4992 Federal Register / Vol. 71, No. 20 / Tuesday, January 31, 2006 / Rules and Regulations 

1See DOT IG Report Number FI–2006–011, 

entitled, ‘‘Inactive Obligations, Federal Highway 

Administration,’’ dated November 14, 2005, 

available at http://www.oig.dot.gov/ 

item.jsp?id=1722. 

2See the ‘‘Principles of Federal Appropriations 

Law, 3rd Edition’’ available at http://www.gao.gov/ 

special.pubs/redbook1.html. 

DEPARTMENT OF TRANSPORTATION 

Federal Highway Administration 

23 CFR Part 630 

[FHWA Docket No. FHWA–2005–20764] 

RIN 2125–AF05 

Project Authorization and Agreements 

AGENCY: Federal Highway 

Administration (FHWA), DOT. 

ACTION: Final rule. 

SUMMARY: The FHWA is revising its 

regulations relating to project 

authorization and agreements and the 

effect on obligations of Federal-aid 

highway funds under these 

requirements. The changes in this 

rulemaking will assist the States and the 

FHWA in monitoring Federal-aid 

highway projects and provide greater 

assurance that the Federal funds 

obligated reflect the current estimated 

cost of the project. In the event that 

Federal funds are de-obligated as a 

result of these changes, those funds may 

then be obligated for new or other active 

projects needing additional funding to 

the extent permitted by law. 

EFFECTIVE DATE: March 2, 2006. 

FOR FURTHER INFORMATION CONTACT: Mr. 

Dale Gray, Federal-aid Financial 

Management Division, (202) 366–0978, 

or Mr. Steven Rochlis, Office of the 

Chief Counsel, (202) 366–1395, Federal 

Highway Administration, 400 Seventh 

Street SW., Washington, DC 20590. 

Office hours are from 7:45 a.m. to 4:15 

p.m., e.t., Monday through Friday, 

except Federal holidays. 

SUPPLEMENTARY INFORMATION: 

Electronic Access 

An electronic copy of this document 

may be downloaded by using the 

Internet to reach the Office of the 

Federal Register’s home page at: http:// 

www.archives.gov and the Government 

Printing Office’s Web page at: http:// 

www.access.gpo.gov/nara. 

Background 

The FHWA currently funds more than 

120,000 highway projects that are 

administered by State and local 

governments. The amount of Federal 

funds legally obligated (committed) to a 

project is generally based on an estimate 

of the cost to complete the project. As 

a project progresses, those costs may 

increase or decrease. The U.S. 

Department of Transportation’s Office of 

Inspector General has repeatedly found 

that some States have failed to timely 

release Federal funds when project 

estimates decrease or when projects are 

completed and no additional 

expenditures are expected.1 The failure 

to take timely action reduces the 

amount of Federal funds available to 

finance new projects. The FHWA has 

worked with the States for many years 

to identify projects where funds can be 

released and has recommended that 

States adopt certain best practices to 

further the efficient use of Federal 

funds. Nevertheless, in Fiscal Year 

2005, the FHWA identified over $750 

million of Federal funds on inactive 

projects that could be released, and in 

most cases reapplied to new projects. 

Because substantial unneeded 

obligations continue to be identified, 

despite the implementation of best 

practice procedures in many States, the 

FHWA believes regulations are 

necessary to clearly define the 

responsibilities and procedures for 

identifying and releasing these funds. In 

addition, as a Federal agency, the 

FHWA is responsible for maintaining 

valid obligations and must annually 

certify that the amounts shown as 

obligated in its financial statements are 

accurate. 

The FHWA is revising its regulation 

relating to project agreements, 23 CFR 

630, to establish a systematic process 

that will assist the States and FHWA in 

monitoring projects, provide greater 

assurance that the amount of Federal 

funds obligated on a project reflects the 

current cost estimate, and ensure that 

funds no longer needed are de-obligated 

in a timely manner. The new 

requirements included in the final rule 

are consistent with Federal 

appropriation law principles requiring 

Federal obligations to be based on a 

documented cost estimate and revised if 

the estimate changes.2

The regulation will require the States 

to monitor projects and (1) de-obligate 

Federal funds when the amount 

obligated exceeds the current cost 

estimate by $250,000 or more, and (2) 

re-evaluate cost estimates on inactive 

projects and release unneeded funds. 

The FHWA will revise the Federal 

obligation amount if the State fails to 

take action as required by the 

regulation. 

Notice of Proposed Rulemaking 

(NPRM) 

The FHWA published a notice of 

proposed rulemaking (NPRM) on July 

11, 2005, at 70 FR 39692. In the NPRM, 

the FHWA proposed to (1) require the 

de-obligation of Federal funds that 

remain committed to inactive projects as 

well as require the de-obligation of 

excess funds not needed for a project; 

(2) reduce the occurrences where 

Federal funds are committed to inactive 

projects or where an obligation is in 

excess of the amount needed to 

complete the project; (3) establish a 

project completion date that would be 

added in all new project agreements and 

in those cases where modifications are 

made to existing project agreements; 

and (4) require States to assure that 

third party contracts and agreements are 

processed and billed promptly when the 

work is completed. 

We received comments from 56 

entities. The comments that were 

received included; 37 State 

transportation departments (States), 10 

local governments, four metropolitan 

planning organizations, two companies, 

one individual representing five States, 

and two national associations, the 

American Association of State Highway 

and Transportation Officials (AASHTO) 

and the Association of American 

Railroads (AAR). 

Discussion of Comments by Section 

General 

Thirty commenters included a 

statement supporting the efficient use of 

Federal funds and closing out projects. 

For example, AASHTO, which 

represents the State transportation 

departments, expressed full support for 

the goal of increasing the efficient use 

of Federal funds and the timeliness of 

project close-outs, but expressed 

substantial concern that the proposed 

provisions would be burdensome for the 

State and local governments to 

implement. Comments from the TG 

Associates expressed support for 

FHWA’s commitment and efforts to 

foster fiscal stewardship and improve 

financial management. Michigan DOT 

agreed that adequate financial controls 

need to be in place to make certain that 

all available Federal funds are used in 

a timely fashion for transportation 

improvements, but was concerned about 

the ‘‘one-size-fits-all approach’’

proposed in the NPRM. The County of 

Los Angeles, California, agreed with the 

overall objective of the proposed 

changes and stated that an increase in 

the collaborative efforts among the 

FHWA, the States, and third-party 

agencies is needed to improve the 

management of Federal funds. 

Twenty-seven commenters expressed 

opposition to some or all of the 

proposed changes. Among the reasons 


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given for those in opposition were that 

the unilateral action on the part of 

FHWA to de-obligate funds is contrary 

to the cooperative working relationship 

of the States and the FHWA, concern 

that a State may lose funds, concern that 

the process would be burdensome for 

the States, and States that currently 

manage funds effectively would be 

penalized under a one-size-fits-all 

approach. AASHTO recommended that 

the FHWA work cooperatively with the 

States to develop a rule that works for 

all parties. 

The FHWA has been working with the 

States for a number of years, but these 

efforts have not resulted in a reduced 

level of unneeded obligations on a 

national level. In our view, a consistent 

policy is necessary for the States to 

clearly understand the level of effort 

necessary to properly manage Federal 

funds. While some commenters were 

concerned that the requirements would 

be burdensome, we believe that the 

effective management of funds is a 

prudent government agency business 

practice. The FHWA recognizes that 

some States may need to apply 

additional resources to manage funds to 

meet the requirements of this rule, but 

the result is that funds will be made 

available to finance new or active 

projects that will benefit the State in 

meeting its transportation needs. The 

regulation does not require the release 

of any funds that are needed for a valid 

and current obligation. 

There were some questions about the 

application of these new requirements, 

i.e., would the requirements apply to all 

projects, and how are projects defined? 

For example, the Arizona DOT 

recommended that congressionally 

mandated projects be exempt from the 

proposed changes, and the South 

Carolina DOT recommended that a State 

be allowed to choose whether to define 

a project as the entire project or as a 

phase of the project. The Tri-County 

Regional Planning Commission, 

California, recommended that projects 

for statewide planning and 

environmental studies be excluded from 

the proposed requirements. 

The requirements established in the 

final rule apply to any project for which 

the State and the FHWA enter into a 

project agreement under Title 23 CFR 

630, subpart A, which generally 

includes congressionally mandated 

projects and planning projects. There is 

no basis to exempt any project from the 

requirement to maintain a valid 

obligation. The scope of the project is 

defined in the project agreement that is 

initiated by the State and may include 

only a single phase of work, such as 

design or construction, or may include 

multiple phases under a single 

agreement. 

Section 630.106 

In the NPRM, we proposed to include 

section 630.106(a)(3) that would have 

required the States to promptly (1) 

revise the amount obligated on a project 

when the cost estimate decreases by 

$100,000 or 10 percent and (2) to adjust 

the amount obligated on inactive 

projects that are expected to be inactive 

for 24 months. 

Most of the commenters stated that 

modifying changes of ‘‘$100,000 or 10 

percent’’ would require additional 

administrative effort by the State and 

local agencies and would result in an 

inefficient use of limited resources. 

Since project costs range from a few 

thousand dollars to tens of millions of 

dollars, many of the commenters 

recommended that different parameters 

be established. Recommended 

parameters ranged from $200,000 to 

$500,000 and from 2 percent to 10 

percent of project costs. For example, 

the Indiana Department of 

Transportation (DOT) stated that a more 

workable solution would be to change 

the threshold to $250,000. The 

Connecticut DOT and Maryland DOT 

recommended parameters of $250,000 

or 5 percent, whichever is greater, and 

the Florida DOT recommended that 

projects with estimated costs of 

$5,000,000 or less be exempt from the 

requirement. 

We agree that the parameters should 

be changed to enable the States to focus 

resources on significant sums of Federal 

funds obligated on large-scale projects. 

Based upon the comments such as those 

mentioned above, the FHWA is revising 

this provision to require a State to 

maintain a process for revising cost 

estimates as required by Federal 

appropriations law principles 

referenced in the Background section. 

As a minimum, a State will be required 

to revise the Federal obligation amount 

on a project within 90 days when the 

Federal share decreases by $250,000 or 

more. 

Most of the commenters 

recommended that the term ‘‘promptly’’

be removed from the regulation or be 

specifically defined. The Pennsylvania 

DOT stated that the term ‘‘promptly’’

could be interpreted to require daily 

accounting and adjustment of Federalaid obligations. While the commenters 

did not suggest a definition for the term, 

we agree that the term should be 

defined and have defined ‘‘promptly’’ as 

being ‘‘within 90 days after the State or 

local agency determines that the costs 

have decreased.’’ We believe that 90 

days after the determination that an 

adjustment to the obligation amount is 

needed is sufficient time to process a 

modified agreement to adjust the 

obligations. 

The Michigan DOT stated that 

financial monitoring should occur at the 

end of each phase of a job/project. We 

agree that this should not be a daily 

activity and are including language to 

clarify that re-estimates would only be 

expected at the end of a project phase 

or when some other significant event 

occurred that would impact project 

costs, such as a value engineering study 

or a change in design. For clarity we 

have separated this provision that 

relates to all projects from the provision 

that relates to ‘‘inactive projects.’’

Some commenters expressed concern 

about the use of the term, ‘‘inactive 

projects.’’ The term was defined in the 

NPRM as projects for which no costs 

have been billed to FHWA in the past 

12 months. We recognize that a number 

of factors can result in no billings for 12 

months, but the objective of the 

requirement is to identify projects that 

need to be evaluated and a lack of 

billing is the best indicator available to 

the FHWA that a project may be stalled 

or completed. If the State determines 

that work on the project is still 

underway or that the obligation amount 

is valid, then no further action is 

needed. Most commenters 

recommended that the inactivity 

threshold be extended to 24 months. For 

example, AASHTO stated that 24 

months of inactivity on a project is a 

more reasonable timeframe than 12 

months because there are multiple 

reasons why projects may not be 

finalized within a one-year period. 

We agree that 24 months may be an 

appropriate time period for most 

projects and have revised the rule to 

state that projects with unexpended 

obligations of $50,000 to $500,000 are 

not required to be evaluated until they 

are determined to be inactive for a 24- 

month period. However, we believe that 

12 months is a more appropriate time to 

review the projects that have larger 

amounts of unexpended obligations so 

that if unneeded funds are identified, 

these more significant amounts do not 

remain idle for an additional year. Our 

current practice is to review projects 

that are inactive for 12 months with 

unexpended obligations over $500,000. 

As noted in the background section, our 

review in Fiscal Year 2005 identified 

over $750 million that could be applied 

to active projects. We believe that these 

projects should be reviewed after 12 

months of inactivity. Allowing the 

States to review projects with $50,000 to 

$500,000 of unexpended obligations 

after two years of inactivity will reduce 


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the burden on the States in complying 

with this provision. To further reduce 

the State’s burden, the final rule allows 

projects with unexpended obligations 

less than $50,000 to be reviewed after 36 

months of inactivity. 

Recognizing that projects may be 

entering inactive status on a daily basis, 

the FHWA is clarifying that States are 

not required to review inactive projects 

more often than quarterly. Previously, 

the FHWA reviewed inactive projects on 

an annual basis but has determined that 

an annual review allows unneeded 

funds to remain on a project too long 

before a review is performed. Quarterly 

reviews also result in a more orderly 

and routine review and analysis of 

inactive projects. 

Some commenters were concerned 

about the provision that would have 

required adjustments to projects that are 

‘‘unlikely to proceed within the next 12 

months,’’ stating that such a 

determination would be difficult to 

predict in most cases. For example, 

Montana DOT stated that additional 

clarification is needed to define what is 

meant by ‘‘unlikely to proceed.’’ The 

purpose of this provision was to ensure 

that funds are not obligated for a project 

prematurely which would tie-up funds 

that should be used for projects that are 

ready to be advanced. We agree with the 

comments that it would be difficult to 

determine that a project is ‘‘unlikely to 

proceed’’ and are not including the 

provision in the final rule. We are 

replacing this provision with a general 

provision that an obligation of Federal 

funds must be documented and based 

on the State’s best estimate of costs. 

This provision reflects the requirements 

of the Federal appropriations law 

principles as discussed in the 

background section. 

In the NPRM, we proposed to revise 

obligations when the State fails to take 

the required actions under these 

requirements. Some commenters 

suggested that the FHWA should have 

the discretion to take action, but that it 

should not be a mandatory requirement 

so that the FHWA can adequately react 

to the various circumstances. Since this 

rule requires the States to take specific 

actions to manage funds, we believe that 

if the FHWA has determined that a deobligation of funds is appropriate and 

the State has failed to act in a timely 

manner, that the FHWA should revise 

the obligations or take other appropriate 

action. 

Most commenters recommended that 

the FHWA should be required to consult 

with the State before adjusting 

obligations. The Arizona DOT strongly 

objected to the language in the NPRM 

because it allows the FHWA to deobligate Federal funds on a project with 

absolutely no consultation with the 

State. The Arizona DOT recommended 

that the State be notified 60 days before 

funds are de-obligated. We agree that 

the FHWA should advise and consult 

with the State before the FHWA 

unilaterally de-obligates funds. We have 

added a statement in the rule that the 

FHWA will advise the State of its 

proposed actions and provide an 

opportunity for the State to respond. We 

did not specify an amount of time to be 

provided to the State to respond as 

recommended by Arizona DOT because 

circumstances will differ from State to 

State. We view this action on the part 

of the FHWA as a remedy of last resort, 

and expect unilateral actions by FHWA 

to be rare. 

Concerns were expressed that deobligations at the end of the fiscal year 

may result is a loss of obligation 

authority. For example, the California 

DOT stated that FHWA should make 

sure that the States do not lose any 

obligation authority if the timing of deobligations is close to the end of the 

Federal fiscal year. We also recognize 

that Congress intends that all obligation 

authority be used before the end of a 

fiscal year, and to further such intent 

Congress provides for an August 

redistribution of that authority to ensure 

that it is fully used. The final rule has 

been revised to include a provision that 

no adjustments in obligations will occur 

from August 1 to September 30 to 

ensure the efficient execution of the 

August redistribution process unless the 

State requests the adjustment. 

Sections 630.108 and 630.110 

In the NPRM, the FHWA proposed 

revisions to sections 630.108 and 

630.110 that would have required States 

to establish a project completion date in 

the Federal-aid project agreement. If the 

project is delayed, the completion date 

could be revised except that the date 

could not be changed because of a delay 

in billing or processing third party 

claims. When the completion date 

occurs, the State would be required to 

close the project within 90 days. 

Almost all commenters expressed 

opposition to these provisions. 

AASHTO summed up many of the 

comments by stating that the definition 

of ‘‘project completion date’’ needs to be 

clarified; it is impractical to establish 

project completion dates in the early 

phases of project development; it is 

impossible for the States to ensure third 

party compliance, particularly those 

States that have statutory time 

allowances for submitting claims; and 

that the 90-day closing requirement 

would result in State and local agencies 

having to absorb the remaining costs 

without reimbursement. The AAR stated 

that the project completion date 

provides insufficient time for the 

processing of bills and that closure and 

release of unexpended funds within 90 

days of the completion date is 

inconsistent with commercial practices. 

In response to these comments, we 

will not revise sections 630.108 and 

630.110 at this time. The FHWA plans 

to modify its Fiscal Management 

Information System (FMIS) during 

Fiscal Year 2006 to include a project 

completion date simply as an 

information item. The FMIS tracks the 

amount of and type of Federal funds 

obligated on individual Federal-aid 

highway projects and collects a variety 

of data on the projects, such as, type of 

work, location, project description, etc. 

We will work with the States to better 

define the project completion date and 

the best way to use the date to improve 

project funds management. 

Rulemaking Analyses and Notices 

Executive Order 12866 (Regulatory 

Planning and Review) and DOT 

Regulatory Policies and Procedures 

The FHWA has determined that this 

final rule is not a significant regulatory 

action within the meaning of Executive 

Order 12866 or significant within the 

meaning of Department of 

Transportation regulatory policies and 

procedures. We anticipate that the 

economic impact of this rulemaking will 

be minimal. In fact, funds released as a 

result of a de-obligation under this rule 

will be credited to the same program 

category and will be immediately 

available for obligation and expenditure 

on eligible projects in accordance with 

23 U.S.C. 118(d). This final rule will not 

adversely affect, in a material way, any 

sector of the economy. In addition, these 

changes will not interfere with any 

action taken or planned by another 

agency and will not materially alter the 

budgetary impact of any entitlements, 

grants, user fees, or loan programs. 

Regulatory Flexibility Act 

In compliance with the Regulatory 

Flexibility Act (Pub. L. 96–354, 5 U.S.C. 

601–612) the FHWA has evaluated the 

effects of this final rule on small entities 

and has determined that the action will 

not have a significant economic impact 

on a substantial number of small 

entities. This final rule addresses 

obligations of Federal funds to States for 

Federal-aid highway projects. As such, 

it affects only States and States are not 

included in the definition of small 

entity set forth in 5 U.S.C. 601. 

Therefore, the Regulatory Flexibility Act 


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does not apply and the FHWA certifies 

that this action will not have a 

significant economic impact on a 

substantial number of small entities. 

Unfunded Mandates Reform Act of 

1995 

This final rule does not impose 

unfunded mandates as defined by the 

Unfunded Mandates Reform Act of 1995 

(Pub. L. 104–4, March 22, 1995, 109 

Stat. 48). This rule will not result in the 

expenditure by State, local, and tribal 

governments, in the aggregate, or by the 

private sector, of $100 million or more 

in any one year. Additionally, the 

definition of ‘‘Federal Mandate’’ in the 

Unfunded Mandates 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. 

Executive Order 13132 (Federalism) 

This final rule has been analyzed in 

accordance with the principles and 

criteria contained in Executive Order 

13132, and the FHWA has determined 

that this action does not have sufficient 

federalism implications to warrant the 

preparation of a federalism assessment. 

The FHWA has also determined that 

this action does not preempt any State 

law or State regulation or affect the 

States’ ability to discharge traditional 

State governmental functions. 

Executive Order 12372 

(Intergovernmental Review) 

Catalog of Federal Domestic 

Assistance Program Number 20.205, 

Highway Planning and Construction. 

The regulations implementing Executive 

Order 12372 regarding 

intergovernmental consultation on 

Federal programs and activities apply to 

this program. 

Paperwork Reduction Act 

This action does not contain a 

collection of information requirement 

under the Paperwork Reduction Act of 

1995, 44 U.S.C. 3501–3520. 

National Environmental Policy Act 

The FHWA has analyzed this final 

rule for the purpose of the National 

Environmental Policy Act of 1969 (42 

U.S.C. 4321–4347) and has determined 

that this action will not have any effect 

on the quality of the environment. 

Executive Order 12630 (Taking of 

Private Property) 

This action will not affect the taking 

of private property or otherwise have 

taking implications under Executive 

Order 12630, Government Actions and 

Interface with Constitutionally 

Protected Property Rights. 

Executive Order 12988 (Civil Justice 

Reform) 

This action meets applicable 

standards in sections 3(a) and 3(b)(2) of 

Executive Order 12988, Civil Justice 

Reform, to minimize litigation, 

eliminate ambiguity, and reduce 

burden. 

Executive Order 13045 (Protection of 

Children) 

We have analyzed this final rule 

under Executive Order 13045, 

Protection of Children from 

Environmental Health Risks and Safety 

Risks. The FHWA certifies that this 

action will not cause an environmental 

risk to health or safety that might 

disproportionately affect children. 

Executive Order 13175 (Tribal 

Consultation) 

The FHWA has analyzed this final 

rule under Executive Order 13175, 

dated November 6, 2000, and believes 

that this action will not have substantial 

direct effects on one or more Indian 

tribes; will not impose substantial direct 

compliance costs on Indian tribal 

governments; and will not preempt 

tribal laws. This final action addresses 

obligations of Federal funds to States for 

Federal-aid highway projects and will 

not impose any direct compliance 

requirements on Indian tribal 

governments. Therefore, a tribal 

summary impact statement is not 

required. 

Executive Order 13211 (Energy Effects) 

We have analyzed this action under 

Executive Order 13211, Actions 

Concerning Regulations That 

Significantly Affect Energy Supply, 

Distribution, or Use Dated May 18, 

2001. We have determined that it is not 

a significant energy action under that 

order because it is not a significant 

regulatory action under Executive Order 

12866 and it is not likely to have a 

significant adverse effect on the supply, 

distribution, or use of energy. Therefore, 

a Statement of Energy Effects is not 

required. 

Regulation Identification Number 

A regulation identification number 

(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 April and 

October of each year. The RIN contained 

in the heading of this document can be 

used to cross-reference this action with 

the Unified Agenda. 

List of Subjects in 23 CFR Part 630 

Reimbursement, Grant programs—

transportation, Highways and roads. 

Issued on: January 25, 2006. 

J. Richard Capka, 

Acting Federal Highway Administrator. 

■ In consideration of the foregoing, the 

FHWA is amending title 23, part 630, 

Code of Federal Regulations as follows: 

PART 630—PRECONSTRUCTION 

PROCEDURES 

Subpart A—Project Authorization and 

Agreements 

■ 1. The authority citation for part 630 

continues to read as follows: 

Authority: 23 U.S.C. 106, 109, 115, 315, 

320, and 402(a); 31 U.S.C. 1.32; and 49 CFR 

1.48(b). 

■ 2. Amend § 630.106 by revising the 

heading to read as set forth below, and 

adding paragraphs (a)(3), (4), (5), and (6) 

to read as follows: 

§ 630.106 Authorization to proceed and 

Project Monitoring. 

(a) * * * 

(3) The State’s request that Federal 

funds be obligated shall be supported by 

a documented cost estimate that is 

based on the State’s best estimate of 

costs. 

(4) The State shall maintain a process 

to adjust project cost estimates. For 

example, the process would require a 

review of the project cost estimate when 

the bid is approved, a project phase is 

completed, a design change is approved, 

etc. Specifically, the State shall revise 

the Federal funds obligated within 90 

days after it has determined that the 

estimated Federal share of project costs 

has decreased by $250,000 or more. 

(5) The State shall review, on a 

quarterly basis, inactive projects (for the 

purposes of this subpart an ‘‘inactive 

project’’ means a project for which no 

expenditures have been charged against 

Federal funds for the past 12 months) 

with unexpended Federal obligations 

and shall revise the Federal funds 

obligated for a project within 90 days to 

reflect the current cost estimate, based 

on the following criteria: 

(i) Projects inactive for the past 12 

months with unexpended balances more 

than $500,000, 

(ii) Projects inactive for the past 24 

months with unexpended balances of 

$50,000 to $500,000, and 

(iii) Projects inactive for the past 36 

months with unexpended balances less 

than $50,000. 


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(6) If the State fails to comply with the 

requirements of paragraphs (a)(3), (4), or 

(5) of this section, then the FHWA shall 

revise the obligations or take such other 

action as authorized by 23 CFR 1.36. 

The FHWA shall advise the State of its 

proposed actions and provide the State 

with the opportunity to respond before 

actions are taken. The FHWA shall not 

adjust obligations without a State’s 

consent during the August 

redistribution process, August 1 to 

September 30. 

* * * * * 

[FR Doc. 06–863 Filed 1–30–06; 8:45 am] 

BILLING CODE 4910–22–P 

DEPARTMENT OF THE TREASURY 

Internal Revenue Service 

26 CFR Parts 1 and 602 

[TD 9248] 

RIN 1545–BC86 

Residence Rules Involving U.S. 

Possessions 

AGENCY: Internal Revenue Service (IRS), 

Treasury. 

ACTION: Final regulations, temporary 

regulations, and removal of temporary 

regulations. 

SUMMARY: This document contains final 

regulations that provide rules for 

determining bona fide residency in the 

following U.S. possessions: American 

Samoa, Guam, the Northern Mariana 

Islands, Puerto Rico, and the United 

States Virgin Islands under sections 

937(a) and 881(b) of the Internal 

Revenue Code (Code). 

DATES: Effective Date: These regulations 

are effective January 31, 2006. 

Applicability Dates: For dates of 

applicability, see §§ 1.881–5(f)(8) and 

1.937–1(i). 

FOR FURTHER INFORMATION CONTACT: J. 

David Varley, (202) 435–5262 (not a tollfree number). 

SUPPLEMENTARY INFORMATION: 

Paperwork Reduction Act 

The collections of information 

contained in these final regulations have 

been reviewed and approved by the 

Office of Management and Budget in 

accordance with the Paperwork 

Reduction Act of 1995 (44 U.S.C. 

3507(d)) under control number 1545–

1930. 

The collections of information in 

these final regulations are in § 1.937–1. 

The collection of information required 

by § 1.937–1(h) is to ensure that 

individuals claiming to become, or 

cease to be, residents of a U.S. 

possession file notice of such a claim 

with the Internal Revenue Service in 

accordance with section 937(c) of the 

Code. Individuals subject to this 

reporting requirement must retain 

information to establish their residency 

as required by section 937(c) of the Code 

and § 1.937–1. An additional collection 

of information in these final regulations 

is in § 1.937–1(c)(4)(iii). This 

information is required to satisfy the 

documentation and production 

requirements for individuals who come 

within an exception to the presence test 

of § 1.937–1(c) as a consequence of 

receiving (or accompanying certain 

family members who receive) qualifying 

medical treatment. 

The collections of information are 

mandatory and will be used for audit 

and examination purposes. The likely 

respondents are individuals who 

become (or cease to be) bona fide 

residents of a U.S. possession and 

individuals who, in satisfying the 

presence test requirement for bona fide 

residence in a possession, exclude days 

in the U.S. or include days in a relevant 

possession because they receive (or 

accompany certain family members who 

receive) qualifying medical treatment. 

Estimated total annual reporting and/ 

or recordkeeping burden: 300,000 hours. 

Estimated average annual burden 

hours per respondent: 4 hours. 

Estimated number of respondents: 

75,000. 

Estimated annual frequency of 

responses: annually. 

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. 

Comments concerning the accuracy of 

this burden estimate and suggestions for 

reducing this burden should be directed 

to the Office of Management and 

Budget, Attn: Desk Officer for the 

Department of Treasury, Office of 

Information and Regulatory Affairs, 

Washington, DC 20503, with copies to 

the Internal Revenue Service, Attn: IRS 

Reports Clearance Officer, 

SE:W:CAR:MP:T:T:SP, Washington, DC 

20224. 

Books or records relating to a 

collection of information must be 

retained as long as their contents might 

become material in the administration 

of any internal revenue law. Generally, 

tax returns and tax return information 

are confidential, as required by 26 

U.S.C. 6103. 

Background 

The American Jobs Creation Act of 

2004 (Pub. L. 108–357) was enacted on 

October 22, 2004. Section 809 of the Act 

added section 937 to the Code, relating 

to residence, source, and effectively 

connected income with respect to the 

U.S. possessions. On April 11, 2005, the 

IRS and Treasury published in the 

Federal Register temporary regulations 

(TD 9194, 70 FR 18920, as corrected at 

70 FR 32589–01), which provided rules 

to implement section 937 and to 

conform existing regulations to other 

legislative changes with respect to U.S. 

possessions. A notice of proposed 

rulemaking (REG–159243–03, 70 FR 

18949) cross-referencing the temporary 

regulations was published in the 

Federal Register on the same day. 

Written comments were received in 

response to the notice of proposed 

rulemaking and a public hearing on the 

proposed regulations was held on July 

21, 2005. The proposed regulations 

relating to the residence rules 

(specifically, §§ 1.937–1 and 1.881–

5T(f)(4)) are adopted as amended by this 

Treasury decision, and the 

corresponding temporary regulations are 

removed. The revisions are discussed 

below. The remainder of the proposed 

and temporary regulations, relating to 

source and effectively connected 

income with respect to U.S. possessions, 

will be finalized together with the other 

conforming changes in a forthcoming 

Treasury decision. 

Explanation of Provisions and 

Summary of Comments 

The proposed and temporary 

regulations under Code section 937(a) 

provide rules for determining whether 

an individual is a ‘‘bona fide resident’’

of a U.S. possession. Generally, § 1.937–

1T provides that an individual is a bona 

fide resident of a possession if the 

individual meets a presence test, a tax 

home test and a closer connection test. 

The IRS received comments relating to 

each of the three tests. 

I. Presence Test 

A. General Rule 

Under section 937(a)(1), in order to 

satisfy the presence test, a person must 

be present in the possession for at least 

183 days during the taxable year (the 

183-day rule). The proposed and 

temporary regulations provide several 

alternatives to the 183-day rule for 

purposes of satisfying the presence test. 

Thus, an individual who does not 

satisfy the 183-day rule nevertheless 

meets the presence test under the 

proposed and temporary regulations if 

the individual spends no more than 90 


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