Federal Register / Vol. 61, No. 93 / Monday, May 13, 1996 / Rules and Regulations 21955

by removing ‘‘Hearing Clerk’’ and

adding ‘‘Proceedings Clerk’’ in its place.

PART 140—[AMENDED]

1. The authority citation for part 140

continues to read as follows:

7 U.S.C. 4a and 12a.

§ 140.20 [Amended]

2. Section 140.20, paragraph (a) is

amended by removing ‘‘Personnel

Security Officer’’ and adding ‘‘Security

Officer’’ in its place.

§ 140.24 [Amended]

3. Section 140.24, paragraph (a)(6) is

amended by removing ‘‘Personnel

Security Officer’’ and adding ‘‘Security

Officer’’ in its place.

§ 140.735–8 [Amended]

4. Section 140.735–8, paragraph (a)(3)

is amended by removing ‘‘Director of

Personnel’’ and adding ‘‘Director of

Human Resources’’ in its place.

5. Section 140.735–8, paragraph (c)(2)

is amended by removing ‘‘Director of

Personnel’’ and adding in its place

‘‘Director of Human Resources.’’

6. Section 140.735–8, paragraphs (e)

and (f) are amended by removing

‘‘Director of Personnel’’ and adding in

its place ‘‘Director of Human

Resources.’’

The foregoing rules shall be effective

May 13, 1996. The Commission finds

that the amendments relate solely to

agency organization, procedure or

practice and that the public procedures

and publication prior to the effective

date of the amendments, in accordance

with the Administrative Procedure Act,

as codified, 5 U.S.C. 553, are not

required.

Issued in Washington, DC, on May 6, 1996,

by the Commission.

Jean Webb,

Secretary of the Commission.

[FR Doc. 96–11923 Filed 5–10–96; 8:45 am]

BILLING CODE 6351–01–P

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 8670]

RIN 1545–AU20

Revision of Section 482 Cost Sharing

Regulations

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final

regulations relating to qualified cost

sharing arrangements under section 482

of the Internal Revenue Code. These

regulations reflect technical changes to

the requirements for qualification as a

controlled participant under the final

cost sharing regulations published in

the Federal Register on December 20,

1995.

DATES: These regulations are effective

May 13, 1996.

These regulations are applicable for

taxable years beginning on or after

January 1, 1996.

FOR FURTHER INFORMATION CONTACT: Lisa

Sams of the Office of Associate Chief

Counsel (International), IRS (202) 622–

3840 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

Section 482 was amended by the Tax

Reform Act of 1986, Public Law 99–514,

100 Stat. 2085, 2561, et. seq. (1986–3

C.B. (Vol. 1) 1, 478). On January 30,

1992, a notice of proposed rulemaking

concerning the section 482 amendment

in the context of cost sharing was

published in the Federal Register

(INTL–0372–88, 57 FR 3571).

Written comments were received with

respect to the notice of proposed

rulemaking, and a public hearing was

held on August 31, 1992.

On December 20, 1995, final

regulations were published in the

Federal Register (INTL–0372–88, 60 FR

65553) as Treasury Decision 8632.

These final regulations amend the

regulations contained in Treasury

Decision 8632 by making technical

changes to the requirements for

qualification as a controlled participant

contained in § 1.482–7(c).

The agency has decided not to issue

a second notice of proposed rulemaking

with respect to the modifications to TD

8632 contained in these final

regulations. The rules to which the

modifications relate (concerning

qualification as a controlled participant)

were the subject of the notice of

proposed rulemaking published on

January 30, 1992, and comments on

those rules were received in connection

with those proposed regulations.

Therefore, a further comment period on

these rules is unnecessary. Taxpayers

need prompt guidance on how to

conform their arrangements to the rules

set forth in TD 8632, which is effective

for taxable years beginning on or after

January 1, 1996, and which provides a

one year transition period for amending

arrangements. The modifications

contained in these final regulations will

aid taxpayers in that regard, and any

delay caused by a second notice of

proposed rulemaking would be

impracticable and contrary to the public

interest. Unsolicited comment letters

were received in connection with TD

8632 and are available for public

inspection in the FOIA reading room.

Explanation of Provisions

The purpose of these regulations is to

rectify problems in qualifying as a

controlled participant caused by the

technical requirements of the active

conduct rule of § 1.482–7(c). This rule

provided that a controlled taxpayer may

be a controlled participant only if it uses

or reasonably expects to use covered

intangibles in the active conduct of a

trade or business.

Under the 1992 proposed cost sharing

regulations, a member of a group of

controlled taxpayers could participate

in a qualified cost sharing arrangement

on behalf of, and could satisfy the active

conduct rule based on activities

performed by, one or more other

members of the group (a cost sharing

subgroup). The participating subgroup

member would then transfer or license

the intangibles developed under the

arrangement to the nonparticipating

subgroup member(s). The proposed

regulations would have measured

benefits in such case on the basis of the

benefits of the entire subgroup from

exploiting the intangibles. TD 8632, in

streamlining the participation rules,

omitted the subgroup rules. Taxpayers

commented that the change would force

them to amend existing arrangements to

include as a participant every operating

company that predictably would be

using covered intangibles.

These regulations further streamline

the participation rules. The principal

reason for the active conduct rule was

to ensure that a controlled participant

stands to benefit from the use of covered

intangibles in a manner that can be

reliably measured. The Treasury and

Service have concluded that this

purpose can be accomplished without

the active conduct rule. No distinction

need be made based on the nature of a

participant’s use of covered intangibles,

so long as its benefits from such use

(whether from directly exploiting the

intangibles or from transferring or

licensing them to others) can be reliably

measured.

Accordingly, these regulations

eliminate the active conduct rule of

§ 1.482–7(c) as a requirement for

qualification as a controlled participant

in a qualified cost sharing arrangement.

Section 1.482–7(c)(1) of these

regulations substitutes a general rule

that a controlled taxpayer may be a

controlled participant in a cost sharing

arrangement only if it reasonably

anticipates that it will derive benefits
21956 Federal Register / Vol. 61, No. 93 / Monday, May 13, 1996 / Rules and Regulations

from the use of covered intangibles. In

addition, § 1.482–7(f)(3)(ii) provides that

if a controlled participant transfers

covered intangibles to another

controlled taxpayer, the participant’s

benefits will be measured with reference

to the transferee’s benefits rather than

with reference to any consideration paid

by the transferee. (This gives rise to

results similar to those under the

subgroup rules of the proposed

regulations by different mechanics.)

Finally, § 1.482–7(f)(3)(ii) continues to

provide that the amount of benefits that

each of the controlled participants is

reasonably anticipated to derive from

covered intangibles must be measured

on a basis that is consistent for all such

participants.

These changes ensure that a

controlled participant must benefit from

the arrangement, that the basis for

measuring benefits must be consistent

for all controlled participants, and that,

in the event of intragroup transfers,

there will be ‘‘look through’’ treatment

for reliably measuring benefits. These

rules allow a participant to exploit

covered intangibles itself or through

transferring or licensing them to others,

so long as the benefits to be derived can

be consistently and reliably measured

for all controlled participants.

These regulations also clarify that the

documentation requirements of § 1.482–

7(j)(2) will satisfy the principal

document requirement of § 1.6662–

6(d)(iii)(B) with respect to a qualified

cost sharing arrangement.

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) and the Regulatory

Flexibility Act (5 U.S.C. chapter 6) do

not apply to these regulations, and,

therefore, a Regulatory Flexibility

Analysis is not required. 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 Lisa Sams, Office of

Associate Chief Counsel (International),

IRS. However, other personnel from 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 for part 1

continues to read in part as follows:

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

Par. 2. Section 1.482–0 is amended by

revising the entries for §§ 1.482–7 (c)

and (j) to read as follows:

§ 1.482–0 Outline of regulations under 482.

* * * * *

§ 1.482–7 Sharing of costs.

* * * * *

(c) Participant.

(1) In general.

(2) Treatment of a controlled taxpayer that

is not a controlled participant.

(i) In general.

(ii) Example.

(3) Treatment of consolidated group.

* * * * *

(j) Administrative requirements.

(1) In general.

(2) Documentation.

(i) Requirements.

(ii) Coordination with penalty regulation.

(3) Reporting requirements.

* * * * *

Par. 3. Section 1.482–7 is amended as

follows:

a. By revising paragraph (c)(1)(i).

b. By adding paragraph (c)(1)(iv).

c. By removing paragraphs (c)(2) and

(c)(3) and redesignating paragraphs

(c)(4) and (c)(5) as paragraphs (c)(2) and

(c)(3), respectively.

d. By revising newly designated

paragraph (c)(2)(ii).

e. By adding a sentence after the

second sentence in paragraph (f)(3)(ii).

f. By revising Example 8 of paragraph

(f)(3)(iii)(E).

g. By redesignating the text of

paragraph (j)(2) following the heading as

paragraph (j)(2)(i) and adding a heading

for newly designated paragraph (j)(2)(i).

h. By removing the language ‘‘(j)(2)’’

and adding ‘‘(j)(2)(i)’’ in its place in the

first sentence of newly designated

paragraph (j)(2)(i).

i. By adding a paragraph (j)(2)(ii).

The additions and revisions read as

follows:

§ 1.482–7 Sharing of costs.

* * * * *

(c) * * * (1) * * *

(i) Reasonably anticipates that it will

derive benefits from the use of covered

intangibles;

* * * * *

(iv) The following example illustrates

paragraph (c)(1)(i) of this section:

Example. Foreign Parent (FP) is a foreign

corporation engaged in the extraction of a

natural resource. FP has a U.S. subsidiary

(USS) to which FP sells supplies of this

resource for sale in the United States. FP

enters into a cost sharing arrangement with

USS to develop a new machine to extract the

natural resource. The machine uses a new

extraction process that will be patented in

the United States and in other countries. The

cost sharing arrangement provides that USS

will receive the rights to use the machine in

the extraction of the natural resource in the

United States, and FP will receive the rights

in the rest of the world. This resource does

not, however, exist in the United States.

Despite the fact that USS has received the

right to use this process in the United States,

USS is not a qualified participant because it

will not derive a benefit from the use of the

intangible developed under the cost sharing

arrangement.

(2) * * *

(ii) Example. The following example

illustrates this paragraph (c)(2):

Example. (i) U.S. Parent (USP), one foreign

subsidiary (FS), and a second foreign

subsidiary constituting the group’s research

arm (R+D) enter into a cost sharing agreement

to develop manufacturing intangibles for a

new product line A. USP and FS are assigned

the exclusive rights to exploit the intangibles

respectively in the United States and the rest

of the world, where each presently

manufactures and sells various existing

product lines. R+D is not assigned any rights

to exploit the intangibles. R+D’s activity

consists solely in carrying out research for

the group. It is reliably projected that the

shares of reasonably anticipated benefits of

USP and FS will be 662⁄3% and 331⁄3,

respectively, and the parties’ agreement

provides that USP and FS will reimburse

662⁄3% and 331⁄3%, respectively, of the

intangible development costs incurred by

R+D with respect to the new intangible.

(ii) R+D does not qualify as a controlled

participant within the meaning of paragraph

(c) of this section, because it will not derive

any benefits from the use of covered

intangibles. Therefore, R+D is treated as a

service provider for purposes of this section

and must receive arm’s length consideration

for the assistance it is deemed to provide to

USP and FS, under the rules of § 1.482–

4(f)(3)(iii). Such consideration must be

treated as intangible development costs

incurred by USP and FS in proportion to

their shares of reasonably anticipated

benefits (i.e., 662⁄3% and 331⁄3%,

respectively). R+D will not be considered to

bear any share of the intangible development

costs under the arrangement.

* * * * *

(f) * * *

(3) * * *

(ii) * * * If a controlled participant

transfers covered intangibles to another
Federal Register / Vol. 61, No. 93 / Monday, May 13, 1996 / Rules and Regulations 21957

controlled taxpayer, such participant’s

benefits from the transferred intangibles

must be measured by reference to the

transferee’s benefits, disregarding any

consideration paid by the transferee to

the controlled participant (such as a

royalty pursuant to a license agreement).

* * *

(iii) * * *

(E) * * *

Example 8. U.S. Parent (USP), Foreign

Subsidiary 1 (FS1) and Foreign Subsidiary 2

(FS2) enter into a cost sharing arrangement

to develop computer software that each will

market and install on customers’ computer

systems. The participants divide costs on the

basis of projected sales by USP, FS1, and FS2

of the software in their respective geographic

areas. However, FS1 plans not only to sell

but also to license the software to unrelated

customers, and FS1’s licensing income

(which is a percentage of the licensees’ sales)

is not counted in the projected benefits. In

this case, the basis used for measuring the

benefits of each participant is not the most

reliable because all of the benefits received

by participants are not taken into account. In

order to reliably determine benefit shares,

FS1’s projected benefits from licensing must

be included in the measurement on a basis

that is the same as that used to measure its

own and the other participants’ projected

benefits from sales (e.g., all participants

might measure their benefits on the basis of

operating profit).

* * * * *

(j) * * *

(2) Documentation—(i) Requirements.

* * *

(ii) Coordination with penalty

regulation. The documents described in

paragraph (j)(2)(i) of this section will

satisfy the principal documents

requirement under § 1.6662–

6(d)(2)(iii)(B) with respect to a qualified

cost sharing arrangement.

* * * * *

Approved: May 2, 1996.

Margaret Milner Richardson,

Commissioner of Internal Revenue.

Leslie Samuels,

Assistant Secretary of the Treasury.

[FR Doc. 96–11781 Filed 5–9–96; 8:45 am]

BILLING CODE 4830–01–U

DEPARTMENT OF TRANSPORTATION

Coast Guard

33 CFR Part 3

[CGD 96–016]

RIN 2115–AF31

First and Fifth District Boundaries,

Marine Inspection and Captain of the

Port Zone Boundaries

AGENCY: Coast Guard, DOT.

ACTION: Final rule.

SUMMARY: The Coast Guard is changing

the boundary between the First and

Fifth Districts and revising the

descriptions of several Marine

Inspection and Captain of the Port Zone

boundaries in the First and Fifth

Districts. The Marine Inspection Zone

that covers the New York and Long

Island Sound Captain of the Port Zones

is being split into two Marine Inspection

Zones, each of which will be the same

geographic area as its respective Captain

of the Port Zone. These changes clarify

Coast Guard geographic area

responsibilities both in the First and

Fifth Coast Guard Districts. These

changes are administrative and will

impact Coast Guard services.

EFFECTIVE DATE: This rule is effective on

April 15, 1996.

ADDRESSES: Unless otherwise indicated,

documents referred to in this preamble

are available for inspection or copying

at the office of the Executive Secretary,

Marine Safety Council (G–LRA/3406),

U.S. Coast Guard Headquarters, 2100

Second Street SW., room 3406,

Washington, DC 20593–0001, between 8

a.m. and 3 p.m., Monday through

Friday, except Federal Holidays. The

telephone number is (202) 267–1477.

FOR FURTHER INFORMATION CONTACT:

Richard Schaefer, Project Manager,

Program Branch, Search Rescue

Division (G–NRS–1), (202) 267–1089.

SUPPLEMENTARY INFORMATION:

Background and Purpose

The Coast Guard is revising 33 CFR

part 3 to reflect a change in the

boundaries of the First and Fifth

Districts. The First District,

headquartered in Boston, includes New

England and the State and City of New

York and is located immediately to the

north of the Fifth District which

includes the mid-Atlantic area and is

headquartered in Portsmouth, Virginia.

The Coast Guard has moved the

boundary between the districts

approximately 21 miles north, thereby

enlarging the area of the Fifth District

and reducing the area of the First

District.

Portions of the area transferred from

the First to the Fifth District which are

currently part of the New York Captain

of the Port Zone become part of the

Philadelphia Marine Inspection Zone

and Captain of the Port Zone, and the

Hampton Roads Marine Inspection Zone

and Captain of the Port Zone. The

boundaries of the Philadelphia and

Hampton Roads Zones are amended to

reflect this additional area.

Additionally, within the First District,

two new Marine Inspection Zones are

being established. Previously, the New

York and Long Island Captain of the

Port Zones together comprised a single

Marine Inspection Zone. This single

Marine Inspection Zone is being divided

into two new zones. One new Marine

Inspection Zone will have the same

boundaries as the New York Captain of

the Port Zone, and the other new Marine

Inspection Zone will have the same

boundaries as the Long Island Sound

Captain of the Port Zone.

Discussion of Changes

The current descriptions do not

reflect the changes in these District and

Marine Inspection and Captain of the

Port Zone boundaries. This rule revises

these descriptions. The Coast Guard is

proceeding directly to a final rule under

section 553(b)(3)(A) of the

Administrative Procedures Act (5 U.S.C.

551 et seq.) which excludes rulemakings

relating to agency organization,

procedure, or practice from the

requirements of public notice and

comment. These changes are

administrative and will not impact

Coast Guard services.

Section 3.05–1. This section is revised

to describe the First District’s new

boundaries. Portions of northern New

Jersey which were formerly in the First

District are now in the Fifth District.

The new boundary line between the

districts in New Jersey moves

approximately 21 miles north from

39°57′ N. latitude at the Toms River to

40°18′ N. latitude, just south of the

Shrewsbury River. The offshore

boundary in the Atlantic Ocean moves

north an equal distance.

Section 3.05–25. This section,

describing the New York Marine

Inspection Zone, is removed.

Section 3.05–30. This section,

describing the New York Captain of the

Port Zone, is revised to describe the

boundaries of the new New York

Captain of the Port Zone and the new

New York Marine Inspection Zone, both

of which have the same boundaries.

Section 3–05–35. This section,

describing the Long Island Sound

Captain of the Port Zone, is revised to

describe the boundaries of the new Long

Island Sound Captain of the Port Zone

and the new Long Island Sound Marine

Inspection Zone, both of which have the

same boundaries.

Section 3–25–1. This section,

describing the Fifth District boundaries,

is revised to add those portions of New

Jersey and adjacent offshore waters of

the Atlantic Ocean which previously

were in the First District. All of Ocean

County, NJ, the southern half of