9–7–95 Thursday Vol. 60 No. 173 September 7, 1995 … · new framework for operation and...

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ThursdaySeptember 7, 1995Vol. 60 No. 173

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Federal Register / Vol. 60, No. 173 / Thursday, September 7, 1995

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Contents Federal RegisterIII

Vol. 60, No. 173

Thursday, September 7, 1995

Agency for Health Care Policy and ResearchNOTICESMeetings:

Health Care Policy, Research, and Evaluation NationalAdvisory Council, 46620

Agriculture DepartmentSee Animal and Plant Health Inspection ServiceSee Grain Inspection, Packers and Stockyards

Administration

Animal and Plant Health Inspection ServiceNOTICESEnvironmental statements; availability, etc.:

Nonregulated status determinationsNorthrup King Co.; genetically engineered corn, 46573

46574

Army DepartmentSee Engineers Corps

Children and Families AdministrationNOTICESAgency information collection activities under OMB

review:Proposed agency information collection activities;

comment request, 46598Grants and cooperative agreements; availability, etc.:

Child welfare waiver demonstration projects, 4661646620

Native American social and economic developmentprojects, 4659846616

Civil Rights CommissionNOTICESSenior Executive Service:

Performance Review Board; membership, 4657446575

Commerce DepartmentSee National Oceanic and Atmospheric Administration

Comptroller of the CurrencyNOTICESAgency information collection activities under OMB

review, 46683

Corporation for National and Community ServiceNOTICESGrants and cooperative agreements; availability, etc.:

Governors innovative programs, etc., 4657846579

Defense DepartmentSee Engineers CorpsRULESVocational rehabilitation and education:

Veterans educationEducational assistance test program; rates payable

increases, 4653346535NOTICESMeetings:

Electron Devices Advisory Group, 4657946580National Security Education Board, 46580Women in Services Advisory Committee, 4658046581

Education DepartmentNOTICESMeetings:

National Assessment Governing Board, 4658246583

Employment Standards AdministrationSee Wage and Hour Division

Energy DepartmentSee Energy Efficiency and Renewable Energy OfficeSee Federal Energy Regulatory CommissionNOTICESGrants and cooperative agreements; availability, etc.:

Rapid commercialization initiative, 46583

Energy Efficiency and Renewable Energy OfficeNOTICESMeetings:

Alternative-fuel automotive technician training; voluntarycertification program; TeleVideo conference, 4658346584

Engineers CorpsNOTICESPatent licenses; non-exclusive, exclusive, or partially

exclusive:Concrete armor unit, 46581

Environmental Protection AgencyRULESAir quality implementation plans; approval and

promulgation; various States:California, 4653546536

Solid wastes:Underground storage tanks; lender liability, 4669246715

NOTICESPesticide registration, cancellation, etc.:

2-Methoxyethanol, etc., 4659246595Kill-Ko Horse and Cattle Spray, etc.; correction, 46595

Reports; availability, etc.:Wood furniture finishing and cleaning operations; control

techniques guideline document, 4659546596Toxic and hazardous substances control:

Categorical sulfide pretreatment; waiver approvalsUber Tanning Co., 46596

Executive Office of the PresidentSee Trade Representative, Office of United States

Federal Aviation AdministrationPROPOSED RULESAirworthiness directives:

Airbus, 4654146542Boeing, 4654246544McDonnell Douglas, 4654446547

Colored Federal airways, 4654746548NOTICESExemption petitions; summary and disposition, 46680

46682

IV Federal Register / Vol. 60, No. 173 / Thursday, September 7, 1995 / Contents

Federal Communications CommissionRULESCommon carrier services:

Local telephone company facilities; expandedinterconnection; correction, 46537

Radio services, special:Private land mobile services

Wireless telecommunications services; non-nationwide220 MHz licensees authorized within Line A ofCanadian border; operation deadline extension,4653746538

PROPOSED RULESRadio services, special:

Private land mobile servicesWireless services; phase I licensees in 220 MHz

service; minor modifications, 4656446566Wireless services and 220-222 MHz land mobile band;

new framework for operation and licensing,4656646568

Radio stations; table of assignments:Texas, 4656246563Virgin Islands, 46563

Television broadcasting:Childrens television broadcast services, 4656346564

Federal Election CommissionNOTICESMeetings; Sunshine Act, 46689

Federal Energy Regulatory CommissionNOTICESElectric rate and corporate regulation filings:

LG&E Power Operating Services, Inc., et al., 46584Environmental statements; availability, etc.:

CNG Transmission Corp. et al., 4658546586Hydroelectric applications, 4658646589Applications, hearings, determinations, etc.:

Arkansas Western Pipeline Co., 46589Black Marlin Pipeline Co., 46589Eastern Shore Natural Gas Co., 4658946590El Paso Natural Gas Co., 46590Florida Gas Transmission Co., 4659046591Gasdel Pipeline System, Inc., 46591Panhandle Eastern Pipe Line Co., 46591Tarpon Transmission Co., 4659146592Trunkline Gas Co., 46592

Federal Highway AdministrationNOTICESMotor carrier safety standards:

Commercial motor vehicle operations; advanced driver,vehicle, and inspection technology, 4668246683

Federal Reserve SystemNOTICESApplications, hearings, determinations, etc.:

CNB Bancorp, Inc., et al., 4659646597First Midwest Bancorp, Inc., 46597Independence Bancorp, Inc., Employee Stock Ownership

Plan, 46597MidWest Bancorporation, Inc., et al., 46598

Fish and Wildlife ServicePROPOSED RULESEndangered and threatened species:

Findings on petitions, etc.Mission dolores campion, 4656846569Mohave ground squirrel, 4656946571Mono Lake brine shrimp, 4657146572

NOTICESEndangered and threatened species:

Incidental take permitsCoquina Palms Townhomes project, Brevard County,

FL, 4662346624Recovery plans

Lepanthes eltorensis, etc., 46624

Food and Drug AdministrationPROPOSED RULESMedical devices:

Class III preamendments devices; premarket approvalrequirement; effective date, 4671846743

Grain Inspection, Packers and Stockyards AdministrationNOTICESStockyards; posting and deposting:

Centre Livestock Market, Inc., AL, et al., 46574Reel Livestock Center, Inc., IL, et al., 46574

Health and Human Services DepartmentSee Agency for Health Care Policy and ResearchSee Children and Families AdministrationSee Food and Drug AdministrationSee National Institutes of HealthSee Public Health ServiceSee Substance Abuse and Mental Health Services

Administration

Housing and Urban Development DepartmentNOTICESGrants and cooperative agreements; availability, etc.:

Public and Indian housingPublic housing development; Rescissions Act impact,

4674646748

Immigration and Naturalization ServiceNOTICESAsylum and asylum-related applications; special filing

instructions for ABC class members; correction, 46628

Interior DepartmentSee Fish and Wildlife ServiceSee Land Management BureauSee Minerals Management ServiceSee National Park Service

Internal Revenue ServiceRULESIncome taxes:

Controlled foreign corporations, foreign base companyincome, and foreign personal holding companyincome; definitions, 4650046530

PROPOSED RULESIncome taxes:

Controlled foreign corporations, foreign base companyincome, and foreign personal holding companyincome; definitions, 4654846553

International Development Cooperation AgencySee Overseas Private Investment Corporation

International Trade CommissionRULESPractice and procedure:

Uruguay Round Agreements Act (URAA)Implementation, 46500

VFederal Register / Vol. 60, No. 173 / Thursday, September 7, 1995 / Contents

NOTICESImport investigations:

Memory devices with increased capacitance and productscontaining same, 46626

North American Free Trade Agreement rules of origin;probable effect of modifications, 4662646627

Interstate Commerce CommissionNOTICESEnvironmental statements; availability, etc.:

Southern Pacific Transportation Co. et al., 46628Railroad services abandonment:

Burlington Northern Railroad Co., 46627

Justice DepartmentSee Immigration and Naturalization ServiceSee National Institute of Corrections

Labor DepartmentSee Wage and Hour DivisionPROPOSED RULESFederal Acquisition Streamlining Act of 1944; contract

labor laws, 4655346556

Land Management BureauNOTICESClosure of public lands:

Nevada, 46624Realty actions; sales, leases, etc.:

Oregon, 4662446625Survey plat filings:

Wyoming, 46625

Minerals Management ServicePROPOSED RULESRoyalty management:

Indian Gas Valuation Negotiated Rulemaking CommitteeMeetings, 46556

National Aeronautics and Space AdministrationNOTICESPatent licenses; non-exclusive, exclusive, or partially

exclusive:ACO, Inc., 46628

National Institute of CorrectionsNOTICESGrants and cooperative agreements; availability, etc.:

Program plan (1996 FY), 46628

National Institutes of HealthNOTICESMeetings:

Chronic pain and insomnia treatment, behavioral andrelaxation approaches; technology assessmentconference, 4662046621

National Oceanic and Atmospheric AdministrationRULESFishery conservation and management:

Pacific Coast groundfish, 4653846540PROPOSED RULESFishery conservation and management:

Gulf of Alaska and Bering Sea and Aleutian Islandsgroundfish, 46572

NOTICESCoastal zone management programs and estuarine

sanctuaries:State programs

Intent to evaluate performance, 46575

Meetings:Mid-Atlantic Fishery Management Council, 4657546576North Pacific Fishery Management Council, 4657646577Pacific Fishery Management Council, 46577

Permits:Marine mammals, 46576Marine mammals and endangered and threatened species,

4657746578Senior Executive Service:

Performance Review Board; membership, 46576

National Park ServicePROPOSED RULESSpecial regulations:

Cape Cod National Seashore Off-Road Vehicle UseNegotiated Rulemaking Committee

Meetings, 46562NOTICESEnvironmental statements; availability, etc.:

Fire Island National Seashore, NY; deer managementplan, 46625

Meetings:Missouri National Recreational River Advisory Group,

4662546626Sleeping Bear Dunes National Lakeshore Advisory

Commission, 46626

Nuclear Regulatory CommissionRULESPlants and materials; physical protection:

Reactor containment access control; securityrequirements changes, 4649746498

NOTICESCommittees; establishment, renewal, termination, etc.:

Nuclear Safeguards Advisory Committee, 4662846629Environmental statements; availability, etc.:

Babcock & Wilcox Co., 4663046633Site decommissioning management plan sites; removals

from list:Wood River Junction Site, 4662946630

Applications, hearings, determinations, etc.:Georgia Power Co. et al., 4663346635Washington Public Power Supply System, 46630

Office of United States Trade RepresentativeSee Trade Representative, Office of United States

Overseas Private Investment CorporationNOTICESMeetings; Sunshine Act, 46689

Public Health ServiceSee Agency for Health Care Policy and ResearchSee Food and Drug AdministrationSee National Institutes of HealthSee Substance Abuse and Mental Health Services

AdministrationNOTICESOrganization, functions, and authority delegations:

National Institutes of Health, 4662146623

Securities and Exchange CommissionRULESPractice and procedure:

Administrative proceedings; evidentiary hearings beforeadministrative law judges, etc.

Technical amendments and corrections, 4649846500NOTICESMeetings; Sunshine Act, 46689

VI Federal Register / Vol. 60, No. 173 / Thursday, September 7, 1995 / Contents

Self-regulatory organizations; proposed rule changes:American Stock Exchange, Inc., 4663746644Chicago Board Options Exchange, Inc., 4664446651National Association of Securities Dealers, Inc., 46651

46653New York Stock Exchange, Inc., 4665346660Pacific Stock Exchange, Inc., 4666046667Philadelphia Stock Exchange, Inc., 4666746674

Applications, hearings, determinations, etc.:Keyport Life Insurance Co. et al., 4667446678Van Kampen Merritt Equity Trust et al., 4667846679

State DepartmentNOTICESMeetings:

Secured Interests in International Transactions AdvisoryCommittee Study Group, 46680

Substance Abuse and Mental Health ServicesAdministration

NOTICESMeetings:

Substance Abuse Treatment Center National AdvisoryCouncil, 46623

Thrift Depositor Protection Oversight BoardNOTICESMeetings:

Affordable Housing Advisory Board, 4658146582

Trade Representative, Office of United StatesNOTICESMeetings:

Trade Intergovernmental Policy Advisory Committee,46635

Trade Policy and Negotiations Advisory Committee,4663546636

Tariff-rate quota amount determinations:Sugar, 4663646637

Transportation DepartmentSee Federal Aviation AdministrationSee Federal Highway Administration

Treasury DepartmentSee Comptroller of the CurrencySee Internal Revenue ServicePROPOSED RULESBank Secrecy Act:

Suspicious transactions; reporting requirement, 4655646562

United States Information AgencyNOTICESGrants and cooperative agreements; availability, etc.:

Newly independent states (NIS)Secondary school initiative inbound academic year

placement, 4668346685

U.S. academic studies inbound/outbound program,4668546688

Meetings:Cultural Property Advisory Committee, 46688

Veterans Affairs DepartmentRULESAdjudication; pensions, compensation, dependency, etc.:

Birth, death, marriage, or relationship; evidencerequirements, 4653146533

Vocational rehabilitation and education:Veterans education

Educational assistance test program; rates payableincreases, 4653346535

NOTICESMeetings:

Medical Research Service Merit Review Committee,46688

Wage and Hour DivisionRULESEmployee Polygraph Protection Act of 1988; application,

4653046531PROPOSED RULESFederal Acquisition Streamlining Act of 1974; contract

labor laws, 4655346556

Separate Parts In This Issue

Part IIEnvironmental Protection Agency, 4669246715

Part IIIFood and Drug Administration, 4671846743

Part IVHousing and Urban Development Department, 4674646748

Reader AidsAdditional information, including a list of public laws,telephone numbers, and finding aids, appears in the ReaderAids section at the end of this issue.

Electronic Bulletin BoardFree Electronic Bulletin Board service for Public Lawnumbers, Federal Register finding aids, and a list ofdocuments on public inspection is available on 2022751538 or 2750920.

CFR PARTS AFFECTED IN THIS ISSUE

A cumulative list of the parts affected this month can be found in theReader Aids section at the end of this issue.

VIIFederal Register / Vol. 60, No. 173 / Thursday, September 7, 1995 / Contents

10 CFR73.....................................46497

14 CFRProposed Rules:39 (3 documents) ...........46541,

46542, 4654471.....................................46547

17 CFR201...................................46498

19 CFR206...................................46500

21 CFRProposed Rules:864...................................46718868...................................46718870...................................46718872...................................46718876...................................46718880...................................46718882...................................46718884...................................46718888...................................46718890...................................46718

26 CFR1.......................................465004.......................................46500602...................................46500Proposed Rules:1.......................................46548

29 CFR801...................................46530Proposed Rules:4.......................................465535.......................................46553

30 CFRProposed Rules:Ch. II ................................46556

31 CFRProposed Rules:103...................................46556

36 CFRProposed Rules:7.......................................46562

38 CFR3.......................................4653121.....................................46533

40 CFR52.....................................46535280...................................46692281...................................46692

41 CFRProposed Rules:50-201..............................4655350-206..............................46553

47 CFR64.....................................4653769.....................................4653790.....................................46537Proposed Rules:73 (3 documents) ...........46562,

4656390 (2 documents) ...........46564,

46566

50 CFR663...................................46538Proposed Rules:17 (3 documents) ...........46568,

46569, 46571672...................................46572675...................................46572

This section of the FEDERAL REGISTERcontains regulatory documents having generalapplicability and legal effect, most of whichare keyed to and codified in the Code ofFederal Regulations, which is published under50 titles pursuant to 44 U.S.C. 1510.

The Code of Federal Regulations is sold bythe Superintendent of Documents. Prices ofnew books are listed in the first FEDERALREGISTER issue of each week.

Rules and Regulations Federal Register46497

Vol. 60, No. 173

Thursday, September 7, 1995

NUCLEAR REGULATORYCOMMISSION

10 CFR Part 73

RIN 3150AF36

Changes to Nuclear Power PlantSecurity Requirements AssociatedWith Containment Access Control

AGENCY: Nuclear RegulatoryCommission.ACTION: Final rule.

SUMMARY: The Nuclear RegulatoryCommission (NRC) is amending itsregulations to delete certain securityrequirements for controlling the accessof personnel and materials into reactorcontainment during periods of hightraffic such as refueling and majormaintenance. This action relievesnuclear power plant licensees of therequirement to separately control accessto reactor containments during theseperiods. Deletion of this requirementdecreases the regulatory burden for thelicensees without degradation ofphysical security.EFFECTIVE DATE: October 10, 1995.FOR FURTHER INFORMATION CONTACT: Dr.Sandra Frattali, Office of NuclearRegulatory Research, U.S. NuclearRegulatory Commission, Washington,DC 20555, telephone (301) 4156261, e-mail [email protected].

SUPPLEMENTARY INFORMATION:

Background

In 1991, the Commission re-examinedthe NRCs nuclear power plant securityrequirements associated with aninternal threat contained in 10 CFR Part73, Physical Protection of Plants andMaterials. In a report to theCommission dated August 4, 1992(SECY92272), the NRC staff identifiedrequirements that were redundant, outof date, or marginal to safety. Followingpublic meetings held to discuss these

requirements, the NRC staff submitted asubsequent report to the Commissiondated December 12, 1993 (SECY93326), with recommended changes to 73.55. One of the recommendedchanges was the deletion of 73.55(d)(8), which contained arequirement for separate access controlto reactor containments, which isunneeded, and a requirement for locksand alarms, which is containedelsewhere in 10 CFR Part 73. TheCommission has decided to remove thisparagraph to provide burden relief tolicensees without compromising thephysical protection of licensed activitiesagainst radiological sabotage. The otherrecommendations contained in SECY93326 will be addressed in anotherNRC rulemaking action.

Proposed Rule and Public Comments

On May 10, 1995 (60 FR 24803), theNRC published, with a public commentperiod of 30 days, a proposed rule thatwould delete 73.55(d)(8). Twenty-twocomments were received: 20 fromutilities, 1 from an industry group, and1 from a labor union. All commenterssupported the proposed rule. Thecommenters agreed that the proposedaction would reduce the regulatoryburden but would not degrade thephysical security of nuclear powerplants. The industry group furthercommented that significant savingscould result from this rulemaking. Oneof the utilities commented that it wouldenable utilities to make more efficientuse of their resources.

One utility questioned whether thesame relief would apply when access tocontainment is from an area providedwith access controls and other securityfeatures but not formally designated asa vital area. The same relief would notgenerically apply to these situationsbecause the level of control varies foreach area. However, the NRC willconsider each situation on a case-by-case basis.

Another utility asked if its approvedsecurity plan, which already hadrequirements for access to containmentdirectly from a protected area, wasaffected by this rulemaking. This ruleaffects access controls only from vitalareas into containment. This rule doesnot affect access controls from protectedareas into containment, thus, it does notaffect any approved security plan foraccess to containment from a protected

area. When access from a protected areainto containment is necessary, existingaccess controls must remain in effect atthe entrances to containment.

Final RuleBased on the public comments, the

NRC staff considers that no change tothe final rule is necessary. Thus, thefinal rule remains the same as theproposed rule.

The final rule deletes paragraph (d)(8)of 73.55. This amendment relieveslicensees of an unnecessary burden,without degrading physical security.Moreover, since security personnel areno longer required to be assigned to aradiation control area, there will be adecrease in occupational exposure. NRCnotes that this change applies only toaccess control from vital areas intoreactor containment for the purpose ofphysical security and does not relieve alicensee of requirements established forthe purpose of radiological control andemergency planning.

Environmental Impact: CategoricalExclusion

The Commission has determined thatthis rule is the type of action describedas a categorical exclusion in 10 CFR51.22 (c)(2). Therefore, neither anenvironmental impact statement nor anenvironmental assessment has beenprepared for this rule.

Paperwork Reduction Act StatementThis final rule does not contain a new

or amended information collectionrequirement subject to the PaperworkReduction Act of 1980 (44 U.S.C. 3501et seq.). Existing requirements wereapproved by the Office of Managementand Budget, approval number 31500002.

Regulatory AnalysisElimination of 73.55(d)(8) relieves

licensees of the requirement to stationsecurity personnel at entrances tocontainment during periods of hightraffic. The potential savings to thelicensees from the elimination of thisrequirement are substantial. Assuming,on the average, two security personnelare needed to control access tocontainment during the time the reactoris open, and assuming that thecontainment is open 50 days per majoroutage, with 2 major outages every 3years, and a wage of approximately $30per hour (loaded) for security personnel,

46498 Federal Register / Vol. 60, No. 173 / Thursday, September 7, 1995 / Rules and Regulations

the total savings per reactor per yearwill be:

2 guards/reactor 50 days/outage 23outages/year $30/hr-guard 24hrs/day = $48,000/year-reactor.

With 110 operating nuclear powerreactors, the total savings for theindustry are potentially $5,280,000/year. Moreover, deletion of 73.55(d)(8)results in a decrease in occupationalexposure because security personnelwill no longer be required to be withinthe radiation controlled area directlyadjacent to containment.

Reactor containment or adjacent areasthat provide access to containment arealready vital areas. Thus, access ofpersonnel into containment is alreadycontrolled. In addition, having securitypersonnel control access of materialsinto containment provides nosubstantial benefit since material accessinto the protected area is alreadycontrolled and the containment islocated within the protected area.Furthermore, after reactor containmentis secured following periods of heavytraffic, existing NRC requirements forwalkdown inspections and securitysearches apply and assure the securityof the containment. Hence, therequirement that access into the reactorcontainment itself be separatelycontrolled provides little or noadditional security.

In addition, because a reactorcontainment is a vital area, it is subjectto the vital area requirements for locksand alarms contained in other sectionsof 73.55, as well as all other policiesand procedures related to vital areas andequipment. Thus, the requirement forlocks and alarms in paragraph (d)(8) isredundant.

Based on the above discussion, theNRC concludes that eliminating 73.55(d)(8) provides relief to thelicensees and lowers occupationalexposure without compromisingphysical protection of licensed activitiesagainst radiological sabotage at nuclearpower reactors.

Regulatory Flexibility Certification

As required by the RegulatoryFlexibility Act of 1980, 5 U.S.C. 605(b),the Commission certifies that this ruledoes not have a significant economicimpact on a substantial number of smallentities. This rule affects only licenseesauthorized to operate nuclear powerreactors. These licensees do not fallwithin the scope of the definition ofsmall entities set forth in theRegulatory Flexibility Act, or the sizestandards established by the NRC (10CFR 2.810).

Backfit Analysis

The Commission has determined thatthe backfit rule, 10 CFR 50.109, does notapply to this final rule because thisamendment does not impose newrequirements on existing 10 CFR Part 50licensees. It is voluntary and should thelicensee decide to implement thisamendment, it is a reduction in burdento the licensee. Therefore, a backfitanalysis has not been prepared for thisamendment.

List of Subjects in 10 CFR Part 73

Criminal penalties, Hazardousmaterials transportation, Export, Import,Nuclear materials, Nuclear power plantsand reactors, Reporting andrecordkeeping requirements, Securitymeasures.

For the reasons set out in thepreamble and under the authority of theAtomic Energy Act of 1954, as amended,the Energy Reorganization Act of 1974,as amended, and 5 U.S.C. 552 and 553,the NRC is adopting the followingamendments to 10 CFR Part 73.

PART 73PHYSICAL PROTECTION OFPLANTS AND MATERIALS

1. The authority citation for Part 73continues to read as follows:

Authority: Secs. 53, 161, 68 Stat. 930, 948,as amended; sec. 147, 94 Stat. 780 (42 U.S.C.2073, 2167, 2201); sec. 201, as amended; sec.204, 88 Stat. 1242, as amended, 1245; sec.1701, 106 Stat. 2951, 2952, 2953 (42 U.S.C.5841, 5844, 2297f).

Section 73.1 also issued under secs. 135,141, Pub. L. 97425, 96 Stat. 2232, 2241 (42U.S.C. 10155, 10161). Section 73.37(f) alsoissued under sec. 301, Pub. L. 96295, 94Stat. 789 (42 U.S.C. 5841 note). Section 73.57is issued under sec. 606, Pub. L. 99399, 100Stat. 876 (42 U.S.C. 2169).

73.55 [Amended]

2. In 73.55, paragraph (d)(8) isremoved and paragraph (d)(9) isredesignated as (d)(8).

Dated at Rockville, Maryland, this 21st dayof August 1995.

For the Nuclear Regulatory Commission.

James M. Taylor,

Executive Director for Operations.

[FR Doc. 9522187 Filed 9695; 8:45 am]

BILLING CODE 759001P

SECURITIES AND EXCHANGECOMMISSION

17 CFR Part 201

[Release No. 3436174; File No. S74092]

RIN 3235AF91

Rules of Practice; TechnicalAmendments and Corrections

AGENCY: Securities and ExchangeCommission.

ACTION: Technical amendments andcorrections to final rules.

SUMMARY: This document containstechnical amendments and correctedcomments for the Securities andExchange Commissions Rules ofPractice adopted on June 9, 1995 andpublished Friday, June 23, 1995 (60 FR32738). The Rules of Practice are theprocedural rules that governCommission administrativeproceedings.EFFECTIVE DATE: September 5, 1995.FOR FURTHER INFORMATION CONTACT:Andrew Z. Glickman, Office of theGeneral Counsel at (202) 9420870; U.S.Securities and Exchange Commission;450 Fifth Street, NW., Stop 66;Washington, DC 20549.


Background

The Commission recentlyconsolidated its inspection andexamination functions from theDivisions of Market Regulation andInvestment Management into a newofficethe Office of ComplianceInspections and Examinations. See 60FR 39643 (Aug. 3, 1995) (establishmentof office and delegation of authority).This release contains technicalamendments to reflect these changes inthe Rules of Practice and corrections tothe comments associated with thechanged rules. This release also correctsa citation error.

Comments (a) and (b) to Rule 230(which originally appeared in theSupplementary Information section onpage 32762, in the tenth line of the firstcolumn) are corrected to read as follows:

Comment (a): A respondents right toinspect and copy documents under thisrule is automatic; the respondent doesnot need to make a formal request foraccess through the hearing officer.Generally, the rule requires that theDivision of Enforcement make availablefor inspection and copying documentsobtained by the Division from personsnot employed by the Commissionduring the course of its investigationprior to the institution of proceedings.

46499Federal Register / Vol. 60, No. 173 / Thursday, September 7, 1995 / Rules and Regulations

Final inspection or examination reportsprepared by the Office of ComplianceInspections and Examinations, theDivision of Market Regulation or theDivision of Investment Management,may be attorney work product, andother privileges may apply to suchreports. Nonetheless, the Commissionhas determined as a general matter thatthese final reports will be madeavailable, but only to namedrespondents in Commission-initiatedadjudicative proceedings. This rule doesnot restrict the Commissions ability towithhold these reports from publicdisclosure in other contexts, such aspursuant to a request under theFreedom of Information Act. 5 U.S.C.552.

Rule 230 is not the exclusive meansby which a respondent may obtainaccess to or production of documents.Production of documents prepared bythe staff may be required under thedoctrine of Brady v. Maryland, 373 U.S.83 (1963), or pursuant to Jencks Actrequirements made applicable to theCommission pursuant to Rule 231, ormay be sought by subpoena pursuant toRule 232 or through other procedures.See, e.g., Freedom of Information Act, 5U.S.C. 552.

The Rule states that the Division ofEnforcement shall (1) make available forinspection and copying (2) documents(3) obtained by the Division (4) inconnection with the investigationleading to the institution of proceedings.

(1) The Division of Enforcement isrequired to make documents availablefor inspection and copying. It is notrequired to produce a copy of thedocuments to each respondent.

(2) The definition of the termdocuments in paragraph (a) ismodeled on the definition of documentsin Rule 34 of the Federal Rules of CivilProcedure.

(3) The Division of Enforcementsobligation under this rule relates todocuments obtained by the Division ofEnforcement. Documents located onlyin the files of other divisions or officesare beyond the scope of the rule.

(4) The investigation leading to theDivisions recommendation to instituteproceedings ordinarily is delineated bythe investigation number or numbersunder which requests for documents,testimony or other information weremade. When an investigation is initiatedby the Division of Enforcement it isassigned a number, often referred to asthe case or investigation number.Each request for documents, testimonyor other information from persons notemployed by the Commission specifiesthe investigation or preliminaryinvestigation number to which it relates.

In turn, each written recommendationby the Division of Enforcement toinstitute proceedings identifies on itscover page, by investigation number, thesource investigation or investigations towhich it relates. Accordingly, theidentity and content of the appropriateinvestigation file or files from whichdocuments must be made available canbe based on objective criteria.

Comment (b): Under paragraph (b),the Division can withhold documentsunder four exceptions. Exception (1)shields information subject to a claim ofprivilege. Exception (2) protects asattorney work product internaldocuments prepared by Commissionemployees, which will not be offered inevidence. Work product includes anynotes, working papers, memoranda orother similar materials, prepared by anattorney in anticipation of litigation. SeeHickman v. Taylor, 329 U.S. 495 (1947);see also Fed. R. Civ. P. 26 (b)(3) and(b)(5). Except to the limited extentspecifically provided in paragraph (a),documents prepared by Commissionstaff are treated as attorney workproduct, and do not have to be madeavailable pursuant to this rule.Accountants, paralegals andinvestigators who work on aninvestigation do so at the direction ofthe director, an associate director, anassociate regional administrator oranother supervisory attorney, and theirwork product is therefore shielded bythe rule. A respondents claim that workproduct should be turned over willnecessarily be evaluated on a case-by-case basis.

Exception (3) protects the identity ofa confidential source. See 5 U.S.C.552(b)(7) (C) and (D). Exception (4)protects any other document or categoryof documents that the hearing officerdetermines may be withheld as notrelevant to the subject matter of theproceeding, or otherwise for good causeshown. This exception provides amechanism to address a situation wherea single investigation involves a discretesegment or segments that are relatedonly indirectly, or not at all, to therecommendations ultimately made tothe Commission with respect to theparticular respondents in a specificproceeding. To require that documentsnot relevant to the subject matter of theproceeding be made available, simplybecause they were obtained as part of abroad investigation, burdens therespondent as well as the Division ofEnforcement with unnecessary costsand delay.

For example, a single investigationmay encompass inquiry into an issuersallegedly false accounting disclosureand an unrelated manipulation of the

issuers securities by a third party. If therecommendation to the Commission andresulting administrative proceedinginvolve only the accounting disclosures,the Division could seek leave towithhold trading records, transcriptsand other documents related to themanipulation investigation.

Comment (a) to Rule 430 (whichoriginally appeared in theSupplementary Information section onpage 32777, in the fifth line of thesecond column) is corrected to read asfollows:

Comment (a): Congress granted theCommission explicit authority todelegate certain functions to anindividual commissioner, divisiondirectors and others in 1962. Pub. L. No.87592, 76 Stat. 394. This authorityappears in Sections 4A and 4B of theExchange Act, 15 U.S.C. 78d1 and78d2, and was amended most recentlyin 1987. See Pub. L. No. 100181, TitleIII, section 308(a), 101 Stat. 1254. Thepredecessor rule to Rules 430 and 431,former Rule 26, was adopted in 1963.See Securities Act Release No. 4588(Mar. 8, 1963) (adopting release).

Due to the different nature of mattersdelegated to hearing officers, senior staffor the duty officer, the Commissionsrules provide different mechanisms forreview of such actions. See Rules 410and 411 (procedures relating to initialdecisions by a hearing officer); 17 CFR200.42 (procedures relating to dutyofficer). Rule 430 relates to certaindelegations made to staff. It applies onlyto review of actions taken pursuant toauthority delegated in 17 CFR 200.301 through 200.3018. Authoritydelegated by other provisionsforexample, the delegation of authority toissue subpoenas pursuant to a privateorder directing investigation (formalorder)is not subject to the Rule.

Correction of Publication

Accordingly, the publication on June23, 1995 of the final Rules of Practice,which were the subject of FR Doc. 9514750, is corrected as follows:

201.100 [Corrected]

1. On page 32797, in the eighth lineof the first column, in 201.100(b)(2)17 CFR 200.42. is corrected to read17 CFR 200.43.

201.230 [Corrected]

2. On page 32807, in the first column,in 201.230, paragraph (a)(1)(vi) iscorrected to read as follows:

(vi) Any final examination orinspection reports prepared by theOffice of Compliance Inspections andExaminations, the Division of Market


Regulation, or the Division ofInvestment Management.

201.430 [Corrected]3. On page 32814, in the first column,

last line, in 201.430(a) the reference to200.3017 is corrected to read200.3018.

4. On page 32814, in the secondcolumn, in 201.430(c) the reference to200.3017 is corrected to read200.3018.

201.431 [Corrected]5. On page 32814, in the second

column, in the sixth line of 201.431(a)200.3017 is corrected to read200.3018.

Dated: August 31, 1995.By the Commission.

Margaret H. McFarland,Deputy Secretary.[FR Doc. 9522110 Filed 9695; 8:45 am]BILLING CODE 801001P

INTERNATIONAL TRADECOMMISSION

19 CFR Part 206

Implementing Rules for the UruguayRound Agreements Act

AGENCY: International TradeCommission.ACTION: Adoption of interim rules asfinal rules.

SUMMARY: The Commission has adoptedas final rules, without change, interimrules that amend part 206 of theCommissions rules to conform its rulesof practice and procedure withamendments made to sections 201204of the Trade Act of 1974 (19 U.S.C.22512254) by the Uruguay RoundAgreements Act (URAA) (Pub. L. 103465, 108 Stat. 4809 (1994)). The URAA,among other things, amended sections201204 of the Trade Act to bring U.S.law into conformity with the UruguayRound Agreement on Safeguards.EFFECTIVE DATE: September 7, 1995.FOR FURTHER INFORMATION CONTACT:William Gearhart (2022053091),Office of the General Counsel, U.S.International Trade Commission.Hearing impaired individuals areadvised that information on this mattercan be obtained by contacting theCommissions TDD terminal on 2022051810.


Background

The interim rules were published inthe Federal Register on January 3, 1995

(60 FR 10). The interim amendment tosection 206.17 was effective January 3,1995; all other amendments wereeffective January 1, 1995. Comments onthe interim rules were required to bereceived on or before April 3, 1995. Nocomments were received.

Accordingly, the Commission hasadopted as final rules, without change,the interim rules amending 19 CFR part206 that were published at 60 FR 10 onJanuary 3, 1995.

List of Subjects in 19 CFR Part 206

Administrative practice andprocedure, Investigations, Imports.

Authority: 19 U.S.C. 1335; 19 U.S.C. 22512254, 33513382; secs. 103, 301302, Pub. L.103465, 108 Stat. 4809.

By order of the Commission.Issued: August 30, 1995.

Donna R. Koehnke,Secretary.[FR Doc. 9522235 Filed 9695; 8:45 am]BILLING CODE 702002P

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1, 4 and 602

[TD 8618]

RIN 1545AM15

Definition of a Controlled ForeignCorporation, Foreign Base CompanyIncome and Foreign Personal HoldingCompany Income of a ControlledForeign Corporation

AGENCY: Internal Revenue Service (IRS),Treasury.ACTION: Final regulations.

SUMMARY: This document contains finalIncome Tax Regulations governing thedefinition of a controlled foreigncorporation and the definitions offoreign base company income andforeign personal holding companyincome of a controlled foreigncorporation. These regulations arenecessary because of changes made tothe prior law by the Tax Reform Act of1986, the Technical and MiscellaneousRevenue Act of 1988, the RevenueReconciliation Act of 1989, and theOmnibus Budget Reconciliation Act of1993. Certain conforming changes in theregulations were necessary because ofchanges made by the Deficit ReductionAct of 1984. The regulations willprovide the public with the guidance tocomply with those acts and will affectUnited States shareholders of controlledforeign corporations.

DATES: These regulations are effectiveSeptember 7, 1995.

For dates of applicability, see 1.9540(a).FOR FURTHER INFORMATION CONTACT:Valerie Mark of the Office of AssociateChief Counsel (International), within theOffice of the Chief Counsel, InternalRevenue Service, 1111 ConstitutionAvenue, NW., Washington, DC 20224(Attention CC:INTL:2 (INTL036288).Telephone (202) 6223840 (not a toll-free call).


Paperwork Reduction Act

The collection of informationcontained in these final regulations hasbeen reviewed and approved by theOffice of Management and Budget(OMB) in accordance with thePaperwork Reduction Act of 1980 (44U.S.C. 3504(h)) under control number15451068. The estimated averageburden per respondent associated withthe collection of information in thisregulation is one hour.

Comments concerning the accuracy ofthis burden estimate and suggestions forreducing this burden should be directedto the Internal Revenue Service, Attn:IRS Reports Clearance Officer, PC:FP,Washington, DC 20224, and to theOffice of Management and Budget, Attn:Desk Officer for the Department of theTreasury, Office of Information andRegulatory Affairs, Washington, DC20503.

Background

This document contains finalregulations amending the Income TaxRegulations (26 CFR Part 1) undersections 954(b), 954(c) and 957(a) of theInternal Revenue Code (Code). Sections954 and 957 were amended by sections1201, 1221, 1222 and 1223 of the TaxReform Act of 1986 (Pub. L. 99514), bysection 1012 of the Technical andMiscellaneous Revenue Act of 1988(Pub. L. 100647), by section 7811 of theRevenue Reconciliation Act of 1989(Pub. L. 101239) and by section 13233of the Omnibus Budget ReconciliationAct of 1993 (Pub. L. 10366). Theseregulations are also issued underauthority contained in section 7805 ofthe Code.

Temporary regulations (TD 8216) anda cross-referenced notice of proposedrulemaking (INTL36288) undersections 954 and 957 of the Code werepublished in the Federal Register onJuly 21, 1988 (53 FR 27489 and 53 FR27532, respectively). Numerous writtencomments on the proposed andtemporary regulations were receivedfrom the public. As explained below,


the comments were considered in thedrafting of the final regulations.

Discussion of Major Comments andChanges to the Regulations

Section 1.9541: Foreign Base CompanyIncome

Section 1.9541T(a)(3) and (5)(temporary regulations) apply the deminimis and full inclusion tests ofsection 954(b)(3) before the high taxexception of section 954(b)(4).Commenters have expressed concernthat, in certain cases, the only amountsrequired to be included in the grossincome of the United Statesshareholders of a controlled foreigncorporation may be full inclusionincome. This result may occur whensubpart F income, other than fullinclusion foreign base company income,qualifies for the high tax exception. Inresponse to these comments, 1.9541(d)(6) provides that an amount thatotherwise would be included as fullinclusion foreign base company income,pursuant to the operation of the fullinclusion test of section 954(b)(3)(B),will be excluded from full inclusionforeign base company income if morethan 90 percent of the adjusted grossforeign base company and adjustedgross insurance income qualifies for thehigh tax exception described in section954(b)(4) and the high tax election isactually made.

Section 1.9541T(a)(4) provides thatin computing net foreign base companyincome, foreign personal holdingcompany income is reduced by relatedperson interest expense beforeallocating and apportioning otherexpenses in accordance with 1.904(d)5(c)(2). Commenters understood thisrule to be at variance with 1.904(d)5(c)(2), which requires related personinterest expense to be allocated topassive foreign personal holdingcompany income after the allocation ofdirectly related expenses. In response tothis comment, the rule regardingallocation of related person interestexpense was removed from 1.9541T(a)(4) and (c) was amended to clarifythat foreign base company income isreduced by directly related expensesbefore passive foreign personal holdingcompany income is reduced by relatedperson interest expense.

Section 1.9541T(a)(7) treats amountsrecharacterized as foreign base companyincome or insurance income undersection 952(c) as adjusted net foreignbase company income or adjusted netinsurance income. Thus, these amountsare not included in net foreign basecompany income or net insuranceincome for purposes of applying the

high tax exception. Commenters arguedthat the rules of paragraph (a)(7) shouldbe amended to provide that amountsthat are recharacterized under section952(c)(2) should not be treated asadjusted net foreign base companyincome or adjusted net insuranceincome if the amounts would havequalified for the high tax exception.This comment was rejected becausesection 952(c)(2) does not incorporatethe exclusions and special rules ofsection 954(b)(4). Additional rulesregarding the coordination of sections952(c) and 954 are being proposedunder section 952 in a separatedocument published elsewhere in thisissue of the Federal Register.

Several comments were madeconcerning the anti-abuse rules of 1.9541T(b)(4), which requireaggregation of gross income of relatedcontrolled foreign corporations forpurposes of the de minimis and fullinclusion tests. One comment suggestedthat the aggregation rules of paragraph(b)(4) should be applied only if apurpose of first importance (as opposedto a principal purpose) is to avoid theapplication of the de minimis or fullinclusion tests described in section954(b)(3). This comment was rejectedbecause the standard suggested issignificantly more subjective than thatof the regulations and is thereforeunadministrable. However, it wasdetermined that it was unnecessary tomake the aggregation rules of paragraph(b)(4) applicable to the full inclusiontest, for which there is not the sameopportunity for tax avoidance.

One commenter suggested that theanti-abuse rules of 1.9541T(b)(4)should be amended to provide that thegross income of separate controlledforeign corporations is aggregated onlyif a substantial portion of the activitiesof the separate corporations wouldcomprise a single branch, and that thepresumptions described in paragraph(b)(4)(ii) should be eliminated. Thecommenter also suggested that thedefinition of related person for purposesof these rules should refer to theprovisions of section 954(d)(3), ratherthan the broader provisions of section267. These comments were rejectedbecause the suggested amendmentswould unduly restrict the application ofthe anti-abuse rules. The presumptionsdescribed in paragraph (b)(4)(ii) may berebutted, for example, by establishingreliance on the requirements of foreignlaw. The anti-abuse rules are necessaryto prevent the misuse of the de minimisrule of section 954(b)(3), and do notimpose a significant limitation orburden on the activities of controlledforeign corporations.

Section 1.9541T(c) provides that incomputing net foreign base companyincome, the gross amount in eachcategory of foreign base companyincome may not be reduced below zero.Section 1.9542T(e) provides that theexcess of losses over gains from the saleor exchange of certain property may notbe allocated to any other category offoreign personal holding companyincome. Section 1.9542T (f) and (g)contain similar provisions with regardto excess losses from commodities andforeign currency transactions,respectively. Because the categories offoreign base company income describedin section 954(a) and the categories offoreign personal holding companyincome described in section 954(c)(1)(B), (C) and (D) are defined in terms ofnet income, the temporary regulationsinterpreted the statutory scheme asgenerally precluding the allocation ofexcess losses from categories of foreignpersonal holding company incomedescribed in paragraph (e), (f), or (g)against other foreign personal holdingcompany income categories.Commenters contended that bypreventing any category of subpart Fincome from being reduced below zero,paragraph (c) caused inappropriate taxcredit results and failed to harmonizethe subpart F provisions with section904(f)(5). Commentators stated thatparagraphs (e), (f) and (g) should beamended to allow excess lossesdescribed in those paragraphs to beallocated to other categories of foreignpersonal holding company income.

Paragraph (c) has been amended toclarify that, in determining net income,if the amount in any category of foreignbase company income (including anycategory of foreign personal holdingcompany income) is less than zero, theloss may not reduce any other categoriesof foreign base company income (orforeign personal holding companyincome) except by operation of theearnings and profits limitation.Proposed regulations publishedelsewhere in this issue of the FederalRegister will provide rules concerningthe application of the earnings andprofits limitation.

Section 1.9541T(d) provides that theeffective rate of foreign income tax onan item of income is determined in amanner consistent with the existingforeign tax credit regime under sections904 and 960. In some cases, the amountof an item of income for foreign lawpurposes with respect to which foreignincome tax is paid will be different fromthe amount for United States taxpurposes. As a result, the effective rateof tax with respect to the item of incomemay be affected. In addition, because


pursuant to section 960 the foreignincome taxes of a controlled foreigncorporation more than three tiers belowa United States shareholder are notconsidered, the high tax exception willnever apply to items of income of suchcorporations.

Commenters suggested that certainforeign law accounting practices shouldbe considered in determining theeffective rate of tax on an item ofincome, for purposes of applying thehigh tax exception of section 954(b)(4)and paragraph (d) of the regulations.Commenters also contended that it isinappropriate to use section 960 todetermine the effective rate of foreigntax and thus prevent consideration oftaxes paid by controlled foreigncorporations more than three tiers belowthe United States shareholder.

The comment that the high taxexception should not be limited tocreditable taxes under section 960 wasrejected. The high tax exception is notintended to apply to the extent that anitem of income would be subject toresidual United States tax if such itemwere included in the gross income ofthe United States shareholder. The taxespaid with respect to such item ofincome should be considered forpurposes of the high tax exception onlyto the extent they are otherwiseconsidered for United States taxingpurposes. See Joint Committee onTaxation Staff, General Explanation ofthe Tax Reform Act of 1986, 99th Cong.,2d Sess. 97071 (1986).

The comment that foreign lawaccounting practices should beconsidered in determining the effectiverate of tax on an item of income, forpurposes of applying the high taxexception, was also rejected. Such a rulewould impose a significant burden onthe IRS. It would require the IRS tomonitor and apply foreign tax andaccounting principles, and to reconciletheir application with United States taxand accounting principles, both in thecurrent tax year and in later tax years toprevent an item of income, deduction,credit, gain or loss from beingduplicated or omitted. Further, the IRSwould have to consider and identify theparticular foreign tax and accountingprinciples that could be taken intoaccount for purposes of these rules.

Section 1.9541T(d)(4) defines theterm item of income for purposes of thehigh tax exception by reference to theforeign tax credit and subpart F incomecategories to which the income relates.Thus, it is possible that amountsattributable to separate transactions maybe included in the same item of income.If the income from the separatetransactions were subject to foreign

income tax at different rates, theeffective rate of tax for the income itemwould reflect an average of the two (ormore) rates of tax. One commenter hassuggested that additional categories ofincome be created within the existingforeign tax credit and subpart F incomegroups to limit the effect of this tax rateblending.

The regulations rely on existingguidance under the foreign tax creditand subpart F provisions generally todefine item of income for purposes ofsection 954(b)(4). To identify items ofincome on a transaction-by-transactionbasis is inconsistent with the separatelimitation categories of incomedescribed in section 904, and addscomplexity by requiring differentcomputations for purposes of these rulesand the rules under the foreign taxcredit provisions of the Code. Moreover,there is no bias in the existing rulestoward a particular result.

Commenters suggested that theconsistency rule of 1.9541T(d)(4)(ii)(B) be eliminated, to allowtaxpayers to apply the high taxexception on an item-by-item basis. Theconsistency rule prohibits a taxpayerfrom selectively applying the high taxexception with respect to foreignpersonal holding company income thatis passive income under section 904(d).Elimination of the consistency rulewould provide a result that isincompatible with the foreign tax creditprovisions of the Code, and thus thecomment was rejected.

The final regulations clarify how therules of paragraph (d) coordinate withthe earnings and profits limitation ofsection 952(c)(1). Under 1.9541(d)(4)(ii), if the amount of incomeincluded in subpart F income for thetaxable year is reduced by the earningsand profits limitation, the amount ofincome that is an item of income, forpurposes of paragraph (d), is determinedafter the application of the rules ofsection 952(c)(1). An example wasadded to illustrate this rule.

Section 1.9541T(d)(5) provides thatthe election to apply the high taxexception must be made by thecontrolling United States shareholdersand is binding on all United Statesshareholders of the controlled foreigncorporation. Commenters argued thatthe Secretary does not have theauthority to bind all United Statesshareholders to a single election. Thiscomment was rejected because it wasdetermined that section 954(b)(4)provides the authority. Further,allowing each United States shareholderto separately elect the high taxexception would add undue complexity

to the operation of the foreign tax creditrules.

Section 1.9541(f) provides guidanceon the definition of related personunder section 954(d)(3).

Section 1.9542: Foreign PersonalHolding Company Income

Section 1.9542T(a)(2)(i) providesthat amounts that fall within thedefinition of income equivalent tointerest, under paragraph (h), will be sotreated though such amounts may alsofall within the definition of gain fromcertain property transactions underparagraph (e), gain from a commoditiestransaction under paragraph (f) orforeign currency gain under paragraph(g). Paragraph (a)(2)(i) provides thatamounts will be treated as incomeequivalent to interest even if theseamounts are excluded from thecomputation of foreign personal holdingcompany income under paragraphs (e),(f), or (g) because they are derived fromcertain qualifying business transactions.A commenter suggested that paragraph(a)(2)(i) should not treat income fromqualifying business transactionsexcluded under paragraphs (e), (f), or (g)as income equivalent to interest. Thiscomment was rejected. The rulesregarding qualifying businesstransactions in paragraphs (e), (f) and (g)do not operate to exclude interestincome from characterization as foreignpersonal holding company income.Income equivalent to interest within themeaning of section 954(c)(1)(E) andparagraph (h) generally should betreated like interest for purposes ofsubpart F.

Several commenters suggested thatthe test described in 1.9542T(a)(3) todetermine the use for which property isheld (for purposes of determining thecharacter of the income, gain or lossrealized from a disposition of suchproperty) should not focus solely on theuse of the property immediately prior toits disposition, but instead shouldconsider the predominant use for whichthe property was held. This commentwas accepted. Section 1.9542(a)(3)provides that the use for which propertyis held is the use for which it was heldfor more than one-half of the periodduring which the controlled foreigncorporation held the property. If therehas been a change in use, however, anda principal purpose for such change inuse was to avoid characterizing incomeor gain attributable to the property asforeign personal holding companyincome, then the change in use will bedisregarded.

Section 1.9542T(a)(3)(ii), Examples 2and 3 illustrate the rules regardingchange in use for which property is


held. The final regulations delete theseexamples because Example 1sufficiently illustrated the rules of thisparagraph. Examples 4 and 5 ofparagraph (a)(3)(ii) illustrate the changein use rules with respect to hedgingtransactions. The final regulationsdelete these examples because the rulesgoverning hedging transactions are nowgenerally contained in paragraph(a)(4)(ii).

Section 1.9542T(a)(4)(i) lists some ofthe types of income that are included inthe term interest. To clarify that this listwas not meant to be exclusive,paragraph (a)(4)(i) has been amended toprovide that the term interest includesall amounts that are treated as interest(including tax-exempt interest) underthe Code and regulations or any otherprovision of law. A new sentenceillustrates the types of income thatwould be treated as interest.

Section 1.9542T(a)(4)(ii) providesthat certain hedging transactions thatreduce the risk of price changes in thecost of inventory and similar propertyare included within the definition ofinventory and similar property if certainrequirements are met and if they are soidentified by the fifth day after whichthey are entered into. Paragraphs (f)(4)and (g)(4) of the temporary regulationscontain definitions of the term qualifiedhedging transaction that have similarfive-day identification requirements.These several definitions of a hedgingtransaction have been consolidated in 1.9542(a)(4)(ii) which contains adefinition of bona fide hedgingtransaction and new identificationrequirements for bona fide hedgingtransactions that apply for purposes ofcomputing foreign personal holdingcompany income under 1.9542.

Section 1.9542(a)(4)(ii)(A) generallydefines a bona fide hedging transactionas a transaction that meets therequirements of 1.12212 (a) through(c) with two exceptions. First, the riskbeing hedged may be with respect toordinary property, section 1231property or a section 988 transaction.Second, a transaction that hedges theliabilities, inventory or other assets of arelated person, or that is entered into toassume or reduce risks of a relatedperson, will not be treated as a bona fidehedging transaction. Severalcommenters had sought to expand thedefinition of qualified hedgingtransactions to include hedgingtransactions conducted by a controlledforeign corporation that is a currencycoordination center, i.e., a controlledforeign corporation that aggregates thecurrency exposures of related controlledforeign corporations and hedges suchexposures. The statute provides,

however, that a transaction must satisfythe business needs of the particularcontrolled foreign corporation. See alsoJoint Committee on Taxation Staff,General Explanation of the Tax ReformAct of 1986, 99th Cong., 2d Sess. 976(1986).

Section 1.9542(a)(4)(ii)(B) providesidentification requirements for a bonafide hedging transaction. The same-dayidentification and the recordkeepingrequirements of 1.12212 apply fortransactions entered on or after March 7,1996. For bona fide hedging transactionsentered into prior to this date and afterJuly 22, 1988, the transaction must beidentified by the close of the fifth dayafter the day on which it is entered into.For bona fide hedging transactionsentered into prior to July 22, 1988, thetransaction must be identifiedreasonably contemporaneously with thedate it is entered into but no later thanwithin the normal period prescribedunder the method of accounting of thecontrolled foreign corporation used forfinancial reporting purposes.

Section 1.9542(a)(4)(ii)(C) describesthe treatment of transactions that aremisidentified as hedging transactions,and hedging transactions that thetaxpayer fails to identify as such.Paragraph (a)(4)(ii)(C) also providesrelief for taxpayers that have identified,or failed to identify, a hedgingtransaction due to inadvertent error.These misidentification rules aresubstantially similar to the rules in 1.12212(f), modified for purposes ofthe subpart F regime.

Section 1.9542T(a)(4)(iii) definesregular dealer, and states that,purchasing and selling propertythrough a regulated exchange or off-exchange market (for example, engagingin futures transactions) is not activelyengaging as a merchant for purposes ofthese rules. This provision was intendedto mean that such purchasing andselling activity alone, in the absence ofother activities, will not qualify acontrolled foreign corporation as aregular dealer within the meaning ofparagraph (a)(4)(iii). Becausecommenters indicated that thisreference to purchasing and sellingthrough a regular exchange or off-exchange market was confusing, thisprovision was removed. Further, thedefinition of regular dealer wasamended. Section 1.9542(a)(4)(iv)provides that a controlled foreigncorporation will be a regular dealer if itregularly and actively offers to, and infact does, engage in certain specifiedactivities with customers who are notrelated persons (as defined in section954(d)(3)) with respect to the CFC.Examples were added to clarify that a

controlled foreign corporation thatqualifies as a dealer under 1.9542(a)(4)(iv) will not be disqualified frombeing treated as a regular dealer becauseit also engages in transactions withrelated persons.

The temporary regulations definedealer property as property held by acontrolled foreign corporation that is aregular dealer in property of such kindin its capacity as a dealer. Thetemporary regulations also state thatproperty held for investment orspeculation is not dealer property. Acommenter suggested that propertyshould be considered dealer propertywithin the meaning of 1.9542T(a)(4)(iv) if the controlled foreigncorporation holding the property is aregular dealer in such property. Thiscomment was rejected because itproposes an unduly expansivedefinition of dealer property. Paragraph(a)(4), therefore, generally continues todefine dealer property in the samemanner as the temporary regulations.

The final regulations do clarify,however, that if a controlled foreigncorporation qualifies as a regular dealer,all of the property held in a dealercapacity by that corporation is treated asdealer property. Thus, dealer propertyincludes property arising from atransaction entered into with a relatedperson, as long as the controlled foreigncorporation is a regular dealer and holdsthe property in its capacity as a dealer,and not for investment or speculation.The examples of 1.9542(a)(4)(vi)illustrate this rule. A rule has beenadded for licensed securities dealersunder which only securities identifiedas held for investment under section475(b) or 1236 will be treated as held forinvestment or speculation. Also, toconform to amendments to section954(c)(1)(B) made by the Technical andMiscellaneous Revenue Act of 1988, 1.9542(a)(4)(v)(C) provides that abona fide hedging transaction withrespect to dealer property is treated asa transaction in dealer property.

Section 954(c)(2)(B) and 1.9542T(b)(2) exclude from foreign personalholding company income exportfinancing interest that is derived in theactive conduct of a banking business. Acommenter suggested that paragraph(b)(2) should treat a controlled foreigncorporation as engaged in the conduct ofa banking business even if it transfersthe servicing of loans to related orunrelated parties. This comment wasrejected because servicing of loans is afundamental element of banking activitythat gives rise to export financinginterest for which an exception fromforeign personal holding companyincome is intended.


Section 1.9542T(b)(2) references thedefinition of export financing interestcontained in section 904(d)(2)(G). Undersection 904(d)(2)(G), the property that isfinanced must be manufactured,produced, grown or extracted in theUnited States by the taxpayer or arelated person. Section 1.9542(b)(2)clarifies that 1.927(a)1T(c)(1) appliesfor purposes of determining whetherproperty is manufactured, produced,grown or extracted in the United States.

Section 1.9542T(b)(2) also providesthat the term export financing interestdoes not include income from relatedparty factoring that is treated as interestunder section 864(d)(1) or (6). The finalregulations contain examples thatclarify that if amounts are not treated asinterest under section 864(d)(1) or (6)because the exception under section864(d)(7) applies, these amounts may beexport financing interest underparagraph (b)(2).

Section 954(c)(3)(A) and 1.9542T(b) (3) and (4) provide that certaindividend, interest, rent or royaltyincome received from related corporatepayors is not included in foreignpersonal holding company income. Toreflect amendments to section954(c)(3)(A) by the RevenueReconciliation Act of 1989, the finalregulations provide that if a partnershipwith one or more corporate partnersmakes a payment of interest, rent orroyalties, the interest, rent or royaltypayment will be treated as paid by acorporate partner to the extent thepayment gives rise to a partnership itemof deduction that is allocable to thecorporate partner or to the extent that apartnership item reasonably related tothe payment would be allocated to thecorporate partner under an existingallocation under the partnershipagreement. To the extent the payment istreated as made by the corporatepartner, it will be excluded from theforeign personal holding companyincome of the recipient if the corporatepartner otherwise satisfies theconditions of section 954(c)(3)(A).

Under 1.9542T(b)(3)(ii), interestmay not be excluded from foreignpersonal holding company income ofthe recipient to the extent the deductionfor interest is allocated to the payorssubpart F income. To clarify how thisrule is to be applied when a controlledforeign corporation is both the recipientand payor of interest, 1.9542(b)(4)(ii)(B)(2) was added, whichparallels the rule contained in 1.9045(k)(2).

Section 1.9542T(b)(3) provides that,to exclude dividends and interestreceived from related corporate payorsfrom foreign personal holding company

income, a substantial part of the payorsassets must be used in a trade orbusiness in the payors country ofincorporation. Section 1.9542T(b)(3)(iv) provides that a substantialpart of the payors assets will beconsidered to be used in a trade orbusiness in the payors country ofincorporation if, for each quarter of thetaxable year, the average value of itsassets which are so used is over 50percent of the average value of all of itsassets (determined as of the beginningand end of the quarter). To simplify theapplication of this rule, 1.9542(b)(4)(iv) provides that the averagevalue of assets is to be determined ona yearly rather than a quarterly basis byaveraging the values of assets as of theclose of each quarter.

Section 1.9542T(b)(3)(vi)(A)provides that for purposes of thesubstantial assets test, tangible property(other than inventory) is generallyconsidered located where it isphysically located. Paragraph(b)(3)(vi)(B) contains an exception forproperty temporarily located elsewherefor inspection or repair. A commentersuggested that, in addition to thisexception, the regulations shouldrestore the exception contained in priorregulations that treated purchasedproperty located abroad and intendedfor prompt shipment to the country ofincorporation as property located in thecountry of incorporation. This commentwas rejected because this provisionwould have been inconsistent with therule that property purchased for use ina trade or business is not consideredused in a trade or business until it isplaced in service.

Section 1.9542T(b)(3)(vii)(A)provides that for purposes of thesubstantial assets test, the location ofintangible property is determined basedon the site of the activities conducted bythe payor during the taxable year inconnection with the use or exploitationof the property. The country in whichservices are performed is determinedunder the principles of section 954(e)and 1.9544(c). This rule wasamended to provide morecomprehensive guidance to determinethe situs of activities in connection withthe use or exploitation of intangibleproperty. Section 1.9542(b)(4)(vii)(B)provides that the country in which theactivities connected to the use orexploitation of property are conductedis the country in which the expensesassociated with these activities areincurred by the payor or its agent or anindependent contractor.

Section 1.9542T(b)(3)(vii)(A)provides that the intangible property isconsidered located in the payors

country of incorporation during eachquarter of the taxable year if theactivities connected with its use orexploitation are conducted in itscountry of incorporation during theentire taxable year. A commenter arguedthat this test is inconsistent with thequarterly determination required by thesubstantial assets test of 1.9542T(b)(3)(iv). Changes were made to thelocation of property rules ( 1.9542(b)(4)(vi) through (ix)) so that relevantdeterminations are made for eachquarter separately.

The final regulations continue toreserve on the provision of special rulesregarding the location of assets of banksand insurance companies for purposesof the same-country exception.Comments are invited regarding theneed for special guidance on this issue.

Several comments questioned theapplication of the rules of 1.9542T(b)(6), pursuant to which interestincome of a controlled foreigncorporation that is described in section103 is included in foreign personalholding company income but ischaracterized as tax-exempt interestwhen included in the gross income ofthe United States shareholders. Thepurpose of this rule was to prevent aperson from avoiding the consequencesof the alternative minimum taxprovisions by investing in tax-exemptobligations described in section 103through a controlled foreigncorporation.

The final regulations reserve on thetreatment of tax-exempt interest. Theadministrative complexity of applyingthe rule described in the temporaryregulations, and the potential for doubletaxation that it creates, argue against itscontinued application. Proposedregulations, published elsewhere in thisissue of the Federal Register, willprovide rules regarding the treatment oftax-exempt interest. In the interim, therules of the temporary regulationscontinue to apply.

Section 1.9542T(b)(5) provides thatthe determination whether rents androyalties are derived from the activeconduct of a trade or business is madeunder the facts and circumstances ofeach case, and refers to paragraphs (c)and (d) for the application of itsprovisions. Commenters have askedwhether only the facts andcircumstances described in paragraphs(c) and (d) may be considered. The finalregulations are clarified to reflect thatwhether rents or royalties are derived inthe active conduct of a trade or businessis determined solely under theprovisions of paragraphs (c) and (d).

Section 1.9542T(c)(2)(iii) definesactive leasing expenses for purposes of


determining whether rental income isderived in the active conduct of a tradeor business. A commenter suggestedthat paragraph (c)(2)(iii) be amended tostate that if a corporation sells propertyof the same type as the property that isleased, the corporations expenses thatare of the type described in thatparagraph may be pro-rated on anyreasonable basis between the leasingand the sales function. It wasdetermined that the change requested bythis commenter was unnecessarybecause paragraph (c)(2)(iii) alreadydefines active leasing expenses asdeductions properly allocable to rentalincome.

A commenter suggested that anexample be added to 1.9542T(c) toillustrate that expenses such aspayments to third parties for insurance,utilities and repairs are consideredactive leasing expenses and not amountspaid to agents or independentcontractors. The regulations wereamended in response to this comment.Section 1.9542(c)(2)(iii)(D) providesthat the term active leasing expensesdoes not include payments to agents orindependent contractors other thanpayments for insurance, utilities andother expenses for like services orcapitalized property. A similar changewas made to the definition of the termadjusted leasing profit.

Section 954(c)(1)(B) and 1.9542T(e)include in foreign personal holdingcompany income the excess of gainsover losses from certain propertytransactions. Section 1.9542T(e)(1)(i)provides that gain or loss that is treatedas capital gain or loss under section988(a)(1)(B) is not foreign currency gainor loss but rather gain or loss from aproperty transaction under paragraph(e). A commenter contended that gain orloss from transactions described insection 988(a)(1)(B) should becharacterized as gain or loss describedin section 954(c)(1)(C) and 1.9542T(f)rather than in section 954(c)(1)(B) andparagraph (e). This comment wasrejected, because the capitaltransactions described in section988(a)(1)(B) are more appropriatelysubject to the provisions of section954(c)(1)(B) and paragraph (e). Thisprovision is now contained in 1.9542(g)(5).

A commenter asked that gain from adisposition of stock of a subsidiary beexcluded from foreign personal holdingcompany income to the extent that gainfrom the subsidiarys disposition of itsassets would be so excluded. There isno statutory authority for the positionrecommended by the commenter,however. In addition, the look-throughtreatment proposed by the commenter is

inconsistent with the treatmentprescribed for dispositions of interestsin a partnership or trust under section954(c)(1)(B)(ii). For these reasons, thecomment was rejected.

Pursuant to 1.9542T(e)(3)(vi), gainfrom a disposition of non-depreciableintangible property or goodwill ischaracterized as foreign personalholding company income unless theintangible property is disposed of inconnection with a disposition of theentire trade or business of the controlledforeign corporation. Commenters haveargued that the gain should be excludedfrom foreign personal holding companyincome if such property is used in thetrade or business of the controlledforeign corporation, without regard towhether an entire trade or business ofthe controlled foreign corporation issold.

The regulations were modified inresponse to this comment. Section1.9522(e)(3)(iv) excludes from foreignpersonal holding company income anygain or loss of a controlled foreigncorporation from a disposition ofintangible property, goodwill or goingconcern value to the extent used or heldfor use in the trade or business of thecontrolled foreign corporation.

Section 1.9542T(e)(4) provides thatgain or loss from the sale, exchange orretirement of a debt instrument isincluded in the computation of foreignpersonal holding company incomeunder paragraph (e) with certainexceptions. However, a loss on a debtinstrument taken in consideration forthe sale or exchange of property isexcluded from foreign personal holdingcompany income if the gain or loss fromthat underlying sale or exchange is notincludible in foreign base companyincome. This rule was eliminated fromthe final regulations because it wasinconsistent to prevent a controlledforeign corporation from using theselosses to offset subpart F income whengain from such debt instruments wasnot excepted from the general inclusionrule.

Section 1.9542T(e)(5) provides thatrights to acquire property, other thancertain property that is dealer propertyor inventory property, are characterizedas property that does not give rise toincome for purposes of section954(c)(1)(B). One commenter hassuggested that such rights should not becharacterized as property that does notgive rise to income. This comment wasrejected because any gain that may ariseupon a disposition of an option,warrant, or other right to acquireproperty, other than gain from adisposition of inventory or dealerproperty, is income of the type intended

to be characterized as foreign personalholding company income for purposesof section 954(c)(1)(B). The provisionsof 1.9542T(e)(5) are now incorporatedinto the definition of property that doesnot give rise to income under 1.9542(e)(3). However, the final regulationsclarify that notional principal contractsare excluded from the definition ofproperty that does not give rise toincome. (But see 1.9542 (f), (g) and(h).)

Section 954(c)(1)(C) and 1.9542T(f)provide rules for including the excess ofgains over losses from commoditiestransactions in foreign personal holdingcompany income. Several commentersargued that 1.9542T(f)(2)(i) definescommodity too broadly, and that, likesections 553 and 864, the regulationsshould apply only to commodities thatare actively traded on a regulatedexchange. This comment was rejectedbecause the statute and its legislativehistory make clear that section954(c)(1)(C) is intended to apply broadlyto any commodity of a kind that isactively traded. Thus, there is no reasonto distinguish income from a dispositionof a commodity actively traded on aregulated exchange from income from adisposition of a commodity of a kindthat is otherwise actively traded.

Although 1.9542(f)(2)(i) no longerexplicitly provides that nonfunctionalcurrency is a commodity, nonfunctionalcurrency continues to fall within thegeneral definition of commodity.Consequently, foreign currency is stilltreated as a commodity if the currencyis actively traded or if contractualinterests in the currency are activelytraded. Under the ordering rules ofparagraph (a)(2), however, paragraph (g)(foreign currency transactions)continues to apply before paragraph (f).Thus, unless an election is made undersection 988(c)(1)(D)(ii), a currencyfutures contract is treated as acommodities transaction, while acurrency forward contract is generallytreated as a foreign currency transaction.

Section 1.9542T(f)(1) excludes gainsand losses from qualified active salesand qualified hedging transactions fromthe computation of foreign personalholding company income underparagraph (f). In defining qualifiedactive sale, paragraph (f)(3) requiressubstantially all of the controlledforeign corporations business to be asan active producer, processor, merchantor handler of commodities of like kind.Commenters argued that by using thephrase of like kind, 1.9542T(f)(3)defines qualified active sales toonarrowly. The of like kind languagewas not intended to require that all ofthe commodities be of one kind, but


rather that the controlled foreigncorporation must be an active producer,etc., with respect to each kind ofcommodity. To avoid confusion, the oflike kind language has been eliminatedfrom the definition of the term qualifiedactive sale.

Section 1.9542T(f)(3)(ii) defines theterm sale of commodities. Commentersquestioned the requirement,incorporated in the definition of thisterm, that the corporation hold thecommodity in physical form. Thiscomment was accepted. The finalregulations no longer require thecontrolled foreign corporation to holdthe commodity in physical form.Section 1.9542(f)(2)(iii)(B) requiresonly that the controlled foreigncorporation hold the commoditydirectly and not through anindependent contractor. The retentionof this requirement is consistent withthe legislative history of section954(c)(1)(C), which makes clear that theexclusion from foreign personal holdingcompany income was intended to applyonly with respect to commodities forwhich controlled foreign corporationsare active producers, processors,handlers or merchants. Section 1.9542(f)(2)(iii)(D) provides that activities ofemployees of entities related to thecontrolled foreign corporation may betreated as activities directly engaged inby the controlled foreign corporation ifthe employees are paid and supervisedby the controlled foreign corporation.

Section 1.9542(f)(2)(iii)(B) alsoamends the definition of the term activeconduct of a commodities business byclarifying that the requirementsspecified in that paragraph must besatisfied with respect to eachcommodity and that property may beheld either as dealer property or asinventory or similar property.

Section 954(c)(1)(C)(ii) and 1.9542T(f) (1) and (3) exclude incomeattributable to commodities transactionsfrom foreign personal holding companyincome if substantially all of thebusiness of a controlled foreigncorporation is as an active producer,processor, merchant or handler ofcommodities. Section 1.9542T(f)(3)(iv)provides that the controlled foreigncorporation will satisfy the substantiallyall requirement if 85 percent of itstaxable income for the taxable year isattributable to qualified active sales andqualified hedging transactions. Severalcommenters argued that this test couldfail to reflect the nature of the controlledforeign corporations businessaccurately in some years because of thevolatility of certain commoditiesmarkets.

To accommodate this concern, 1.9542(f)(2)(iii)(C) modifies thedefinition of the term substantially allby applying the 85 percent test to grossreceipts rather than taxable income. Toprevent manipulation of this modifiedtest, a provision was added under whichthe District Director may disregard anysale or hedging transaction that has asa principal purpose manipulation of the85 percent test.

Section 1.9542T(f)(4) defines theterm qualified hedging transaction as

9–7–95 Thursday Vol. 60 No. 173 September 7, 1995 … · new framework for operation and...

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Transcript of 9–7–95 Thursday Vol. 60 No. 173 September 7, 1995 … · new framework for operation and...