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[Federal Register: May 8, 2008 (Volume 73, Number 90)]
[Proposed Rules]
[Page 26199-26307]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr08my08-36]
[[Page 26199]]
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Part II
Department of the Treasury
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Alcohol and Tobacco Tax and Trade Bureau
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27 CFR Part 19
Proposed Revision of Distilled Spirits Plant Regulations (2001R-194P);
Proposed Rule
[[Page 26200]]
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DEPARTMENT OF THE TREASURY
Alcohol and Tobacco Tax and Trade Bureau
27 CFR Part 19
[Docket No. TTB-2008-0004]; [Notice No. 83]
RIN 1513-AA23
Proposed Revision of Distilled Spirits Plant Regulations (2001R-
194P)
AGENCY: Alcohol and Tobacco Tax and Trade Bureau, Treasury.
ACTION: Notice of proposed rulemaking.
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SUMMARY: The Alcohol and Tobacco Tax and Trade Bureau (TTB) proposes to
amend its distilled spirits plant regulations. Many of these proposed
revisions are the result of comments submitted by the Distilled Spirits
Council of the United States in response to a Bureau of Alcohol,
Tobacco and Firearms notice of proposed rulemaking (NPRM) published in
November 1998. Other proposed revisions are a result of a comprehensive
TTB review of the distilled spirits plant regulations. This NPRM
supersedes the NPRM issued in November 1998. We believe the proposed
amendments will modernize the requirements for operating distilled
spirits plants and make the regulations easier to understand, thereby
allowing proprietors of such plants to operate in a more efficient
manner. The proposed regulations are also written in a plain language
format to improve clarity.
DATES: We must receive your written comments on or before August 6,
2008.
ADDRESSES: You may send comments on this notice to one of the following
addresses:
http://www.regulations.gov (via the online comment form
for this notice as posted within Docket No. TTB-2008-0004 on
Regulations.gov, the Federal e-rulemaking portal); or
Mail: Director, Regulations and Rulings Division, Alcohol
and Tobacco Tax and Trade Bureau, P.O. Box 14412, Washington, DC 20044-
4412; or
Hand Delivery/Courier in lieu of Mail: Alcohol and Tobacco
Tax and Trade Bureau, 1310 G Street, NW., Suite 200-E, Washington, DC
20005.
See the Public Participation section of this notice for specific
instructions and requirements for submitting comments, and for
information on how to request a public hearing.
You may view copies of this notice and any comments we receive
about this proposal at http://www.regulations.gov. A direct link to the
appropriate Regulations.gov docket is available under Notice No. 83 on
the TTB Web site at http://www.ttb.gov/spirits/spirits_
rulemaking.shtml. You also may view copies of this notice and any
comments we receive about this proposal by appointment at the TTB
Information Resource Center, 1310 G Street, NW., Washington, DC 20220.
To make an appointment, call 202-927-2400.
FOR FURTHER INFORMATION CONTACT: Daniel J. Hiland, Regulations and
Rulings Division, Alcohol and Tobacco Tax and Trade Bureau, 1310 G
Street NW., Suite 200-E, Washington, DC 20220; telephone 202-927-8176.
SUPPLEMENTARY INFORMATION:
Table of Contents
Notice to Readers
Impact of the Homeland Security Act on this Rulemaking
I. Background Information for this Notice
A. Distilled Spirits Plant Operations under Current Law
Basic Definitions
Federal Laws and Regulatory Authority
Major Regulatory Provisions
B. Petition to Amend 27 CFR Part 19
C. General Changes Proposed in this Notice
Plain Language
Structure of Part 19
Redundancy with the Law
Alternate Methods or Procedures
D. Specific Changes Proposed in this Notice
Subpart A--General Provisions
Subpart B--Administrative and Miscellaneous Provisions
Subpart C--Restrictions on Production, Location, and
Use of Plants
Subpart D--Registration of a Distilled Spirits Plant
and Obtaining a Permit
Subpart E--Changes to Registrations and Permits
Subpart F--Bonds and Consents of Surety
Subpart G--Construction, Equipment, and Security
Requirements ----
Subpart H--Special (Occupational) Tax
Subpart I--Distilled Spirits Taxes
Subpart J--Claims
Subpart K--Gauging
Subpart L--Production of Distilled Spirits
Subpart M--Storage of Distilled Spirits
Subpart N--Processing of Distilled Spirits
Subpart O--Denaturing Operations and Manufacture of
Articles
Subpart P--Transfers, Receipts, and Withdrawals
Subpart Q--Return of Spirits to Bonded Premises and
Voluntary Destruction
Subpart R--Losses and Shortages
Subpart S--Containers and Marks
Subpart T--Liquor Bottle, Label, and Closure
Requirements
Subpart U--Reserved
Subpart V--Records and Reports
Subpart W--Production of Vinegar by the Vaporizing
Process
Subpart X--Distilled Spirits for Fuel Use
Subpart Y--Paperwork Reduction Act
II. Derivation Table for Proposed Part 19
III. Public Participation
Comments Invited
Submitting Comments
Confidentiality
Public Disclosure
IV. Regulatory Analyses and Notices
Paperwork Reduction Act
Regulatory Flexibility Act
Executive Order 12866
Executive Order 13132
V. Drafting Information
VI. List of Subjects
VII. Authority and Issuance
Text of the Proposed Rule
Notice to Readers--Impact of the Homeland Security Act on This
Rulemaking
Effective January 24, 2003, the Homeland Security Act of 2002 (Pub.
L. 107-296, 116 Stat. 2135 (2002)) divided the Bureau of Alcohol,
Tobacco and Firearms (ATF) into two new agencies, the Alcohol and
Tobacco Tax and Trade Bureau (TTB) in the Department of the Treasury
and the Bureau of Alcohol, Tobacco, Firearms and Explosives in the
Department of Justice. The regulation and taxation of alcohol beverages
remains a function of the Department of the Treasury and is the
responsibility of TTB. References to ATF in this notice reflect the
time period prior to January 24, 2003, while references to TTB are
after that date.
I. Background Information for This Notice
A. Distilled Spirits Plant Operations Under Current Law
Distilled spirits taxation is a specialized area of Federal law.
The following background material provides basic information about how
distilled spirits plants operate and are regulated under Federal law.
Basis Definitions
Distilled Spirits. The term ``distilled spirits'' refers to those
products that contain ethyl alcohol and are generally the result of
distillation. This term does not apply to wine and beer, which are
products of fermentation. Examples of distilled spirits products
include vodka, whiskey, gin, brandy, cordials, liqueurs, flavored
brandies, and other similar products.
Distilled Spirits Plants. The term ``Distilled Spirits Plant''
(DSP) refers to a plant at which distilled spirits are manufactured or
produced, aged or stored, or packaged or bottled, either for beverage
or industrial use.
Federal Laws and Regulatory Authority
Federal law prohibits the manufacture or production of distilled
spirits in the United States at other than a registered DSP that has
received a permit from
[[Page 26201]]
TTB. While Federal law allows for the limited home production of wine
and beer, no such exemption exists for distilled spirits.
DSPs are regulated under the provisions of two laws, the Internal
Revenue Code of 1986 (IRC) (Title 26 of the United States Code) and the
Federal Alcohol Administration Act (FAA Act) (Title 27 of the United
States Code). The IRC imposes an excise tax on distilled spirits,
requires plants to register, requires plants to obtain permits not
otherwise required by the FAA Act, and imposes strict controls over the
operation of DSPs. The FAA Act imposes a requirement to obtain a basic
permit and contains various consumer-protection provisions, including
provisions related to the formulation, labeling, and advertising of
alcohol beverages. The FAA Act also controls various trade practices
within the alcohol industry.
Under these two laws, TTB regulates the distilled spirits industry
in the United States. Each law authorizes the Secretary of the Treasury
to prescribe regulations to carry out and enforce its provisions, and
the Secretary has delegated this authority to TTB. The TTB regulations
concerning DSPs are contained in title 27 of the Code of Federal
Regulations, Part 19, Distilled Spirits Plants (27 CFR part 19).
Major Regulatory Provisions
A DSP consists of one or more of the following: production,
storage, processing, denaturation, and bottling facilities. A DSP may
be a large and complex plant, having all facilities, a simple storage
facility consisting of only one building, or a small bottling facility
with storage facilities. Production facilities are usually accompanied
by some storage facilities. Bottling facilities are often accompanied
by storage facilities, and must by law be accompanied by either a
production or a storage facility. However, large storage facilities are
often not accompanied by either of the other two types.
Registration. Before commencing operations, the DSP proprietor must
obtain an approved notice of registration. This application for
registration includes: documents to set up distilling apparatus,
environmental impact forms, personnel questionnaires, signature
authorities, and a statement of security.
Permits. Under the FAA Act, all persons who intend to engage in the
business of: (a) Distilling spirits; (b) rectifying, blending, or
bottling (processing) distilled spirits; or (c) warehousing and
bottling distilled spirits, must file for a basic permit.
To maintain control over the industrial use of distilled spirits,
the IRC requires that an operating permit be obtained before commencing
the production, warehousing, or bottling of alcohol for industrial use.
Specifically, a permit is required for:
Distilling for industrial use.
Bonded warehousing of spirits for industrial use.
Denaturation of spirits.
Bonded warehousing of spirits (without bottling) for non-
industrial use.
Bottling or packaging of spirits for industrial use.
Any other distilling, warehousing, or bottling operations
not required to be covered by a basic permit under the FAA Act.
DSP Bonded Premises. The physical premises of a DSP are divided
into two technical categories: ``bonded premises,'' and unbonded or
``general premises.'' All activities relating to the distilling,
storage, and processing (blending and mixing) of distilled spirits must
be conducted on bonded premises. All activities relating to taxpaid
alcohol beverages conducted at the distilled spirits plant must be
conducted on general premises.
Operations as a distiller, warehouseman, or processor may be
conducted only on the bonded premises of a DSP by a person qualified to
carry on such operations under 27 CFR part 19 and who has obtained the
basic permits required by 27 CFR part 1, or, as appropriate, the
operating permit required by part 19. However, certain other
activities, such as those of apothecaries, customs bonded warehousemen,
manufacturers of nonbeverage products, and users of specially denatured
alcohol, may be carried on outside of DSPs.
The continuity of a DSP must be unbroken except for separations
that may include public waterways, thoroughfares, or carrier rights-of-
way. In most instances, DSPs are also prohibited from being located in
a dwelling house, in a shed, yard, or enclosure connected with a
dwelling house, on board a vessel or boat, on premises where beer or
wine is produced, in a retail liquor establishment, or where any other
business is conducted.
Bonds. Normally, the distilled spirits tax is not collected while
spirits are held on the ``bonded'' premises of a distilled spirits
plant. The potential tax liability of the spirits held on bonded
premises is guaranteed by an operations bond, and taxable removals are
covered by a withdrawal bond.
The bond is a legally binding, written agreement involving three
parties: the taxpayer, the surety (insurance or bonding company), and
the U.S. Government. The purpose of the bond is to protect the
financial interest of the Government. If for any reason, the taxpayer
fails to pay the tax, then the surety (insurance or bonding company) is
obliged to pay, up to the limit of the bond.
Other Requirements. In addition to registering, obtaining a permit,
and providing a bond, plants are required to comply with a number of
regulations relating to plant security; the production, storage, and
processing of spirits; recordkeeping; inspection and audit; and filing
of reports. These requirements are outlined in 27 CFR part 19.
Recordkeeping Accounts. All operations at a DSP are accounted for
within three recordkeeping accounts: Production, Storage, and
Processing. Since the facilities (tanks and rooms) of a DSP may be used
for multiple purposes, the accountability of spirits must be maintained
by appropriate records within the three accounts instead of physical
separation.
Payment of Taxes. The Federal excise tax on distilled spirits
attaches to the spirits as soon as they are produced, and the distilled
spirits plant is held liable for the tax on all distilled spirits held
in the bond premises. The amount of Federal excise tax that a distilled
spirits plant must pay is based upon the taxable removal of the spirits
from the bonded premises. There are two basic methods of paying the tax
on distilled spirits withdrawn from bonded premises-deferred payment
and prepayment. Under the deferred payment system, the proprietor may
withdraw spirits from bond after tax determination but before payment
of tax. The excise tax paid is based on the amount of spirits removed
from bond during each return period. Under the prepayment system, the
proprietor must pay the distilled spirits tax after tax determination
but before withdrawal of the spirits from bonded premises. Most DSP
proprietors use the deferred payment system.
Currently, the Federal excise tax rate on distilled spirits is
$13.50 per proof gallon. The term ``proof gallon'' is unique to this
particular commodity and means: a liquid gallon that contains 50
percent ethyl alcohol.
Although the tax rate for distilled spirits is $13.50 per proof
gallon, many distilled spirits products are actually taxed at a lower
rate. Many products contain wine and/or flavors, and the IRC at 26
U.S.C. 5010 provides a credit for the wine and flavors content of the
product. These credits effectively
[[Page 26202]]
reduce the rate of excise tax paid on distilled spirits products that
contain wine and flavors.
Nontaxable Transactions. Certain types of shipments to and from a
distilled spirits plant are permitted without payment of tax. Examples
are:
Shipments of bulk (unbottled) spirits from one registered
distilled spirits plant to another. (Bottled spirits are not eligible
for untaxed transfer in bond between plants.)
Shipments of bulk imported spirits from U.S. Customs and
Border Protection custody to a distilled spirits plant. (Only bulk
imported spirits are eligible for this type of transfer.)
Direct exports of products from the United States.
Shipments to users of industrial alcohol (certain permit
holders who use alcohol for medical, research, or industrial purposes).
B. Notice No. 870 and the Petition To Amend 27 CFR Part 19
On November 30, 1998, ATF issued a notice of proposed rulemaking,
Notice No. 870 (63 FR 65720), that solicited comments on proposed
changes to several sections of the regulations in 27 CFR part 19. The
proposed changes included: (1) Delegations of authority, (2) removing a
special tax provision, (3) liberalizing the requirement for approval of
certain changes in plant personnel or procedures, (4) reducing the
paperwork when plant premises are alternated with other premises, (5)
providing for alternation of distilled spirits plant and brewery
premises, (6) allowing denaturation and manufacture of articles to be
done in a single, unified process, (7) specifying marks for packages of
industrial spirits withdrawn taxpaid, (8) clarifying regulations that
refer to a transfer record, and (9) incorporating a provision of an ATF
Industry Circular regarding alcohol fuel into the regulations.
In addition to these proposed changes, ATF asked for comments
regarding the general recordkeeping system for distilled spirits plants
prescribed in part 19.
In response to Notice No. 870, ATF received extensive comments from
the Distilled Spirits Council of the United States (DISCUS), a trade
association representing distilled spirits industry members with
interests in the U.S. market. While DISCUS provided comments on the
specific issues raised in Notice No. 870, it also asked that ATF
consider a broad range of regulatory changes to part 19. Essentially,
in its comments on part 19, DISCUS asked ATF to initiate a complete
revision of part 19. In support of its petition, DISCUS provided ATF
with sample regulations that consisted of a ``markup'' version of 27
CFR part 19, along with numerous copies of variances (alternate methods
or procedures) that ATF granted to members of the distilled spirits
industry over the years. Suggested amendments included a broad range of
issues, including, but not limited to, reduced recordkeeping
requirements for distilled spirits plants, greater use of commercial
records, reduced reporting requirements, reduced requirements for
reporting changes affecting the DSP's registration, liberalized use of
DSP premises, storage of distilled spirits on bonded premises through
``constructive segregation'' based on commercial records, and adoption
of alternative methods in the regulations for universal applicability.
In response to Notice No. 870, ATF also received comments from
Equistar Chemicals, LP. Equistar is a producer of industrial ethyl
alcohol, and its comments addressed issues in Notice No. 870 related to
industrial alcohol. Equistar also commented on other issues affecting
distilled spirits plants such as the amendment of plant registrations,
recordkeeping, denaturation, and gauging.
After reviewing the comments received in response to the Notice No.
870, ATF concluded that the amendments proposed in the 1998 NPRM were
not extensive enough to address the changes that have taken place in
the industry since the last major revision to the distilled spirits
plant regulations took place over 20 years ago when ATF implemented the
Distilled Spirits Tax Revision Act of 1979, commonly referred to as
``All in Bond.''
As the successor agency to ATF, TTB undertook a comprehensive
review of the distilled spirits plant regulations in 27 CFR part 19 and
the comments received in response to Notice No. 870. This notice of
proposed rulemaking is the result of that review, and this notice
supersedes Notice No. 870. We believe the proposed amendments will
modernize the requirements for operating distilled spirits plants and
make the regulations easier to understand, thereby allowing proprietors
of such plants to operate in a more efficient manner. A discussion of
our new proposal to amend part 19 in a more comprehensive way follows.
C. General Changes Proposed in This Notice
The following summarizes the general changes we propose to make to
27 CFR part 19.
Plain Language
On June 1, 1998, the President issued a memorandum that requires
Federal agencies to write regulations in ``plain language.'' We fully
support this initiative, and we have written these proposed regulations
in the plain language style. In an effort to make these regulations
easier to understand, we made several plain language changes to the
part 19 regulations:
We use the active voice in the regulations, whenever
possible;
We use shorter sentences, paragraphs, and sections; and
We minimize the use of jargon and unnecessary technical
terms.
Structure of Part 19
In its comments on part 19, DISCUS points out that part 19 is
``excessively long, overcomplicated and very difficult to read.''
Further, it stated that the regulations are ``divided into 25 subparts,
with many related and overlapping provisions included in two or more
subparts.'' DISCUS recommends ``consolidating and re-grouping a number
of regulatory provisions which are closely related, eliminating
regulations which merely are redundant of each other or the statute,
adding cross-references to related regulations, and clarifying
regulatory language.''
We reviewed the various sections and subparts in the current part
19 and determined that much of the basic structure for part 19 needs to
be amended. Under the current structure, information is not always
located where a reader would logically expect to find it.
For example, under the current regulations, information regarding
distilled spirits taxes is found in two separate subparts, Subpart C,
Taxes, and Subpart P, Transfers and Withdrawals. Subpart C contains
much of the basic information about distilled spirits taxes, including
the methods for calculating tax credits under the IRC at 26 U.S.C.
5010. However, information regarding determination of taxes and the
filing of tax returns is located in subpart P. Logically, all
information associated with distilled spirits taxes should appear
within the same subpart. The proposed regulations consolidate all of
the information concerning distilled spirits taxes into a new Subpart
I, Distilled Spirits Taxes. Similarly, we reviewed all of the major
topics covered in part 19 and attempted to group them together in a
more logical order. Accordingly, this proposed, amended version of part
19 has been restructured with new subparts and related
[[Page 26203]]
information has been consolidated, where appropriate, into a single
subpart. In addition, duplicative sections have been eliminated. The
intent of this restructuring is to assist the reader and make it easier
to locate related topics within part 19.
The proposed subparts are as follows:
Subpart A--General Provisions
Subpart B--Administrative and Miscellaneous Provisions
Subpart C--Restrictions on Production, Location, and Use
of Plants
Subpart D--Registration of a Distilled Spirits Plant and
Obtaining a Permit
Subpart E--Changes to Registrations and Permits
Subpart F--Bonds and Consents of Surety
Subpart G--Construction, Equipment, and Security
Requirements
Subpart H--Special (Occupational) Tax
Subpart I--Distilled Spirits Taxes
Subpart J--Claims
Subpart K--Gauging
Subpart L--Production of Distilled Spirits
Subpart M--Storage of Distilled Spirits
Subpart N--Processing of Distilled Spirits
Subpart O--Denaturing Operations and Manufacture of
Articles
Subpart P--Transfers, Receipts, and Withdrawals
Subpart Q--Return of Spirits to Bonded Premises and
Voluntary Destruction
Subpart R--Losses and Shortages
Subpart S--Containers and Marks
Subpart T--Liquor Bottle, Label, and Closure Requirements
Subpart U--Reserved
Subpart V--Records and Reports
Subpart W--Production of Vinegar by the Vaporizing Process
Subpart X--Distilled Spirits for Fuel Use
Subpart Y--Paperwork Reduction Act
Redundancy With the Law
In its comments on part 19, DISCUS recommends that several sections
of the regulations be deleted because those sections are ``redundant
with the law.'' DISCUS notes that many of the sections simply repeat
provisions of law contained in title 26 of the IRC. DISCUS recommends
we delete these redundant sections of part 19 or revise the regulations
to simply reference the appropriate section of the IRC.
TTB recognizes that some sections of the part 19 regulations repeat
provisions of the IRC. However, we intend that the part 19 regulations
provide users with a comprehensive and complete body of the
requirements for operating a distilled spirits plant. By making part 19
a complete reference tool, persons researching a particular issue will
not need access to both the IRC and the regulations. Therefore, when a
provision of law affects operations at a distilled spirits plant, we
included that provision in part 19. However, in some instances, we
deleted sections of the regulations that simply repeated information
found in other regulations within part 19.
Alternate Methods or Procedures.
Periodically, TTB allows industry members to use an alternate
method or procedure in lieu of a specific regulatory requirement in
part 19. The current regulation at 27 CFR 19.62 describes how DSP
proprietors may apply for an alternate method or procedure. Section
19.62 also describes the criteria that TTB uses when evaluating such
requests. Generally, TTB may approve the use of an alternate method or
procedure when:
Good cause has been shown for use of the alternate method
or procedure,
The alternate method or procedure is consistent with the
intent of the regulation, and
The alternate method or procedure is not contrary to the
law.
Over the years, DSP proprietors have applied for a wide range of
alternate methods or procedures in lieu of the requirements stated in
part 19. We have evaluated these requests on a case-by-case basis using
the criteria established in 27 CFR 19.62, and we have approved many of
these requests. Industry members commonly refer to these alternate
methods or procedures as ``variances.''
As part of its comments on part 19, DISCUS submitted numerous
copies of variances that have been granted to members of the distilled
spirits industry. The variances submitted by DISCUS were divided into
three general categories, recordkeeping, separation of premises, and
``other.'' In its comments, DISCUS asserts that ATF granted variances
from many of the regulatory requirements and that it is not aware of
any variance that has caused any problems with Federal excise tax
compliance. DISCUS recommends that variances granted to individual
plant proprietors be extended to all plants in the revised regulations.
In response to this suggestion, TTB reviewed the individual
variances submitted by DISCUS for possible applicability to all
distilled spirits plants. We found that many variances did, in fact,
have general applicability to all plants. As a result, we have
incorporated many of those methods or procedures into the proposed
regulations, where appropriate. For example:
Several variances were issued that allowed for the use of
computer-generated records. This proposal has been adopted into the
revised regulations at Sec. 19.572 and is discussed later in this
preamble under our discussion of Records in subpart V.
Several variances were issued that allowed for computer-
generated reports and computer-generated transaction forms. These
proposals were adopted into the revised regulations at Sec. 19.634,
and are discussed later in this preamble under our discussion of
records in subpart V.
A variance was issued that allows for the filing of
letterhead notices to report certain changes at a plant. This procedure
providing for the use of letterhead notices has been incorporated into
the new subpart E and is explained more fully under our discussion of
subpart E.
Several variances were issued that allow for the use of
``commercial records'' to record transactions and/or operations. The
use of documents created in the ordinary course of business, rather
than documents created expressly to meet the requirements of part 19 is
now provided for in the proposed regulations at Sec. 19.572 in subpart
V.
A variance was issued that allows modified
``abbreviations'' to be used. The proposed regulations will not
prescribe any official abbreviations for use on forms and records to
identify spirits, and the provisions of current Sec. 19.726, which
prescribe official abbreviations have been deleted from the proposed
regulations. However, we will continue to list authorized abbreviations
for marking containers found in the current regulations at Sec.
19.612.
A variance was issued that allows filled, capped, and
labeled bottles to remain on the bottling line at the end of each work
day if the same brand and size will be produced on the next bottling
shift. This variance was incorporated into the proposed regulations at
Sec. 19.358 and is discussed under subpart N.
A variance that allows the bottling of liqueurs from a
tank truck or tote was incorporated into the proposed regulations at
Sec. 19.352 and is discussed under subpart N.
A variance whereby certain small tanks are not required to
be mounted on scales was incorporated into the proposed regulations at
Sec. 19.183 and is discussed under subpart G.
[[Page 26204]]
Several variances have been approved that allow for the
use of meters in gauging spirits for purposes other than tax
determination. We are proposing significant changes in the new
regulations that will allow for the use of accurate mass flow meters,
without prior approval by TTB, for bulk tax determination gauges and
other required gauges at a distilled spirits plant if the meters meet
certain criteria for accuracy.
During our review of the variances submitted by DISCUS, we also
found several that were not appropriate for incorporation into the new,
revised regulations. In some instances, we did not wish to apply the
provisions of a particular alternate method or procedure to all DSP
proprietors without regard to their compliance history and other
factors. As such, proprietors may continue to apply for these types of
alternate methods or procedures, and we will evaluate them on a case-
by-case basis.
For example, we have issued several variances to DSP proprietors
regarding the timing and frequency of required inventories for bulk and
cased spirits. In evaluating this type of variance, we frequently
consider the compliance history of the particular plant, shortages and
gains disclosed by past inventories, along with other factors.
Accordingly, this type of authorization does not have general
applicability and is not appropriate for inclusion in the new proposed
regulations. However, we will continue to approve this type of request,
when appropriate, on a case-by-case basis.
In other instances, the subject matter of a particular variance
only applied to a very specific situation at a single plant and was,
therefore, not applicable to all plants. Accordingly, we did not
incorporate this type of variance into the new proposed regulations.
For example:
We approved several variances in regard to case markings
that did not have general application to the case markings used by
other plants.
We approved a ``business day'' for a plant that runs from
2 a.m. through 1:59 a.m. This type of variance does not have general
applicability to other plants.
In summary, we have incorporated a number of existing variances
into the proposed regulations where appropriate, and when the variance
would have general applicability to the industry.
D. Specific Changes Proposed in This Notice
The following is a discussion of the new, revised subparts in 27
CFR part 19 and the specific changes that we propose to make in the
part 19 regulations.
Subpart A--General Provisions
Proposed subpart A includes several sections that have general
applicability to part 19, including a revised definitions section, a
section that defines the territorial extent of the regulations, and a
section that identifies other regulations that relate to part 19.
In the proposed definitions section at Sec. 19.1, we propose some
minor amendments to the language used within this section to clarify
the meaning of some terms. We also propose to add some new terms and
delete an outdated term found in the current definitions section. We
propose to add the terms ``accurate mass flow meter,'' ``general
premises,'' ``letterhead application,'' ``letterhead notice,''
``National Revenue Center,'' ``TTB officer,'' and ``we.'' We propose to
delete the term ``region director.''
We also propose to move two sections currently located in subpart
D, under the heading ``Activities Not Subject To This Part,'' to
subpart A. The relocated sections are Sec. 19.4, Recovery and reuse of
denatured spirits in manufacturing processes, and Sec. 19.5,
Manufacturing products unfit for beverage use, which are currently
found at Sec. Sec. 19.57 and 19.58, respectively.
Subpart B--Administrative and Miscellaneous Provisions
Proposed subpart B contains the administrative and miscellaneous
provisions for part 19 that are currently found in subpart D. However,
some sections of regulations that are located in the current subpart D
have been relocated to other revised subparts, where appropriate. For
example, we propose to move sections relating to gauging to the new
proposed Subpart K, Gauging. Similarly, we propose to relocate sections
relating to the conveyance of spirits or wines on plant premises to the
new proposed Subpart C, Restrictions, Location, and Use of Plants.
Proposed subpart B includes a ``penalty of perjury'' section that
is currently located at Sec. 19.100. In its comments on part 19,
DISCUS proposes the deletion of the requirement that documents be
executed under penalties of perjury from several sections of
regulations. DISCUS states that ``these penalties are unnecessary and
excessive in light of the fact that a proprietor's permit is subject to
revocation under the Federal Alcohol Administration Act for failure to
comply with the Bureau's requirements.'' TTB did not adopt this
proposal. The penalty of perjury statement is an important safeguard
that places legal responsibility for the truthfulness of significant
documents filed with TTB on the documents' signatories. Generally, we
do not require the ``penalty of perjury'' statement on most documents
and records. Its use is generally restricted to claims, tax returns,
applications, and similar documents. The IRC at 26 U.S.C. 6065 states,
``Except as otherwise provided by the Secretary, any return,
declaration, statement, or other document required to be made under any
provisions of the internal revenue laws or regulations shall contain or
be verified by a written declaration that it is made under penalties of
perjury.'' Consistent with the IRC at 26 U.S.C. 6065 and along with the
other tax collection agencies within the Department of the Treasury,
TTB requires that such documents be signed under penalties of perjury.
The penalty of perjury provision in the proposed regulations is located
at Sec. 19.45.
Subpart C--Restrictions on Production, Location, and Use of Plants
Proposed subpart C covers restrictions associated with the
operation of a distilled spirits plant, along with the location and use
of DSP premises. In its comments on part 19, DISCUS makes several
recommendations affecting those sections of the current regulations
that govern restrictions, locations, and use of DSP premises. We
discuss these recommendations and our responses below.
Restrictions regarding location. Currently, 27 CFR 19.131 provides
that a distilled spirits plant may not be located on premises where
beer or wine is produced, or liquors of any description are retailed,
or (except as provided in Sec. 19.133) on premises where any other
business is conducted. DISCUS contends that physical separation of
commodities is meaningless and recommends that this restriction be
amended to allow a distilled spirits plant to be located on such
premises if the proprietor's records show the separate operations. We
did not adopt this proposal because Federal law does not provide for
``constructive'' separation of premises by records only. The language
of this regulation is derived directly from the language of the IRC at
26 U.S.C. 5178(a)(1)(B), which states that a distilled spirits plant
shall not be located ``on premises where beer or wine is made or
produced, or liquors of any description are retailed, or on premises
where any other business is carried on (except when authorized under
subsection (b)).'' This
[[Page 26205]]
provision appears in the proposed regulations at Sec. 19.52.
Continuity of premises. Currently, the regulation at Sec. 19.132
provides that the physical continuity of a distilled spirits plant must
be unbroken except for separation by public waterways, thoroughfares,
or carrier rights-of-way. However, TTB may approve other separations of
the plant premises when all parts of the plant are in the ``same
general location.'' DISCUS recommends that the term ``same general
location'' mean within 200 miles of the distilled spirits plant.
We did not adopt this recommendation in the proposed regulations.
Although DISCUS states that a ``200 mile rule'' would provide increased
operational flexibility for proprietors, they do not explain how this
would occur under their proposal and why that distance is more
appropriate than any other.
Over the years TTB has received a number of requests to establish
non-contiguous distilled spirits plant premises. We have evaluated each
of these requests on a case-by-case basis. In our evaluation of each
request, we consider a number of factors, such as:
Security and protection of the revenue,
Distance between the main plant premises and the proposed
non-contiguous premises,
Whether the non-contiguous premises would cross State
lines,
Whether the non-contiguous premises will facilitate
inspections and audits, and
Whether establishment of non-contiguous premises would
provide the proprietor with a means for delaying payment of taxes.
We propose to retain the case-by-case analysis based on multiple
factors, instead of adopting a 200 mile rule as proposed by DISCUS. As
a general rule, we believe that the ``same general location'' must not
be too large an area so that the revenue is placed at risk. Also,
because a distance of 200 miles could extend over a multi-state area
and would cross over into different field offices within TTB, such a
distance would create administrative difficulties for TTB. This
provision appears in the proposed regulations at Sec. 19.53.
Other businesses. Currently, the regulation at Sec. 19.68 provides
that TTB may authorize the carrying on of other businesses (not
otherwise prohibited) on DSP premises under certain conditions. The
other businesses should not pose a jeopardy to the revenue, hinder the
effective administration of part 19, or be contrary to law. There is a
similar section of regulations at Sec. 19.72. DISCUS recommends the
removal of Sec. 19.68 since it is redundant with Sec. 19.72.
We agree that Sec. Sec. 19.68 and 19.72 are very similar, and we
have merged the two sections into a single section within the proposed
regulations at Sec. 19.55.
Bonded warehouses not on premises qualified for production of
spirits. The current regulation at Sec. 19.134 allows for the
establishment of a bonded warehouse on premises that are not qualified
for the production of spirits, if the need for such is clearly
established. DISCUS recommends the amendment of this section by adding
language stating that the warehouse may be within 200 miles of the main
plant. We did not adopt this recommendation for the same reasons
discussed above under the heading, ``Continuity of Premises.'' This
provision is found in the proposed regulations at Sec. 19.56.
Taxpaid spirits or wines on bonded premises. The current regulation
at Sec. 19.97 provides that spirits or wines on which the tax has been
paid or determined may be conveyed across bonded premises but cannot be
stored or remain on bonded premises, and must be kept separate and
apart from spirits or wines on which the tax has not been paid or
determined. DISCUS recommends the addition of new language to this
section whereby the area where taxpaid spirits or wines are stored will
not be considered bonded premises if the proprietor's records show that
the tax has been paid or determined. They state that their proposal
would ``shift the focus from the outdated requirement of physical
segregation to a modernized, efficient approach based upon
`constructive segregation.' ''
We did not adopt this recommendation because the IRC does not allow
for the separation of premises solely by records. The IRC at 26 U.S.C.
5612 clearly states that taxpaid or tax determined spirits cannot be
stored on bonded premises. Further, the bonded area of a DSP is a
clearly defined physical area of the plant with clearly defined
boundaries. It is not an area defined only by records of the type of
spirits stored on the premises. In our proposed regulations, this
section is now found at Sec. 19.58.
Conveyance of untaxed spirits or wines within a distilled spirits
plant. Currently, the regulation at Sec. 19.98 provides that untaxed
spirits or wines can be conveyed between different bonded areas of a
plant and across areas of a plant that are not bonded. DISCUS
recommends the amendment of this section by adding language whereby if
the proprietor's records show the tax has not been paid or determined,
then the untaxed spirits will be considered to be on bonded premises
(constructive segregation).
We did not adopt this recommendation because the regulation already
allows for the transfer of untaxed spirits across areas of a plant that
are not bonded. The amendment proposed by DISCUS would only incorporate
the idea of ``constructive segregation'' into this section of the
regulations. However, since the regulation already allows for transfers
across areas of the plant that are not bonded, the amendment proposed
by DISCUS is not necessary. This section of the regulations is now
found at Sec. 19.59 in the proposed regulations.
Spirits in customs custody. Currently, the regulation at Sec.
19.99 provides that spirits in customs custody may be conveyed across
DSP premises under certain conditions. Those conditions include:
The spirits may not be stored or allowed to remain on DSP
premises.
The spirits must be kept separate from other spirits on
DSP premises.
The means and route of conveyance must be approved.
The proprietor must file a consent of surety.
DISCUS recommends the addition of language to this section whereby
if the proprietor's records show that spirits are in customs custody,
then the area where the spirits are stored will not be considered part
of the DSP premises.
We did not adopt this DISCUS recommendation for several reasons.
First, this section of regulations deals with conveyance of spirits in
customs custody across DSP premises. It does not deal with the storage
of such spirits on DSP premises.
In addition, TTB bonded premises and customs bonded premises are
two distinct types of bonded premises. TTB bonded premises are
established under the laws and regulations administered by the Alcohol
and Tobacco Tax and Trade Bureau, while customs bonded premises are
established under a separate set of laws and regulations administered
by U.S. Customs and Border Protection. As such, the premises cannot be
co-located, and there is no basis in the law for constructive
segregation of these bonded premises by records only. The bonded area
of a DSP is a clearly defined physical area of the plant with clearly
defined boundaries. It is not an area defined only by records. In our
proposed regulations, this section is now found at Sec. 19.60.
Production of distilled spirits for personal use. Frequently, TTB
receives
[[Page 26206]]
questions from the general public asking whether the law allows for the
production of distilled spirits in the home for personal use. Under
Federal law (26 U.S.C. 5171), distilled spirits may only be produced at
a registered distilled spirits plant. Therefore, we propose to add a
new section to subpart C, which will explain that a person may not
distill spirits at home for personal use. This new section is found in
the proposed regulation at Sec. 19.51.
Subpart D--Registration of a Distilled Spirits Plant and Obtaining a
Permit
The current regulations governing the qualification of a distilled
spirits plant are found in subpart G. These regulations cover a number
of issues, including the requirements for plant registration, operating
permits, alternation of premises, and amending registrations and
operating permits.
Proposed subpart D covers the initial registration of a distilled
spirits plant and procedures for obtaining an operating permit. We
propose to assign regulations concerning changes after the original
qualification of the plant to the new subpart E.
In the proposed subpart D, we also propose to rearrange the
information related to the qualification of a distilled spirits plant
in a more logical order. For example, we propose to group all
registration information together under a heading titled ``Requirements
for Registering a Plant,'' while information relating to operating
permits is grouped together under a separate heading titled
``Requirements for an Operating Permit Under the I.R.C.'' In the
current regulations, much of the information regarding registration and
operating permits is intermingled. We believe that separating these
subjects will make it easier for readers to understand which
requirements apply to plant registration and which requirements apply
to operating permits.
Other businesses. In its comments on part 19, DISCUS proposes the
inclusion of a cross-reference at Sec. 19.152 of the current
regulations, indicating that ``other businesses'' may be allowed under
a separate section of the regulations. We adopted this proposal in the
proposed regulations at Sec. [thns x p]19.73(b).
Major equipment. DISCUS also recommends in its comments that the
requirement to list major equipment on the application for
registration, currently found at Sec. 19.166, be amended. First, it
states that the regulation should be clarified to provide that ``major
equipment'' must be identified in the registration only if it is ``set
up'' and ``used for distillation, redistillation, or recovery of
spirits.''
We adopted this suggestion in part. We do not see any need to list
major equipment in the application that is not ``set up'' and used for
the production, storage, or processing of spirits. Therefore, we have
inserted language in the proposed regulations at Sec. 19.75, which
requires that equipment be listed if it is ``set up'' and used for the
production, storage, or processing of spirits.
DISCUS also recommends that a paragraph be added to Sec. 19.166
stating that ``bulk containers of less than 101 wine gallon capacity
and not meeting the criteria of a tank under Sec. 19.273 (such as
perks and small totes) are not items of major equipment and are not
required to be listed in the application for registration.'' This
recommendation is reasonable because such containers are not items of
major equipment, and we include it in the proposed regulation at Sec.
19.75.
In addition, DISCUS recommends that the requirement to provide a
``statement of certification of accurate calibration'' for tanks found
in the current regulations at Sec. Sec. 19.166 and 19.273(a)(6) be
eliminated. This recommendation is reasonable and has been adopted in
the proposed regulations because it only involves eliminating a
requirement to include a ``statement of certification of accurate
calibration'' in the notice of registration. The proposed regulation at
Sec. 19.182 will continue to require that tanks be accurately
calibrated.
Registration file. The IRC at 26 U.S.C. 5171(c) requires that
persons must apply for and receive a notice of registration before
commencing business as a distilled spirits plant. In regard to the
maintenance of the registration file, currently at Sec. 19.155, DISCUS
recommends the addition of language to allow the registration file to
be kept in computerized records. We did not adopt this proposal because
registration documents are normally submitted to TTB in a hard-copy
format and returned to the proprietor by TTB in hard-copy format.
DISCUS also recommended the elimination of the requirement that the
registration file be kept ``at the plant.'' We did not adopt this
proposal because the file must be readily available for inspection by
appropriate TTB officers.
LLCs and LLPs. The current regulations governing qualification of a
distilled spirits plant in subpart G only acknowledge three types of
business organizations, sole proprietorships, partnerships, and
corporations. In view of the increasing use of limited liability
companies (LLCs) and limited liability partnerships (LLPs), we have
included instructions for these types of business organizations in the
proposed regulations at Sec. 19.93.
Subpart E--Changes to Registrations and Permits
Proposed subpart E includes the regulations governing changes to
the distilled spirits plant registration, changes to operating permits,
and alternation of plant premises. Similar to the changes that we
propose in new subpart D, much of the information in the new subpart E
is arranged in a more logical order. For example, matters affecting
changes to registration are grouped together under the heading titled
``Rules for Amending a Registration,'' and matters affecting changes to
operating permits are grouped together under the heading titled ``Rules
for Amending an Operating Permit.''
In the current regulations, much of the information regarding
changes to the registration and changes to the operating permit is
intermingled. As with new subpart D, we believe that separating these
subjects will make it easier for readers to understand the specific
requirements that apply to amending either the plant registration or
the operating permit.
Letterhead notices and letterhead applications. In its comments on
part 19, DISCUS makes several recommendations regarding how proprietors
should apply for changes to a plant's registration or operating permit.
Generally, DISCUS recommends that, in most instances, the regulations
allow proprietors to request changes by filing a letterhead notice. In
its petition, DISCUS states that:
Subpart G provisions regarding changes in the information shown
in the original registration should be revised to eliminate
unnecessary prior submissions and prior approval requirements.
Similar to our alternation proposals, 27 CFR 19.180, 19.82 and
19.183 (application for amended registration, change in name of
proprietor and change of trade name, respectively) should be amended
to provide that a proprietor file a letterhead notice reporting any
change within 30 days after the change. Further, 27 CFR 19.184 and
19.185 (changes to largest stockholders and changes in officers and
directors, respectively) should be revised to provide identical
treatment (i.e., reported in the next amended registration) because
there is no reason to treat these changes differently.
TTB agrees that we should simplify the amendment of registrations
and permits wherever possible. Accordingly, we are proposing to expand
the use of both letterhead notices and letterhead applications for
reporting changes to the registration and permit. We will allow the use
of letterhead notices to report
[[Page 26207]]
minor changes affecting the registration or permit. We will allow for
the use of letterhead applications for more substantive changes but
these must be approved by TTB prior to the change. The use of amended
applications, letterhead applications, and letterhead notices are
discussed in the proposed regulations at Sec. Sec. 19.112 and 19.126.
Changes in the statement of plant security. In the current
regulation at Sec. 19.153(b), an application for amended plant
registration (form TTB F 5110.41) must be filed each time there is a
change in plant personnel or procedures contained in the statement of
security. In Notice No. 870, ATF proposed to liberalize this
requirement. Therefore, we propose that Sec. 19.153(b) be amended to
require that a letterhead application be filed for changes in the
security procedures listed in Sec. 19.153(a)(1)-(4), and that a
letterhead notice be filed for changes in the personnel listed in Sec.
19.153(a)(5). Thus, the letterhead application or letterhead notice
would replace the amended registration that was required each time that
the information in Sec. 19.153(a)(1)-(5) changed. The plant
registration would be updated on an annual basis to incorporate changes
made during the preceding year.
In its comments on Notice No. 870, Equistar Chemicals states that
it endorses the proposed changes and would encourage any additional
efforts to facilitate compliance through reducing nonessential
paperwork. However, Equistar asks for some clarification of this
proposal. It pointed out that the proposal allows companies to submit a
``letterhead application'' and ``letterhead notice'' for changes.
Equistar states that it presumes that we intended companies to simply
send an informal letter notifying the agency of procedure or personnel
changes. The company asks for a clarification of these terms.
In response to this request for clarification, TTB advises that the
terms ``letterhead application'' and ``letterhead notice'' refer to a
letter from a company representative, with signature authority, on
company letterhead (see definitions). The ``letterhead application'' is
subject to TTB approval prior to the change; however, the ``letterhead
notice'' is not subject to prior approval. These terms are now fully
explained in the proposed regulations at Sec. Sec. 19.112 and 19.126.
Equistar also points out that ``the proposal requires a letterhead
application for `changes in any of the information' listed in the
sections of the Statement of Physical Security that address procedural
changes.'' The company states that a requirement to advise us of ``any
changes'' is overly broad and could encompass non-substantive as well
as substantive changes. Equistar recommends that we maintain the rule's
original language that covers changes in ``procedure'' rather than
``any changes.''
The current regulation governing changes in plant security, which
appears at Sec. 19.153, has been rewritten to clarify the type of
changes that may be reported to TTB by letterhead application or
letterhead notice. In our proposed regulations, this section is now
located at Sec. 19.123.
In its response to Notice No. 870, DISCUS states that it supports
the proposal whereby a distilled spirits plant would file a letterhead
notice instead of an amended registration for changes in the
information provided under 27 CFR 19.153(a)(5). However, DISCUS
recommends the deletion of the word ``security'' from the proposed term
``security personnel listed in paragraph (a)(5).'' DISCUS states that
the term ``security personnel'' is not used in paragraph (a)(5) and is
not synonymous with the persons covered by paragraph (a)(5).
We agree that the term ``security personnel'' is not an accurate
term. Therefore, we propose deleting the word ``security'' from the
proposed regulation at Sec. 19.76.
DISCUS also recommends that the regulations conform their treatment
of changes in Sec. 19.153(a)(1)-(4) to the proposed changes in
paragraph (a)(5). DISCUS asks that the regulations allow these changes
to be reported by a letterhead notice within 30 days after the changes.
DISCUS states that the information required by paragraphs (a)(1)-(4)
and (a)(5) concern the same issues, and ``no reason exists to subject
subsection (a)(5) to different treatment than subsections (a)(1)-
(a)(4).''
In response to this recommendation, TTB advises that the
information at Sec. 19.153 is part of the data for an ``application''
for registration (27 CFR 19.152(k)). As such, the items of information
provided under Sec. 19.153 are subject to pre-approval for initial
qualification of a distilled spirits plant and continued qualification
of each plant. Further, the items listed under Sec. 19.153(a)(1)
through (4) represent crucial physical security features of a plant and
must, therefore, be subject to prior approval by TTB. In contrast, the
information required by Sec. 19.153(a)(5) is a listing of persons
having responsibility for custody and access to keys for approved locks
at the distilled spirits plant. Since plants are free to designate the
persons responsible for such custody, this particular item of
information is not something that needs to be pre-approved. Therefore,
this item will be treated as a ``notification'' rather than an
``application.'' These changes now appear in the new, proposed
regulations Sec. Sec. 19.76 and 19.123.
Change in name of proprietor. The current regulation at Sec.
19.182 requires that the proprietor file an application to amend the
registration and the operating permit whenever there is a change in the
name of the proprietor. DISCUS recommends the amendment of that
regulation to allow the filing of a letterhead notice within 30 days of
the name change, and that the new information be included in the next
application to amend the registration and the next application to amend
the operating and/or basic permit filed by the proprietor. DISCUS also
recommends deleting from the current regulations the phrase,
``Operations may not be conducted under the new name prior to approval
of the amended registration and issuance of the amended permit.''
The provisions of the current regulation at Sec. 19.182 will be
covered in the proposed regulations at Sec. Sec. 19.113 and 19.128,
and the proposed regulations will no longer require the filing of
amended applications. Instead, the proposed regulations will allow for
the filing of a letterhead application. However, since a change in the
proprietor's name is a substantive change, the proposed regulation will
still prohibit operations conducted under the new name before TTB
approves the letterhead application.
Change of trade name. The current regulation at Sec. 19.183
requires that the proprietor file an application to amend the operating
permit when there is a change in the trade name of the proprietor.
Operations may not be conducted under the new trade name until the
amended permit is approved. DISCUS recommends the amendment of the
regulation to allow for the filing of a letterhead notice within 30
days of the change and no longer require an application to amend the
operating permit.
In the proposed regulation at Sec. 19.129, TTB will no longer
require the filing of an amended application. Instead, the proposed
regulation will allow for the filing of a letterhead application.
However, since any change in the trade names used by the proprietor is
a substantive change, the proposed regulations will still prohibit
operations conducted under the new trade name prior to TTB's approval
of the letterhead application.
Change of stockholders. The current regulation at Sec. 19.184
allows for the filing of an annual report of changes in
[[Page 26208]]
major stockholders except where the sale or transfer of capital stock
results in a change in control or management. In its comments on part
19, DISCUS recommends that the language of the regulation be amended to
read, ``Changes in the list of stockholders furnished under the
provision of Sec. 19.167(c)(1) shall be reported in the next
application for amended registration on Form 5110.41 filed by the
proprietor.''
In the proposed regulations at Sec. Sec. 19.114 and 19.130 we will
allow a proprietor to submit an annual letterhead notice regarding
changes in major stockholders. Under the proposed regulations, the
changes must be incorporated in the next application filed, unless a
change of control occurs. If a change in control takes place, Sec.
19.114 requires that the proprietor must file TTB F 5110.41,
Registration of Distilled Spirits Plant, within 30 days of the change,
and Sec. 19.130 requires that the proprietor must file TTB F 5110.25,
Application for Operating Permit Under 5171(d), within 30 days of the
change.
Changes in officers and directors. The current regulation at Sec.
19.185 requires that a proprietor file an application for amended
registration on Form 5110.41 when there is a change in the list of
officers or directors. DISCUS recommends that the regulation be amended
to state that the proprietor will report the change on the next
application on TTB F 5110.41 for amended registration filed by the
proprietor.
In the proposed regulations at Sec. Sec. 19.115 and 19.131, we
propose to allow a proprietor to submit a letterhead notice at the time
of the changes and incorporate the changes in the next application for
amended registration filed on form TTB F 5110.41 and the next form TTB
F 5110.25 filed.
Permit transfers. In its comment on Notice No. 870, Equistar
Chemicals asked that ATF (BATF in its comment) examine ways to minimize
the paperwork and notice requirements associated with ATF permits when
a change of ownership occurs. Equistar states:
BATF should examine ways to minimize the paperwork and notice
requirements necessary to transfer BATF permit ownership in order to
facilitate a smoother and less burdensome transition to the
acquiring entity. Because the Securities and Exchange Commission
(SEC) obtains copious records on publicly traded companies, perhaps
BATF could coordinate efforts with SEC in cases where the acquiring
entity is a publicly traded company and obtain company information
through existing government databases. Alternatively, BATF could
also prevent duplication by allowing companies to submit their
annual reports in lieu of filling out numerous forms and
applications. Such solutions would simultaneously facilitate BATF's
access to companies' business information and alleviate the burden
on companies who must currently submit new documentation of standard
business information to each governmental branch who requests it.
In general, TTB agrees that we should simplify the amendment of
registrations and permits wherever possible. For this reason, we
propose to expand the use of both letterhead notices and letterhead
applications for reporting changes to the registration and the
operating permit.
However, in regard to utilizing SEC filings in cases where there is
a change in ownership or control, there are several problems. First,
much of the information that a proprietor submits in support of a plant
registration or an operating permit is specific to distilled spirits
operations. As such, this type of information, except for some similar
items of information, is not required by agencies such as the SEC and
so copies of such submissions would be inadequate for TTB purposes.
Adoption of formulas. The current regulation at Sec. 19.187
provides for the adoption of formulas by a successor. DISCUS recommends
in its comments on part 19 that the regulation refer to 27 CFR 5.28 and
that the language in Sec. 19.187 which is redundant with Sec. 5.28 be
removed.
In the proposed regulations we eliminated Sec. 19.187 as a
separate section of regulations and we have incorporated references to
the adoption of formulas and Sec. Sec. 5.28 and 20.63 into the
proposed regulations at Sec. Sec. 19.116 and 19.132.
Changes in premises. The current regulation at Sec. 19.190 refers
to several sections of regulations relating to alternation of premises.
DISCUS recommends the amendment of these references to ensure the
accuracy of cross-references to other appropriate sections in part 19.
The accuracy of cross-references is important so we propose to amend
the references at proposed Sec. 19.119 to reflect the new section
numbers for alternation of premises.
Change in operations. The current regulation at Sec. 19.191
requires that a DSP proprietor file an application to amend the
registration and operating permit if the proprietor wishes to engage in
a new business involving distilled spirits. This section also applies
to conducting other businesses on DSP premises. DISCUS recommends the
addition of language to the end of this section stating, ``Applications
may be approved as provided in Sec. 19.72.''
In the proposed regulation at Sec. 19.120, we now include a
reference to Sec. 19.55, which is the section of regulations relating
to other businesses.
Changes in construction or use of buildings and equipment. The
current regulation at Sec. 19.193 requires a DSP proprietor to submit
a letterhead notice prior to a material change in construction or use
of buildings or equipment and then incorporate the change into the next
amendment of the notice of registration. DISCUS recommends the
elimination of most of this section because it is redundant with the
general instructions relating to applications for amended registration
found at Sec. 19.180.
We did not eliminate this section because we do not believe that it
is redundant. Similar to the other sections in this subpart, it
provides specific instructions for amending the registration. The
provisions of current Sec. 19.193 appear in the proposed regulations
at Sec. 19.122.
Procedures for alternation of proprietors. The current regulation
at Sec. 19.201 covers the procedures that proprietors must follow when
DSP premises, or part of the premises, are alternated between different
proprietors. Alternation of premises refers to the formal, legal
transfer of operations from one proprietor to another proprietor.
DISCUS proposes to amend this regulation by eliminating the requirement
to provide a diagram of the area of the plant to be alternated.
Further, DISCUS proposes that language be inserted into the regulation
that would allow the proprietor's production, storage, and processing
records to be used to document the alternation of proprietors.
We did not adopt this DISCUS proposal. Records of production,
storage, and processing are used to record the details of production,
storage, and processing activities at a plant. These records are not
designed to officially document the alternation of plant premises from
one proprietor to another proprietor. Further, such records would not
identify the actual bonded areas of the plant that are alternated; only
a diagram can provide this information. However, we did substantially
rewrite this section of the regulations to clarify the procedure for
alternating proprietors. In addition, the requirement to file Form
5110.34 has been replaced with the requirement to file a letterhead
notice with TTB when such alternations occur. The proposed amended
section appears at Sec. 19.141.
Alternate operations. The current regulation at Sec. 19.202
provides for the alternate use of plant premises and equipment for
customs purposes whereby the premises of the plant are
[[Page 26209]]
converted from TTB bonded premises to Customs bonded premises. The
current regulation also requires that the proprietor file a notice on
Form 5110.34 whenever the plant premises are curtailed or extended for
customs purposes. In Notice No. 870 ATF proposed to substitute a
letterhead notice for the filing of Form 5110.34 each time that
distilled spirits plant premises are alternated for customs purposes.
The current regulations at Sec. Sec. 19.203 through 19.206 provide
for the alternation of distilled spirits plant premises with bonded
wine cellar premises, taxpaid wine bottling house premises, general
premises, and premises for the manufacture of eligible flavors. The
current regulations also require that the proprietor file a notice on
Form 5110.34 whenever the premises are curtailed or extended for these
purposes. In Notice No. 870, ATF proposed to simplify this requirement
by amending Sec. Sec. 19.203 through 19.206 to provide that after a
proprietor has received approval for the alternation plan that defines
the boundary of the premises to be alternated, the alternation may take
place pursuant to records kept in a logbook. In Notice No. 870, ATF
listed the requirements for the proposed logbook record in a new
section of regulations at Sec. 19.781. In Notice No. 870, ATF also
proposed to allow for the alternation of distilled spirits plant and
brewery premises under the same conditions. Alternation of distilled
spirits plant premises and brewery premises is not provided for in the
current regulations.
In its comments on Notice No. 870, DISCUS expresses support for the
proposal to eliminate the requirement to file Form 5110.34 each time
that the premises are alternated. However, DISCUS does not support the
proposal to require a proprietor to prepare a logbook containing the
information required by proposed Sec. 19.781 each time that the
proprietor alternates premises. DISCUS states that ``this proposal runs
contrary to the objective of effective regulatory reform; [sic] to
replace formal recordkeeping requirements with reliance upon commercial
business records maintained in the ordinary course of business.''
Further, DISCUS contends that the proposal does not eliminate the
requirements for prior submission and prior approval or the requirement
to physically segregate products by type (wine, beer, spirits, or
flavors). It asserts that the requirement in the regulations to
segregate products is burdensome and that companies can track,
distinguish, and identify products and operations by computer. DISCUS
also asserts that `` `constructive segregation' of product by
computerized records protects BATF's regulatory objectives, without the
inefficient use of space and time and effort inherent in requiring
physical separation.''
DISCUS recommends that the regulations allow alternation under
Sec. Sec. 19.202 through 19.206 if the distilled spirits plant
proprietor files a letterhead notice reporting the alternation within
30 days after the alternation takes place. It also proposes that the
proprietor's ordinary business records be used to substantiate the
alternation and that we eliminate the requirement to physically
separate products as currently required.
For the reasons discussed earlier in this notice, TTB is not
adopting these recommendations regarding dependence upon company
records for segregation of goods and reliance upon ``constructive
segregation.'' As stated earlier, the IRC does not provide for the
separation of premises solely by records. Further, the bonded area of a
DSP is a clearly defined physical area of the plant with clearly
defined boundaries. It is not an area defined only by commercial
records.
Therefore, in this current notice we propose a new section of
regulations at Sec. 19.142 to provide for the alternation of premises
for customs purposes whereby proprietors will file a letterhead notice
with TTB prior to any alternation of premises. We have also eliminated
the requirement to file Form 5110.34. We do not agree with the DISCUS
proposal that would allow notices to be filed up to 30 days after the
fact. Thus, the proposed regulation at Sec. 19.142 will require that
the letterhead notice must be filed prior to alternation of premises
for customs purposes.
In addition, we propose a new, single section of regulations at
Sec. 19.143 that will provide for extension and curtailment of
distilled spirits plant bonded premises with either general premises,
an adjacent bonded wine cellar, an adjacent taxpaid wine bottling
house, an adjacent brewery, or facilities for the manufacture of
eligible flavors. Under our proposed regulations, proprietors will
document such alternations in the record prescribed in proposed Sec.
19.627 at the time the alternation occurs, and we will not require the
filing of a letterhead notice with TTB or the filing of form TTB F
5110.34. The record prescribed in proposed Sec. 19.627 will allow for
the use of commercial records, when the commercial records provide the
same information required by Sec. 19.627 and are retrievable and
available for inspection by TTB officers. Because of the variability of
commercial records, we believe that there is a need to provide minimum
standards for the commercial records that document alternation of
premises. Further, the proposed regulation at Sec. 19.143 will still
require the segregation of products. We disagree with the DISCUS
recommendation that would allow for the ``constructive segregation'' of
products based on computerized records. This is not an actual
segregation of product as required by law at 26 U.S.C. 5178(a)(1)(B)
and 5612 and could result in the commingling of taxpaid and non-taxpaid
product.
Subpart F--Bonds and Consents of Surety
Proposed subpart F covers the bonding of distilled spirits plants.
For the most part, this subpart contains the same information found in
current regulations at subpart H, except that the proposed regulations
are written in plain language.
However, the proposed regulation at Sec. 19.163 will allow persons
who operate more than one distilled spirits plant serviced by TTB's
National Revenue Center to give TTB a single area operations bond that
covers the operations of two or more distilled spirits plants and
adjacent bonded wine cellars located within the same geographic area.
For practical purposes this means that, since TTB's National Revenue
Center services the entire United States, a proprietor's operations
bond may cover all of the proprietor's plants in the United States.
DISCUS did not recommend any substantive changes to these
regulations in its comments on part 19. However, it did recommend that
the requirement to execute a bond under penalties of perjury be
deleted. This recommendation is not being considered in this proposed
rule for the reasons discussed earlier in this notice.
Subpart G--Construction, Equipment, and Security Requirements
Under the current regulations in part 19, construction, equipment,
and security issues are covered at subpart I. In the regulations
proposed by this notice, those issues will be covered in the new
proposed subpart G. The following is a discussion of the changes we
that propose in the new subpart G.
Construction of buildings. The current regulation at Sec. 19.271,
Construction of buildings, will not be included in the proposed
regulations. We found that it simply repeats requirements already found
in Sec. Sec. 19.281(a) and 19.281(b).
Equipment. The current regulation at Sec. 19.272, Equipment, will
also be deleted. We found that it simply repeats
[[Page 26210]]
requirements found in several other sections of the current regulations
including: Sec. Sec. 19.152(h), 19.152(k), 19.153, 19.166, and
19.281(a), (c), and (d).
Tanks. DISCUS recommends that the requirement to permanently mount
scale tanks on scales should not apply to tanks that do not exceed a
55-gallon capacity. This proposal is reasonable because such small
tanks are intended to be portable and there is no need to mount them
permanently on scales. Therefore, we adopted this recommendation in the
proposed regulation at Sec. 19.183(b).
Continuous distilling system. We propose to eliminate the current
regulation at Sec. 19.275, Continuous distilling system, from the
regulations in the new proposed subpart G. The requirement for a
continuous distilling system is already covered in the proposed
regulations at Subpart L, Production of Distilled Spirits, and we found
Sec. 19.275 of the current regulations to be redundant.
Meters. During the course of certain operations at distilled
spirits plants, proprietors are required to measure the volume of
distilled spirits. When measuring spirits for purposes other than tax
determination, the regulations require that the spirits be measured in
a tank or a conveyance using calibration charts. The current regulation
at Sec. 19.277 also allows for the use of meters when measuring
spirits for purposes other than tax determination. However, in order to
use a meter, the proprietor must first submit an application to TTB,
along with technical data regarding the meter they intend to use. TTB
must approve the meter prior to its use at a plant.
In its petition and markup of part 19, DISCUS proposes the
elimination of the prior approval requirement for meters. DISCUS states
that this requirement imposes unnecessary and time-consuming burdens on
TTB resources and the industry and serves only to delay operations at a
DSP. DISCUS states that the proprietor should be responsible for using
and maintaining accurate equipment.
After careful consideration of this proposal, TTB has decided to
propose significant changes in the new proposed regulations whereby a
proprietor may use mass flow meters for all required bulk gauges at a
distilled spirits plant, including bulk tax determination gauges, if
the meters meet certain criteria for accuracy. This will reduce the
burden on industry members and TTB while ensuring the accuracy of bulk
measurements.
Accordingly, the proposed regulation at Sec. 19.188(c) provides
that a proprietor may use a mass flow meter for tax determination of
bulk spirits if the meter is certified by the manufacturer or other
qualified person as accurate within a tolerance of +/-0.1%. For all
other required gauges of bulk spirits at a distilled spirits plant, a
proprietor may use a mass flow meter if it is certified by the
manufacturer or other qualified person as accurate within a tolerance
of +/-0.5%. For both tax determination gauges and all other required
gauges, the proprietor must make corrections for the temperature of the
spirits being measured in conjunction with the volumetric measurement
of spirits by mass flow meter. The proprietor must also test mass flow
meters at least every 6 months to ensure that they are accurate within
the required tolerances.
Miscellaneous changes. In addition to the changes proposed above,
TTB also proposes to make several editorial changes in subpart G that
will make the regulations easier to understand. For example, the
current regulation at Sec. 19.273, Tanks, has been divided into
several shorter sections covering: (a) The general requirements for
tanks, (b) scale tanks, (c) graduation of scale tanks, and (d) testing
for accuracy. The proposed, shorter sections are found at Sec. Sec.
19.182, 19.183, 19.184, and 19.185.
Subpart H--Special (Occupational) Tax
On October 22, 2004, the President signed into law the American
Jobs Creation Act of 2004 (the Act), Public Law 108-357, 118 Stat.
1418. Section 246 of the Act amended the IRC by providing that, during
the 3-year period from July 1, 2005 through June 30, 2008, the rate of
special (occupational) tax imposed under IRC sections 5081, 5091, 5111,
5121, and 5131 is zero. The effect of this provision is that
proprietors of distilled spirits plants, including alcohol fuel plants
and certain other proprietors, are not subject to special
(occupational) tax during the suspension period. However, although the
tax rate for the occupations affected by the suspension is zero during
the suspension period, the IRC still requires that persons engaging in
those occupations must register annually and comply with all applicable
recordkeeping requirements. On October 31, 2005, TTB issued Treasury
decision T.D.TTB-36 (70 FR 62238) which implemented this provision of
the Act by amending the special (occupational) tax regulations in part
19 and other affected parts.
On August 10, 2005, the President signed into law the Safe,
Accountable, Efficient Transportation Equity Act: A Legacy for Users,
Public Law 109-59, 119 Stat. 1144. Section 11125 of this act repeals
the special (occupational) tax applicable to proprietors of distilled
spirits plants. This provision will become effective on July 1, 2008.
The special (occupational) tax regulations proposed in this notice
are located in proposed subpart H and are based upon the American Jobs
Creation Act of 2004. Thus, they provide for a suspension of the
special (occupational) tax through June 30, 2008. However, prior to the
effective date of section 11125 of the Safe, Accountable, Efficient
Transportation Equity Act, TTB intends to develop and issue regulations
for all parts in title 27 of the Code of Federal Regulations that are
affected by the special tax repeal provisions of that act. Therefore,
the regulatory text in the final rule associated with this notice of
proposed rulemaking will reflect the statutory provisions that are in
effect when that final rule is published.
Subpart I--Distilled Spirits Taxes
Under the current regulations, information regarding payment of the
distilled spirits taxes is found in two separate subparts, Subpart C,
Taxes, and Subpart P, Transfers and Withdrawals. Subpart C contains
much of the basic information about distilled spirits taxes, plus the
methods for calculating tax credits under the IRC at 26 U.S.C. 5010.
Information regarding determination of taxes and the filing of tax
returns is located in subpart P.
Logically, all information associated with distilled spirits taxes
should appear in the same subpart. Therefore, the proposed regulations
consolidate all of the information relating to distilled spirits taxes
currently found in subparts C and P plus several other miscellaneous
tax provisions currently located in other subparts into a new proposed
Subpart I, Distilled Spirits Taxes.
General sections. In addition to consolidating the tax information
currently found in subpart C and P, we have created several new general
sections within the proposed subpart I. These new sections discuss
issues such as deferred payment and prepayment of taxes, and the tax
credits provided under 26 U.S.C. 5010. These general sections are
intended to give the reader a brief introduction to some of the more
complex subject matter within proposed subpart I.
Gallonage taxes. In its comments on part 19, DISCUS recommends the
elimination of several sections of the current Subpart C regulations
that appear under the heading ``gallonage taxes.'' This includes
Sec. Sec. 19.21, 19.22,
[[Page 26211]]
19.23, 19.24, 19.25, and 19.26. DISCUS states that these sections are
redundant with the IRC.
TTB agrees that many of these sections of regulations repeat
provisions of the IRC. However, as stated earlier in this notice, we
intend that the regulations in part 19 provide users with a
comprehensive and complete guide to the requirements for operating a
distilled spirits plant, and where appropriate, we will repeat certain
statutory requirements in the regulations. We do not wish to
unnecessarily require readers of these regulations to reference both
the IRC and the regulations when researching an issue. Therefore, we
propose to retain most of the information provided in current
Sec. Sec. 19.21, 19.22, 19.23, 19.24, 19.25, and 19.26 in proposed
Subpart I.
Inventory reserve account. In its markup of part 19, DISCUS also
proposes the deletion of Sec. 19.38, which provides for an inventory
reserve account. The inventory reserve account is one of the optional
methods that a proprietor may use for applying effective tax rates
under the IRC at 26 U.S.C. 5010. DISCUS offers no explanation for
deleting this section. In the proposed regulations, we retained this
section in order to provide industry members with another option in
determining the method for applying effective tax rates.
Subpart J--Claims
Under the current regulations in part 19, the subject of ``Claims''
is covered as a subcategory of subpart C, Taxes. In these proposed
regulations, we have relocated the regulations related to claims into a
new, separate subpart J. Most of the changes to the regulations in
proposed subpart J are relatively minor and are intended to improve the
language and thereby make the regulations easier to comprehend.
Under the current regulations governing claims, only distilled
spirits that were withdrawn from a domestic distilled spirits plant may
be returned to a distilled spirits plant and a claim filed. We propose
to amend the language of the regulations in proposed Subpart J, Claims,
and in Subpart Q, Return of Spirits to Bonded Premises and Voluntary
Destruction, to reflect the fact that imported bottled spirits that
were taxpaid or tax determined when imported into the United States may
be returned to a distilled spirits plant and a claim filed. This change
reflects an amendment to the law at 26 U.S.C. 5008(c), which became
effective on April 1, 1998.
Subpart K--Gauging
We propose to establish a new subpart K that will amend and
consolidate gauging instructions that are currently located in several
different subparts within part 19 at Sec. Sec. 19.84, 19.91, 19.92,
19.93, 19.319, and 19.503.
We believe that placing gauging issues within a single subpart will
assist the reader in locating gauging information that was formerly
located within administrative and miscellaneous subparts. We have also
restructured several of the sections relating to gauging to make them
easier to understand. We also propose to amend several of the
regulations relating to gauging.
Meters. Under the current regulations at Sec. 19.277(c), TTB may
authorize proprietors to use a meter for measuring quantities of
spirits for purposes other than tax determination. In order to receive
authorization to use a meter for this purpose, Sec. 19.277 requires
that the proprietor make an application to the appropriate TTB officer
that includes technical data about the meter such as make, model, and
the accuracy tolerance. TTB must then evaluate the data to determine
whether the meter is suitable for the intended use before approving its
use. The current regulations do not provide for the use of meters for
bulk tax determination gauges.
Under the proposed regulations at Sec. 19.284, TTB would allow for
the use of mass flow meters for both bulk tax determination gauges and
all other bulk gauges that must be performed at a distilled spirits
plant. Further, the proprietor's use of mass flow meters would not be
subject to prior approval by TTB. Instead, the proposed regulations
establish standards of accuracy that a mass flow meter must meet for
use in bulk tax determination gauges and a separate standard of
accuracy for all other bulk gauges. As proposed, a mass flow meter used
for tax determination gauges must be certified by the manufacturer or
other qualified person as accurate within a tolerance of 0.1%. A mass flow meter used for all other required gauges must
be certified by the manufacturer or other qualified person as accurate
within a tolerance of 0.5%.
In its comments on part 19, DISCUS recommends amending the current
regulation at Sec. 19.319(a) by deleting the requirement to use an
``approved meter'' for volume determinations in the production gauge.
We propose to change this requirement by substituting the term
``accurate mass flow meter'' for the term ``approved meter.'' Thus, the
volume determination on the production gauge can be made using an
``accurate mass flow meter.'' This change appears in the proposed
regulations at Sec. 19.289.
For several years, TTB has seen an increased interest in the use of
meters by proprietors of distilled spirits plants. Further,
manufacturers of meters have improved the accuracy of their mass flow
meters. The proposed regulations will give proprietors the opportunity
to take advantage of the improved performance of mass flow meters and
modernize operations at their plants without the need to seek prior
approval from TTB.
Spirits in receiving tanks. DISCUS recommends the deletion of a
sentence from the current regulation at Sec. 19.319(a) that states,
``Spirits in each receiving tank shall be gauged before reduction in
proof and both before and after each removal of spirits therefrom.'' We
did not adopt this recommendation because we need accurate measurements
of spirits removed from production, including a measurement of the
spirits before and after removal from the receiving tank. This
provision is found in the proposed regulations at Sec. 19.289(a).
Gauge record for packages filled. DISCUS also recommends the
deletion of the requirement for a gauge record for each lot of packages
filled, found in the current regulation at Sec. 19.319(d). We did not
adopt this recommendation. We continue to need this type of information
and we will continue to require a gauge record for each lot of packages
filled. This provision is now found in the proposed regulations at
Sec. 19.289(d).
Other industry proposals. DISCUS also recommends that gauges no
longer be required when spirits are filled into packages from storage
tanks and when spirits are transferred between operational accounts. We
did not adopt these changes in the proposed regulations. We believe
that these gauges are still an important means of accounting for
spirits within the plant.
The current regulation at Sec. 19.91(b) covers the gauging of
alcoholic flavoring materials when dumped. The regulation states that
when proof of the flavoring materials is determined from a label or the
manufacturer's statement, the proprietor must periodically test a
sufficient number of samples and record the results in the gauge
record. DISCUS recommends the elimination of the requirement to record
those results in a gauge record. TTB has adopted this recommendation in
the proposed regulations at Sec. 19.287. This is a relatively minor
gauging requirement,
[[Page 26212]]
and we see no reason to require a record for such gauges.
In its comment on Notice No. 870, Equistar Chemicals asks that the
requirement in the current regulations at Sec. 19.503 and Sec. 30.43
be clarified. The company states that the existing regulations appear
to require the establishment of a separate tare for each package
individually gauged. The term ``tare'' refers to the weight of an empty
package. They propose that TTB allow for an average tare in order to
facilitate packaging by reducing the time involved in recording a gauge
and tare for each package. We did not adopt this recommendation. TTB
requires an accurate gauge of spirits that are withdrawn from bonded
premises. A package (drum, barrel, or similar container; see Sec. 19.1
definition) is so large that the variance in tare can be significant.
This means that the proprietor must establish the actual tare of each
package to be withdrawn from bond. This requirement appears in the
proposed regulations at Sec. 19.288.
Subpart L--Production of Distilled Spirits
Under the current regulations in part 19, production of distilled
spirits is covered at subpart J. In the regulations proposed by this
notice, production issues will be covered in proposed subpart L. In its
comments on part 19, DISCUS recommends several changes affecting the
regulations that govern production of distilled spirits. Below is a
summary of the recommended changes and TTB's evaluation of those
recommendations. Also discussed is a proposed change to a regulation
based on an amendment to the IRC at section 5222(b)(2).
Notices. The current regulation at Sec. 19.311 requires a
proprietor to file a notice on Form 5110.34 with the appropriate TTB
officer prior to commencing, resuming, or suspending production
operations. DISCUS recommends that the proprietor simply file a
letterhead notice for such actions. This recommendation is reasonable
because the filing of a letterhead notice accomplishes the same
objective as the filing of a form. We adopted this recommendation in
the proposed regulations at Sec. 19.292.
Suspension of reports. DISCUS recommends that during periods when
production operations are suspended, the regulations should not require
proprietors to file reports of production under current subpart W. This
recommendation is reasonable because TTB does not need to receive
reports of no activity, and we adopted this recommendation in the
proposed regulations at Sec. Sec. 19.292(c) and 19.632.
Record of fermenting material. DISCUS recommends amendment of the
current regulation at Sec. 19.314 by the deletion of the requirement
to maintain a record of fermenting material removed from or used on
bonded premises for other purposes. We did not adopt this
recommendation. The IRC at 26 U.S.C. 5207(a)(1)(A) specifically
requires that the proprietor maintain records of the receipt of
materials intended for use in the production of distilled spirits, and
the use thereof.
Unfinished spirits. The current regulation at Sec. 19.316
discusses the requirements for a continuous distillation system and
redistillation of unfinished spirits. DISCUS recommends amendment of
this section of regulation by the deletion of the requirement to
determine the quantity and proof of unfinished spirits produced from
distilling materials. We did not adopt this recommendation because this
type of record is required by the IRC at 26 U.S.C. 5207(a)(1)(C).
Entry gauge. DISCUS recommends amendment of the current regulation
at Sec. 19.321 by the insertion of language that would allow the
production gauge to be used as the entry gauge when spirits are
deposited for storage or processing at the same plant and entered for
redistillation at the same plant. This is a reasonable recommendation
because a single gauge will be sufficient as the production gauge and
the entry gauge and we adopted this recommendation in the proposed
regulation at Sec. 19.306.
Record of tests. DISCUS also recommends that the current regulation
at Sec. 19.326 be amended by deleting a requirement to maintain a
record of tests for the spirits content of chemicals produced by the
production process. We did not adopt this recommendation. The
proprietor is required by this section of regulations to test chemicals
for spirits content. We believe that it is reasonable that the
proprietor keep a record of such tests in order to document that the
spirits content of chemicals removed from the premises does not exceed
the 10 percent by volume limit imposed by the proposed regulation at
Sec. 19.308.
Production inventories. DISCUS recommends amendment of the current
regulation at Sec. 19.329 by changing the requirement to conduct an
inventory from a quarterly to an annual basis. We did not adopt this
recommendation. For inventories that involve bulk liquids in tanks, one
inventory per year is not adequate to accurately keep track of
quantities on hand and detect losses in a timely manner. The shorter
time period between inventories makes it easier for both TTB and a
proprietor to reconcile any discrepancies and thereby protect the
revenue. This requirement has been retained in the proposed regulations
at Sec. 19.312.
Receipts of beer. The current regulation at Sec. 19.312 provides
that fermented material to be used in the production of spirits may
include beer if it is produced at a brewery contiguous to the distilled
spirits plant. Thus, under current regulations beer may only be
received at a distilled spirits plant from a brewery that is contiguous
to the plant. However, in 1997, Public Law 105-34 amended the IRC at 26
U.S.C. 5222(b)(2) by removing the requirement that beer may only be
received from contiguous brewery premises. Instead, 26 U.S.C.
5222(b)(2) now provides that fermented material to be used in the
production of distilled spirits may include beer conveyed without
payment of tax from brewery premises and beer which has been lawfully
removed from brewery premises upon determination of tax. This provision
has been incorporated into the proposed regulations at Sec. 19.296.
Subpart M--Storage of Distilled Spirits
Under the current regulations in part 19, the storage of distilled
spirits is covered at subpart L. In these proposed regulations, issues
related to the storage of distilled spirits will be covered under
subpart M.
In its comments on part 19, DISCUS recommends several changes to
the regulations that govern the storage of distilled spirits. Below is
a summary of the recommended changes and TTB's evaluation of those
recommendations.
Tanks. The current regulation at Sec. 19.342(b) states that if
``spirits or wines are being deposited in a partially filled tank in
storage on bonded premises, simultaneous withdrawals may not be made
therefrom unless the flow of spirits or wines into and out of the tank
is being measured by meters or other devices approved by the
appropriate TTB officer which permit a determination of the quantity
being deposited and the quantity being removed.'' DISCUS recommends
that this subparagraph be deleted. We agree, and we have deleted this
subparagraph from the proposed regulations because we consider this to
be a common-sense issue rather than an issue that needs to be spelled
out in the regulations. In addition, we believe that the requirement to
conduct proper gauging is sufficiently covered in the proposed Subpart
K, Gauging.
Filling packages from tanks. The current regulation at Sec. 19.344
states that
[[Page 26213]]
spirits or wines in a tank must be gauged before and after filling
packages from the tank on bonded premises. DISCUS recommends that this
section of regulations be deleted. We disagree with this
recommendation. This type of gauge is needed in order to properly
account for spirits in the storage account and thereby protect the
revenue.
Packages dumped for mingling. The current regulation at Sec.
19.347 states that when packages are dumped for mingling, the
proprietor must record such mingling on a tank record or tank summary
record. DISCUS recommends that this section be eliminated. We disagree
because the mingling of spirits needs to be documented on a record in
order to properly account for spirits in the storage account and
thereby protect the revenue.
Mingling spirits or wines held in tanks. The current regulation at
Sec. 19.349 states that when spirits of less than 190[deg] of proof or
wines are mingled in a tank, the proprietor must perform a gauge and
record the gauge on the tank record. DISCUS recommends that this
section be deleted. We disagree because the result of such mingling
needs to be gauged and documented on a record in order to account for
spirits in the storage account.
Storage inventories. The current regulation at Sec. 19.353
requires each warehouseman to take a physical inventory of all spirits
and wines in tanks at the close of each calendar quarter. DISCUS
recommends that this requirement be changed to an annual inventory. We
did not adopt this recommendation. One inventory per year is not
adequate to accurately keep track of the quantity of spirits and wines
on hand and detect losses in a timely manner. The shorter time period
between inventories makes it easier for both TTB and a proprietor to
reconcile any discrepancies and thereby protect the revenue.
Subpart N--Processing of Distilled Spirits
Under the current regulations, processing operations other than
denaturation and manufacture of articles is covered at subpart M. In
these proposed regulations, the processing of distilled spirits will be
covered under proposed subpart N. Denaturation of spirits and
manufacture of articles will be covered under proposed subpart O.
In its comments on part 19, DISCUS recommends several changes to
the regulations that govern the processing of distilled spirits. Below
is a summary of its recommended changes and TTB's evaluation of those
recommendations.
Receipt of spirits. DISCUS recommends amendment of the current
regulation at Sec. 19.372(b) by adding a sentence allowing the
shipper's gauge for bulk spirits to be used as the receiving gauge. We
did not adopt this proposal. This suggested change would eliminate the
receiving gauge for transfers in bond of bulk spirits and there would
be no basis for determining whether a loss of spirits occurred during
the shipment, thereby posing a jeopardy to the revenue.
Bottling tanks. The current regulation at Sec. 19.382 requires
that spirits be bottled from bottling tanks. However, TTB can authorize
bottling from original packages or special containers if the proprietor
files a notice with TTB explaining such need. DISCUS recommends that
language be inserted into this section that would allow liqueurs to be
bottled from a tank truck or tote without our prior approval. TTB has
previously approved several requests for the bottling of liqueurs
directly from tank trucks or totes because this is a reasonable method
for handling products such as liqueurs and we adopted this
recommendation in the proposed regulation at Sec. 19.352.
Alcohol content and fill. The current regulation at Sec. 19.386
requires that proprietors conduct proof and fill checks of bottled
spirits at regular intervals and record the results of those tests.
These tests are conducted to ensure that the actual proof and fill of
bottled spirits agree with the alcohol content and quantity stated on
the label. DISCUS recommends that proprietors no longer be required to
record the results of those tests as required by Sec. 19.386(c). We
did not adopt this recommendation in the proposed regulations. We
believe that the recording of the proof and fill checks is important
because it documents whether the proprietor is properly conducting the
tests as required by the regulation.
Completion of bottling. The current regulation at Sec. 19.387
requires that when the contents of a bottling tank are not completely
bottled at the end of the day, the proprietor must make entries on the
bottling and packaging record covering the total quantity bottled that
day. DISCUS recommends that this requirement be deleted from the
regulations. We did not adopt this recommendation. The bottling and
packaging record represents a record of bottling and packaging activity
at the plant and the record should reflect the bottling and packaging
activity that takes place on a daily basis.
Bottles on the bottling line at the end of the work day. In its
comments on part 19, DISCUS states that when the bottling of a
particular product run is not completed by the end of the day and is to
be resumed on the following work day, Sec. 19.388(a)(1) requires
removal of all bottles on the line and packing them in cases that must
be sealed. DISCUS recommends that TTB allow proprietors to keep filled
bottles on the line at the end of the work day, if the same sized
product will be produced on the next bottling shift. DISCUS states that
proprietors can save substantial amounts of money if this proposal is
adopted in the regulations. After careful consideration, we believe
that this proposal is reasonable because it will save both time and
expense for proprietors without jeopardizing the revenue. Therefore, we
are proposing this change in the proposed regulation at Sec.
19.358(b).
Remnants. The current regulation at Sec. 19.389 covers remnant
bottles that remain after the completion of bottling. Remnants are the
few bottles that may remain after completion of bottling. This
regulation requires that notations be made on the bottling record
regarding remnant bottles. In their proposal, DISCUS recommends that we
delete some of the recordkeeping provisions that relate to remnant
bottles. Their suggestion is reasonable because it will eliminate
paperwork for the proprietor without jeopardizing the revenue. We are
proposing this change in the proposed regulation at Sec. 19.359.
Filling packages. The current regulation at Sec. 19.390 requires
that spirits filled into packages on processing premises be gauged and
the results recorded on a package gauge record. DISCUS recommends that
this requirement be eliminated. We did not adopt this recommendation
because without such a gauge, there would be no record of the amount of
spirits filled into packages.
Daily summary record. The current regulation at Sec. 19.400
requires that a daily summary record of bottling and packaging be
prepared as required by Sec. 19.751. DISCUS recommends that this
section be deleted. While no specific reason was given, this
recommendation to delete Sec. 19.400 appears to be part of the general
proposal by DISCUS to eliminate all daily records. We did not adopt
this recommendation. Our reasons for maintaining daily records are
explained in our discussion of Subpart V, Records and Reports.
While we did not retain Sec. 19.400 as a separate section in the
proposed regulations, it has been combined with the current regulation
at Sec. 19.384, Preparation of bottling or packaging
[[Page 26214]]
record. The new combined section will now appear at Sec. 19.354.
Bulk inventories. The current regulation at Sec. 19.401 requires
that the proprietor conduct a physical inventory of bulk wine and
spirits in the processing account at the close of each calendar
quarter. DISCUS recommends that this requirement be changed to an
annual inventory. We did not adopt this recommendation. One inventory
per year is not adequate to accurately keep track of the quantity of
spirits and wines on hand and detect losses in a timely manner. The
shorter time period between inventories makes it easier for both TTB
and a proprietor to reconcile any discrepancies and thereby protect the
revenue.
Inventory of bottled and packaged spirits. The current regulation
at Sec. 19.402 requires that the proprietor conduct a physical
inventory of bottled and packaged spirits twice each year. DISCUS
recommends that this requirement be changed to once a year. We did not
adopt this recommendation. There is already an allowance in the current
regulation at Sec. 19.402 whereby the proprietor may request
permission to conduct a single inventory each year. TTB believes that a
single inventory may be adequate for some plants, but it is not
adequate for others. Approval to take a single inventory may be
obtained provided the proprietor maintains accurate records and an
annual inventory will not make protecting the revenue more difficult.
To require only one inventory per year in all cases in the regulations
would weaken TTB's control and protection of the revenue in those
plants where more than one inventory per year is desirable.
Variations in fill. The current regulation at Sec. 19.386 provides
criteria for slight variations in the alcohol content and the fill of
bottled distilled spirits that may occur during bottling operations.
Acceptable variations in alcohol content (proof) are well defined and
very specific in the regulation at Sec. 19.386(b). However, this is
not the case for variations in fill. As stated in Sec. 19.386(b), the
proprietor must rebottle, recondition, or relabel spirits if the bottle
contents do not agree with the label, ``except for such variation as
may occur in filling conducted in compliance with good commercial
practice with an overall objective of maintaining 100 percent fill for
spirits bottled.'' We believe that this criteria could be improved and
we propose to establish a standard whereby there must be approximately
the same number of overfills and underfills for each lot bottled and in
no case may the quantity in a bottle vary by more than plus or minus
two percent from the quantity stated on the label. This new
clarification appears in the proposed regulation at Sec. 19.356(b).
Subpart O--Denaturing Operations and Manufacture of Articles
Under the current regulations in part 19, denaturing operations are
covered under subpart N. In these proposed regulations, denaturing
operations will be covered under proposed subpart O. In their
individual responses to Notice No. 870, DISCUS and Equistar Chemicals
proposed changes to the regulations governing denaturation. Below is a
discussion of the recommended changes and TTB's evaluation of those
recommendations.
Gauge for denaturation. The current regulation at Sec. 19.454
states that the measurement of spirits and denaturants shall be made by
volume, weight, approved meter, or, when approved by the Director, by
other devices or methods. In its markup of part 19, submitted in
response to Notice No. 870, DISCUS recommends that the term
``approved'' meter be deleted. We believe it is important to still
require that distilled spirits plants use measurement devices that are
accurate, and although we propose deleting the word ``approved'' as
recommended by DISCUS, we are proposing to change the regulation to
allow for the use of an ``accurate mass flow meter'' in the proposed
regulation at Sec. 19.383. As discussed earlier in this notice, TTB
proposes to allow for the use of ``accurate mass flow meters,'' without
prior approval by TTB, if they meet certain criteria for accuracy.
Denatured spirits inventory. DISCUS recommends the amendment of the
regulation at Sec. 19.464 by changing the requirement to conduct an
inventory from quarterly to annually. We did not adopt this
recommendation in the proposed rule. The shorter time period between
inventories makes it easier for both TTB and a proprietor to reconcile
discrepancies and thereby protect the revenue.
Denaturation and article manufacture. In Notice No. 870, ATF
advised that under Sec. 19.454 gauging is required before and after
denaturation. This prevents a distilled spirits plant from conducting
denaturation and article manufacture in a single, unified process
because the proprietor must gauge the spirits after denaturation and
before making an article. In Notice No. 870, ATF proposed to amend the
current regulation at Sec. 19.454 to provide proprietors with greater
flexibility to conduct denaturation and article manufacture in a
single, unified process. ATF also proposed to provide a prescribed
method of computation to accurately determine the quantity of denatured
spirits used and produced.
Equistar Chemicals wrote in support of the proposal to allow for a
unified process for denaturation and article manufacture. However, the
company suggested that the regulations continue to allow for
measurements by volume, meter, or other approved methods, and it
suggested alternative language for Sec. 19.454. Equistar's suggestion
is included in these proposed regulations with some modification; i.e.,
we will not prescribe a weight calculation as the sole means for
determining the quantity of specially denatured alcohol produced when
denaturation and article manufacture occur in a single process. These
changes appear in the proposed regulations at Sec. 19.383.
Filling containers from tanks. In its comments on Notice No. 870,
Equistar recommends amendment of the current regulation at Sec.
19.462, Filling of containers from tanks. This regulation requires
companies to record a gauge measurement both before and after
withdrawing spirits from a tank. Equistar suggests that the regulations
eliminate the requirement for the first gauge measurement and simply
allow the second, after-withdrawal gauge measurement to serve as the
starting measurement for the second withdrawal. This proposal is
reasonable because a single gauge may serve both purposes, and we are
proposing to amend the regulations at Sec. 19.389 to reflect that
change.
Subpart P--Transfers, Receipts, and Withdrawals
Proposed subpart P will cover several issues, including transfers
in bond, receipts from customs custody, withdrawals without payment of
tax, withdrawal free of tax, samples of spirits, and securing of
conveyances. Sections of the current regulations related to withdrawal
on determination and payment of tax have been moved to proposed Subpart
I, Distilled Spirits Taxes. Below is a discussion of several changes to
the regulations that we are proposing in the new subpart P.
General. We propose to add a new ``General'' section to the
regulations that will identify the subject matter covered in the new
subpart P. This new section appears in the proposed regulations at
Sec. 19.401.
Consignee premises. The current regulation at Sec. 19.510,
Consignee premises, contains several references to Form 703. The Form
703 was formerly used for the transfer in bond of wine, but it is now
obsolete. References to the
[[Page 26215]]
Form 703 have been removed from the proposed regulations at Sec.
19.407, Consignee premises.
Receipt of Transfers in Bond by Consignees. The current regulation
at Sec. 19.510 requires that when spirits, denatured spirits, or wines
are received by transfer in bond, the consignee is required, among
other things, to examine the conveyance, check the seals for tampering,
gauge, and record the receipt of the shipment. TTB has always
interpreted this section to mean that when the shipment arrives at the
consignee premises or the carrier has completed its transportation of
the shipment, such as when a rail carrier delivers a tank car to a rail
siding on or adjacent to the plant premises, the transfer in bond is
complete and the consignee must gauge and record the shipment as
received.
However, during the course of some recent on-site field audits, TTB
has discovered a number of instances in which distilled spirits plant
proprietors failed to timely gauge and record the receipt of bulk
distilled spirits transferred in bond. Some proprietors have chosen to
apply an alternate interpretation to the term, ``received,'' as used in
the regulation, and they believe that they can delay required gauges
and recordkeeping until after testing and formally accepting title to
the spirits, which may take several weeks or longer after the date of
actual delivery. In other words, some industry members have decided
that the physical arrival of a shipment does not constitute receipt of
the shipment, and they believe that they may decide when the shipment
is ``received.''
TTB believes that the meaning of the current regulation is clear
and that the term ``received'' means that the shipment has physically
arrived at its destination. In fact, the language of the current
regulation also uses the phrase ``upon arrival at his premises''.
However, in order to further clarify the meaning of the regulation,
the proposed regulation at Sec. 19.407, which governs actions to be
taken by a consignee upon receipt of a shipment, has been amended to
emphasize the ``arrival'' of a shipment at the consignee's plant or at
a location which represents the final destination for the carrier.
Thus, it should be clear that shipments that physically arrive at the
consignee's plant or rail sidings at or near the consignee's plant have
been received and must be recorded as such. As proposed, the amended
regulation at Sec. 19.407 will use the following phrase to describe
the time when the shipment is received, ``[U]pon arrival of an in bond
shipment at the consignee's premises or at the destination point
specified in the carrier's transportation documents, the consignee must
* * *.'' TTB believes that this amended language will clarify the
current meaning of the regulation.
Determination of tare. The current regulation at Sec. 19.503
discusses determination of tare when packages are to be individually
gauged for withdrawal from bonded premises. In the proposed
regulations, this section has been moved to Subpart K, Gauging, and now
appears at Sec. 19.288.
Disposition of excess spirits. In the current regulation at Sec.
19.539, there are instructions for Government agencies regarding the
disposition of excess spirits that were withdrawn from a distilled
spirits plant free of tax. This section has been deleted from the
proposed regulations because these instructions are properly covered in
27 CFR 20.246 and 22.176.
Securing of Conveyances. The current regulation at Sec. 19.96
requires that securing devices used on conveyances in which spirits are
transferred in bond, or withdrawn free of tax or withdrawn without
payment of tax, require approval by the appropriate TTB officer before
use. However, securing devices that meet the criteria described in
Sec. 19.96 do not require prior approval by TTB. Currently, the
securing devices that do not require prior approval by TTB include cap
seals and ball-strap-type (railroad) seals. The proposed regulation at
Sec. 19.441 has been amended to also allow for the use of locking
security cables without prior approval by TTB.
Subpart Q--Return of Spirits to Bonded Premises and Voluntary
Destruction
Under the current regulations in part 19, issues relating to the
return of spirits to bonded premises and voluntary destruction are
covered under subpart U. In these proposed regulations, these subjects
will be covered in a new subpart Q. Below is a discussion of several
changes to the regulations that we are proposing in the new subpart Q.
Imported spirits. The Taxpayer Relief Act of 1997 amended the IRC
at 26 U.S.C. 5008(c)(1) by allowing a credit or refund of tax to be
granted for imported bottled spirits that are returned to a distilled
spirits plant. The proposed regulation at Sec. 19.452 provides that a
proprietor may return tax paid or tax determined spirits to bonded
premises that were tax paid upon importation through U.S. Customs and
Border Protection. As discussed earlier in this notice, conforming
changes were also made in Subpart J, Claims.
Returns to bond. The new subpart Q has been substantially revised
to make clearer the types of spirits, denatured spirits, and articles
that may be returned to bonded premises. In addition, we propose to
replace several sections of regulations with a chart for easier
reference and use. We have incorporated Sec. Sec. 19.683 through
19.686 of the current regulations into the proposed chart at Sec.
19.454.
Voluntary destructions. In its suggested changes to part 19, DISCUS
recommends that the section of regulations dealing with voluntary
destructions at Sec. 19.691 include a subparagraph that references the
filing of claims. We did not include this recommendation in the
proposed regulations because the filing of claims is already covered in
the new subpart J of the proposed regulations.
Subpart R--Losses and Shortages
Under the current regulations in part 19, losses and shortages are
covered in subpart Q. In the proposed regulations, these subjects will
be covered in a new subpart R. In its comments on part 19, DISCUS
recommends several changes affecting the regulations governing losses
and shortages. Below is a summary of the suggested DISCUS changes and
TTB's evaluation of those recommendations.
Losses in general. DISCUS recommends the elimination Sec. 19.561
of the current regulations because it is redundant with the statute.
TTB agrees that this section of the regulations repeats provisions
covered in the IRC. However, the regulations in part 19 are intended to
provide users with a comprehensive and complete guide to the
requirements for operating a distilled spirits plant. TTB does not
consider it appropriate to require readers of these regulations to
reference both the IRC and the regulations when seeking guidance on an
issue. Therefore, the information provided in the current regulations
at Sec. 19.561 will appear in the proposed regulations at Sec.
19.461.
Determination of losses in bond, loss of spirits from packages.
DISCUS recommends that the current regulations at Sec. Sec. 19.562 and
19.563 be moved to the claims subpart within part 19. We disagree with
this suggestion. These sections deal with the determination of losses
in bond and are appropriately located in the subpart for losses and
shortages.
Loss of spirits from packages. DISCUS recommends amendment of the
current regulation at Sec. 19.563 by replacing a reference to the
regulation at Sec. 19.561(b) with a reference to the IRC at 26 U.S.C.
5008(a)(1)(A). Apparently, they recommended this change because they
had earlier proposed to eliminate
[[Page 26216]]
Sec. 19.561 from the regulations altogether. Since we did not
eliminate Sec. 19.561, (now proposed Sec. 19.461), there is no need
to replace the reference to it with a reference to the statute.
Losses after tax determination. DISCUS recommends elimination of
Sec. 19.564, Losses after tax determination, because it is redundant
with the statute and other rules, and it recommends the transfer of
part of the text to Sec. 19.43, Claims relating to spirits lost after
tax determination. In the proposed regulations, we have retained this
section at Sec. 19.464; however, we have substantially shortened it,
and it now refers to subpart J where claims for losses after tax
determination are covered. TTB proposes to continue this provision
because it is inappropriate to require readers of these regulations to
reference both the IRC and the regulations when seeking guidance on an
issue.
Subpart S--Containers and Marks
Proposed subpart S covers requirements for containers and marks
that are covered in the current regulations at subpart R. In the new
subpart S, much of the information regarding containers and marks has
been rearranged and put into a more logical order. In addition, we
propose several amendments to the regulations governing containers and
marks.
Industrial versus nonindustrial. The current regulations in subpart
R list requirements that apply to spirits for ``industrial'' use and
separate requirements that apply to spirits for ``nonindustrial'' use.
However, the terms ``industrial'' use and ``nonindustrial'' use are not
explained within subpart R. The proposed regulations in subpart S
define those terms in a new section which appears at Sec. 19.472.
Tanks, pipelines. In its comments on part 19, DISCUS proposes that
the current regulations at Sec. 19.586, Tanks, and Sec. 19.587,
Pipelines, be deleted because they are redundant with other sections of
the regulations. We agree that they are redundant, and propose such
deletion in the proposed regulations.
Filling containers. In the current regulation at Sec. 19.582,
there is a limitation on filling containers during processing
operations. This regulation limits filling to containers of not more
than 10 gallons. We deleted this limitation in the proposed regulation
at Sec. 19.474 because we foresee instances where a processor may have
a need to fill containers in excess of 10 gallons. In addition, the
current r |
