44214 Federal Register / Vol. 62, No. 161 / Wednesday, August 20, 1997 / Rules and Regulations

ultimate purchaser the country of origin

of a foreign article and at the same time

protect an ultimate purchaser from

misleading or deceptive non-origin type

references. The proposed amendment to

§ 134.46 effectively accomplishes these

goals. It also gives the Customs field

offices discretion as to whether the

stringent marking requirements of

§ 134.46 should be applied in situations

where non-origin type references

appearing on the article or its container

are clearly not misleading or deceiving

as to the actual origin of the imported

article.

Comment: Another commenter

opposes Customs proposed regulation

because he believes that the proposed

change would open the door to

litigation due to differing opinions as to

what is ‘‘misleading or deceiving.’’ This

commenter observes that every time

Customs sends out a Notice of

Redelivery for a marking violation for

merchandise which is marked with a

country or locality other than the

country or locality in which the

merchandise was manufactured or

produced, the recipient of that Notice

will respond that the marking ‘‘will’’ not

mislead or deceive the ultimate

purchaser in the U.S.

Response: Customs disagrees that the

proposal would open the door to

litigation due to the differing opinions

as to what is ‘‘misleading or deceiving.’’

The proposed amendment applies a

standard based on whether the nonorigin type reference ‘‘may mislead or

deceive an ultimate purchaser as to the

actual country of origin of the article’’

rather than ‘‘will’’ as the commenter

mistakenly states, so that every case

does not become a question of fact, as

the commenter suggests.

Conclusion

In accordance with the analysis of

comments above and after further

consideration, Customs concludes that

the proposed amendments to

§§ 134.36(b) and 134.46 should be

adopted as proposed. It is noted that

certain editorial changes are made to

§ 134.46 which are not substantive in

effect. It is also noted that Customs

intends to issues a new Notice of

Proposed Rulemaking regarding

§ 134.47, as discussed earlier.

Regulatory Reflexibility Act and

Executive Order 12866

Pursuant to the provisions of the

Regulatory Flexibility Act (5 U.S.C. 601

et seq.), because this regulation eases

the country of origin marking

requirements and thus reduces the

regulatory burden, it is certified that the

regulations will not have a significant

economic impact on a substantial

number of small entities. Accordingly,

the regulations are not subject to the

regulatory analysis or other

requirements of 5 U.S.C. 603 and 604.

This document does not meet the

criteria for a ‘‘significant regulatory

action’’ as specified in Executive Order

12866.

Drafting Information: The principal

author of this document was Janet L.

Johnson, Regulations Branch. However,

personnel from other offices

participated in its development.

List of Subjects in Part 134

Customs duties and inspection,

Labeling, Packaging and containers.

Amendment to the Regulations

For the reasons set forth in the

preamble, part 134 of the Customs

Regulations (19 CFR Part 134) is

amended as set forth below.

PART 134—COUNTRY OF ORIGIN

MARKING

1. The general authority citation for

part 134 continues to read as follows:

Authority: 5 U.S.C. 301; 19 U.S.C. 66, 1202

(General Note 20, Harmonized Tariff

Schedule of the United States), 1304, 1624.

§ 134.36 [Amended]

2. Section 134.36 is amended by

revising its heading to read

‘‘Inapplicablity of Marking Exception

for Articles Processed by Importer’’,

removing the designation and heading

of paragraph (a) and removing

paragraph (b).

3. Section 134.46 is revised to read as

follows:

§ 134.46 Marking when name of country or

locality other than country of origin

appears.

In any case in which the words

‘‘United States,’’ or ‘‘American,’’ the

letters ‘‘U.S.A.,’’ any variation of such

words or letters, or the name of any city

or location in the United States, or the

name of any foreign country or locality

other than the country or locality in

which the article was manufactured or

produced appear on an imported article

or its container, and those words, letters

or names may mislead or deceive the

ultimate purchaser as to the actual

country of origin of the article, there

shall appear legibly and permanently in

close proximity to such words, letters or

name, and in at least a comparable size,

the name of the country of origin

preceded by ‘‘Made in,’’ ‘‘Product of,’’

or other words of similar meaning.

George J. Weise,

Commissioner of Customs.

Approved: July 1, 1997.

John P. Simpson,

Deputy Assistant Secretary of the Treasury.

[FR Doc. 97–22034 Filed 8–19–97; 8:45 am]

BILLING CODE 4820–02–U

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 8730]

RIN 1545–AT32

Allocations of Depreciation Recapture

Among Partners in a Partnership

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final

regulations relating to the allocation of

depreciation recapture among partners

in a partnership. The final regulations

amend existing regulations to require

that gain characterized as depreciation

recapture be allocated, to the extent

possible, to the partners who took the

depreciation or amortization

deductions. The final regulations affect

partnerships (and their partners) that

sell or dispose of certain depreciable or

amortizable property.

DATES: These regulations are effective

August 20, 1997. For dates of

applicability of these regulations, see

§§ 1.704–3(f) and 1.1245–1(e)(2)(iv).

FOR FURTHER INFORMATION CONTACT:

Daniel J. Coburn, (202) 622–3050 (not a

toll-free number).

SUPPLEMENTARY INFORMATION:

Background

This document amends the Income

Tax Regulations (26 CFR part 1) relating

to the characterization and allocation of

depreciation recapture among partners

in a partnership. Section 1245 of the

Internal Revenue Code requires

taxpayers to recharacterize as ordinary

income some or all of the gain on the

disposition of certain types of business

properties. The amount recharacterized

as ordinary income (depreciation

recapture) is the lesser of (1) the gain

realized on the disposition, or (2) the

total deductions allowed or allowable

for depreciation or amortization from

the property.

On December 12, 1996, the IRS

published in the Federal Register (61
Federal Register / Vol. 62, No. 161 / Wednesday, August 20, 1997 / Rules and Regulations 44215

FR 65371) a notice of proposed

rulemaking (REG–209762–95) to

provide guidance on partnership

allocations of depreciation recapture.

Although a public hearing was

scheduled for March 27, 1997, the IRS

cancelled the hearing because it

received no requests to speak.

Explanation of Provisions

I. General Background

The regulations provide guidance on

allocating depreciation recapture among

partners, including depreciation

recapture attributable to contributed

property.

The regulations provide that a

partner’s share of depreciation recapture

is equal to the lesser of (1) the partner’s

share of total gain arising from the

disposition of the property (gain

limitation) or (2) the partner’s share of

depreciation or amortization from the

property (as defined in paragraph

(e)(2)(ii) of the regulations). This rule

seeks to insure, to the extent possible,

that a partner recognizes recapture on

the disposition of property in an amount

equal to the depreciation or

amortization deductions from the

property previously taken by the

partner. Any depreciation recapture that

is not allocated to a partner due to the

gain limitation is allocated among those

partners whose shares of total gain on

the disposition of the property exceed

their shares of depreciation or

amortization from the property. This

unallocated depreciation recapture is

allocated among those partners in

proportion to their relative shares of the

total gain on the disposition of the

property.

The regulations provide special rules

for determining a partner’s share of

depreciation or amortization from

contributed property subject to section

704(c). Under the regulations, a

contributing partner’s share of

depreciation or amortization includes

depreciation or amortization allowed or

allowable prior to contribution. In

addition, the regulations provide that

curative and remedial allocations

generally reduce the contributing

partner’s share of depreciation or

amortization and increase the

noncontributing partners’ shares of

depreciation or amortization.

II. Changes in Response to Comments

In response to comments, the

regulations clarify the effect of curative

and remedial allocations on the

partners’ shares of depreciation or

amortization from contributed property.

The examples now demonstrate that

curative and remedial allocations can

reduce the contributing partner’s share

of depreciation or amortization to zero,

but not below zero. Once the

contributing partner’s share of

depreciation or amortization has been

reduced to zero, the curative or remedial

allocations do not affect the contributing

partner’s share of depreciation or

amortization. However, the curative or

remedial allocations continue to affect

the noncontributing partners’ shares of

depreciation or amortization.

The regulations have also been

revised to make it clear that these

amendments to the section 1245

regulations only affect how the

depreciation recapture recognized by

the partnership is allocated among the

partners; they do not affect the

computation of depreciation recapture

at the partnership level. The regulations

recognize that even absent a gain

limitation, remedial and curative

allocations may cause the total of the

partners’ shares of depreciation to

exceed the amount of depreciation

recapture recognized at the partnership

level. In such a case, the partnership’s

depreciation recapture with respect to

the contributed property is to be

allocated among the partners in

proportion to their relative shares of

depreciation or amortization with

respect to that property. However, no

partner’s share of depreciation recapture

from the property can exceed that

partner’s share of the total gain arising

from the disposition of the property.

Example 2 of paragraph (e)(2)(iii) of

the regulations has also been revised to

demonstrate more thoroughly how

recapture is allocated when a partner’s

share of depreciation recapture is

capped by the partner’s share of gain

from the disposition of the property. As

illustrated in the example, some

partnerships may find it necessary to

make multiple reallocations of

depreciation recapture from a property

if allocations under the general rule

(allocations in proportion to the

remaining partners’ shares of gain from

the disposition of the property) cause a

remaining partner’s share of

depreciation to exceed the partner’s

share of gain from the disposition of the

property.

One commentator requested that the

regulations allow but not require that

partnerships allocate depreciation

recapture in proportion to the partners’

shares of the gain from the disposition

of the property. This change was not

made because the IRS and Treasury

continue to believe that matching

depreciation recapture allocations to

depreciation allocations most

appropriately carries out the policies

underlying section 1245.

A number of terminology and stylistic

changes have also been made to these

regulations. These changes were made

for purposes of economy and should not

be interpreted as substantive changes.

Special Analyses

It has been determined that this

Treasury decision is not a significant

regulatory action as defined in EO

12866. Therefore, a regulatory

assessment is not required. It also has

been determined that section 553(b) of

the Administrative Procedure Act (5

U.S.C. chapter 5) does not apply to these

regulations, and because the regulations

do not impose a collection of

information on small entities, the

Regulatory Flexibility Act (5 U.S.C.

chapter 6) does not apply. Pursuant to

section 7805(f) of the Internal Revenue

Code, the notice of proposed rulemaking

preceding these regulations was

submitted to the Small Business

Administration for comment on its

impact on small business.

Drafting Information: The principal

author of these regulations is Daniel J.

Coburn, Office of Assistant Chief

Counsel (Passthroughs and Special

Industries), IRS. However, other

personnel from the IRS and Treasury

participated in their development.

List of Subjects in 26 CFR Part 1

Income taxes, Reporting and

recordkeeping requirements.

Adoption of Amendments to the

Regulations

Accordingly, 26 CFR part 1 is

amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation

for part 1 continues to read, in part, as

follows:

Authority: 26 U.S.C. 7805 * * *

Par. 2. Section 1.704–3 is amended

by:

(1) Adding new paragraph (a)(11).

(2) Revising paragraph (f).

The addition and revision read as

follows:

§ 1.704–3 Contributed property.

(a) * * *

(11) Contributing and noncontributing

partners’ recapture shares. For special

rules applicable to the allocation of

depreciation recapture with respect to

property contributed by a partner to a

partnership, see §§ 1.1245–1(e)(2) and

1.1250–1(f).

* * * * *

(f) Effective date. With the exception

of paragraph (a)(11) of this section, this

section applies to properties contributed
44216 Federal Register / Vol. 62, No. 161 / Wednesday, August 20, 1997 / Rules and Regulations

to a partnership and to restatements

pursuant to § 1.704–1(b)(2)(iv)(f) on or

after December 21, 1993. Paragraph

(a)(11) of this section applies to

properties contributed by a partner to a

partnership on or after August 20, 1997.

However, partnerships may rely on

paragraph (a)(11) of this section for

properties contributed before August 20,

1997 and disposed of on or after August

20, 1997.

Par. 3. Section 1.1245–1 is amended

by revising paragraph (e)(2) to read as

follows:

§ 1.1245–1 General rule for treatment of

gain from dispositions of certain

depreciable property.

* * * * *

(e) * * *

(2)(i) Unless paragraph (e)(3) of this

section applies, a partner’s distributive

share of gain recognized under section

1245(a)(1) by the partnership is equal to

the lesser of the partner’s share of total

gain from the disposition of the property

(gain limitation) or the partner’s share of

depreciation or amortization with

respect to the property (as determined

under paragraph (e)(2)(ii) of this

section). Any gain recognized under

section 1245(a)(1) by the partnership

that is not allocated under the first

sentence of this paragraph (e)(2)(i)

(excess depreciation recapture) is

allocated among the partners whose

shares of total gain from the disposition

of the property exceed their shares of

depreciation or amortization with

respect to the property. Excess

depreciation recapture is allocated

among those partners in proportion to

their relative shares of the total gain

(including gain recognized under

section 1245(a)(1)) from the disposition

of the property that is allocated to the

partners who are not subject to the gain

limitation. See Example 2 of paragraph

(e)(2)(iii) of this section.

(ii)(A) Subject to the adjustments

described in paragraphs (e)(2)(ii)(B) and

(e)(2)(ii)(C) of this section, a partner’s

share of depreciation or amortization

with respect to property equals the total

amount of allowed or allowable

depreciation or amortization previously

allocated to that partner with respect to

the property.

(B) If a partner transfers a partnership

interest, a share of depreciation or

amortization must be allocated to the

transferee partner as it would have been

allocated to the transferor partner. If the

partner transfers a portion of the

partnership interest, a share of

depreciation or amortization

proportionate to the interest transferred

must be allocated to the transferee

partner.

(C)(1) A partner’s share of

depreciation or amortization with

respect to property contributed by the

partner includes the amount of

depreciation or amortization allowed or

allowable to the partner for the period

before the property is contributed.

(2) A partner’s share of depreciation

or amortization with respect to property

contributed by a partner is adjusted to

account for any curative allocations.

(See § 1.704–3(c) for a description of the

traditional method with curative

allocations.) The contributing partner’s

share of depreciation or amortization

with respect to the contributed property

is decreased (but not below zero) by the

amount of any curative allocation of

ordinary income to the contributing

partner with respect to that property

and by the amount of any curative

allocation of deduction or loss (other

than capital loss) to the noncontributing

partners with respect to that property. A

noncontributing partner’s share of

depreciation or amortization with

respect to the contributed property is

increased by the noncontributing

partner’s share of any curative

allocation of ordinary income to the

contributing partner with respect to that

property and by the amount of any

curative allocation of deduction or loss

(other than capital loss) to the

noncontributing partner with respect to

that property. The partners’ shares of

depreciation or amortization with

respect to property from which curative

allocations of depreciation or

amortization are taken is determined

without regard to those curative

allocations. See Example 3(iii) of

paragraph (e)(2)(iii) of this section.

(3) A partner’s share of depreciation

or amortization with respect to property

contributed by a partner is adjusted to

account for any remedial allocations.

(See § 1.704–3(d) for a description of the

remedial allocation method.) The

contributing partner’s share of

depreciation or amortization with

respect to the contributed property is

decreased (but not below zero) by the

amount of any remedial allocation of

income to the contributing partner with

respect to that property. A

noncontributing partner’s share of

depreciation or amortization with

respect to the contributed property is

increased by the amount of any

remedial allocation of depreciation or

amortization to the noncontributing

partner with respect to that property.

See Example 3(iv) of paragraph

(e)(2)(iii) of this section.

(4) If, under paragraphs (e)(2)(ii)(C)(2)

and (e)(2)(ii)(C)(3) of this section, the

partners’ shares of depreciation or

amortization with respect to a

contributed property exceed the

adjustments reflected in the adjusted

basis of the property under § 1.1245–

2(a) at the partnership level, then the

partnership’s gain recognized under

section 1245(a)(1) with respect to that

property is allocated among the partners

in proportion to their relative shares of

depreciation or amortization (subject to

any gain limitation that might apply).

(5) This paragraph (e)(2)(ii)(C) also

applies in determining a partner’s share

of depreciation or amortization with

respect to property for which

differences between book value and

adjusted tax basis are created when a

partnership revalues partnership

property pursuant to § 1.704–

1(b)(2)(iv)(f).

(iii) Examples. The application of this

paragraph (e)(2) may be illustrated by

the following examples:

Example 1. Recapture allocations. (i) Facts.

A and B each contribute $5,000 cash to form

AB, a general partnership. The partnership

agreement provides that depreciation

deductions will be allocated 90 percent to A

and 10 percent to B, and, on the sale of

depreciable property, A will first be allocated

gain to the extent necessary to equalize A’s

and B’s capital accounts. Any remaining gain

will be allocated 50 percent to A and 50

percent to B. In its first year of operations,

AB purchases depreciable equipment for

$5,000. AB depreciates the equipment over

its 5-year recovery period and elects to use

the straight-line method. In its first year of

operations, AB’s operating income equals its

expenses (other than depreciation). (To

simplify this example, AB’s depreciation

deductions are determined without regard to

any first-year depreciation conventions.)

(ii) Year 1. In its first year of operations,

AB has $1,000 of depreciation from the

partnership equipment. In accordance with

the partnership agreement, AB allocates 90

percent ($900) of the depreciation to A and

10 percent ($100) of the depreciation to B. At

the end of the year, AB sells the equipment

for $5,200, recognizing $1,200 of gain ($5,200

amount realized less $4,000 adjusted tax

basis). In accordance with the partnership

agreement, the first $800 of gain is allocated

to A to equalize the partners’ capital

accounts, and the remaining $400 of gain is

allocated $200 to A and $200 to B.

(iii) Recapture allocations. $1,000 of the

gain from the sale of the equipment is treated

as section 1245(a)(1) gain. Under paragraph

(e)(2)(i) of this section, each partner’s share

of the section 1245(a)(1) gain is equal to the

lesser of the partner’s share of total gain

recognized on the sale of the equipment or

the partner’s share of total depreciation with

respect to the equipment. Thus, A’s share of

the section 1245(a)(1) gain is $900 (the lesser

of A’s share of the total gain ($1,000) and A’s

share of depreciation ($900)). B’s share of the

section 1245(a)(1) gain is $100 (the lesser of

B’s share of the total gain ($200) and B’s

share of depreciation ($100)). Accordingly,

$900 of the $1,000 of total gain allocated to

A is treated as ordinary income and $100 of
Federal Register / Vol. 62, No. 161 / Wednesday, August 20, 1997 / Rules and Regulations 44217

the $200 of total gain allocated to B is treated

as ordinary income.

Example 2. Recapture allocation subject to

gain limitation. (i) Facts. A, B, and C form

general partnership ABC. The partnership

agreement provides that depreciation

deductions will be allocated equally among

the partners, but that gain from the sale of

depreciable property will be allocated 75

percent to A and 25 percent to B. ABC

purchases depreciable personal property for

$300 and subsequently allocates $100 of

depreciation deductions each to A, B, and C,

reducing the adjusted tax basis of the

property to $0. ABC then sells the property

for $440. ABC allocates $330 of the gain to

A (75 percent of $440) and allocates $110 of

the gain to B (25 percent of $440). No gain

is allocated to C.

(ii) Application of gain limitation. Each

partner’s share of depreciation with respect

to the property is $100. C’s share of the total

gain from the disposition of the property,

however, is $0. As a result, under the gain

limitation provision in paragraph (e)(2)(i) of

this section, C’s share of section 1245(a)(1)

gain is limited to $0.

(iii) Excess depreciation recapture. Under

paragraph (e)(2)(i) of this section, the $100 of

section 1245(a)(1) gain that cannot be

allocated to C under the gain limitation

provision (excess depreciation recapture) is

allocated to A and B (the partners not subject

to the gain limitation at the time of the

allocation) in proportion to their relative

shares of total gain from the disposition of

the property. A’s relative share of the total

gain allocated to A and B is 75 percent ($330

of $440 total gain). B’s relative share of the

total gain allocated to A and B is 25 percent

($110 of $440 total gain). However, under the

gain limitation provision of paragraph

(e)(2)(i) of this section, B cannot be allocated

25 percent of the excess depreciation

recapture ($25) because that would result in

a total allocation of $125 of depreciation

recapture to B (a $100 allocation equal to B’s

share of depreciation plus a $25 allocation of

excess depreciation recapture), which is in

excess of B’s share of the total gain from the

disposition of the property ($110). Therefore,

only $10 of excess depreciation recapture is

allocated to B and the remaining $90 of

excess depreciation recapture is allocated to

A. A is not subject to the gain limitation

because A’s share of the total gain ($330) still

exceeds A’s share of section 1245(a)(1) gain

($190). Accordingly, all $110 of the total gain

allocated to B is treated as ordinary income

($100 share of depreciation allocated to B

plus $10 of excess depreciation recapture)

and $190 of the total gain allocated to A is

treated as ordinary income ($100 share of

depreciation allocated to A plus $90 of

excess depreciation recapture).

Example 3. Determination of partners’

shares of depreciation with respect to

contributed property. (i) Facts.C and D form

partnership CD as equal partners. C

contributes depreciable personal property C1

with an adjusted tax basis of $800 and a fair

market value of $2,800. Prior to the

contribution, C claimed $200 of depreciation

from C1. At the time of the contribution, C1

is depreciable under the straight-line method

and has four years remaining on its 5-year

recovery period. D contributes $2,800 cash,

which CD uses to purchase depreciable

personal property D1, which is depreciable

over seven years under the straight-line

method. (To simplify the example, all

depreciation is determined without regard to

any first-year depreciation conventions.)

(ii) Traditional method. C1 generates $700

of book depreciation (1⁄4 of $2,800 book

value) and $200 of tax depreciation (1⁄4 of

$800 adjusted tax basis) each year. C and D

will each be allocated $350 of book

depreciation from C1 in year 1. Under the

traditional method of making section 704(c)

allocations, D will be allocated the entire

$200 of tax depreciation from C1 in year 1.

D1 generates $400 of book and tax

depreciation each year (1⁄7 of $2,800 book

value and adjusted tax basis). C and D will

each be allocated $200 of book and tax

depreciation from D1 in year 1. As a result,

after the first year of partnership operations,

C’s share of depreciation with respect to C1

is $200 (the depreciation taken by C prior to

contribution) and D’s share of depreciation

with respect to C1 is $200 (the amount of tax

depreciation allocated to D). C and D each

have a $200 share of depreciation with

respect to D1. At the end of four years, C’s

share of depreciation with respect to C1 will

be $200 (the depreciation taken by C prior to

contribution) and D’s share of depreciation

with respect to C1 will be $800 (four years

of $200 depreciation per year). At the end of

four years, C and D will each have an $800

share of depreciation with respect to D1 (four

years of $200 depreciation per year).

(iii) Effect of curative allocations. (A) Year

1. If the partnership elects to make curative

allocations under § 1.704–3(c) using

depreciation from D1, the results will be the

same as under the traditional method, except

that $150 of the $200 of tax depreciation from

D1 that would be allocated to C under the

traditional method will be allocated to D as

additional depreciation with respect to C1.

As a result, after the first year of partnership

operations, C’s share of depreciation with

respect to C1 will be reduced to $50 (the total

depreciation taken by C prior to contribution

($200) decreased by the amount of the

curative allocation to D ($150)). D’s share of

depreciation with respect to C1 will be $350

(the depreciation allocated to D under the

traditional method ($200) increased by the

amount of the curative allocation to D

($150)). C and D will each have a $200 share

of depreciation with respect to D1.

(B) Year 4. At the end of four years, C’s

share of depreciation with respect to C1 will

be reduced to $0 (the total depreciation taken

by C prior to contribution ($200) decreased,

but not below zero, by the amount of the

curative allocations to D ($600)), and D’s

share of depreciation with respect to C1 will

be $1,400 (the total depreciation allocated to

D under the traditional method ($800)

increased by the amount of the curative

allocations to D ($600)). However, CD’s

section 1245(a)(1) gain with respect to C1

will not be more than $1,000 (CD’s tax

depreciation ($800) plus C’s tax depreciation

prior to contribution ($200)). Under

paragraph (e)(2)(ii)(C)(4) of this section,

because the partners’ shares of depreciation

with respect to C1 exceed the adjustments

reflected in the property’s adjusted basis,

CD’s section 1245(a)(1) gain will be allocated

in proportion to the partners’ relative shares

of depreciation with respect to C1. Because

C’s share of depreciation with respect to C1

is $0, and D’s share of depreciation with

respect to C1 is $1,400, all of CD’s $1,000 of

section 1245(a)(1) gain will be allocated to D.

At the end of four years, C and D will each

have an $800 share of depreciation with

respect to D1 (four years of $200 depreciation

per year).

(iv) Effect of remedial allocations. (A) Year

1. If the partnership elects to make remedial

allocations under § 1.704–3(d), there will be

$600 of book depreciation from C1 in year 1.

(Under the remedial allocation method, the

amount by which C1’s book basis ($2,800)

exceeds its tax basis ($800) is depreciated

over a 5-year life, rather than a 4-year life.)

C and D will each be allocated one-half

($300) of the total book depreciation. As

under the traditional method, D will be

allocated all $200 of tax depreciation from

C1. Because the ceiling rule would cause a

disparity of $100 between D’s book and tax

allocations of depreciation, D will also

receive a $100 remedial allocation of

depreciation with respect to C1, and C will

receive a $100 remedial allocation of income

with respect to C1. As a result, after the first

year of partnership operations, D’s share of

depreciation with respect to C1 is $300 (the

depreciation allocated to D under the

traditional method ($200) increased by the

amount of the remedial allocation ($100)). C’s

share of depreciation with respect to C1 is

$100 (the total depreciation taken by C prior

to contribution ($200) decreased by the

amount of the remedial allocation of income

($100)). C and D will each have a $200 share

of depreciation with respect to D1.

(B) Year 5. At the end of five years, C’s

share of depreciation with respect to C1 will

be $0 (the total depreciation taken by C prior

to contribution ($200) decreased, but not

below zero, by the total amount of the

remedial allocations of income to C ($600)).

D’s share of depreciation with respect to C1

will be $1,400 (the total depreciation

allocated to D under the traditional method

($800) increased by the total amount of the

remedial allocations of depreciation to D

($600)). However, CD’s section 1245(a)(1)

gain with respect to C1 will not be more than

$1,000 (CD’s tax depreciation ($800) plus C’s

tax depreciation prior to contribution ($200)).

Under paragraph (e)(2)(ii)(C)(4) of this

section, because the partners’ shares of

depreciation with respect to C1 exceed the

adjustments reflected in the property’s

adjusted basis, CD’s section 1245(a)(1) gain

will be allocated in proportion to the

partners’ relative shares of depreciation with

respect to C1. Because C’s share of

depreciation with respect to C1 is $0, and D’s

share of depreciation with respect to C1 is

$1,400, all of CD’s $1,000 of section

1245(a)(1) gain will be allocated to D. At the

end of five years, C and D will each have a

$1,000 share of depreciation with respect to

D1 (five years of $200 depreciation per year).

(iv) Effective date. This paragraph

(e)(2) is effective for properties acquired

by a partnership on or after August 20,
44218 Federal Register / Vol. 62, No. 161 / Wednesday, August 20, 1997 / Rules and Regulations

1997. However, partnerships may rely

on this paragraph (e)(2) for properties

acquired before August 20, 1997 and

disposed of on or after August 20, 1997.

* * * * *

Michael P. Dolan,

Acting Commissioner of Internal Revenue.

Approved: July 8, 1997.

Donald C. Lubick,

Acting Assistant Secretary of the Treasury.

[FR Doc. 97–22019 Filed 8–19–97; 8:45 am]

BILLING CODE 4830–01–U

ENVIRONMENTAL PROTECTION

AGENCY

40 CFR Part 52

[SC 30–1–9645a: FRL–5877–1]

Approval and Promulgation of State

Implementation Plan, South Carolina:

Addition of Supplement C to the Air

Quality Modeling Guidelines

AGENCY: Environmental Protection

Agency (EPA).

ACTION: Direct final rule.

SUMMARY: On May 6, 1996, the South

Carolina Department of Health and

Environmental Control submitted

revisions to the South Carolina State

Implementation Plan (SIP) involving

revisions to 61–62.5 Standard 7,

Prevention of Significant Deterioration

to add Supplement C to air quality

modeling guidelines. This revision

updates the South Carolina SIP to meet

the latest EPA modeling requirements.

Therefore, these revisions are being

approved into the SIP.

DATES: This action is effective October

20, 1997 unless adverse or critical

comments are received by September

19, 1997. If the effective date is delayed,

timely notice will be published in the

Federal Register.

ADDRESSES: Written comments on this

action should be addressed to Mr.

Randy Terry at the EPA Region 4 Office

listed below.

Copies of the documents relative to

this action are available for public

inspection during normal business

hours at the following locations. The

interested persons wanting to examine

these documents should make an

appointment with the appropriate office

at least 24 hours before the visiting day.

Air and Radiation Docket and

Information Center (Air Docket 6102),

US Environmental Protection Agency,

401 M Street, SW., Washington, D.C.

20460.

Environmental Protection Agency,

Region 4, Air Planning Branch, 61

Forsyth Street Atlanta, Georgia 30303.

South Carolina Department of Health

and Environmental Control, 2600 Bull

Street, Columbia, South Carolina

29201–1708.

FOR FURTHER INFORMATION CONTACT:

Randy Terry, Regulatory Planning

Section, Air Planning Branch, Air,

Pesticides & Toxics Management

Division, Region 4 Environmental

Protection Agency, 61 Forsyth Street,

Atlanta, Georgia 30303. The telephone

number is (404) 562–9032.

SUPPLEMENTARY INFORMATION: On May 6,

1996, the State of South Carolina

Department of Health and

Environmental Control submitted a

notice to amend Section IV, Part D, Air

Quality Models, of Regulation 61–62.5,

Standard 7. These regulations were

revised by adding Supplement C to the

previously approved air quality

guidelines. Supplement C incorporates

improved algorithms for treatment of

area sources and dry deposition in the

Industrial Source Complex (ISC) model,

adopts a solar radiation/delta T (SRDT)

method for estimating atmospheric

stability categories, and adopts a new

screening approach for assessing annual

NO2 impacts.

Final Action

EPA is approving South Carolina’s

notice submitted on May 6, 1996, for

incorporation into the South Carolina

SIP. The EPA is publishing this action

without prior proposal because the EPA

views this as a noncontroversial

amendment and anticipates no adverse

comments. However, in a separate

document in this Federal Register

publication, the EPA is proposing to

approve the SIP revision should adverse

or critical comments be filed. This

action will be effective October 20, 1997

unless, by September 19, 1997, adverse

or critical comments are received.

If the EPA receives such comments,

this action will be withdrawn before the

effective date by publishing a

subsequent document that will

withdraw the final action. All public

comments received will then be

addressed in a subsequent final rule

based on this action serving as a

proposed rule. The EPA will not

institute a second comment period on

this action. Any parties interested in

commenting on this action should do so

at this time. If no such comments are

received, the public is advised that this

action will be effective October 20,

1997.

The EPA has reviewed this request for

revision of the Federally-approved SIP

for conformance with the provisions of

the 1990 Amendments enacted on

November 15, 1990. The EPA has

determined that this action conforms

with those requirements.

Nothing in this action shall be

construed as permitting or allowing or

establishing a precedent for any future

request for a revision to any SIP. Each

request for revision to the SIP shall be

considered separately in light of specific

technical, economic, and environmental

factors and in relation to relevant

statutory and regulatory requirements.

Administrative Requirements

A. Executive Order 12866

This action has been classified as a

Table 3 action for signature by the

Regional Administrator under the

procedures published in the Federal

Register on January 19, 1989 (54 FR

2214–2225), as revised by a July 10,

1995 memorandum from Mary Nichols,

Assistant Administrator for Air and

Radiation. The Office of Management

and Budget (OMB) has exempted this

regulatory action from E.O. 12866

review.

B. Regulatory Flexibility Act

Under the Regulatory Flexibility Act,

5 U.S.C. 600 et seq., EPA must prepare

a regulatory flexibility analysis

assessing the impact of any proposed or

final rule on small entities. 5 U.S.C. 603

and 604. Alternatively, EPA may certify

that the rule will not have a significant

impact on a substantial number of small

entities. Small entities include small

businesses, small not-for-profit

enterprises, and government entities

with jurisdiction over populations of

less than 50,000.

SIP approvals under 110 and

subchapter I, part D of the Clean Air Act

do not create any new requirements, but

simply approve requirements that the

State is already imposing. Therefore,

because the Federal SIP approval does

not impose any new requirements, I

certify that it does not have a significant

impact on any small entities affected.

Moreover, due to the nature of the

Federal-state relationship under the

CAA, preparation of a regulatory

flexibility analysis would constitute

Federal inquiry into the economic

reasonableness of state action. The CAA

forbids EPA to base its actions

concerning SIPs on such grounds.

Union Electric Co. v. U.S.EPA., 427 U.S.

246, 256–66 (1976); 42 U.S.C. 7410(a)(2)

and 7410(k)(3).

C. Unfunded Mandates

Under sections 202, of the Unfunded

Mandates Reform Act of 1995

(‘‘Unfunded Mandates Act’’), signed

into law on March 22, 1995, EPA must

prepare a budgetary impact statement to