41420 Federal Register / Vol. 63, No. 149 /Tuesday, August 4, 1998 /Rules and Regulations

The ANADA is approved as of April 24,

1998, and the regulations in 21 CFR

522.90b(b) are amended to reflect the

approval. The basis of approval is

discussed in the freedom of information

summary.

In accordance with the freedom of

information provisions of 21 CFR part

20 and 514.11(e)(2)(ii), a summary of

safety and effectiveness data and

information submitted to support

approval of this application may be seen

in the Dockets Management Branch

(HFA–305), Food and Drug

Administration, 12420 Parklawn Dr.,

rm. 1–23, Rockville, MD 20857, between

9 a.m. and 4 p.m., Monday through

Friday.

The agency has determined under 21

CFR 25.33(a)(1) that this action is of a

type that does not individually or

cumulatively have a significant effect on

the human environment. Therefore,

neither an environmental assessment

nor an environmental impact statement

is required.

List of Subjects in 21 CFR Part 522

Animal drugs.

Therefore, under the Federal Food,

Drug, and Cosmetic Act and under

authority delegated to the Commissioner

of Food and Drugs and redelegated to

the Center for Veterinary Medicine, 21

CFR part 522 is amended as follows:

PART 522—IMPLANTATION OR

INJECTABLE DOSAGE FORM NEW

ANIMAL DRUGS

1. The authority citation for 21 CFR

part 522 continues to read as follows:

Authority: 21 U.S.C. 360b.

2. Section 522.90b is amended by

revising paragraph (b) to read as follows:

§ 522.90b Ampicillin trihydrate for sterile

suspension.

* * * * *

(b) Sponsor. (1) See 000856 in

§ 510.600(c) of this chapter for use of 50,

100, and 250 milligrams per milliliter

ampicillin suspension.

(2) See 010515 in § 510.600(c) of this

chapter for use of 100 and 250

milligrams per milliliter ampicillin

suspension.

* * * * *

Dated: June 30, 1998.

Stephen F. Sundlof,

Director, Center for Veterinary Medicine.

[FR Doc. 98–20698 Filed 8–3–98; 8:45 am]

BILLING CODE 4160–01–F

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 8777]

RIN 1545–AV17

Qualified Nonrecourse Financing

Under Section 465(b)(6)

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final

regulations on certain issues regarding

qualified nonrecourse financing under

section 465(b)(6). These final

regulations affect individuals and C

corporations for which the stock

ownership requirement of section

542(a)(2) is satisfied. These regulations

provide guidance on certain issues

relating to section 465(b)(6).

DATES: Effective date: These regulations

are effective August 4, 1998.

Applicability dates: See Effective

Dates under Supplementary Information

of the preamble.

FOR FURTHER INFORMATION CONTACT: Jeff

Erickson at (202) 622–3070 (not a tollfree number).

SUPPLEMENTARY INFORMATION:

Background

This document amends 26 CFR part 1

to provide rules regarding qualified

nonrecourse financing under section

465(b)(6). Section 465 limits a

taxpayer’s loss deduction for an activity

to the taxpayer’s amount at risk in the

activity at the close of the taxable year.

A taxpayer’s amount at risk generally

includes the amount of any cash and the

adjusted tax basis of any property

contributed by the taxpayer to the

activity plus any amounts borrowed for

use in the activity to the extent the

taxpayer is personally liable for

repayment. For the activity of holding

real property, section 465(b)(6) provides

that a taxpayer may include as an

amount at risk the taxpayer’s share of

any qualified nonrecourse financing that

is secured by real property used in the

activity of holding real property, even

though the taxpayer is not personally

liable for repayment of the financing.

On August 13, 1997, the IRS

published in the Federal Register (62

FR 43295) a notice of proposed

rulemaking regarding section 465(b)(6).

A number of comments were received

on the proposed regulations. The public

hearing scheduled for December 10,

1997, was canceled because no one

requested to speak. After considering

the written comments, the proposed

regulations are adopted as revised by

this Treasury decision.

Explanation of Provisions

I. Secured by Real Property

A. Proposed Rule

Section 465(b)(6)(A) provides that

qualified nonrecourse financing must be

secured by real property used in the

activity of holding real property. The

proposed regulations provided that a

financing can be a qualified nonrecourse

financing if, in addition to the real

property used in the activity of holding

real property, the financing is secured

by other property that is incidental to

the activity of holding real property

(incidental property).

B. Discussion of Comments

A commentator recommended that

the final regulations clarify the term

incidental property. Another

commentator asked that the IRS and

Treasury define incidental property as

any property with a value of not more

than 15 percent of the value of the real

property held by the borrowing

partnership. A third commentator

explained that real estate partnerships

often hold assets in addition to real

property and incidental property. This

commentator was concerned that only

financings held by partnerships that

own only real estate assets could satisfy

the proposed regulations. Under the

final regulations, if the total gross fair

market value of property that is neither

real property used in the activity of

holding real property nor incidental

property is less than 10 percent of the

total gross fair market value of all the

property securing the financing, such

other property is ignored in determining

whether the financing satisfies the

secured-by-real-property requirement.

Another commentator asked for a

look-through rule for partnerships that

own an interest in another partnership

to determine the character of the assets

securing a qualified nonrecourse

financing. The final regulations adopt

this suggestion by requiring a borrower

(whether or not a partnership) to

determine the character of its assets by

treating itself as owning directly its

proportional share of the assets in any

partnership in which it owns (directly

or indirectly through a chain of

partnerships) an equity interest. If a

borrower pledges a partnership interest

as security for a financing, the

partnership assets attributable to the

borrower’s proportional share of the

partnership’s assets will be treated as

security for the financing.
Federal Register / Vol. 63, No. 149 /Tuesday, August 4, 1998 /Rules and Regulations 41421

Commentators also asked under what

circumstances qualified nonrecourse

financing will be treated as secured by

real property. Because this issue is

closely-related to the determination of

whether the personal liability of a

partnership will be disregarded, those

issues are addressed together and are

discussed in II. Personal Liability of this

preamble.

A commentator suggested that the

final regulations adopt a rule to allocate

a single debt obligation among multiple

brother-sister partnerships when the

obligation is secured by the assets of

more than one partnership. The IRS and

Treasury believe this issue is beyond the

scope of these regulations.

II. Personal Liability

A. Proposed Rule

Section 465(b)(6)(B)(iii) provides that,

except to the extent provided in

regulations, no person may be

personally liable for repayment of a

qualified nonrecourse financing. The

proposed regulations provided that the

personal liability of a partnership

(including a limited liability company

that is treated as a partnership) is

disregarded in determining whether a

financing is a qualified nonrecourse

financing if the entity’s only assets are

real property used in the activity of

holding real property or both real

property and other property that is

incidental to the activity of holding real

property, and no other person is liable

for the financing.

B. Discussion of Comments

Commentators focused on how the

proposed regulations apply to tiered

partnership structures—when a

partnership (the upper-tier partnership)

owns a partnership interest in another

partnership (the lower-tier partnership).

These commentators questioned

whether the personal liability of an

upper-tier partnership that holds,

directly or indirectly, only real property

or incidental property should disqualify

a financing under section 465(b)(6). As

mentioned in I. Secured by Real

Property of this preamble, commentators

also requested guidance as to the

situations in which a nonrecourse

financing will be treated as secured by

real property.

In order to address these comments,

the final regulations adopt a three-part

test. Under the final regulations, the

personal liability of any partnership will

be disregarded and, provided certain

other requirements are satisfied, the

financing will be treated as qualified

nonrecourse financing secured by real

property if (i) the only persons

personally liable to repay the financing

are partnerships; (ii) each partnership

with personal liability holds only

property that is permitted as security for

qualified nonrecourse financing

(applying a look-through rule for lowertier partnerships); and (iii) in exercising

its remedies to collect on the financing

in a default or default-like situation, the

lender may proceed only against

property that is permitted as security for

qualified nonrecourse financing and

that is held by the partnership or

partnerships (applying a look-through

rule for lower-tier partnerships). Similar

principles apply in determining the

treatment of financing incurred by an

entity that is disregarded for federal tax

purposes under § 301.7701–3 of the

Procedure and Administration

Regulations. The final regulations

contain three examples illustrating the

application of these rules to tiered

partnerships and one example

addressing a situation that involves a

disregarded entity.

III. Other Issues

A commentator asked that the final

regulations clarify whether an entity is

disregarded for purposes of section

465(b)(6) if that entity is disregarded as

separate from its owner under

§ 301.7701–3. An entity that is

disregarded as an entity separate from

its owner under § 301.7701–3 is

disregarded under section 465(b)(6).

Certain rules that apply to financings

involving disregarded entities are

discussed above.

Commentators also raised several

other issues, including the treatment of

publicly traded financing, that are

beyond the scope of these regulations.

IV. Effective Dates

The final regulations are effective for

any financing incurred on or after

August 4, 1998. In response to

comments, however, the final

regulations include a provision allowing

taxpayers to apply the regulations

retroactively for financing incurred

before August 4, 1998. If a taxpayer

chooses to apply these regulations

retroactively to financing incurred

before August 4, 1998, the IRS will

require the taxpayer to reduce the

amounts at risk as a result of the

application of the regulations to taxable

years ending before August 4, 1998,

only to the extent the application

increases the losses allowed for such

years.

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 regulation

does not impose a collection of

information on small entities, the

Regulatory Flexibility Act (5 U.S.C.

chapter 6) does not apply. Therefore, a

Regulatory Flexibility Analysis is not

required. Pursuant to section 7805(f),

the notice of proposed rulemaking

preceding these regulations was

submitted to the Chief Counsel for

Advocacy of the Small Business

Administration for comment on its

impact on small business.

Drafting Information: The principal

author of these regulations is Jeff

Erickson, Office of the Assistant Chief

Counsel (Passthroughs and Special

Industries), IRS. However, other

personnel from the offices of the IRS

and Treasury Department 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 is amended by adding an entry

in numerical order to read as follows:

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

§ 1.465–27 also issued under 26 U.S.C.

465(b)(6)(B)(iii).* * *

Par. 2. Section 1.465–27 is added to

read as follows:

§ 1.465–27 Qualified nonrecourse

financing.

(a) In general. Notwithstanding any

provision of section 465(b) or the

regulations under section 465(b), for an

activity of holding real property, a

taxpayer is considered at risk for the

taxpayer’s share of any qualified

nonrecourse financing which is secured

by real property used in such activity.

(b) Qualified nonrecourse financing

secured by real property—(1) In general.

For purposes of section 465(b)(6) and

this section, the term qualified

nonrecourse financing means any

financing—

(i) Which is borrowed by the taxpayer

with respect to the activity of holding

real property;

(ii) Which is borrowed by the

taxpayer from a qualified person or

represents a loan from any federal, state,
41422 Federal Register / Vol. 63, No. 149 /Tuesday, August 4, 1998 /Rules and Regulations

or local government or instrumentality

thereof, or is guaranteed by any federal,

state, or local government;

(iii) For which no person is personally

liable for repayment, taking into account

paragraphs (b)(3), (4), and (5) of this

section; and

(iv) Which is not convertible debt.

(2) Security for qualified nonrecourse

financing—(i) Types of property. For a

taxpayer to be considered at risk under

section 465(b)(6), qualified nonrecourse

financing must be secured only by real

property used in the activity of holding

real property. For this purpose,

however, property that is incidental to

the activity of holding real property will

be disregarded. In addition, for this

purpose, property that is neither real

property used in the activity of holding

real property nor incidental property

will be disregarded if the aggregate gross

fair market value of such property is less

than 10 percent of the aggregate gross

fair market value of all the property

securing the financing.

(ii) Look-through rule for

partnerships. For purposes of paragraph

(b)(2)(i) of this section, a borrower shall

be treated as owning directly its

proportional share of the assets in a

partnership in which the borrower owns

(directly or indirectly through a chain of

partnerships) an equity interest.

(3) Personal liability; partial liability.

If one or more persons are personally

liable for repayment of a portion of a

financing, the portion of the financing

for which no person is personally liable

may qualify as qualified nonrecourse

financing.

(4) Partnership liability. For purposes

of section 465(b)(6) and this paragraph

(b), the personal liability of any

partnership for repayment of a financing

is disregarded and, provided the

requirements contained in paragraphs

(b)(1)(i), (ii), and (iv) of this section are

satisfied, the financing will be treated as

qualified nonrecourse financing secured

by real property if—

(i) The only persons personally liable

to repay the financing are partnerships;

(ii) Each partnership with personal

liability holds only property described

in paragraph (b)(2)(i) of this section

(applying the principles of paragraph

(b)(2)(ii) of this section in determining

the property held by each partnership);

and

(iii) In exercising its remedies to

collect on the financing in a default or

default-like situation, the lender may

proceed only against property that is

described in paragraph (b)(2)(i) of this

section and that is held by the

partnership or partnerships (applying

the principles of paragraph (b)(2)(ii) of

this section in determining the property

held by the partnership or partnerships).

(5) Disregarded entities. Principles

similar to those described in paragraph

(b)(4) of this section shall apply in

determining whether a financing of an

entity that is disregarded for federal tax

purposes under § 301.7701–3 of this

chapter is treated as qualified

nonrecourse financing secured by real

property.

(6) Examples. The following examples

illustrate the rules of this section:

Example 1. Personal liability of a

partnership; incidental property. (i) X is a

limited liability company that is classified as

a partnership for federal tax purposes. X

engages only in the activity of holding real

property. In addition to real property used in

the activity of holding real property, X owns

office equipment, a truck, and maintenance

equipment that it uses to support the activity

of holding real property. X borrows $500 to

use in the activity. X is personally liable on

the financing, but no member of X and no

other person is liable for repayment of the

financing under local law. The lender may

proceed against all of X’s assets if X defaults

on the financing.

(ii) Under paragraph (b)(2)(i) of this

section, the personal property is disregarded

as incidental property used in the activity of

holding real property. Under paragraph (b)(4)

of this section, the personal liability of X for

repayment of the financing is disregarded

and, provided the requirements contained in

paragraphs (b)(1)(i), (ii), and (iv) of this

section are satisfied, the financing will be

treated as qualified nonrecourse financing

secured by real property.

Example 2. Bifurcation of a financing. The

facts are the same as in Example 1, except

that A, a member of X, is personally liable

for repayment of $100 of the financing. If the

requirements contained in paragraphs

(b)(1)(i), (ii), and (iv) of this section are

satisfied, then under paragraph (b)(3) of this

section, the portion of the financing for

which A is not personally liable for

repayment ($400) will be treated as qualified

nonrecourse financing secured by real

property.

Example 3. Personal liability; tiered

partnerships. (i) UTP1 and UTP2, both

limited liability companies classified as

partnerships, are the only general partners in

Y, a limited partnership. Y borrows $500

with respect to the activity of holding real

property. The financing is a general

obligation of Y. UTP1 and UTP2, therefore,

are personally liable to repay the financing.

Under section 752, UTP1’s share of the

financing is $300, and UTP2’s share is $200.

No person other than Y, UTP1, and UTP2 is

personally liable to repay the financing. Y,

UTP1, and UTP2 each hold only real

property.

(ii) Under paragraph (b)(4) of this section,

the personal liability of Y, UTP1, and UTP2

to repay the financing is disregarded and,

provided the requirements of paragraphs

(b)(1)(i), (ii), and (iv) of this section are

satisfied, UTP1’s $300 share of the financing

and UTP2’s $200 share of the financing will

be treated as qualified nonrecourse financing

secured by real property.

Example 4. Personal liability; tiered

partnerships. The facts are the same as in

Example 3, except that Y’s general partners

are UTP1 and B, an individual. Because B,

an individual, is also personally liable to

repay the $500 financing, the entire financing

fails to satisfy the requirement in paragraph

(b)(1)(iii) of this section. Accordingly, UTP1’s

$300 share of the financing will not be

treated as qualified nonrecourse financing

secured by real property.

Example 5. Personal liability; tiered

partnerships. The facts are the same as in

Example 3, except that Y is a limited liability

company and UTP1 and UTP2 are not

personally liable for the debt. However,

UTP1 and UTP2 each pledge property as

security for the loan that is other than real

property used in the activity of holding real

property and other than property that is

incidental to the activity of holding real

property. The fair market value of the

property pledged by UTP1 and UTP2 is

greater than 10 percent of the sum of the

aggregate gross fair market value of the

property held by Y and the aggregate gross

fair market value of the property pledged by

UTP1 and UTP2. Accordingly, the financing

fails to satisfy the requirement in paragraph

(b)(1)(iii) of this section by virtue of its

failure to satisfy paragraph (b)(4)(iii) of this

section. Therefore, the financing is not

qualified nonrecourse financing secured by

real property.

Example 6. Personal liability; Disregarded

entity. (i) X is a single member limited

liability company that is disregarded as an

entity separate from its owner for federal tax

purposes under § 301.7701–3 of this chapter.

X owns certain real property and property

that is incidental to the activity of holding

the real property. X does not own any other

property. For federal tax purposes, A, the

sole member of X, is considered to own all

of the property held by X and is engaged in

the activity of holding real property through

X. X borrows $500 and uses the proceeds to

purchase additional real property that is used

in the activity of holding real property. X is

personally liable to repay the financing, but

A is not personally liable for repayment of

the financing under local law. The lender

may proceed against all of X’s assets if X

defaults on the financing.

(ii) X is disregarded so that the assets and

liabilities of X are treated as the assets and

liabilities of A. However, A is not personally

liable for the $500 liability. Provided that the

requirements contained in paragraphs

(b)(1)(i), (ii), and (iv) of this section are

satisfied, the financing will be treated as

qualified nonrecourse financing secured by

real property with respect to A.

(c) Effective date. This section is

effective for any financing incurred on

or after August 4, 1998. Taxpayers,

however, may apply this section

retroactively for financing incurred

before August 4, 1998.
Federal Register / Vol. 63, No. 149 /Tuesday, August 4, 1998 /Rules and Regulations 41423

Approved: July 16, 1998.

Michael P. Dolan,

Deputy Commissioner of Internal Revenue.

Donald C. Lubick,

Assistant Secretary of the Treasury (Tax

Policy).

[FR Doc. 98–20801 Filed 8–3–98; 8:45 am]

BILLING CODE 4830–01–P

DEPARTMENT OF THE INTERIOR

Office of Surface Mining Reclamation

and Enforcement

30 CFR Part 917

[SPATS No. KY–191–FOR]

Kentucky Regulatory Program

AGENCY: Office of Surface Mining

Reclamation and Enforcement (OSM),

Interior.

ACTION: Final rule; approval of

amendment.

SUMMARY: OSM is announcing approval,

with an exception, of an amendment to

the Kentucky permanent regulatory

program approved pursuant to the

Surface Mining Control and

Reclamation Act of 1977 (SMCRA). This

amendment provides that areas

reclaimed following the removal of

temporary structures such as

sedimentation ponds, roads, and small

diversions are not subject to a

revegetation responsibility period and

bond liability period separate from that

of the permit area or increment thereof

served by such facilities. The

amendment is intended to clarify

ambiguities in the State regulations and

to improve operational efficiency.

EFFECTIVE DATE: August 4, 1998.

FOR FURTHER INFORMATION CONTACT:

William J. Kovacic, Director, Lexington

Field Office, Telephone (606) 233–2894.

SUPPLEMENTARY INFORMATION:

I. Background on the Kentucky Program

II. Submission of the Proposed Amendment

III. Director’s Findings

IV. Summary and Disposition of Comments

V. Director’s Decision

VI. Procedural Determinations

I. Background on the Kentucky

Program

The Secretary of the Interior

conditionally approved the Kentucky

regulatory program effective May 18,

1982. Background information on the

permanent program submission, as well

as the Secretary’s findings, the

disposition of comments and a detailed

explanation of the conditions of

approval can be found in the May 18,

1982, Federal Register (47 FR 21404).

Subsequent actions concerning the

conditions of approval and program

amendments are identified at 30 CFR

917.11, 917.13, 917.15, 917.16 and

917.17.

II. Submission of the Proposed

Amendment

By letter dated June 28, 1991

(Administrative Record No. KY–1059,

Kentucky submitted revisions to section

1(7) of the Kentucky Administrative

Regulations (KAR) at 405 KAR 16:200

and 18:200 as part of a larger

rulemaking. OSM announced receipt of

the proposed amendment in the July 22,

1991, Federal Register (56 FR 33398),

and, in the same notice, opened the

public comment period and provided

opportunity for a public hearing on the

adequacy of the proposed amendment.

The public comment period ended on

August 21, 1991. Since no one requested

an opportunity to testify at a public

hearing, no hearing was held.

By letter dated January 22, 1992

(Administrative Record No. KY–1107),

Kentucky revised the proposed

amendment in response to changes

made during its promulgation process.

OSM announced receipt of the revised

amendment in the April 13, 1992,

Federal Register (57 FR 12775), and, in

the same notice, reopened the public

comment period and again provided an

opportunity for a public hearing. The

public comment period closed on May

13, 1992. As with the previous

submittal, no one requested an

opportunity to testify at a public

hearing; therefore, no hearing was held.

OSM subsequently announced its

decision on most provisions of the

proposed amendment in the June 9,

1993 Federal Register (58 FR 32283).

Like the corresponding Federal

regulations at 30 CFR 816/817.116(c)(1)

and (c)(2), proposed sections 1(7) of 405

KAR 16:200 and 18:200 require that the

revegetation responsibility period begin

after the last augmented seeding,

fertilizing, irrigating or other work and

continue for a minimum of 5 years.

However, proposed subsections 1(7)(b)

would exempt haul roads, areas from

which sedimentation ponds and

associated diversion have been

removed, and disposal areas for

accumulated sediment and

sedimentation pond embarkment

material from the full revegetation

responsibility period, provided

vegetation established on all these areas

has been in place at least 2 years before

final bond release. In its final decision,

OSM stated at 58 FR 32285 that it was

deferring a decision on section 1(7)(b) of

405 KAR 16:200 and 18:200 until

additional opportunity for public

comment was provided in a separate

Federal Register notice. That

commitment was fulfilled by the notice

published on September 15, 1993 (58 FR

48333), which opened the public

comment period until October 15, 1993.

Since no one requested an opportunity

to testify at a public hearing, no hearing

was held. This notice also included

similar proposed revisions to the Illinois

and Ohio regulations as well as a

discussion of OSM’s proposed policy

concerning restart of the revegetation

responsibility period every time a small

portion of the permit area requires

reseeding or replanting. Subsequent to

this notice, on May 29, 1996, OSM

approved similar proposed revisions to

the Colorado regulations (61 FR 26792)

and on October 22, 1997, the Illinois

regulations (62 FR 54765).

III. Director’s Findings

Set forth below, pursuant to SMCRA

and the Federal regulations at 30 CFR

732.15 and 732.17, are the Director’s

findings concerning the deferred

revisions at sections 1(7)(b) of 405 KAR

16:200 and 18:200.

A. OSM’s policy concerning the term of

liability for reclamation of roads and

Temporary Sediment Control Structures

The following discussion of the rules

in 30 CFR Part 816, which applies to

surface mining activitities, also pertains

to similarly or identically constructed

sections in 30 CFR Part 817, which

applies to underground mining

activities.

Section 515(b)(20) of SMCRA

provides that the revegetation

responsibility period shall commence

‘‘after the last year of augmented

seeding, fertilizing, irrigation, or other

work’’ needed to assure revegetation

success. In the absence of any indication

of Congressional intent in the legislative

history, OSM interprets this

requirement as applying to the

increment or permit area as a whole, not

individually to those lands within the

permit area upon which revegetation is

delayed solely because of their use in

support of the reclamation effort on the

planted area. As implied in the

preamble discussion in 30 CFR

816.46(b)(5), which prohibits the

removal of ponds or other siltation

structures until two years after the last

augmented seeding, planting of the sites

from which such structures are removed

need not itself be considered an

augmented seeding necessitating an

extended or separate liability period (48

FR 44038–44039, September 26, 1983).

Such areas would include sediment

control structures and associated

structures and facilities such as

diversion ditches, disposal and storage