Taxpaid Distilled Spirits Used in Manufacturing Products Unfit for Beverage Use (73R-24P)

DEPARTMENT OF THE TREASURY

Bureau of Alcohol, Tobacco and Firearms

27 CFR Parts 17, 19, 70, 170, 194, 197, and 250

[T.D. ATF-379; Re Notice Nos. 634, 649, 748, and 758]

RIN 1512-AA20

Taxpaid Distilled Spirits Used in Manufacturing Products Unfit

for Beverage Use (73R-24P)

AGENCY: Bureau of Alcohol, Tobacco and Firearms (ATF), Department of

the Treasury.

ACTION: Final rule, Treasury decision.

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SUMMARY: This final rule amends and recodifies the regulations on

taxpaid distilled spirits used to manufacture nonbeverage products. The

regulations formerly in 27 CFR part 197 (Drawback on Distilled Spirits

Used in Manufacturing Nonbeverage Products) are recodified as a new

part, designated 27 CFR part 17. In conjunction with the

recodification, a number of changes to the drawback regulations have

been made. Further, the regulations formerly in 27 CFR part 170,

subpart U (Manufacture and Sale of Certain Compounds, Preparations, and

Products Containing Alcohol) have been distributed between 27 CFR part

19 and the new part 17; and conforming amendments have been made in 27

CFR parts 70, 194, and 250. Significant changes from prior regulations

are discussed below under SUPPLEMENTARY INFORMATION.

EFFECTIVE DATE: This Treasury decision is effective on August 19, 1996.

FOR FURTHER INFORMATION CONTACT: Steve Simon, Wine, Beer, and Spirits

Regulations Branch, Bureau of Alcohol, Tobacco and Firearms, 650

Massachusetts Avenue NW, Washington, DC 20226; (202) 927-8210.

SUPPLEMENTARY INFORMATION:

Notices of Proposed Rulemaking

On July 29, 1987, ATF published Notice No. 634 in the Federal

Register (52 FR 28286). That notice proposed the recodification of

regulations concerning nonbeverage drawback, including changes from the

former regulations (27 CFR part 197). Public comment was requested

concerning the proposed changes. A 90-day comment period was provided,

which ended on October 27, 1987. In response to Notice No. 634, ATF

received four written public comments. In addition, some review

comments were received from ATF personnel after the publication of

Notice No. 634.

On December 8, 1987, ATF solicited additional public comments

regarding the nonbeverage drawback regulations. On that date, ATF

published Notice No. 649 (52 FR 46628), which requested comments

specifically relating to drawback on nonbeverage products brought into

the U.S. from Puerto Rico or the Virgin Islands. In conjunction, the

comment period for Notice No. 634 was extended until January 8, 1988.

No additional comments concerning Notice No. 634 were received pursuant

to that extension.

On August 31, 1992, ATF decided to republish the proposed

recodification and amendment of 27 CFR part 197. Notice No. 748 was

published in the Federal Register (57 FR 39536). Because more than 4

years had elapsed since the end of the previous comment periods, the

proposed regulations were republished in their entirety, with some

additional changes, so that anyone else who wished to comment on them

would have an opportunity to do so.

Notice No. 748 prescribed a 30-day comment period, which was

scheduled to end on September 30, 1992. On September 14, 1992, ATF was

asked to extend this comment period for an additional 90 days. ATF

partially granted this request. On October 1, 1992, Notice No. 758 (57

FR 45357) extended the comment period for Notice No. 748 by an

additional 30 days, until October 30, 1992. The full 90-day extension

(as requested) was not granted, because most of the same regulatory

issues had been previously aired for public comment during a sufficient

length of time. Subsequent to the official ending of the comment

period, comments that were received while it was still practicable to

consider them were given consideration.

In response to Notices No. 748 and 758, comments were received by

letter, telephone, and personal visit from a total of twelve persons

representing eleven entities (nine industry members and two industry

groups). These comments are discussed carefully below, following the

discussion of comments submitted previously under Notice No. 634.

Public Comments on Notice No. 634

Comments relating to Notice No. 634 were received from four

correspondents:

1. One commenter proposed that Sec. 17.183 be liberalized to allow

manufacturers to sell or transport byproducts from which alcohol may be

recovered, without removing the alcohol or adding an appropriate

substance to prevent the recovery of residual alcohol. The commenter

was concerned particularly about economic loss from an inability to

process ``spent'' vanilla beans for food use applications.

ATF did not adopt this comment, because potable alcohol recovered

from a nonbeverage manufacturer's byproduct would have been previously

subject to drawback; thus less than 10% of the tax would remain paid.

The possible recovery of such potable alcohol by unknown persons would

present an unacceptable jeopardy to the revenue. Subject to formula

approval and/or approval of an alternative procedure under Sec. 17.3,

ATF could allow byproducts containing recoverable alcohol to be

subjected to additional processing, on the manufacturer's premises, for

food use applications.

The basis for Sec. 17.183 in this final rule is ATF Ruling 81-8,

1981-4 QB 24. That ruling provided a liberalized procedure for the

disposition of spent vanilla beans, whereby they could be treated with

any substance that the manufacturer deemed adequate to make

[[Page 31400]]

recovery of potable alcohol impractical. This procedure has been

broadened in Sec. 17.183 to apply to the disposition of any byproduct

from which alcohol can be recovered. However, under the broadened rule,

prior approval from ATF must be obtained for treatment with substances

not previously authorized.

In Sec. 17.183(c), certain substances are authorized for treatment

of spent vanilla beans. No further authorization is needed for the use

of these substances, when disposing of spent vanilla beans. Approval is

required if other substances will be added to such beans, or if other

byproducts from which alcohol can be recovered will be disposed of.

Manufacturers who have already received approval for other methods of

disposal, not mentioned in Sec. 17.183, may continue to operate under

such approval.

2. Another commenter expressed support for some of the proposals of

Notice No. 634, but he had reservations about several others. He

requested that ATF review the nonbeverage industry's ``historical

compliance track record'' before imposing new recordkeeping

requirements concerning usage of finished products (Sec. 17.166); he

questioned the revised definition of ``distilled spirits'' in

Sec. 17.11 as being different from the definition of the same term in

27 CFR part 5; and he sought a ``transition period'' for the

implementation of new language in Sec. 17.161 (dealing with general

requirements for records).

ATF reviewed the compliance record of the nonbeverage manufacturing

industry and determined that the new records in Sec. 17.166(b),

concerning usage of nonbeverage products, are needed to verify that

such products were manufactured in the amount claimed. The new records

close a gap in the recordkeeping system of the former part 197.

(However, see the further discussion of this issue below, in

conjunction with a comment submitted pursuant to Notice No. 748.)

The revised definition of ``distilled spirits'' was also kept

unchanged, because the revised definition is consistent with the

definition of ``distilled spirits'' in the Internal Revenue Code (26

U.S.C. 5002(a)(8)). The nonbeverage drawback regulations are issued

under the Internal Revenue Code, while 27 CFR part 5 is a regulation

under the Federal Alcohol Administration Act. The revised definition in

part 17 differs from the former definition in part 197 only by the

deletion of the words ``fully taxpaid or tax determined at the

distilled spirits rate.'' This change brings the definition closer both

to 26 U.S.C. 5002(a)(8) and to the ordinary meaning of ``distilled

spirits.'' Whenever taxpaid distilled spirits are specifically intended

in part 17, the word ``taxpaid'' is stated. A new definition of

``taxpaid'' is provided in Sec. 17.11.

Finally, ATF determined that there is no need for a transition

period for implementation of new language in Sec. 17.161, because the

only substantive change brought about by that new language is

liberalizing. That change makes it clear that normal business records,

including invoices and cost accounting records, are adequate for

regulatory purposes if they contain the required information. (ATF

anticipates that ordinarily no records besides these normal business

records need be maintained for purposes of compliance with the

regulations.) Other new language in Sec. 17.161 does not impose a

substantive requirement, but simply spells out the purposes of records.

3. A third commenter pointed out what appeared to him to be

contradictions in the proposed regulations. However, the apparent

contradictions were actually the result of misunderstanding. In one

instance, the commenter confused the terms ``eligible for drawback''

and ``subject to drawback.'' In order to prevent further confusion of

this sort, definitions of both of these terms were included in Notice

No. 748 and remain in this final rule (see Sec. 17.11).

Another point of confusion concerned the difference between spirits

contained in an intermediate product and spirits consumed in the

manufacture of such a product. Spirits contained in an intermediate

product are eligible for drawback, and become subject to drawback when

the intermediate product is used in the manufacture of a nonbeverage

product. However, spirits consumed in the manufacture of an

intermediate product (which are not contained in that product when

completed) never become subject to drawback. Drawback cannot be claimed

on such spirits (see Secs. 17.154 and 17.155). Nevertheless, under

Secs. 17.127 and 17.185, a manufacturer may treat the intermediate

product as an unfinished nonbeverage product; then the consumed spirits

may be included in a drawback claim.

4. A fourth commenter took issue with the standard used by ATF to

determine whether to grant drawback of tax on spirits used in

nonbeverage products. He questioned the requirement that products

produced with spirits must be ``unfit for beverage use.'' The commenter

asked that this be changed to ``sale and use for (non) beverage

purposes.''

This commenter's requested change was not adopted, because the

standard that must be met in order to receive drawback is expressly

stated in the law (26 U.S.C. 5131(a)). Drawback may be granted only for

``distilled spirits on which the tax has been determined, (used) in the

manufacture or production of medicines, medicinal preparations, food

products, flavors, flavoring extracts, or perfume, which are unfit for

beverage purposes'' (emphasis added).

Public Comments on Notice No. 748

The following paragraphs discuss the suggested changes that were

submitted in response to Notice No. 748 (as amended by Notice No. 758).

The comments are grouped topically, since in some cases several

commenters proposed the same or similar recommendations.

1. Section 17.136 states that ``A product is not a medicine,

medicinal preparation, food product, flavor, flavoring extract, or

perfume for nonbeverage drawback if its formula would violate a ban or

restriction of the U.S. Food and Drug Administration (FDA) pertaining

to such products.'' This reflects a longstanding ATF policy. See Rev.

Rul. 58-350, 1958-2 CB 974; see also various regional industry

memoranda in 1991 regarding FD&C Red No. 3, and the following Industry

Circulars: 61-2, 62-33, 65-4, 70-12, 72-8, 72-28, 72-29, 73-6, and 76-

17.

However, a group of commenters pointed out that the wording of

Sec. 17.136 could be interpreted to prevent manufacturers from

receiving drawback on products intended for export to countries with

different food and drug requirements. Further, certain products for

domestic use, such as tobacco flavors and animal feed flavors, are not

subject to the same requirements as products intended for internal

human consumption. Products may legally be made for such uses even

though banned for human consumption.

ATF appreciates this comment. Since the limitation of Sec. 17.136

only applies to products that violate FDA bans or restrictions, it is

not intended to prevent drawback in the situations mentioned by the

commenters. In general, there would be no FDA violations in those

situations. Therefore, language has been added to Sec. 17.136 in this

final rule to clarify this point.

2. Another suggestion pertained to Sec. 17.166(b). This new

regulation requires records of ``other disposition'' of nonbeverage

products--that is, disposition other than by sale. Former regulations

in 27 CFR 197.130 only

[[Page 31401]]

required disposition records for products disposed of by sale;

Sec. 17.166(b) closes this gap in the recordkeeping system.

However, a change in Sec. 17.166(b)(1) introduced by Notice No.

748, adding some language which had not been present in Notice No. 634,

was a cause of concern for several commenters. This change added a

proposed requirement that would have applied whenever a nonbeverage

product is disposed of by being used as an ingredient in other

products. The new language would have required disposition records, in

such instances, to show the formula number of every other product in

which the first product was used as an ingredient. The commenters

stated that a requirement to show such formula numbers would be onerous

for many flavor companies who frequently use their flavors as

ingredients in many other flavors.

The purpose of the proposed requirement added by Notice No. 748 was

to enable an ATF inspector to follow the ``audit trail'' to the next

product and compare its batch records, showing usage of the first

product, with the first product's records of disposition. This

inspection technique had been facilitated under the former regulations

in part 197 by a requirement that supporting data (submitted with each

claim) show, for each product manufactured, the formula number of each

nonbeverage or intermediate product used as an ingredient. That

requirement was eliminated from the simplified supporting data proposed

by Notice No. 748 (and adopted by this final rule), but its absence

would have been more than made up for by the proposed additional

language in Sec. 17.166(b)(1).

After carefully considering this public comment, ATF has decided

that the benefits of the proposed additional requirement in

Sec. 17.166(b)(1) may not be commensurate with the added burden to

industry. Therefore, in this final rule, Sec. 17.166(b)(1) reads as it

did in Notice No. 634, without the formula-number requirement added by

Notice No. 748. However, ATF reserves the right to examine this issue

further and possibly to propose another rulemaking, if experience shows

that the formula-number requirement, or something similar, is needed

for adequate administration of the law.

3. Two commenters requested permission to continue using the old

supporting data, as prescribed under Rev. Proc. 64-32, 1964-2 CB 951,

and former regulations (27 CFR 197.110-197.119). Even though the new

supporting data prescribed by this final rule is much simpler, some

companies have computerized their system, and it would actually be a

hardship for them to have to change.

Section 17.147 allows modifications of the supporting data to be

used without prior permission, if the modified form contains all of the

required information. For the most part, the old supporting data

contains all of the information required under this final rule. There

are only a few new elements, which include: A certification that

required physical inventories have been taken, separate data for

different effective tax rates and for Puerto Rican and U.S. Virgin

Islands spirits and imported rum, and certain explanatory information

sometimes required in Part IV of the new form. Therefore, drawback

claimants may continue to use the old supporting data as long as the

new elements are included.

4. Another comment stated an objection to the requirement for

physical inventories (Sec. 17.167). The commenter claimed that physical

inventories were not required under part 197. However, that is not so.

Physical inventories were mentioned in Secs. 197.116-197.119, with the

intent that they should be taken every claim period. Such inventories

are necessary from time to time to ensure the accuracy of the book

account. In line with the principles of the Administration's

``Reinventing Government'' regulatory initiative, ATF has determined

that claimants with bond coverage need not be required to take a

physical inventory every month (as proposed in Notices No. 634 and

748). Therefore, this final rule provides for quarterly physical

inventories.

5. Some other suggested improvements were related to the proposed

revision of the formula form (previously numbered ATF F 1678, now ATF F

5154.1). A draft version of this form was published in the same issue

of the Federal Register as Notice No. 748 (see 57 FR 39564). First, the

commenter requested additional space for addresses when a single form

is filed for multiple plants; but this is not necessary, since adequate

space is provided on the reverse of the form. (The reverse was not

printed in the Federal Register, since it is virtually a blank page.)

If the reverse is still not sufficient, a continuation on plain paper

is acceptable.

Also, the commenter suggested that ATF F 5154.1 be redesigned for

computer-generated insertion of data. However, he did not propose any

specific changes. If a claimant has a specific proposal for a computer-

generated form, it could be approved as an alternate procedure under

Sec. 17.3. In a separate project, ATF has developed a computer program

to facilitate the preparation of nonbeverage product formulas, which is

available for use by industry members. For more information on this

project, please contact the ATF Laboratory or the person listed above

under FOR FURTHER INFORMATION CONTACT.

6. Another suggestion proposed a simplified procedure for

alternation of premises between a distilled spirits plant and a

nonbeverage product manufacturing plant. This suggestion cannot be

considered at this time, since it relates to other regulations that are

not the subject of this rulemaking. This comment will be treated as a

suggestion for future amendment of 27 CFR part 19.

7. Another comment pointed out that the last sentence of

Sec. 17.137 (requiring qualification as a distilled spirits plant)

should be limited to products that are disapproved as ``fit for

beverage use.'' This comment is well taken. Under Sec. 19.58, as

amended by this final rule, exemption from qualification requirements

is provided to manufacturers of various products that are unfit for

beverage use, which nevertheless would not be approved for drawback

because they are not medicines, medicinal preparations, flavors,

flavoring extracts, food products, or perfume. Therefore, the suggested

change has been made.

8. Several comments addressed the procedure for determining whether

products are fit or unfit for beverage use (Sec. 17.134). It was stated

that the use of an organoleptic examination (taste test) performed by

ATF is not sufficiently objective and ``can result in a very arbitrary

tasting method with unpredictable results.''

As an alternative to the method currently used, one commenter

suggested the use of an independent testing panel funded by industry.

The commenter opined that such a panel might be more ``objective'' and

might alleviate the problem of delays in formula approvals caused by a

backlog of submissions at the ATF Laboratory.

Interestingly, this particular idea (absent the funding proposal)

had been previously considered by ATF pursuant to a suggestion

submitted by two ATF employees. At that time, ATF determined that the

panel would have to be restricted to analysis of samples, since most

industry members would be opposed to allowing an independent laboratory

to see their formulas. Additionally, it was determined that training

and certification by ATF would be necessary, thus minimizing any time

and cost savings to the Government. These findings are still considered

to be valid.

[[Page 31402]]

Furthermore, ATF disagrees that a panel funded by industry would be

any more objective than the taxpayer-funded ATF Laboratory. On the

contrary, industry funding would seem to introduce a possibility for

bias not currently present. ATF has no interest to be served by

approving or disapproving any particular formula. Our only interest is

to administer the law on an impartial basis. An element of subjectivity

(but not bias) is unavoidably present due to the legal requirement that

products be ``unfit for beverage use.'' This cannot be eliminated

merely by shifting the responsibility for decision-making to another

entity. Therefore, ATF has decided not to adopt this suggestion.

Another commenter proposed a different alternative. This one

suggested that ATF incorporate a ``standard reference method'' for

organoleptic examination based on a method prescribed by the American

Society for Testing and Materials (ASTM). The method recommended by the

commenter is as follows:

Samples: (1) Non-Beverage Test (NBT) sample(s)--Formulate six or

fewer samples over a range of dilution levels of the NBT component

in 15% ethanol. (2) Non-Beverage Reference (NBR) and Beverage

Reference (BR) samples--From the list of ingredients and amounts in

Table 1 (i.e. a table listing ingredients and their quantities

recognized by ATF as usually sufficient to make products unfit for

beverage use), select and formulate one sample for a NBR at 15%

ethanol. Reduce the amount of the respective ingredient in the NBR

sample to formulate a BR sample that would be deemed potable.

Procedure: (1) Recruit a panel of at least 15 members previously

screened as outlined below.

(2) Each panelist is presented the NBR and BR samples as

examples of a nonpotable and potable beverage, respectively.

(3) Each panelist is then presented in random order each NBT

sample for comparison in acceptablility to the NBR and BR sample.

(4) Each panelist responds to the question, ``Is this sample

more like the NBR or BR sample in acceptability?''

(5) Count the number of panelists scoring each NBT sample as

more like the BR sample in acceptability.

(6) Use the statistical tables for the duo-trio difference test

(from ASTM ``Manual on Sensory Testing Methods, STP 434'') to

conclude which NBT samples are potable. Determine significance at

the 95% confidence level.

(7) Report the highest concentration of the nonbeverage

component that is significant as an upper bound in concentration of

the NBT component for potability.

Panelist Screening: (1) Present both the NBR and BR samples to a

prospective panelist.

(2) Ask the question, ``Which sample is more acceptable to

you?''

(3) Screen out any panelists which select the NBR sample.

ATF has reviewed this proposed method and finds it unacceptable for

several reasons. First, the method does not test for the specific

information needed for drawback determinations under 26 U.S.C. 5131.

The proposal is, in effect, a test for determining what concentration

of a single ``component'' is needed to render an ethanol solution

nonpotable. However, in making drawback determinations, ATF is not just

interested in the contribution to potability by a specific component;

rather, ATF is interested in the resulting potability of a product,

which may contain many components. Further, ATF is not interested in

quantitating the level of concentration at which a solution becomes

nonpotable; rather, ATF is just interested in determining, yes or no,

whether a particular final product is fit for beverage use. In other

words, the proposed method provides extraneous, unnecessary information

while simultaneously failing to provide the particular information that

ATF needs.

Secondly, the proposed method does not even provide a definitive

determination whether a particular sample is beverage or nonbeverage.

It only provides a determination whether the sample is ``more like''

the ``beverage reference'' or the ``nonbeverage reference.'' If one of

the two reference samples is closer than the other to the border

separating beverage from nonbeverage, the test sample may in fact be

``more like'' one of them even though it is on the opposite side of

that border. For example, imagine that on a scale of 1-100, the

separation between beverage and nonbeverage occurs at 50. If the

beverage reference is at 40 and the nonbeverage reference is at 75, a

test sample at 55 will taste ``more like'' the beverage reference even

though the sample is in fact nonbeverage.

Thirdly, the composition of the proposed panel would not be

appropriate. As the example just given shows, it is important for the

panel to understand the real difference between beverage and

nonbeverage, not merely whether a sample is ``more like'' one or the

other. This implies a panel with expertise, not just a panel of random

individuals. Though not explicitly stated, it is implied that the

proposed method would utilize randomly selected individuals. By

contrast, the panelists used by ATF are all university-trained

chemists, who receive a minimum of 1 year of special training at the

ATF Laboratory before their vote is given full weight in drawback

approval determinations. This ensures maximum consistency and

continuity over time in application of the ``unfit for beverage use''

standard.

Because ATF uses expert panelists, it is not necessary to empanel a

minimum of 15. In most cases, a panel of two is sufficient for a

definitive determination. If a sample is at all borderline, additional

panelists are recruited up to a maximum of 12. At least \2/3\ of them

must agree that the sample is unfit for beverage use. By this method,

the eight chemists of the ATF Laboratory's Nonbeverage Section (aided

when necessary by the eight chemists of the Beverage Alcohol Section)

are able to examine about 2,400 samples per year. This is in addition

to their other work, which includes chemical analyses and examination

of thousands of formulas submitted without samples.

Therefore, although ATF appreciates the effort put into devising

the proposed new method, we have concluded that it is in no way

superior to the method currently being used.

Accordingly, Sec. 17.134 is adopted by this final rule without

change from Notice No. 748. ATF hopes that the information in this

section will be used by manufacturers to identify and ``weed out''

products that are clearly fit for beverage use.

9. Finally, a commenter requested that ATF publish, in Sec. 17.137,

a list of ingredients and their quantities that are recognized by the

ATF Laboratory as usually sufficient to make products unfit for

beverage use. The commenter was referring to the following Guidelines,

which were distributed to attendees at an ATF-sponsored industry

seminar:

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Ingredient Amount

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Citric Acid................................. If ethanol less than 30%, acid = 0.1 x ethanol content (% v/v) +

0.5.

If ethanol greater than 30%, acid = 0.1 x ethanol content (% v/

v).

Salt........................................ 3.2 grams salt per 100 ml at 45% ethanol (more for greater

ethanol).

Vanillin.................................... 1 oz. per gallon at 30% ethanol.

Ethyl Vanillin.............................. 0.4 oz. per gallon at 30% ethanol.

[[Page 31403]]

Propylene Glycol............................ Equal amounts by volume of propylene glycol and ethanol.

Ethyl Acetate............................... 2.0% by volume at 90% ethanol.

Maltol...................................... 5% at 90% ethanol.

Essential Oils.............................. Most are unfit at a level of 3% in 90% ethanol. An exception is

anise oil which needs 4.2%. Many 1% solutions of essential oils

are unfit.

Benzaldehyde................................ 1.2 oz. benzaldehyde or bitter almond oil per gallon at 90%

ethanol.

----------------------------------------------------------------------------------------------------------------

ATF agrees that this information should be widely distributed among

nonbeverage industry members; however, the problem with publishing it

in the regulations is that it can only be a guide, not applicable to

all products. If it were contained in regulations, industry members

would tend to assume that if their products met the guidelines, they

would automatically be approved for drawback. No such guarantee can be

provided. (For example, products meeting the citric acid guidelines may

nonetheless be fit for beverage use if they contain sufficient sugar.)

Therefore, ATF has decided to publish this information as a future

Industry Circular, rather than as an amendment to the regulations.

Other Changes From Former Regulations

Other changes, proposed in Notice No. 748, were not the subject of

public comment. Except as noted, they have been adopted substantially

as proposed.

1. Adoption of Rulings. The holdings of certain Revenue Rulings and

ATF Rulings are reflected in the final regulations, as follows: Rev.

Rul. 55-689, 1955-2 CB 729 (Sec. 17.187); Rev. Rul. 56-239, 1956-1 CB

715 (Sec. 17.135); Rev. Rul. 56-314, 1956-2 CB 1023 (Sec. 17.137); Rev.

Rul. 56-335, 1956-2 CB 1024 (Sec. 17.181); Rev Rul. 56-336, 1956-2 CB

1023 (Sec. 17.182); Rev. Rul. 56-367, 1956-2 CB 1026

(Sec. 17.135(b)(2)); Rev. Rul. 56-394, 1956-2 CB 1021 (Sec. 17.152(c));

Rev. Rul. 56-395, 1956-2 CB 1025 (Sec. 17.186); Rev. Rul. 58-350, 1958-

2 CB 974 (Sec. 17.136); Rev. Rul. 63-87, 1963-1 CB 384 (Secs. 17.11:

new definition of ``food products,'' and 17.133(d)); Rev. Rul. 69-138,

1969-1 CB 327 (Secs. 17.126(b) and 17.152(a), (c), and (d)); ATF Rul.

73-1, 1973 ATF CB 85 (Sec. 17.133(b)); ATF Rul. 74-2, 1974 ATF CB 27

(Sec. 17.76); ATF Rul. 76-17, 1976 ATF CB 85 (Secs. 17.151 and

17.152(b)); ATF Rul. 76-19, 1976 ATF CB 86 (Secs. 17.169 and

17.185(b)); ATF Rul. 77-27, 1977 ATF CB 165 (Sec. 17.122); and ATF Rul.

82-7, 1982-2 QB 46 (Sec. 17.11: new definition of ``medicines'').

Rev. Rul. 57-369, 1957-2 CB 948, has been adopted in the

instructions to the revised ATF Form 5154.1 (formerly Form 1678). Rev.

Rul. 58-317, 1958-1 CB 586, is not reflected in the regulations; it is

obsolete since iso-alcoholic elixir has been removed from the National

Formulary. Rev. Rul. 58-428, 1958-2 CB 975, is also not reflected in

the regulations, because the repeal of 26 U.S.C. 5082 has removed its

authority. The holding of ATF Rul. 81-8, 1981-4 QB 24, has been

modified in Sec. 17.183 (see discussion above, under ``Public Comments

on Notice No. 634''). Revenue Procedure 64-32, 1964-2 CB 951, has been

replaced by the new supporting data form (ATF Form 5154.2), per

Sec. 17.147.

2. Form number changes. The prescribed form entitled ``Formula and

Process for Nonbeverage Products'' has been revised and renumbered from

1678 to 5154.1. This will not require resubmission of any formulas

previously approved on Form 1678. Similarly, the form number of the

``Bond for Drawback Under 26 U.S.C. 5131'' is being changed from 1730

to 5154.3, but this will not require resubmission of any bonds

previously approved.

3. Alternate methods or procedures. A new section (Sec. 17.3) has

been added to provide for the employment of alternate methods or

procedures, if approved by the Director pursuant to a showing of the

conditions stated in the regulation.

4. Incorporation by reference. Former Sec. 197.3 is not included in

this final rule, because consultation with the Office of the Federal

Register indicated that the use of the National Formulary, United

States Pharmacopeia, and Homeopathic Pharmacopoeia of the United States

does not amount to an incorporation by reference. Although Sec. 17.132

makes a ``reference'' to these books, there is no ``incorporation'' of

them into the regulations. There is merely an authorization, for

manufacturers who so choose, to utilize formulas from them as approved

formulas without the necessity of submitting ATF Form 5154.1.

Incorporation by reference with the approval of the Director of the

Federal Register under 5 U.S.C. 552(a)(1) is intended to be a

substitute for the reprinting of material required to be published in

the Federal Register under Sec. 552(a)(1)(A)-(E). However, the

authorization for manufacturers to make use of the N.F., U.S.P., and

H.P.U.S. on a voluntary basis does not entail a requirement for ATF to

publish the contents of those books in the Federal Register. It is true

that a manufacturer who has chosen to adopt a formula from the N.F.,

U.S.P., or H.P.U.S. may be subject to a $1,000 fine if he subsequently

fails to follow it (Sec. 17.148). However, the enforcement of this

requirement does not require publication of that formula, any more than

similar enforcement of the manufacturer's own proprietary formulas

requires their publication. The enforcement in each instance pertains

to the manufacturer's choice of a formula, rather than to the contents

of the N.F., U.S.P., and H.P.U.S. per se.

5. Signature authority. Section 17.6, generalized from certain

provisions in former Secs. 197.30 and 197.67(a), states the rule as to

when evidence of signature authority is required.

6. Delegations of authority. Authorities vested in the Director by

part 17 may be delegated, through delegation orders, to subordinate

officials. This possibility is reflected in the definition of

``Director'' in Sec. 17.11 by addition of the words ``or his or her

delegate.'' ATF's Alcohol and Tobacco Laboratory is specified in

Secs. 17.121, 17.122, 17.126, 17.131, 17.132, and 17.136 as the

recipient of certain documents, such as formulas. Accordingly, a new

definition of ``Alcohol and Tobacco Laboratory,'' giving its address,

is provided in Sec. 17.11.

7. New and modified definitions. For clarity, some new definitions

are added in Sec. 17.11. Besides those mentioned elsewhere in this

preamble, there are new definitions of ``approved,'' ``CFR,''

``month,'' ``person,'' ``proof gallon,'' ``quarter,'' ``recovered

spirits,'' and ``this chapter.'' With respect to the definitions of

``month'' and ``quarter,'' claimants desiring to use slightly different

time periods may apply under Sec. 17.3. (Existing approvals remain in

effect.) The definitions of ``director of the service center,''

``district director'' (an I.R.S. official), ``total annual

withdrawals,'' and ``year'' in former Sec. 197.5 have been deleted as

unnecessary. The definitions of ``used'' and ``time distilled spirits

are used'' are in regulations Secs. 17.151 and 17.152. The

[[Page 31404]]

definition of ``nonbeverage products'' in Sec. 17.11 has been modified

to reflect the addition of perfume to the list of products that may be

approved for drawback. (Pub. L. 103-465, Sec. 136(a).) Elsewhere in

this final rule, wherever the types of nonbeverage products are listed,

this addition of perfume is reflected as well. ATF is in the process of

delegating authority under its new organizational structure; however,

this process is not yet complete; therefore, the definition of

``regional director (compliance)'' and the use of that term throughout

this final rule are retained.

8. Time for payment of special tax. A sentence has been added in

Sec. 17.24 to clarify when a payment of special tax is considered late.

Under 26 U.S.C. 5131, special tax is a prerequisite for drawback

eligibility. Therefore, no penalty under 26 U.S.C. 5134(c) will be

imposed as long as special tax is paid before completion of final

action on the claim.

9. Retention of special tax stamps. Former regulations did not

specify a retention period for special tax stamps. These final

regulations (Sec. 17.55) make the retention period the same as for

other required records and documents (generally 3 years). The retention

period for the list of multiple business locations, which was 2 years

under former Sec. 197.28, has also been made the same as for other

documents (Sec. 17.31).

10. Reincorporation. A new Sec. 17.77 has been added, stating that

when an existing corporation or corporations are reorganized into a new

corporation, a new special tax must be paid. This new section is

similar to regulations for liquor dealers in Sec. 194.163. Although

Sec. 17.77 states the general rule, there may be exceptions. For

instance, ATF has ruled that a reorganization under 26 U.S.C.

368(a)(1)(F), consisting of a mere change in identity, form, or place

of organization of one corporation, however effected, does not require

a new special tax. If there is a question as to whether a new special

tax is required, the ATF Tax Processing Center, (513) 684-6580, should

be consulted.

11. Amount of bond for monthly claims. The wording of former

Sec. 197.107 allowed for the possibility that the amount (or ``penal

sum'') of a bond might be reduced due to frequent on-site inspections.

This concept has become obsolete, since today no claimant is regularly

inspected as frequently as quarterly. Therefore, under these final

regulations (Sec. 17.102), bonds for monthly claims must cover the

total drawback claimed during any quarter. It is not anticipated that

this change will affect the required bond coverage of any current

monthly claimant.

12. Time for filing formulas. Language in former Sec. 197.95,

respecting time for filing formulas, has been revised in Sec. 17.121(b)

to express more clearly the statutory requirement of 26 U.S.C. 5131-

5134. Both formula and claim must be filed within ``6 months next

succeeding the quarter in which the distilled spirits covered by the

claim were used'' (26 U.S.C. 5134(b)). However, if there is any doubt

about a product's eligibility for drawback, it is preferable that the

formula be filed and approved before commencement of manufacture.

13. Formulas for use at multiple plants. The revised formula form

(ATF F 5154.1) permits a manufacturer to file a single formula for use

at more than one plant, if the plants at which the formula will be used

are listed on the form. This change is reflected in Sec. 17.121(c).

14. Adoption of predecessor's formulas. Former Sec. 197.99 allowed

the adoption of a predecessor's formulas (for continued use at the same

plant, when its ownership changes) by filing a notice listing the

formulas' serial numbers, names, and dates of approval. This final rule

(Sec. 17.125(a)) only requires the notice of adoption to list the names

and serial numbers. The notice must be filed with the regional director

(compliance). Further, since copies of the articles of incorporation or

other documents are necessary to prove the change of ownership, a

sentence has been added to include this general requirement.

15. Adoption of manufacturer's own formulas from another plant.

Adoption of a company's own formulas for use at another of its plants,

including adoption by a parent company of formulas of its wholly owned

subsidiary, and vice versa, is a new option provided by this final

rule. (See Sec. 17.125(b).) Previous regulations did not provide for

this. The procedure for this type of adoption is to submit a letterhead

notice to the ATF Laboratory, accompanied by two photocopies of the

formula to be adopted and some evidence of the relationship between the

plants. After verifying the formulas, the ATF Laboratory will forward

the notice to the regional director (compliance). The adopting plant is

also required to reference the notice in its first claim relating to

the adopted formula(s).

16. Formulas for intermediate products. ATF needs to know all

ingredients that will enter into the finished nonbeverage product.

Therefore, these final regulations (Sec. 17.126) require the submission

of formulas on ATF Form 5154.1 (formerly 1678) for intermediate

products, unless the formula for an intermediate product is written as

part of the approved formula for the nonbeverage product(s) in which

the intermediate product will be used. (If the formula for the

intermediate product is written as part of the nonbeverage product's

formula, the intermediate product is treated as an unfinished

nonbeverage product; see discussion below.)

17. Self-manufactured ingredients optionally treated either as

intermediate products or as unfinished nonbeverage products. Spirits

consumed in the manufacture of intermediate products are not subject to

drawback, both under former regulations (Sec. 197.119) and this final

rule (Sec. 17.155). If spirits are recovered in the manufacture of

intermediate products, drawback may be claimed, but only if and when

the spirits are subsequently reused in the manufacture of a nonbeverage

product (Sec. 197.118 in former regulations and Sec. 17.153(a) in this

final rule). These restrictions are necessary for protection of the

revenue, because when spirits are consumed or recovered in the

manufacture of an intermediate product, it could be difficult or

impossible to correlate the quantity of such spirits with the

production of a batch of finished nonbeverage product in which the

intermediate was used.

However, in some instances, the manufacture of an intermediate

product requires consumption of significant quantities of spirits that

are not ultimately contained in that intermediate product. The

inability to claim drawback on such spirits would be a hardship.

Therefore, manufacturers have been permitted to resubmit their formulas

to show production of the intermediate product as an integral part of

the formula for the related nonbeverage product. If this is done, the

former intermediate product is regarded instead as an unfinished

nonbeverage product; consequently, spirits necessarily consumed (or

recovered) in its manufacture are regarded as consumed (or recovered)

in the manufacture of a nonbeverage product and are subject to

drawback. This procedure protects the Federal revenue, because each

batch of unfinished nonbeverage product is restricted to use in a

specific batch of a predetermined finished product and must be so used

within the time period specified in the approved nonbeverage product's

formula.

Although this procedure was available under former regulations,

many manufacturers were not aware of it, because it was not described

in the

[[Page 31405]]

regulations. In order to inform manufacturers of this procedure, it is

described in Secs. 17.127 and 17.185 of these final regulations.

Manufacturers are given the option to designate their self-manufactured

alcoholic ingredients as either intermediate products or unfinished

nonbeverage products. There are advantages and disadvantages that go

with each choice.

The advantage of designating an ingredient as an unfinished

nonbeverage product is that spirits recovered or consumed in the

manufacture of the ingredient are subject to drawback in the same way

as other spirits recovered or consumed in the manufacture of

nonbeverage products. The disadvantages of this designation are: (1)

Each batch of the ingredient must be used within a limited time in a

single batch of a predetermined nonbeverage product. (2) The ingredient

cannot be transferred to another plant under Sec. 17.185(b). (This

restriction is due to the necessity of a single, unified batch record,

which must be maintained at the place of production.)

Conversely, the advantages of designating an ingredient as an

intermediate product are: (1) Several batches may be accumulated,

stored indefinitely, and used in the manufacture of any nonbeverage

product whose formula calls for their use. Less (or more) than a full

batch of such a product may be used to produce a batch of a finished

nonbeverage product. (2) Ingredients designated as intermediate

products may be transferred to another branch or plant of the same

manufacturer under Secs. 17.169 and 17.185. (3) For manufacturers who

already have intermediate product formulas on file, another advantage

of the ``intermediate product'' designation is that no new formula or

procedural changes would be required. But the disadvantage of that

designation is that spirits consumed or recovered in production of the

intermediate product may not be claimed for drawback.

18. Subpart U of 27 CFR part 170. Subpart U of 27 CFR part 170,

which provided exemptions from special tax and qualification

requirements for manufacturers and sellers of certain products that are

unfit for beverage use, is being revoked, but the material from that

subpart has not been entirely eliminated. Material related exclusively

to drawback manufacturers has been incorporated in the new part 17.

Some material has been eliminated, either as unnecessary or as covered

by other regulations. The remaining material has been relocated into

subpart D of part 19 (see new Sec. 19.58; this section is grouped under

a new centerheading, ``Activities Not Subject to this Part,'' along

with former Sec. 19.69, which is redesignated as Sec. 19.57).

Conforming amendments have also been made in 27 CFR parts 70 and 194.

Former Sec. 170.613(a)(6) (``Salted wines'') was previously

incorporated into 27 CFR 24.215 by T.D. ATF-299 (55 FR 24974). Sections

in part 17 containing language from former subpart U of part 170 are:

Secs. 17.132, 17.133, and 17.168.

19. Submission of quantitative formulas. This change strengthens

requirements respecting submission of formulas for nonbeverage drawback

products. Regulations allow formulas prescribed by the United States

Pharmacopeia (U.S.P.), the National Formulary (N.F.), and the

Homeopathic Pharmacopoeia of the United States (H.P.U.S.) to be used

without the prior filing and approval of quantitative formulas. This

procedure has been allowed because of the descriptive nature of these

formulas and their consistency over the years. At present, however, the

N.F. and U.S.P. are deleting their requirements for specific quantities

of ingredients in some of their formulas, except for the active

ingredients. Such non-descriptive formulas are not adequate for

regulatory purposes, since alcohol is usually a vehicle rather than an

active ingredient and is therefore not stated as a specific quantity

within such formulas. Drawback of tax under 26 U.S.C. 5134 is claimed

and allowed on exact amounts of alcohol used in the manufacture of

nonbeverage products according to the quantity specified in the

approved formula.

Therefore, Sec. 17.132 in this final rule is worded so that ATF may

require submission of quantitative formulas on ATF Form 5154.1

(formerly 1678), Formula and Process for Nonbeverage Products, for

preparations which appear in the N.F., U.S.P., or H.P.U.S. whenever it

is determined that such submission is necessary to maintain control

over alcohol used and to insure that the products meet the statutory

requirements for drawback eligibility. It is expected that the list of

preparations for which approval of quantitative formulas will be

required under this regulation will be published as an ATF ruling in

the ATF Bulletin.

20. Drawback status of U.S.P., N.F., and H.P.U.S. preparations.

Preparations listed in the U.S.P., N.F., and H.P.U.S. are generally

exempt from the requirement to file quantitative formulas (former

Sec. 197.96; Sec. 17.132 in this final rule), but this exemption does

not necessarily entail approval for drawback. The statutory standard of

``unfit for beverage purposes'' remains and must be enforced (26 U.S.C.

5131(a)).

Former regulations in part 197 were silent concerning the drawback

status of U.S.P., N.F., and H.P.U.S. products. However, this issue

should be addressed, so that manufacturers may properly plan.

Therefore, Sec. 17.132 in this final rule states that formulas listed

in the U.S.P., N.F. and H.P.U.S. are approved for drawback except as

otherwise provided by regulation or ATF ruling. Alcohol, U.S.P.

(including dehydrated alcohol and dehydrated alcohol injection),

alcohol and dextrose injection, U.S.P., and tincture of ginger,

H.P.U.S., are specifically declared in this regulation to be fit for

beverage use.

Similarly, H.P.U.S. preparations made at dilutions higher than

``4X'' (i.e. one part in 10,000) are presumed to be fit for beverage

use. Manufacturers of such products may contest this presumption by

submitting appropriate evidence that a specific product is unfit for

beverage use. The reason for the initial presumption is that the ATF

Laboratory has determined that even for H.P.U.S. products containing

certain poisonous materials, dilutions of greater than ``4X'' are fit

for beverage use. ATF neither confirms nor disputes the medicinal value

of such products, but the dilution one part of active ingredients in

10,000 parts or more of alcohol and water has been found to result in a

product that would be suitable for consumption as a beverage.

Therefore, it has been ATF's position to deny drawback for H.P.U.S.

products diluted to greater than ``4X.'' These final regulations

reflect this position in Sec. 17.132(b).

21. Liquor-filled candies. Paragraph (c) of Sec. 17.133 states

ATF's longstanding policy that candies with alcoholic fillings may be

regarded as nonbeverage products only if the fillings meet the

requirements for alcoholic sauces, as stated in Sec. 17.133(a). Since

some States may prohibit or restrict the manufacture or sale of liquor-

filled candies, a sentence in the introductory text of Sec. 17.133

cautions applicants that formula approval does not authorize violation

of State law.

22. Use or sale of products for beverage purposes. The last

sentence of Sec. 17.134 (adapted from former Secs. 170.615 and 170.618)

makes it clear that drawback approval may be revoked if a product is

found being used or sold for beverage purposes.

23. Manufacturers who are also users of denatured alcohol. Since no

tax is paid on denatured spirits, it would be conducive to fraud on the

revenue for a single manufacturer to produce the same product out of

both specially denatured alcohol and taxpaid alcohol

[[Page 31406]]

on which drawback may be claimed. Section 17.135(a) prohibits this

practice.

24. Claims for credit by manufacturers of nonbeverage products.

Drawback manufacturers who also operate a distilled spirits plant may

find it more convenient to claim nonbeverage drawback in the form of a

credit to offset distilled spirits taxes owed by the distilled spirits

plant. Therefore, Sec. 17.142(b) permits such a procedure.

25. Changes in supporting data requirements. Under the regulations

published in this document, the supporting data required to accompany

claims has been simplified. The new supporting data is described by ATF

Form 5154.2, which is authorized by these regulations. Use of this

Government form is not mandatory; Sec. 17.147 permits the use of any

alternative format that clearly shows all the required information.

The new supporting data has eliminated material that is not

necessary to the processing of drawback claims. Former Part II

(``Distilled Spirits Received'') is gone. So is former Part V

(``Intermediate Products Account'') except for the totals in column

(i), which are incorporated into the Distilled Spirits Account. Part

III has been shortened from 16 columns to 8, and is redesignated as

``Production of Nonbeverage Products.'' Most of the simplification in

Part III results from elimination of detailed information on use of

specific finished products. Use of eligible spirits will be reported in

three columns (``Kind,'' ``Drawback Rate,'' and ``Amount''), and use of

ineligible spirits will not be reported, except for recovered spirits.

Information no longer reported in the supporting data must still be

recorded in the manufacturer's records, as prescribed in subpart H of

part 17. The regional director (compliance) is authorized, under

Secs. 17.147(a) and 17.123, to require additional supporting data if

necessary in a particular case.

Some new information has been added to the supporting data.

Information about the place of origin of Puerto Rican and Virgin

Islands spirits and other imported rum is required, because ATF needs

this information in order to implement the Caribbean Basin Economic

Recovery Act (Pub. L. 98-67, Title II). Separate reporting is required

for spirits taxpaid at different effective tax rates through

application of the wine and flavor tax credit of 26 U.S.C. 5010,

because such spirits are subject to drawback at different rates. (The

drawback rate is $1.00 less than the rate at which distilled spirits

tax was paid, as provided in 26 U.S.C. 5134.)

26. Public Law 98-369. This document reflects certain changes made

by Public Law 98-369 (Deficit Reduction Act of 1984). Those changes

are: (1) Addition of 26 U.S.C. 5206(d), relating to obliteration of

marks, and (2) imposition of a $1,000 penalty for nonfraudulent

violations of drawback law and regulations, unless the manufacturer

establishes reasonable cause for a violation. Sections affected are:

Secs. 17.148 and 17.184.

With respect to the $1,000 penalty, the statute requires that the

penalty be imposed ``for each failure to comply'' with law or

regulations. This means that a separate penalty can be imposed for each

product listed on a claim. For example, if several products were not

manufactured according to formula, but were still unfit for beverage

use, a $1,000 penalty could be imposed for each nonconforming product.

If the amount claimed on any such product is less than $1,000, the

penalty is limited to the amount claimed.

Recordkeeping violations can also result in imposition of a penalty

for each separate product. However, if the violations are so serious

that they prevent the manufacturer from establishing either the

unfitness of a product for beverage use or the quantity of the product

that was made, then the penalty provision would not apply. Each claim

must be considered on its own merits, and the burden of proving

entitlement to drawback is always on the manufacturer. If this burden

is not met with respect to any product, the claim for drawback relating

to that product would be denied.

The preceding comments also apply to products manufactured without

submission of a formula. If the manufacturer can sustain the burden of

proof, the claim would be approved subject to the penalty. However,

without a formula, it is unlikely that this burden could be sustained

other than by examination of batch records. ATF is not obliged to send

an inspector to examine batch records when a manufacturer refuses to

comply with the requirement to submit a formula.

With respect to timely filing, a late-filed claim or formula counts

as just one ``failure to comply.'' So if the only noncompliance is

lateness in filing a claim, the maximum penalty would be $1,000. Late-

filed formulas result in a separate penalty for each late formula.

Special tax paid subsequent to final action on a claim also results in

a $1,000 penalty. It should be noted that in no case will a claim be

paid more than 6 years after the quarter in which the products were

manufactured, due to the statute of limitations of 28 U.S.C. 2401.

Finally, the penalty provision does not apply in a case of fraud.

Fraud is considered to be a deliberate violation with intent to

deceive. If there is fraud, the entire claim will be denied, and the

manufacturer may be subject to other civil and criminal penalties as

well.

27. Changes in recordkeeping requirements. Items deleted from the

supporting data have been incorporated into the records required by

subpart H of part 17 to be maintained at each nonbeverage premises.

Certain formerly required records that are duplicative of the

information provided by the supporting data have been deleted from

subpart H. The holding of Industry Circular 79-5 with respect to

records of raw materials and finished products has been clarified and

incorporated in the regulations (see Secs. 17.164 and 17.165). An

amendment to Sec. 19.780, specifying that the record required by that

section must show the contents of each container, will facilitate the

use of that record by nonbeverage manufacturers in complying with

Sec. 17.162 in instances where a shipment consists of non-uniform

containers.

28. Gains in spirits received or on hand. This final rule requires

gains in spirits received, as disclosed by the receiving gauge, and

gains in spirits on hand, as disclosed by physical inventory, to be

deducted from the claim covering the period in which the gain occurs.

Deduction is appropriate in these circumstances, since a gain indicates

either receipt of ineligible (untaxpaid) spirits or an excessive claim

in a previous period. Regulations stating this requirement are in

Secs. 17.147(d), 17.162(d), and 17.167(a).

With respect to spirits received, Sec. 17.162(d) sometimes allows a

gain to be avoided by recording the shipping plant's taxpayment gauge

as the quantity received. For spirits received in a tank car or tank

truck, this is only allowed when the drawback manufacturer's receiving

gauge is within 0.2% of the taxpayment gauge. (This duplicates

Sec. 197.130a(a) in former regulations.) If the taxpayment gauge was

inaccurate within the 0.2% limitation, the discrepancy will tend to

resolve itself as a gain or loss on the drawback manufacturer's next

physical inventory.

If the gauge of spirits received in a tank car or tank truck

differs from the taxpayment gauge by more than 0.2%, the receiving

gauge must be recorded in the manufacturer's records as the quantity

received. This rule is based on the assumption that if the discrepancy

is that great, the receiving gauge is more likely to be accurate. Under

Sec. 17.162(d), any gain disclosed in such

[[Page 31407]]

circumstances must be immediately recorded as such and deducted from

the manufacturer's next claim.

29. Evidence of taxpayment. A new provision in Sec. 17.163 requires

manufacturers to obtain commercial invoices or other documentation when

spirits are purchased from wholesale and retail liquor dealers. This

new requirement will help provide evidence of taxpayment of the

spirits.

In addition, Sec. 17.163 requires all manufacturers to obtain

evidence of the effective tax rate paid on spirits other than alcohol,

grain spirits, neutral spirits, distilled gin, and straight whisky.

Spirits other than those kinds may contain wine and/or flavoring

material that brings the effective tax rate below the normal distilled

spirits rate ($13.50 per proof gallon). The effective tax rate is

significant for nonbeverage drawback, because the drawback rate is $1

less than the rate at which tax was paid or determined (26 U.S.C.

5134(a)).

For shipments received from a distilled spirits plant, an effective

tax rate below $13.50 per proof gallon must be noted on the record of

shipment required by Sec. 19.780 to be forwarded to the nonbeverage

manufacturer. For spirits purchased from wholesale or retail liquor

dealers, the drawback claimant must obtain the evidence of effective

tax rate from the bottler, producer, or importer. If the required

evidence is not obtained, drawback will only be allowed based on the

lowest effective tax rate possible for the kind of distilled spirits

product used.

30. Production (batch) records. Under Sec. 17.164, the production

records for nonbeverage and intermediate products generally must be

kept by batch. To enable an ATF officer to compare the ingredients used

in each batch with the ingredients listed in the product's formula, the

records must refer to ingredients by the same names as are used for

them in the product's formula. Synonymous names may additionally be

shown. Alcohol usage may be shown by weight or by volume, and the proof

of the spirits must also be shown.

The alcohol content of nonbeverage products must be tested ``at

representative intervals.'' This requirement is a variable, because the

appropriate interval will vary to a great degree depending on the type

of product and the frequency with which it is manufactured. The purpose

of testing alcohol content is to verify the accuracy of the formula and

to monitor compliance with it. If a manufacturer feels unsure of how

frequently alcohol content should be tested to accomplish this purpose

for a particular product, advice may be requested from ATF. Whenever

the manufacturer does make a test, the results must be recorded in the

production records.

31. Specifications for physical inventories. These final

regulations (Sec. 17.167) specify that the ``on hand'' figures in the

supporting data must be verified by physical inventories ``as of the

end of each quarter in which nonbeverage products were manufactured for

purposes of drawback.'' The words ``as of'' indicate that the inventory

need not be taken exactly at the end of the quarter; but if it is taken

at a slightly different time, the data must be worked backward or

forward to the end of the quarterly period. The regulations also

authorize the regional director (compliance) to require physical

inventories of nonbeverage products and raw ingredients whenever such

inventories are deemed necessary to ensure compliance with regulations.

32. Recovered alcohol. Recordkeeping requirements for recovered

alcohol, formerly in Sec. 170.617(c), are incorporated in new

Sec. 17.168. The regulations as proposed in Notice No. 748 did not

provide for destruction of recovered alcohol, although permission for

such destruction could be granted under Sec. 17.3, subject to such

recordkeeping and other conditions as the approving official might have

deemed appropriate. Since the need for destruction of recovered alcohol

is an eventuality that can be expected to occur from time to time, this

final rule provides a standard procedure to replace the need for an

application under Sec. 17.3. Section 17.168 provides standard

recordkeeping requirements and Sec. 17.183 requires a notification,

which will give ATF the option of witnessing the destruction.

33. Records retention. Section 17.170 (corresponding to former

Sec. 197.133) extends the records retention period from 2 years to 3

years, for consistency with other ATF regulations. This change will

ensure the availability of records to support any action that may be

taken within the period of the statute of limitations prescribed by 26

U.S.C. 6531. This section of law prescribes a 3-year statute of

limitations for most offenses; but for certain offenses involving fraud

or willful violation, the statute of limitations is 6 years. Therefore,

as in other ATF regulations, Sec. 17.170 contains a provision that

permits the regional director (compliance) to require a longer records

retention period, not to exceed an additional 3 years.

34. Inspection of records. In addition to the records specifically

required by regulations, ATF officers are authorized under 26 U.S.C.

5133 (as delegates of the Secretary of the Treasury) to inspect any

records ``bearing upon the matters required to be alleged'' in drawback

claims. This authority is reiterated in Sec. 17.171.

In carrying out this authority, ATF will continue to protect

proprietary information. For example, the production records in

Sec. 17.164 do not require greater detail as to ingredients than is

shown on a product's formula. If some secret ingredients of a product

are referred to in general terms, such as ``essential oils,'' on the

formula, then the required production record for that product would

only need to show the quantity of ``essential oils'' used in the

production of each batch. The production record would not have to

specify the secret ingredients. If unusual circumstances should require

an ATF officer to examine other records, such as master formulas that

do specify the secret ingredients, Sec. 17.171 does not provide

authority for copies of such formulas to be made without the consent of

the proprietor. (However, such copies could be required by the Director

or a regional director (compliance) under Sec. 17.123.)

The law, in 18 U.S.C. 1905 and 26 U.S.C. 7213, imposes criminal

penalties on any ATF officer who makes unauthorized disclosure of

confidential business information obtained in the course of his or her

employment. Further restrictions on disclosure are found in 26 U.S.C.

6103, which generally prohibits unauthorized disclosure of returns and

return information. ``Returns'' and ``return information'' in that

section include drawback claims and the records and reports which

support them.

35. Discontinuance of business. A requirement has been added, in

Sec. 17.187, for notification to ATF when a manufacturer permanently

discontinues business. This will enable ATF to manage its files, and it

is reasonable in view of the conditional exemption from basic permit

and special (occupational) tax requirements for the sale of alcohol

remaining on hand.

36. Nonbeverage products from Puerto Rico and the Virgin Islands.

Amendments to 27 CFR 250.173 and 250.309 allow use of the new

supporting data form (ATF F 5154.2) and specify that claims and bonds

shall be filed with the Chief, Puerto Rico Operations, for nonbeverage

products brought into the U.S. from Puerto Rico and the Virgin Islands.

Although Notice No. 748 only proposed to amend the place for filing

drawback claims, the place for filing bonds should be amended as well,

since bonds and claims are filed at the same

[[Page 31408]]

place. Other changes in part 250 are miscellaneous technical and

conforming changes.

Distribution Table for Part 197

------------------------------------------------------------------------

Former section New section

------------------------------------------------------------------------

Subpart A

Sec. 197.1............................... Sec. 17.1.

Sec. 197.2............................... Sec. 17.2.

Sec. 197.3............................... Deleted.

Subpart B

Sec. 197.5: (generally).................. Sec. 17.11.

``Director of the Service Center''........ Deleted.

``District Director''..................... Deleted.

``Time distilled spirits used''........... Sec. 17.152(a).

``Total annual withdrawals''.............. Deleted.

``Used''.................................. Sec. 17.151.

``Year''.................................. Deleted.

Subpart C

Sec. 197.25.............................. Sec. 17.21 & Sec. 17.22.

Sec. 197.25a............................. Sec. 17.22.

Sec. 197.26.............................. Sec. 17.23.

Sec. 197.27.............................. Sec. 17.24.

Sec. 197.28.............................. Sec. 17.31.

Sec. 197.29.............................. Sec. 17.32.

Sec. 197.29a(a).......................... Sec. 17.41.

Sec. 197.29a(b).......................... Sec. 17.42.

Sec. 197.29a(c).......................... Sec. 17.43.

Sec. 197.30 (except last sentence)....... Sec. 17.33.

Sec. 197.30 (last sentence).............. Covered by Sec. 17.6.

Sec. 197.31.............................. Sec. 17.34.

Subpart D

Sec. 197.40.............................. Sec. 17.51.

Sec. 197.40a............................. Sec. 17.52.

Sec. 197.41.............................. Sec. 17.54.

Sec. 197.42.............................. Sec. 17.53.

Sec. 197.43.............................. Sec. 17.61.

Sec. 197.46.............................. Sec. 17.62.

Sec. 197.47.............................. Sec. 17.63.

Sec. 197.47a............................. Sec. 17.55.

Sec. 197.48.............................. Sec. 17.71.

Sec. 197.49.............................. Sec. 17.72.

Sec. 197.50.............................. Sec. 17.73.

Sec. 197.51.............................. Sec. 17.74.

Sec. 197.52.............................. Sec. 17.81.

Sec. 197.53.............................. Sec. 17.82.

Sec. 197.54.............................. Sec. 17.83.

Sec. 197.57.............................. Sec. 17.91.

Sec. 197.58.............................. Sec. 17.92.

Sec. 197.59.............................. Sec. 17.93.

Subpart E

Sec. 197.65.............................. Sec. 17.101 (up to last

sentence).

Sec. 197.66.............................. Sec. 17.103.

Sec. 197.67.............................. Secs. 17.105, 17.6.

Sec. 197.68.............................. Sec. 17.104.

Sec. 197.69.............................. Sec. 17.106.

Sec. 197.70.............................. Sec. 17.144 (2nd sentence).

Sec. 197.71.............................. Sec. 17.101 (last

sentence).

Sec. 197.72.............................. Sec. 17.107.

Sec. 197.73.............................. Sec. 17.108.

Sec. 197.75.............................. Sec. 17.111.

Sec. 197.76.............................. Sec. 17.112.

Sec. 197.77 (except last sentence)....... Sec. 17.113.

Sec. 197.77 (last sentence).............. Covered by Sec. 17.108

(last sentence).

Sec. 197.79.............................. Covered by Sec. 17.111.

Sec. 197.80.............................. Sec. 17.114.

Subpart F

Sec. 197.95 (sentences 1-2, 6, 8-9)...... Sec. 17.121.

Sec. 197.95 (sentences 3 & 4)............ Sec. 17.131.

Sec. 197.95 (5th sentence)............... Sec. 17.137.

Sec. 197.95 (7th sentence)............... Sec. 17.122.

Sec. 197.95 (last sentence).............. Deleted.

Sec. 197.96.............................. Sec. 17.132(a).

Sec. 197.97.............................. Sec. 17.123.

Sec. 197.98.............................. Sec. 17.124.

Sec. 197.99.............................. Sec. 17.125(a).

Subpart G

Sec. 197.105............................. Sec. 17.141.

Sec. 197.106 (up to proviso)............. Sec. 17.142(a).

Sec. 197.106 (proviso, except next-to- Sec. 17.143.

last sentence).

Sec. 197.106 (next-to-last sentence)..... Sec. 17.146(b).

Sec. 197.107 (except first & last Sec. 17.102.

sentences).

Sec. 197.107 (first & last sentences).... Sec. 17.144 (first & last

sentences).

Sec. 197.108............................. Sec. 17.145.

Sec. 197.109............................. Sec. 17.146(a).

Sec. 197.110............................. Sec. 17.147.

Sec. 197.111............................. New supporting data form.

Sec. 197.112-113......................... Sec. 17.162(a).

Sec. 197.114............................. Sec. 17.162(b).

Sec. 197.115............................. Sec. 17.147 & new

supporting data form.

Sec. 197.116 (except last sentence)...... New supporting data form.

Sec. 197.116 (last sentence); also Sec. Sec. 17.167(a).

197.117 (2nd sentence), Sec. 197.118

(2nd sentence), & Sec. 197.119 (2nd

sentence).

Sec. 197.117 (first sentence)............ New supporting data form.

Sec. 197.117 (3rd & 4th sentences)....... Sec. 17.153(b).

Sec. 197.117 (last sentence)............. Sec. 17.153(c).

Sec. 197.118 (first sentence)............ New supporting data form.

Sec. 197.118 (last sentence)............. Sec. 17.153(a).

Sec. 197.119 (first sentence)............ Deleted; covered by new

supporting data form and

Sec. 17.164(b).

Sec. 197.119 (last sentence)............. Sec. 17.155.

Subpart H

Sec. 197.130 (introduction).............. Sec. 17.161 (first

sentence).

Sec. 197.130(a)-(d)...................... Covered by Sec. 17.162(a)-

(c).

Sec. 197.130(e)-(g)...................... Sec. 17.164(b).

Sec. 197.130(h)-(j)...................... Sec. 17.166(a).

Sec. 197.130a(a)......................... Sec. 17.162(d).

Sec. 197.130a(b)......................... Sec. 17.164(d).

Sec. 197.130b............................ Sec. 17.163 (a) & (c).

Sec. 197.131............................. Sec. 17.166(c).

Sec. 197.132 (except last clause)........ Sec. 17.161 (from 2nd

sentence to end).

Sec. 197.132 (last clause)............... Covered by Sec. 17.171.

Sec. 197.133 (except last sentence)...... Sec. 17.170.

Sec. 197.133 (last sentence)............. Sec. 17.171.

------------------------------------------------------------------------

Derivation Table for Part 17

------------------------------------------------------------------------

New section Source

------------------------------------------------------------------------

Subpart A

Sec. 17.1................................ Sec. 197.1.

Sec. 17.2................................ Sec. 197.2.

Sec. 17.3................................ NEW.

Sec. 17.4................................ NEW.

Sec. 17.5................................ NEW.

Sec. 17.6................................ NEW (cf. Secs. 197.30 and

197.67(a)).

Subpart B

Sec. 17.11: (generally).................. Sec. 197.5.

``Alcohol & Tobacco Laboratory''...... NEW.

``Approved''.......................... NEW.

``CFR''............................... NEW.

``Eligible''.......................... NEW.

``Food products''..................... Rev. Rul. 63-87.

``Medicines''......................... ATF Rul. 82-7.

``Month''............................. NEW.

``Person''............................ NEW.

``Proof gallon''...................... NEW.

``Quarter''........................... NEW.

``Recovered spirits''................. NEW.

``Subject to drawback''............... NEW.

``Taxpaid''........................... NEW.

``This chapter''...................... NEW.

Subpart C

Sec. 17.21............................... Sec. 197.25.

Sec. 17.22............................... Sec. 197.25a.

Sec. 17.23............................... Sec. 197.26.

Sec. 17.24............................... Sec. 197.27.

Sec. 17.31............................... Sec. 197.28.

Sec. 17.32............................... Sec. 197.29.

Sec. 17.33............................... Sec. 197.30.

Sec. 17.34............................... Sec. 197.31.

Sec. 17.41............................... Sec. 197.29a(a).

Sec. 17.42............................... Sec. 197.29a(b).

Sec. 17.43............................... Sec. 197.29a(c).

Subpart D

Sec. 17.51............................... Sec. 197.40.

Sec. 17.52............................... Sec. 197.40a.

[[Page 31409]]

Sec. 17.53............................... Sec. 197.42.

Sec. 17.54............................... Sec. 197.41.

Sec. 17.55............................... Sec. 197.47a.

Sec. 17.61............................... Sec. 197.43.

Sec. 17.62............................... Sec. 197.46.

Sec. 17.63............................... Sec. 197.47.

Sec. 17.71............................... Sec. 197.48.

Sec. 17.72............................... Sec. 197.49.

Sec. 17.73............................... Sec. 197.50.

Sec. 17.74............................... Sec. 197.51.

Sec. 17.75............................... NEW.

Sec. 17.76............................... ATF Rul. 74-2.

Sec. 17.77............................... NEW.

Sec. 17.81............................... Sec. 197.52.

Sec. 17.82............................... Sec. 197.53.

Sec. 17.83............................... Sec. 197.54.

Sec. 17.91............................... Sec. 197.57.

Sec. 17.92............................... Sec. 197.58.

Sec. 17.93............................... Sec. 197.59.

Subpart E

Sec. 17.101.............................. Secs. 197.65 & 197.71.

Sec. 17.102.............................. Sec. 197.107 (except first

& last sentences).

Sec. 17.103.............................. Sec. 197.66.

Sec. 17.104.............................. Sec. 197.68.

Sec. 17.105.............................. Sec. 197.67.

Sec. 17.106.............................. Sec. 197.69.

Sec. 17.107.............................. Sec. 197.72.

Sec. 17.108.............................. Sec. 197.73.

Sec. 17.111.............................. Secs. 197.75 & 197.79.

Sec. 17.112.............................. Sec. 197.76.

Sec. 17.113.............................. Sec. 197.77.

Sec. 17.114.............................. Sec. 197.80.

Subpart F

Sec. 17.121.............................. Sec. 197.95 (sentences 1-2,

6, 8-9).

Sec. 17.122.............................. Sec. 197.95 (7th sentence)

& ATF Rul. 77-27.

Sec. 17.123.............................. Sec. 197.97.

Sec. 17.124.............................. Sec. 197.98.

Sec. 17.125(a)........................... Sec. 197.99.

Sec. 17.125(b)........................... NEW.

Sec. 17.126(a)........................... NEW.

Sec. 17.126(b)........................... Rev. Rul. 69-138.

Sec. 17.127.............................. NEW.

Sec. 17.131.............................. Sec. 197.95 (3rd & 4th

sentences).

Sec. 17.132(a)........................... Sec. 197.96.

Sec. 17.132(b)........................... Sec. 170.616.

Sec. 17.133.............................. Sec. 170.613(a) (7)-(9),

Rev. Rul. 63-87 & ATF Rul.

73-1.

Sec. 17.134.............................. NEW.

Sec. 17.135.............................. Rev. Ruls. 56-239 & 56-367.

Sec. 17.136.............................. Rev. Rul. 58-350.

Sec. 17.137.............................. Sec. 197.95 (5th sentence)

& Rev. Rul. 56-314.

Subpart G

Sec. 17.141.............................. Sec. 197.105.

Sec. 17.142(a)........................... Sec. 197.106 (up to

proviso) & ATF Order

1100.95A.

Sec. 17.142(b)........................... NEW.

Sec. 17.143.............................. Sec. 197.106 (proviso,

except next-to-last

sentence).

Sec. 17.144.............................. Secs. 197.70 & 197.107

(first & last sentence).

Sec. 17.145.............................. Sec. 197.108.

Sec. 17.146.............................. Secs. 197.106 (next-to-last

sentence) & 197.109.

Sec. 17.147(a)........................... Sec. 197.110.

Sec. 17.147(b)........................... Sec. 197.115 (last

sentence).

Sec. 17.147 (c) & (d).................... NEW.

Sec. 17.148.............................. NEW.

Sec. 17.151.............................. Sec. 197.11 (``Used'').

Sec. 17.152(a)........................... Sec. 197.11 (``Time

distilled spirits are

used'').

Sec. 17.152(b)........................... ATF Rul. 76-17.

Sec. 17.152(c)........................... Rev. Ruls. 56-394 & 69-138.

Sec. 17.152(d)........................... Rev. Rul. 69-138.

Sec. 17.153.............................. Secs. 197.117 (last three

sentences) & 197.118 (last

sentence).

Sec. 17.154.............................. Sec. 197.11 (``Intermediate

products'').

Sec. 17.155.............................. Sec. 197.119 (last

sentence).

Subpart H

Sec. 17.161.............................. Secs. 197.130

(introduction) & 197.132

(except last clause).

Sec. 17.162(a)........................... Secs. 197.112-113 & 197.130

(a)-(d).

Sec. 17.162(b)........................... Secs. 197.114 & 197.130 (a)-

(d).

Sec. 17.162(c)........................... NEW.

Sec. 17.162(d)........................... Sec. 197.130a(a).

Sec. 17.163 (a) & (c).................... Sec. 197.130b.

Sec. 17.163(b)........................... NEW.

Sec. 17.164.............................. Secs. 197.130 (e)-(g) &

197.130a(b).

Sec. 17.165.............................. Industry Circular 79-5.

Sec. 17.166(a)........................... Sec. 197.130 (h)-(j).

Sec. 17.166(b)........................... NEW.

Sec. 17.166(c)........................... Sec. 197.131.

Sec. 17.167(a)........................... Secs. 197.116-119.

Sec. 17.167(b)........................... Industry Circular 79-5.

Sec. 17.168.............................. Sec. 170.617(c).

Sec. 17.169.............................. NEW.

Sec. 17.170.............................. Sec. 197.133 (except last

sentence).

Sec. 17.171.............................. Sec. 197.132 (last two

clauses), Sec. 197.133

(last sentence) & Industry

Circular 79-5.

Subpart I

Sec. 17.181.............................. Rev. Rul. 56-335.

Sec. 17.182.............................. Rev. Rul. 56-336.

Sec. 17.183.............................. ATF Rul. 81-8 (modified).

Sec. 17.184.............................. NEW.

Sec. 17.185 (a) & (c).................... NEW.

Sec. 17.185(b)........................... ATF Rul. 76-19.

Sec. 17.186.............................. Rev. Rul. 56-395.

Sec. 17.187.............................. Rev. Rul. 55-689.

------------------------------------------------------------------------

Executive Order 12866

It has been determined that this rule is not a significant

regulatory action, because it will not: (1) Have an annual effect on

the economy of $100 million or more or adversely affect in a material

way the economy, a sector of the economy, productivity, competition,

jobs, the environment, public health or safety, or State, local or

tribal governments or communities; (2) Create a serious inconsistency

or otherwise interfere with an action taken or planned by another

agency; (3) Materially alter the budgetary impact of entitlements,

grants, user fees, or loan programs or the rights and obligations of

recipients thereof; or (4) Raise novel legal or policy issues arising

out of legal mandates, the President's priorities, or the principles

set forth in Executive Order 12866.

Paperwork Reduction Act

The collections of information contained in this final regulation

have been submitted to the Office of Management and Budget (OMB) in

accordance with the Paperwork Reduction Act of 1980 (44 U.S.C. 3504(h))

and approved under control numbers 1512-0078, 1512-0079, 1512-0095,

1512-0141, 1512-0188, 1512-0378, 1512-0379, 1512-0472, 1512-0492, 1512-

0500, and 1512-0514. The likely respondents and recordkeepers are

businesses or other for-profit institutions, including small businesses

or organizations.

The collection of information under control number 1512-0078 is in

Sec. 17.106. This information is required by ATF to obtain the surety's

agreement to any changes in the terms of bonds. The collections of

information under control number 1512-0079 are in Secs. 17.6 and

17.105. This information is required when agents obtain authority to

sign official documents on behalf of the principal.

The collections of information under control number 1512-0095 are

in Secs. 17.121, 17.126, 17.127, 17.132, and 17.136. This information

is required by ATF to describe the formulas for nonbeverage and

intermediate products. The information is used to ensure that drawback

products meet the statutory requirements for approval as being

medicines, medicinal preparations, food

[[Page 31410]]

products, flavors, flavoring extracts, or perfume that are unfit for

beverage use.

The collections of information under control number 1512-0141 are

in Secs. 17.92, 17.93, 17.142, 17.145, and 17.146. The information on

this claim form must be submitted to ATF by manufacturers claiming

nonbeverage drawback or refund of special (occupational) tax. The

information is used to determine whether the claim is valid.

The collection of information under control number 1512-0188 is in

Sec. 17.6. The information on this form provides ATF with notification

of corporate officials authorized to sign documents on behalf of the

corporation.

The collections of information under control number 1512-0378 are

in Secs. 17.3, 17.54, 17.111, 17.112, 17.122-17.125, 17.143, 17.168(a),

17.183, and 17.187. This control number covers miscellaneous

information required by ATF on an irregular basis to ensure compliance

with law and regulations or to grant permission for the use of optional

procedures.

The collections of information under control number 1512-0379 are

in Secs. 17.161-17.167, 17.168(b), 17.169, 17.170, 17.182, and 17.186.

This information is required to support claims for drawback. The

records kept by manufacturers at their plants are used by ATF

inspectors conducting on-site inspections.

The collections of information under control number 1512-0472 are

in Secs. 17.31-17.34, 17.41, 17.53, 17.61, 17.63, 17.71, and 17.74. The

information on this special tax return is required when paying special

(occupational) tax. The collections of information under control number

1512-0492 are in Secs. 17.42, 17.43, 17.52, and 17.55. This control

number pertains to records associated with the preparation and filing

of the special tax return. The collections of information under control

number 1512-0500 are in Secs. 17.31-17.34, 17.41, and 17.53. This

requirement is the same special tax return covered by control number

1512-0472, except that the form is modified (simplified) for use by

renewal taxpayers.

The collection of information under control number 1512-0514 is in

Secs. 17.147 and 17.182. This collection of information consists of

supporting data required to accompany claims for drawback. The

supporting data submitted to ATF is used to make a preliminary

verification of claims before they are paid.

The estimated total number of respondents and recordkeepers

affected by these collections of information is 611. The estimated

average annual burden is approximately 36 hours per respondent or

recordkeeper. (This figure represents the additional time that would be

required, beyond what a manufacturer would customarily spend on

recordkeeping in the ordinary course of his business.) Comments on

these collections of information, including comments relating to the

accuracy of the burden estimate and suggestions for reducing this

burden, were requested by Notices No. 634 and 748. Public comments

pertaining to the collections of information prescribed by this final

rule are discussed above, under the headings ``Public Comments on

Notice No. 634'' and ``Public Comments on Notice No. 748.'' An agency

may not conduct or sponsor, and a person is not required to respond to,

a collection of information unless it displays a valid control number

assigned by OMB.

Regulatory Flexibility Act

The provisions of the Regulatory Flexibility Act relating to a

final regulatory flexibility analysis (5 U.S.C. 603, 604) are

applicable to this final rule. A final regulatory flexibility analysis

has been prepared and reads as follows:

I. Rationale for Agency Action

The law (26 U.S.C. 5131-5134) authorizes a drawback of internal

revenue tax on alcohol used in the manufacture of certain nonbeverage

products. This drawback shall be granted by the Department of the

Treasury on receipt of a proper claim. To determine whether a claim is

proper, regulations may require certain records to be kept and reports

to be submitted by those claiming drawback, in order to establish their

eligibility. That is, it must be shown that the alcohol on which

drawback is claimed: (A) Was actually used, (B) was used in the

manufacture of the particular products for which drawback is

authorized, and (C) was originally taxpaid.

The regulations dealing with nonbeverage drawback are therefore

issued under this primary rationale: to protect the revenue. However,

this rationale is modified by a secondary rationale, which is: to

require only those items of information to be submitted or to be

recorded which are actually necessary to establish eligibility for

drawback. With respect to those items required to be submitted to the

Bureau of Alcohol, Tobacco and Firearms (ATF), only those should be

submitted which are actually used to maintain control over the approval

of claims. With respect to those records required to be maintained at

the claimant's premises, the claimant's own record system should be

utilized at all possible times to avoid duplication.

II. Objective and Legal Basis for the Rule

A. Objective basis. The objective basis of these regulations is

that a dual control system is used to verify the propriety of claims:

Initially, a sampling procedure in the regional office is used to

screen the claims before they are paid; subsequently, periodic field

inspections at the manufacturing premises provide the opportunity to

audit more detailed records.

At the regional offices, not every item on every report is checked

every time; however, a sufficient number are checked in order to insure

that there is no likelihood of fraud. Those reports which are checked

must contain sufficient information to reveal undisguised fraud and/or

honest mistakes. The information submitted should also permit detection

of any problems which would result in scheduling an on-site inspection

sooner than would otherwise be planned.

During on-site inspections, ATF officers examine original batch

records to verify compliance with approved formulas. A physical

inventory is taken and records are examined to see whether they agree

with the inventory. If necessary, a claim adjustment may be required.

B. Legal basis. The legal basis of these regulations is found in 26

U.S.C. 5131-5134 and 7805. These laws give the Secretary of the

Treasury broad discretion to promulgate regulations, but the

regulations must be limited to the function of revenue protection.

Treasury Department Order No. 120-01 (dated June 6, 1972, effective

July 1, 1972) delegated to the Bureau of Alcohol, Tobacco and Firearms

the function of prescribing and administering such regulations.

C. Estimate of number of small entities affected and types. It is

estimated that this document will affect about 611 small entities which

use taxpaid alcohol to manufacture nonbeverage products.

III. Detailed Estimate and Description of the Reporting,

Recordkeeping and Compliance Requirements

A. Reporting requirements. The most significant reporting

requirements of this document pertain to the supporting data that is

required to accompany each claim. The supporting data must include

information regarding: the amount of taxpaid alcohol received, the

amount of each product produced, the amount of taxpaid alcohol used and

the

[[Page 31411]]

product in which used, the amount of alcohol recovered (if any), the

amount of tax claimed as drawback, the amount of alcohol on hand at the

beginning and end of each claim period, and an explanation of any

discrepancies disclosed by physical inventory. Other reports which are

required less frequently include: Statements of formula and process

(which are necessary to establish that the products being manufactured

are of the types for which drawback is authorized under law), bonds and

consents of surety in the case of claimants filing monthly claims,

samples of the product if needed to determine its nonbeverage

character, a special tax return and registration (as required by law in

26 U.S.C. 5131-5132), an application for an employer identification

number in order to identify the special taxpayer, and information

relating to any changes in the location or control of the business. If

no drawback is claimed, then none of the requirements need be complied

with. The reporting requirements affect all classes of nonbeverage

drawback manufacturers. Some knowledge of chemistry is helpful in

preparing the required formulas for submission, and an elementary

knowledge of bookkeeping is needed to maintain the required accounts

for submission.

B. Recordkeeping requirements. The recordkeeping requirements of

this regulation are designed to be supplementary to the reporting

requirements. The records support and amplify the statements given in

the required reports. Ultimately, the purpose is to facilitate

verification of the amount of drawback claimed. No particular form of

record is required; rather, the records may be kept in any format, so

long as the information is clearly expressed. For the most part, these

required records are merely ordinary business records which the

manufacturer would normally maintain in the course of his business.

However, it is still necessary for regulations to specify that these

records must be kept; otherwise, a claimant under investigation might

falsely deny keeping the records, and if there were no requirement that

the records be kept, then it would be difficult to prove any violation

against such a person. The records which this regulation requires

claimants to keep are: Copies of the reports submitted, records of

disposition of nonbeverage products, records of raw materials received,

accounting for recovered alcohol, invoices of purchases, evidence of

taxpayment, and batch records of ingredients used in each production

batch. The regional director (compliance) may also require a

manufacturer to keep inventory records of raw materials and nonbeverage

products. All classes of nonbeverage drawback manufacturers are

affected by these recordkeeping requirements. An elementary knowledge

of bookkeeping is needed to prepare and record the prescribed accounts.

C. Compliance requirements. The compliance requirements of this

regulation are: To retain the special tax stamp at the place of

business as evidence of payment of special tax; to observe the

statutory time restrictions for filing of claims (six months following

the close of the quarter within which the alcohol was used); to retain

the required records for a period of at least 3 years; to obliterate

taxpayment marks on emptied containers of distilled spirits (as

required by 26 U.S.C. 5206); to use intermediate products, and alcohol

recovered from nonbeverage products, for no purpose other than to

manufacture nonbeverage products; to transfer intermediate products to

no one except another branch or plant of the same manufacturer; to

refrain from transferring unfinished nonbeverage products to any other

premises; and to refrain from selling or transferring any recovered

alcohol or material from which alcohol can be recovered, except as

provided by regulation. All classes of nonbeverage drawback

manufacturers are affected by these requirements. No special skills are

needed for compliance.

IV. Conflicting, Duplicative or Overlapping Federal Rules

Some of the requirements of these regulations may overlap

requirements of the Internal Revenue Service (IRS). The reason for this

is that the IRS requires certain financial and cost accounting records

in order to establish income tax liability, and in some cases the same

information may be required by this part in order to establish

eligibility for drawback of excise tax. In case of such overlap, the

proprietor would not be required to keep two separate sets of records;

the same set of records could suffice to meet the requirements of both

ATF and IRS regulations. There is no additional burden, because these

records are merely those which anyone would keep in the ordinary course

of business. The Food and Drug Administration (FDA) may also require

certain records which duplicate or overlap the records required by

these regulations. Such FDA records will also satisfy the ATF

requirement, due to the fact that these regulations do not specify any

particular format for the records, so long as the information is

clearly presented and available to ATF inspectors.

V. Alternatives

A. Multitiering. This concept is not used, because the large

majority of manufacturers of nonbeverage products are small entities.

Consequently, the regulatory requirements have been specifically

designed in consideration of the needs of small establishments. Larger

establishments should also be able to comply with these requirements

without particular difficulties.

B. Simplification of requirements. The requirements as they are

established are felt to be at the minimum. These requirements are

necessary in order to protect the revenue and detect fraud against the

Treasury. In most cases, of course, no fraud exists. But the

requirements must be imposed equally on all claimants, so that if and

when fraud exists, it will be detected. This is the statutory mandate

of 26 U.S.C. 5132.

C. Performance standards. This concept was utilized as much as

possible. For example, an ATF form for ``supporting data'' reports is

provided--but the format presented on that form is not required. (Any

desired format may be used if it provides the necessary information.)

Similarly, the required records also may be kept in any convenient

format. However, the needs of the Government, with respect to

expeditious processing of claims and tax payments, mandate prescription

of specific forms for submission of drawback claims and payment of

special tax. A specific form is also prescribed for formula submission,

in order to facilitate communication concerning the formula among the

applicable ATF offices as well as between ATF and the claimant. A

special regulations section authorizes variation from most requirements

if good cause can be shown for a variation.

D. Exemption of small entities. The law does not authorize

exemption of any entity from the requirements.

VI. Issues Raised by Comments

No comments directed to the issues addressed in the Initial

Regulatory Flexibility Analyses of Notices No. 634 and 748 have been

received from the public or the Chief Counsel for Advocacy of the Small

Business Administration.

Drafting Information

The principal drafter of this document was Steven C. Simon of the

Wine, Beer, and Spirits Regulations Branch, Bureau of Alcohol, Tobacco

and Firearms.

[[Page 31412]]

List of Subjects

27 CFR Parts 17 and 197

Alcohol and alcoholic beverages, Authority delegations (Government

agencies), Claims, Drugs, Excise taxes, Foods, Reporting and

recordkeeping requirements, Spices and flavorings, Surety bonds.

27 CFR Part 19

Administrative practice and procedure, Alcohol and alcoholic

beverages, Authority delegations (Government agencies), Chemicals,

Claims, Customs duties and inspection, Electronic fund transfers,

Excise taxes, Exports, Gasohol, Imports, Labeling, Liquors, Packaging

and containers, Puerto Rico, Reporting and recordkeeping requirements,

Research, Security measures, Spices and flavorings, Stills, Surety

bonds, Transportation, Vinegar, Virgin Islands, Warehouses, Wine.

27 CFR Part 70

Administrative practice and procedure, Alcohol and alcoholic

beverages, Authority delegations (Government agencies), Claims, Excise

taxes, Firearms and ammunition, Government employees, Law enforcement,

Law enforcement officers, Penalties, Seizures and forfeitures, Surety

bonds, Tobacco.

27 CFR Part 170

Alcohol and alcoholic beverages, Authority delegations (Government

agencies), Claims, Customs duties and inspection, Disaster assistance,

Excise taxes, Labeling, Liquors, Penalties, Reporting and recordkeeping

requirements, Surety bonds, Wine.

27 CFR Part 194

Alcohol and alcoholic beverages, Authority delegations (Government

agencies), Beer, Claims, Excise taxes, Exports, Labeling, Liquors,

Packaging and containers, Penalties, Reporting and recordkeeping

requirements, Wine.

27 CFR Part 250

Administrative practice and procedure, Alcohol and alcoholic

beverages, Authority delegations (Government agencies), Beer, Claims,

Customs duties and inspection, Drugs, Electronic funds transfers,

Excise taxes, Foods, Liquors, Packaging and containers, Puerto Rico,

Reporting and recordkeeping requirements, Spices and flavorings, Surety

bonds, Transportation, Virgin Islands, Warehouses, Wine.

Issuance

Accordingly, title 27 of the Code of Federal Regulations is amended

as follows:

Paragraph A. Title 27 CFR part 17 is added to read as follows:

PART 17--DRAWBACK ON TAXPAID DISTILLED SPIRITS USED IN

MANUFACTURING NONBEVERAGE PRODUCTS

Subpart A--General Provisions

Sec.

17.1 Scope of regulations.

17.2 Forms prescribed.

17.3 Alternate methods or procedures.

17.4 OMB control numbers assigned under the Paperwork Reduction

Act.

17.5 Products manufactured in Puerto Rico or the Virgin Islands.

17.6 Signature authority.

Subpart B--Definitions

17.11 Meaning of terms.

Subpart C--Special Tax

17.21 Payment of special tax.

17.22 Rate of special tax

17.23 Special tax for each place of business.

17.24 Time for payment of special tax.

Special Tax Returns

17.31 Filing of return and payment of special tax.

17.32 Completion of ATF Form 5630.5.

17.33 Signature on returns, ATF Form 5630.5.

17.34 Verification of returns.

Employer Identification Number

17.41 Requirement for employer identification number.

17.42 Application for employer identification number.

17.43 Preparation and filing of Form SS-4.

Subpart D--Special Tax Stamps

17.51 Issuance of stamps.

17.52 Distribution of stamps for multiple locations.

17.53 Correction of errors on stamps.

17.54 Lost or destroyed stamps.

17.55 Retention of special tax stamps.

Change in Location

17.61 General.

17.62 Failure to register.

17.63 Certificates in lieu of lost stamps.

Change in Control

17.71 General.

17.72 Right of succession.

17.73 Failure to register.

17.74 Certificates in lieu of lost stamps.

17.75 Formation of partnership or corporation.

17.76 Addition or withdrawal of partners.

17.77 Reincorporation.

Change in Name or Style

17.81 General.

17.82 Change in capital stock.

17.83 Sale of stock.

Refund of Special Tax

17.91 Absence of liability, refund of special tax.

17.92 Filing of refund claim.

17.93 Time limit for filing refund claim.

Subpart E--Bonds and Consents of Sureties

17.101 General.

17.102 Amount of bond.

17.103 Bonds obtained from surety companies.

17.104 Deposit of collateral.

17.105 Filing of powers of attorney.

17.106 Consents of surety.

17.107 Strengthening bonds.

17.108 Superseding bonds.

Termination of Bonds

17.111 General.

17.112 Notice by surety of termination of bond.

17.113 Extent of release of surety from liability under bond.

17.114 Release of collateral.

Subpart F--Formulas and Samples

17.121 Product formulas.

17.122 Amended or revised formulas.

17.123 Statement of process.

17.124 Samples.

17.125 Adoption of formulas and processes.

17.126 Formulas for intermediate products.

17.127 Self-manufactured ingredients treated optionally as

unfinished nonbeverage products.

Approval of Formulas

17.131 Formulas on ATF Form 5154.1.

17.132 U.S.P., N.F., and H.P.U.S. preparations.

17.133 Food product formulas.

17.134 Determination of unfitness for beverage purposes.

17.135 Use of specially denatured alcohol (S.D.A.).

17.136 Compliance with Food and Drug Administration requirements.

17.137 Formulas disapproved for drawback.

Subpart G--Claims for Drawback

17.141 Drawback.

17.142 Claims.

17.143 Notice for monthly claims.

17.144 Bond for monthly claims.

17.145 Date of filing claim.

17.146 Information to be shown by the claim.

17.147 Supporting data.

17.148 Allowance of claims.

Spirits Subject to Drawback

17.151 Use of distilled spirits.

17.152 Time of use of spirits.

17.153 Recovered spirits.

17.154 Spirits contained in intermediate products.

17.155 Spirits consumed in manufacturing intermediate products.

Subpart H--Records

17.161 General.

17.162 Receipt of distilled spirits.

17.163 Evidence of taxpayment of distilled spirits.

17.164 Production record.

17.165 Receipt of raw ingredients.

[[Page 31413]]

17.166 Disposition of nonbeverage products.

17.167 Inventories.

17.168 Recovered spirits.

17.169 Transfer of intermediate products.

17.170 Retention of records.

17.171 Inspection of records.

Subpart I--Miscellaneous Provisions

17.181 Exportation of medicinal preparations and flavoring

extracts.

17.182 Drawback claims by druggists.

17.183 Disposition of recovered alcohol and material from which

alcohol can be recovered.

17.184 Distilled spirits container marks.

17.185 Requirements for intermediate products and unfinished

nonbeverage products.

17.186 Transfer of distilled spirits to other containers.

17.187 Discontinuance of business.

Authority: 26 U.S.C. 5010, 5131-5134, 5143, 5146, 5206, 5273,

6011, 6065, 6091, 6109, 6151, 6402, 6511, 7011, 7213, 7652, 7805; 31

U.S.C. 9301, 9303, 9304, 9306.

Subpart A--General Provisions

Sec. 17.1 Scope of regulations.

The regulations in this part apply to the manufacture of medicines,

medicinal preparations, food products, flavors, flavoring extracts, and

perfume that are unfit for beverage use and are made with taxpaid

distilled spirits. The regulations cover the following topics:

obtaining drawback of internal revenue tax on distilled spirits used in

the manufacture of nonbeverage products; the payment of special

(occupational) taxes in order to be eligible to receive drawback; and

bonds, claims, formulas and samples, losses, and records to be kept

pertaining to the manufacture of nonbeverage products.

Sec. 17.2 Forms prescribed.

(a) The Director is authorized to prescribe all forms, including

bonds and records, required by this part. All of the information called

for in each form shall be furnished as indicated by the headings on the

form and the instructions on or pertaining to the form. In addition,

information called for in each form shall be furnished as required by

this part.

(b) Requests for forms should be mailed to the ATF Distribution

Center, PO Box 5950, Springfield, Virginia 22150-5950.

Sec. 17.3 Alternate methods or procedures.

(a) General. The Director may approve the use of an alternate

method or procedure in lieu of a method or procedure prescribed in this

part if he or she finds that--

(1) Good cause has been shown for the use of the alternate method

or procedure;

(2) The alternate method or procedure is within the purpose of, and

consistent with the effect intended by, the method or procedure

prescribed by this part, and affords equivalent security to the

revenue; and

(3) The alternate method or procedure will not be contrary to any

provision of law, and will not result in any increase in cost to the

Government or hinder the effective administration of this part.

(b) Application. A letter of application to employ an alternate

method or procedure shall be submitted to the regional director

(compliance) for transmittal to the Director. The application shall

specifically describe the proposed alternate method or procedure, and

shall set forth the reasons therefor.

(c) Approval. No alternate method or procedure shall be employed

until the application has been approved by the Director. The Director

shall not approve any alternate method relating to the giving of any

bond or to the assessment, payment, or collection of any tax. The

manufacturer shall, during the period of authorization, comply with the

terms of the approved application and with any conditions thereto

stated by the Director in the approval. Authorization for any alternate

method or procedure may be withdrawn by written notice from the

Director whenever in his or her judgment the revenue is jeopardized,

the effective administration of this part is hindered, or good cause

for the authorization no longer exists. The manufacturer shall retain,

in the records required by Sec. 17.170, any authorization given by the

Director under this section.

Sec. 17.4 OMB control numbers assigned under the Paperwork Reduction

Act.

(a) Purpose. This section collects and displays the control numbers

assigned to the information collection requirements of this part by the

Office of Management and Budget under the Paperwork Reduction Act of

1980, Public Law 96-511.

(b) OMB control number 1512-0078. OMB control number 1512-0078 is

assigned to the following section in this part: Sec. 17.106.

(c) OMB control number 1512-0079. OMB control number 1512-0079 is

assigned to the following sections in this part: Secs. 17.6 and 17.105.

(d) OMB control number 1512-0095. OMB control number 1512-0095 is

assigned to the following sections in this part: Secs. 17.121, 17.126,

17.127, 17.132, and 17.136.

(e) OMB control number 1512-0141. OMB control number 1512-0141 is

assigned to the following sections in this part: Secs. 17.92, 17.93,

17.142, 17.145, and 17.146.

(f) OMB control number 1512-0188. OMB control number 1512-0188 is

assigned to the following section in this part: Sec. 17.6.

(g) OMB control number 1512-0378. OMB control number 1512-0378 is

assigned to the following sections in this part: Secs. 17.3, 17.54,

17.111, 17.112, 17.122, 17.123, 17.124, 17.125, 17.143, 17.168(a),

17.183, and 17.187.

(h) OMB control number 1512-0379. OMB control number 1512-0379 is

assigned to the following sections in this part: Secs. 17.161, 17.162,

17.163, 17.164, 17.165, 17.166, 17.167, 17.168(b), 17.169, 17.170,

17.182, and 17.186.

(i) OMB control number 1512-0472. OMB control number 1512-0472 is

assigned to the following sections in this part: Secs. 17.31, 17.32,

17.33, 17.34, 17.41, 17.53, 17.61, 17.63, 17.71, and 17.74.

(j) OMB control number 1512-0492. OMB control number 1512-0492 is

assigned to the following sections in this part: Secs. 17.42, 17.43,

17.52, and 17.55.

(k) OMB control number 1512-0500. OMB control number 1512-0500 is

assigned to the following sections in this part: Secs. 17.31, 17.32,

17.33, 17.34, 17.41, and 17.53.

(l) OMB control number 1512-0514. OMB control number 1512-0514 is

assigned to the following sections in this part: Secs. 17.147 and

17.182.

Sec. 17.5 Products manufactured in Puerto Rico or the Virgin Islands.

For additional provisions regarding drawback on distilled spirits

contained in medicines, medicinal preparations, food products, flavors,

flavoring extracts, or perfume which are unfit for beverage purposes

and which are brought into the United States from Puerto Rico or the

U.S. Virgin Islands, see part 250, subparts I and Ob, of this chapter.

Sec. 17.6 Signature authority.

No claim, bond, tax return, or other required document executed by

a person as an agent or representative is acceptable unless a power of

attorney or other proper notification of signature authority has been

filed with the ATF office where the required document must be filed.

The ATF officer with whom the claim or other required document is filed

may, when he or she considers it necessary, require additional evidence

of the authority of the agent or representative to execute the

document. Except as otherwise provided by this part, powers of

[[Page 31414]]

attorney shall be filed on ATF Form 1534 (5000.8), Power of Attorney.

Notification of signature authority of partners, officers, or employees

may be given by filing a copy of corporate or partnership documents,

minutes of a meeting of the board of directors, etc. For corporate

officers or employees, ATF Form 5100.1, Signing Authority for Corporate

Officials, may be used. For additional provisions regarding powers of

attorney, see Sec. 17.105 and 26 CFR part 601, subpart E.

Subpart B--Definitions

Sec. 17.11 Meaning of terms.

As used in this part, unless the context otherwise requires, terms

have the meanings given in this section. Words in the plural form

include the singular, and vice versa, and words indicating the

masculine gender include the feminine. The terms ``includes'' and

``including'' do not exclude things not listed which are in the same

general class.

Alcohol and Tobacco Laboratory. The Alcohol and Tobacco Laboratory,

Bureau of Alcohol, Tobacco and Firearms, 1401 Research Boulevard,

Rockville, Maryland 20850.

Approved, or approved for drawback. When used with reference to

products and their formulas, this term means that drawback may be

claimed on eligible spirits used in such products in accordance with

this part.

ATF officer. An officer or employee of the Bureau of Alcohol,

Tobacco and Firearms (ATF) authorized to perform any function relating

to the administration or enforcement of this part.

CFR. The Code of Federal Regulations.

Director. The Director, Bureau of Alcohol, Tobacco and Firearms,

the Department of the Treasury, Washington, DC 20226; or his or her

delegate.

Distilled spirits, or spirits. That substance known as ethyl

alcohol, ethanol, spirits, or spirits of wine in any form (including

all dilutions and mixtures thereof, from whatever source or by whatever

process produced).

Effective tax rate. The net tax rate, after reduction for any

credit allowable under 26 U.S.C. 5010 for wine and flavor content, at

which the tax imposed on distilled spirits by 26 U.S.C. 5001 or 7652 is

paid or determined. For distilled spirits with no wine or flavors

content, the effective tax rate equals the rate of tax imposed by 26

U.S.C. 5001 or 7652.

Eligible, or eligible for drawback. When used with reference to

spirits, this term designates taxpaid spirits which have not yet been

used in nonbeverage products.

Filed. Subject to the provisions of Secs. 70.305 and 70.306 of this

chapter, a claim for drawback or other document or payment submitted

under this part is generally considered to have been ``filed'' when it

is received by the office of the proper Government official; but if an

item is mailed timely with postage prepaid, then the United States

postmark date is treated as the date of filing.

Food products. Includes food adjuncts, such as preservatives,

emulsifying agents, and food colorings, which are manufactured and

used, or sold for use, in food.

Intermediate products. Products to which all three of the following

conditions apply: they are made with taxpaid distilled spirits, they

have been disapproved for drawback, and they are made by the

manufacturer exclusively for its own use in the manufacture of

nonbeverage products approved for drawback. However, ingredients

treated as unfinished nonbeverage products under Sec. 17.127 are not

considered to be intermediate products.

Medicines. Includes laboratory stains and reagents for use in

medical diagnostic procedures.

Month. A calendar month.

Nonbeverage products. Medicines, medicinal preparations, food

products, flavors, flavoring extracts, or perfume, which are

manufactured using taxpaid distilled spirits, and which are unfit for

use for beverage purposes.

Person. An individual, trust, estate, partnership, association,

company, or corporation.

Proof gallon. A gallon of liquid at 60 degrees Fahrenheit, which

contains 50 percent by volume of ethyl alcohol having a specific

gravity of 0.7939 at 60 degrees Fahrenheit (referred to water at 60

degrees Fahrenheit as unity), or the alcoholic equivalent thereof.

Quarter. A 3-month period beginning January 1, April 1, July 1, or

October 1.

Recovered spirits. Taxpaid spirits that have been salvaged, after

use in the manufacture of a product or ingredient, so that the spirits

are reusable.

Regional director (compliance). The principal ATF regional official

responsible for administering regulations in this part, or his or her

delegate.

Special tax. The special (occupational) tax on manufacturers of

nonbeverage products, imposed by 26 U.S.C. 5131.

Subject to drawback. This term is used with reference to spirits.

Eligible spirits become ``subject to drawback'' when they are used in

the manufacture of a nonbeverage product. When spirits have become

``subject to drawback,'' they may be included in the manufacturer's

claim for drawback of tax covering the period in which they were first

used.

Tax year. The period from July l of one calendar year through June

30 of the following year.

Taxpaid. When used with respect to distilled spirits, this term

shall mean that all taxes imposed on such spirits by 26 U.S.C. 5001 or

7652 have been determined or paid as provided by law.

This chapter. Chapter I of title 27 of the Code of Federal

Regulations.

U.S.C. The United States Code.

Subpart C--Special Tax

Sec. 17.2l Payment of special tax.

Each person who uses taxpaid distilled spirits in the manufacture

or production of nonbeverage products shall pay special tax as

specified in Sec. 17.22 in order to be eligible to receive drawback on

the spirits so used. Special tax shall be paid for each tax year during

which spirits were used in the manufacture of a product covered by a

drawback claim. If a claim is filed covering taxpaid distilled spirits

used during the preceding tax year, and special tax has not been paid

for the preceding tax year, then special tax for the preceding tax year

shall be paid. Regardless of the portion of a tax year covered by a

claim, the full annual special tax shall be paid. The manufacturer is

not required to pay the special tax if drawback is not claimed.

Sec. 17.22 Rate of special tax.

Effective January 1, 1988, the rate of special tax is $500 per tax

year for all persons claiming drawback on distilled spirits used in the

manufacture or production of nonbeverage products.

Sec. 17.23 Special tax for each place of business.

A separate special tax shall be paid for each place where distilled

spirits are used in the manufacture or production of nonbeverage

products, except for any such place in a tax year for which no claim is

filed, or no drawback is paid, on spirits used at that place.

Sec. 17.24 Time for payment of special tax.

Special tax may be paid in advance of actual use of distilled

spirits. Special tax shall be paid before a claimant may receive

drawback. Special tax may be paid without penalty under 26 U.S.C.

5134(c) at any time prior to completion of final action on the claim.

[[Page 31415]]

Special Tax Returns

Sec. 17.31 Filing of return and payment of special tax.

Special tax shall be paid by return. The prescribed return is ATF

Form 5630.5, Special Tax Registration and Return. Special tax returns,

with payment of tax, shall be filed with ATF in accordance with

instructions on the form.

(26 U.S.C. 609l, 6151)

Sec. 17.32 Completion of ATF Form 5630.5.

(a) General. All of the information called for on Form 5630.5 shall

be provided, including:

(1) The true name of the taxpayer.

(2) The trade name(s) (if any) of the business(es) subject to

special tax.

(3) The employer identification number (see Secs. 17.41-43).

(4) The exact location of the place of business, by name and number

of building or street, or if these do not exist, by some description in

addition to the post office address. In the case of one return for two

or more locations, the address to be shown shall be the taxpayer's

principal place of business (or principal office, in the case of a

corporate taxpayer).

(5) The class of special tax to which the taxpayer is subject.

(6) Ownership and control information: The name, position, and

residence address of every owner of the business and of every person

having power to control its management and policies with respect to the

activity subject to special tax. ``Owner of the business'' shall

include every partner if the taxpayer is a partnership, and every

person owning 10% or more of its stock if the taxpayer is a

corporation. However, the ownership and control information required by

this paragraph need not be stated if the same information has been

previously provided to ATF, and if the information previously provided

is still current.

(b) Multiple locations. A taxpayer subject to special tax for the

same period at more than one location or for more than one class of tax

shall--

(1) File one special tax return, ATF Form 5630.5, with payment of

tax, to cover all such locations and classes of tax; and

(2) Prepare, in duplicate, a list identified with the taxpayer's

name, address (as shown on the Form 5630.5), employer identification

number, and period covered by the return. The list shall show, by

States, the name, address, and tax class of each location for which

special tax is being paid. The original of the list shall be filed with

ATF in accordance with instructions on the return, and the copy shall

be retained at the taxpayer's principal place of business (or principal

office, in the case of a corporate taxpayer) for the period specified

in Sec. 17.170.

(26 U.S.C. 6011, 7011)

Sec. 17.33 Signature on returns, ATF Form 5630.5.

The return of an individual proprietor shall be signed by the

proprietor; the return of a partnership shall be signed by a general

partner; and the return of a corporation shall be signed by a corporate

officer. All signatures must be original; photocopies are not

acceptable. In each case, the person signing the return shall designate

his or her capacity, as ``individual owner,'' ``member of

partnership,'' or, in the case of a corporation, the title of the

officer. Receivers, trustees, assignees, executors, administrators, and

other legal representatives who continue the business of a bankrupt,

insolvent, deceased person, etc., shall indicate the fiduciary capacity

in which they act.

Sec. 17.34 Verification of returns.

ATF Forms 5630.5 shall contain or be verified by a written

declaration that the return is made under the penalties of perjury.

(68A Stat. 749 (26 U.S.C. 6065))

Employer Identification Number

Sec. 17.41 Requirement for employer identification number.

The employer identification number (defined in 26 CFR 301.7701-12)

of the taxpayer who has been assigned such a number shall be shown on

each special tax return (ATF Form 5630.5), including amended returns

filed under this subpart. Failure of the taxpayer to include the

employer identification number on Form 5630.5 may result in assertion

and collection of the penalty specified in Sec. 70.113 of this chapter.

(Secs. 1(a), (b), Pub. L. 87-397, 75 Stat. 828 (26 U.S.C. 6109,

6723))

Sec. 17.42 Application for employer identification number.

(a) An employer identification number is assigned pursuant to

application on IRS Form SS-4, Application for Employer Identification

Number, filed by the taxpayer. Form SS-4 may be obtained from any

office of the Internal Revenue Service.

(b) Each taxpayer who files a return on ATF Form 5630.5 shall make

application on IRS Form SS-4 for an employer identification number,

unless he or she has already been assigned such a number or made

application for one. The application on Form SS-4 shall be filed on or

before the seventh day after the date on which the first return on Form

5630.5 is filed.

(c) Each taxpayer shall make application for and shall be assigned

only one employer identification number, regardless of the number of

places of business for which the taxpayer is required to file Form

5630.5.

(Sec. 1(a), Pub. L. 87-397, 75 Stat. 828 (26 U.S.C. 6109))

Sec. 17.43 Preparation and filing of Form SS-4.

The taxpayer shall prepare and file the application on IRS Form SS-

4, together with any supplementary statement, in accordance with

instructions on the form or issued in respect to it.

(Sec. 1(a), Pub. L. 87-397, 75 Stat. 828 (26 U.S.C. 6109))

Subpart D--Special Tax Stamps

Sec. 17.51 Issuance of stamps.

Each manufacturer of nonbeverage products, upon filing a properly

executed return on ATF Form 5630.5, together with the proper tax

payment in the full amount due, shall be issued a special tax stamp

designated ``Manufacturer of Nonbeverage Products.'' This special tax

stamp shall not be sold or otherwise transferred to another person

(except as provided in Secs. 17.71 and 17.72). If the Form 5630.5

submitted with the tax payment covers multiple locations, the taxpayer

shall be issued one appropriately designated stamp for each location

listed in the attachment to Form 5630.5 required by Sec. 17.32(b)(2),

but showing, as to name and address, only the name of the taxpayer and

the address of the taxpayer's principal place of business (or principal

office in the case of a corporate taxpayer).

Sec. 17.52 Distribution of stamps for multiple locations.

On receipt of the special tax stamps, the taxpayer shall verify

that a stamp has been obtained for each location listed on the retained

copy of the attachment to ATF Form 5630.5 required by Sec. 17.32(b)(2).

The taxpayer shall designate one stamp for each location and shall type

on it the trade name (if different from the name in which the stamp was

issued) and address of the business conducted at the location for which

the stamp is designated. The taxpayer shall then forward each stamp to

the place of business designated on the stamp.

Sec. 17.53 Correction of errors on stamps.

(a) Single location. On receipt of a special tax stamp, the

taxpayer shall

[[Page 31416]]

examine it to ensure that the name and address are correctly stated. If

an error has been made, the taxpayer shall return the stamp to ATF at

the address shown thereon, with a statement showing the nature of the

error and setting forth the proper name or address. On receipt of the

stamp and statement, the data shall be compared with that on ATF Form

5630.5, and if an error on the part of ATF has been made, the stamp

shall be corrected and returned to the taxpayer. If the Form 5630.5

agrees with the data on the stamp, the taxpayer shall be required to

file a new Form 5630.5, designated ``Amended Return,'' disclosing the

proper name and address.

(b) Multiple locations. If an error is discovered on a special tax

stamp obtained under the provisions of Sec. 17.32(b), relating to

multiple locations, and if the error concerns any of the information

contained in the attachment to Form 5630.5, the taxpayer shall return

the stamp, with a statement showing the nature of the error and the

correct data, to his or her principal office. The data on the stamp

shall then be compared with the taxpayer's copy of the attachment to

Form 5630.5, retained at the principal office. If the error is in the

name and address and was made by the taxpayer, the taxpayer shall

correct the stamp and return it to the designated place of business. If

the error was made in the attachment to Form 5630.5, the taxpayer shall

file with ATF an amended Form 5630.5 and an amended attachment with a

statement showing the error.

Sec. 17.54 Lost or destroyed stamps.

If a special tax stamp is lost or accidentally destroyed, the

taxpayer shall immediately notify the regional director (compliance).

On receipt of this notification, the regional director (compliance)

shall issue to the taxpayer a ``Certificate in Lieu of Lost or

Destroyed Special Tax Stamp.'' The taxpayer shall keep the certificate

available for inspection in the same manner as prescribed for a special

tax stamp in Sec. 17.55.

Sec. 17.55 Retention of special tax stamps.

Taxpayers shall keep their special tax stamps at the place of

business covered thereby for the period specified in Sec. 17.170, and

shall make them available for inspection by any ATF officer during

business hours.

(Title II, sec. 201, Pub. L. 85-859, 72 Stat. 1348 (26 U.S.C. 5146))

Change in Location

Sec. 17.61 General.

A manufacturer who, during a tax year for which special tax has

been paid, moves its place of manufacture to a place other than that

specified on the related special tax stamp, shall register the change

with ATF within 90 days after the move to the new premises, by

executing a new return on ATF Form 5630.5, designated as ``Amended

Return.'' This Amended Return shall set forth the time of the move and

the address of the new location. The taxpayer shall also submit the

special tax stamp to ATF, for endorsement of the change in location.

(Title II, sec. 201, Pub. L. 85-859, 72 Stat. 1374 (26 U.S.C. 5143))

Sec. 17.62 Failure to register.

A manufacturer who fails to register a change of location with ATF,

as required by Sec. 17.61, shall pay a new special tax for the new

location if a claim for drawback is filed on distilled spirits used at

the new location during the tax year for which the original special tax

was paid.

Sec. 17.63 Certificates in lieu of lost stamps.

The provisions of Secs. 17.61 and 17.62 apply to certificates

issued in lieu of lost or destroyed special tax stamps.

Change in Control

Sec. 17.71 General.

Certain persons, other than the person who paid the special tax,

may qualify for succession to the same privileges granted by law to the

taxpayer, to cover the remainder of the tax year for which the special

tax was paid. Those who may qualify are specified in Sec. 17.72. To

secure these privileges, the successor or successors shall file with

ATF, within 90 days after the date on which the successor or successors

assume control, a return on ATF Form 5630.5, showing the basis of the

succession.

Sec. 17.72 Right of succession.

Under the conditions set out in Sec. 17.71, persons listed below

have the right of succession:

(a) The surviving spouse or child, or executor, administrator, or

other legal representative of a taxpayer.

(b) A husband or wife succeeding to the business of his or her

living spouse.

(c) A receiver or trustee in bankruptcy, or an assignee for the

benefit of creditors.

(d) The members of a partnership remaining after the death or

withdrawal of a general partner.

Sec. 17.73 Failure to register.

A person eligible for succession to the privileges of a taxpayer,

in accordance with Secs. 17.71 and 17.72, who fails to register the

succession with ATF, as required by Sec. 17.71, shall pay a new special

tax if a claim for drawback is filed on distilled spirits used by the

successor during the tax year for which the original special tax was

paid.

Sec. 17.74 Certificates in lieu of lost stamps.

The provisions of Secs. 17.71-73 apply to certificates issued in

lieu of lost or destroyed special tax stamps.

Sec. 17.75 Formation of partnership or corporation.

If one or more persons who have paid special tax form a partnership

or corporation, as a separate legal entity, to take over the business

of manufacturing nonbeverage products, the new firm or corporation

shall pay a new special tax in order to be eligible to receive

drawback.

Sec. 17.76 Addition or withdrawal of partners.

(a) General partners. When a business formed as a partnership,

subject to special tax, admits one or more new general partners, the

new partnership shall pay a new special tax in order to be eligible to

receive drawback. Withdrawal of general partners is covered by

Sec. 17.72(d).

(b) Limited partners. Changes in the membership of a limited

partnership requiring amendment of the certificate but not dissolution

of the partnership are not changes that incur liability to additional

special tax.

Sec. 17.77 Reincorporation.

When a new corporation is formed to take over and conduct the

business of one or more corporations that have paid special tax, the

new corporation shall pay special tax and obtain a stamp in its own

name.

Change in Name or Style

Sec. 17.81 General.

A person who paid special tax is not required to pay a new special

tax by reason of a mere change in the trade name or style under which

the business is conducted, nor by reason of a change in management

which involves no change in the proprietorship of the business.

Sec. 17.82 Change in capital stock.

A new special tax is not required by reason of a change of name or

increase in the capital stock of a corporation, if the laws of the

State of incorporation provide for such changes without creating a new

corporation.

Sec. 17.83 Sale of stock.

A new special tax is not required by reason of the sale or transfer

of all or a controlling interest in the capital stock of a corporation.

[[Page 31417]]

Refund of Special Tax

Sec. 17.91 Absence of liability, refund of special tax.

The special tax paid may be refunded if it is established that the

taxpayer did not file a claim for drawback for the period covered by

the special tax stamp. If a claim for drawback is filed, the special

tax may be refunded if no drawback is paid or allowed for the period

covered by the stamp.

Sec. 17.92 Filing of refund claim.

Claim for refund of special tax shall be filed on ATF Form 2635

(5620.8), Claim--Alcohol, Tobacco and Firearms Taxes. The claim shall

be filed with the Chief, Tax Processing Center, PO Box 145433,

Cincinnati, OH 45203. The claim shall set forth in detail sufficient

reasons and supporting facts to inform the regional director

(compliance) of the exact basis of the claim. The special tax stamp

shall be attached to the claim.

(68A Stat. 791 (26 U.S.C. 6402))

Sec. 17.93 Time limit for filing refund claim.

A claim for refund of special tax shall not be allowed unless filed

within three years after the payment of the tax.

(68A Stat. 808 (26 U.S.C. 6511))

Subpart E--Bonds and Consents of Sureties

Sec. 17.101 General.

A bond shall be filed by each person claiming drawback on a monthly

basis. Persons who claim drawback on a quarterly basis are not required

to file bonds. Bonds shall be prepared and executed on ATF Form 5154.3,

Bond for Drawback Under 26 U.S.C. 5131, in accordance with the

provisions of this part and the instructions printed on the form. The

bond requirement of this part shall be satisfied either by bonds

obtained from authorized surety companies or by deposit of collateral

security. Regional directors (compliance) are authorized to approve all

bonds and consents of surety required by this part.

Sec. 17.102 Amount of bond.

The bond shall be a continuing one, in an amount sufficient to

cover the total drawback to be claimed on spirits used during any

quarter. However, the amount of any bond shall not exceed $200,000 nor

be less than $1,000.

Sec. 17.103 Bonds obtained from surety companies.

(a) The bond may be obtained from any surety company authorized by

the Secretary of the Treasury to be a surety on Federal bonds. Surety

companies so authorized are listed in the current revision of

Department of the Treasury Circular 570 (Companies Holding Certificates

of Authority as Acceptable Sureties on Federal Bonds and as Acceptable

Reinsuring Companies), and subject to such amendatory circulars as may

be issued from time to time. Bonds obtained from surety companies are

also governed by the provisions of 31 U.S.C. 9304, and 31 CFR part 223.

(b) A bond executed by two or more surety companies shall be the

joint and several liability of the principal and the sureties; however,

each surety company may limit its liability, in terms upon the face of

the bond, to a definite, specified amount. This amount shall not exceed

the limitations prescribed for each surety company by the Secretary, as

stated in Department of the Treasury Circular 570. If the sureties

limit their liability in this way, the total of the limited liabilities

shall equal the required amount of the bond.

(c) Department of the Treasury Circular No. 570 is published in

the Federal Register annually on the first workday in July. As they

occur, interim revisions of the circular are published in the Federal

Register. Copies of the circular may be obtained from: Surety Bond

Branch, Financial Management Service, Department of the Treasury,

Washington, DC 20227.

(Sec. 1, Pub. L. 97-258, 96 Stat. 1047 (31 U.S.C. 9304))

Sec. 17.104 Deposit of collateral.

Except as otherwise provided by law or regulations, bonds or notes

of the United States, or other obligations which are unconditionally

guaranteed as to both interest and principal by the United States, may

be pledged and deposited by principals as collateral security in lieu

of bonds obtained from surety companies. Deposit of collateral security

is governed by the provisions of 31 U.S.C. 9303, and 31 CFR part 225.

(Sec. 1, Pub. L. 97-258, 96 Stat. 1046 (31 U.S.C. 9301, 9303))

Sec. 17.105 Filing of powers of attorney.

(a) Surety companies. The surety company shall prepare and submit

with each bond, and with each consent to changes in the terms of a

bond, a power of attorney in accordance with Sec. 17.6, authorizing the

agent or officer who executed the bond or consent to act in this

capacity on behalf of the surety. The power of attorney shall be

prepared on a form provided by the surety company and executed under

the corporate seal of the company. If other than a manually signed

original is submitted, it shall be accompanied by certification of its

validity.

(b) Principal. The principal shall execute and file with the

regional director (compliance) a power of attorney, in accordance with

Sec. 17.6, for every person authorized to execute bonds on behalf of

the principal.

(Sec. 1, Pub. L. 97-258, 96 Stat. 1047 (31 U.S.C. 9304, 9306))

Sec. 17.106 Consents of surety.

The principal and surety shall execute on ATF Form 1533 (5000.18),

Consent of Surety, any consents of surety to changes in the terms of

bonds. Form 1533 (5000.18) shall be executed with the same formality

and proof of authority as is required for the execution of bonds.

Sec. 17.107 Strengthening bonds.

Whenever the amount of a bond on file and in effect becomes

insufficient, the principal may give a strengthening bond in a

sufficient amount, provided the surety is the same as on the bond

already on file and in effect; otherwise a superseding bond covering

the entire liability shall be filed. Strengthening bonds, filed to

increase the bond liability of the surety, shall not be construed in

any sense to be substitute bonds, and the regional director

(compliance) shall not approve a strengthening bond containing any

notation which may be interpreted as a release of any former bond or as

limiting the amount of either bond to less than its full amount.

Sec. 17.108 Superseding bonds.

(a) The principal on any bond filed pursuant to this part may at

any time replace it with a superseding bond.

(b) Executors, administrators, assignees, receivers, trustees, or

other persons acting in a fiduciary capacity continuing or liquidating

the business of the principal, shall execute and file a superseding

bond or obtain the consent of the surety or sureties on the existing

bond or bonds.

(c) When, in the opinion of the regional director (compliance), the

interests of the Government demand it, or in any case where the

security of the bond becomes impaired in whole or in part for any

reason whatever, the principal shall file a superseding bond. A

superseding bond shall be filed immediately in case of the insolvency

of the surety. If a bond is found to be not acceptable or for any

reason becomes invalid or of no effect, the principal shall immediately

file a satisfactory superseding bond.

(d) A bond filed under this section to supersede an existing bond

shall be marked by the obligors at the time of execution, ``Superseding

Bond.'' When

[[Page 31418]]

such a bond is approved, the superseded bond shall be released as to

transactions occurring wholly subsequent to the effective date of the

superseding bond, and notice of termination of the superseded bond

shall be issued, as provided in Sec. 17.111.

Termination of Bonds

Sec. 17.111 General.

(a) Bonds on ATF Form 5154.3 shall be terminated by the regional

director (compliance), as to liability on drawback allowed after a

specified future date, in the following circumstances:

(1) Pursuant to a notice by the surety as provided in Sec. 17.112.

(2) Following approval of a superseding bond, as provided in

Sec. 17.108.

(3) Following notification by the principal of an intent to

discontinue the filing of claims on a monthly basis.

(b) However, the bond shall not be terminated until all outstanding

liability under it has been discharged. Upon termination, the regional

director (compliance) shall mark the bond ``canceled,'' followed by the

date of cancellation, and shall issue a notice of termination of bond.

A copy of this notice shall be given to the principal and to each

surety.

Sec. 17.112 Notice by surety of termination of bond.

A surety on any bond required by this part may at any time, in

writing, notify the principal and the regional director (compliance) in

whose office the bond is on file that the surety desires, after a date

named, to be relieved of liability under the bond. Unless the notice is

withdrawn, in writing, before the date named in it, the notice shall

take effect on that date. The date shall not be less than 60 days after

the date on which both the notice and proof of service on the principal

have been received by the regional director (compliance). The surety

shall deliver one copy of the notice to the principal and the original

to the regional director (compliance). The surety shall also file with

the regional director (compliance) an acknowledgment or other proof of

service on the principal.

Sec. 17.113 Extent of release of surety from liability under bond.

The rights of the principal as supported by the bond shall cease as

of the date when termination of the bond takes effect, and the surety

shall be relieved from liability for drawback allowed on and after that

date. Liability for drawback previously allowed shall continue until

the claims for such drawback have been properly verified by the

regional director (compliance) according to law and this part.

Sec. 17.114 Release of collateral.

The release of collateral security pledged and deposited to satisfy

the bond requirement of this part is governed by the provisions of 31

CFR part 225. When the regional director (compliance) determines that

there is no outstanding liability under the bond, and is satisfied that

the interests of the Government will not be jeopardized, the security

shall be released and returned to the principal.

(Sec. 1, Pub. L. 97-258, 96 Stat. 1046 (31 U.S.C. 9301, 9303))

Subpart F--Formulas and Samples

Sec. 17.121 Product formulas.

(a) General. Except as provided in Secs. 17.132 and 17.182,

manufacturers shall file quantitative formulas for all preparations for

which they intend to file drawback claims. Such formulas shall state

the quantity of each ingredient, and shall separately state the

quantity of spirits to be recovered or to be consumed as an essential

part of the manufacturing process.

(b) Filing. Formulas shall be filed with the Alcohol and Tobacco

Laboratory on ATF Form 5154.1, Formula and Process for Nonbeverage

Products. Filing shall be accomplished no later than 6 months after the

end of the quarter in which taxpaid distilled spirits were first used

to manufacture the product for purposes of drawback. If a product's

formula is disapproved, no drawback shall be allowed on spirits used to

manufacture that product, unless it is later used as an intermediate

product, as provided in Sec. 17.137.

(c) Numbering. The formulas shall be serially numbered by the

manufacturer, commencing with number 1 and continuing thereafter in

numerical sequence. However, a new formula for use at several plants

shall be given the highest number next in sequence at any of those

plants. The numbers that were skipped at the other plants shall not be

used subsequently.

(d) Distribution and retention of approved formulas. One copy of

each approved Form 5154.1 shall be returned to the manufacturer. The

formulas returned to manufacturers shall be kept in serial order at the

place of manufacture, as provided in Sec. 17.170, and shall be made

available to ATF officers for examination in the investigation of

drawback claims.

Sec. 17.122 Amended or revised formulas.

Except as provided in this section, amended or revised formulas are

considered to be new formulas and shall be numbered accordingly. Minor

changes may be made to a current formula on ATF Form 5154.1 with

retention of the original formula number, if approval is obtained from

the Director. In order to obtain approval to make a minor formula

change, the person holding the Form 5154.1 shall submit a letter of

application to the Alcohol and Tobacco Laboratory, indicating the

formula change and requesting that the proposed change be considered a

minor change. Each such application shall clearly identify the original

formula by number, date of approval, and name of product. The

application shall indicate whether the product is, has been, or will be

used in alcoholic beverages, and shall specify whether the proposed

change is intended as a substitution or merely as an alternative for

the original formula. No changes may be made to current formulas

without specific ATF approval in each case.

Sec. 17.123 Statement of process.

Any person claiming drawback under the regulations in this part may

be required, at any time, to file a statement of process, in addition

to that required by ATF Form 5154.1, as well as any other data

necessary for consideration of the claim for drawback. When pertinent

to consideration of the claim, submission of copies of the commercial

labels used on the finished products may also be required.

Sec. 17.124 Samples.

Any person claiming drawback or submitting a formula for approval

under the regulations in this part may be required, at any time, to

submit a sample of each nonbeverage or intermediate product for

analysis. If the product is manufactured with a mixture of oil or other

ingredients, the composition of which is unknown to the claimant, a 1-

ounce sample of the mixture shall be submitted with the sample of

finished product when so required.

Sec. 17.125 Adoption of formulas and processes.

(a) Adoption of predecessor's formulas. If there is a change in the

proprietorship of a nonbeverage plant and the successor desires to use

the predecessor's formulas at the same location, the successor may, in

lieu of submitting new formulas in its own name, adopt any or all of

the formulas of the predecessor by filing a notice of

[[Page 31419]]

adoption with the regional director (compliance). The notice shall be

filed with the first claim relating to any of the adopted formulas. The

notice shall list, by name and serial number, all formulas to be

adopted, and shall state that the products will be manufactured in

accordance with the adopted formulas and processes. The notice shall be

accompanied by a certified copy of the articles of incorporation or

other document(s) necessary to prove the transfer of ownership. The

manufacturer shall retain a copy of the notice with the related

formulas.

(b) Adoption of manufacturer's own formulas from a different

location. A manufacturer's own formulas may be adopted for use at

another of the manufacturer's plants. Further, a wholly owned

subsidiary may adopt the formulas of the parent company, and vice

versa. The procedure for such adoption shall be by filing a letterhead

notice, accompanied by two photocopies of each formula to be adopted,

with the Alcohol and Tobacco Laboratory for transmittal to the regional

director (compliance). The notice shall list the numbers of all

formulas to be adopted and shall indicate the plant where each was

originally approved and the plant(s) where each is to be adopted. Some

evidence of the relationship between the plants involved in the

adoption shall be attached to the notice. The notice shall be

referenced in Part IV of the supporting data (ATF Form 5154.2) filed

with the first claim relating to the adopted formula(s).

Sec. 17.126 Formulas for intermediate products.

(a) The manufacturer shall submit a formula on ATF Form 5154.1 to

the Alcohol and Tobacco Laboratory for each self-manufactured

ingredient made with taxpaid spirits and intended for the

manufacturer's own use in nonbeverage products, unless the formula for

any such ingredient is fully expressed as part of the approved formula

for each nonbeverage product in which that ingredient is used, or

unless the formula for the ingredient is contained in one of the

pharmaceutical publications listed in Sec. 17.132.

(b) Upon receipt of Form 5154.1 covering a self-manufactured

ingredient made with taxpaid spirits, the formula shall be examined

under Sec. 17.131. If the formula is approved for drawback, the

ingredient shall be treated as a finished nonbeverage product for

purposes of this part, rather than as an intermediate product,

notwithstanding its use by the manufacturer. (For example, see

Sec. 17.152(d).) If the formula is disapproved for drawback, the

ingredient may be treated as an intermediate product in accordance with

this part. Requirements pertaining to intermediate products are found

in Sec. 17.185(b).

(c) If there is a change in the composition of an intermediate

product, the manufacturer shall submit an amended or revised formula,

as provided in Sec. 17.122.

Sec. 17.127 Self-manufactured ingredients treated optionally as

unfinished nonbeverage products.

A self-manufactured ingredient made with taxpaid spirits, which

otherwise would be treated as an intermediate product, may instead be

treated as an unfinished nonbeverage product, if the ingredient's

formula is fully expressed as a part of the approved formula for the

nonbeverage product in which the ingredient will be used. A

manufacturer desiring to change the treatment of an ingredient from

``intermediate product'' to ``unfinished nonbeverage product'' (or vice

versa) may do so by resubmitting the applicable formula(s) on ATF Form

5154.1. Requirements pertaining to unfinished nonbeverage products are

found in Sec. 17.185(c).

Approval of Formulas

Sec. 17.131 Formulas on ATF Form 5154.1.

Upon receipt by the Alcohol and Tobacco Laboratory, formulas on ATF

Form 5154.1 shall be examined and, if found to be medicines, medicinal

preparations, food products, flavors, flavoring extracts, or perfume

which are unfit for beverage purposes and which otherwise meet the

requirements of law and this part, they shall be approved for drawback.

If the formulas do not meet the requirements of the law and regulations

for drawback products, they shall be disapproved.

Sec. 17.132 U.S.P., N.F., and H.P.U.S. preparations.

(a) General. Except as otherwise provided by paragraph (b) of this

section or by ATF ruling, formulas for compounds in which alcohol is a

prescribed quantitative ingredient, which are stated in the current

revisions or editions of the United States Pharmacopoeia (U.S.P.), the

National Formulary (N.F.), or the Homeopathic Pharmacopoeia of the

United States (H.P.U.S.), shall be considered as approved formulas and

may be used as formulas for drawback products without the filing of ATF

Form 5154.1.

(b) Exceptions. Alcohol (including dehydrated alcohol and

dehydrated alcohol injection), U.S.P.; alcohol and dextrose injection,

U.S.P.; and tincture of ginger, H.P.U.S., have been found to be fit for

beverage use and are disapproved for drawback. All attenuations of

other H.P.U.S. products diluted beyond one part in 10,000 (``4 x '')

are also disapproved for drawback, unless the manufacturer receives

approval for a formula submitted on Form 5154.1 in accordance with this

subpart. The formula for such attenuations shall be submitted with a

sample of the product and a statement explaining why it should be

classified as unfit for beverage use.

Sec. 17.133 Food product formulas.

Formulas for nonbeverage food products on ATF Form 5154.1 may be

approved if they are unfit for beverage purposes. Approval does not

authorize manufacture or sale contrary to State law. Examples of food

products that have been found to be unfit for beverage purposes are

stated below:

(a) Sauces or syrups. Sauces, or syrups consisting of sugar

solutions and distilled spirits, in which the alcohol content is not

more than 12 percent by volume and the sugar content is not less than

60 grams per 100 cubic centimeters.

(b) Brandied fruits. Brandied fruits consisting of solidly packaged

fruits, either whole or segmented, and distilled spirits products not

exceeding the quantity and alcohol content necessary for flavoring and

preserving. Generally, brandied fruits will be considered to have met

these standards if the container is well filled, the alcohol in the

liquid portion does not exceed 23 percent by volume, and the liquid

portion does not exceed 45 percent of the volume of the container.

(c) Candies. Candies with alcoholic fillings, if the fillings meet

the standards prescribed for sauces and syrups by paragraph (a) of this

section.

(d) Other food products. Food products such as mincemeat, plum

pudding, and fruit cake, where only sufficient distilled spirits are

used for flavoring and preserving; and ice cream and ices where only

sufficient spirits are used for flavoring purposes. Also food adjuncts,

such as preservatives, emulsifying agents, and food colorings, that are

unfit for beverage purposes and are manufactured and used, or sold for

use, in food.

Sec. 17.134 Determination of unfitness for beverage purposes.

The Director has responsibility for determining whether products

are fit or unfit for beverage purposes within the meaning of 26 U.S.C.

5131. This determination may be based either on the content and

description of the

[[Page 31420]]

ingredients as shown on ATF Form 5154.1, or on organoleptic

examination. In such examination, samples of products may be diluted

with water to an alcoholic concentration of 15% and tasted. Sale or use

for beverage purposes is indicative of fitness for beverage use.

Sec. 17.135 Use of specially denatured alcohol (S.D.A.).

(a) Use of S.D.A. in nonbeverage or intermediate products--(1)

General. Except as provided in paragraph (b) of this section, the use

of specially denatured alcohol (S.D.A.) and taxpaid spirits in the same

product by a nonbeverage manufacturer is prohibited where drawback of

tax is claimed.

(2) Alternative formulations. No formula for a product on ATF Form

5154.1 shall be approved for drawback under this subpart if the

manufacturer also has on file an approved ATF Form 1479-A or Form

5150.19, Formula for Article Made With Specially Denatured Alcohol or

Rum, pertaining to the same product.

(b) Use of S.D.A. in ingredients--(1) Purchased ingredients.

Generally, purchased ingredients containing S.D.A. may be used in

nonbeverage or intermediate products. However, such ingredients shall

not be used in medicinal preparations or flavoring extracts intended

for internal human use, where any of the S.D.A. remains in the finished

product.

(2) Self-manufactured ingredients. Self-manufactured ingredients

may be made with S.D.A. and used in nonbeverage or intermediate

products, provided--

(i) No taxpaid spirits are used in manufacturing such ingredients;

and

(ii) All S.D.A. is recovered or dissipated from such ingredients

prior to their use in nonbeverage or intermediate products. (Recovery

of S.D.A. shall be in accordance with subpart K of part 20 of this

chapter; recovered S.D.A., with or without its original denaturants,

shall not be reused in nonbeverage or intermediate products.)

(Sec. 201, Pub. L. 85-859, 72 Stat. 1372, as amended (26 U.S.C.

5273))

Sec. 17.136 Compliance with Food and Drug Administration requirements.

A product is not a medicine, medicinal preparation, food product,

flavor, flavoring extract, or perfume for nonbeverage drawback if its

formula would violate a ban or restriction of the U.S. Food and Drug

Administration (FDA) pertaining to such products. If FDA bans or

restricts the use of any ingredient in such a way that further

manufacture of a product in accordance with its formula would violate

the ban or restriction, then the manufacturer shall change the formula

and resubmit it on ATF Form 5154.1 to the Alcohol and Tobacco

Laboratory. This section does not preclude approval for products

manufactured solely for export or for uses other than internal human

consumption (e.g. tobacco flavors or animal feed flavors) in accordance

with laws and regulations administered by FDA. Under Sec. 17.123,

manufacturers may be required to demonstrate compliance with FDA

requirements applicable to this section.

Sec. 17.137 Formulas disapproved for drawback.

A formula may be disapproved for drawback either because it does

not prescribe appropriate ingredients in sufficient quantities to make

the product unfit for beverage use, or because the product is neither a

medicine, a medicinal preparation, a food product, a flavor, nor a

flavoring extract. The formula for a disapproved product may be used as

an intermediate product formula under Sec. 17.126. No drawback will be

allowed on distilled spirits used in a disapproved product, unless that

product is later used in the manufacture of an approved nonbeverage

product. In the case of a product that is disapproved because it is fit

for beverage use, any further use or disposition of such a product,

other than as an intermediate product in accordance with this part,

subjects the manufacturer to the qualification requirements of parts 1

and 19 of this chapter.

Subpart G--Claims for Drawback

Sec. 17.141 Drawback.

Upon the filing of a claim as provided in this subpart, drawback

shall be allowed to any person who meets the requirements of this part.

Drawback shall be paid at the rat

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