This section of the FEDERAL REGISTER

contains regulatory documents having general

applicability and legal effect, most of which

are keyed to and codified in the Code of

Federal Regulations, which is published under

50 titles pursuant to 44 U.S.C. 1510.

The Code of Federal Regulations is sold by

the Superintendent of Documents. Prices of

new books are listed in the first FEDERAL

REGISTER issue of each week.

Rules and Regulations Federal Register

2225 

Vol. 77, No. 10 

Tuesday, January 17, 2012 

DEPARTMENT OF THE TREASURY 

Internal Revenue Service 

26 CFR Part 1 

[TD 9571] 

RIN 1545- BJ84 

Allocation and Apportionment of 

Interest Expense 

AGENCY: Internal Revenue Service (IRS), 

Treasury. 

ACTION: Temporary regulations. 

SUMMARY: This document contains 

temporary regulations that provide 

guidance regarding the allocation and 

apportionment of interest expense. 

These temporary regulations provide 

guidance concerning the allocation and 

apportionment of interest expense by 

corporations owning a 10 percent or 

greater interest in a partnership, as well 

as the allocation and apportionment of 

interest expense using the fair market 

value method. These temporary 

regulations also update the interest 

allocation regulations to conform to the 

statutory changes made by section 216 

of the legislation commonly referred to 

as the Education Jobs and Medicaid 

Assistance Act (EJMAA), enacted on 

August 10, 2010, affecting the affiliation 

of certain foreign corporations for 

purposes of section 864(e). These 

regulations affect taxpayers that allocate 

and apportion interest expense. The text 

of these temporary regulations also 

serves as the text of the proposed 

regulations (REG–113903–10) set forth 

in the notice of proposed rulemaking on 

this subject published elsewhere in this 

issue of the Federal Register. 

DATES: Effective Date: These regulations 

are effective on January 17, 2012. 

Applicability Dates: For dates of 

applicability, see §§ 1.861–9T(k) and 

1.861–11T(h). 

FOR FURTHER INFORMATION CONTACT: 

Jeffrey L. Parry, (202) 622–3850 (not a 

toll-free call). 

SUPPLEMENTARY INFORMATION: 

Background and Explanation of 

Provisions 

I. Interest Expense Allocation by 

Partners 

Section 1.861–9T(e) provides rules 

governing the apportionment of interest 

expense by a partner in a partnership. 

In general, § 1.861–9T(e) adopts an 

aggregate, or look-through, approach to 

apportioning a partner’s distributive 

share of interest expense incurred by the 

partnership. Section 1.861–9T(e)(1) 

provides the general rule that a partner’s 

distributive share of the interest expense 

of a partnership is considered related to 

all income-producing activities and 

assets of the partner. Similarly, § 1.861– 

9T(e)(2) requires that a corporate partner 

whose direct or indirect interest in the 

partnership is 10 percent or more 

apportion its distributive share of 

partnership interest expense by 

reference to the partner’s assets, 

including the partner’s pro rata share of 

the partnership’s assets. 

By contrast, limited partners (whether 

individual or corporate) and corporate 

general partners with a less-than-10- 

percent partnership interest are 

excepted from aggregate treatment. 

Under § 1.861–9T(e)(4)(i), such partners 

must directly allocate their distributive 

share of partnership interest expense to 

their distributive share of partnership 

gross income. In addition, for purposes 

of allocating other interest expense 

incurred directly by such a partner, 

§ 1.861–9T(e)(4)(ii) provides that the 

relevant asset is the partner’s interest in 

the partnership, and not the partner’s 

share of the partnership assets. This 

approach for such minority partners 

avoids the potential administrative 

burden that an aggregate approach 

would impose on such minority 

partners. 

These temporary regulations revise 

§ 1.861–9T(e)(2) to clarify that a 

corporate partner with a 10 percent or 

greater interest in a partnership must 

allocate its direct interest expense to all 

of its assets, including its proportionate 

share of partnership assets. The IRS and 

the Treasury Department believe that an 

aggregate approach for corporate 

partners with a 10 percent or greater 

interest in the partnership is appropriate 

and consistent with the aggregate 

approach applicable to apportioning 

such partner’s distributive share of 

interest expense incurred by the 

partnership. 

These temporary regulations also 

revise § 1.861–9T(e)(2) to provide that 

when a corporate partner with a 10 

percent or greater interest in a 

partnership uses the tax book value or 

alternative tax book value method, and 

therefore must use the partnership’s 

inside basis in its assets when allocating 

interest expense, the partnership’s 

inside basis includes any section 734(b) 

adjustments and any section 743(b) 

adjustments of the corporate partner for 

this purpose. Section 1.861–9T(e)(3) is 

also revised to provide a similar rule for 

individual partners who are general 

partners or limited partners with a 10 

percent or greater interest in the 

partnership. 

II. Fair Market Value Method 

Section 864(e)(2) requires that the 

allocation and apportionment of interest 

expense be made on the basis of assets 

and not gross income (the asset 

method). Under the asset method, 

interest expense is apportioned between 

(or among) statutory and residual 

groupings of gross income in proportion 

to the average total values of assets 

within each such grouping for the 

taxable year. For this purpose, taxpayers 

may elect to value assets based on their 

fair market value (the FMV method), tax 

book value, or alternative tax book 

value. §§ 1.861–8T(c)(2) and 1.861–9(i). 

The temporary regulations set forth a 

multi-step methodology for determining 

the fair market value of a taxpayer’s 

assets. Section 1.861–9T(h)(1) provides 

rules for determining the fair market 

value of the taxpayer’s intangible assets. 

First, the taxpayer determines the 

aggregate value of assets that it and its 

subsidiaries own (Step 1); second, the 

taxpayer values its tangible assets, 

excluding any stock or indebtedness in 

a related person (Step 2); and third, it 

subtracts the amount determined in 

Step 2 from the amount determined in 

Step 1 to arrive at total intangible asset 

value (Step 3). The intangible assets 

owned by the taxpayer are then 

apportioned among the taxpayer’s 

affiliates under § 1.861–9T(h)(2) on the 

basis of net income (Step 4). 

Once a taxpayer has determined the 

fair market value of its intangible assets, 

those assets must be characterized as 

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2226 Federal Register / Vol. 77, No. 10 / Tuesday, January 17, 2012 / Rules and Regulations 

provided in § 1.861–9T(h)(3) (Step 5). 

Finally, the rules of § 1.861–9T(h)(4) 

apply to determine the value of stock in 

a related person held by the taxpayer (or 

by another person related to the 

taxpayer) (Step 6). Under those rules, 

§ 1.861–9T(h)(4) states that the value of 

such stock is equal to the sum of the 

following amounts, less the taxpayer’s 

pro rata share of liabilities of such 

related person: (i) The intangible assets 

apportioned to the related person in 

Step 4, above; (ii) the tangible assets (as 

determined in Step 2) held by the 

related person; and (iii) the total value 

of stock held in all other related persons 

held by the related person. 

The IRS and the Treasury Department 

have become aware that certain 

taxpayers are taking the position that 

the language of Step 2 of the FMV 

method, which requires related party 

debt to be excluded as an asset as part 

of the process for determining total 

intangible asset value, means that such 

debt also is not treated as an asset in the 

hands of the taxpayer for the broader 

purpose of applying the asset method. 

In addition, for purposes of valuing the 

stock in related persons under Step 6, 

some taxpayers are taking the position 

that those rules exclude related party 

debt as an asset (because of the 

reference in § 1.861–9T(h)(4) to § 1.861– 

9T(h)(1)(ii)), but permit reduction of the 

value of the stock of the related person 

obligor by the amount of the related 

party debt as a liability (because the 

language of § 1.861–9T(h)(4)(ii) does not 

limit the reduction for liabilities to 

unrelated party liabilities). 

The IRS and the Treasury Department 

believe that interpreting the regulations 

to require that the related party debt be 

taken into account as a liability for 

purposes of valuing stock in the related 

person without also treating the related 

party debt as an asset in the creditor’s 

hands distorts the relative values of 

assets assigned to each statutory 

grouping. This result is contrary to the 

general principles of the § 1.861–9 

regulations, which are based on the 

concept that interest expense must be 

apportioned on the basis of the value of 

all assets. Accordingly, these temporary 

regulations amend § 1.861–9T(h)(4) to 

reflect the fact that related party debt is 

an asset that must be taken into account 

whether held by the taxpayer or a 

related person. 

These temporary regulations first 

revise § 1.861–9T(h)(4) by adding a new 

paragraph § 1.861–9T(h)(4)(i) to provide 

for the valuation of related party debt. 

Prior to its revision by these temporary 

regulations, § 1.861–9T(h)(4) provided 

for the valuation of the stock of a related 

person, but the regulations did not 

provide any explanation of how the 

related party debt is to be valued. As 

revised by these temporary regulations, 

§ 1.861–9T(h)(4)(i) provides that a 

related party debt obligation held by a 

taxpayer or another person related to the 

taxpayer has a value equal to the 

amount of the liability of the obligor 

related person. These temporary 

regulations also revise § 1.861–9T(h)(4) 

by providing that the value of stock in 

a related person includes the taxpayer’s 

pro rata share of related party debt held 

by the related person. Finally, these 

temporary regulations provide a new 

example illustrating the changes made 

to § 1.861–9T(h)(4). 

These amendments make clear that 

related party debt is an asset in the 

hands of the creditor for purposes of 

applying the asset method and is 

included in the valuation of stock of a 

related person. Very broadly, these 

changes ensure that both the receivable 

and the payable sides of related party 

debt are included for valuation purposes 

under the FMV method, and that the 

value of each side is determined in a 

consistent manner. No inference is 

intended regarding the interpretation of 

prior regulations as a result of these 

modifications. 

III. Affiliated Groups 

The interest expense of each member 

of an affiliated group is allocated and 

apportioned as if all members of such 

group were a single corporation. Section 

864(e)(1). Prior to its amendment by the 

EJMAA, section 864(e)(5)(A) defined the 

term ‘‘affiliated group’’ by reference to 

the rules under section 1504 for 

determining whether corporations are 

eligible to file consolidated returns. The 

section 1504 rules generally exclude 

foreign corporations from an affiliated 

group. Section 1.861–11T(d)(6)(ii) 

provides that certain foreign 

corporations are nevertheless treated as 

affiliated corporations for purposes of 

allocating and apportioning interest 

expense if (1) at least 80 percent of 

either the vote or value of the 

corporation’s outstanding stock is 

owned directly or indirectly by 

members of an affiliated group, and (2) 

more than 50 percent of the 

corporation’s gross income for the 

taxable year is effectively connected 

with the conduct of a trade or business 

in the United States (effectively 

connected income). 

In the case of a foreign corporation 

that is treated as an affiliated 

corporation for interest allocation and 

apportionment purposes, § 1.861– 

11T(d)(6)(ii) provides that the 

percentage of assets and income that is 

taken into account for purposes of 

applying the affiliated group interest 

apportionment rules depends on the 

percentage of the corporation’s gross 

income that is effectively connected 

income. If 80 percent or more of the 

foreign corporation’s gross income is 

effectively connected income, then all of 

the corporation’s assets and interest 

expense are taken into account. If, 

instead, between 50 percent and 80 

percent of the foreign corporation’s 

gross income is effectively connected 

income, then only the corporation’s 

assets that generate effectively 

connected income and a percentage of 

its interest expense equal to the 

percentage of its assets that generate 

effectively connected income are taken 

into account. 

Section 864(e)(5)(A), as amended by 

the EJMAA, provides that a foreign 

corporation will be treated as a member 

of an affiliated group for interest 

allocation and apportionment purposes 

if (1) more than 50 percent of the gross 

income of such foreign corporation for 

the taxable year is effectively connected 

income, and (2) at least 80 percent of 

either the vote or value of all 

outstanding stock of such foreign 

corporation is owned directly or 

indirectly by members of the affiliated 

group. In such event, all of the 

qualifying foreign corporation’s assets 

and interest expense are taken into 

account for purposes of applying the 

affiliated group interest apportionment 

rules. These temporary regulations 

revise § 1.861–11T(d)(6) to reflect these 

statutory changes. 

Special Analyses 

It has been determined that this 

Treasury decision is not a significant 

regulatory action as defined in 

Executive Order 12866. Therefore, a 

regulatory assessment is not required. It 

has also 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), these regulations have 

been submitted to the Chief Counsel for 

Advocacy of the Small Business 

Administration for comment on their 

impact on small business. 

Drafting Information 

The principal author of these 

regulations is Jeffrey L. Parry of the 

Office of Chief Counsel (International). 

However, other personnel from the IRS 

and the Treasury Department 

participated in their development. 

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Federal Register / Vol. 77, No. 10 / Tuesday, January 17, 2012 / Rules and Regulations 2227 

List of Subjects in 26 CFR Part 1 

Income taxes, Reporting and 

recordkeeping requirements. 

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 1.861–9T is amended 

by: 

■ 1. Revising the first two sentences of 

paragraph (e)(2), the fifth sentence of 

(e)(3), and paragraph (h)(4); 

■ 2. Adding four sentences before the 

last sentence of paragraph (k); and 

■ 3. Adding paragraph (l). 

The revisions and additions read as 

follows: 

§ 1.861–9T Allocation and apportionment 

of interest expense (temporary). 

* * * * * 

(e) * * * 

(2) Corporate partners whose interest 

in the partnership is 10 percent or more. 

A corporate partner shall apportion its 

interest expense (including the partner’s 

distributive share of partnership interest 

expense) by reference to the partner’s 

assets, including the partner’s pro rata 

share of partnership assets, under the 

rules of paragraph (f) of this section if 

the corporate partner’s direct and 

indirect interest in the partnership (as 

determined under the attribution rules 

of section 318) is 10 percent or more. A 

corporation using the tax book value 

method or alternative tax book value 

method of apportionment shall use the 

partnership’s inside basis in its assets, 

including adjustments under sections 

734(b) and 743(b), if any, and adjusted 

to the extent required under § 1.861– 

10T(d)(2). * * * 

(3) Individual partners who are 

general partners or who are limited 

partners with an interest in the 

partnership of 10 percent or more. 

* * * An individual using the tax book 

value or alternative tax book value 

method of apportionment shall use the 

partnership’s inside basis in its assets, 

including adjustments under sections 

734(b) and 743(b), if any, and adjusted 

to the extent required under § 1.861– 

10T(d)(2). * * * 

* * * * * 

(h) * * * 

(4) Valuing related party debt and 

stock in related persons—(i) Related 

party debt. For purposes of this section, 

the value of a debt obligation of a 

related person held by the taxpayer or 

another person related to the taxpayer 

equals the amount of the liability of the 

obligor related person. 

(ii) Stock in related persons. The 

value of stock in a related person held 

by the taxpayer or by another person 

related to the taxpayer equals the sum 

of the following amounts reduced by the 

taxpayer’s pro rata share of liabilities of 

such related person: 

(A) The portion of the value of 

intangible assets of the taxpayer and 

related persons that is apportioned to 

such related person under paragraph 

(h)(2) of this section; 

(B) The taxpayer’s pro rata share of 

tangible assets held by the related 

person (as determined under paragraph 

(h)(1)(ii) of this section); 

(C) The taxpayer’s pro rata share of 

debt obligations of any related person 

held by the related person (as valued 

under paragraph (h)(4)(i) of this 

section); and 

(D) The total value of stock in all 

related persons held by the related 

person as determined under this 

paragraph (h)(4). 

(iii) Example. (A) Facts. USP, a domestic 

corporation, wholly owns CFC1 and owns 

80% of CFC2, both foreign corporations. The 

aggregate trading value of USP’s stock traded 

on established securities markets at the end 

of Year 1 is $700 and the amount of USP’s 

liabilities to unrelated persons at the end of 

Year 1 is $400. Neither CFC1 nor CFC2 has 

liabilities to unrelated persons at the end of 

Year 1. USP owns plant and equipment 

valued at $500, CFC1 owns plant and 

equipment valued at $400, and CFC2 owns 

plant and equipment valued at $250. The 

value of these assets has been determined 

using generally accepted valuation 

techniques, as required by § 1.861– 

9T(h)(1)(ii). There is an outstanding loan 

from CFC2 to CFC1 in an amount of $100. 

There is also an outstanding loan from USP 

to CFC1 in an amount of $200. 

(B) Valuation of group assets. Pursuant to 

§ 1.861–9T(h)(1)(i), the aggregate value of 

USP’s assets is $1100 (the $700 trading value 

of USP’s stock increased by $400 of USP’s 

liabilities to unrelated persons). 

(C) Valuation of tangible assets. Pursuant 

to § 1.861–9T(h)(1)(ii), the value of USP’s 

tangible assets and pro rata share of assets 

held by CFC1 and CFC2 is $1100 (the plant 

and equipment held directly by USP, valued 

at $500, plus USP’s 100% pro rata share of 

the plant and equipment held by CFC1 

valued at $400 and USP’s 80% pro rata share 

of the plant and equipment held by CFC 2 

valued at $200 (80% of $250)). 

(D) Computation of intangible asset value. 

Pursuant to § 1.861–9T(h)(1)(iii), the value of 

the intangible assets of USP, CFC1, and CFC2 

is $0 (total aggregate group asset value 

($1100) determined in paragraph (B) less 

total tangible asset value ($1100) determined 

in paragraph (C)). Because the intangible 

asset value is zero, the provisions of § 1.861– 

9T(h)(2) and (3) relating to the apportionment 

and characterization of intangible assets do 

not apply. 

(E) Valuing related party debt obligations. 

Pursuant to § 1.861–9T(h)(4)(i), the value of 

the debt obligation of CFC1 held by CFC2 is 

equal to the amount of the liability, $100. 

The value of the debt obligation of CFC1 held 

by USP is equal to the amount of the liability, 

$200. 

(F) Valuing the stock of CFC1 and CFC2. 

Pursuant to § 1.861–9T(h)(4)(ii), the value of 

the stock of CFC2 held by USP is $280 (USP’s 

80% pro rata share of tangible assets of CFC2 

included in paragraph (C) ($200) plus USP’s 

80% pro rata share of the debt obligation of 

CFC1 held by CFC2 valued in paragraph (E) 

($80). The value of the stock of CFC1 held 

by USP is $100 (USP’s 100% pro rata share 

of tangible assets of CFC1 included in 

paragraph (C) ($400) less USP’s 100% pro 

rata share of the liabilities of CFC1 to USP 

and CFC2 ($300)). 

* * * * * 

(k) * * * Paragraphs (e)(2) and (3) 

apply to taxable years beginning after 

January 17, 2012. See 26 CFR 1.861– 

9T(e)(2) and (3) (revised as of April 1, 

2011) for rules applicable to taxable 

years beginning on or before January 17, 

2012. Paragraph (h)(4) applies to taxable 

years ending on or after January 17, 

2012. See 26 CFR 1.861–9T(h)(4) 

(revised as of April 1, 2011) for rules 

applicable to taxable years ending 

before January 17, 2012. * * * 

(l) Expiration date. The applicability 

of paragraphs (e)(2), (h)(1)(iv), and (h)(4) 

expires on January 13, 2015. 

■ Par. 4. Sec 1.861–11T is amended by 

revising paragraphs (d)(6)(ii) and (h) and 

adding paragraph (i) to read as follows: 

§ 1.861–11T Special rules for allocating 

and apportioning interest expense of an 

affiliated group of corporations (temporary). 

* * * * * 

(6) * * * 

(ii) Any foreign corporation if more 

than 50 percent of the gross income of 

such foreign corporation for the taxable 

year is effectively connected with the 

conduct of a trade or business within 

the United States and at least 80 percent 

of either the vote or value of all 

outstanding stock of such foreign 

corporation is owned directly or 

indirectly by members of the affiliated 

group (determined with regard to this 

sentence). 

* * * * * 

(h) Effective/applicability date. In 

general, the rules of this section apply 

for taxable years beginning after 

December 31, 1986. Paragraph (d)(6)(ii) 

applies to taxable years beginning after 

August 10, 2010. See 26 CFR 1.861– 

11T(d)(6)(ii) (revised as of April 1, 2010) 

for rules applicable to taxable years 

beginning on or before August 10, 2010. 

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2228 Federal Register / Vol. 77, No. 10 / Tuesday, January 17, 2012 / Rules and Regulations 

1See Vigil v. Leavitt, 381 F.3d 826 (9th Cir. 2004) 

(upholding EPA’s approval of the Arizona Ag BMP 

rule, Arizona Administrative Code (A.A.C.) R18–2– 

610 and R18–2–611); Latino Issues Forum v. EPA, 

558 F.3d 936 (9th Cir. 2009) (upholding EPA’s 

approval of SJVUAPCD Rule 4550). 2 Vigil, 381 F.3d at 836. 

(i) Expiration date. The applicability 

of paragraphs (d)(1) and (6) expires on 

January 13, 2015. 

Steven T. Miller, 

Deputy Commissioner for Services and 

Enforcement. 

Approved: December 6, 2011. 

Emily S. McMahon, 

Acting Assistant Secretary of the Treasury 

(Tax Policy). 

[FR Doc. 2012–597 Filed 1–13–12; 8:45 am] 

BILLING CODE 4830–01–P 

ENVIRONMENTAL PROTECTION 

AGENCY 

40 CFR Part 52 

[EPA–R09–OAR–2011–0789; FRL–9615–5] 

Revisions to the California State 

Implementation Plan, San Joaquin 

Valley Unified Air Pollution Control 

District 

AGENCY: Environmental Protection 

Agency (EPA). 

ACTION: Final rule. 

SUMMARY: EPA is finalizing approval of 

revisions to the San Joaquin Valley 

Unified Air Pollution Control District 

(SJVUAPCD) portion of the California 

State Implementation Plan (SIP). These 

revisions were proposed in the Federal 

Register on September 14, 2011 and 

concern volatile organic compound 

(VOC) emissions from confined animal 

facilities (CAFs) and biosolids, animal 

manure, and poultry litter operations. 

We are approving local rules that 

regulate these emission sources under 

the Clean Air Act as amended in 1990 

(CAA or the Act). 

DATES: Effective Date: This rule is 

effective on February 16, 2012. 

ADDRESSES: EPA has established docket 

number EPA–R09–OAR–2011–0789 for 

this action. Generally, documents in the 

docket for this action are available 

electronically at http:// 

www.regulations.gov or in hard copy at 

EPA Region IX, 75 Hawthorne Street, 

San Francisco, California. To inspect the 

hard copy materials, please schedule an 

appointment during normal business 

hours with the contact listed in the FOR

FURTHER INFORMATION CONTACT section. 

FOR FURTHER INFORMATION CONTACT: 

Nancy Levin, EPA Region IX, (415) 972– 

3848, levin.nancy@epa.gov. 

SUPPLEMENTARY INFORMATION: 

Throughout this document, ‘‘we,’’ ‘‘us’’ 

and ‘‘our’’ refer to EPA. 

Table of Contents 

I. Proposed Action 

II. Public Comments and EPA Responses 

III. EPA Action 

IV. Statutory and Executive Order Reviews 

I. Proposed Action 

On September 14, 2011 (76 FR 56706), 

EPA proposed to approve the following 

rules into the California SIP. 

Local agency Rule No. Rule title Adopted Submitted 

SJVUAPCD ........................ 4570 Confined Animal Facilities .................................................................. 10/21/10 4/05/11 

SJVUAPCD ........................ 4565 Biosolids, Animal Manure, and Poultry Litter Operations ................... 3/15/07 8/24/07 

We proposed to approve these rules 

because we determined that they 

complied with the relevant CAA 

requirements. Our proposed action 

contains more information on the rules 

and our evaluation, including 

recommendations for future rule 

improvements. 

II. Public Comments and EPA 

Responses 

EPA’s proposed action provided a 30- 

day public comment period. During this 

period, we did not receive comments on 

Rule 4565, and received comments on 

Rule 4570 from one party: Brent Newell, 

Center on Race, Poverty & the 

Environment (CRPE); letter dated and 

received October 14, 2011. The 

comments and our responses are 

summarized below. 

Comment #1: CRPE argues that Rule 

4570’s menu approach does not comply 

with RACT because the rule allows 

operators to choose among options that 

are not mutually exclusive and thus 

fails to require all economically and 

technologically feasible reductions. 

Response to Comment #1: A menu 

approach can be consistent with RACT 

and may be a reasonable regulatory 

approach for agricultural sources where 

there is variability among operations. 

The Ninth Circuit Court of Appeals has 

twice upheld EPA’s approval of menubased rules regulating emissions of 

particulate matter from agricultural 

sources.1 Although Rule 4570 regulates 

VOCs, not particulate matter, these 

cases are instructive on the question of 

whether a menu approach can comply 

with RACT. 

In upholding EPA’s approval of 

Arizona’s AgBMP Rule as meeting the 

standard for Best Available Control 

Measures (BACM), as required by CAA 

section 189(b)(1)(B), the Ninth Circuit 

stated: 

Petitioners do not challenge any particular 

practice adopted as BACM. [footnote 

omitted] Rather, petitioners contend that 

there is no reason why Arizona could not 

require farmers to implement more than one 

control measure in each category. Petitioners 

point out that because, in one sense, Arizona 

has already found these measures to be 

‘‘feasible,’’ more than one measure must be 

implemented. As a matter of theory, 

petitioners are, of course, correct. Intuitively, 

it seems obvious to say that if one measure 

per category is good, two or more would be 

better. Petitioners’ argument proves too 

much, however. By petitioners’ logic, if two 

are better than one, three are better than two, 

and so forth. We have little doubt that if 

Arizona required all of these measures, it 

would achieve greater reductions than under 

its present plan. 

Petitioners’ argument would be compelling 

if the Act required a state to reduce its 

emissions to the maximum extent possible, 

regardless of cost. EPA, however, has 

concluded that ‘‘best available control 

measures’’ means the maximum degree of 

emissions reduction of PM–10 and PM–10 

precursors from a source * * * which is 

determined on a case-by-case basis, taking 

into account energy, environmental, and 

economic impacts and other costs, to be 

achievable for such source through 

application of production processes and 

available methods, systems, and techniques 

for control of each such pollutant. 

Addendum, 59 Fed.Reg. at 42,010. 

Petitioners do not challenge this 

longstanding interpretation of the Act, and 

we cannot say that the interpretation is 

impermissible. See Alaska Dep’t of Envtl. 

Conservation, 540 U.S. 461, 124 S.Ct. at 1001; 

cf. 42 U.S.C. § 7479(3) (similarly defining the 

term ‘‘best available control technology’’ for 

purposes of the Prevention of Significant 

Deterioration program).2

Regarding SJVUAPCD Rule 4550, the 

court ruled that a menu-based approach 

can meet the requirements of CAA 

179(d)(2), which requires ‘‘additional 

measures as the Administrator may 

reasonably prescribe, including all 

WREIER-aviles on DSK5TPTVN1PROD with RULES