Payment of Federal Taxes and the Treasury Tax and Loan Program

SUMMARY: The Financial Management Service is issuing this final rule to

implement provisions of the North American Free Trade Agreement

Implementation Act (NAFTA), as amended. NAFTA requires the development

and implementation of an electronic funds transfer (EFT) system for the

collection of certain depository taxes. This regulation implements the

Electronic Federal Tax Payment System (EFTPS) by prescribing rules for

financial institutions and Federal Reserve Banks that use EFT

mechanisms to process Federal tax payments through the EFTPS. The EFTPS

began operation in the fall of 1996.

This regulation also updates the rules governing the changes to the

Treasury's investment program that were necessitated by the

implementation of this EFT system.

EFFECTIVE DATE: March 5, 1998.

ADDRESSES: Cynthia L. Johnson, Director, Cash Management Policy and

Planning Division, Financial Management Service, LCB 420, 401 14th

Street, S.W., Washington, D.C. 20227.

FOR FURTHER INFORMATION CONTACT: Michael G. Dressler, Senior Financial

Program Specialist; Cynthia L. Johnson, Director, Cash Management

Policy and Planning Division, 401 14th Street, S.W., Washington, D.C.

20227, at (202) 874-6590; or Randall S. Lewis, Principal Attorney, at

(202) 874-6680. A copy of this final rule is available for downloading

on the Financial Management Service home page at the following address:

http://www.fms.treas.gov/regs.html.

SUPPLEMENTARY INFORMATION:

Background

This regulation is authorized by the North American Free Trade

Agreement Implementation Act (NAFTA), Public Law 103-182, Section 523,

107 Stat. 2057, 2161 (1993), the substantive provisions of which are

codified at 26 U.S.C. 6302(h). NAFTA mandates that the Secretary of the

Treasury (Secretary) phase-in the collection of a minimum percentage of

certain types of depository taxes by electronic funds transfer (EFT)

and develop and implement an EFT system for the collection of such

taxes. The Secretary has delegated responsibility to the Internal

Revenue Service (IRS) for the former and to the Financial Management

Service (FMS) for the latter. With the enactment of NAFTA, the FMS

achieved its longstanding goal to collect depositary taxes

electronically. This regulation implements the FMS' Electronic Federal

Tax Payment System (EFTPS), which began operation on October 28, 1996.

On September 30, 1996, the FMS published in the Federal Register a

notice of proposed rulemaking (NPRM) that would govern the deposit of

Federal taxes using EFT mechanisms (61 FR 51186). The NPRM also

proposed rules updating Treasury's investment program to reflect the

impact of the new electronic system. The original closing date for the

submission of comments was November 21, 1996. However, the FMS

published a notice in the Federal Register extending that date to

January 13, 1997 (61 FR 59211).

Comments on the Proposed Rule

The title of this part has been changed in two steps for two

reasons. The first change from ``Treasury Tax and Loan Depositaries''

to the NPRM designation as ``Treasury Tax and Loan Depositaries and the

Payment of Federal Taxes'' reflects the importance of the addition of

the EFTPS. Secondly, the title used in this Final Rule reverses the

order in the NPRM title to shift the emphasis from the Treasury Tax and

Loan (TT&L) depositaries to the payment of Federal taxes through the

EFTPS because under this Final Rule at Sec. 203.9, ``a financial

institution does not need to be designated as a TT&L depositary in

order to process electronic Federal tax payments.''

Two sections of the NPRM, Secs. 203.4 and 203.5, have been combined

in this Final Rule as Sec. 203.4 causing all sections of the Final Rule

after Sec. 203.4 to be renumbered. For clarity, each section citation

in this Final Rule is identified as either an NPRM or Final Rule

citation. For example, the NPRM Sec. 203.11 was the section covering

Enrollment. All references to the NPRM section on Enrollment will

identify it as NPRM Sec. 203.11 (emphasis added). In the Final Rule,

the section covering Enrollment is Sec. 203.10. Therefore, all

references to the Enrollment section of the Final Rule will identify it

as Sec. 203.10 in the Final Rule (emphasis added).

By the close of the January 13, 1997, comment period, the FMS

received comments on the NPRM from twelve organizations: six financial

institutions and six industry trade associations. The following

includes a discussion of the significant and most heavily commented

upon issues:

Conformance With Industry Automated Clearing House (ACH) Rules

Commenters expressed concern with certain NPRM provisions that

would require financial institutions to adhere to a set of rules

different from private industry ACH rules. Eleven of the twelve

commenters advocated the adoption of the National Automated Clearing

House Association (NACHA) Operating Rules for ACH processing,

enrollment, compensation, and/or credit reversals for electronic

Federal tax payments.

Currently, the FMS is proposing a revision of 31 CFR Part 210 which

considers adoption of NACHA rules wherever practicable. The revision as

proposed would address the role of NACHA rules in all Federal payments

and collections made through the ACH system. However, as the examples

that follow illustrate, Part 203 requires certain exceptions to the

wholesale adoption of industry rules due to EFTPS program

considerations. Therefore, ACH entries governed by Part 203 are not

subject to any provisions of Part 210 that are inconsistent with Part

203.

The FMS understands the commenters' interest in having a uniform

set of rules governing both commercial and Federal transactions and has

recognized these concerns by revising this Final Rule to conform with

commercial operating rules to the extent practicable. For example, the

FMS has revised the Final Rule to conform to commercial operating rules

for both ACH credit reversals and the waiting period between the

origination of a prenotification entry and the first payment.

However, Treasury, as an executive agency within the Federal

Government, is constrained from the wholesale adoption of commercial

operating rules. For example, the Internal Revenue Code provisions

governing the disclosure of returns and return information preclude

Treasury from adopting the commercial operating rules for electronic

enrollments. In addition, the FMS is constrained from adopting

commercial operating rules that would require Treasury to pay interest

for payments erroneously made by financial institutions. Specifically,

such interest is not recoverable from the United States unless

expressly provided by statute. The FMS has not identified any statute

that would authorize Treasury to pay such interest.

[[Page 5645]]

Enrollment and Enrollment Liabilities

Section 203.11(a) of the NPRM provided that the taxpayer may enroll

in EFTPS using either a paper-based or electronic enrollment method.

Section 203.11(b)(2) of the NPRM allowed a financial institution to

assist its customers by offering electronic enrollment. However, even

if the financial institution offered electronic enrollment, a

representative of the financial institution would have to verify and

sign an enrollment form, and provide a paper copy of the completed form

to the taxpayer for the taxpayer's signature and submission to the

Treasury Financial Agent (TFA).

Five commenters were concerned that no details were provided on how

an electronic enrollment process would work and recommended that the

FMS adopt procedures developed by NACHA to transmit enrollment data

through the ACH using the standard entry class code, ``ENR.'' One

commenter suggested enrolling taxpayers through the EFTPS home page on

the Internet. Additionally, five commenters questioned the need for a

paper copy of the enrollment form to be submitted to the TFA when an

electronic enrollment option is used. One commenter further recommended

that the FMS send back an acknowledgment file including an

acknowledgment number that could take the place of the taxpayer's

written signature.

Section 203.10 of the Final Rule deletes all references to

electronic enrollments since such electronic processes would not

eliminate the IRS' need for a paper copy of an enrollment form signed

by the taxpayer. Currently, the IRS requires the taxpayer's written

signature for all enrollments in EFTPS. The written taxpayer signature

provides the IRS with the requisite authority to disclose to the TFAs

and to the taxpayer's financial institution the confidential taxpayer

return information necessary to effect enrollment and payment

transactions, provides the TFAs with the authority to initiate debits

to the taxpayer's account, and provides the IRS with authority to

resolve issues related to enrollments and payments. Until an all

electronic enrollment process becomes feasible for IRS tax payments,

taxpayers will continue to enroll in the EFTPS by means of paper

enrollment forms.

Notwithstanding the deletion of the hybrid electronic/paper

enrollment process from this Final Rule, the FMS understands that the

IRS is undertaking efforts towards accepting electronic signatures.

Treasury also will continue to work with entities such as NACHA to

determine the feasibility of using the ENR enrollment standard entry

class code for EFTPS enrollments, and may look at other options for an

all electronic enrollment process in the future.

NPRM Sec. 203.11(c) provided that if a taxpayer enrolled for the

ACH debit method, ``* * * an authorized representative of the financial

institution shall verify the accuracy of the financial institution

routing number, taxpayer account number, and taxpayer account type * *

* [and] shall sign the enrollment form attesting to the accuracy of the

financial institution information.''

Five commenters suggested that it is unnecessary and inappropriate

for Treasury to require a financial institution to sign the enrollment

form to verify bank routing and account numbers. The commenters stated

that there is no way to verify that the signature is an authorized

signature of a bank representative and that the banking information

would be verified in the prenotification process. Another commenter

supported the requirement for financial institutions to sign the

enrollment form since it provides taxpayers with an opportunity to talk

to their financial institutions and to ask questions.

The FMS agrees with both sets of comments, and has balanced both

interests in the Final Rule. Specifically, Sec. 203.10(c) of the Final

Rule deletes the requirement that a financial institution sign the

enrollment form, but requires the financial institution to verify

certain information upon the specific request of the taxpayer. A

financial institution may perform such verification by telephone.

One commenter requested additional information on the status of an

enrollment if the form is not signed by a representative of the

taxpayer's financial institution, and asked what, if any, liability is

assumed by the financial institution if the form is unsigned or signed

with inaccurate information. Because the Final Rule deletes the

requirement that an authorized financial institution representative

sign the enrollment form, such enrollment forms will be processed

without a financial institution signature, and the financial

institutions will not accrue any liabilities if authorized

representatives do not sign such forms. However, the FMS may hold such

financial institutions liable under Sec. 203.14(a) of the Final Rule if

taxpayers request verification of banking data, and the financial

institutions fail to identify incorrect banking data that result in a

late tax payment.

One commenter recommended that Treasury modify the enrollment form

to require a taxpayer to obtain the signature of a financial

institution representative as evidence of permission to use ACH credit

origination services to make EFTPS payments. The FMS recognizes the

importance of a taxpayer discussing the provision of ACH credit

services with its financial institution before the taxpayer sends the

enrollment form. Accordingly, the FMS has revised the enrollment form

to instruct taxpayers electing the ACH credit option to verify in

advance whether the financial institution is capable of providing ACH

credit origination services.

One commenter inquired whether a taxpayer could enroll via a

prenotification entry. The prenotification entry cannot be used to

enroll a taxpayer because it does not provide all the required

information. Taxpayers must enroll as prescribed in Sec. 203.10 of the

Final Rule.

Prenotification

NPRM Sec. 203.13(b)(1) required financial institutions that receive

an ACH debit entry to ``timely verify the information contained in the

ACH prenotification entry.'' Three commenters sought clarification on

what information the financial institution is required to verify in the

prenotification or zero dollar entry it receives. One financial

institution commenter asked whether financial institutions must verify

the taxpayer identification number (TIN). Section 203.12(b)(1) of the

Final Rule clarifies that financial institutions need to verify the

account number and account type, and not the TIN. Moreover, because the

TFAs will not originate zero dollar entries, financial institutions

will need to verify only information in prenotification entries.

NPRM Sec. 203.13(c)(1) provided that the financial institution

``shall originate an ACH credit prenotification entry that may be in

the form of a zero dollar entry'' and that credit entries may not be

initiated less than 10 calendar days after the date the prenotification

was transmitted. Some commenters expressed a preference for

prenotification entries and some expressed a preference for zero dollar

entries. Two commenters opposed the mandatory use of prenotification

entries, and one favored it. Several commenters pointed out that the

NACHA rules make prenotification entries optional. They noted that it

would require computer system modifications to identify Federal tax

payments in several situations: where a

[[Page 5646]]

file could contain Federal tax payments among many other types of

payments, and where the credits are triggered by customers themselves.

Nine commenters were critical of the 10 calendar day waiting period

between origination of a prenotification or zero dollar entry and the

first payment. Several pointed out that the NACHA rules were changed in

March, 1997, to require a six business day waiting period between

prenotification entries and the first payment.

The FMS recognizes the merits of these comments and has revised the

Final Rule. Specifically, Sec. 203.12(c)(1) of the Final Rule clarifies

that the FMS will accept either an ACH prenotification entry containing

the TIN in the entry detail record (no addenda) or the zero dollar

entry with the TIN in the addenda record. The TFA will use the

information to verify with the IRS that the TIN is valid and

corresponds with an enrolled taxpayer. The FMS has limited the

requirement that financial institutions originate prenotification

entries for ACH credits. Under the Final Rule, a prenotification or

zero dollar entry is not required unless specifically requested by the

taxpayer. Financial institutions should note, however, that guidance

sent from the TFAs following enrollment suggests that taxpayers

instruct their financial institutions to originate zero dollar

transactions or prenotification entries prior to the first payment.

Consequently, financial institutions will have to be able to originate

such entries. The FMS also has deleted the 10 calendar day waiting

period between the origination of a prenotification entry and the first

payment in light of the NACHA rules.

Prenotification Liabilities

The FMS received a number of inquiries regarding what liability, if

any, is assumed by financial institutions in the prenotification

process. In the context of ACH debits, the TFA will initiate a

prenotification, not a zero dollar entry, for each taxpayer enrolling

for ACH debit. Sections 203.12(b)(1) and (2) of the Final Rule require

the financial institution receiving an EFTPS prenotification to

``timely verify the account number and account type contained in the

ACH prenotification entry [and] timely and properly return a

prenotification entry that contains an invalid account number or

account type, or is otherwise erroneous or unprocessable.'' In

addition, Sec. 203.14(a) in the Final Rule clarifies NPRM

Sec. 203.15(a) by providing that the FMS may assess interest where a

financial institution failed to respond to an ACH prenotification entry

as required in Secs. 203.12(b) and 203.12(c) of the Final Rule, where

such failure resulted in a late tax payment. In the context of ACH

credits, the FMS may hold a financial institution liable under

Sec. 203.14(a) of the Final Rule if a late tax payment results from the

financial institution's failure to initiate a taxpayer-requested

prenotification or zero dollar entry.

The FMS believes that the potential imposition of such liabilities

on financial institutions during the prenotification process is fair,

equitable, and a logical outgrowth of the NPRM. Specifically, the

preamble to the NPRM notified readers that the liability provisions

generally were geared towards placing liability for errors on the party

making the errors. The FMS believes that this principle serves two

important purposes here. First, it is an incentive for financial

institutions to process EFTPS payments in accordance with this Part,

which will help ensure that depository taxes are credited to the TGA on

tax due date. Second, it makes the United States whole for the lost

value of funds resulting from late tax payments. For example, a

financial institution receiving an ACH debit prenotification entry may

have little or no incentive to review and return timely a

prenotification entry containing an invalid account number if it can do

so without any financial exposure.

Acknowledgments

NPRM Sec. 203.13(c)(4) required financial institutions originating

ACH credit tax payments to provide a transaction trace number to their

customers upon request. One commenter stated that the process for

assigning and providing a trace number is unclear and the numbers

provided by financial institution proprietary systems may not be

sufficient.

The intent of this provision was to ensure that taxpayers have the

means to trace their tax payments at the IRS if there is some

discrepancy or problem. For example, in originating ACH credit entries,

financial institutions transmit to the IRS transaction trace numbers,

that are included in the IRS master file. If there is a question

between the IRS and the taxpayer as to the timeliness of a tax payment,

the taxpayer may obtain the transaction trace number from its financial

institution, and provide it to the IRS, which will then trace the

payment. The FMS seeks to protect the interests of taxpayers by

ensuring that they have a means of tracing their tax payments while at

the same time affording financial institutions maximum flexibility in

providing taxpayers with the means to do so. Accordingly,

Sec. 203.12(c)(4) of the Final Rule requires financial institutions to

provide their customers, upon request, either transaction trace numbers

or some other method to trace the tax payment.

Four commenters recommended that Treasury implement a system to

provide electronic acknowledgments for ACH credit tax payments and

three commenters recommended that Treasury utilize the new ACH

acknowledgments (``ACK'' and ``ATX'') developed by NACHA. The FMS

currently is considering the operational implications of developing and

utilizing the new NACHA acknowledgments.

Two of the commenters expressed concern over a perceived system

bias between the ACH debit and the ACH credit acknowledgment process.

The FMS believes that there is no system bias, and that taxpayers can

easily obtain ACH acknowledgment numbers for both ACH debit and credit

transactions. Specifically, EFTPS provides a taxpayer initiating an ACH

debit through the telephone or personal computer with an automated

response acknowledgment number at the end of the reporting session.

Taxpayers initiating an ACH credit transaction may obtain an ACH credit

acknowledgment number by placing a toll-free call to the EFTPS Customer

Service Centers on the tax due date.

ACH credit deadlines

NPRM Sec. 203.13(c)(3) and the preamble to the NPRM left open the

possibility of a deadline different from that currently required for

ACH credit entries. In the preamble to the NPRM, the FMS suggested that

if a different ACH credit deadline were required, that deadline would

be approximately 11:00 p.m. on the day before the entry was to settle.

All of the commenters suggested that establishing an ACH credit

deadline for EFTPS payments that is different from the standard

deadline already in place for such entries would impose significant

operational problems for financial institutions and/or confuse

taxpayers/customers. The commenters were concerned that financial

institutions would be unaware that ACH files originated by its

customers would contain such tax payment credit entries subject to an

earlier deadline. Several commenters suggested that the establishment

of a separate deadline for EFTPS ACH credit payments may serve as a

disincentive for financial institutions to offer such services to their

taxpaying customers.

Section 203.12(c)(3) of the Final Rule remains substantively

unchanged. The FMS needs the flexibility to change ACH credit deadlines

for purposes of maximizing the timely investment of tax

[[Page 5647]]

receipts. However, the FMS emphasizes that it has no current plans to

impose a deadline different from the existing standard ACH processing

schedules. Moreover, the FMS would ensure that financial institutions

are provided with sufficient advance notice of any deadline changes so

that they may undertake any necessary steps to continue to process

timely ACH credit entries on behalf of their customers. While the FMS

recognizes the possibility that any deadline change may cause some

financial institutions to cease offering such services to their

customers, the FMS believes that the marketplace would fill any void.

ACH Credit Reversals

NPRM Sec. 203.13(d) required advance IRS approval for all

corrections of ACH credit entries. In general, the commenters opposed

obtaining approval from the IRS for reversals of ACH credit entries,

remarking that obtaining approval from IRS is cumbersome; the requests

must be done manually and quickly; and that IRS could not respond

quickly enough to prevent financial institutions from losing the value

of funds. Several commenters suggested that the reversals be governed

by NACHA rules, which at that time did not require ACH credit

originators to notify receivers when initiating an ACH credit reversal.

The FMS recognizes the merits of these comments, and has revised

the Final Rule. Specifically, Sec. 203.12(d) of the Final Rule

eliminates the need to obtain advance approval from the IRS before

originating an ACH credit reversal. A December 1997 NACHA rule change

requires an ACH originator to notify a receiver when making a reversing

entry to the receiver's account. For the reasons stated above, the

Final Rule does not require that IRS be notified when an ACH credit

reversal is initiated. However, financial institutions are reminded of

ACH record retention rules, and need to be able to provide

documentation per the requirements of the procedural instructions.

Same-day payments

NPRM Sec. 203.14(a) proposed a 2:00 P.M. FRB head office local zone

time (LZT) deadline for all three same-day tax payment methods (Fedwire

value, Fedwire non-value, and Direct Access). One commenter requested

that the Fedwire deadline for Federal tax payments be the same as the

normal Fedwire national deadline currently established for third party

transactions (6:00 p.m. ET).

The FMS believes that a uniform same-day payment cutoff time is

necessary to maximize and meet the needs of Treasury's investment

program. Under this program, Treasury invests tax payments with the

taxpayers' financial institutions in open-ended interest-bearing

obligations or ``note balances.'' In order for these financial

institutions to receive these investments, Treasury must designate and

employ them separately as Treasury Tax and Loan (TT&L) note

depositaries. The 2:00 p.m. LZT cutoff time is necessary to ensure that

EFTPS tax payments transmitted by these financial institutions via

Fedwire non-value and Direct Access are credited to their TT&L note

balances on the same day, thereby maximizing Treasury's investment

opportunities. Specifically, Fedwire non-value and Direct Access

transactions are settled through the Federal Reserve's TT&L system. The

2:00 p.m. LZT cutoff is necessary to provide time for the TT&L system

to process these two non-value transactions, and create the investment

entries to credit the note depositaries' balances.

The FMS has decided to apply this same cutoff time to the Fedwire

value payment method because it is in the interest of the Treasury's

investment program that Fedwire value not be favored over the Fedwire

non-value and Direct Access options. Specifically, tax payments

remitted via the Fedwire value method are credited to Treasury's

General Account at the FRB and cannot be invested with note option

depositaries that day, thereby delaying Treasury's investment

opportunities. If the cutoff time for the Fedwire value payment method

was later than for the two non-value payment methods, informal

conversations with financial institutions and the TFAs indicate that

Fedwire value likely would be favored over the Fedwire non-value and

Direct Access payment methods which would have detrimental effects on

the Treasury's investment program.

Consequently, the FMS has decided to retain the 2:00 p.m. LZT

cutoff time for all three same day payment methods. However,

Secs. 203.13(a), (e)(1)(i), and (e)(3) of the Final Rule delete

specific references to this cutoff time, and instead refer to the

procedural instructions that will contain the 2:00 p.m. LZT cutoff

time.

Furthermore, the FMS currently is contemplating the adoption of a

uniform national cutoff time of 5:00 p.m. Eastern Time (ET) for all

same-day payments with a potential implementation date of mid-1999. The

possibility of a uniform cutoff time stems from the Riegle-Neal

Interstate Banking and Branching Efficiency Act of 1994, Public Law

103-328, 108 Stat. 2338 (1994). Under this law, a financial institution

will have a single Federal Reserve account where its master account is

located. The location of this master account will determine the cutoff

time for all same-day Federal tax payments. If the FMS maintains the

2:00 p.m. LZT cutoff time, financial institutions with a master account

located on the West Coast would enjoy a competitive advantage in

attracting customers over financial institutions with a master account

on the East Coast due to the additional three hours for making a same-

day Federal tax payment. In order to prevent unfair business advantages

among financial institutions, the FMS is considering an FRB

recommendation to implement a uniform national cutoff time of 5:00 p.m.

ET for all same-day payments. If the FMS decides to adopt such a

uniform national cutoff time, the FMS will ensure that financial

institutions will be provided adequate advance notice to make any

necessary system changes.

In the preamble to the NPRM, the FMS requested comments on

restricting the use of the Fedwire non-value and Direct Access same-day

payment methods to TT&L note depositaries. One commenter supported FMS'

underlying intent and five commenters opposed such restrictions. The

FMS has decided against imposing any restrictions, and all three same-

day mechanisms are available for use by any financial institution

capable of originating these transactions.

Two commenters expressed concern over limiting the use of same-day

payment mechanisms to certain categories of taxpayers. This Final Rule

does not prescribe which payment methods taxpayers must use.

NPRM Secs. 203.14(b), (c), and (d) provided that upon the request

of the taxpayer, the taxpayer's financial institution shall provide the

taxpayer with reference numbers for same-day transactions (the Input

Message Accountability Data (IMAD) number and the Electronic Tax

Application (ETA) reference number). For example, for Fedwire

transactions, the ETA reference number is assigned once the payment has

been received by the Federal Reserve's ETA. This number is provided to

the TFAs and the IRS at the end of each business day and is available

to originating financial institutions from their local FRB upon request

only. Taxpayers wishing to receive the IMAD or ETA reference numbers on

a day subsequent to the transaction date also may obtain such reference

numbers by contacting the EFTPS Customer Service Centers. One

[[Page 5648]]

commenter suggested that the IMAD and ETA reference numbers for same-

day payments should be provided to the taxpayer automatically.

The FMS does not accept this comment, and as a result,

Secs. 203.13(b), (c), and (d) of the Final Rule remain substantively

unchanged. The FMS has weighed the needs of the taxpayers in receiving

such reference numbers against the burdens that would be imposed upon

financial institutions if the Final Rule were to require financial

institutions to provide taxpayers with such numbers automatically. This

Final Rule balances the needs of both parties by requiring financial

institutions to provide their customers with such reference numbers

upon the specific request of their customers. The FMS believes that to

mandate that financial institutions provide their customers with these

reference numbers in instances where the customer may not seek such

numbers would be unduly burdensome on financial institutions given

certain operational constraints. Taxpayers seeking such reference

numbers on a continuous basis should tailor their contracts with their

financial institutions to meet their needs.

NPRM Sec. 203.14(e) defined the circumstances in which the FRB or

the IRS could reverse or cancel a same-day payment. Two commenters

recommended that taxpayers be contacted before the FRB or the IRS

cancel or reject a same-day payment.

The FMS does not accept these comments. Therefore, section

203.13(e) of the Final Rule remains substantively unchanged. Due to the

time critical nature of the same-day payment mechanism, it is neither

feasible nor practicable to notify the taxpayer before a same-day

payment is reversed or canceled. Specifically, all same-day payments

are edited by the FRB's ETA, which will automatically reverse same-day

tax payments that are late, e.g., that are received after the ETA

deadline, or that are timely but do not contain enough information to

identify the taxpayer. The FRB also reverses same-day payments at the

direction of the IRS, which may direct a reversal in situations where a

payment cannot be posted in the IRS database because the TIN is

invalid, or where a taxpayer or financial institution have requested

the funds be returned because of an overpayment. The FRB also may

reverse or cancel tax payments at the request of the originating

financial institution if the request is received prior to the ETA

cutoff time on the transaction date.

In all cases, the FMS believes that it is the responsibility of

financial institutions to notify their customers if same-day payments

are returned or canceled. This is especially important where timely

same-day payments are returned or canceled so that customers may

attempt to correct the payment prior to the cutoff time.

Interest Assessments for Lost Value of Funds

NPRM Sec. 203.12(c) provided that Treasury will not pay interest on

any payments erroneously paid to Treasury and subsequently refunded to

the financial institution. Several commenters asked that Treasury

compensate financial institutions for the time value of funds held.

The FMS rejects these comments, and, as a result, section 203.11(c)

of the Final Rule remains substantively unchanged. It is a well settled

principle that interest is not payable by the United States unless

expressly provided by statute or in a contract authorized by law. This

principle extends equally to situations where notions of equity would

seem to militate in favor of the United States paying interest.

Congress has expressly authorized the payment of interest for tax

refunds when the IRS pays without being sued and when a taxpayer

receives a judgment from a court for any overpayment of internal

revenue taxes. See 26 U.S.C. 6402 and 28 U.S.C. 2411 respectively.

Because the FMS has not identified any statutory provision that

authorizes it to pay interest to financial institutions that make

erroneous payments that subsequently are refunded by Treasury, the FMS

is unable to compensate financial institutions for their lost value of

funds.

NPRM Sec. 203.15 set forth the circumstances and procedures for the

assessment, calculation, and collection of interest from financial

institutions for purposes of making the United States whole for the

lost value of funds resulting from late tax payments. One commenter

suggested that only taxpayers be held liable for late tax payments.

Other commenters opposed the interest assessment provisions. One

commenter recommended that financial institutions only be penalized if

they transmit a certain number of late tax payments each year.

The FMS does not accept these comments, and Sec. 203.14 of the

Final Rule remains substantively unchanged on these points. The

legislative scheme underlying EFTPS is to ensure that certain

depository taxes are credited to the TGA on the tax due date. If an

EFTPS tax payment is not credited to the TGA on the tax due date, the

IRS will impose a penalty on the taxpayer pursuant to 26 U.S.C. 6656.

However, IRS Revenue Ruling 94-46 (July 6, 1994) provides that the IRS

will abate this penalty if the taxpayer establishes that the

instructions the taxpayer provided to its financial institution were

timely and correct, and that it had sufficient funds to make the tax

payment. For example, the FMS understands that if the taxpayer did

everything right in initiating an ACH credit payment, but the

taxpayer's financial institution failed to originate the payment

timely, which resulted in a late tax payment, the IRS will abate the

penalty imposed upon the taxpayer. However, under these circumstances,

the United States will have lost the value of funds from the date the

taxpayer specified that its payment should settle to the TGA to the

time the late tax payment actually settled to the TGA.

As a result, the FMS believes that to implement successfully the

legislative scheme underlying EFTPS, it may be necessary in these

circumstances to hold a financial institution liable for the lost value

of funds. Specifically, if a financial institution is not held liable

for its mistakes which result in a late tax payment, a financial

institution may have less incentive to process timely such tax payments

for credit to the TGA on the tax due date. The interest assessment in

most instances simply recovers the imputed value of funds erroneously

retained by the financial institution. The FMS further believes that

financial institutions can minimize this risk by imposing conditions on

their customers, and by initiating prenotification or zero dollar

entries.

Nevertheless, the FMS will not assess interest on financial

institutions for errors resulting in late tax payments where such

errors occur before the effective date of this Final Rule.

Furthermore, Sec. 203.14(b) of the Final Rule limits a financial

institution's interest liability to seven calendar days for ACH debit

transactions and 45 calendar days for both ACH credit and same-day

payment transactions. The FMS has established this cap in recognition

of the fact that taxpayers have a responsibility, upon learning of

their financial institution's error, to initiate a new payment

transaction. The seven calendar day cap for ACH debit transactions

stems from the fact that if the taxpayer's financial institution

returns the taxpayer's ACH debit transaction, the TFA will take

immediate steps to mail the taxpayer a notification letter. The FMS

believes that upon receipt of this letter from the TFA, the taxpayer

has a responsibility to initiate a new tax payment transaction. The FMS

also believes that this process generally should take no longer than

[[Page 5649]]

seven calendar days from the date the tax payment would have settled to

the TGA. The 45 day cap for ACH credit and same-day payment

transactions stems from the fact that if the TFA returns an ACH credit

transaction or if the FRB returns a same-day payment transaction to the

financial institution, the taxpayer, at the latest, will learn of the

return upon receipt of its monthly statement of account from its

financial institution. The 45 days is based upon an estimated 30 day

statement cycle, and 15 days processing and mail time.

One commenter asked whether Treasury will assess interest on

financial institutions when the late tax payment is due to the ACH

operator, a system problem, a daylight overdraft, or other causes.

Whether the FMS will assess interest on a financial institution to make

the United States whole for the lost value of funds depends on the

specific facts and circumstances. Financial institutions will have the

right to contest any interest assessment under Sec. 203.16 of the Final

Rule.

Several commenters asked for more specific information on the

interest assessment process. The specific procedures will be published

in the procedural instructions in the Treasury Financial Manual (TFM).

NPRM Sec. 203.15(c) provided that a financial institution that

processes tax payments under this part is deemed to authorize the FRB,

acting as Treasury's fiscal agent, to debit its reserve account for

interest assessments. One commenter suggested that Treasury should not

initiate a debit to a financial institution's reserve account. Another

commenter suggested that Treasury give financial institutions an

opportunity to appeal the interest prior to paying it.

The FMS does not accept these comments, and Sec. 203.14(c) of the

Final Rule remains substantively unchanged. The FMS believes that the

operational steps underlying the collection of interest assessments

will take several months from the date of the late tax payment due to

the extensive IRS research required. Because the FMS will not assess

``interest on interest,'' the FMS believes that affording a financial

institution an opportunity to contest the assessment prior to

collecting it only would exacerbate the lost value of funds to the

United States, especially in light of the cap on a financial

institution's liability at Sec. 203.14(b) of the Final Rule. Moreover,

Sec. 203.14(c) of the Final Rule, which authorizes the FMS to debit the

interest assessment from a financial institution's reserve account, is

consistent with the current process by which FMS recovers the lost

value of funds from financial institutions in the paper Federal Tax

Deposit (FTD) system. The FRB will send an electronic message to the

financial institution the day prior to the day that the financial

institution's reserve account is debited for the interest assessment.

NPRM Sec. 203.15(d) and Sec. 203.14(d) of the Final Rule provide

that Treasury will not assess interest on a financial institution when

the taxpayer has not satisfied the conditions imposed by its financial

institution. Several commenters asked what information a financial

institution would need to provide to establish that the taxpayer failed

to meet the financial institution's conditions. The FMS has no pre-set

requirements; however, the FMS will consider such information as the

written conditions themselves; a saved electronic file; and/or a tape

of telephonic instructions showing the time and the direction to

initiate a transaction. The FMS will not regulate the agreements

between the financial institution and its customers, and therefore,

will not give guidance on the conditions a financial institution may

impose.

One commenter asked if a financial institution must disclose to the

taxpayer its proof that the taxpayer failed to satisfy its requirements

for making an EFTPS payment. This part does not regulate the exchange

of information between a taxpayer and its financial institution.

Unauthorized Debits

NPRM Sec. 203.16 prohibited financial institutions from initiating

debits to the TGA unless they had prior written permission. NPRM

Sec. 203.16 also provided that financial institutions that do initiate

such unauthorized debit entries are liable for the amount of the debit

and an interest charge at the Federal funds rate plus two percent, and

are deemed to authorize the Federal Reserve Bank to debit their reserve

accounts for the amount of the debit plus interest.

One commenter pointed out that a customer theoretically could

initiate a debit to the TGA by using a customer delivery system, and

that a financial institution would suffer an undue burden if it had to

ensure that its customers could not initiate such debits. The FMS does

not accept this comment, and Sec. 203.15 of the Final Rule is

substantively unchanged on this point. The FMS believes that financial

institutions are responsible for how they allow their customers to key

in transaction information. This approach is consistent with commercial

operating rules, which generally provide that originating depository

financial institutions warrant that their entries are authorized by

both the originator and the receiver.

However, should such a situation occur, the TFA will attempt to

return the unauthorized debit entry in time for same-day settlement. If

this return is made on the same day, there will be no need to recover

the principal nor will there be any interest charge. If the return is

not accomplished in the same day, the financial institution shall be

liable to the Treasury for the amount of the transaction and interest

charges calculated according to the procedural instructions published

in the TFM.

One commenter stated that reversals should be excluded expressly

from this section. The FMS agrees and has clarified Sec. 203.15(a) of

the Final Rule.

One commenter recommended that the interest charge assessed for an

unauthorized ACH debit be lowered to the Federal funds rate. The FMS

does not accept this comment and Sec. 203.15(d) of the Final Rule

remains substantively unchanged. This higher rate is intended to deter

unauthorized debits from the TGA.

Appeal and Dispute Resolution

NPRM Sec. 203.17 afforded financial institutions the opportunity to

appeal an interest assessment under NPRM Sec. 203.15 or an interest

charge under NPRM Sec. 203.16. Several commenters requested an

explanation as to how this process would work. The FMS will provide

greater detail on these processes in its procedural instructions in the

TFM. Nevertheless, Sec. 203.16 of the Final Rule expands the

administrative remedies afforded financial institutions. Specifically,

if a financial institution is unsuccessful in contesting an interest

assessment, it may appeal the administrative denial to a higher level

Treasury official. This two-step administrative review process is

similar to the one currently used for the paper FTD system.

Compensation

NPRM Sec. 203.19(a)(8) prohibited financial institutions serving as

TT&L depositaries from accepting compensation from taxpayers for

handling the deposit of tax payments in the paper FTD system. Three

commenters suggested that the FMS remove this prohibition. The FMS does

not accept this comment and Sec. 203.18 of the Final Rule is

substantively unchanged. While the FMS believes that such comments may

have merit, the NPRM did not give affected parties adequate notice of

this possibility. As a result, the FMS is constrained from accepting

these comments. However,

[[Page 5650]]

the FMS intends to issue an NPRM on removing this prohibition.

Two commenters noted that the NPRM was silent on whether financial

institutions could charge taxpayers for processing tax payments under

EFTPS. These commenters recommended that the FMS expressly authorize

financial institutions to charge their customers for processing their

EFTPS tax payments. The FMS does not accept these comments, and the

Final Rule remains silent on whether financial institutions, acting as

the taxpayers' agents, can charge their customers for processing EFTPS

payments.

The decision not to regulate the fees financial institutions can

charge under EFTPS stems from the fact that the EFTPS eliminates one of

the benefits currently provided financial institutions under the paper-

based FTD system. Specifically, when a taxpayer makes its tax payment

under the FTD system, the tax payment is deposited into a non-interest-

bearing TT&L account at the financial institution. The financial

institution retains the imputed value of these funds until the next day

when the funds either are credited to the TGA or are invested with the

financial institution in interest-bearing notes. Under EFTPS, these tax

payments will no longer be deposited overnight into such non-interest

bearing accounts, and the financial institutions will no longer retain

the value of these funds. The FMS believes that it is best left to the

marketplace to decide what fees, if any, financial institutions will

charge their customers. However, the FMS believes that any fees for ACH

credit or debit entries will be insignificant.

Collateral

NPRM Sec. 203.25(f)(1) was modeled on existing Sec. 203.14(f)(1)

and provided that in the event of a TT&L depositary's insolvency or

closure, Treasury may apply the collateral pledged to satisfy any claim

of the United States. The NPRM preamble explained Treasury's

longstanding interpretation that ``any claim of the United States''

includes, but is not limited to, claims arising out of the depositary

relationship for which the collateral was originally pledged. One

commenter suggested that the TT&L collateral only be used to satisfy

TT&L claims. The FMS does not accept this comment, and the FMS'

interpretation of Sec. 203.24(f)(1) of the Final Rule remains

unchanged. The FMS believes that this interpretation is necessary to

protect the United States from loss.

NPRM Sec. 203.25 set forth Treasury's collateral security

requirement for financial institutions serving as TT&L depositaries.

One commenter asked how a TT&L depositary would be notified of the

amount in the Note Option/Direct Investment account so that it could

deposit sufficient collateral to secure the deposits. This information

appears in the daily Federal Reserve account activity statement, which

the depositary can access after 9:00 a.m. ET via Fedline by using the

Accounting Services application and choosing the IAS Account Inquiry

option or by using the TT&L application and choosing the Host Account

Activity Report. Section 203.24 of the Final Rule provides that note

option depositaries that participate in the direct investment program

are not required to collateralize continuously the pre-established

maximum balance but must be prepared to pledge collateral on the day

the direct investment is placed.

One commenter sought confirmation that same-day EFTPS payments

initiated by a financial institution serving as a TT&L depositary that

miss the cutoff time are not required to be collateralized. The

preamble of the NPRM stated that ``financial institutions processing

tax payments under the EFTPS . . . need not pledge collateral, unless

they elect to participate in Treasury's investment program.'' EFTPS

payments, including those that the depositary is unable to complete,

are not required to be collateralized.

Regulatory Analysis

These regulations are not a significant regulatory action as

defined in Executive Order 12866. Accordingly, a regulatory assessment

is not required. It is hereby certified that this revision will not

have a significant economic impact on a substantial number of small

entities. Therefore, a regulatory flexibility analysis is not required.

This regulation will not impose significant costs on small entities. It

is further expected that such costs associated with electronic tax

payments will be offset by cost savings resulting from reductions in

the paperwork burden and the availability of a user-friendly electronic

tax collection system.

List of Subjects in 31 CFR Part 203

Banks, Banking, Electronic Funds Transfers, Taxes.

For the reasons set out in the preamble, 31 CFR part 203 is revised

to read as follows:

PART 203--PAYMENT OF FEDERAL TAXES AND THE TREASURY TAX AND LOAN

PROGRAM

Subpart A--General Information

Sec.

203.1 Scope.

203.2 Definitions.

203.3 Financial institution eligibility for designation as a

Treasury Tax and Loan depositary.

203.4 Designation of financial institutions as Treasury Tax and

Loan depositaries.

203.5 Obligations of the depositary.

203.6 Compensation for services.

203.7 Termination of agreement or change of election or option.

203.8 Application of part and procedural instructions.

Subpart B--Electronic Federal Tax Payments

203.9 Scope of the subpart.

203.10 Enrollment.

203.11 Electronic payment methods.

203.12 Future-day reporting and payment mechanisms.

203.13 Same-day reporting and payment mechanisms.

203.14 Electronic Federal Tax Payment System interest assessments.

203.15 Prohibited debits through the Automated Clearing House.

203.16 Appeal and dispute resolution.

Subpart C--Federal Tax Deposits.

203.17 Scope of the subpart.

203.18 Tax deposits using Federal Tax Deposit coupons.

203.19 Note option.

203.20 Remittance option.

Subpart D--Investment Program and Collateral Security Requirements

for Treasury Tax and Loan Depositaries

203.21 Scope of the subpart.

203.22 Sources of balances.

203.23 Note balance.

203.24 Collateral security requirements.

Authority: 12 U.S.C. 90, 265-266, 332, 391, 1452(d), 1464(k),

1767, 1789a, 2013, 2122, and 3102; 26 U.S.C. 6302; 31 U.S.C. 321,

323 and 3301-3304.

Subpart A--General Information

Sec. 203.1 Scope.

The regulations in this part govern the processing of Federal tax

payments by financial institutions and the Federal Reserve Banks (FRB)

using electronic payment or paper methods; the designation of Treasury

Tax and Loan (TT&L) depositaries; and the operation of the Department

of the Treasury's (Treasury) investment program.

Sec. 203.2 Definitions.

As used in this part:

(a) Advice of credit means the Treasury form used in the Federal

Tax

[[Page 5651]]

Deposit system that is supplied to depositaries to summarize and report

Federal tax deposits. The current form is Treasury Form 2284. Advice of

credit information also may be delivered electronically.

(b) Automated Clearing House (ACH) credit entry means a transaction

originated by a financial institution in accordance with applicable ACH

formats and applicable laws, regulations, and procedural instructions.

(c) Automated Clearing House (ACH) debit entry means a transaction

originated by a Treasury Financial Agent (TFA), in accordance with

applicable ACH formats and applicable laws, regulations, and

instructions.

(d) Business day means any day on which the FRB of the district is

open.

(e) Direct Access transaction means same-day Federal tax payment

information transmitted by a financial institution directly to the

Electronic Tax Application at an FRB using the Fedline Taxpayer Deposit

Application.

(f) Direct investment means placement of Treasury funds with a

depositary and a corresponding increase in a depositary's note balance.

(g) Electronic Federal Tax Payment System (EFTPS) means the system

through which taxpayers remit Federal tax payments electronically.

(h) Electronic Tax Application (ETA) means a sub-system of EFTPS

that receives, processes, and transmits same-day Federal tax payment

information for taxpayers. ETA activity is comprised of Fedwire value

transfers, Fedwire non-value transactions, and Direct Access

transactions.

(i) Electronic Tax Application (ETA) reference number means the

unique number assigned to each ETA transaction by an FRB.

(j) Federal funds rate means the Federal funds rate published

weekly by the Board of Governors of the Federal Reserve System.

(k) Federal Reserve account means an account with reserve or

clearing balances held by a financial institution at an FRB.

(l) Federal Reserve Bank of the district means the FRB that

services the geographical area in which the financial institution is

located, or such other FRB that may be designated in an FRB operating

circular.

(m) Federal Tax Deposit (FTD) means a tax deposit or payment made

using an FTD coupon.

(n) Federal Tax Deposit coupon (FTD coupon) means a paper form

supplied to a taxpayer by the Treasury for use in the FTD system to

accompany deposits of Federal taxes. The current paper form is Form

8109.

(o) Federal Tax Deposit system (FTD system) means the paper-based

system through which taxpayers remit Federal tax payments by presenting

an FTD coupon and payment to a depositary or an FRB. The depositary

prepares an advice of credit summarizing all FTDs.

(p) Federal taxes means those Federal taxes or other payments

specified by the Secretary of the Treasury as eligible for payment

through the procedures prescribed in this part.

(q) Fedwire means the funds transfer system owned and operated by

the FRBs.

(r) Fedwire non-value transaction means the same-day Federal tax

payment information transmitted by a financial institution to an FRB

using a Fedwire type 1090 message to authorize a payment.

(s) Fedwire value transfer means a Federal tax payment made by a

financial institution using a Fedwire type 1000 message.

(t) Financial institution means any bank, savings bank, savings and

loan association, credit union, or similar institution.

(u) Fiscal Agent means the Federal Reserve acting as agent for the

Treasury.

(v) Input Message Accountability Data (IMAD) means a unique number

assigned to each Fedwire transaction by the financial institution

sending the transaction to an FRB.

(w) Note option means that program available to a TT&L depositary

under which Treasury invests in obligations of the depositary. The

amount of such investments will be evidenced by an open-ended interest-

bearing note balance maintained at the FRB of the district.

(x) Procedural instructions means the procedures contained in the

Treasury Financial Manual, Volume IV (IV TFM), other Treasury

instructions issued through the TFAs, and FRB operating circulars

issued consistent with this part.

(y) Recognized insurance coverage means the insurance provided by

the Federal Deposit Insurance Corporation, the National Credit Union

Administration, and by insurance organizations specifically qualified

by the Secretary.

(z) Remittance option means that program available to a depositary

that processes FTD payments, under which the amount of deposits

credited by the depositary to the TT&L account will be withdrawn by the

FRB for deposit to the Treasury General Account on the day that the FRB

receives the advices of credit supporting such deposits.

(aa) Same-day payment means the following ETA payment options:

(1) Direct Access transaction;

(2) Fedwire non-value transaction; and

(3) Fedwire value transfer.

(bb) Secretary means the Secretary of the Treasury, or the

Secretary's delegate.

(cc) Special direct investment means the placement of Treasury

funds with a depositary and a corresponding increase in a depositary's

note balance, where the investment specifically is identified as a

``special direct investment'' and may be secured by collateral retained

in the possession of the depositary pursuant to the terms of

Sec. 203.24(c)(2)(i).

(dd) Tax due date means the day on which a tax payment is due to

Treasury, as determined by statute and Internal Revenue Service (IRS)

regulations.

(ee) Transaction trace number means an identifying number assigned

by the taxpayer's financial institution to each ACH credit transaction.

(ff) Treasury Financial Agent (TFA) means a financial institution

designated as an agent of Treasury for processing EFTPS enrollments,

receiving EFTPS tax payment information, and originating ACH debit

entries on behalf of Treasury as authorized by the taxpayer.

(gg) Treasury General Account (TGA) means an account maintained in

the name of the United States Treasury at an FRB.

(hh) Treasury Tax and Loan (TT&L) account means the Treasury

account maintained by a depositary in which funds are credited by the

depositary after receiving and collateralizing FTDs.

(ii) Treasury Tax and Loan depositary (depositary) means a

financial institution designated as a depositary by the FRB of the

district for the purpose of maintaining a TT&L account and/or note

balance.

(jj) Treasury Tax and Loan (TT&L) Program means the program for

collecting Federal taxes and investing the Government's excess

operating funds.

(kk) Treasury Tax and Loan (TT&L) rate of interest means the

Federal funds rate less twenty-five basis points (i.e., \1/4\ of 1

percent).

Sec. 203.3 Financial institution eligibility for designation as a

Treasury Tax and Loan depositary.

(a) To be designated as a TT&L depositary, a financial institution

shall be insured as a national banking association, state bank, savings

bank, savings and loan, building and loan, homestead association,

Federal home loan bank, credit union, trust company,

[[Page 5652]]

or a U.S. branch of a foreign banking corporation, the establishment of

which has been approved by the Comptroller of the Currency.

(b) A financial institution shall possess the authority to pledge

collateral to secure TT&L account balances and/or a note balance.

(c) In order to be designated as a TT&L depositary for the purposes

of processing tax deposits in the FTD system, a financial institution

shall possess under its charter either general or specific authority

permitting the maintenance of the TT&L account, the balance of which is

payable on demand without previous notice of intended withdrawal. In

addition, note option depositaries shall possess either general or

specific authority permitting the maintenance of a note balance, which

is payable on demand without previous notice of intended withdrawal.

Sec. 203.4 Designation of financial institutions as Treasury Tax and

Loan depositaries.

(a) Parties to the agreement. To be designated as a TT&L

depositary, a financial institution shall enter into a depositary

agreement with Treasury's fiscal agent, the FRB. By entering into this

agreement, the financial institution agrees to be bound by this part,

and procedural instructions issued pursuant to this part.

(b)(1) Application procedures. An eligible financial institution

seeking designation as a depositary and, thereby, the authority to

maintain a TT&L account and/or a note balance shall file with the FRB,

Financial Management Service Form 458, ``Financial Institution

Agreement and Application for Designation as a TT&L Depositary,'' and

Financial Management Service Form 459, ``Resolution Authorizing the

Financial Institution Agreement and Application for Designation as a

TT&L Depositary,'' certified by its board of directors. Financial

Management Service Forms 458 and 459 are available upon request from

the FRB of the district.

(2) Depositaries processing tax payments in the FTD system are

required to elect either the remittance or the note option.

(c) Designation. Each financial institution satisfying the

eligibility requirements and the application procedures will receive

from the FRB notification of its specific designation as a TT&L

depositary. A financial institution is not authorized to maintain a

TT&L account or note balance until it has been designated as a TT&L

depositary by the FRB.

Sec. 203.5 Obligations of the depositary.

A depositary shall:

(a) Administer a note balance, if not participating in the FTD

System.

(b) Administer a TT&L account and, if applicable, a note balance,

if participating in the FTD System.

(c) Comply with the requirements of Section 202 of Executive Order

11246, entitled ``Equal Employment Opportunity'' (3 CFR, 1964-1965

Comp. p. 339) as amended by Executive Orders 11375 and 12086 (3 CFR,

1966-1970 Comp., p. 684; 3 CFR, 1978 Comp. p. 230), and the regulations

issued thereunder at 41 CFR Chapter 60.

(d) Comply with the requirements of Section 503 of the

Rehabilitation Act of 1973, as amended, and the regulations issued

thereunder at 41 CFR part 60-741, requiring Federal contractors to take

affirmative action to employ and advance in employment qualified

individuals with disabilities.

(e) Comply with the requirements of Section 503 of the Vietnam Era

Veterans' Readjustment Assistance Act of 1972, as amended, 38 U.S.C.

4212, Executive Order 11701 (3 CFR 1971-1975 Comp. p. 752), and the

regulations issued thereunder at 41 CFR parts 60-250 and 61-250,

requiring Federal contractors to take affirmative action to employ and

advance in employment qualified special disabled veterans and Vietnam-

era veterans.

Sec. 203.6 Compensation for services.

Except as provided in the procedural instructions, Treasury will

not compensate financial institutions for servicing and maintaining the

TT&L account, or for processing tax payments through the EFTPS or the

FTD system.

Sec. 203.7 Termination of agreement or change of election or option.

(a) Termination by Treasury. The Secretary may terminate the

agreement of a depositary at any time upon notice to that effect to

that depositary, effective on the date set forth in the notice.

(b) Termination or change of election or option by the depositary.

A depositary may terminate its depositary agreement, or change its

option or election, consistent with this part and the procedural

instructions, by submitting notice to that effect in writing to the FRB

effective at a prospective date set forth in the notice.

Sec. 203.8 Application of part and procedural instructions.

The terms of this part and procedural instructions issued pursuant

to this part shall be binding on financial institutions that process

tax payments and/or maintain a note balance under this part. By

accepting or originating Federal tax payments, the financial

institution agrees to be bound by this part and by procedural

instructions issued pursuant to this part.

Subpart B--Electronic Federal Tax Payments

Sec. 203.9 Scope of the subpart.

This subpart prescribes the rules by which financial institutions

shall process Federal tax payment transactions electronically. A

financial institution does not need to be designated as a TT&L

depositary in order to process electronic Federal tax payments. In

addition, a financial institution that does process electronic Federal

tax payments under this subpart does not thereby become a Federal

Government depositary and shall not advertise itself as one because of

that fact.

Sec. 203.10 Enrollment.

(a) General. Taxpayers shall complete an enrollment process with

the TFA prior to making their first electronic Federal tax payment.

(b) Enrollment forms. The TFA shall provide financial institutions

and taxpayers with enrollment forms upon request. The taxpayer is

responsible for completing the enrollment form, obtaining the

verifications required on the form, and returning the enrollment form

to the TFA.

(c) Verification. If the taxpayer elects the ACH debit entry method

of paying taxes, an authorized representative of the financial

institution shall verify the accuracy of the financial institution

routing number, taxpayer account number, and taxpayer account type at

the request of the taxpayer.

Sec. 203.11 Electronic payment methods.

(a) General. Electronic payment methods for Federal tax payments

available under this subpart include ACH debit entries, ACH credit

entries, and same-day payments. Any financial institution that is

capable of originating and/or receiving transactions for these payment

methods, by itself or through a correspondent financial institution,

may do so on behalf of a taxpayer.

(b) Conditions to making an electronic payment. Nothing contained

in this part shall affect the authority of financial institutions to

enter into contracts with their customers regarding the terms and

conditions for processing payments, provided that such terms and

conditions are not inconsistent with this subpart and applicable law

governing the particular transaction type.

(c) Payment of interest for time value of funds held. Treasury will

not pay

[[Page 5653]]

interest on any payments erroneously paid to Treasury and subsequently

refunded to the financial institution.

Sec. 203.12 Future-day reporting and payment mechanisms.

(a) General. A financial institution may receive an ACH debit

entry, originated by the TFA at the direction of the taxpayer; or, a

financial institution may originate an ACH credit entry, at the

direction of the taxpayer. Taxpayers will be credited for the actual

amount received by Treasury.

(b) ACH debit. A financial institution receiving an ACH debit entry

originated by the TFA shall, as applicable:

(1) Timely verify the account number and account type contained in

an ACH prenotification entry;

(2) Timely and properly return a prenotification entry that

contains an invalid account number or account type, or otherwise is

erroneous or unprocessable;

(3) Timely and accurately notify the TFA of incorrect information

on entries received, using a Notification of Change entry; and

(4) Timely and accurately return an entry not posted, including but

not limited to, a return or a contested dishonored return for

acceptable return reasons, as set forth in the procedural instructions.

(c) ACH credit. A financial institution originating an ACH credit

entry at the direction of a taxpayer shall:

(1) At the request of the taxpayer, originate either an ACH

prenotification containing the taxpayer's identification number or a

zero dollar ACH entry with the appropriate addenda record. Additional

format information is contained in the procedural instructions;

(2) Format the ACH credit entry in the ACH format approved by

Treasury for Federal tax payments;

(3) Originate an ACH credit entry by the appropriate deadline, as

specified by the FRB or Treasury, whichever is earlier, in order to

meet the tax due date specified by the taxpayer; and

(4) Provide the taxpayer, upon request, a transaction trace number,

or some other method to trace the tax payment.

(d) ACH credit reversals. Reversals may be initiated for a

duplicate or erroneous file or entry. No advance approval from, or

notification to, the IRS is required when originating an ACH credit

reversal. Documentation of reversals shall be made available as set

forth in the procedural instructions.

Sec. 203.13 Same-day reporting and payment mechanisms.

(a) General. A financial institution or its authorized

correspondent may initiate same-day reporting and payment transactions

on behalf of taxpayers. A same-day payment must be received by the FRB

of the district by the deadline established by the Treasury in the

procedural instructions. Taxpayers will be credited for the actual

amount received by Treasury.

(b) Fedwire value transfer. To initiate a Fedwire value tax

payment, the financial institution shall be a Fedwire participant and

shall comply with the FRB's Fedwire format for tax payments. The

taxpayer's financial institution shall provide the taxpayer, upon

request, the IMAD and the ETA reference numbers for a Fedwire value

transfer. The financial institution may obtain the ETA reference number

for Fedwire value transfers from its FRB by supplying the related IMAD

number. Fedwire value transfers settle immediately to the TGA and thus

are not credited to a depositary's note balance.

(c) Fedwire non-value transaction. By initiating a Fedwire non-

value transaction, a financial institution authorizes the FRB of the

district to debit its Federal Reserve account or, for a TT&L

depositary, to debit the Federal Reserve account of the depositary or

its designated correspondent financial institution, for the amount of

the tax payment specified in the transaction. To initiate a Fedwire

non-value transaction, the financial institution shall be a Fedwire

participant and shall comply with the FRB's Fedwire format for tax

payments. The taxpayer's financial institution shall provide the

taxpayer, upon request, the IMAD and ETA reference numbers for the

Fedwire non-value transaction. The financial institution may obtain the

ETA reference number for Fedwire non-value transactions from its FRB by

supplying the related IMAD number.

(1) For a note option depositary using a Fedwire non-value

transaction, the tax payment amount will be credited to the

depositary's note balance on the day of the transaction.

(2) For a remittance option depositary using a Fedwire non-value

transaction, the tax payment amount will be debited from the Federal

Reserve account of the depositary or the depositary's designated

correspondent and credited to the TGA on the day of the transaction.

(3) For a non-TT&L depositary financial institution using a Fedwire

non-value transaction, the tax payment amount will be debited from the

financial institution's Federal Reserve account and credited to the TGA

on the day of the transaction.

(d) Direct Access Transaction. By initiating a Direct Access

transaction, a financial institution authorizes the FRB of the district

to debit its Federal Reserve account or, for a TT&L depositary, to

debit the Federal Reserve account of the depositary or its designated

correspondent financial institution for the amount of the tax payment

specified in the transaction. The taxpayer's financial institution

shall provide the taxpayer, upon request, the ETA reference number for

the Direct Access transaction.

(1) For a note option depositary using a Direct Access transaction,

the tax payment amount will be credited to the depositary's note

balance on the day of the transaction.

(2) For a remittance option depositary or a non-TT&L depositary

financial institution using a Direct Access transaction, the tax

payment amount will be debited from the Federal Reserve account of the

financial institution or its designated correspondent financial

institution, and credited to the TGA on the day of the transaction.

(e) Cancellations and reversals. In addition to cancellations due

to insufficient funds in the financial institution's Federal Reserve

account, the FRB may reverse a same-day transaction:

(1) If the transaction:

(i) Is originated by a financial institution after the deadline

established by the Treasury in the procedural instructions;

(ii) Has an unenrolled taxpayer identification number; or

(iii) Does not meet the edit and format requirements set forth in

the procedural instructions; or,

(2) At the direction of the IRS, for the following reasons:

(i) Incorrect taxpayer name;

(ii) Overpayment; or

(iii) Unidentified payment; or,

(3) At the request of the financial institution that sent the same-

day transaction, if the request is made prior to the deadline

established by Treasury in the procedural instructions on the day the

payment was made.

(f) Other than as stated in paragraph (e) of this section, Treasury

is not obligated to reverse all or any part of a payment.

Sec. 203.14 Electronic Federal Tax Payment System interest

assessments.

(a) Circumstances subject to interest assessments. Treasury may

assess interest on a financial institution in instances where a

taxpayer that failed to meet a tax due date proves to the IRS

[[Page 5654]]

that the delivery of tax payment instructions to the financial

institution was timely and that the taxpayer satisfied the conditions

imposed by the financial institution pursuant to Sec. 203.11(b).

Treasury also may assess interest where a financial institution failed

to respond to an ACH prenotification entry on an ACH debit as required

in Sec. 203.12(b) or failed to originate an ACH prenotification or zero

dollar entry on an ACH credit as described in Sec. 203.12(c) which then

resulted in a late payment.

(b) Calculation of interest assessment. Any interest assessed under

this section will be at the TT&L rate. The interest will be assessed

from the day the taxpayer specified that its payment should settle to

the Treasury until the receipt of the payment by Treasury, subject to

the following limitations: For ACH debit transactions, interest will be

limited to no more than seven calendar days; for ACH credit and same-

day transactions, interest will be limited to no more than 45 calendar

days. The limitation of liability in this paragraph does not apply to

any interest assessment in which there is an indication of fraud, the

presentation of a false claim, or misrepresentation or embezzlement on

the part of the financial institution or any employee or agent of the

financial institution.

(c) Authorization to assess interest. A financial institution that

processes Federal tax payments made by electronic payment methods under

this subpart is deemed to authorize the FRB to debit its Federal

Reserve account or the account of its designated correspondent

financial institution for any interest assessed under this section.

Upon the direction of Treasury, the FRB shall debit the Federal Reserve

account of the financial institution or the account of its designated

correspondent financial institution for the amount of the assessed

interest.

(d)(1) Circumstances not subject to the assessment of interest. (1)

Treasury will not assess interest on a taxpayer's financial institution

if a taxpayer fails to meet a tax due date because the taxpayer has not

satisfied conditions imposed by the financial institution pursuant to

Sec. 203.11(b) and the financial institution has not contributed to the

delay. The burden is on the financial institution to establish,

pursuant to the procedures in Sec. 203.16, that the taxpayer has not

satisfied the conditions and that the financial institution has not

contributed to the delay.

(2) Treasury will not assess interest on a financial institution if

the delay causing the interest assessment is due to the FRB or the TFA

and the financial institution did not contribute to the delay. The

burden is on the financial institution to establish, pursuant to the

procedures in Sec. 203.16, that it did not cause or contribute to the

delay.

Sec. 203.15 Prohibited debits through the Automated Clearing House.

(a) General. The Treasury has instituted operational safeguards to

scrutinize all entries that remove funds from the TGA. In the event

funds are removed from the TGA without authority, this section sets

forth the liability of financial institutions originating such entries.

Accordingly, a financial institution shall not originate an ACH

transaction to debit the TGA without the prior written permission of

Treasury. Unauthorized entries under this section do not include

reversal entries of previously initiated ACH credits authorized in

Sec. 203.12(d).

(b) Liability. A financial institution that originates an

unauthorized ACH entry that debits the TGA shall be liable to Treasury

for the amount of the transaction and shall be liable for interest

charges as specified in paragraph (d) of this section.

(c) Authorization to recover principal and assess interest charge.

By initiating unauthorized debits to the TGA through the ACH, a

financial institution is deemed to authorize the FRB to debit its

Federal Reserve account or the account of its designated correspondent

financial institution for any principal and, if applicable, an interest

charge assessed by Treasury under this section.

(d) Interest charge calculation. The interest charge shall be at a

rate equal to the Federal funds rate plus two percent. The interest

charge shall be assessed for each calendar day from the day the TGA was

debited to the day the TGA is recredited with the full amount of

principal due.

Sec. 203.16 Appeal and dispute resolution.

(a) Contest. A financial institution may contest any interest

assessed under Sec. 203.14, any principal or interest assessed under

Sec. 203.15, or any late fees assessed under Sec. 203.20. The financial

institution shall submit information supporting its position and the

relief sought. The information must be received, in writing, by the

Treasury officer or fiscal agent identified in the procedural

instructions, no later than 90 calendar days after the date the FRB

debits the reserve account of the financial institution under

Secs. 203.14, 203.15, or 203.20. The Treasury officer or fiscal agent

will: uphold the assessment, or reverse the assessment, or modify the

assessment, or mandate other action.

(b) Appeal. The financial institution may appeal the decision to

Treasury as set forth in the procedural instructions. No further

administrative review of the Treasury's decision is available under

this Part.

(c) Recoveries. In the event of an over or under recovery of either

interest, principal, or late fees, Treasury will instruct the FRB to

credit or debit the Federal Reserve account of the financial

institution or its designated correspondent financial institution, as

appropriate.

Subpart C--Federal Tax Deposits

Sec. 203.17 Scope of the subpart.

This subpart applies to all depositaries that accept FTD coupons

and governs the acceptance and processing of those coupons.

Sec. 203.18 Tax deposits using Federal Tax Deposit coupons.

(a) FTD coupons. A depositary that accepts FTD coupons, through any

of its offices that accept demand and/or savings deposits, shall:

(1) Accept from a taxpayer, cash, a postal money order drawn to the

order of the depositary, or a check or draft drawn on and to the order

of the depositary, covering an amount to be deposited as Federal taxes

when accompanied by an FTD coupon on which the amount of the deposit

has been properly entered in the space provided. A depositary may

accept, at its discretion, a check drawn on another financial

institution, but it does so at its option and absorbs for its own

account any float and other costs involved.

(2) Issue a counter receipt when requested to do so by a taxpayer

that makes an FTD deposit over the counter.

(3) Place a stamp impression on the face of each FTD coupon in the

space provided. The stamp shall reflect the date on which the tax

deposit was received and the name and location of the depositary. The

timeliness of the tax payment will be determined by reference to the

date stamped by the depositary on the FTD coupon.

(4) Credit, on the date of receipt, all FTD deposits to the TT&L

account and administer that account pursuant to the provisions of this

part.

(5) Forward, each day, to the IRS Center servicing the geographical

area in which the depositary is located, the FTD coupons for all FTD

deposits received that day. The FTD coupons shall be accompanied by an

advice of credit reflecting the total amount of all FTD coupons.

(6) Establish an adequate record of all FTD deposits prior to

transmittal to the

[[Page 5655]]

IRS Center so that the depositary will be able to identify deposits in

the event tax deposit coupons are lost in shipment. For tracking

purposes, a record shall be made of each FTD deposit showing, at a

minimum, the date of deposit, the taxpayer identification number, and

the amount of the deposit. The depositary's copy of the advice of

credit may be used to provide the necessary information if individual

deposits are listed separately, showing date, taxpayer identification

number, and amount.

(7) Deliver its advices of credit to the FRB by the cutoff hour

designated by the FRB for receipt of advices.

(8) Not accept compensation from taxpayers for accepting FTDs and

handling them as required by this section.

(b) FTD deposits with Federal Reserve Banks. An FRB shall:

(1) Accept an FTD directly from a taxpayer when such tax deposit

is:

(i) Mailed or delivered by a taxpayer; and

(ii) Provided in the form of cash or a check or postal money order

payable to the order of that FRB; and,

(iii) Accompanied by an FTD coupon on which the amount of the tax

deposit has been properly entered in the space provided.

(2) Issue a counter receipt, when requested to do so by a taxpayer

that makes an FTD over the counter; and,

(3) Place, in the space provided on the face of each FTD coupon

accepted directly from a taxpayer, a stamp impression reflecting the

name of the FRB and the date on which the tax deposit will be credited

to the TGA. Timeliness of the Federal tax payment will be determined by

this date. However, if a deposit is mailed to an FRB, it shall be

subject to the ``Timely mailing treated as timely filing and paying''

clause of the Internal Revenue Code, 26 U.S.C. 7502; and,

(4) Credit the TGA with the amount of the tax payment;

(i) On the date the payment is received, if payment is made in

cash; or,

(ii) On the date the proceeds of the tax payment are collected, if

payment is made by postal money order or check.

Sec. 203.19 Note option.

(a) Late delivery of advices of credit. If an advice of credit does

not arrive at the FRB before the designated cutoff hour for receipt of

such advices, the FRB will post the funds to the note balance as of the

next business day after the date on the advice of credit. This is the

date on which funds will begin to earn interest for Treasury.

(b) Transfer of funds from TT&L account to the note balance. For a

depositary selecting the note option, funds equivalent to the amount of

deposits credited by a depositary to the TT&L account shall be

withdrawn by the depositary and credited to the note balance on the

business day following the receipt of the tax payment.

Sec. 203.20 Remittance option.

(a) FTD late fee. If an advice of credit does not arrive at the FRB

before the designated cutoff hour for receipt of such advices, an FTD

late fee in the form of interest at the TT&L rate will be assessed for

each day's delay in receipt of such advice. Upon the direction of

Treasury, the FRB shall debit the Federal Reserve account of the

financial institution or the account of its designated correspondent

financial institution for the amount of the late fee.

(b) Withdrawals. For a depositary selecting the Remittance Option,

the amount of deposits credited by a depositary to the TT&L account

will be withdrawn upon receipt by the FRB of the advices of credit. The

FRB will charge the depositary's Federal Reserve account or the account

of the depositary's designated correspondent financial institution.

Subpart D--Investment Program and Collateral Security Requirements

for Treasury Tax and Loan Depositaries

Sec. 203.21 Scope of the subpart.

This subpart provides rules for TT&L depositaries on crediting note

balances under the various payment methods; debiting note balances; and

pledging collateral security.

Sec. 203.22 Sources of balances.

Depositaries electing to participate in the investment program can

receive Treasury's investments in obligations of the depositary from

the following sources:

(a) FTDs that have been credited to the TT&L account pursuant to

subpart C of this part;

(b) EFTPS ACH credit and debit transactions, Fedwire non-value

transactions, and Direct Access transactions pursuant to subpart B of

this part; and

(c) Direct investments and special direct investments pursuant to

subpart D of this part.

Sec. 203.23 Note balance.

(a) Additions. Treasury will invest funds in obligations of

depositaries selecting the note option. Such obligations shall be in

the form of open-ended, interest-bearing notes; and additions and

reductions will be reflected on the books of the FRB of the district.

(1) FTD system. A depositary processing tax deposits using the FTD

system and electing the note option shall debit the TT&L account and

credit its note balance as stated in Sec. 203.19(b).

(2) EFTPS.

(i) ACH debit and ACH credit. A note option depositary processing

EFTPS ACH debit entries and/or ACH credit entries shall credit its note

balance for the value of the transactions on the date that an exchange

of funds is reflected on the books of the Federal Reserve Bank of the

district. Financial institutions may refer to the procedural

instructions for information on how to ascertain the amount of the

credit to the note balance.

(ii) Fedwire non-value and Direct Access. A note option depositary

processing Fedwire non-value and/or Direct Access transactions pursuant

to subpart B of this part shall credit its note balance and debit its

customer's account for the value of the transactions on the date ETA

receives and processes the transactions.

(b) Other additions. Other funds from Treasury may be offered from

time to time to certain note option depositaries through direct

investments, special direct investments, or other investment programs.

(c) Note balance withdrawals. The amount of the note balance shall

be payable on demand without prior notice. Calls for payment on the

note will be by direction of the Secretary through the FRBs. On behalf

of Treasury, the FRB shall charge the reserve account of the depositary

or the depositary's designated correspondent on the day specified in

the call for payment.

(d) Interest. A note shall bear interest at the TT&L rate. Such

interest is payable by a charge to the Federal Reserve account of the

depositary or its designated correspondent in the manner prescribed in

the procedural instructions.

(e) Maximum balance.

(1) Note option depositaries. A depositary selecting the note

option shall establish a maximum balance for its note by providing

notice to that effect in writing to the FRB of the district. The

maximum balance is the amount of funds for which a note option

depositary is willing to provide collateral in accordance with

Sec. 203.24(c)(1). The depositary shall provide the advance notice

required in the procedural instructions before reducing the established

maximum balance unless it is a reduction resulting from a collateral

re-evaluation as determined by the depositary's FRB. That portion of

any advice of credit or EFTPS tax payment, which, when

[[Page 5656]]

posted at the FRB, would cause the note balance to exceed the maximum

balance amount specified by the depositary, will be withdrawn by the

FRB that day.

(2) Direct investment depositaries. A note option depositary that

participates in direct investment shall set a maximum balance for

direct investment purposes which is higher than its peak balance

normally generated by the depositary's advices of credit and EFTPS tax

payment inflow. The direct investment note option depositary shall

provide the advance notice required in the procedural instructions

before reducing the established maximum balance.

(3) Special direct investment depositaries. Special direct

investments, while credited to the note balance, shall not be

considered in setting the amount of the maximum balance or in

determining the amounts to be withdrawn where a depositary's maximum

balance is exceeded.

Sec. 203.24 Collateral security requirements.

Financial institutions that process EFTPS tax payments, but are not

TT&L depositaries, have no collateral requirements under this part.

Financial institutions that are note option depositaries or remittance

option depositaries have collateral security requirements, as follows:

(a) Note option.

(1) FTD deposits and EFTPS tax payments. A depositary shall pledge

collateral security in accordance with the requirements of paragraphs

(c)(1), (d), and (e) of this section in an amount that is sufficient to

cover the pre-established maximum balance for the note, and, if

applicable, the closing balance in the TT&L account which exceeds

recognized insurance coverage. Depositaries shall pledge collateral for

the full amount of the maximum balance at the time the maximum balance

is established. If the depositary maintains a TT&L account, the

depositary shall pledge collateral security before crediting deposits

to the TT&L account.

(2) Direct investments. A note option depositary that participates

in direct investment is not required to pledge collateral continuously

in the amount of the pre-established maximum balance. However, each

note option depositary participating in direct investment shall pledge,

no later than the day the direct investment is placed, the additional

collateral in accordance with paragraphs (c)(1), (d), and (e) of this

section to cover the total note balance including those funds received

through direct investment. If a direct investment depositary has a

history of frequent collateral deficiencies, it shall fully

collateralize its maximum balance at all times.

(3) Special direct investments. Before special direct investments

are credited to a depositary's note balance, the note option depositary

shall pledge collateral security, in accordance with the requirements

of paragraphs (c)(2) and (e) of this section, to cover 100 percent of

the amount of the special direct investments to be received.

(b) Remittance option. Prior to crediting FTD deposits to the TT&L

account, a remittance option depositary shall pledge collateral

security in accordance with the requirements of paragraph (c)(1), (d),

and (e) of this section in an amount which is sufficient to cover the

balance in the TT&L account at the close of business each day, less

recognized insurance coverage.

(c) Deposits of securities.

(1) Collateral security required under paragraphs (a)(1), (2), and

(b) of this section shall be deposited with the FRB of the district, or

with a custodian or custodians within the United States designated by

the FRB, under terms and conditions prescribed by the FRB.

(2)(i) Collateral security required under paragraph (a)(3) of this

section shall be pledged under a written security agreement on a form

provided by the FRB of the district. The collateral security pledged to

satisfy the requirements of paragraph (a)(3) of this section may remain

in the pledging depositary's possession and the fact that it has been

pledged shall be evidenced by advices of custody to be incorporated by

reference in the written security agreement. The written security

agreement and all advices of custody covering collateral security

pledged under that agreement shall be provided by the depositary to the

FRB of the district. Collateral security pledged under the agreement

shall not be substituted for or released without the advance approval

of the FRB of the district, and any collateral security subject to the

security agreement shall remain so subject until an approved

substitution is made. No substitution or release shall be approved

until an advice of custody containing the description required by the

written security agreement is received by the FRB of the district.

(ii) Treasury's security interest in collateral security pledged by

a depositary in accordance with paragraph (c)(2)(i) of this section to

secure special direct investments is perfected without Treasury taking

possession of the collateral security for a period not to exceed 21

calendar days from the day of the depositary's receipt of the special

direct investment.

(d) Acceptable securities. Unless otherwise specified by the

Secretary, collateral security pledged under this section may be

transferable securities, owned by the depositary free and clear of all

liens, charges, or claims, of any of the classes listed in the

procedural instructions. Collateral values will be assigned by the FRB

of the district.

(e) Assignment of securities. A TT&L depositary that pledges

acceptable securities which are not negotiable without its endorsement

or assignment may furnish, in lieu of placing its unqualified

endorsement on each security, an appropriate resolution and irrevocable

power of attorney authorizing the FRB to assign the securities. The

resolution and power of attorney shall conform to such terms and

conditions as the FRB shall prescribe.

(f) Effecting payments of principal and interest on securities

pledged as collateral.

(1) General. If the depositary fails to pay, when due, the whole or

any part of the funds received by it for credit to the TT&L account,

and/or if applicable, its note balance; or otherwise violates or fails

to perform any of the terms of this part, or fails to pay when due

amounts owed to the United States or the United States Treasury; or if

the depositary is closed for business by regulatory action or by proper

corporate action, or in the event that a receiver, conservator,

liquidator or any other officer is appointed; then the Treasury,

without notice or demand, may sell, or otherwise collect the proceeds

of all or part of the collateral, including additions and

substitutions; and apply the proceeds, to satisfy any claims of the

United States against the depositary. All principal and interest

payments on any security pledged to protect the note balance (if

applicable) and/or the TT&L account (if applicable), due as of the date

of the insolvency or closure, or thereafter becoming due, shall be held

separate and apart from any other assets and shall constitute a part of

the pledged security available to satisfy any claim of the United

States.

(2) Payment procedures.

(i) Subject to the waiver in paragraph (f)(2)(iii) of this section,

each depositary (including, with respect to such depositary, an

assignee for the benefit of creditors, a trustee in bankruptcy, or a

receiver in equity) shall immediately remit each payment of principal

and/or interest received by it with respect to collateral pledged

pursuant to this section to the FRB of the district, as fiscal agent of

the United States, and in

[[Page 5657]]

any event shall so remit no later than 10 days after receipt of such a

payment.

(ii) Subject to the waiver in paragraph (f)(2)(iii) of this

section, each obligor on a security pledged by a depositary pursuant to

this section, upon notification that the Treasury is entitled to any

payment associated with that pledged security, shall make each payment

of principal and/or interest due with respect to such security directly

to the FRB of the district, as fiscal agent of the United States.

(iii) The requirements of paragraphs (f)(2)(i) and (ii) of this

section are hereby waived for only so long as a pledging depositary

avoids both termination from the program under Sec. 203.7; and also,

those circumstances identified in paragraph (f)(1) which may lead to

the collection of the proceeds of collateral or the waiver is otherwise

terminated by Treasury.

Dated: January 27, 1998.

Richard L. Gregg,

Acting Commissioner.

[FR Doc. 98-2494 Filed 2-2-98; 8:45 am]

BILLING CODE 4810-35-P