regulations to prevent abuse, other misuse, or unintended consequences that only arise due to the classification rules under the check-the-box regime is an appropriate exercise of the authority underlying the regulations, including the express delegation of authority under section 7805(a) of the Code. These revisions generally produce outcomes consistent with what would have occurred if certain disregarded payments were regarded for U.S. tax purposes (as discussed in part II.F of the Summary of Comments and Explanation of Revisions).

As a limitation on disregarded entity classifications, the DPL rules are consistent with other special rules in the check-the-box regulations that regard an entity for certain limited purposes, while generally retaining the entity's disregarded entity classification. For example, disregarded entity status is not respected for purposes of certain rules related to banking, federal tax liabilities, and employment and excise taxes. See § 301.7701-2(c)(2)(ii) through (v). Similarly, § 301.7701-2(c)(2)(vi) treats certain domestic disregarded entities as corporations for purposes of section 6038A to provide the IRS with access to information to satisfy its obligations under international agreements and strengthen the enforcement of U.S. tax laws.

When the check-the-box regulations were issued, the preamble made clear that additional rules may be required to prevent inappropriate outcomes. TD 8697 (61 FR 66584, 66585) (describing that, in light of the increased flexibility under an elective regime for entity classifications, the Treasury Department and the IRS will monitor for, and take appropriate action to address, results that are inconsistent with the policies and rules of particular Code provisions). Further, the history of Notice 98-11 and the regulations issued thereunder do not support the conclusion that the Treasury Department and the IRS lack authority for the DPL rules. In fact, the Senate report specifically stated that the proposed moratorium on the regulations described in Notice 98-11 should not be interpreted as the Treasury Department and the IRS lacking authority to impose limitations on disregarded entity classifications. See S. Rept. 105-174, at 110 (1998).

Moreover, the DPL rules are a reasonable response to significant policy concerns resulting from the check-the-box regulations. Addressing these concerns by requiring an income inclusion (that neutralizes the double deduction outcome by, in effect, offsetting the related deduction that would otherwise be allowed for U.S. tax purposes) prevents taxpayers from circumventing the DCL rules through the artifice of causing payments to be disregarded. The approach in this rulemaking maintains the simplicity and flexibility (including the electivity component) of the check-the-box regulations while preventing inappropriate outcomes through new rules with narrow application. Further, taxpayers that prefer to avoid the application of the DPL rules can do so by restructuring to avoid these inappropriate outcomes, as illustrated in § 1.1503(d)-7(c)(45) (Example 45). See also parts II.D.1, II.D.2, II.F, and G.1 of the Summary of Comments and Explanation of Revisions (discussing certain revisions in response to comments, which have the effect of further narrowing and deferring the application of the DPL rules). Thus, by preventing the check-the-box regulations from enabling inappropriate outcomes, the DPL rules are a reasonable modification of the regulations. Furthermore, the Treasury Department and the IRS disagree that DPL rules inappropriately promote the policy underlying the OECD recommendations to address double non-taxation resulting from hybridity. Instead, the DPL rules promote the U.S. tax policy underlying section 1503(d), which was enacted in 1986 (and modified in a technical correction in 1988), to prevent double deduction outcomes; the OECD policy that was set forth in the Hybrids Mismatch Report and Branch Mismatch Report, issued in 2015 and 2017, respectively, is simply consistent with the existing, longstanding U.S. policy.

Finally, the Treasury Department and the IRS have consistently raised the concern that the check-the-box regulations could expand the use of hybrid structures. This concern was identified in Notice 95-14, 1995-14 IRB 7, which first announced that an elective entity classification regime was under consideration and solicited comments on the propriety of extending an elective regime to foreign entities, noting the increased potential for hybrid entities. Since then, the check-the-box regime has increased the prevalence of hybrid structures to an extent not initially foreseen, and many of these structures are designed for tax avoidance. The Treasury Department and the IRS have addressed this avoidance through targeted rules where feasible. See, for example, § 1.894-1(d)(2)(ii) and TD 8999 (67 FR 40157) (relating to the use of domestic reverse hybrid entities to obtain inappropriate treaty benefits); §§ 1.1503(d)-1(c) and 301.7701-3(c)(3) (relating to the use of domestic reverse hybrid entities to obtain double-deduction outcomes). Taxpayers therefore should not have an expectation that a disregarded entity classification can be used to circumvent the DCL rules, and in any case, the Treasury Department and the IRS are of the view that any such expectations would not constitute a significant reliance interest that would caution against this rulemaking, given the limited extent to which the DPL rules impose a condition on certain payments involving disregarded entities. Reliance interests, if any, are significantly outweighed by the need to prevent inappropriate results.

Comments also asserted that the Treasury Department and the IRS do not have authority to apply the DPL rules in specific fact patterns. According to these comments, the DPL rules should not apply where no entity classification election is made under § 301.7701-3, such as where a foreign entity defaults to disregarded entity classification, because in these cases there is no affirmative act by reason of which the taxpayer consents to the application of the DPL rules. Another comment claimed that the DPL rules should not apply where the DPE owner is not part of a group that files a consolidated return, asserting that sections 1502 and 1503(d) cannot apply to a corporation that is not a member of a consolidated group.

The Treasury Department and the IRS disagree with these comments. As discussed in part II.B.1 of the Summary of Comments and Explanation of Revisions, the DPL rules are a component of the check-the-box regime. Under the check-the-box regulations, promulgated in 1996, the Treasury Department and the IRS permit certain entities with a single owner to choose whether or not to be treated as disregarded as separate from their owner for most federal income tax purposes. However, even entities that choose to be disregarded as separate from their owner for most federal income tax purposes are not disregarded for all purposes. For example, these entities are regarded for purposes of federal income tax liability, excise taxes, and employment taxes. See § 301.7701-2(c)(2). The treatment of an entity as disregarded for some purposes and regarded for other purposes under § 301.7701-2(c)(2) does not depend on whether the entity is treated as disregarded pursuant to the default rules or by election.

Like the other rules in § 301.7701-2(c)(2) and as discussed in part II.F of the Summary of Comments and Explanation of Revisions, the DPL regulations effectively provide that a DPE is regarded for purposes of recognizing certain interest and royalty payments between a DPE and its owner or between a DPE and other disregarded entities. However, for purposes of administrability, these rules do not regard the payment more broadly or require the filing of amended returns to reflect the revocation of a disregarded entity classification.

Further, the check-the-box regime is an elective regime that allows eligible entities to choose their entity classification. The check-the-box regulations provide default classification rules that aim to match taxpayers' expectations and thus reduce the number of elections that taxpayers must file to select their entity classification of choice. See TD 8797 (61 FR 66584). Thus, through the check-the-box regulations, an eligible entity chooses to be classified as a disregarded entity, regardless of whether that choice occurs by accepting the default classification (that is, by choosing not to elect an alternative treatment) or by filing an election; it is merely the mechanics of obtaining a disregarded entity classification that differ. On the other hand, absent regulations under section 7701, no foreign business entity would generally be treated as a disregarded entity.

Moreover, applying the DPL rules without regard to whether disregarded entity classification is obtained by election or pursuant to the default rules ensures consistency. Otherwise, similarly situated taxpayers could have different outcomes based solely on whether the entity they choose to use is an entity that satisfies the default rule to be treated as a disregarded entity rather than requiring an election to achieve that result.

Lastly, the DPL rules are not issued under section 1502 authority (and section 1503(d) is not limited in application to consolidated groups). The DPL rules are issued under the authority of sections 1503(d), 7701, and 7805(a) and are located under section 1503(d) because the rules leverage concepts from, and prevent the avoidance of, the DCL rules.

As discussed in part II.C of the Explanation of Provisions of the 2024 proposed regulations, the DPL rules operate independently of the DCL rules. For example, only items that are regarded for U.S. tax purposes are taken into account in computing a DCL (or the DCL cumulative register), and only items that are disregarded for U.S. tax purposes would be taken into account in computing a DPL (or the DPL cumulative register). The view of the Treasury Department and the IRS as expressed in the 2024 proposed regulations was that integrating the two regimes would result in considerable complexity and administrative burden. For example, fully integrating the regimes would likely require a significantly broader scope of the DPL rules to take into account all disregarded payments (consistent with the scope of the DCL rules, which take into account all regarded payments) and to take into account all of the triggering events that apply with respect to DCLs (rather than only two triggering events that apply under the DPL rules).

Comments requested integration or coordination of the DPL rules and DCL rules, suggesting that an integrated or coordinated set of rules could ensure consistent treatment of similar transactions (regardless of whether regarded or disregarded for U.S. tax purposes) and simplify compliance. For example, one comment proposed withdrawing the DPL rules and revising the DCL rules to ignore disregarded and intercompany transactions (as defined in § 1.1502-13(b)(1)) in calculating the amount of a DCL, while at the same time taking such transactions into account under a modified DCL register. Specifically, under this approach, a separate unit would calculate its income or loss both with and without disregarded and intercompany transaction items that offset in amount, with the smaller amount of income being dual income and thus increasing the DCL register, or with the smaller amount of loss being a dual loss and thus a DCL. The difference between the with-and-without calculation in a year would be tracked as an attribute—excess income or excess loss—for purposes of applying the with-and-without calculation in subsequent years. The comment stated that this approach would provide parity between disregarded and intercompany transactions, parity between calculation of a DCL register and the amount of a DCL, and parity between different types of items.

The final regulations do not adopt these comments because the Treasury Department and the IRS remain of the view that integration or other coordination would result in considerable complexity and administrative burden. Additionally, the with-and-without approach proposed by a comment would not address the double deduction outcome arising from a disregarded entity classification in a prototypical case involving a DPL arising from back-to-back financing where the disregarded entity does not also incur a DCL—that is, the excess loss carried forward for purposes of the with-and-without calculation would be relevant only to the extent that the disregarded entity's regarded items of deduction or loss in a year exceed the regarded items of income or gain in that year.

Another comment suggested that the DPL rules be replaced with an approach that would treat a disregarded entity as a regarded pass-through entity (for example, a one-partner partnership) solely for purposes of the DCL rules, citing section 1503(d) as authority for such an approach. The comment noted that the application of the DPL rules to a disregarded entity can be avoided by introducing another owner (thereby converting the entity to a partnership) and that the suggested approach avoids the administrative complexity of this type of restructuring. The final regulations do not adopt this approach because it would require broader changes to check-the-box regulations (for example, by creating a new type of regarded pass-through entity), and it could increase complexity and compliance or administrative burden as a result of regarding items that are outside the scope of the DPL rules, such as payments for services and property transactions giving rise to ordinary income or loss.

Lastly, a comment suggested that because the DPL rules were issued as part of a notice of proposed rulemaking that also addresses the DCL rules and those would operate independently of each other, the DPL rules should be withdrawn and issued as a standalone notice of proposed rulemaking. According to the comment, this approach would afford taxpayers a more adequate notice-and-comment period and more clearly signal to affected taxpayers the standalone nature of the DPL rules. The Treasury Department and the IRS have determined that finalizing the DPL rules is appropriate regardless of whether the proposed version of the rules was included in a notice of proposed rulemaking that included other concepts and that the proposed version of the rules provided sufficient notice-and-comment, including about the standalone nature of the DPL rules.

Under the 2024 proposed regulations, the DPL or DPI of a DPE would be determined by taking into account only items that both (i) give rise to deductions or income of the DPE under a foreign tax law (in the case of deductions, determined with regard to any application of foreign hybrid mismatch rules), and (ii) are disregarded for U.S. tax purposes but would be interest, structured payments, or royalties if the items were regarded. 4 See proposed § 1.1503(d)-1(d)(6)(ii) and (d)(7)(v). This limited application of the DPL rules would address transactions that are likely structured to avoid the DCL rules.

Comments suggested narrowing the scope of the DPL rules in several respects (and not expanding the rules to cover other payments such as for disregarded services), so that the rules better address transactions likely to give rise to double non-taxation and minimize compliance burden. Some comments suggested that the DPL rules not apply to royalties, or at least royalties paid pursuant to a license executed before the date of the 2024 proposed regulations. A comment asserted that most foreign entities enter into intercompany licensing arrangements for non-tax business reasons and that restructuring these licenses is not always easy or feasible, including because of legal restrictions or foreign tax costs. Other comments asserted that the licenses generally create substantial dual inclusion income (either through exploiting the intangible property or sub-licenses) and, therefore, do not give rise to double non-taxation; one of these comments, however, noted that absent at least partial integration of the DCL and DPL regimes, the dual inclusion income attributable to a license agreement could be double counted by both reducing a DPL and a DCL.

Comments also suggested not applying the DPL rules to payments that are subject to tax in another foreign country (for example, payments between DPEs that are tax residents of different foreign countries), or possibly only to the extent that the other foreign country has a sufficiently high statutory or effective tax rate. A comment noted that an effective tax rate analysis for purposes of such an exception could rely on existing methods, like the GloBE Model Rules or the GILTI high-tax exception in § 1.951A-2(c)(7) but acknowledged resulting compliance and administrative burdens. Comments also suggested not applying the DPL rules if the disregarded entity has net income for foreign tax purposes (for example where the DPE's net regarded income or net disregarded services income exceeds its DPL), asserting that, absent such an exception, the entity classification regime would be more complex to administer and taxpayers would be incentivized to restructure in a manner that is adverse to U.S. tax policy and results in additional foreign tax and, in turn, additional foreign tax credits. Further, comments recommended not applying the DPL rules to payments subject to hybrid mismatch rules in the payor jurisdiction, contending that such jurisdiction has taken the necessary steps to address erosion of its tax base.

The final regulations generally do not adopt these specific comments. The Treasury Department and the IRS have determined that excluding all royalties from the DPL rules could incentivize new licensing structures intended to give rise to avoidance of the DCL rules given the ease with which licenses can be put in place.

The Treasury Department and the IRS have also determined that a deduction in both the United States and a foreign country is not adequately neutralized by an income inclusion in another foreign country. Additionally, to the extent that taxpayers generally minimize payments from entities in low-tax countries to related entities in high-tax countries, an exception for payments taxed at a sufficiently high tax rate would likely have limited effect while adding significant complexity.

Further, the Treasury Department and the IRS have determined that an exception under which the DPL rules do not apply if the disregarded entity has net income for foreign tax purposes would be contrary to the approach of maintaining separate DCL and DPL rules, and give rise to inappropriate results, as discussed in parts II.C and III.B of the Summary of Comments and Explanation of Revisions, respectively. Also, taking into account the application of foreign hybrid mismatch rules in determining a DPL or DPI will in many cases limit the application of the DPL rules to DPEs subject to foreign hybrid mismatch rules. Moreover, if there is no foreign use of a DPL and annual certification requirements are satisfied, the DPL rules have no further effect. The Treasury Department and the IRS remain of the view that the filing of certification requirements is necessary, even in situations where there may not be a net loss for foreign tax purposes in that particular year, to ensure that any deduction or loss composing a DPL is not put to a foreign use during the certification period. Moreover, this approach is consistent with the requirement in the DCL rules that a domestic use agreement be filed (to put a DCL to a domestic use) even in cases where it may be unlikely that a DCL can be put to a foreign use in a particular year, such as due to disregarded income that is not taken into account for DCL purposes.

Finally, structures involving hybridity that produce double deduction outcomes are contrary to the U.S. tax policies underlying section 1503(d). Consistent with the current DCL rules, the DPL rules apply even in circumstances where the absence of DPL rules could reduce the amount of foreign income tax that would otherwise be creditable for U.S. tax purposes or where the adoption of such rules may cause some taxpayers to restructure in a manner that increases the amount of creditable foreign income tax.

However, in response to these comments, the final regulations provide a de minimis exception and (consistent with a comment) do not apply the DPL rules to royalties paid pursuant to a license agreement executed before the date of the 2024 proposed regulations. See § 1.1503(d)-1(d)(5)(ii)(E) and (d)(6)(vii). Together, these modifications are intended to further limit application of the DPL rules to cases that are likely structured to produce double deduction outcomes. The Treasury Department and the IRS have determined that this approach strikes an appropriate balance between that goal and considerations like those discussed in the preceding paragraphs, while also eliminating compliance burden in certain cases.

Under the de minimis exception, a DPL with respect to a DPE and a foreign taxable year is deemed to be zero if it is incurred in connection with the conduct of an active trade or business (based on rules set forth under § 1.367(a)-2(d)), and the amount of the DPL is less than the lesser of $3 million or 10 percent of the aggregate amount of all items of the DPE that are deductible under a foreign tax law. See § 1.1503(d)-1(d)(6)(vii). This de minimis threshold is determined based on the foreign tax law and, therefore, takes into account items regardless of whether regarded or disregarded for U.S. tax purposes.

In addition to certain disregarded entities, the 2024 proposed regulations would treat certain foreign branches and dual resident corporations as DPEs. See proposed § 1.1503(d)-1(d)(1). This is because a payment treated as made by a foreign branch of a domestic corporation, including a dual resident corporation, under foreign tax law to a disregarded entity of the corporation could give rise to a deduction for foreign tax purposes without an inclusion for U.S. tax purposes, and any resulting double deduction generally would not occur if the payee were regarded for U.S. tax purposes. Further, where a DPE is owned through a partnership, the DPL rules would apply as to a DPE owner on a proportionate basis, based on the percentage of interests (by value) of the DPE that the DPE owner indirectly owns. See proposed § 1.1503(d)-1(d)(7)(ii).

Comments expressed concerns about applying the DPL rules to minority interests in DPEs, contending that such interests do not present the same related-party tax structuring concerns that the DPL rules are intended to address, and noting that a foreign use triggering event under the DPL rules requires a use by a person related to the DPE owner. The comments further noted that the DPE combination rule would exacerbate these concerns because, for example, a DPE owner's inability to comply with certification requirements with respect to a minority interest in a DPE could cause a triggering event with respect to a DPL attributable to that DPE and other DPEs in the same foreign country. Accordingly, the comments recommended applying the DPL rules with respect to a DPE owner and DPE only if the entities are related (determined under section 954(d)(3), for instance). A comment also asserted that applying the DPL rules on a proportionate basis by reference to the value of a partnership interest is burdensome because it requires an annual valuation of the partnership, and the comment suggested retaining this approach only to the extent that other partnership rules require similar valuations.

The Treasury Department and the IRS agree that the DPL rules should not apply to minority interests. Accordingly, the final regulations revise the DPE definition to exclude entities that are not related, within the meaning of section 954(d)(3), to a DPE owner. See § 1.1503(d)-1(d)(5)(i). In addition, where a DPE owner indirectly owns less than all the interests (but more than a minority interest) in a DPE, the final regulations remove the requirement in the 2024 proposed regulations that would apply the DPL rules on a proportionate basis based on value, because the Treasury Department and the IRS have determined that a DPE owner's proportionate interest can be determined under other reasonable methods.

Further, the final regulations clarify that a foreign branch owned by a domestic corporation through one or more partnerships may be a DPE. See § 1.1503(d)-1(d)(5)(i)(B). Thus, if a partnership makes a payment to a disregarded entity of the partnership and the payment is attributed to a foreign branch under foreign tax law, then (because the foreign branch may be a DPE) a domestic corporate partner's proportionate share of a resulting deduction under the foreign tax law can give rise to a DPL. See § 1.1503(d)-1(d)(6)(ii). Similarly, to address deductions arising under foreign tax law by reason of the partnership being a tax resident of a foreign country (rather than by reason of the partnership having a foreign branch), the final regulations provide that an entity that is treated as a partnership for U.S. tax purposes, but is a foreign tax resident, may be a DPE. See § 1.1503(d)-1(d)(5)(i)(C).

Because the DPL rules are a component of the check-the-box rules, the rules do not apply with respect to deductions resulting under a foreign tax law from payments treated as made between a “true” foreign branch (that is, a foreign taxable presence not conducted through a disregarded entity) and its owner. One comment expressed concerns with disparate treatment resulting from this limitation, asserting that it would incentivize structures involving true foreign branches.

The Treasury Department and the IRS have determined that this concern does not detract from the utility of the DPL rules. To the extent disregarded entity classifications facilitate structures intended to give rise to avoidance of the DCL rules, addressing those structures through new rules is appropriate regardless of whether the new rules would also address structures that are less common or more burdensome to implement.

Under the 2024 proposed regulations, a foreign use of a DPL would be determined under the principles of the rules determining the foreign use of a DCL, which are in § 1.1503(d)-3. See proposed § 1.1503(d)-1(d)(3)(i). Thus, for example, under the so-called “made available” standard, a foreign use of a DPL would occur if any portion of a deduction taken into account in computing the DPL is made available under a relevant foreign tax law to offset an item of income that, for U.S. tax purposes, is an item of income of a foreign corporation that is related to the DPE owner. Generally, a foreign use of a DPL (or DCL) would occur as a result of structures intended to avoid the application of the DCL rules.

The concept of the entirety of a DPL (or DCL) being put to a foreign use by reason of the availability under a relevant foreign tax law of any portion of a deduction composing the DPL (or DCL) is, in conjunction with the “made available” standard, referred to as the “all or nothing” principle. See TD 9315 (72 FR 12902, 12910-11). As indicated in the preamble to the 2024 proposed regulations, the all or nothing principle addresses a concern of the Treasury Department and the IRS that alternative approaches, such as treating a foreign use as occurring only to the extent that a deduction actually offsets income of a foreign corporation, would lead to significant administrative complexity and the need for detailed ordering rules.

A comment recommended against the all or nothing principle, asserting that the administrability concerns underlying the principle in the DCL context are not applicable in the DPL context because a DPL is defined only by reference to certain deductions existing for foreign tax purposes and, thus, the DPL rules do not require an analysis of whether an item that exists for U.S. tax purposes composes an item that exists for, and has been made available for use under, a foreign tax law. Additionally, the comment stated that the all or nothing principle is inconsistent with OECD reports and can give rise to inappropriate outcomes.

The Treasury Department and the IRS remain of the view that departing from the all or nothing principle in the DPL context would (like in the DCL context) give rise to significant administrability and compliance concerns. See also TD 9315, 72 FR 12902, 12911 (“The IRS and Treasury Department continue to believe that, even under the approaches suggested by these commentators, departing from the all or nothing principle would lead to substantial administrative complexity.”) For example, specific rules would be needed to address a situation where portions of each of a DPL and a non-DPL loss are shared through foreign tax consolidation or a similar regime, as well as a situation where a foreign corporation has a net operating loss that forms part of a net operating loss carryforward that includes the DPL. Additionally, the Treasury Department and the IRS have determined that consistency is needed between the DCL rules and DPL rules because the DPL rules are intended to prevent the avoidance of the DCL rules. Accordingly, the final regulations do not adopt the comment.

A comment stated that a foreign use of a DPL can occur only if, under a foreign tax law, deductions composing a DPL are included in a net operating loss that is carried forward or carried back to another taxable year, and the comment suggested that the DPL certification rules should be limited to monitoring whether such a carryover occurs. According to the comment, the scenarios presenting the risk of a foreign use of a DPL are more limited than the scenarios presenting the risk of a foreign use of a DCL because, unlike DCLs, DPLs do not give rise to timing differences between U.S. and foreign tax systems.

The Treasury Department and the IRS agree that a foreign use of a DPL may occur through carryforwards or carrybacks of losses but have determined that a foreign use would more commonly occur in the year in which the DPL is incurred. A foreign use could also result from a merger or similar transaction (such as the transfer of the interests in the DPE that incurs the DPL to a related CFC). Accordingly, the final regulations do not adopt this comment.

The final regulations narrow the definition of a foreign use for DPL purposes by excluding the deemed foreign use that may occur under the mirror legislation rule. See § 1.1503(d)-3(e)(4). This exception, which is consistent with the exception in § 1.1503(d)-3(e)(3) for domestic consenting corporations, clarifies that any denial of a deduction for a disregarded payment under foreign hybrid mismatch rules is not treated as giving rise to a DPL or a foreign use of a DPL. See also § 1.1503(d)-1(d)(6)(v) (coordination with foreign hybrid mismatch rules).

The 2024 proposed regulations would provide that a DPL cumulative register with respect to a DPE is, for each foreign taxable year of the DPE, increased by the DPE's DPI or decreased by its DPL. See proposed § 1.1503(d)-1(d)(5)(ii). When a DPL of the DPE is triggered, any positive balance in the cumulative register would be applied to the DPL and, accordingly, would reduce the amount that the DPE owner must include in income with respect to the DPE under the DPL rules. See proposed § 1.1503(d)-1(d)(2) and (5).

Comments recommended that the DPL cumulative register be adjusted to include a DPL inclusion amount that has been included in the DPE owner's gross income. The comments noted that, without such an adjustment, a single DPL could be included in the DPE owner's income more than once. Comments also recommended treating a DPL inclusion as giving rise to a deduction (or similar offset) of the DPE owner in subsequent taxable years to prevent the DPL rules from permanently increasing U.S. taxable income. These comments suggested allowing such a deduction (or similar offset) once the DPE has sufficient DPI or “dual inclusion income” (determined as the lesser of certain foreign taxable income and certain U.S. taxable income) in subsequent years. Further, a comment recommended treating the deduction as having the same U.S. tax characteristics (for example, character and source) as the DPL inclusion.

The Treasury Department and the IRS agree with these comments. The final regulations thus modify the determination of a DPL cumulative register so that a DPL does not decrease the register, thereby preventing a negative balance in the register. See § 1.1503(d)-1(d)(2)(iii); see also § 1.1503(d)-7(c)(42) (example illustrating this rule). This approach generally achieves the same outcomes as those recommended by comments, while also facilitating the application of any positive register balance to a triggered DPL in cases where there are multiple DPLs but not all the DPLs are triggered.

Additionally, to reflect a DPL inclusion (and consistent with comments), the final regulations provide the DPE owner a deduction (not to exceed the DPL inclusion) to the extent that the DPE derives DPI in a year following the year of the DPL inclusion. See § 1.1503(d)-1(d)(1) and (d)(2)(ii). Regardless of the extent to which the DPI is derived from interest or royalties, the deduction has the same character and source as the DPL inclusion to which it relates. See § 1.1503(d)-1(d)(2)(iv)(B). In this way, the DPE owner's items of income and deduction under the DPL rules are similar to the items that the DPE owner would have had if the payments composing the DPL were regarded for U.S. tax purposes. To illustrate, consider a case where a disregarded entity makes a payment to its domestic corporate owner and the payment gives rise to an interest deduction under foreign tax law that is put to a foreign use in the current year. If the payment were instead regarded for U.S. tax purposes (for example, if the payment were instead a § 1.1502-13 intercompany transaction), the payment would give rise to an income inclusion in the current year and a deduction, the use of which generally would be suspended under the DCL rules until there is sufficient income in subsequent years. The DPL rules produce a similar outcome.

Finally, to prevent a single DPL from giving rise to more than one DPL inclusion, the final regulations terminate the certification period with respect to a DPL as a result of a DPL inclusion. See § 1.1503(d)-1(d)(6)(iii).

Comments requested clarification on how to compute a DPL or DPI for the first foreign taxable year in which an entity or branch is treated as a DPE of a DPE owner. In such a case, some comments suggested a rule pursuant to which the DPL or DPI would be computed without regard to items incurred (or allocable to, including under the principles of § 1.1502-76(b)) during the portion of the foreign taxable year that precedes the first day that the DPL rules apply with respect to the DPE owner and DPE.

The Treasury Department and the IRS agree with these comments, and the final regulations therefore clarify that items incurred or derived in the portion of a foreign taxable year that an entity or foreign branch is not a DPE are not taken into account for purposes of calculating DPI or DPL. See § 1.1503(d)-1(d)(5)(ii). On the other hand, if an entity or foreign branch is a DPE at all times during the foreign taxable year, this pro-ration rule does not apply even though the DPE owner's U.S. taxable year may differ from the DPE's foreign taxable year.

One comment supported the DPL rules, noting that closing this existing loophole and providing clarity is important to ensure tax fairness, prevent abuse, and provide consistency. The comment also suggested that the rules provide detailed guidance on the documentation and reporting requirements for disregarded payments, such as specifying that taxpayers must maintain detailed records and submit these records as part of their tax filings.

The Treasury Department and the IRS have determined that the documentation and reporting requirements in the proposed regulations, as modified in these final regulations (such as to require additional reporting in § 1.1503(d)-1(d)(4)(iv) related to the suspended deduction), are sufficient for the IRS to administer the rules effectively. Further, the IRS may request additional information regarding DPLs on audit, as necessary. Accordingly, this comment is not adopted.

The 2024 proposed regulations would include an anti-avoidance rule that applies with respect to both DCLs and DPLs. This rule generally would provide that appropriate adjustments may be made with respect to a transaction, series of transactions, plan, or arrangement that is engaged with a view to avoid the purposes of section 1503(d) and the regulations thereunder. See proposed § 1.1503(d)-1(f). The preamble to the 2024 proposed regulations noted that the anti-avoidance rule could address new avoidance structures or interpretations, rather than continuing to address these transactions on a case-by-case basis through the adoption of new rules. See part I.C. of the Explanation of Provisions of the 2024 proposed regulations.

Some comments asserted that the application of the anti-avoidance rule is unclear and should therefore be withdrawn. Other comments requested that, rather than applying the anti-avoidance rule based on whether there is “a view” to avoid the purposes of section 1503(d) and the regulations thereunder, it should apply based on the more common principal purpose-based standard, or if the taxpayer is attempting to “evade” the purposes of section 1503(d). Comments also requested additional examples illustrating the application or nonapplication of the anti-avoidance rule, including examples that would clarify that the anti-avoidance rule does not apply if taxpayers restructure their operations to avoid the application of the DPL rules. Finally, one comment requested that, consistent with the general approach in the DCL rules to calculate the amount of a DCL based on U.S. tax items, the anti-avoidance rule should be revised to ignore the treatment of items under foreign law.

In response to the comments, the anti-avoidance rule is modified to make clear that the purpose of section 1503(d) and the regulations thereunder is to prevent double deduction and similar outcomes. Thus, if taxpayers restructure their arrangements to avoid the application of the DPL rules or the DCL rules, such as by converting disregarded payments into regarded payments or terminating agreements that give rise to disregarded payments, the anti-avoidance rule does not apply if the restructured arrangement does not give rise to the potential for two deductions—one for foreign tax purposes, and one for US. tax purposes. See § 1.1503(d)-1(f). The final regulations also provide additional examples that illustrate the application, and nonapplication, of the anti-avoidance rule. See § 1.1503(d)-7(c)(44) and (45). The Treasury Department and the IRS continue to study how the intercompany transaction rules of § 1.1502-13 would apply to the facts such as those presented in the example in § 1.1503(d)-7(c)(44).

The final regulations add certain exceptions to the application of the anti-avoidance rule, as it applies to DCLs, for transactions or interpretations that would be addressed by rules in the 2024 proposed regulations. See § 1.1503(d)-1(f)(2). For example, the anti-avoidance rule does not apply to structures that may reduce or eliminate a DCL by reason of items of income arising from the ownership of stock and taken into account under § 1.1503(d)-5(b)(1) or (c)(4)(iv) (the “stock ownership rule”). This exception is intended to make clear that the anti-avoidance rule does not apply in such a case even though the 2024 proposed regulations would eliminate the stock ownership rule (other than with respect to certain portfolio interests) and the preamble to the 2024 regulations states that taxpayers may be affirmatively structuring into the rules to produce inappropriate double-deduction outcomes. The Treasury Department and the IRS have determined that the anti-avoidance rule should not apply in such cases at this time, despite the policy concerns underlying the transactions, because the substantive rules that would address the transactions have not yet been finalized. These exceptions to the anti-avoidance rule would be removed or modified if, after taking into account comments, the corresponding rules in the 2024 proposed regulations are finalized in a subsequent guidance project. The non-application of the anti-avoidance rule in these cases does not affect the potential application of other rules or judicial doctrines, such as the substance-over-form or step-transaction doctrines. The Treasury Department and the IRS request comments on the modification or removal of these exceptions upon finalization of the corresponding proposed rules.

In light of the additional certainty and clarity provided by the modification to the rule and the additional examples, these final regulations do not adopt the recommendations to withdraw the anti-avoidance rule or employ a new standard based on a principal purpose or evasion. Finally, because the anti-avoidance rule applies with respect to the DPL rules, which are premised on the treatment of items under foreign law, these final regulations do not adopt the recommendation to ignore foreign law treatment in applying the anti-avoidance rule.

In determining the foreign use of a DPL, the 2024 proposed regulations would provide that the principles of the exceptions in § 1.1503(d)-3(c) apply, which include the deemed ordering rule under § 1.1503(d)-3(c)(3). See proposed § 1.1503(d)-1(d)(3)(i). This rule generally would provide that if losses or deductions are available under foreign law both to offset income that would constitute a foreign use and income that would not constitute a foreign use, and the foreign law does not provide applicable rules for determining which income is offset by the losses or deductions, then the losses or deductions are first deemed to be available to offset the income that would not constitute a foreign use, to the extent thereof, before being considered to be made available to offset the income that would constitute a foreign use. See § 1.1503(d)-3(c)(3).

In cases where a DPE has both a DPL and income that is not DPI, such as items of income other than interest and royalties that are disregarded for U.S. tax purposes or income that is regarded for U.S. tax purposes, comments asserted that the application of the deemed ordering rule is unclear, and that income that is not DPI should be taken into account in determining whether the exception prevents a foreign use of the DPL (or, alternatively, prevents the creation of a DPL). Under this approach, a DPL would be treated as first offsetting the DPE's income under the foreign tax law, regardless of whether that income is regarded or disregarded. Accordingly, no foreign use of a DPL would generally occur if the DPE has net positive income under the foreign tax law.

The Treasury Department and the IRS disagree with these comments. The deemed ordering rule is related to, and therefore must apply in a manner consistent with, the rules that calculate a DCL or DPL and related cumulative register. Thus, because the calculation of a DCL and DCL cumulative register only takes into account regarded items, the deemed ordering rule as applied to DCLs also must only take into account such items. Similarly, because the calculation of a DPL and DPL cumulative register only takes into account disregarded interest and royalties, so too should the deemed ordering rule only take such items into account. This consistent approach promotes coordinated outcomes, ensures that all relevant items are appropriately taken into account, and avoids double-counting concerns. A partial integration of the DCL and DPL rules only in the deemed ordering rule would not be appropriate without providing comprehensive rules to address, for example, the opposite fact pattern where regarded items of deduction or loss could be viewed as offsetting disregarded interest and royalty income and thereby creating or increasing the amount of a DPL that is put to a foreign use.

One comment requested clarification regarding the condition that the deemed ordering rule applies only if the laws of the foreign country do not provide applicable rules for determining which income is offset by the losses or deductions. The comment noted, as an example, that such uncertainty can arise in connection with the steps required in applying the GloBE Model Rules. It has also been observed that the method by which the foreign country takes into account items that would, or would not, give rise to a foreign use likely would not change the arithmetic result of determining taxable income under foreign law or otherwise have economic significance. Further, there is no similar condition in the rules that determine a DCL or DPL, or the related cumulative registers, and as noted above these regimes should operate in a consistent manner. As a result, the final regulations eliminate this condition from the deemed ordering rule for purposes of both the DPL and DCL rules. See § 1.1503(d)-3(c)(3).

The 2024 proposed regulations would apply the DPL rules as of the date those regulations were filed with the Federal Register (August 6, 2024), subject to a one-year delay for certain entities in existence on that date. See proposed § 301.7701-3(c)(4)(vi). Comments requested a deferred application of the DPL rules, with some suggesting specific dates (such as taxable years beginning after publication of final regulations) and others generally suggesting additional time for taxpayers to implement new processes and systems or undertake restructurings to avoid the application of the DPL rules. Comments also requested clarification on when the DPL rules would apply in cases like one where a domestic corporation owns multiple disregarded entities that are tax residents of foreign countries, with some (but not all) formed or acquired after August 6, 2024, but before August 6, 2025.

The Treasury Department and the IRS agree with the suggestions to defer application of the DPL rules. Accordingly, the final regulations apply the DPL rules to taxable years of DPE owners beginning on or after January 1, 2026. See §§ 1.1503(d)-8(b)(11) and 301.7701-2(e)(10). This use of a single applicability date obviates the need for additional rules clarifying application of the DPL rules in cases like ones where a domestic corporation owns multiple disregarded entities.

The final regulations apply the anti-avoidance rule to DCLs incurred in taxable years ending on or after August 6, 2024, consistent with the approach in the 2024 proposed regulations. See § 1.1503(d)-8(b)(15). Further, consistent with the applicability date of the DPL rules, the anti-avoidance rule applies to DPLs for taxable years beginning on or after January 1, 2026. See id. Additionally, the final regulations apply revisions to the deemed ordering rule in § 1.1503(d)-3(c)(3) to DCLs incurred in taxable years beginning on or after January 1, 2026, and to DPLs in taxable years beginning on or after January 1, 2026 (each consistent with the applicability date of the DPL rules). See § 1.1503(d)-8(b)(17). Finally, the final regulations apply the rule regarding the non-application of the sixty-month limitation for an entity that, absent an election to change its classification, would become a DPE as of August 6, 2024. See § 301.7701-2(e)(10).

As noted in the Background of this preamble, the 2024 proposed regulations would address the application of the DCL rules to the GloBE Model Rules. For example, the 2024 proposed regulations would provide that an IIR or QDMTT may be an income tax for purposes of the DCL rules. 5 The 2024 proposed regulations also would address the effect of an IIR or a QDMTT on certain entities and foreign business operations, the application of the DCL rules to the Transitional CbCR Safe Harbour, and the interaction of the duplicate loss arrangement rules with the mirror legislation rule under § 1.1503(d)-3(e). In addition, the 2024 proposed regulations would extend and broaden, the transition relief announced in Notice 2023-80 such that the DCL rules (including the DPL rules) would generally apply without taking into account QDMTTs or Top-up Taxes collected under an IIR or UTPR with respect to losses incurred in taxable years beginning before August 6, 2024. See proposed § 1.1503(d)-8(b)(12). This extension, and broadening, would provide taxpayers more certainty, allow for further consideration of the proposed regulations and related comments, and allow for consideration of further developments at the OECD.

Several comments requested additional transition relief for the application of the DCL rules and DPL rules to the GloBE Model Rules. For example, comments suggested that the applicability date be delayed until taxable years beginning on or after January 1, 2025, or through 2026; another comment suggested that the rules not apply until there are final DCL rules and final GloBE Model Rules. Some comments requested additional transition relief because the GloBE Model Rules are still evolving, and relief would allow for additional time to take into account additional OECD guidance and legislation enacted by jurisdictions to incorporate the GloBE Model Rules. One comment stated that if the DCL rules and DPL rules apply with respect to UTPRs that transition relief be provided for such application for at least 2025. Finally, one comment requested clarification that the transition relief is also available with respect to DPLs.

The Treasury Department and the IRS agree that additional transitional relief is warranted. As some comments noted, such relief would allow additional time to consider future OECD guidance and legislation enacted by foreign jurisdictions that would implement the GloBE Model Rules. Accordingly, when the 2024 proposed regulations addressing the application of the DCL rules to the GloBE Model Rules are finalized, the applicability date set forth in the 2024 proposed regulations will be modified. The final regulations will provide that the DCL rules will apply without taking into account QDMTTs or Top-up Taxes collected under an IIR or UTPR incurred in taxable years beginning before August 31, 2025. The additional transition relief does not affect the application of the DPL rules because the DPL rules do not apply until taxable years beginning on or after January 1, 2026. Taxpayers may rely on the guidance described in this paragraph until final regulations are published in the Federal Register . The transition relief is limited to an additional year to minimize the double deduction outcomes that may result.

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

The Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) (“PRA”) requires that a Federal agency obtain the approval of the OMB before collecting information from the public, whether such collection of information is mandatory, voluntary, or required to obtain or retain a benefit. Section 1.1503(d)-1(d)(4) of these regulations requires the collection of information.

As discussed in part II.B.3 of the Explanation of Provisions of the 2024 proposed regulations, to avoid or reduce a DPL inclusion amount certain taxpayers are required to make certifications, for example, that no foreign use has occurred with respect to a disregarded payment loss. The IRS will use this information to determine the extent to which these taxpayers need to recognize income under these final regulations.

The reporting burden associated with this collection of information will be reflected in the PRA submissions associated with Form 1120 (OMB control number 1545-0123). The Treasury Department and the IRS do not have readily available data to determine the number of taxpayers affected by this collection of information because no reporting module currently identifies these types of disregarded payments.

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

The Treasury Department and the IRS do not expect that these final regulations will have a significant economic impact on a substantial number of small entities. However, because there is a possibility of significant economic impact on a substantial number of small entities, an initial regulatory flexibility analysis was provided in the 2024 proposed regulations. No comments were received in response to the request for comments concerning the number of small entities that may be impacted and whether that impact will be economically significant.

As explained in part II.A of the Explanation of Provisions of the 2024 proposed regulations, the disregarded payment loss rules in these final regulations address certain hybrid payments that can give rise to double deduction outcomes.

The disregarded payment loss rules in these final regulations require an income inclusion for U.S. tax purposes to prevent the avoidance of the DCL rules that would otherwise arise from certain disregarded payments. Sections 1503(d)(2)(B) and (d)(3), 7701, and 7805 of the Code are the legal basis for these regulations.

Because an estimate of the number of small businesses affected is not currently feasible, this regulatory flexibility analysis assumes that a substantial number of small businesses will be affected. The Treasury Department and the IRS do not expect that these final regulations will affect a substantial number of small nonprofit organizations or small governmental jurisdictions.

The final regulations impose a certification requirement that is filed with a domestic corporation's tax return, and to comply with that requirement the domestic corporation may need to keep records such as its DPL cumulative register as defined in § 1.1503(d)-1(d)(2)(iii). See § 1.1503(d)-1(d)(4)(iii).

The Treasury Department and the IRS are not aware of any Federal rules that duplicate, overlap, or conflict with these final regulations.

These final regulations address policy concerns that are similar to the concerns underlying the enactment of section 1503(d), which applies uniformly to large and small business entities. The Treasury Department and the IRS have determined that these final regulations should generally apply without regard to the size of the corporation—a small business exception would undermine the anti-hybridity policies underlying these regulations. Accordingly, there is no viable alternative to these final regulations for small entities. The Treasury Department and the IRS expect that the revisions in these final regulations to apply a de minimis threshold, and exclude royalties from pre-August 6, 2024, licenses and minority interests, will reduce any economic impact that the regulations could have on small entities.

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. The final rules do 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 Executive Order 13132. The final rules 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 Executive Order 13132.

Section 3 of Notice 2023-80 (2023-52 IRB 1583) is obsolete as of August 6, 2024.

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

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

Accordingly, the Treasury Department and the IRS amend 26 CFR parts 1 and 301 as follows:

On January 1, 2021, Congress enacted the William M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021, Public Law 116-283, 134 Stat. 3388 (January 1, 2021) which included significant reforms to the U.S. anti-money laundering framework, including the Anti-Money Laundering Act of 2020. That law was, in turn, amended by the Anti-Money Laundering Whistleblower Improvements Act, Sec. 401 of the Consolidated Appropriations Act of 2023, Public Law 117-328, 136 Stat 4459 (enacted December 29, 2022). The anti-retaliation provisions, codified at 31 U.S.C. 5323 (g)(1)-(3) & (5)-(6), and referred to throughout this interim final rule as AMLA, the Act, or the AMLA anti-retaliation provisions, prohibit retaliation by an employer against a whistleblower in the terms and conditions of employment or post-employment in reprisal for the whistleblower having engaged in protected activity. 1 Protected activity under AMLA includes any lawful act done by a whistleblower in reporting certain information to the Secretary of the Treasury; Attorney General; a Federal regulatory or law enforcement agency; any Member of Congress or any committee of Congress; or the employer of the individual, including as part of the job duties of the individual. The employer includes “a person with supervisory authority over the whistleblower, or such other person working for the employer who has the authority to investigate, discover, or terminate misconduct.” 31 U.S.C. 5323(g)(1)(A)(iv). Protected activity also includes any lawful act done by a whistleblower in initiating, testifying in, or assisting in any investigation or judicial or administrative action of the Department of the Treasury or the Department of Justice based upon or related to such information. 31 U.S.C. 5323(g)(1)(B).

The information must relate to violations of certain enumerated statutes, including violations of 31 U.S.C. chapter 53, subchapter II (31 U.S.C. 5311-5336), chapter 35 or section 4305 or 4312 of title 50, U.S.C., or the Foreign Narcotics Kingpin Designation Act (21 U.S.C. 1901 et seq. ), or conspiracies to violate the aforementioned provisions. 31 U.S.C. 5323(a)(5) (as amended). 31 U.S.C. chapter 53, subchapter II is part of the Bank Secrecy Act (BSA). The legislative framework generally referred to as the BSA consists of the Currency and Foreign Transactions Reporting Act of 1970, Title II of Public Law 91-508 (October 26, 1970), as amended by the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA PATRIOT Act), Public Law 107-56 (October 26, 2001), and other legislation, including the AMLA. 2 The Secretary of the Treasury is authorized to administer the BSA and to require financial institutions to keep records and file reports that “are highly useful in criminal, tax, or regulatory investigations or proceedings” or in the conduct of “intelligence or counterintelligence activities, including analysis, to protect against international terrorism”. 3 Authority to implement, administer, and enforce compliance with the BSA and its implementing regulations has been delegated to the Director of the Financial Crimes Enforcement Network (FinCEN), a bureau of the Department of the Treasury. 4 See https://www.fincen.gov/resources/statutes-and-regulations/bank-secrecy-act; https://bsaaml.ffiec.gov/ . “Chapter 35 of Title 50” refers to the International Emergency Economic Powers Act (IEEPA), 50 U.S.C. 1701 et seq., as amended, which authorizes the President to take certain actions, including, but not limited to, the regulation of transactions subject to U.S. jurisdiction involving property in which any foreign country or foreign national has an interest, to deal with any unusual or extraordinary threat, which has its source in whole or in substantial part outside the United States, to the national security, foreign policy, or economy of the United States, if the President has declared a national emergency with respect to such threat. 50 U.S.C. 4305 and 4312 are provisions of the Trading with the Enemy Act (TWEA); section 4305 authorizes during time of war, among other measures, regulation of transactions subject to U.S. jurisdiction involving any property in which a foreign country or foreign national has an interest, while section 4312 authorizes seizure and holding of foreign-owned property in trust during times of war. The Foreign Narcotics Kingpin Designation Act, 21 U.S.C. 1901 et seq., effectively applies the authorities in the IEEPA, 50 U.S.C. 1701 et seq., to significant foreign narcotics traffickers and their organizations operating worldwide. See https://ofac.treasury.gov/ (explaining the Office of Foreign Asset Control (OFAC) administration and enforcement of IEEPA, TWEA, and the Foreign Narcotics Kingpin Designation Act).

Providing information regarding any conduct that the whistleblower reasonably believes constitutes a violation of any law, rule, or regulation subject to the jurisdiction of the Department of the Treasury, or a violation of section 1956, 1957, or 1960 of title 18 (or any rule or regulation under any such provision) is also protected, if the information is provided to a person with supervisory authority over the whistleblower at the employer of the whistleblower; or to another individual working for the employer who the whistleblower reasonably believes has the authority to investigate, discover, or terminate the misconduct; or take any other action to address the misconduct. See 31 U.S.C. 5323(g)(1)(C). 18 U.S.C. 1956 and 1957 are Federal criminal statutes which prohibit money laundering and related financial transactions, while 18 U.S.C. 1960 is a Federal criminal statute that prohibits unlicensed money transmitting businesses.

While the AMLA anti-retaliation provision at 31 U.S.C. 5323(g) provides broad protection against retaliation in employment and post-employment for whistleblowers, it also contains a statutory exclusion from protection under 31 U.S.C. 5323(g) for employees of federally insured depository institutions and credit unions covered by the anti-retaliation provisions of two separate federal statutes. 31 U.S.C. 5323(g)(6) (“This subsection [31 U.S.C. 5323(g)] shall not apply with respect to any employer that is subject to section 33 of the Federal Deposit Insurance Act (12 U.S.C. 23 1831j) or section 213 or 214 of the Federal Credit Union Act (12 U.S.C. 1790b, 1790c)”).

This interim final rule establishes procedures for the handling of retaliation complaints under the Act.

AMLA incorporates the rules, procedures, and burdens of proof set forth in the Wendell H. Ford Aviation Investment and Reform Act for the 21st Century (AIR21), 49 U.S.C. 42121(b), with some exceptions. 31 U.S.C. 5323(g)(3)(A). Under AMLA, a person who believes that they have been discharged or otherwise retaliated against in violation of the Act (complainant) may file a complaint with the Secretary of Labor (Secretary) within 90 days of the alleged retaliation. 31 U.S.C. 5323(g)(3)(A), incorporating the requirements of 49 U.S.C. 42121(b). Upon receipt of the complaint, the Secretary must provide written notice to each person named in the complaint alleged to have violated the Act (respondent) and to the complainant's employer (which in most cases will be the respondent) of the filing of the complaint, the allegations contained in the complaint, the substance of the evidence supporting the complaint, and the rights afforded the respondent throughout the investigation. 49 U.S.C. 42121(b)(1). The Secretary must then conduct an investigation, within 60 days of receipt of the complaint, after affording the respondent an opportunity to submit a written response and to meet with the investigator to present statements from witnesses. 49 U.S.C. 42121(b)(2)(A).

The Secretary may conduct an investigation only if the complainant has made a prima facie showing that the protected activity was a contributing factor in the adverse action alleged in the complaint and the respondent has not demonstrated, through clear and convincing evidence, that it would have taken the same adverse action in the absence of that activity. (See § 1992.104 for a summary of the investigation process) OSHA interprets the prima facie case requirement as allowing the complainant to meet this burden through the information the complainant provides in the complaint as supplemented by interviews of the complainant.

After investigating a complaint, the Secretary will issue written findings. If, as a result of the investigation, the Secretary finds there is reasonable cause to believe that retaliation has occurred, the Secretary must notify the complainant and respondent of those findings, and issue a preliminary order providing relief including reinstatement with the same seniority status that the individual would have had, but for the retaliation, two times the amount of back pay otherwise owed to the individual, with interest; compensatory damages, which shall include compensation for litigation costs, expert witness fees, and reasonable attorney fees; and any other appropriate remedy with respect to the conduct that is the subject of the complaint or action, as applicable.

The complainant and the respondent then have 30 days after the date of receipt of the Secretary's notification in which to file objections to the findings and/or preliminary order and request a hearing before an ALJ. The filing of objections will not stay any reinstatement order. However, under OSHA's regulations, the filing of objections will stay any other remedy in the preliminary order. If a hearing before an ALJ is not requested within 30 days, the preliminary order becomes final and is not subject to judicial review.

If a hearing is held, the hearing must be conducted “expeditiously.” 49 U.S.C. 42121(b)(2)(A). The Secretary then has 120 days after the conclusion of any hearing to issue a final order, which may provide appropriate relief or deny the complaint. 49 U.S.C. 42121(b)(3)(A). Until the Secretary's final order is issued, the Secretary, the complainant, and the respondent may enter into a settlement agreement that terminates the proceeding. Id. Where the Secretary has determined that a violation has occurred, the Secretary will order relief including reinstatement with the same seniority status that the individual would have had, but for the retaliation, two times the amount of back pay otherwise owed to the individual, with interest; compensatory damages, which shall include compensation for litigation costs, expert witness fees, and reasonable attorney fees; and any other appropriate remedy with respect to the conduct that is the subject of the complaint or action, as applicable. The Secretary also may award a prevailing employer reasonable attorney fees, not exceeding $1,000, if the Secretary finds that the complaint is frivolous or has been brought in bad faith. Within 60 days of the issuance of the final order, any person adversely affected or aggrieved by the Secretary's final order may file an appeal with the United States Court of Appeals for the circuit in which the violation allegedly occurred or the circuit where the complainant resided on the date of the violation. 49 U.S.C. 42121(b)(4).

The Act permits the whistleblower to bring an AMLA retaliation claim against the employer in the appropriate United States district court if the Secretary has not issued a final decision within 180 days after the filing of the complaint and there is no showing that the delay is due to the bad faith of the complainant. The court will have jurisdiction over the action without regard to the amount in controversy and either party is entitled to request a trial by jury.

The Act also states that the rights and remedies provided in the AMLA anti-retaliation provision may not be waived by any agreement, policy form, or condition of employment, including by a predispute arbitration agreement. No predispute arbitration agreement is valid or enforceable, to the extent that the agreement requires arbitration of a dispute arising under the AMLA anti-retaliation provision. 31 U.S.C. 5323(j). Finally, under the Act, nothing in the AMLA anti-retaliation provision shall be deemed to diminish the rights, privileges, or remedies of any whistleblower under any Federal or State law, or under any collective bargaining agreement. 31 U.S.C. 5323(g)(5).

The regulatory provisions in this part have been written and organized to be consistent with other whistleblower regulations promulgated by OSHA to the extent possible within the bounds of the statutory language of the Act. Responsibility for receiving and investigating complaints under the Act has been delegated to the Assistant Secretary for Occupational Safety and Health (Assistant Secretary) by Secretary of Labor's Order No. 08-2020 (May 15, 2020), 85 FR 58393 (September 18, 2020). Hearings on determinations by the Assistant Secretary are conducted by the Office of Administrative Law Judges, and appeals from decisions by ALJs are decided by the ARB. See Secretary of Labor's Order 01-2020 (Feb. 21, 2020), 85 FR 13024-01 (Mar. 6, 2020) (Delegation of Authority and Assignment of Responsibility to the Administrative Review Board).

This section describes the purpose of the regulations in this interim final rule implementing the anti-retaliation provisions of AMLA and provides an overview of the procedures covered by these regulations.

This section includes the general definitions of certain terms used in this rule. In particular, 31 U.S.C. 5323(a)(5) defines the statutory term “whistleblower.” 31 U.S.C. 5323(a)(5)(A) provides that the term “whistleblower” means “any individual who provides, or 2 or more individuals acting jointly who provide, information relating to a violation of this subchapter, chapter 35 or section 4305 or 4312 of title 50, the Foreign Narcotics Kingpin Designation Act (21 U.S.C. 1901 et seq. ),” and “for conspiracies to violate the aforementioned provisions to the employer of the individual or individuals, including as part of the job duties of the individual or individuals, or to the Secretary or the Attorney General.” 31 U.S.C. 5323(a)(5)(B) provides a special rule that expands the definition of the term “whistleblower” solely for purposes of the anti-retaliation provisions at 31 U.S.C. 5323(g)(1) to include “any individual who takes, or 2 or more individuals acting jointly who take, an action described in subsection (g)(1)(A).” Thus, a whistleblower who is protected against retaliation under AMLA includes any individual who meets the criteria in 31 U.S.C. 5323(a)(5)(A) and/or 31 U.S.C. 5323(a)(5)(B). To reflect the provisions that define a “whistleblower” that is protected from retaliation, OSHA has defined a “whistleblower” in these rules as “any individual, or two or more individuals acting jointly, who take any of the actions described in § 1992.102(b).” Section 1992.102(b) in turn, as described below, encompasses all of the activities listed in 31 U.S.C. 5323(a)(5) and (g)(1). Consistent with the broad language of the statutory definition of “whistleblower,” which refers to “any individual” or two or more individuals acting jointly (31 U.S.C. 5323(a)(5)), the approach that OSHA has taken in defining covered employees under other whistleblower protection provisions, and applicable ARB case law, the interim final rule includes in the definition of “whistleblower” the explanation that “[a] whistleblower includes an individual presently or formerly working for an employer, an individual applying to work for an employer, or an individual whose employment could be affected by an employer.” See, e.g., 29 CFR 1979.101 (AIR21 definition of employee); 29 CFR 1980.101(g) (Sarbanes-Oxley Act of 2002 (SOX) definition of employee). This section also provides that the term “FinCEN” means the Financial Crimes Enforcement Network, a bureau of the Department of the Treasury. As explained below, under these rules FinCEN will receive copies of complaints and OSHA findings in AMLA cases and the Department of the Treasury may participate in AMLA proceedings pending before an ALJ or the ARB.

This section describes the activities that are protected under the Act and the conduct that is prohibited in response to any protected activities. The Act prohibits an employer from directly or indirectly discharging, demoting, suspending, threatening, blacklisting, harassing or in any other manner discriminating against a whistleblower in the terms and conditions of employment or post-employment because of any lawful act done by the whistleblower to engage in protected activity. Protected activity under AMLA includes any lawful act done by the whistleblower in providing certain information to the Secretary of the Treasury or the Attorney General, a Federal regulatory or law enforcement agency, a Member of Congress or a Committee of Congress, or the employer. The employer includes a person with supervisory authority over the whistleblower or such other person working for the employer who has authority to investigate, discover, or terminate misconduct. The information must relate to a violation of 31 U.S.C. chapter 53, subchapter II (31 U.S.C. 5311-5336, requiring records and reports on monetary instruments transactions); 50 U.S.C. chapter 35 (50 U.S.C. 1701 et seq., as amended (IEEPA)); 50 U.S.C. 4305 or 4312 (provisions of the Trading with the Enemy Act); 21 U.S.C. 1901 et seq. (the Foreign Narcotics Kingpin Designation Act), or conspiracies to violate any of the aforementioned provisions. 31 U.S.C. 5323(a)(5), (g)(1)(A).

Protected activity also includes any lawful act done by the whistleblower in initiating, testifying in, or assisting in any investigation or judicial or administrative action of the Department of the Treasury or the Department of Justice based upon or related to the information described above. 31 U.S.C. 5323(g)(1)(B).

Finally, protected activity also includes any lawful act done by the whistleblower in providing information regarding any conduct that the whistleblower reasonably believes constitutes a violation of any law, rule, or regulation subject to the jurisdiction of the Department of the Treasury, or a violation of section 1956, 1957, or 1960 of title 18 (or any rule or regulation under any such provision) to a person with supervisory authority over the whistleblower at the employer of the whistleblower; or another individual working for the employer who the whistleblower reasonably believes has the authority to investigate, discover, or terminate the misconduct; or take any other action to address the misconduct. 31 U.S.C. 5323(g)(1)(C).

However, in keeping with the statutory exclusion for employees of federally insured depository institutions and credit unions at 31 U.S.C. 5323(g)(6), which applies only to the anti-retaliation provisions in 31 U.S.C. 5323(g), this section (29 CFR 1992.102) does not apply with respect to any employer that is subject to section 33 of the Federal Deposit Insurance Act (12 U.S.C. 1831j) or section 213 or 214 of the Federal Credit Union Act (12 U.S.C. 1790b, 1790c). 31 U.S.C. 5323(g)(6), which provide separate protections from retaliation for certain categories of whistleblowing for those employees.

To engage in protected activity under this section, the whistleblower need not show that the conduct complained of is an actual violation of one of the provisions of law listed in the statute. The statute protects the provision of information relating to a violation of a relevant law or a conspiracy to violate a relevant law (31 U.S.C. 5323(a)(5)) and information regarding conduct that the employee reasonably believes constitutes a violation of a relevant law (31 U.S.C. 5323(g)(1)(C)). In providing broad protection for such information, the statutory language reflects Congress's desire to encourage reporting not only to expose but also to prevent money laundering and related violations of law. Cf. Sylvester v. Parexel Int'l LLC, ARB No. 07-123, 2011 WL 2165854, at *18 (ARB May 25, 2011) (explaining with respect to an analogous SOX whistleblower provision that “[t]he purpose of Section 806, and the SOX in general, is to protect and encourage greater disclosure. Section 806 exists not only to expose existing fraud, i.e., conduct satisfying the elements of a fraud claim, but also to prevent potential fraud in its earliest stages.”). Indeed, case law under analogous anti-retaliation provisions, such as SOX, makes clear that a report based on a whistleblower's reasonable but mistaken belief that reported conduct could lead to a violation is protected. See Van Asdale v. Int'l Game Techs., 577 F.3d 989, 1001 (9th Cir. 2009); Allen v. Admin. Review Bd., 514 F.3d 468, 477 (5th Cir. 2008).

To have a reasonable belief that there is a violation of relevant law, the whistleblower must subjectively believe that the conduct is a violation and that belief must be objectively reasonable. See, e.g., Rhinehimer v. U.S. Bancorp. Invs., Inc., 787 F.3d 797, 811 (6th Cir. 2015) (discussing the reasonable belief standard under analogous language in the SOX whistleblower provision, 18 U.S.C. 1514A) (citations omitted); Harp v. Charter Commc'ns, Inc., 558 F.3d 722, 723 (7th Cir. 2009) (agreeing with First, Fourth, Fifth, and Ninth Circuits that determining reasonable belief under the SOX whistleblower provision requires analysis of the complainant's subjective belief and the objective reasonableness of that belief); Sylvester, 2011 WL 2165854, at *11-12 (same). The requirement that the whistleblower have a subjective, good faith belief is satisfied so long as the whistleblower actually believed that the conduct at issue violated the relevant law or regulation. See Sylvester, 2011 WL 2165854, at *11-12 (citing Harp, 558 F.3d at 723; Day v. Staples, Inc., 555 F.3d 42, 54 n.10 (1st Cir. 2009)). The objective reasonableness of a whistleblower's belief is typically determined “based on the knowledge available to a reasonable person in the same factual circumstances with the same training and experience as the aggrieved employee.” Harp, 558 F.3d at 723 (quoting Allen, 514 F.3d at 477).

This section explains the requirements for filing a retaliation complaint under the AMLA anti-retaliation provisions. To be timely, a complaint must be filed within 90 days of when the alleged violation occurs. Under Delaware State College v. Ricks, 449 U.S. 250, 258 (1980), an alleged violation occurs when the retaliatory decision has been made and communicated to the complainant. In other words, the limitations period commences once the individual is aware or reasonably should be aware of the employer's decision to take an adverse action. EEOC v. United Parcel Serv., Inc., 249 F.3d 557, 561-62 (6th Cir. 2001). The time for filing a complaint under AMLA may be tolled or equitably modified for reasons warranted by applicable case law. For example, OSHA may consider the time for filing a complaint to be tolled if a complainant mistakenly files a complaint with an agency other than OSHA within 90 days after an alleged adverse action. Xanthopoulos v. U.S. Dep't of Labor, 991 F.3d 823, 832 (7th Cir. 2021) (affirming ARB's refusal to toll the statute of limitations under SOX and explaining the limited circumstances in which tolling is appropriate for a timely filing in the wrong forum); see also Martin v. Paragon Foods, ARB No. 2022-0058 (June 8, 2023) (explaining the distinction between equitable estoppel and tolling). Retaliation complaints filed under this section need not be in any particular form. They may be either oral or in writing. If the complainant is unable to file the complaint in English, OSHA will accept the complaint in any language. With the consent of the whistleblower, complaints may be filed by any person on the whistleblower's behalf.

This section describes the procedures that apply to OSHA's investigation of AMLA retaliation complaints. Paragraph (a) of this section outlines the procedures for notifying the respondent, the employer (if different from the respondent), and FinCEN of the complaint and notifying the respondent of the rights under these regulations. Paragraph (b) describes the procedures for the respondent to submit the response to the complaint. Paragraph (c) specifies that OSHA will request that the parties provide each other with copies of their submissions to OSHA during the investigation and that, if a party does not provide such copies, OSHA generally will do so at a time permitting the other party an opportunity to respond to those submissions. Before providing such materials, OSHA will redact them consistent with the Privacy Act of 1974, 5 U.S.C. 552a and other applicable confidentiality laws. Paragraph (d) of this section discusses confidentiality of information provided during investigations.

Paragraph (e) of this section sets forth the applicable burdens of proof. AMLA incorporates the burdens of proof in AIR21. 31 U.S.C. 5323(g)(3)(A), incorporating the burdens of proof in 49 U.S.C. 42121(b). Thus, in order for OSHA to conduct an investigation, AMLA requires that a complainant make an initial prima facie showing that a protected activity was “a contributing factor” in the adverse action alleged in the complaint, i.e., that the protected activity, alone or in combination with other factors, affected in some way the outcome of the employer's decision. The complainant will be considered to have met the required burden for OSHA to commence an investigation if the complaint on its face, supplemented as appropriate through interviews of the complainant, alleges the existence of facts and either direct or circumstantial evidence to meet the required showing. The complainant's burden at this stage may be satisfied, for example, if the complainant shows that the adverse action took place shortly after the protected activity.

If the complainant does not make the required prima facie showing, the investigation must be discontinued and the complaint dismissed. See Trimmer v. U.S. Dep't of Labor, 174 F.3d 1098, 1101 (10th Cir. 1999) (noting that the burden-shifting framework of the Energy Reorganization Act of 1974, as amended, (ERA) which is the same as that under AMLA, serves a “gatekeeping function” intended to “stem[] frivolous complaints”). Even in cases where the complainant successfully makes a prima facie showing, the investigation must be discontinued if the employer demonstrates, by clear and convincing evidence, that it would have taken the same adverse action in the absence of the protected activity. Thus, OSHA must dismiss the complaint and not investigate further if either: (1) the complainant fails to make the prima facie showing that protected activity was a contributing factor in the alleged adverse action; or (2) the employer rebuts that showing by clear and convincing evidence that it would have taken the same adverse action absent the protected activity.

Assuming that an investigation proceeds beyond the gatekeeping phase, the statute requires OSHA to determine whether there is reasonable cause to believe that protected activity was a contributing factor in the alleged adverse action. A contributing factor is “any factor which, alone or in connection with other factors, tends to affect in any way the outcome of the decision.” Wiest v. Tyco Elec. Corp., 812 F.3d 319, 330 (3d Cir. 2016) (discussing “contributing factor standard” under SOX); Feldman v. Law Enforcement Assocs. Corp., 752 F.3d 339, 348 (4th Cir. 2014) (same); Lockheed Martin Corp. v. Admin. Review Bd., 717 F.3d 1121, 1136 (10th Cir. 2013) (same). A conclusion that protected activity was a contributing factor in an adverse action can be based on direct evidence or circumstantial evidence “such as the temporal proximity between the protected activity and the adverse action, indications of pretext such as inconsistent application of policies and shifting explanations, antagonism or hostility toward protected activity, the relation between the discipline and the protected activity, and the presence [or absence] of intervening events that independently justify” the adverse action. Hess v. Union Pac. R.R. Co., 898 F.3d 852, 858 (8th Cir. 2018) (quoted source omitted) (discussing the contributing factor standard under the Federal Railroad Safety Act). The evidence must show that the protected activity was a contributing factor in the unfavorable personnel action but the whistleblower does not need to prove that his or her employer acted with “retaliatory intent.” Murray v. UBS Securities, LLC, 601 U.S. 23, 39 (2024).

If OSHA finds reasonable cause to believe that the alleged protected activity was a contributing factor in the adverse action, OSHA may not order relief if the employer demonstrates by “clear and convincing evidence” that it would have taken the same action in the absence of the protected activity. See 49 U.S.C. 42121(b)(2)(B)(iv). The “clear and convincing evidence” standard is a higher burden of proof than a “preponderance of the evidence” standard. Clear and convincing evidence is evidence indicating that the thing to be proved is highly probable or reasonably certain. Clarke v. Navajo Express, ARB No. 09-114, 2011 WL 2614326, at *3 (ARB June 29, 2011).

Paragraph (f) describes the procedures OSHA will follow prior to the issuance of findings and a preliminary order when OSHA has reasonable cause to believe that a violation has occurred and reinstatement is required. Their purpose is to ensure compliance with the Due Process Clause of the Fifth Amendment, as interpreted by the Supreme Court in Brock v. Roadway Express, Inc., 481 U.S. 252 (1987) (requiring OSHA to give a Surface Transportation Assistance Act respondent the opportunity to review the substance of the evidence and respond prior to ordering preliminary reinstatement).

This section provides that, on the basis of information obtained in the investigation, the Assistant Secretary will issue, within 60 days of the filing of a complaint, written findings regarding whether or not there is reasonable cause to believe that the complaint has merit. If the findings are that there is reasonable cause to believe that the complaint has merit, the Assistant Secretary will order reinstatement with the same seniority status that the complainant would have had, but for the retaliation; double back pay with interest; and compensatory damages, including litigation costs, expert witness fees, and reasonable attorney fees, as well as any other appropriate remedy for the retaliation, as applicable. The findings and, where appropriate, preliminary order, will also advise the parties of their right to file objections to the findings of the Assistant Secretary and to request a hearing. The findings and, where appropriate, the preliminary order, will also advise the respondent of the right to request an award of attorney fees not exceeding a total of $1,000 from the ALJ, regardless of whether the respondent has filed objections, if the respondent alleges that the complaint was frivolous or brought in bad faith. If no objections are filed within 30 days of receipt of the findings, the findings and any preliminary order of the Assistant Secretary become the final decision and order of the Secretary. If objections are timely filed, any order of preliminary reinstatement will take effect, but the remaining provisions of the order will not take effect until administrative proceedings are completed.

The remedies provided under AMLA aim to make the complainant whole by restoring the complainant to the position that the complainant would have occupied absent the retaliation and to counteract the chilling effect of retaliation on protected whistleblowing in the complainant's workplace. The back pay, benefits, and other remedies appropriate in each case will depend on the individual facts of the case and the evidence submitted, and the complainant's interim earnings must be taken into account in determining the appropriate back pay award. When there is evidence to determine these figures, a back pay award under AMLA might include, for example, amounts that the complainant would have earned in commissions, bonuses, overtime, or raises had the complainant not been discharged in retaliation for engaging in protected activity under AMLA. Lost benefits may also be included in a back pay award under AMLA when there is evidence to support an award for lost benefits. Such benefits might include amounts that the employer would have contributed to a 401(k) plan, insurance plan, profit-sharing plan, or retirement plan on the complainant's behalf had the complainant not been discharged in retaliation for engaging in protected activity under AMLA. Other damages, including non-pecuniary damages, such as damages for emotional distress due to the retaliation, are also available under AMLA. See, e.g., Jones v. Southpeak Interactive Corp. of Del., 777 F.3d 658, 670-71 (4th Cir. 2015) (holding that emotional distress damages are available under an identical remedial provision in SOX); Halliburton, Inc. v. Admin. Review Bd., 771 F.3d 254, 264-66 (5th Cir. 2014) (same). Consistent with the rules under other whistleblower statutes enforced by the Department of Labor, in ordering interest on any back pay award under AMLA, OSHA will compute interest due by compounding daily the Internal Revenue Service interest rate for the underpayment of taxes, which under 26 U.S.C. 6621 generally is the Federal short-term rate plus three percentage points, against back pay. See, e.g., 29 CFR 1980.105(a) (SOX); 29 CFR 1982.105(a) (Federal Railroad Safety Act (FRSA)); 29 CFR 1988.105(a) (Moving Ahead for Progress in the 21st Century Act (MAP-21)).

Consistent with the rules governing other Department of Labor-enforced whistleblower protection statutes, where appropriate, in ordering back pay, OSHA will require the respondent to submit the appropriate documentation to the Social Security Administration (SSA) allocating the back pay to the appropriate periods. See, e.g., 29 CFR 1980.105(a) (SOX); 29 CFR 1982.105(a) (FRSA); 29 CFR 1988.105(a) (MAP-21)).

The statute permits OSHA to preliminarily reinstate whistleblowers to their positions if OSHA finds reasonable cause to believe that they were discharged in violation of AMLA. See 49 U.S.C. 42121(b)(2)(A). When a violation is found, the norm is for OSHA to order immediate preliminary reinstatement. In appropriate circumstances, in lieu of preliminary reinstatement, OSHA may order that the complainant receive the same pay and benefits that the complainant received prior to termination but not actually return to work. Such “economic reinstatement” is akin to an order of front pay and is sometimes employed in cases arising under section 105(c) of the Federal Mine Safety and Health Act of 1977, which protects miners from retaliation. 30 U.S.C. 815(c); see, e.g., Sec'y of Labor, MSHA v. North Fork Coal Corp., 33 FMSHRC 589, 2011 WL 1455831, at *4 (FMSHRC Mar. 25, 2011) (explaining economic reinstatement in lieu of temporary reinstatement in the context of section 105(c)). Front pay has been recognized as an appropriate remedy in cases under the whistleblower statutes enforced by OSHA in circumstances where reinstatement would not be appropriate. See, e.g., Deltek, Inc. v. Dep't of Labor, Admin. Rev Bd., 649 Fed. App'x. 320, 333 (4th Cir. 2016) (affirming award of front pay in SOX case due to “pronounced animosity between the parties;” explaining that “front pay `is designed to place the complainant in the identical financial position' that she would have occupied had she remained employed or been reinstated.”); Continental Airlines, Inc. v. Admin. Review Bd., 638 Fed. App'x. 283, 289-90, 2016 WL 97461, at *4 (5th Cir. 2016) (affirming front pay award under AIR21, and explaining that “front-pay is available when reinstatement is not possible”), aff'g Luder v. Cont'l Airlines, Inc., ARB No. 10-026, 2012 WL 376755, at *11 (ARB Jan. 31, 2012); see also Brown v. Lockheed Martin Corp., ALJ No. 2008-SOX-00049, 2010 WL 2054426, at *55-56 (ALJ Jan. 15, 2010) (noting that while reinstatement is the “presumptive remedy” under SOX whistleblower provision, front pay may be awarded as a substitute when reinstatement is inappropriate), aff'd Lockheed Martin Corp. v. Admin. Review Bd., 717 F.3d 1121, 1138 (10th Cir. 2013) (noting availability of all relief necessary to make the employee whole in SOX case but remanding for DOL to quantify remedies); Indiana Michigan Power Co. v. U.S. Dept. of Labor, 278 Fed. Appx. 597, 606 (6th Cir. 2008) (affirming front pay award under ERA). Neither an employer nor a whistleblower has a statutory right to choose economic reinstatement. Rather, economic reinstatement is designed to accommodate situations in which evidence establishes to OSHA's satisfaction that immediate reinstatement is inadvisable for some reason, notwithstanding the employer's retaliatory discharge of the whistleblower.

Objections to the findings of the Assistant Secretary must be in writing and must be filed with the Chief Administrative Law Judge, U.S. Department of Labor, in accordance with 29 CFR part 18, as applicable, within 30 days of the receipt of the findings. The date of the postmark, facsimile transmittal, or electronic transmittal is considered the date of the filing; if the objection is filed in person, by hand-delivery or other means, the objection is filed upon receipt. The filing of objections also is considered a request for a hearing before an ALJ. Although the parties are directed to serve a copy of their objections on the other parties of record, as well as on the OSHA official who issued the findings and order, the Assistant Secretary, and the U.S. Department of Labor's Associate Solicitor for Fair Labor Standards, the failure to serve copies of the objections on the other parties of record does not affect the ALJ's jurisdiction to hear and decide the merits of the case. See Shirani v. Calvert Cliffs Nuclear Power Plant, Inc., ARB No. 04-101, 2005 WL 2865915, at *7 (ARB Oct. 31, 2005). OSHA and the Associate Solicitor for Fair Labor Standards may specify the means, including electronic means, to serve them with copies of objections to OSHA's findings.

The timely filing of objections stays all provisions of the preliminary order, except for the portion requiring reinstatement. A respondent may file a motion to stay the Assistant Secretary's preliminary order of reinstatement with the Office of Administrative Law Judges. However, such a motion will be granted only based on exceptional circumstances. The Secretary believes that a stay of the Assistant Secretary's preliminary order of reinstatement under AMLA would be appropriate only where the respondent can establish the necessary criteria for equitable injunctive relief, i.e., irreparable injury, likelihood of success on the merits, a balancing of possible harms to the parties, and that the public interest favors a stay. If no timely objection to the Assistant Secretary's findings and/or preliminary order is filed, then the Assistant Secretary's findings and/or preliminary order become the final decision of the Secretary not subject to judicial review.

This section adopts the rules of practice and procedure for administrative hearings before the Office of Administrative Law Judges, as set forth in 29 CFR part 18, subpart A. This section provides that the hearing is to commence expeditiously, except upon a showing of good cause or unless otherwise agreed to by the parties. Hearings will be conducted de novo, on the record. As noted in this section, formal rules of evidence will not apply, but rules or principles designed to assure production of the most probative evidence will be applied. The ALJ may exclude evidence that is immaterial, irrelevant, or unduly repetitious.

The Assistant Secretary may participate as a party or amicus curiae at any time in the administrative proceedings under AMLA. For example, the Assistant Secretary may exercise discretion to prosecute the case in the administrative proceeding before an ALJ; petition for review of a decision of an ALJ, including a decision based on a settlement agreement between the complainant and the respondent, regardless of whether the Assistant Secretary participated before the ALJ; or participate as amicus curiae before the ALJ or the ARB. Although OSHA anticipates that ordinarily the Assistant Secretary will not participate, the Assistant Secretary may choose to do so in appropriate cases, such as cases involving important or novel legal issues, multiple whistleblowers, alleged violations that appear egregious, or where the interests of justice might require participation by the Assistant Secretary. The Department of the Treasury, if interested in a proceeding, also may participate as amicus curiae at any time in the proceedings.

This section sets forth the requirements for the content of the decisions and orders of the ALJ, and includes the standard for finding a violation under AMLA. Specifically, because AMLA incorporates the burdens of proof in AIR21, the complainant must demonstrate ( i.e., prove by a preponderance of the evidence) that the protected activity was a “contributing factor” in the adverse action. See 49 U.S.C. 42121(b)(2)(B)(iii); see, e.g., Allen, 514 F.3d at 475 n.1 (“The term `demonstrates' [under identical burden-shifting scheme in the SOX whistleblower provision] means to prove by a preponderance of the evidence.”). If the whistleblower demonstrates that the alleged protected activity was a contributing factor in the adverse action, then the employer must demonstrate by “clear and convincing evidence” that it would have taken the same action in the absence of the protected activity. See 49 U.S.C. 42121(b)(2)(B)(iv).

Paragraph (c) of this section further provides that OSHA's determination to dismiss the complaint without an investigation or without a complete investigation under § 1992.104 is not subject to review. Thus, § 1992.109(c) clarifies that OSHA's determinations on whether to proceed with an investigation under AMLA and whether to make particular investigative findings are discretionary decisions not subject to review by the ALJ. The ALJ hears cases de novo and, therefore, as a general matter, may not remand cases to OSHA to conduct an investigation or make further factual findings.

Paragraph (d) notes the remedies that the ALJ may order under AMLA and, as discussed under § 1992.105 above, provides that interest on any back pay award will be calculated using the interest rate applicable to underpayment of taxes under 26 U.S.C. 6621 and will be compounded daily, and that the respondent will be required to submit appropriate documentation to the SSA allocating any back pay award to the appropriate periods. Paragraph (e) requires that the ALJ's decision be served on all parties to the proceeding, OSHA, and the U.S. Department of Labor's Associate Solicitor for Fair Labor Standards. OSHA and the Associate Solicitor for Fair Labor Standards may specify the means, including electronic means, for service of the ALJ's decision on them. Paragraph (e) also provides that any ALJ decision requiring reinstatement or lifting an order of reinstatement by the Assistant Secretary will be effective immediately upon receipt of the decision by the respondent. All other portions of the ALJ's order will be effective 30 days after the date of the decision unless a timely petition for review has been filed with the ARB. If a timely petition for review is not filed with the ARB, the decision of the ALJ becomes the final decision of the Secretary and is not subject to judicial review.

Upon the issuance of the ALJ's decision, the parties have 30 days within which to petition the ARB for review of that decision. The date of the postmark or electronic transmittal is considered the date of filing of the petition; if the petition is filed in person, by hand delivery, or other means, the petition is considered filed upon receipt.

The appeal provisions in this part provide that an appeal to the ARB is only accepted at the discretion of the ARB. The parties should identify with some specificity in their petitions for review the legal conclusions or orders to which they object, or the objections may be deemed waived. Simply attaching the order objected to will not suffice for a petition for review. The ARB has 30 days to decide whether to grant the petition for review. If the ARB does not grant the petition, the decision of the ALJ becomes the final decision of the Secretary. If a timely petition for review is filed with the ARB, any relief ordered by the ALJ, except for that portion ordering reinstatement, is inoperative while the matter is pending before the ARB. When the ARB accepts a petition for review, the ALJ's factual determinations will be reviewed under the substantial evidence standard, while questions of law will be reviewed de novo. Sylvester, 2011 WL 2165854, at *6.

This section also provides that, based on exceptional circumstances, the ARB may grant a motion to stay an ALJ's preliminary order of reinstatement under AMLA (which otherwise would be effective immediately), while the ARB reviews the order. The Secretary believes that a stay of an ALJ's preliminary order of reinstatement under AMLA would be appropriate only where the respondent can establish the necessary criteria for equitable injunctive relief, i.e., irreparable injury, likelihood of success on the merits, a balancing of possible harms to the parties, and that the public interest favors a stay.

If the ARB concludes that the respondent has violated the law, it will issue an order providing relief. The order will require, where appropriate: reinstatement with the same seniority status that the complainant would have had, but for the retaliation; double back pay with interest; and compensatory damages, including litigation costs, expert witness fees, and reasonable attorney fees, as well as any other appropriate remedy for the retaliation, as applicable. Interest on any back pay award will be calculated using the interest rate applicable to underpayment of taxes pursuant to 26 U.S.C. 6621 and will be compounded daily, and the respondent will be required to submit appropriate documentation to the SSA allocating any back pay award to the appropriate periods. If the ARB determines that the respondent has not violated the law, an order will be issued denying the complaint. If, upon the request of the respondent, the ARB determines that a complaint was frivolous or was brought in bad faith, the ARB may award to the respondent a reasonable attorney fee, not exceeding a total of $1,000.

The decision of the ARB is subject to discretionary review by the Secretary of Labor. See Secretary of Labor's Order, 01-2020 (Feb. 21, 2020), 85 FR 13024-01 (Mar. 6, 2020). As provided in that Secretary's Order, a party may petition the ARB to refer a decision to the Secretary for further review, after which the Secretary may accept review, decline review, or take no action. If no such petition is filed, the ARB's decision shall become the final action of the Department 28 calendar days after the date on which the decision was issued. If such a petition is filed and the ARB declines to refer the case to the Secretary, the ARB's decision shall become final 28 calendar days after the date on which the petition for review was filed. If the ARB refers a decision to the Secretary for further review, and the Secretary takes no action in response to the ARB's referral, or declines to accept the case for review, the ARB's decision shall become final either 28 calendar days from the date of the referral, or on the date on which the Secretary declines review, whichever comes first.

In the alternative, under the Secretary's Order, at any point during the first 28 calendar days after the date on which an ARB decision was issued, the Secretary may direct the ARB to refer the decision to the Secretary for review. If the Secretary directs the ARB to refer a case to the Secretary or notifies the parties that the case has been accepted for review, the ARB's decision shall not become the final action of the Department and shall have no legal force or effect, unless and until the Secretary adopts the ARB's decision.

Under the Secretary's Order, any final decision made by the Secretary shall be made solely based on the administrative record, the petition and briefs filed with the ARB, and any amicus briefs permitted by the Secretary. The decision shall be in writing and shall be transmitted to the ARB, which will publish the decision and transmit it to the parties to the case. The Secretary's decision shall constitute final action by the Department and shall serve as binding precedent in all Department proceedings involving the same issue or issues.

This section provides the procedures and time periods for withdrawal of complaints, withdrawal of findings and/or preliminary orders by the Assistant Secretary, and withdrawal of objections to findings and/or orders. It permits complainants to withdraw their complaints orally, and provides that, in such circumstances, OSHA will confirm a complainant's desire to withdraw in writing. It also provides for approval of settlements at the investigative and adjudicatory stages of the case.

This section describes the statutory provisions for judicial review of decisions of the Secretary and requires, in cases where judicial review is sought, the ARB or the ALJ to submit the record of proceedings to the appropriate court pursuant to the rules of such court.

This section describes the ability of the Secretary, the complainant, and the respondent under AMLA to obtain judicial enforcement of orders and terms of settlement agreements. Through the incorporation of the rules and procedures in AIR21, AMLA authorizes district courts to enforce orders issued by the Secretary under the provisions of 49 U.S.C. 42121(b). Specifically, 49 U.S.C. 42121(b)(5) provides that “[w]henever any person has failed to comply with an order issued under paragraph (3), the Secretary of Labor may file a civil action in the United States district court for the district in which the violation was found to occur to enforce such order. In actions brought under this paragraph, the district courts shall have jurisdiction to grant all appropriate relief, including injunctive relief and compensatory damages.” 49 U.S.C. 42121(b)(5). Similarly, 49 U.S.C. 42121(b)(6) provides that a person on whose behalf an order was issued “may commence a civil action against the person to whom such order was issued to required compliance with such order” in the appropriate United States district court, which will have jurisdiction without regard to the amount in controversy or the citizenship of the parties, to enforce such order. The Secretary views these provisions as permitting district courts to enforce both final orders of the Secretary and preliminary orders of reinstatement for the same reasons that the Secretary has expressed with regard to SOX, which incorporates the rules and procedures of AIR21 using identical language to that in AMLA. See Procedures for the Handling of Retaliation Complaints Under section 806 of the Sarbanes-Oxley Act of 2002, as Amended, Final Rule, 80 FR 11865-02, 11877 (Mar. 5, 2015) (discussing district court enforcement of preliminary reinstatement orders under SOX); see also Brief for the Intervenor/Plaintiff-Appellee Secretary of Labor, Solis v. Tenn. Commerce Bancorp, Inc., No. 10-5602 (6th Cir. 2010); Solis v. Tenn. Commerce Bancorp, Inc., 713 F. Supp. 2d 701 (M.D. Tenn. 2010); but see Bechtel v. Competitive Techs., Inc., 448 F.3d 469 (2d Cir. 2006); Welch v. Cardinal Bankshares Corp., 454 F. Supp. 2d 552 (W.D. Va. 2006), decision vacated, appeal dismissed, No. 06-2295 (4th Cir. Feb. 20, 2008)).

This section sets forth AMLA's provisions allowing a complainant to bring an original de novo civil action in district court, alleging the same allegations contained in the complaint filed with OSHA, if there has been no final decision of the Secretary within 180 days after the date of the filing of the complaint. See 31 U.S.C. 5323(g)(2)(B). This section also incorporates the statutory provision that allows for a jury trial at the request of either party in a district court action. See 31 U.S.C. 5323(g)(3)(B). A civil action may not be brought under AMLA more than 6 years after the date on which the violation occurs or more than 3 years after the date on which when facts material to the right of action are known, or reasonably should have been known, by the whistleblower alleging a violation. See 31 U.S.C. 5323(g)(3)(B)(ii).

This section also requires that, within seven days after filing a complaint in district court, a complainant must provide a file-stamped copy of the complaint to OSHA, the ALJ, or the ARB, depending on where the proceeding is pending. If the ARB has issued a decision that has not yet become final under Secretary of Labor's Order 01-2020, the case is regarded as pending before the ARB for purposes of this section and a copy of any district court complaint should be sent to the ARB. A copy of the district court complaint also must be provided to the OSHA official who issued the findings and/or preliminary order, the Assistant Secretary, and the U.S. Department of Labor's Associate Solicitor for Fair Labor Standards. This provision is necessary to notify the agency that the complainant has opted to file a complaint in district court. This provision is not a substitute for the complainant's compliance with the requirements for service of process of the district court complaint contained in the Federal Rules of Civil Procedure and the local rules of the district court where the complaint is filed.

Finally, it should be noted that although a complainant may file an action in district court if the Secretary has not issued a final decision within 180 days of the filing of the complaint with OSHA, it is the Department of Labor's position that complainants may not initiate an action in federal court after the Secretary issues a final decision, even if the date of the final decision is more than 180 days after the filing of the complaint. Thus, for example, after the ARB has issued a decision that has become final denying a whistleblower complaint, the complainant no longer may file an action for de novo review in federal district court. See Soo Line R.R., Inc. v. Admin. Review Bd., 990 F.3d 596, 598 n.1 (8th Cir. 2021). The purpose of the “kick-out” provision is to aid the complainant in receiving a prompt decision. That goal is not implicated in a situation where the complainant already has received a final decision from the Secretary. In addition, permitting the complainant to file a new case in district court in such circumstances could conflict with the parties' rights to seek judicial review of the Secretary's final decision in the court of appeals. See 49 U.S.C. 42121(b)(4)(B) (providing that an order with respect to which review could have been obtained in the court of appeals shall not be subject to judicial review in any criminal or other civil proceeding).

This section provides that, in circumstances not contemplated by these rules or for good cause, the ALJ or the ARB may, upon application and notice to the parties, waive any rule as justice or the administration of AMLA requires.

This rule contains a reporting provision (filing a retaliation complaint, § 1992.103) which was previously reviewed as a statutory requirement of AMLA and approved for use by the Office of Management and Budget (OMB), as part of the Information Collection Request (ICR) assigned OMB control number 1218-0236 under the provisions of the Paperwork Reduction Act of 1995 (PRA). See Public Law 104-13, 109 Stat. 163 (1995). A non-material change has been submitted to OMB to include the regulatory citation.

The notice and comment rulemaking procedures of section 553 of the Administrative Procedure Act (APA) do not apply “to interpretative rules, general statements of policy, or rules of agency organization, procedure, or practice.” 5 U.S.C. 553(b)(A). This interim final rule is a rule of agency procedure, practice, and interpretation within the meaning of that section, because it provides the procedures for the handling of retaliation complaints. Therefore, publication in the Federal Register of a notice of proposed rulemaking and request for comments are not required for this rule. Although this interim final rule is a procedural and interpretative rule not subject to the notice and comment procedures of the APA, OSHA is providing persons interested in this interim final rule 60 days to submit comments. A final rule will be published after OSHA receives and reviews the public's comments.

Furthermore, because this interim final rule is procedural and interpretative rather than substantive, the normal requirement of 5 U.S.C. 553(d) that a rule be effective 30 days after publication in the Federal Register is inapplicable. 5 U.S.C. 553(d)(2). OSHA also finds good cause to provide an immediate effective date for this interim final rule. It is in the public interest that the rule be effective immediately so that parties may know what procedures are applicable to pending cases.

The Office of Information and Regulatory Affairs has concluded that this rule is not a “significant regulatory action” within the meaning of Executive Order 12866, as reaffirmed and amended by Executive Orders 14094 and 13563, because it is not likely to: (1) have an annual effect on the economy of $200 million or more or adversely affect in a material way the economy, a sector of the economy, productivity, competition, jobs, the environment, public health or safety, or State, local, Territorial or Tribal governments or communities; (2) create a serious inconsistency or otherwise interfere with an action taken or planned by another agency; (3) materially alter the budgetary impact of entitlements, grants, user fees, or loan programs or the rights and obligations of recipients thereof; or (4) raise novel legal or policy issues for which centralized review would meaningfully further the President's priorities or the principles set forth in Executive Order 12866. Modernizing Regulatory Review, 88 FR 21879, 21879 (Apr. 11, 2023). Therefore, no economic impact analysis under section 6(a)(3)(C) of Executive Order 12866 has been prepared.

Also, because this rule is not significant under Executive Order 12866, and because no notice of proposed rulemaking has been published, no statement is required under section 202 of the Unfunded Mandates Reform Act of 1995, 2 U.S.C. 1532. In any event, this rulemaking is procedural and interpretative in nature and is thus not expected to have a significant economic impact. Finally, this rule does not have “federalism implications.” The rule does not have substantial direct effects on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government, and therefore, is not subject to Executive Order 13132 (Federalism).

The notice and comment rulemaking procedures of section 553 of the APA do not apply “to interpretative rules, general statements of policy, or rules of agency organization, procedure, or practice.” 5 U.S.C. 553(b)(A). Rules that are exempt from APA notice and comment requirements are also exempt from the Regulatory Flexibility Act (RFA). See Small Business Administration Office of Advocacy, A Guide for Government Agencies: How to Comply with the Regulatory Flexibility Act, at 9; also found at https://www.sba.gov/advocacy/guide-government-agencies-how-comply-regulatory-flexibility-act. This is a rule of agency procedure, practice, and interpretation within the meaning of 5 U.S.C. 553; and, therefore, the rule is exempt from both the notice and comment rulemaking procedures of the APA and the requirements under the RFA.

This document was prepared under the direction and control of Douglas L. Parker, Assistant Secretary of Labor for Occupational Safety and Health.

Accordingly, for the reasons set out in the preamble, 29 CFR part 1992 is added to read as follows:

In the final rule published December 19, 2024, there was one technical error that is now identified and corrected in this document. The provisions in this correction document are effective as if they had been included in the document published December 19, 2024. Accordingly, the following corrections are effective January 18, 2025.

In FR Doc. 2024-29652, appearing on page 103992 in the Federal Register of Thursday, December 19, 2024, the following correction is made:

1. On page 103992, in the first column, correct the DATES section to read as follows:

On November 20, 2024, the USPTO published a final rule setting or adjusting patent fees as authorized by the AIA, as amended by the SUCCESS Act. See 89 FR 91898. Subsequent to the publication of that final rule, it was discovered that the preamble discussion and several amendatory instructions contained inadvertent errors requiring correction. For example, in the preamble, example 10, which provides guidance for “Adding timely benefit claims under 35 U.S.C. 120 after filing; multiple fees due,” contained an incorrect internal cross-reference to the subject application. The subject application in the example should be “J” and not “I.” Also, in table 20, in the entry for § 1.17(m)(2), for a “Petition to excuse applicant's failure to act within prescribed time limits in an international design application, delay less than or equal to two years,” the table reflected that the final rule fee applicable to a micro entity for this action was “$54,” which is incorrect. The correct fee should be “$452.” In addition, in the regulatory text at § 42.15(e), the description of the fee did not reflect changes made by an intervening final rule published on October 10, 2024, entitled “Expanding Opportunities To Appear Before the Patent Trial and Appeal Board” (89 FR 82172), which revised the terminology used to reference counsel recognized pro hac vice before the Patent Trial and Appeal Board. This correction updates the description of the fee in paragraph (e) to reflect the revision made by the October 10, 2024 final rule. No changes are being made to the fee amount that was published in the November 20, 2024, final rule. This final rule corrects these errors, as well as other minor typographical errors in the amendatory instructions. These changes are administrative in nature and are intended to provide clarification to impacted entities to avoid any potential confusion.

This final rule corrects typographical and format errors in a rulemaking setting and adjusting patent fees. The changes in this final rule involve rules of agency practice and procedure and/or interpretive rules and do not require notice-and-comment rulemaking. See Perez v. Mortg. Bankers Ass'n, 135 S.Ct. 1199, 1204 (2015) (explaining that interpretive rules “advise the public of the agency's construction of the statutes and rules which it administers” and do not require notice-and-comment rulemaking when issued or amended); Cooper Techs. Co. v. Dudas, 536 F.3d 1330, 1336-37 (Fed. Cir. 2008) (stating that 5 U.S.C. 553, and thus 35 U.S.C. 2(b)(2)(B), do not require notice-and comment rulemaking for “interpretative rules, general statements of policy, or rules of agency organization, procedure, or practice”); and JEM Broadcasting Co. v. F.C.C., 22 F.3d 320, 328 (D.C. Cir. 1994) (explaining that rules are not legislative because they do not “foreclose effective opportunity to make one's case on the merits”).

Moreover, the Director of the USPTO, pursuant to authority at 5 U.S.C. 553(b)(B) and (d)(1), finds good cause to adopt the changes in this final rule without prior notice and an opportunity for public comment or a 30-day delay in effectiveness, as such procedures would be unnecessary, impracticable, and contrary to the public interest. As discussed above, the changes in this rulemaking involve correcting minor typographical and other nonsubstantive errors in the final rule published on November 20, 2024, which itself underwent notice and comment and a delay in effective date. These changes are administrative in nature and are intended to provide clarification to impacted entities to avoid any potential confusion that could result if these errors are not corrected prior to the effective date of the November 20, 2024, final rule. Therefore, good cause exists to dispense with the requirement for prior notice and an opportunity for public comment and a 30-day delay in effectiveness.

In FR Doc. 2024-26821 appearing on page 91898 in the Federal Register of Wednesday, November 20, 2024, the following corrections are made:

Example 10: Adding timely benefit claims under 35 U.S.C. 120 after filing; multiple fees due. Application J is a nonprovisional application filed on July 5, 2029. The ADS present upon J's filing contains a benefit claim under 35 U.S.C. 120 to nonprovisional application O filed on February 2, 2021, which is the only benefit claim in the application. J's EBD is February 2, 2021, which is more than six but not more than nine years, earlier than J's actual filing date of July 5, 2029. In this example, the § 1.17(w)(1) fee of $2,700 is due upon J's filing. The applicant pays the fee. Two months after J's filing, the applicant files a second ADS containing the previously added benefit claim to O and a new benefit claim under 35 U.S.C. 120 to nonprovisional application N filed on March 2, 2020. This newly added benefit claim causes J's EBD to become March 2, 2020, which is more than nine years earlier than J's actual filing date of July 5, 2029, and thus prompts the fee in § 1.17(w)(2). Because the fee in § 1.17(w)(1) was previously paid, the previous payment is subtracted from the amount now due under § 1.17(w)(2). Accordingly, the amount due upon filing of the second ADS is $1,300 (the current fee amount of $4,000 set forth in § 1.17(w)(2) less the $2,700 previously paid under § 1.17(w)(1)).

On November 18, 2024, the USPTO published a final rule setting or adjusting trademark fees as authorized by the AIA, as amended by the SUCCESS Act. See 89 FR 91062. Subsequent to the publication of that final rule, it was discovered that the rule inadvertently omitted applicable cross-references in 37 CFR 2.22(a)(6) and (9) and contained an incorrect cross-reference in § 2.22(a)(8), which referenced a fee that did not apply. This correction amends these sections to provide the correct cross-references.

Section 2.22 applies to all applications under section 1 and/or 44 of the Trademark Act, which includes not only trademark and service mark applications, but also applications for collective, collective membership, and certification marks. However, the cross-references in § 2.22(a)(6) and (9) referred only to §§ 2.34 and 2.33, respectively, which set out the requirements for trademark and service mark applications. Sections 2.22(a)(6) and (9) each should have included cross-references to §§ 2.44 and 2.45, which set forth the corresponding applicable requirements for collective, collective membership, and certification marks. This omission was unintentional and adding the applicable cross-references is not a substantive change to the final rule.

As noted in the preamble of the final rule, the USPTO is implementing a single electronic filing option for all section 1 and/or 44 applications, which includes collective and certification marks. Applicants choosing to comply with the base application requirements set forth in § 2.22 will pay the lowest fees under the final fee schedule. Applicants were always subject to the requirements for collective, collective membership, and certification marks at §§ 2.44 and 2.45, as applicable. The addition of these sections in § 2.22(a)(6) and (9) do not impose any new limitations but provide clarity to applicants that the requirements for collective, collective membership, and certification marks apply. This correction amends the preamble and § 2.22(a)(6) and (9) to add the inadvertently omitted cross-references.

In addition, § 2.22(a)(8) contained an incorrect cross-reference to § 2.6(a)(1)(ii), which is the fee for filing an application under section 66(a) of the Trademark Act and therefore does not apply to applications filed under section 1 and/or 44. This section should have cross-referenced only § 2.6(a)(1)(iii), which provides for the applicable fee. This correction amends the preamble and § 2.22(a)(9) to remove the cross-reference to § 2.6(a)(1)(ii).

This final rule corrects inadvertent errors in a rulemaking setting and adjusting trademark fees. The changes in this final rule involve rules of agency practice and procedure and/or interpretive rules and do not require notice-and-comment rulemaking. See Perez v. Mortg. Bankers Ass'n, 135 S.Ct. 1199, 1204 (2015) (explaining that interpretive rules “advise the public of the agency's construction of the statutes and rules which it administers” and do not require notice-and-comment rulemaking when issued or amended); Cooper Techs. Co. v. Dudas, 536 F.3d 1330, 1336-37 (Fed. Cir. 2008) (stating that 5 U.S.C. 553, and thus 35 U.S.C. 2(b)(2)(B), do not require notice-and comment rulemaking for “interpretative rules, general statements of policy, or rules of agency organization, procedure, or practice”); and JEM Broadcasting Co. v. F.C.C., 22 F.3d 320, 328 (D.C. Cir. 1994) (explaining that rules are not legislative because they do not “foreclose effective opportunity to make one's case on the merits”).

Moreover, the Director of the USPTO, pursuant to authority at 5 U.S.C. 553(b)(B) and (d)(1), finds good cause to adopt the changes in this final rule without prior notice and an opportunity for public comment or a 30-day delay in effectiveness, as such procedures would be unnecessary, impracticable, and contrary to the public interest. As discussed above, the changes in this rulemaking involve corrections of errors in the final rule published on November 18, 2024, (which itself underwent notice and comment rulemaking and a 30-day delay in effective date) that provide clarity and without imposing any new requirements. The corrections will provide clarity and address potential confusion that could result if these errors are not corrected prior to the effective date of the November 18, 2024, final rule. Therefore, good cause exists to dispense with the requirement for prior notice and an opportunity for public comment and a 30-day delay in effectiveness.

In FR Doc. 2024-26644 appearing on page 91062 in the Federal Register of Monday, November 18, 2024, at 89 FR 91062, the following corrections are made:

• One or more bases for filing that satisfy all the requirements of §§ 2.34, 2.44, or 2.45, as applicable. If more than one basis is set forth, the applicant must comply with the requirements of §§ 2.34, 2.44, or 2.45 for each asserted basis, as applicable;

AmeriCorps is a Federal agency that engages millions of Americans in service. AmeriCorps members and AmeriCorps Seniors volunteers serve directly with nonprofit organizations to tackle some of our nation's most pressing challenges. For more information, visit americorps.gov .

AmeriCorps has two civil monetary penalties in its regulations. A civil monetary penalty under the Act is a penalty, fine, or other sanction that: (1) is for a specific monetary amount as provided by Federal law or has a maximum amount provided for by Federal law; and (2) is assessed or enforced by an agency pursuant to Federal law; and (3) is assessed or enforced pursuant to an administrative proceeding or a civil action in the Federal courts. ( See 28 U.S.C. 2461 note.) A civil monetary penalty does not include a penalty levied for violation of a criminal statute, or fees for services, licenses, permits, or other regulatory review.

The Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015 (sec. 701 of Pub. L. 114-74) (the “Act”) requires agencies to adjust their civil monetary penalties for inflation annually. This rule updates AmeriCorps' two civil penalties for inflation.

The inflation adjustment for each applicable civil monetary penalty is determined using the percent increase in the Consumer Price Index for all Urban Consumers (CPI-U) for the month of October of the year in which the amount of each civil money penalty was most recently established or modified. See December 17, 2024, OMB Memo for the Heads of Executive Departments and Agencies, M-25-02, Implementation of Penalty Inflation Adjustments for 2025, Pursuant to the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015. The cost-of-living adjustment multiplier for 2025, based on the CPI-U for the month of October 2024, not seasonally adjusted, is 1.02598.

The agency identified two civil penalties in its regulations: (1) the penalty associated with Restrictions on Lobbying (45 CFR 1230.400) and (2) the penalty associated with the Program Fraud Civil Remedies Act (45 CFR 2554.1):

• The civil monetary penalties related to Restrictions on Lobbying (45 CFR 1230.400) range from $24,497 to $244,957. Using the 2025 multiplier, the new range of possible civil monetary penalties is from $25,133 to $251,321.

• The Program Fraud Civil Remedies Act of 1986 (45 CFR 2554.1) civil monetary penalty has an upper limit of $13,946. Using the 2025 multiplier, the new upper limit of the civil monetary penalty is $14,308.

This final rule adjusts the civil monetary penalty amounts related to Restrictions on Lobbying (45 CFR 1230.400) and the Program Fraud Civil Remedies Act of 1986 (45 CFR 2554.1). The range of civil monetary penalties related to Restrictions on Lobbying increase from “$24,497 to $244,957” to “$25,133 to $251,321”. The civil monetary penalties for the Program Fraud Civil Remedies Act of 1986 increase from “up to $13,946” to “up to $14,308”.

Section 553(b) of the Administrative Procedure Act (APA) (5 U.S.C. 553) provides that, when an agency for good cause finds that notice and public comment procedures are impracticable, unnecessary, or contrary to the public interest, then the agency may issue a rule without providing notice and an opportunity for prior public comment. The agency finds that there is good cause to except this rule from the public notice and comment provisions of the APA in this case. Because the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015 requires the agency to update its regulations based on a prescribed formula, the agency has no discretion in the nature or amount of the change to the civil monetary penalties to reflect any views or suggestions provided by commenters. Accordingly, it would serve no purpose to provide an opportunity for public comment on this rule prior to promulgation. Thus, providing for notice and public comment is impracticable and unnecessary. Additionally, it would not be possible to meet the deadlines imposed by the Act if we were to first publish a proposed rule, allow the public sufficient time to submit comments, analyze the comments, and publish a final rule. Therefore, notice and comment for these proscribed updates is impracticable and unnecessary.

Furthermore, the agency finds under section 553(d)(3) of the APA that good cause exists to make this final rule effective immediately upon publication in the Federal Register . In the Act, Congress expressly required Federal agencies to publish annual inflation adjustments to civil penalties in the Federal Register by January 15 of each year, notwithstanding section 553 of the APA. Under the statutory framework and OMB guidance, the new penalty levels take effect immediately upon the effective date of the adjustment. The statutory deadline does not allow time to delay this rule's effective date beyond publication. Moreover, a delayed effective date would delay application of the new penalty levels, contrary to Congress's intent.

Accordingly, we are issuing the annual adjustments as a final rule without prior notice or an opportunity for comment and with an effective date immediately upon publication in the Federal Register .

The agency has determined that making technical changes to the amount of civil monetary penalties in its regulations does not trigger any requirements under procedural statutes and Executive orders that govern rulemaking procedures.

For the reasons discussed in the preamble, under the authority of 42 U.S.C. 12651c(c), the Corporation for National and Community Service amends chapters XII and XXV, title 45 of the Code of Federal Regulations as follows:

This rule adjusts the civil monetary penalties assessable by the Commission in accordance with the 2015 Act, which became effective on November 2, 2015. Public Law 114-74, section 701. The 2015 Act further amended the Federal Civil Penalties Inflation Adjustment Act of 1990 (FCPIAA), Public Law 101-410, 104 Stat. 890 (codified as amended at 28 U.S.C. 2461 note), in order to improve the effectiveness of civil monetary penalties and to maintain their deterrent effect.

The 2015 Act requires agencies to adjust civil monetary penalties under their jurisdiction by January 15 each year, based on changes in the consumer price index (CPI-U) for the month of October in the previous calendar year. On December 17, 2024, the Office of Management and Budget published guidance stating that based on the CPI-U for October 2024, not seasonally adjusted, the cost-of-living adjustment multiplier for 2025 is 1.02598. 1 In order to complete the annual adjustment, the Commission must multiply the most recent civil penalty amounts in 46 CFR part 506 by the multiplier, 1.02598.

Adjustments under the FCPIAA, as amended by the 2015 Act, are not subject to the procedural rulemaking requirements of the Administrative Procedure Act (APA) (5 U.S.C. 553), including the requirements for prior notice, an opportunity for comment, and a delay between the issuance of a final rule and its effective date. 2 The 2015 Act requires that the Commission adjust its civil monetary penalties no later than January 15 of each year.

The rule is not a “major rule” as defined by the Congressional Review Act, codified at 5 U.S.C. 801 et seq. The rule will not result in: (1) an annual effect on the economy of $100,000,000 or more; (2) a major increase in costs or prices; or (3) significant adverse effects on competition, employment, investment, productivity, innovation, or the ability of United States-based companies to compete with foreign-based companies. 5 U.S.C. 804(2).

The Regulatory Flexibility Act (codified as amended at 5 U.S.C. 601-612) provides that whenever an agency promulgates a final rule after being required to publish a notice of proposed rulemaking under the APA (5 U.S.C. 553), the agency must prepare and make available a final regulatory flexibility analysis describing the impact of the rule on small entities or the head of the agency must certify that the rule will not have a significant economic impact on a substantial number of small entities. 5 U.S.C. 604-605. As indicated above, this final rule is not subject to the APA's notice and comment requirements, and the Commission is not required to either conduct a regulatory flexibility analysis or certify that the final rule would not have a significant economic impact on a substantial number of small entities.

The Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3521) requires an agency to seek and receive approval from the Office of Management and Budget (OMB) before collecting information from the public. 44 U.S.C. 3507. The agency must submit collections of information in rules to OMB in conjunction with the publication of the notice of proposed rulemaking. 5 CFR 1320.11. This final rule does not contain any collection of information, as defined by 44 U.S.C. 3502(3) and 5 CFR 1320.3(c).

For the reasons stated in the preamble, 46 CFR part 506 is amended as follows:

The Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015 (2015 Act), enacted as part of the Bipartisan Budget Act of 2015, Public Law 114-74, sec. 701, 129 Stat. 584, 599-601, requires agencies to adjust their civil penalties for inflation annually, beginning on July 1, 2016, and no later than January 15 of every year thereafter. In accordance with the 2015 Act, annual inflation adjustments are to be based on the percent change between the Consumer Price Index for all Urban Consumers (CPI-U) for October of the previous year and the October CPI-U of the year before that. Penalty level adjustments should be rounded to the nearest dollar.

The statutory definition of civil monetary penalty covers various civil penalty provisions under the Rail (Part A); Motor Carriers, Water Carriers, Brokers, and Freight Forwarders (Part B); and Pipeline Carriers (Part C) provisions of the Interstate Commerce Act, as amended. The Board's civil (and criminal) penalty authority related to rail transportation is codified at 49 U.S.C. 11901-11908. The Board's penalty authority related to motor carriers, water carriers, brokers, and freight forwarders appears at 49 U.S.C. 14901-14916. The Board's penalty authority related to pipeline carriers is codified at 49 U.S.C. 16101-16106. 1 The Board has regulations at 49 CFR part 1022 that codify the method set forth in the 2015 Act for annually adjusting for inflation the civil monetary penalties within the Board's jurisdiction.

As set forth in this final rule, the Board is amending 49 CFR part 1022 to make an annual inflation adjustment to the civil monetary penalties in conformance with the requirements of the 2015 Act. The adjusted penalties set forth in the rule will apply only to violations that occur after the effective date of this regulation.

In accordance with the 2015 Act, the annual adjustment adopted here is calculated by multiplying each current penalty by the cost-of-living adjustment factor of 1.02598, which reflects the percentage change between the October 2024 CPI-U (315.664) and the October 2023 CPI-U (307.671). The table at the end of this decision shows the statutory citation for each civil penalty, a description of the provision, the adjusted statutory civil penalty level for 2024, and the adjusted statutory civil penalty level for 2025.

The final rule set forth at the end of this decision is being issued without notice and comment pursuant to the rulemaking provision of the Administrative Procedure Act (APA), 5 U.S.C. 553(b)(B), which does not require that process “when the agency for good cause finds” that public notice and comment are “unnecessary.” Here, Congress has mandated that the agency make an annual inflation adjustment to its civil monetary penalties. The Board has no discretion to set alternative levels of adjusted civil monetary penalties, because the amount of the inflation adjustment must be calculated in accordance with the statutory formula. Given the absence of discretion, the Board has determined that there is good cause to promulgate this rule without soliciting public comment and to make this regulation effective immediately upon publication.

The Regulatory Flexibility Act (RFA), as amended by the Small Business Regulatory Enforcement Fairness Act of 1996, 5 U.S.C. 601-612, generally requires an agency to prepare a regulatory flexibility analysis of any rule subject to notice and comment rulemaking requirements, unless the agency certifies that the rule will not have a significant economic impact on a substantial number of small entities. Because the Board has determined that notice and comment are not required under the APA for this rulemaking, the requirements of the RFA do not apply.

Pursuant to the Congressional Review Act, 5 U.S.C. 801-808, the Office of Information and Regulatory Affairs has designated this rule as a non-major rule, as defined by 5 U.S.C. 804(2).

This final rule does not contain a new or amended information collection requirement subject to the Paperwork Reduction Act of 1995, 44 U.S.C. 3501-3521.

It is ordered:

1. The Board amends its rules as set forth in this decision. Notice of the final rule will be published in the Federal Register .

2. This decision is effective on its date of publication in the Federal Register .

Decided: January 7, 2025.

By the Board, Board Members Fuchs, Hedlund, Primus, and Schultz. Board Member Primus concurred with a separate expression.

For the past couple years when the Board adjusted its civil monetary penalties, I wrote separately to express concern about the adequacy of the penalties afforded by statute. Civ. Monetary Penalties—2024 Adjustment, EP 716 (Sub-No. 9) (STB served Jan. 12, 2024), slip op. at 3 (Member Primus concurring); Civ. Monetary Penalties—2023 Adjustment, EP 716 (Sub-No. 8) (STB served Jan. 13, 2023), slip op. at 3-4 (Member Primus concurring). My concern remains today. The Board's decision, consistent with the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015, makes minor adjustments to its civil penalties—for example, increasing the penalty in 49 U.S.C. 11901(a) from $9,718 to $9,970. For the reasons I have stated previously, those penalties are unlikely to provide the deterrent effect intended by Congress, and Congress should address this inadequacy.

For the reasons set forth in the preamble, part 1022 of title 49, chapter X, of the Code of Federal Regulations is amended as follows: