Proposed Revision of Distilled Spirits Plant Regulations (2001R-194P)

DEPARTMENT OF THE TREASURY

Alcohol and Tobacco Tax and Trade Bureau

27 CFR Part 19

[Docket No. TTB-2008-0004]; [Notice No. 83]

RIN 1513-AA23

Proposed Revision of Distilled Spirits Plant Regulations (2001R-194P)

AGENCY:

Alcohol and Tobacco Tax and Trade Bureau, Treasury.

ACTION:

Notice of proposed rulemaking.

SUMMARY:

The Alcohol and Tobacco Tax and Trade Bureau (TTB) proposes to amend its distilled spirits plant regulations. Many of these proposed revisions are the result of comments submitted by the Distilled Spirits Council of the United States in response to a Bureau of Alcohol, Tobacco and Firearms notice of proposed rulemaking (NPRM) published in November 1998. Other proposed revisions are a result of a comprehensive TTB review of the distilled spirits plant regulations. This NPRM supersedes the NPRM issued in November 1998. We believe the proposed amendments will modernize the requirements for operating distilled spirits plants and make the regulations easier to understand, thereby allowing proprietors of such plants to operate in a more efficient manner. The proposed regulations are also written in a plain language format to improve clarity.

DATES:

We must receive your written comments on or before August 6, 2008.

ADDRESSES:

You may send comments on this notice to one of the following addresses:

•

http://www.regulations.gov

(via the online comment form for this notice as posted within Docket No. TTB-2008-0004 on Regulations.gov, the Federal e-rulemaking portal); or

•

Mail:

Director, Regulations and Rulings Division, Alcohol and Tobacco Tax and Trade Bureau, P.O. Box 14412, Washington, DC 20044-4412; or

•

Hand Delivery/Courier in lieu of Mail:

Alcohol and Tobacco Tax and Trade Bureau, 1310 G Street, NW., Suite 200-E, Washington, DC 20005.

See the

Public Participation

section of this notice for specific instructions and requirements for submitting comments, and for information on how to request a public hearing.

You may view copies of this notice and any comments we receive about this proposal at

http://www.regulations.gov

. A direct link to the appropriate Regulations.gov docket is available under Notice No. 83 on the TTB Web site at

http://www.ttb.gov/spirits/spirits_rulemaking.shtml

. You also may view copies of this notice and any comments we receive about this proposal by appointment at the TTB Information Resource Center, 1310 G Street, NW., Washington, DC 20220. To make an appointment, call 202-927-2400.

FOR FURTHER INFORMATION CONTACT:

Daniel J. Hiland, Regulations and Rulings Division, Alcohol and Tobacco Tax and Trade Bureau, 1310 G Street NW., Suite 200-E, Washington, DC 20220; telephone 202-927-8176.

SUPPLEMENTARY INFORMATION:

Table of Contents

Notice to Readers

Impact of the Homeland Security Act on this Rulemaking

I. Background Information for this Notice

A. Distilled Spirits Plant Operations under Current Law

• Basic Definitions

• Federal Laws and Regulatory Authority

• Major Regulatory Provisions

B. Petition to Amend 27 CFR Part 19

C. General Changes Proposed in this Notice

• Plain Language

• Structure of Part 19

• Redundancy with the Law

• Alternate Methods or Procedures

D. Specific Changes Proposed in this Notice

• Subpart A—General Provisions

• Subpart B—Administrative and Miscellaneous Provisions

• Subpart C—Restrictions on Production, Location, and Use of Plants

• Subpart D—Registration of a Distilled Spirits Plant and Obtaining a Permit

• Subpart E—Changes to Registrations and Permits

• Subpart F—Bonds and Consents of Surety

• Subpart G—Construction, Equipment, and Security Requirements ——

• Subpart H—Special (Occupational) Tax

• Subpart I—Distilled Spirits Taxes

• Subpart J—Claims

• Subpart K—Gauging

• Subpart L—Production of Distilled Spirits

• Subpart M—Storage of Distilled Spirits

• Subpart N—Processing of Distilled Spirits

• Subpart O—Denaturing Operations and Manufacture of Articles

• Subpart P—Transfers, Receipts, and Withdrawals

• Subpart Q—Return of Spirits to Bonded Premises and Voluntary Destruction

• Subpart R—Losses and Shortages

• Subpart S—Containers and Marks

• Subpart T—Liquor Bottle, Label, and Closure Requirements

• Subpart U—Reserved

• Subpart V—Records and Reports

• Subpart W—Production of Vinegar by the Vaporizing Process

• Subpart X—Distilled Spirits for Fuel Use

• Subpart Y—Paperwork Reduction Act

II. Derivation Table for Proposed Part 19

III. Public Participation

• Comments Invited

• Submitting Comments

• Confidentiality

• Public Disclosure

IV. Regulatory Analyses and Notices

• Paperwork Reduction Act

• Regulatory Flexibility Act

• Executive Order 12866

• Executive Order 13132

V. Drafting Information

VI. List of Subjects

VII. Authority and Issuance

• Text of the Proposed Rule

Notice to Readers—Impact of the Homeland Security Act on This Rulemaking

Effective January 24, 2003, the Homeland Security Act of 2002 (Pub. L. 107-296, 116 Stat. 2135 (2002)) divided the Bureau of Alcohol, Tobacco and Firearms (ATF) into two new agencies, the Alcohol and Tobacco Tax and Trade Bureau (TTB) in the Department of the Treasury and the Bureau of Alcohol, Tobacco, Firearms and Explosives in the Department of Justice. The regulation and taxation of alcohol beverages remains a function of the Department of the Treasury and is the responsibility of TTB. References to ATF in this notice reflect the time period prior to January 24, 2003, while references to TTB are after that date.

I. Background Information for This Notice

A. Distilled Spirits Plant Operations Under Current Law

Distilled spirits taxation is a specialized area of Federal law. The following background material provides basic information about how distilled spirits plants operate and are regulated under Federal law.

Basis Definitions

Distilled Spirits.

The term “distilled spirits” refers to those products that contain ethyl alcohol and are generally the result of distillation. This term does not apply to wine and beer, which are products of fermentation. Examples of distilled spirits products include vodka, whiskey, gin, brandy, cordials, liqueurs, flavored brandies, and other similar products.

Distilled Spirits Plants.

The term “Distilled Spirits Plant” (DSP) refers to a plant at which distilled spirits are manufactured or produced, aged or stored, or packaged or bottled, either for beverage or industrial use.

Federal Laws and Regulatory Authority

Federal law prohibits the manufacture or production of distilled spirits in the United States at other than a registered DSP that has received a permit from

TTB. While Federal law allows for the limited home production of wine and beer, no such exemption exists for distilled spirits.

DSPs are regulated under the provisions of two laws, the Internal Revenue Code of 1986 (IRC) (Title 26 of the United States Code) and the Federal Alcohol Administration Act (FAA Act) (Title 27 of the United States Code). The IRC imposes an excise tax on distilled spirits, requires plants to register, requires plants to obtain permits not otherwise required by the FAA Act, and imposes strict controls over the operation of DSPs. The FAA Act imposes a requirement to obtain a basic permit and contains various consumer-protection provisions, including provisions related to the formulation, labeling, and advertising of alcohol beverages. The FAA Act also controls various trade practices within the alcohol industry.

Under these two laws, TTB regulates the distilled spirits industry in the United States. Each law authorizes the Secretary of the Treasury to prescribe regulations to carry out and enforce its provisions, and the Secretary has delegated this authority to TTB. The TTB regulations concerning DSPs are contained in title 27 of the Code of Federal Regulations, Part 19, Distilled Spirits Plants (27 CFR part 19).

Major Regulatory Provisions

A DSP consists of one or more of the following: production, storage, processing, denaturation, and bottling facilities. A DSP may be a large and complex plant, having all facilities, a simple storage facility consisting of only one building, or a small bottling facility with storage facilities. Production facilities are usually accompanied by some storage facilities. Bottling facilities are often accompanied by storage facilities, and must by law be accompanied by either a production or a storage facility. However, large storage facilities are often not accompanied by either of the other two types.

Registration.

Before commencing operations, the DSP proprietor must obtain an approved notice of registration. This application for registration includes: documents to set up distilling apparatus, environmental impact forms, personnel questionnaires, signature authorities, and a statement of security.

Permits.

Under the FAA Act, all persons who intend to engage in the business of: (a) Distilling spirits; (b) rectifying, blending, or bottling (processing) distilled spirits; or (c) warehousing and bottling distilled spirits, must file for a basic permit.

To maintain control over the industrial use of distilled spirits, the IRC requires that an operating permit be obtained before commencing the production, warehousing, or bottling of alcohol for industrial use. Specifically, a permit is required for:

• Distilling for industrial use.

• Bonded warehousing of spirits for industrial use.

• Denaturation of spirits.

• Bonded warehousing of spirits (without bottling) for non-industrial use.

• Bottling or packaging of spirits for industrial use.

• Any other distilling, warehousing, or bottling operations not required to be covered by a basic permit under the FAA Act.

DSP Bonded Premises.

The physical premises of a DSP are divided into two technical categories: “bonded premises,” and unbonded or “general premises.” All activities relating to the distilling, storage, and processing (blending and mixing) of distilled spirits must be conducted on bonded premises. All activities relating to taxpaid alcohol beverages conducted at the distilled spirits plant must be conducted on general premises.

Operations as a distiller, warehouseman, or processor may be conducted only on the bonded premises of a DSP by a person qualified to carry on such operations under 27 CFR part 19 and who has obtained the basic permits required by 27 CFR part 1, or, as appropriate, the operating permit required by part 19. However, certain other activities, such as those of apothecaries, customs bonded warehousemen, manufacturers of nonbeverage products, and users of specially denatured alcohol, may be carried on outside of DSPs.

The continuity of a DSP must be unbroken except for separations that may include public waterways, thoroughfares, or carrier rights-of-way. In most instances, DSPs are also prohibited from being located in a dwelling house, in a shed, yard, or enclosure connected with a dwelling house, on board a vessel or boat, on premises where beer or wine is produced, in a retail liquor establishment, or where any other business is conducted.

Bonds.

Normally, the distilled spirits tax is not collected while spirits are held on the “bonded” premises of a distilled spirits plant. The potential tax liability of the spirits held on bonded premises is guaranteed by an operations bond, and taxable removals are covered by a withdrawal bond.

The bond is a legally binding, written agreement involving three parties: the taxpayer, the surety (insurance or bonding company), and the U.S. Government. The purpose of the bond is to protect the financial interest of the Government. If for any reason, the taxpayer fails to pay the tax, then the surety (insurance or bonding company) is obliged to pay, up to the limit of the bond.

Other Requirements.

In addition to registering, obtaining a permit, and providing a bond, plants are required to comply with a number of regulations relating to plant security; the production, storage, and processing of spirits; recordkeeping; inspection and audit; and filing of reports. These requirements are outlined in 27 CFR part 19.

Recordkeeping Accounts.

All operations at a DSP are accounted for within three recordkeeping accounts: Production, Storage, and Processing. Since the facilities (tanks and rooms) of a DSP may be used for multiple purposes, the accountability of spirits must be maintained by appropriate records within the three accounts instead of physical separation.

Payment of Taxes.

The Federal excise tax on distilled spirits attaches to the spirits as soon as they are produced, and the distilled spirits plant is held liable for the tax on all distilled spirits held in the bond premises. The amount of Federal excise tax that a distilled spirits plant must pay is based upon the taxable removal of the spirits from the bonded premises. There are two basic methods of paying the tax on distilled spirits withdrawn from bonded premises-deferred payment and prepayment. Under the deferred payment system, the proprietor may withdraw spirits from bond after tax determination but before payment of tax. The excise tax paid is based on the amount of spirits removed from bond during each return period. Under the prepayment system, the proprietor must pay the distilled spirits tax after tax determination but before withdrawal of the spirits from bonded premises. Most DSP proprietors use the deferred payment system.

Currently, the Federal excise tax rate on distilled spirits is $13.50 per proof gallon. The term “proof gallon” is unique to this particular commodity and means: a liquid gallon that contains 50 percent ethyl alcohol.

Although the tax rate for distilled spirits is $13.50 per proof gallon, many distilled spirits products are actually taxed at a lower rate. Many products contain wine and/or flavors, and the IRC at 26 U.S.C. 5010 provides a credit for the wine and flavors content of the product. These credits effectively

reduce the rate of excise tax paid on distilled spirits products that contain wine and flavors.

Nontaxable Transactions.

Certain types of shipments to and from a distilled spirits plant are permitted without payment of tax. Examples are:

• Shipments of bulk (unbottled) spirits from one registered distilled spirits plant to another. (Bottled spirits are not eligible for untaxed transfer in bond between plants.)

• Shipments of bulk imported spirits from U.S. Customs and Border Protection custody to a distilled spirits plant. (Only bulk imported spirits are eligible for this type of transfer.)

• Direct exports of products from the United States.

• Shipments to users of industrial alcohol (certain permit holders who use alcohol for medical, research, or industrial purposes).

B. Notice No. 870 and the Petition To Amend 27 CFR Part 19

On November 30, 1998, ATF issued a notice of proposed rulemaking, Notice No. 870 (63 FR 65720), that solicited comments on proposed changes to several sections of the regulations in 27 CFR part 19. The proposed changes included: (1) Delegations of authority, (2) removing a special tax provision, (3) liberalizing the requirement for approval of certain changes in plant personnel or procedures, (4) reducing the paperwork when plant premises are alternated with other premises, (5) providing for alternation of distilled spirits plant and brewery premises, (6) allowing denaturation and manufacture of articles to be done in a single, unified process, (7) specifying marks for packages of industrial spirits withdrawn taxpaid, (8) clarifying regulations that refer to a transfer record, and (9) incorporating a provision of an ATF Industry Circular regarding alcohol fuel into the regulations.

In addition to these proposed changes, ATF asked for comments regarding the general recordkeeping system for distilled spirits plants prescribed in part 19.

In response to Notice No. 870, ATF received extensive comments from the Distilled Spirits Council of the United States (DISCUS), a trade association representing distilled spirits industry members with interests in the U.S. market. While DISCUS provided comments on the specific issues raised in Notice No. 870, it also asked that ATF consider a broad range of regulatory changes to part 19. Essentially, in its comments on part 19, DISCUS asked ATF to initiate a complete revision of part 19. In support of its petition, DISCUS provided ATF with sample regulations that consisted of a “markup” version of 27 CFR part 19, along with numerous copies of variances (alternate methods or procedures) that ATF granted to members of the distilled spirits industry over the years. Suggested amendments included a broad range of issues, including, but not limited to, reduced recordkeeping requirements for distilled spirits plants, greater use of commercial records, reduced reporting requirements, reduced requirements for reporting changes affecting the DSP's registration, liberalized use of DSP premises, storage of distilled spirits on bonded premises through “constructive segregation” based on commercial records, and adoption of alternative methods in the regulations for universal applicability.

In response to Notice No. 870, ATF also received comments from Equistar Chemicals, LP. Equistar is a producer of industrial ethyl alcohol, and its comments addressed issues in Notice No. 870 related to industrial alcohol. Equistar also commented on other issues affecting distilled spirits plants such as the amendment of plant registrations, recordkeeping, denaturation, and gauging.

After reviewing the comments received in response to the Notice No. 870, ATF concluded that the amendments proposed in the 1998 NPRM were not extensive enough to address the changes that have taken place in the industry since the last major revision to the distilled spirits plant regulations took place over 20 years ago when ATF implemented the Distilled Spirits Tax Revision Act of 1979, commonly referred to as “All in Bond.”

As the successor agency to ATF, TTB undertook a comprehensive review of the distilled spirits plant regulations in 27 CFR part 19 and the comments received in response to Notice No. 870. This notice of proposed rulemaking is the result of that review, and this notice supersedes Notice No. 870. We believe the proposed amendments will modernize the requirements for operating distilled spirits plants and make the regulations easier to understand, thereby allowing proprietors of such plants to operate in a more efficient manner. A discussion of our new proposal to amend part 19 in a more comprehensive way follows.

C. General Changes Proposed in This Notice

The following summarizes the general changes we propose to make to 27 CFR part 19.

Plain Language

On June 1, 1998, the President issued a memorandum that requires Federal agencies to write regulations in “plain language.” We fully support this initiative, and we have written these proposed regulations in the plain language style. In an effort to make these regulations easier to understand, we made several plain language changes to the part 19 regulations:

• We use the active voice in the regulations, whenever possible;

• We use shorter sentences, paragraphs, and sections; and

• We minimize the use of jargon and unnecessary technical terms.

Structure of Part 19

In its comments on part 19, DISCUS points out that part 19 is “excessively long, overcomplicated and very difficult to read.” Further, it stated that the regulations are “divided into 25 subparts, with many related and overlapping provisions included in two or more subparts.” DISCUS recommends “consolidating and re-grouping a number of regulatory provisions which are closely related, eliminating regulations which merely are redundant of each other or the statute, adding cross-references to related regulations, and clarifying regulatory language.”

We reviewed the various sections and subparts in the current part 19 and determined that much of the basic structure for part 19 needs to be amended. Under the current structure, information is not always located where a reader would logically expect to find it.

For example, under the current regulations, information regarding distilled spirits taxes is found in two separate subparts, Subpart C, Taxes, and Subpart P, Transfers and Withdrawals. Subpart C contains much of the basic information about distilled spirits taxes, including the methods for calculating tax credits under the IRC at 26 U.S.C. 5010. However, information regarding determination of taxes and the filing of tax returns is located in subpart P. Logically, all information associated with distilled spirits taxes should appear within the same subpart. The proposed regulations consolidate all of the information concerning distilled spirits taxes into a new Subpart I, Distilled Spirits Taxes. Similarly, we reviewed all of the major topics covered in part 19 and attempted to group them together in a more logical order. Accordingly, this proposed, amended version of part 19 has been restructured with new subparts and related

information has been consolidated, where appropriate, into a single subpart. In addition, duplicative sections have been eliminated. The intent of this restructuring is to assist the reader and make it easier to locate related topics within part 19.

The proposed subparts are as follows:

• Subpart A—General Provisions

• Subpart B—Administrative and Miscellaneous Provisions

• Subpart C—Restrictions on Production, Location, and Use of Plants

• Subpart D—Registration of a Distilled Spirits Plant and Obtaining a Permit

• Subpart E—Changes to Registrations and Permits

• Subpart F—Bonds and Consents of Surety

• Subpart G—Construction, Equipment, and Security Requirements

• Subpart H—Special (Occupational) Tax

• Subpart I—Distilled Spirits Taxes

• Subpart J—Claims

• Subpart K—Gauging

• Subpart L—Production of Distilled Spirits

• Subpart M—Storage of Distilled Spirits

• Subpart N—Processing of Distilled Spirits

• Subpart O—Denaturing Operations and Manufacture of Articles

• Subpart P—Transfers, Receipts, and Withdrawals

• Subpart Q—Return of Spirits to Bonded Premises and Voluntary Destruction

• Subpart R—Losses and Shortages

• Subpart S—Containers and Marks

• Subpart T—Liquor Bottle, Label, and Closure Requirements

• Subpart U—Reserved

• Subpart V—Records and Reports

• Subpart W—Production of Vinegar by the Vaporizing Process

• Subpart X—Distilled Spirits for Fuel Use

• Subpart Y—Paperwork Reduction Act

Redundancy With the Law

In its comments on part 19, DISCUS recommends that several sections of the regulations be deleted because those sections are “redundant with the law.” DISCUS notes that many of the sections simply repeat provisions of law contained in title 26 of the IRC. DISCUS recommends we delete these redundant sections of part 19 or revise the regulations to simply reference the appropriate section of the IRC.

TTB recognizes that some sections of the part 19 regulations repeat provisions of the IRC. However, we intend that the part 19 regulations provide users with a comprehensive and complete body of the requirements for operating a distilled spirits plant. By making part 19 a complete reference tool, persons researching a particular issue will not need access to both the IRC and the regulations. Therefore, when a provision of law affects operations at a distilled spirits plant, we included that provision in part 19. However, in some instances, we deleted sections of the regulations that simply repeated information found in other regulations within part 19.

Alternate Methods or Procedures.

Periodically, TTB allows industry members to use an alternate method or procedure in lieu of a specific regulatory requirement in part 19. The current regulation at 27 CFR 19.62 describes how DSP proprietors may apply for an alternate method or procedure. Section 19.62 also describes the criteria that TTB uses when evaluating such requests. Generally, TTB may approve the use of an alternate method or procedure when:

• Good cause has been shown for use of the alternate method or procedure,

• The alternate method or procedure is consistent with the intent of the regulation, and

• The alternate method or procedure is not contrary to the law.

Over the years, DSP proprietors have applied for a wide range of alternate methods or procedures in lieu of the requirements stated in part 19. We have evaluated these requests on a case-by-case basis using the criteria established in 27 CFR 19.62, and we have approved many of these requests. Industry members commonly refer to these alternate methods or procedures as “variances.”

As part of its comments on part 19, DISCUS submitted numerous copies of variances that have been granted to members of the distilled spirits industry. The variances submitted by DISCUS were divided into three general categories, recordkeeping, separation of premises, and “other.” In its comments, DISCUS asserts that ATF granted variances from many of the regulatory requirements and that it is not aware of any variance that has caused any problems with Federal excise tax compliance. DISCUS recommends that variances granted to individual plant proprietors be extended to all plants in the revised regulations.

In response to this suggestion, TTB reviewed the individual variances submitted by DISCUS for possible applicability to all distilled spirits plants. We found that many variances did, in fact, have general applicability to all plants. As a result, we have incorporated many of those methods or procedures into the proposed regulations, where appropriate. For example:

• Several variances were issued that allowed for the use of computer-generated records. This proposal has been adopted into the revised regulations at § 19.572 and is discussed later in this preamble under our discussion of Records in subpart V.

• Several variances were issued that allowed for computer-generated reports and computer-generated transaction forms. These proposals were adopted into the revised regulations at § 19.634, and are discussed later in this preamble under our discussion of records in subpart V.

• A variance was issued that allows for the filing of letterhead notices to report certain changes at a plant. This procedure providing for the use of letterhead notices has been incorporated into the new subpart E and is explained more fully under our discussion of subpart E.

• Several variances were issued that allow for the use of “commercial records” to record transactions and/or operations. The use of documents created in the ordinary course of business, rather than documents created expressly to meet the requirements of part 19 is now provided for in the proposed regulations at § 19.572 in subpart V.

• A variance was issued that allows modified “abbreviations” to be used. The proposed regulations will not prescribe any official abbreviations for use on forms and records to identify spirits, and the provisions of current § 19.726, which prescribe official abbreviations have been deleted from the proposed regulations. However, we will continue to list authorized abbreviations for marking containers found in the current regulations at § 19.612.

• A variance was issued that allows filled, capped, and labeled bottles to remain on the bottling line at the end of each work day if the same brand and size will be produced on the next bottling shift. This variance was incorporated into the proposed regulations at § 19.358 and is discussed under subpart N.

• A variance that allows the bottling of liqueurs from a tank truck or tote was incorporated into the proposed regulations at § 19.352 and is discussed under subpart N.

• A variance whereby certain small tanks are not required to be mounted on scales was incorporated into the proposed regulations at § 19.183 and is discussed under subpart G.

• Several variances have been approved that allow for the use of meters in gauging spirits for purposes other than tax determination. We are proposing significant changes in the new regulations that will allow for the use of accurate mass flow meters, without prior approval by TTB, for bulk tax determination gauges and other required gauges at a distilled spirits plant if the meters meet certain criteria for accuracy.

During our review of the variances submitted by DISCUS, we also found several that were not appropriate for incorporation into the new, revised regulations. In some instances, we did not wish to apply the provisions of a particular alternate method or procedure to all DSP proprietors without regard to their compliance history and other factors. As such, proprietors may continue to apply for these types of alternate methods or procedures, and we will evaluate them on a case-by-case basis.

For example, we have issued several variances to DSP proprietors regarding the timing and frequency of required inventories for bulk and cased spirits. In evaluating this type of variance, we frequently consider the compliance history of the particular plant, shortages and gains disclosed by past inventories, along with other factors. Accordingly, this type of authorization does not have general applicability and is not appropriate for inclusion in the new proposed regulations. However, we will continue to approve this type of request, when appropriate, on a case-by-case basis.

In other instances, the subject matter of a particular variance only applied to a very specific situation at a single plant and was, therefore, not applicable to all plants. Accordingly, we did not incorporate this type of variance into the new proposed regulations. For example:

• We approved several variances in regard to case markings that did not have general application to the case markings used by other plants.

• We approved a “business day” for a plant that runs from 2 a.m. through 1:59 a.m. This type of variance does not have general applicability to other plants.

In summary, we have incorporated a number of existing variances into the proposed regulations where appropriate, and when the variance would have general applicability to the industry.

D. Specific Changes Proposed in This Notice

The following is a discussion of the new, revised subparts in 27 CFR part 19 and the specific changes that we propose to make in the part 19 regulations.

Subpart A—General Provisions

Proposed subpart A includes several sections that have general applicability to part 19, including a revised definitions section, a section that defines the territorial extent of the regulations, and a section that identifies other regulations that relate to part 19.

In the proposed definitions section at § 19.1, we propose some minor amendments to the language used within this section to clarify the meaning of some terms. We also propose to add some new terms and delete an outdated term found in the current definitions section. We propose to add the terms “accurate mass flow meter,” “general premises,” “letterhead application,” “letterhead notice,” “National Revenue Center,” “TTB officer,” and “we.” We propose to delete the term “region director.”

We also propose to move two sections currently located in subpart D, under the heading “Activities Not Subject To This Part,” to subpart A. The relocated sections are § 19.4, Recovery and reuse of denatured spirits in manufacturing processes, and § 19.5, Manufacturing products unfit for beverage use, which are currently found at §§ 19.57 and 19.58, respectively.

Subpart B—Administrative and Miscellaneous Provisions

Proposed subpart B contains the administrative and miscellaneous provisions for part 19 that are currently found in subpart D. However, some sections of regulations that are located in the current subpart D have been relocated to other revised subparts, where appropriate. For example, we propose to move sections relating to gauging to the new proposed Subpart K, Gauging. Similarly, we propose to relocate sections relating to the conveyance of spirits or wines on plant premises to the new proposed Subpart C, Restrictions, Location, and Use of Plants.

Proposed subpart B includes a “penalty of perjury” section that is currently located at § 19.100. In its comments on part 19, DISCUS proposes the deletion of the requirement that documents be executed under penalties of perjury from several sections of regulations. DISCUS states that “these penalties are unnecessary and excessive in light of the fact that a proprietor's permit is subject to revocation under the Federal Alcohol Administration Act for failure to comply with the Bureau's requirements.” TTB did not adopt this proposal. The penalty of perjury statement is an important safeguard that places legal responsibility for the truthfulness of significant documents filed with TTB on the documents' signatories. Generally, we do not require the “penalty of perjury” statement on most documents and records. Its use is generally restricted to claims, tax returns, applications, and similar documents. The IRC at 26 U.S.C. 6065 states, “Except as otherwise provided by the Secretary, any return, declaration, statement, or other document required to be made under any provisions of the internal revenue laws or regulations shall contain or be verified by a written declaration that it is made under penalties of perjury.” Consistent with the IRC at 26 U.S.C. 6065 and along with the other tax collection agencies within the Department of the Treasury, TTB requires that such documents be signed under penalties of perjury. The penalty of perjury provision in the proposed regulations is located at § 19.45.

Subpart C—Restrictions on Production, Location, and Use of Plants

Proposed subpart C covers restrictions associated with the operation of a distilled spirits plant, along with the location and use of DSP premises. In its comments on part 19, DISCUS makes several recommendations affecting those sections of the current regulations that govern restrictions, locations, and use of DSP premises. We discuss these recommendations and our responses below.

Restrictions regarding location.

Currently, 27 CFR 19.131 provides that a distilled spirits plant may not be located on premises where beer or wine is produced, or liquors of any description are retailed, or (except as provided in § 19.133) on premises where any other business is conducted. DISCUS contends that physical separation of commodities is meaningless and recommends that this restriction be amended to allow a distilled spirits plant to be located on such premises if the proprietor's records show the separate operations. We did not adopt this proposal because Federal law does not provide for “constructive” separation of premises by records only. The language of this regulation is derived directly from the language of the IRC at 26 U.S.C. 5178(a)(1)(B), which states that a distilled spirits plant shall not be located “on premises where beer or wine is made or produced, or liquors of any description are retailed, or on premises where any other business is carried on (except when authorized under subsection (b)).” This

provision appears in the proposed regulations at § 19.52.

Continuity of premises.

Currently, the regulation at § 19.132 provides that the physical continuity of a distilled spirits plant must be unbroken except for separation by public waterways, thoroughfares, or carrier rights-of-way. However, TTB may approve other separations of the plant premises when all parts of the plant are in the “same general location.” DISCUS recommends that the term “same general location” mean within 200 miles of the distilled spirits plant.

We did not adopt this recommendation in the proposed regulations. Although DISCUS states that a “200 mile rule” would provide increased operational flexibility for proprietors, they do not explain how this would occur under their proposal and why that distance is more appropriate than any other.

Over the years TTB has received a number of requests to establish non-contiguous distilled spirits plant premises. We have evaluated each of these requests on a case-by-case basis. In our evaluation of each request, we consider a number of factors, such as:

• Security and protection of the revenue,

• Distance between the main plant premises and the proposed non-contiguous premises,

• Whether the non-contiguous premises would cross State lines,

• Whether the non-contiguous premises will facilitate inspections and audits, and

• Whether establishment of non-contiguous premises would provide the proprietor with a means for delaying payment of taxes.

We propose to retain the case-by-case analysis based on multiple factors, instead of adopting a 200 mile rule as proposed by DISCUS. As a general rule, we believe that the “same general location” must not be too large an area so that the revenue is placed at risk. Also, because a distance of 200 miles could extend over a multi-state area and would cross over into different field offices within TTB, such a distance would create administrative difficulties for TTB. This provision appears in the proposed regulations at § 19.53.

Other businesses.

Currently, the regulation at § 19.68 provides that TTB may authorize the carrying on of other businesses (not otherwise prohibited) on DSP premises under certain conditions. The other businesses should not pose a jeopardy to the revenue, hinder the effective administration of part 19, or be contrary to law. There is a similar section of regulations at § 19.72. DISCUS recommends the removal of § 19.68 since it is redundant with § 19.72.

We agree that §§ 19.68 and 19.72 are very similar, and we have merged the two sections into a single section within the proposed regulations at § 19.55.

Bonded warehouses not on premises qualified for production of spirits.

The current regulation at § 19.134 allows for the establishment of a bonded warehouse on premises that are not qualified for the production of spirits, if the need for such is clearly established. DISCUS recommends the amendment of this section by adding language stating that the warehouse may be within 200 miles of the main plant. We did not adopt this recommendation for the same reasons discussed above under the heading, “Continuity of Premises.” This provision is found in the proposed regulations at § 19.56.

Taxpaid spirits or wines on bonded premises.

The current regulation at § 19.97 provides that spirits or wines on which the tax has been paid or determined may be conveyed across bonded premises but cannot be stored or remain on bonded premises, and must be kept separate and apart from spirits or wines on which the tax has not been paid or determined. DISCUS recommends the addition of new language to this section whereby the area where taxpaid spirits or wines are stored will not be considered bonded premises if the proprietor's records show that the tax has been paid or determined. They state that their proposal would “shift the focus from the outdated requirement of physical segregation to a modernized, efficient approach based upon ‘constructive segregation.’ ”

We did not adopt this recommendation because the IRC does not allow for the separation of premises solely by records. The IRC at 26 U.S.C. 5612 clearly states that taxpaid or tax determined spirits cannot be stored on bonded premises. Further, the bonded area of a DSP is a clearly defined physical area of the plant with clearly defined boundaries. It is not an area defined only by records of the type of spirits stored on the premises. In our proposed regulations, this section is now found at § 19.58.

Conveyance of untaxed spirits or wines within a distilled spirits plant.

Currently, the regulation at § 19.98 provides that untaxed spirits or wines can be conveyed between different bonded areas of a plant and across areas of a plant that are not bonded. DISCUS recommends the amendment of this section by adding language whereby if the proprietor's records show the tax has not been paid or determined, then the untaxed spirits will be considered to be on bonded premises (constructive segregation).

We did not adopt this recommendation because the regulation already allows for the transfer of untaxed spirits across areas of a plant that are not bonded. The amendment proposed by DISCUS would only incorporate the idea of “constructive segregation” into this section of the regulations. However, since the regulation already allows for transfers across areas of the plant that are not bonded, the amendment proposed by DISCUS is not necessary. This section of the regulations is now found at § 19.59 in the proposed regulations.

Spirits in customs custody.

Currently, the regulation at § 19.99 provides that spirits in customs custody may be conveyed across DSP premises under certain conditions. Those conditions include:

• The spirits may not be stored or allowed to remain on DSP premises.

• The spirits must be kept separate from other spirits on DSP premises.

• The means and route of conveyance must be approved.

• The proprietor must file a consent of surety.

DISCUS recommends the addition of language to this section whereby if the proprietor's records show that spirits are in customs custody, then the area where the spirits are stored will not be considered part of the DSP premises.

We did not adopt this DISCUS recommendation for several reasons. First, this section of regulations deals with conveyance of spirits in customs custody across DSP premises. It does not deal with the storage of such spirits on DSP premises.

In addition, TTB bonded premises and customs bonded premises are two distinct types of bonded premises. TTB bonded premises are established under the laws and regulations administered by the Alcohol and Tobacco Tax and Trade Bureau, while customs bonded premises are established under a separate set of laws and regulations administered by U.S. Customs and Border Protection. As such, the premises cannot be co-located, and there is no basis in the law for constructive segregation of these bonded premises by records only. The bonded area of a DSP is a clearly defined physical area of the plant with clearly defined boundaries. It is not an area defined only by records. In our proposed regulations, this section is now found at § 19.60.

Production of distilled spirits for personal use.

Frequently, TTB receives

questions from the general public asking whether the law allows for the production of distilled spirits in the home for personal use. Under Federal law (26 U.S.C. 5171), distilled spirits may only be produced at a registered distilled spirits plant. Therefore, we propose to add a new section to subpart C, which will explain that a person may not distill spirits at home for personal use. This new section is found in the proposed regulation at § 19.51.

Subpart D—Registration of a Distilled Spirits Plant and Obtaining a Permit

The current regulations governing the qualification of a distilled spirits plant are found in subpart G. These regulations cover a number of issues, including the requirements for plant registration, operating permits, alternation of premises, and amending registrations and operating permits.

Proposed subpart D covers the initial registration of a distilled spirits plant and procedures for obtaining an operating permit. We propose to assign regulations concerning changes after the original qualification of the plant to the new subpart E.

In the proposed subpart D, we also propose to rearrange the information related to the qualification of a distilled spirits plant in a more logical order. For example, we propose to group all registration information together under a heading titled “Requirements for Registering a Plant,” while information relating to operating permits is grouped together under a separate heading titled “Requirements for an Operating Permit Under the I.R.C.” In the current regulations, much of the information regarding registration and operating permits is intermingled. We believe that separating these subjects will make it easier for readers to understand which requirements apply to plant registration and which requirements apply to operating permits.

Other businesses.

In its comments on part 19, DISCUS proposes the inclusion of a cross-reference at § 19.152 of the current regulations, indicating that “other businesses” may be allowed under a separate section of the regulations. We adopted this proposal in the proposed regulations at § 19.73(b).

Major equipment.

DISCUS also recommends in its comments that the requirement to list major equipment on the application for registration, currently found at § 19.166, be amended. First, it states that the regulation should be clarified to provide that “major equipment” must be identified in the registration only if it is “set up” and “used for distillation, redistillation, or recovery of spirits.”

We adopted this suggestion in part. We do not see any need to list major equipment in the application that is not “set up” and used for the production, storage, or processing of spirits. Therefore, we have inserted language in the proposed regulations at § 19.75, which requires that equipment be listed if it is “set up” and used for the production, storage, or processing of spirits.

DISCUS also recommends that a paragraph be added to § 19.166 stating that “bulk containers of less than 101 wine gallon capacity and not meeting the criteria of a tank under § 19.273 (such as perks and small totes) are not items of major equipment and are not required to be listed in the application for registration.” This recommendation is reasonable because such containers are not items of major equipment, and we include it in the proposed regulation at § 19.75.

In addition, DISCUS recommends that the requirement to provide a “statement of certification of accurate calibration” for tanks found in the current regulations at §§ 19.166 and 19.273(a)(6) be eliminated. This recommendation is reasonable and has been adopted in the proposed regulations because it only involves eliminating a requirement to include a “statement of certification of accurate calibration” in the notice of registration. The proposed regulation at § 19.182 will continue to require that tanks be accurately calibrated.

Registration file.

The IRC at 26 U.S.C. 5171(c) requires that persons must apply for and receive a notice of registration before commencing business as a distilled spirits plant. In regard to the maintenance of the registration file, currently at § 19.155, DISCUS recommends the addition of language to allow the registration file to be kept in computerized records. We did not adopt this proposal because registration documents are normally submitted to TTB in a hard-copy format and returned to the proprietor by TTB in hard-copy format. DISCUS also recommended the elimination of the requirement that the registration file be kept “at the plant.” We did not adopt this proposal because the file must be readily available for inspection by appropriate TTB officers.

LLCs and LLPs.

The current regulations governing qualification of a distilled spirits plant in subpart G only acknowledge three types of business organizations, sole proprietorships, partnerships, and corporations. In view of the increasing use of limited liability companies (LLCs) and limited liability partnerships (LLPs), we have included instructions for these types of business organizations in the proposed regulations at § 19.93.

Subpart E—Changes to Registrations and Permits

Proposed subpart E includes the regulations governing changes to the distilled spirits plant registration, changes to operating permits, and alternation of plant premises. Similar to the changes that we propose in new subpart D, much of the information in the new subpart E is arranged in a more logical order. For example, matters affecting changes to registration are grouped together under the heading titled “Rules for Amending a Registration,” and matters affecting changes to operating permits are grouped together under the heading titled “Rules for Amending an Operating Permit.”

In the current regulations, much of the information regarding changes to the registration and changes to the operating permit is intermingled. As with new subpart D, we believe that separating these subjects will make it easier for readers to understand the specific requirements that apply to amending either the plant registration or the operating permit.

Letterhead notices and letterhead applications.

In its comments on part 19, DISCUS makes several recommendations regarding how proprietors should apply for changes to a plant's registration or operating permit. Generally, DISCUS recommends that, in most instances, the regulations allow proprietors to request changes by filing a letterhead notice. In its petition, DISCUS states that:

Subpart G provisions regarding changes in the information shown in the original registration should be revised to eliminate unnecessary prior submissions and prior approval requirements. Similar to our alternation proposals, 27 CFR 19.180, 19.82 and 19.183 (application for amended registration, change in name of proprietor and change of trade name, respectively) should be amended to provide that a proprietor file a letterhead notice reporting any change within 30 days after the change. Further, 27 CFR 19.184 and 19.185 (changes to largest stockholders and changes in officers and directors, respectively) should be revised to provide identical treatment (i.e., reported in the next amended registration) because there is no reason to treat these changes differently.

TTB agrees that we should simplify the amendment of registrations and permits wherever possible. Accordingly, we are proposing to expand the use of both letterhead notices and letterhead applications for reporting changes to the registration and permit. We will allow the use of letterhead notices to report

minor changes affecting the registration or permit. We will allow for the use of letterhead applications for more substantive changes but these must be approved by TTB prior to the change. The use of amended applications, letterhead applications, and letterhead notices are discussed in the proposed regulations at §§ 19.112 and 19.126.

Changes in the statement of plant security.

In the current regulation at § 19.153(b), an application for amended plant registration (form TTB F 5110.41) must be filed each time there is a change in plant personnel or procedures contained in the statement of security. In Notice No. 870, ATF proposed to liberalize this requirement. Therefore, we propose that § 19.153(b) be amended to require that a letterhead application be filed for changes in the security procedures listed in § 19.153(a)(1)-(4), and that a letterhead notice be filed for changes in the personnel listed in § 19.153(a)(5). Thus, the letterhead application or letterhead notice would replace the amended registration that was required each time that the information in § 19.153(a)(1)-(5) changed. The plant registration would be updated on an annual basis to incorporate changes made during the preceding year.

In its comments on Notice No. 870, Equistar Chemicals states that it endorses the proposed changes and would encourage any additional efforts to facilitate compliance through reducing nonessential paperwork. However, Equistar asks for some clarification of this proposal. It pointed out that the proposal allows companies to submit a “letterhead application” and “letterhead notice” for changes. Equistar states that it presumes that we intended companies to simply send an informal letter notifying the agency of procedure or personnel changes. The company asks for a clarification of these terms.

In response to this request for clarification, TTB advises that the terms “letterhead application” and “letterhead notice” refer to a letter from a company representative, with signature authority, on company letterhead (see definitions). The “letterhead application” is subject to TTB approval prior to the change; however, the “letterhead notice” is not subject to prior approval. These terms are now fully explained in the proposed regulations at §§ 19.112 and 19.126.

Equistar also points out that “the proposal requires a letterhead application for `changes in any of the information' listed in the sections of the Statement of Physical Security that address procedural changes.” The company states that a requirement to advise us of “any changes” is overly broad and could encompass non-substantive as well as substantive changes. Equistar recommends that we maintain the rule's original language that covers changes in “procedure” rather than “any changes.”

The current regulation governing changes in plant security, which appears at § 19.153, has been rewritten to clarify the type of changes that may be reported to TTB by letterhead application or letterhead notice. In our proposed regulations, this section is now located at § 19.123.

In its response to Notice No. 870, DISCUS states that it supports the proposal whereby a distilled spirits plant would file a letterhead notice instead of an amended registration for changes in the information provided under 27 CFR 19.153(a)(5). However, DISCUS recommends the deletion of the word “security” from the proposed term “security personnel listed in paragraph (a)(5).” DISCUS states that the term “security personnel” is not used in paragraph (a)(5) and is not synonymous with the persons covered by paragraph (a)(5).

We agree that the term “security personnel” is not an accurate term. Therefore, we propose deleting the word “security” from the proposed regulation at § 19.76.

DISCUS also recommends that the regulations conform their treatment of changes in § 19.153(a)(1)-(4) to the proposed changes in paragraph (a)(5). DISCUS asks that the regulations allow these changes to be reported by a letterhead notice within 30 days after the changes. DISCUS states that the information required by paragraphs (a)(1)-(4) and (a)(5) concern the same issues, and “no reason exists to subject subsection (a)(5) to different treatment than subsections (a)(1)-(a)(4).”

In response to this recommendation, TTB advises that the information at § 19.153 is part of the data for an “application” for registration (27 CFR 19.152(k)). As such, the items of information provided under § 19.153 are subject to pre-approval for initial qualification of a distilled spirits plant and continued qualification of each plant. Further, the items listed under § 19.153(a)(1) through (4) represent crucial physical security features of a plant and must, therefore, be subject to prior approval by TTB. In contrast, the information required by § 19.153(a)(5) is a listing of persons having responsibility for custody and access to keys for approved locks at the distilled spirits plant. Since plants are free to designate the persons responsible for such custody, this particular item of information is not something that needs to be pre-approved. Therefore, this item will be treated as a “notification” rather than an “application.” These changes now appear in the new, proposed regulations §§ 19.76 and 19.123.

Change in name of proprietor.

The current regulation at § 19.182 requires that the proprietor file an application to amend the registration and the operating permit whenever there is a change in the name of the proprietor. DISCUS recommends the amendment of that regulation to allow the filing of a letterhead notice within 30 days of the name change, and that the new information be included in the next application to amend the registration and the next application to amend the operating and/or basic permit filed by the proprietor. DISCUS also recommends deleting from the current regulations the phrase, “Operations may not be conducted under the new name prior to approval of the amended registration and issuance of the amended permit.”

The provisions of the current regulation at § 19.182 will be covered in the proposed regulations at §§ 19.113 and 19.128, and the proposed regulations will no longer require the filing of amended applications. Instead, the proposed regulations will allow for the filing of a letterhead application. However, since a change in the proprietor's name is a substantive change, the proposed regulation will still prohibit operations conducted under the new name before TTB approves the letterhead application.

Change of trade name.

The current regulation at § 19.183 requires that the proprietor file an application to amend the operating permit when there is a change in the trade name of the proprietor. Operations may not be conducted under the new trade name until the amended permit is approved. DISCUS recommends the amendment of the regulation to allow for the filing of a letterhead notice within 30 days of the change and no longer require an application to amend the operating permit.

In the proposed regulation at § 19.129, TTB will no longer require the filing of an amended application. Instead, the proposed regulation will allow for the filing of a letterhead application. However, since any change in the trade names used by the proprietor is a substantive change, the proposed regulations will still prohibit operations conducted under the new trade name prior to TTB's approval of the letterhead application.

Change of stockholders.

The current regulation at § 19.184 allows for the filing of an annual report of changes in

major stockholders except where the sale or transfer of capital stock results in a change in control or management. In its comments on part 19, DISCUS recommends that the language of the regulation be amended to read, “Changes in the list of stockholders furnished under the provision of Sec. 19.167(c)(1) shall be reported in the next application for amended registration on Form 5110.41 filed by the proprietor.”

In the proposed regulations at §§ 19.114 and 19.130 we will allow a proprietor to submit an annual letterhead notice regarding changes in major stockholders. Under the proposed regulations, the changes must be incorporated in the next application filed, unless a change of control occurs. If a change in control takes place, § 19.114 requires that the proprietor must file TTB F 5110.41, Registration of Distilled Spirits Plant, within 30 days of the change, and § 19.130 requires that the proprietor must file TTB F 5110.25, Application for Operating Permit Under 5171(d), within 30 days of the change.

Changes in officers and directors

. The current regulation at § 19.185 requires that a proprietor file an application for amended registration on Form 5110.41 when there is a change in the list of officers or directors. DISCUS recommends that the regulation be amended to state that the proprietor will report the change on the next application on TTB F 5110.41 for amended registration filed by the proprietor.

In the proposed regulations at §§ 19.115 and 19.131, we propose to allow a proprietor to submit a letterhead notice at the time of the changes and incorporate the changes in the next application for amended registration filed on form TTB F 5110.41 and the next form TTB F 5110.25 filed.

Permit transfers

. In its comment on Notice No. 870, Equistar Chemicals asked that ATF (BATF in its comment) examine ways to minimize the paperwork and notice requirements associated with ATF permits when a change of ownership occurs. Equistar states:

BATF should examine ways to minimize the paperwork and notice requirements necessary to transfer BATF permit ownership in order to facilitate a smoother and less burdensome transition to the acquiring entity. Because the Securities and Exchange Commission (SEC) obtains copious records on publicly traded companies, perhaps BATF could coordinate efforts with SEC in cases where the acquiring entity is a publicly traded company and obtain company information through existing government databases. Alternatively, BATF could also prevent duplication by allowing companies to submit their annual reports in lieu of filling out numerous forms and applications. Such solutions would simultaneously facilitate BATF's access to companies' business information and alleviate the burden on companies who must currently submit new documentation of standard business information to each governmental branch who requests it.

In general, TTB agrees that we should simplify the amendment of registrations and permits wherever possible. For this reason, we propose to expand the use of both letterhead notices and letterhead applications for reporting changes to the registration and the operating permit.

However, in regard to utilizing SEC filings in cases where there is a change in ownership or control, there are several problems. First, much of the information that a proprietor submits in support of a plant registration or an operating permit is specific to distilled spirits operations. As such, this type of information, except for some similar items of information, is not required by agencies such as the SEC and so copies of such submissions would be inadequate for TTB purposes.

Adoption of formulas

. The current regulation at § 19.187 provides for the adoption of formulas by a successor. DISCUS recommends in its comments on part 19 that the regulation refer to 27 CFR 5.28 and that the language in § 19.187 which is redundant with § 5.28 be removed.

In the proposed regulations we eliminated § 19.187 as a separate section of regulations and we have incorporated references to the adoption of formulas and §§ 5.28 and 20.63 into the proposed regulations at §§ 19.116 and 19.132.

Changes in premises

. The current regulation at § 19.190 refers to several sections of regulations relating to alternation of premises. DISCUS recommends the amendment of these references to ensure the accuracy of cross-references to other appropriate sections in part 19. The accuracy of cross-references is important so we propose to amend the references at proposed § 19.119 to reflect the new section numbers for alternation of premises.

Change in operations

. The current regulation at § 19.191 requires that a DSP proprietor file an application to amend the registration and operating permit if the proprietor wishes to engage in a new business involving distilled spirits. This section also applies to conducting other businesses on DSP premises. DISCUS recommends the addition of language to the end of this section stating, “Applications may be approved as provided in Sec. 19.72.”

In the proposed regulation at § 19.120, we now include a reference to § 19.55, which is the section of regulations relating to other businesses.

Changes in construction or use of buildings and equipment

. The current regulation at § 19.193 requires a DSP proprietor to submit a letterhead notice prior to a material change in construction or use of buildings or equipment and then incorporate the change into the next amendment of the notice of registration. DISCUS recommends the elimination of most of this section because it is redundant with the general instructions relating to applications for amended registration found at § 19.180.

We did not eliminate this section because we do not believe that it is redundant. Similar to the other sections in this subpart, it provides specific instructions for amending the registration. The provisions of current § 19.193 appear in the proposed regulations at § 19.122.

Procedures for alternation of proprietors

. The current regulation at § 19.201 covers the procedures that proprietors must follow when DSP premises, or part of the premises, are alternated between different proprietors. Alternation of premises refers to the formal, legal transfer of operations from one proprietor to another proprietor. DISCUS proposes to amend this regulation by eliminating the requirement to provide a diagram of the area of the plant to be alternated. Further, DISCUS proposes that language be inserted into the regulation that would allow the proprietor's production, storage, and processing records to be used to document the alternation of proprietors.

We did not adopt this DISCUS proposal. Records of production, storage, and processing are used to record the details of production, storage, and processing activities at a plant. These records are not designed to officially document the alternation of plant premises from one proprietor to another proprietor. Further, such records would not identify the actual bonded areas of the plant that are alternated; only a diagram can provide this information. However, we did substantially rewrite this section of the regulations to clarify the procedure for alternating proprietors. In addition, the requirement to file Form 5110.34 has been replaced with the requirement to file a letterhead notice with TTB when such alternations occur. The proposed amended section appears at § 19.141.

Alternate operations

. The current regulation at § 19.202 provides for the alternate use of plant premises and equipment for customs purposes whereby the premises of the plant are

converted from TTB bonded premises to Customs bonded premises. The current regulation also requires that the proprietor file a notice on Form 5110.34 whenever the plant premises are curtailed or extended for customs purposes. In Notice No. 870 ATF proposed to substitute a letterhead notice for the filing of Form 5110.34 each time that distilled spirits plant premises are alternated for customs purposes.

The current regulations at §§ 19.203 through 19.206 provide for the alternation of distilled spirits plant premises with bonded wine cellar premises, taxpaid wine bottling house premises, general premises, and premises for the manufacture of eligible flavors. The current regulations also require that the proprietor file a notice on Form 5110.34 whenever the premises are curtailed or extended for these purposes. In Notice No. 870, ATF proposed to simplify this requirement by amending §§ 19.203 through 19.206 to provide that after a proprietor has received approval for the alternation plan that defines the boundary of the premises to be alternated, the alternation may take place pursuant to records kept in a logbook. In Notice No. 870, ATF listed the requirements for the proposed logbook record in a new section of regulations at § 19.781. In Notice No. 870, ATF also proposed to allow for the alternation of distilled spirits plant and brewery premises under the same conditions. Alternation of distilled spirits plant premises and brewery premises is not provided for in the current regulations.

In its comments on Notice No. 870, DISCUS expresses support for the proposal to eliminate the requirement to file Form 5110.34 each time that the premises are alternated. However, DISCUS does not support the proposal to require a proprietor to prepare a logbook containing the information required by proposed § 19.781 each time that the proprietor alternates premises. DISCUS states that “this proposal runs contrary to the objective of effective regulatory reform; [sic] to replace formal recordkeeping requirements with reliance upon commercial business records maintained in the ordinary course of business.” Further, DISCUS contends that the proposal does not eliminate the requirements for prior submission and prior approval or the requirement to physically segregate products by type (wine, beer, spirits, or flavors). It asserts that the requirement in the regulations to segregate products is burdensome and that companies can track, distinguish, and identify products and operations by computer. DISCUS also asserts that “ `constructive segregation' of product by computerized records protects BATF's regulatory objectives, without the inefficient use of space and time and effort inherent in requiring physical separation.”

DISCUS recommends that the regulations allow alternation under §§ 19.202 through 19.206 if the distilled spirits plant proprietor files a letterhead notice reporting the alternation within 30 days after the alternation takes place. It also proposes that the proprietor's ordinary business records be used to substantiate the alternation and that we eliminate the requirement to physically separate products as currently required.

For the reasons discussed earlier in this notice, TTB is not adopting these recommendations regarding dependence upon company records for segregation of goods and reliance upon “constructive segregation.” As stated earlier, the IRC does not provide for the separation of premises solely by records. Further, the bonded area of a DSP is a clearly defined physical area of the plant with clearly defined boundaries. It is not an area defined only by commercial records.

Therefore, in this current notice we propose a new section of regulations at § 19.142 to provide for the alternation of premises for customs purposes whereby proprietors will file a letterhead notice with TTB prior to any alternation of premises. We have also eliminated the requirement to file Form 5110.34. We do not agree with the DISCUS proposal that would allow notices to be filed up to 30 days after the fact. Thus, the proposed regulation at § 19.142 will require that the letterhead notice must be filed prior to alternation of premises for customs purposes.

In addition, we propose a new, single section of regulations at § 19.143 that will provide for extension and curtailment of distilled spirits plant bonded premises with either general premises, an adjacent bonded wine cellar, an adjacent taxpaid wine bottling house, an adjacent brewery, or facilities for the manufacture of eligible flavors. Under our proposed regulations, proprietors will document such alternations in the record prescribed in proposed § 19.627 at the time the alternation occurs, and we will not require the filing of a letterhead notice with TTB or the filing of form TTB F 5110.34. The record prescribed in proposed § 19.627 will allow for the use of commercial records, when the commercial records provide the same information required by § 19.627 and are retrievable and available for inspection by TTB officers. Because of the variability of commercial records, we believe that there is a need to provide minimum standards for the commercial records that document alternation of premises. Further, the proposed regulation at § 19.143 will still require the segregation of products. We disagree with the DISCUS recommendation that would allow for the “constructive segregation” of products based on computerized records. This is not an actual segregation of product as required by law at 26 U.S.C. 5178(a)(1)(B) and 5612 and could result in the commingling of taxpaid and non-taxpaid product.

Subpart F—Bonds and Consents of Surety

Proposed subpart F covers the bonding of distilled spirits plants. For the most part, this subpart contains the same information found in current regulations at subpart H, except that the proposed regulations are written in plain language.

However, the proposed regulation at § 19.163 will allow persons who operate more than one distilled spirits plant serviced by TTB's National Revenue Center to give TTB a single area operations bond that covers the operations of two or more distilled spirits plants and adjacent bonded wine cellars located within the same geographic area. For practical purposes this means that, since TTB's National Revenue Center services the entire United States, a proprietor's operations bond may cover all of the proprietor's plants in the United States.

DISCUS did not recommend any substantive changes to these regulations in its comments on part 19. However, it did recommend that the requirement to execute a bond under penalties of perjury be deleted. This recommendation is not being considered in this proposed rule for the reasons discussed earlier in this notice.

Subpart G—Construction, Equipment, and Security Requirements

Under the current regulations in part 19, construction, equipment, and security issues are covered at subpart I. In the regulations proposed by this notice, those issues will be covered in the new proposed subpart G. The following is a discussion of the changes we that propose in the new subpart G.

Construction of buildings

. The current regulation at § 19.271, Construction of buildings, will not be included in the proposed regulations. We found that it simply repeats requirements already found in §§ 19.281(a) and 19.281(b).

Equipment

. The current regulation at § 19.272, Equipment, will also be deleted. We found that it simply repeats

requirements found in several other sections of the current regulations including: §§ 19.152(h), 19.152(k), 19.153, 19.166, and 19.281(a), (c), and (d).

Tanks

. DISCUS recommends that the requirement to permanently mount scale tanks on scales should not apply to tanks that do not exceed a 55-gallon capacity. This proposal is reasonable because such small tanks are intended to be portable and there is no need to mount them permanently on scales. Therefore, we adopted this recommendation in the proposed regulation at § 19.183(b).

Continuous distilling system

. We propose to eliminate the current regulation at § 19.275, Continuous distilling system, from the regulations in the new proposed subpart G. The requirement for a continuous distilling system is already covered in the proposed regulations at Subpart L, Production of Distilled Spirits, and we found § 19.275 of the current regulations to be redundant.

Meters

. During the course of certain operations at distilled spirits plants, proprietors are required to measure the volume of distilled spirits. When measuring spirits for purposes other than tax determination, the regulations require that the spirits be measured in a tank or a conveyance using calibration charts. The current regulation at § 19.277 also allows for the use of meters when measuring spirits for purposes other than tax determination. However, in order to use a meter, the proprietor must first submit an application to TTB, along with technical data regarding the meter they intend to use. TTB must approve the meter prior to its use at a plant.

In its petition and markup of part 19, DISCUS proposes the elimination of the prior approval requirement for meters. DISCUS states that this requirement imposes unnecessary and time-consuming burdens on TTB resources and the industry and serves only to delay operations at a DSP. DISCUS states that the proprietor should be responsible for using and maintaining accurate equipment.

After careful consideration of this proposal, TTB has decided to propose significant changes in the new proposed regulations whereby a proprietor may use mass flow meters for all required bulk gauges at a distilled spirits plant, including bulk tax determination gauges, if the meters meet certain criteria for accuracy. This will reduce the burden on industry members and TTB while ensuring the accuracy of bulk measurements.

Accordingly, the proposed regulation at § 19.188(c) provides that a proprietor may use a mass flow meter for tax determination of bulk spirits if the meter is certified by the manufacturer or other qualified person as accurate within a tolerance of +/−0.1%. For all other required gauges of bulk spirits at a distilled spirits plant, a proprietor may use a mass flow meter if it is certified by the manufacturer or other qualified person as accurate within a tolerance of +/−0.5%. For both tax determination gauges and all other required gauges, the proprietor must make corrections for the temperature of the spirits being measured in conjunction with the volumetric measurement of spirits by mass flow meter. The proprietor must also test mass flow meters at least every 6 months to ensure that they are accurate within the required tolerances.

Miscellaneous changes

. In addition to the changes proposed above, TTB also proposes to make several editorial changes in subpart G that will make the regulations easier to understand. For example, the current regulation at § 19.273, Tanks, has been divided into several shorter sections covering: (a) The general requirements for tanks, (b) scale tanks, (c) graduation of scale tanks, and (d) testing for accuracy. The proposed, shorter sections are found at §§ 19.182, 19.183, 19.184, and 19.185.

Subpart H—Special (Occupational) Tax

On October 22, 2004, the President signed into law the American Jobs Creation Act of 2004 (the Act), Public Law 108-357, 118 Stat. 1418. Section 246 of the Act amended the IRC by providing that, during the 3-year period from July 1, 2005 through June 30, 2008, the rate of special (occupational) tax imposed under IRC sections 5081, 5091, 5111, 5121, and 5131 is zero. The effect of this provision is that proprietors of distilled spirits plants, including alcohol fuel plants and certain other proprietors, are not subject to special (occupational) tax during the suspension period. However, although the tax rate for the occupations affected by the suspension is zero during the suspension period, the IRC still requires that persons engaging in those occupations must register annually and comply with all applicable recordkeeping requirements. On October 31, 2005, TTB issued Treasury decision T.D.TTB-36 (70 FR 62238) which implemented this provision of the Act by amending the special (occupational) tax regulations in part 19 and other affected parts.

On August 10, 2005, the President signed into law the Safe, Accountable, Efficient Transportation Equity Act: A Legacy for Users, Public Law 109-59, 119 Stat. 1144. Section 11125 of this act repeals the special (occupational) tax applicable to proprietors of distilled spirits plants. This provision will become effective on July 1, 2008.

The special (occupational) tax regulations proposed in this notice are located in proposed subpart H and are based upon the American Jobs Creation Act of 2004. Thus, they provide for a suspension of the special (occupational) tax through June 30, 2008. However, prior to the effective date of section 11125 of the Safe, Accountable, Efficient Transportation Equity Act, TTB intends to develop and issue regulations for all parts in title 27 of the Code of Federal Regulations that are affected by the special tax repeal provisions of that act. Therefore, the regulatory text in the final rule associated with this notice of proposed rulemaking will reflect the statutory provisions that are in effect when that final rule is published.

Subpart I—Distilled Spirits Taxes

Under the current regulations, information regarding payment of the distilled spirits taxes is found in two separate subparts, Subpart C, Taxes, and Subpart P, Transfers and Withdrawals. Subpart C contains much of the basic information about distilled spirits taxes, plus the methods for calculating tax credits under the IRC at 26 U.S.C. 5010. Information regarding determination of taxes and the filing of tax returns is located in subpart P.

Logically, all information associated with distilled spirits taxes should appear in the same subpart. Therefore, the proposed regulations consolidate all of the information relating to distilled spirits taxes currently found in subparts C and P plus several other miscellaneous tax provisions currently located in other subparts into a new proposed Subpart I, Distilled Spirits Taxes.

General sections

. In addition to consolidating the tax information currently found in subpart C and P, we have created several new general sections within the proposed subpart I. These new sections discuss issues such as deferred payment and prepayment of taxes, and the tax credits provided under 26 U.S.C. 5010. These general sections are intended to give the reader a brief introduction to some of the more complex subject matter within proposed subpart I.

Gallonage taxes.

In its comments on part 19, DISCUS recommends the elimination of several sections of the current Subpart C regulations that appear under the heading “gallonage taxes.” This includes §§ 19.21, 19.22,

19.23, 19.24, 19.25, and 19.26. DISCUS states that these sections are redundant with the IRC.

TTB agrees that many of these sections of regulations repeat provisions of the IRC. However, as stated earlier in this notice, we intend that the regulations in part 19 provide users with a comprehensive and complete guide to the requirements for operating a distilled spirits plant, and where appropriate, we will repeat certain statutory requirements in the regulations. We do not wish to unnecessarily require readers of these regulations to reference both the IRC and the regulations when researching an issue. Therefore, we propose to retain most of the information provided in current §§ 19.21, 19.22, 19.23, 19.24, 19.25, and 19.26 in proposed Subpart I.

Inventory reserve account.

In its markup of part 19, DISCUS also proposes the deletion of § 19.38, which provides for an inventory reserve account. The inventory reserve account is one of the optional methods that a proprietor may use for applying effective tax rates under the IRC at 26 U.S.C. 5010. DISCUS offers no explanation for deleting this section. In the proposed regulations, we retained this section in order to provide industry members with another option in determining the method for applying effective tax rates.

Subpart J—Claims

Under the current regulations in part 19, the subject of “Claims” is covered as a subcategory of subpart C, Taxes. In these proposed regulations, we have relocated the regulations related to claims into a new, separate subpart J. Most of the changes to the regulations in proposed subpart J are relatively minor and are intended to improve the language and thereby make the regulations easier to comprehend.

Under the current regulations governing claims, only distilled spirits that were withdrawn from a domestic distilled spirits plant may be returned to a distilled spirits plant and a claim filed. We propose to amend the language of the regulations in proposed Subpart J, Claims, and in Subpart Q, Return of Spirits to Bonded Premises and Voluntary Destruction, to reflect the fact that imported bottled spirits that were taxpaid or tax determined when imported into the United States may be returned to a distilled spirits plant and a claim filed. This change reflects an amendment to the law at 26 U.S.C. 5008(c), which became effective on April 1, 1998.

Subpart K—Gauging

We propose to establish a new subpart K that will amend and consolidate gauging instructions that are currently located in several different subparts within part 19 at §§ 19.84, 19.91, 19.92, 19.93, 19.319, and 19.503.

We believe that placing gauging issues within a single subpart will assist the reader in locating gauging information that was formerly located within administrative and miscellaneous subparts. We have also restructured several of the sections relating to gauging to make them easier to understand. We also propose to amend several of the regulations relating to gauging.

Meters.

Under the current regulations at § 19.277(c), TTB may authorize proprietors to use a meter for measuring quantities of spirits for purposes other than tax determination. In order to receive authorization to use a meter for this purpose, § 19.277 requires that the proprietor make an application to the appropriate TTB officer that includes technical data about the meter such as make, model, and the accuracy tolerance. TTB must then evaluate the data to determine whether the meter is suitable for the intended use before approving its use. The current regulations do not provide for the use of meters for bulk tax determination gauges.

Under the proposed regulations at § 19.284, TTB would allow for the use of mass flow meters for both bulk tax determination gauges and all other bulk gauges that must be performed at a distilled spirits plant. Further, the proprietor's use of mass flow meters would not be subject to prior approval by TTB. Instead, the proposed regulations establish standards of accuracy that a mass flow meter must meet for use in bulk tax determination gauges and a separate standard of accuracy for all other bulk gauges. As proposed, a mass flow meter used for tax determination gauges must be certified by the manufacturer or other qualified person as accurate within a tolerance of ±0.1%. A mass flow meter used for all other required gauges must be certified by the manufacturer or other qualified person as accurate within a tolerance of ±0.5%.

In its comments on part 19, DISCUS recommends amending the current regulation at § 19.319(a) by deleting the requirement to use an “approved meter” for volume determinations in the production gauge. We propose to change this requirement by substituting the term “accurate mass flow meter” for the term “approved meter.” Thus, the volume determination on the production gauge can be made using an “accurate mass flow meter.” This change appears in the proposed regulations at § 19.289.

For several years, TTB has seen an increased interest in the use of meters by proprietors of distilled spirits plants. Further, manufacturers of meters have improved the accuracy of their mass flow meters. The proposed regulations will give proprietors the opportunity to take advantage of the improved performance of mass flow meters and modernize operations at their plants without the need to seek prior approval from TTB.

Spirits in receiving tanks.

DISCUS recommends the deletion of a sentence from the current regulation at § 19.319(a) that states, “Spirits in each receiving tank shall be gauged before reduction in proof and both before and after each removal of spirits therefrom.” We did not adopt this recommendation because we need accurate measurements of spirits removed from production, including a measurement of the spirits before and after removal from the receiving tank. This provision is found in the proposed regulations at § 19.289(a).

Gauge record for packages filled.

DISCUS also recommends the deletion of the requirement for a gauge record for each lot of packages filled, found in the current regulation at § 19.319(d). We did not adopt this recommendation. We continue to need this type of information and we will continue to require a gauge record for each lot of packages filled. This provision is now found in the proposed regulations at § 19.289(d).

Other industry proposals.

DISCUS also recommends that gauges no longer be required when spirits are filled into packages from storage tanks and when spirits are transferred between operational accounts. We did not adopt these changes in the proposed regulations. We believe that these gauges are still an important means of accounting for spirits within the plant.

The current regulation at § 19.91(b) covers the gauging of alcoholic flavoring materials when dumped. The regulation states that when proof of the flavoring materials is determined from a label or the manufacturer's statement, the proprietor must periodically test a sufficient number of samples and record the results in the gauge record. DISCUS recommends the elimination of the requirement to record those results in a gauge record. TTB has adopted this recommendation in the proposed regulations at § 19.287. This is a relatively minor gauging requirement,

and we see no reason to require a record for such gauges.

In its comment on Notice No. 870, Equistar Chemicals asks that the requirement in the current regulations at § 19.503 and § 30.43 be clarified. The company states that the existing regulations appear to require the establishment of a separate tare for each package individually gauged. The term “tare” refers to the weight of an empty package. They propose that TTB allow for an average tare in order to facilitate packaging by reducing the time involved in recording a gauge and tare for each package. We did not adopt this recommendation. TTB requires an accurate gauge of spirits that are withdrawn from bonded premises. A package (drum, barrel, or similar container; see § 19.1 definition) is so large that the variance in tare can be significant. This means that the proprietor must establish the actual tare of each package to be withdrawn from bond. This requirement appears in the proposed regulations at § 19.288.

Subpart L—Production of Distilled Spirits

Under the current regulations in part 19, production of distilled spirits is covered at subpart J. In the regulations proposed by this notice, production issues will be covered in proposed subpart L. In its comments on part 19, DISCUS recommends several changes affecting the regulations that govern production of distilled spirits. Below is a summary of the recommended changes and TTB's evaluation of those recommendations. Also discussed is a proposed change to a regulation based on an amendment to the IRC at section 5222(b)(2).

Notices.

The current regulation at § 19.311 requires a proprietor to file a notice on Form 5110.34 with the appropriate TTB officer prior to commencing, resuming, or suspending production operations. DISCUS recommends that the proprietor simply file a letterhead notice for such actions. This recommendation is reasonable because the filing of a letterhead notice accomplishes the same objective as the filing of a form. We adopted this recommendation in the proposed regulations at § 19.292.

Suspension of reports.

DISCUS recommends that during periods when production operations are suspended, the regulations should not require proprietors to file reports of production under current subpart W. This recommendation is reasonable because TTB does not need to receive reports of no activity, and we adopted this recommendation in the proposed regulations at §§ 19.292(c) and 19.632.

Record of fermenting material.

DISCUS recommends amendment of the current regulation at § 19.314 by the deletion of the requirement to maintain a record of fermenting material removed from or used on bonded premises for other purposes. We did not adopt this recommendation. The IRC at 26 U.S.C. 5207(a)(1)(A) specifically requires that the proprietor maintain records of the receipt of materials intended for use in the production of distilled spirits, and the use thereof.

Unfinished spirits.

The current regulation at § 19.316 discusses the requirements for a continuous distillation system and redistillation of unfinished spirits. DISCUS recommends amendment of this section of regulation by the deletion of the requirement to determine the quantity and proof of unfinished spirits produced from distilling materials. We did not adopt this recommendation because this type of record is required by the IRC at 26 U.S.C. 5207(a)(1)(C).

Entry gauge.

DISCUS recommends amendment of the current regulation at § 19.321 by the insertion of language that would allow the production gauge to be used as the entry gauge when spirits are deposited for storage or processing at the same plant and entered for redistillation at the same plant. This is a reasonable recommendation because a single gauge will be sufficient as the production gauge and the entry gauge and we adopted this recommendation in the proposed regulation at § 19.306.

Record of tests.

DISCUS also recommends that the current regulation at § 19.326 be amended by deleting a requirement to maintain a record of tests for the spirits content of chemicals produced by the production process. We did not adopt this recommendation. The proprietor is required by this section of regulations to test chemicals for spirits content. We believe that it is reasonable that the proprietor keep a record of such tests in order to document that the spirits content of chemicals removed from the premises does not exceed the 10 percent by volume limit imposed by the proposed regulation at § 19.308.

Production inventories

. DISCUS recommends amendment of the current regulation at § 19.329 by changing the requirement to conduct an inventory from a quarterly to an annual basis. We did not adopt this recommendation. For inventories that involve bulk liquids in tanks, one inventory per year is not adequate to accurately keep track of quantities on hand and detect losses in a timely manner. The shorter time period between inventories makes it easier for both TTB and a proprietor to reconcile any discrepancies and thereby protect the revenue. This requirement has been retained in the proposed regulations at § 19.312.

Receipts of beer.

The current regulation at § 19.312 provides that fermented material to be used in the production of spirits may include beer if it is produced at a brewery contiguous to the distilled spirits plant. Thus, under current regulations beer may only be received at a distilled spirits plant from a brewery that is contiguous to the plant. However, in 1997, Public Law 105-34 amended the IRC at 26 U.S.C. 5222(b)(2) by removing the requirement that beer may only be received from contiguous brewery premises. Instead, 26 U.S.C. 5222(b)(2) now provides that fermented material to be used in the production of distilled spirits may include beer conveyed without payment of tax from brewery premises and beer which has been lawfully removed from brewery premises upon determination of tax. This provision has been incorporated into the proposed regulations at § 19.296.

Subpart M—Storage of Distilled Spirits

Under the current regulations in part 19, the storage of distilled spirits is covered at subpart L. In these proposed regulations, issues related to the storage of distilled spirits will be covered under subpart M.

In its comments on part 19, DISCUS recommends several changes to the regulations that govern the storage of distilled spirits. Below is a summary of the recommended changes and TTB's evaluation of those recommendations.

Tanks.

The current regulation at § 19.342(b) states that if “spirits or wines are being deposited in a partially filled tank in storage on bonded premises, simultaneous withdrawals may not be made therefrom unless the flow of spirits or wines into and out of the tank is being measured by meters or other devices approved by the appropriate TTB officer which permit a determination of the quantity being deposited and the quantity being removed.” DISCUS recommends that this subparagraph be deleted. We agree, and we have deleted this subparagraph from the proposed regulations because we consider this to be a common-sense issue rather than an issue that needs to be spelled out in the regulations. In addition, we believe that the requirement to conduct proper gauging is sufficiently covered in the proposed Subpart K, Gauging.

Filling packages from tanks.

The current regulation at § 19.344 states that

spirits or wines in a tank must be gauged before and after filling packages from the tank on bonded premises. DISCUS recommends that this section of regulations be deleted. We disagree with this recommendation. This type of gauge is needed in order to properly account for spirits in the storage account and thereby protect the revenue.

Packages dumped for mingling.

The current regulation at § 19.347 states that when packages are dumped for mingling, the proprietor must record such mingling on a tank record or tank summary record. DISCUS recommends that this section be eliminated. We disagree because the mingling of spirits needs to be documented on a record in order to properly account for spirits in the storage account and thereby protect the revenue.

Mingling spirits or wines held in tanks.

The current regulation at § 19.349 states that when spirits of less than 190° of proof or wines are mingled in a tank, the proprietor must perform a gauge and record the gauge on the tank record. DISCUS recommends that this section be deleted. We disagree because the result of such mingling needs to be gauged and documented on a record in order to account for spirits in the storage account.

Storage inventories.

The current regulation at § 19.353 requires each warehouseman to take a physical inventory of all spirits and wines in tanks at the close of each calendar quarter. DISCUS recommends that this requirement be changed to an annual inventory. We did not adopt this recommendation. One inventory per year is not adequate to accurately keep track of the quantity of spirits and wines on hand and detect losses in a timely manner. The shorter time period between inventories makes it easier for both TTB and a proprietor to reconcile any discrepancies and thereby protect the revenue.

Subpart N—Processing of Distilled Spirits

Under the current regulations, processing operations other than denaturation and manufacture of articles is covered at subpart M. In these proposed regulations, the processing of distilled spirits will be covered under proposed subpart N. Denaturation of spirits and manufacture of articles will be covered under proposed subpart O.

In its comments on part 19, DISCUS recommends several changes to the regulations that govern the processing of distilled spirits. Below is a summary of its recommended changes and TTB's evaluation of those recommendations.

Receipt of spirits.

DISCUS recommends amendment of the current regulation at § 19.372(b) by adding a sentence allowing the shipper's gauge for bulk spirits to be used as the receiving gauge. We did not adopt this proposal. This suggested change would eliminate the receiving gauge for transfers in bond of bulk spirits and there would be no basis for determining whether a loss of spirits occurred during the shipment, thereby posing a jeopardy to the revenue.

Bottling tanks.

The current regulation at § 19.382 requires that spirits be bottled from bottling tanks. However, TTB can authorize bottling from original packages or special containers if the proprietor files a notice with TTB explaining such need. DISCUS recommends that language be inserted into this section that would allow liqueurs to be bottled from a tank truck or tote without our prior approval. TTB has previously approved several requests for the bottling of liqueurs directly from tank trucks or totes because this is a reasonable method for handling products such as liqueurs and we adopted this recommendation in the proposed regulation at § 19.352.

Alcohol content and fill.

The current regulation at § 19.386 requires that proprietors conduct proof and fill checks of bottled spirits at regular intervals and record the results of those tests. These tests are conducted to ensure that the actual proof and fill of bottled spirits agree with the alcohol content and quantity stated on the label. DISCUS recommends that proprietors no longer be required to record the results of those tests as required by § 19.386(c). We did not adopt this recommendation in the proposed regulations. We believe that the recording of the proof and fill checks is important because it documents whether the proprietor is properly conducting the tests as required by the regulation.

Completion of bottling.

The current regulation at § 19.387 requires that when the contents of a bottling tank are not completely bottled at the end of the day, the proprietor must make entries on the bottling and packaging record covering the total quantity bottled that day. DISCUS recommends that this requirement be deleted from the regulations. We did not adopt this recommendation. The bottling and packaging record represents a record of bottling and packaging activity at the plant and the record should reflect the bottling and packaging activity that takes place on a daily basis.

Bottles on the bottling line at the end of the work day.

In its comments on part 19, DISCUS states that when the bottling of a particular product run is not completed by the end of the day and is to be resumed on the following work day, § 19.388(a)(1) requires removal of all bottles on the line and packing them in cases that must be sealed. DISCUS recommends that TTB allow proprietors to keep filled bottles on the line at the end of the work day, if the same sized product will be produced on the next bottling shift. DISCUS states that proprietors can save substantial amounts of money if this proposal is adopted in the regulations. After careful consideration, we believe that this proposal is reasonable because it will save both time and expense for proprietors without jeopardizing the revenue. Therefore, we are proposing this change in the proposed regulation at § 19.358(b).

Remnants.

The current regulation at § 19.389 covers remnant bottles that remain after the completion of bottling. Remnants are the few bottles that may remain after completion of bottling. This regulation requires that notations be made on the bottling record regarding remnant bottles. In their proposal, DISCUS recommends that we delete some of the recordkeeping provisions that relate to remnant bottles. Their suggestion is reasonable because it will eliminate paperwork for the proprietor without jeopardizing the revenue. We are proposing this change in the proposed regulation at § 19.359.

Filling packages.

The current regulation at § 19.390 requires that spirits filled into packages on processing premises be gauged and the results recorded on a package gauge record. DISCUS recommends that this requirement be eliminated. We did not adopt this recommendation because without such a gauge, there would be no record of the amount of spirits filled into packages.

Daily summary record.

The current regulation at § 19.400 requires that a daily summary record of bottling and packaging be prepared as required by § 19.751. DISCUS recommends that this section be deleted. While no specific reason was given, this recommendation to delete § 19.400 appears to be part of the general proposal by DISCUS to eliminate all daily records. We did not adopt this recommendation. Our reasons for maintaining daily records are explained in our discussion of Subpart V, Records and Reports.

While we did not retain § 19.400 as a separate section in the proposed regulations, it has been combined with the current regulation at § 19.384, Preparation of bottling or packaging

record. The new combined section will now appear at § 19.354.

Bulk inventories.

The current regulation at § 19.401 requires that the proprietor conduct a physical inventory of bulk wine and spirits in the processing account at the close of each calendar quarter. DISCUS recommends that this requirement be changed to an annual inventory. We did not adopt this recommendation. One inventory per year is not adequate to accurately keep track of the quantity of spirits and wines on hand and detect losses in a timely manner. The shorter time period between inventories makes it easier for both TTB and a proprietor to reconcile any discrepancies and thereby protect the revenue.

Inventory of bottled and packaged spirits.

The current regulation at § 19.402 requires that the proprietor conduct a physical inventory of bottled and packaged spirits twice each year. DISCUS recommends that this requirement be changed to once a year. We did not adopt this recommendation. There is already an allowance in the current regulation at § 19.402 whereby the proprietor may request permission to conduct a single inventory each year. TTB believes that a single inventory may be adequate for some plants, but it is not adequate for others. Approval to take a single inventory may be obtained provided the proprietor maintains accurate records and an annual inventory will not make protecting the revenue more difficult. To require only one inventory per year in all cases in the regulations would weaken TTB's control and protection of the revenue in those plants where more than one inventory per year is desirable.

Variations in fill.

The current regulation at § 19.386 provides criteria for slight variations in the alcohol content and the fill of bottled distilled spirits that may occur during bottling operations. Acceptable variations in alcohol content (proof) are well defined and very specific in the regulation at § 19.386(b). However, this is not the case for variations in fill. As stated in § 19.386(b), the proprietor must rebottle, recondition, or relabel spirits if the bottle contents do not agree with the label, “except for such variation as may occur in filling conducted in compliance with good commercial practice with an overall objective of maintaining 100 percent fill for spirits bottled.” We believe that this criteria could be improved and we propose to establish a standard whereby there must be approximately the same number of overfills and underfills for each lot bottled and in no case may the quantity in a bottle vary by more than plus or minus two percent from the quantity stated on the label. This new clarification appears in the proposed regulation at § 19.356(b).

Subpart O—Denaturing Operations and Manufacture of Articles

Under the current regulations in part 19, denaturing operations are covered under subpart N. In these proposed regulations, denaturing operations will be covered under proposed subpart O. In their individual responses to Notice No. 870, DISCUS and Equistar Chemicals proposed changes to the regulations governing denaturation. Below is a discussion of the recommended changes and TTB's evaluation of those recommendations.

Gauge for denaturation.

The current regulation at § 19.454 states that the measurement of spirits and denaturants shall be made by volume, weight, approved meter, or, when approved by the Director, by other devices or methods. In its markup of part 19, submitted in response to Notice No. 870, DISCUS recommends that the term “approved” meter be deleted. We believe it is important to still require that distilled spirits plants use measurement devices that are accurate, and although we propose deleting the word “approved” as recommended by DISCUS, we are proposing to change the regulation to allow for the use of an “accurate mass flow meter” in the proposed regulation at § 19.383. As discussed earlier in this notice, TTB proposes to allow for the use of “accurate mass flow meters,” without prior approval by TTB, if they meet certain criteria for accuracy.

Denatured spirits inventory.

DISCUS recommends the amendment of the regulation at § 19.464 by changing the requirement to conduct an inventory from quarterly to annually. We did not adopt this recommendation in the proposed rule. The shorter time period between inventories makes it easier for both TTB and a proprietor to reconcile discrepancies and thereby protect the revenue.

Denaturation and article manufacture.

In Notice No. 870, ATF advised that under § 19.454 gauging is required before and after denaturation. This prevents a distilled spirits plant from conducting denaturation and article manufacture in a single, unified process because the proprietor must gauge the spirits after denaturation and before making an article. In Notice No. 870, ATF proposed to amend the current regulation at § 19.454 to provide proprietors with greater flexibility to conduct denaturation and article manufacture in a single, unified process. ATF also proposed to provide a prescribed method of computation to accurately determine the quantity of denatured spirits used and produced.

Equistar Chemicals wrote in support of the proposal to allow for a unified process for denaturation and article manufacture. However, the company suggested that the regulations continue to allow for measurements by volume, meter, or other approved methods, and it suggested alternative language for § 19.454. Equistar's suggestion is included in these proposed regulations with some modification; i.e., we will not prescribe a weight calculation as the sole means for determining the quantity of specially denatured alcohol produced when denaturation and article manufacture occur in a single process. These changes appear in the proposed regulations at § 19.383.

Filling containers from tanks.

In its comments on Notice No. 870, Equistar recommends amendment of the current regulation at § 19.462, Filling of containers from tanks. This regulation requires companies to record a gauge measurement both before and after withdrawing spirits from a tank. Equistar suggests that the regulations eliminate the requirement for the first gauge measurement and simply allow the second, after-withdrawal gauge measurement to serve as the starting measurement for the second withdrawal. This proposal is reasonable because a single gauge may serve both purposes, and we are proposing to amend the regulations at § 19.389 to reflect that change.

Subpart P—Transfers, Receipts, and Withdrawals

Proposed subpart P will cover several issues, including transfers in bond, receipts from customs custody, withdrawals without payment of tax, withdrawal free of tax, samples of spirits, and securing of conveyances. Sections of the current regulations related to withdrawal on determination and payment of tax have been moved to proposed Subpart I, Distilled Spirits Taxes. Below is a discussion of several changes to the regulations that we are proposing in the new subpart P.

General.

We propose to add a new “General” section to the regulations that will identify the subject matter covered in the new subpart P. This new section appears in the proposed regulations at § 19.401.

Consignee premises.

The current regulation at § 19.510, Consignee premises, contains several references to Form 703. The Form 703 was formerly used for the transfer in bond of wine, but it is now obsolete. References to the

Form 703 have been removed from the proposed regulations at § 19.407, Consignee premises.

Receipt of Transfers in Bond by Consignees.

The current regulation at § 19.510 requires that when spirits, denatured spirits, or wines are received by transfer in bond, the consignee is required, among other things, to examine the conveyance, check the seals for tampering, gauge, and record the receipt of the shipment. TTB has always interpreted this section to mean that when the shipment arrives at the consignee premises or the carrier has completed its transportation of the shipment, such as when a rail carrier delivers a tank car to a rail siding on or adjacent to the plant premises, the transfer in bond is complete and the consignee must gauge and record the shipment as received.

However, during the course of some recent on-site field audits, TTB has discovered a number of instances in which distilled spirits plant proprietors failed to timely gauge and record the receipt of bulk distilled spirits transferred in bond. Some proprietors have chosen to apply an alternate interpretation to the term, “received,” as used in the regulation, and they believe that they can delay required gauges and recordkeeping until after testing and formally accepting title to the spirits, which may take several weeks or longer after the date of actual delivery. In other words, some industry members have decided that the physical arrival of a shipment does not constitute receipt of the shipment, and they believe that they may decide when the shipment is “received.”

TTB believes that the meaning of the current regulation is clear and that the term “received” means that the shipment has physically arrived at its destination. In fact, the language of the current regulation also uses the phrase “upon arrival at his premises”.

However, in order to further clarify the meaning of the regulation, the proposed regulation at § 19.407, which governs actions to be taken by a consignee upon receipt of a shipment, has been amended to emphasize the “arrival” of a shipment at the consignee's plant or at a location which represents the final destination for the carrier. Thus, it should be clear that shipments that physically arrive at the consignee's plant or rail sidings at or near the consignee's plant have been received and must be recorded as such. As proposed, the amended regulation at § 19.407 will use the following phrase to describe the time when the shipment is received, “[U]pon arrival of an in bond shipment at the consignee's premises or at the destination point specified in the carrier's transportation documents, the consignee must * * *.” TTB believes that this amended language will clarify the current meaning of the regulation.

Determination of tare.

The current regulation at § 19.503 discusses determination of tare when packages are to be individually gauged for withdrawal from bonded premises. In the proposed regulations, this section has been moved to Subpart K, Gauging, and now appears at § 19.288.

Disposition of excess spirits.

In the current regulation at § 19.539, there are instructions for Government agencies regarding the disposition of excess spirits that were withdrawn from a distilled spirits plant free of tax. This section has been deleted from the proposed regulations because these instructions are properly covered in 27 CFR 20.246 and 22.176.

Securing of Conveyances.

The current regulation at § 19.96 requires that securing devices used on conveyances in which spirits are transferred in bond, or withdrawn free of tax or withdrawn without payment of tax, require approval by the appropriate TTB officer before use. However, securing devices that meet the criteria described in § 19.96 do not require prior approval by TTB. Currently, the securing devices that do not require prior approval by TTB include cap seals and ball-strap-type (railroad) seals. The proposed regulation at § 19.441 has been amended to also allow for the use of locking security cables without prior approval by TTB.

Subpart Q—Return of Spirits to Bonded Premises and Voluntary Destruction

Under the current regulations in part 19, issues relating to the return of spirits to bonded premises and voluntary destruction are covered under subpart U. In these proposed regulations, these subjects will be covered in a new subpart Q. Below is a discussion of several changes to the regulations that we are proposing in the new subpart Q.

Imported spirits.

The Taxpayer Relief Act of 1997 amended the IRC at 26 U.S.C. 5008(c)(1) by allowing a credit or refund of tax to be granted for imported bottled spirits that are returned to a distilled spirits plant. The proposed regulation at § 19.452 provides that a proprietor may return tax paid or tax determined spirits to bonded premises that were tax paid upon importation through U.S. Customs and Border Protection. As discussed earlier in this notice, conforming changes were also made in Subpart J, Claims.

Returns to bond.

The new subpart Q has been substantially revised to make clearer the types of spirits, denatured spirits, and articles that may be returned to bonded premises. In addition, we propose to replace several sections of regulations with a chart for easier reference and use. We have incorporated §§ 19.683 through 19.686 of the current regulations into the proposed chart at § 19.454.

Voluntary destructions.

In its suggested changes to part 19, DISCUS recommends that the section of regulations dealing with voluntary destructions at § 19.691 include a subparagraph that references the filing of claims. We did not include this recommendation in the proposed regulations because the filing of claims is already covered in the new subpart J of the proposed regulations.

Subpart R—Losses and Shortages

Under the current regulations in part 19, losses and shortages are covered in subpart Q. In the proposed regulations, these subjects will be covered in a new subpart R. In its comments on part 19, DISCUS recommends several changes affecting the regulations governing losses and shortages. Below is a summary of the suggested DISCUS changes and TTB's evaluation of those recommendations.

Losses in general.

DISCUS recommends the elimination § 19.561 of the current regulations because it is redundant with the statute. TTB agrees that this section of the regulations repeats provisions covered in the IRC. However, the regulations in part 19 are intended to provide users with a comprehensive and complete guide to the requirements for operating a distilled spirits plant. TTB does not consider it appropriate to require readers of these regulations to reference both the IRC and the regulations when seeking guidance on an issue. Therefore, the information provided in the current regulations at § 19.561 will appear in the proposed regulations at § 19.461.

Determination of losses in bond, loss of spirits from packages.

DISCUS recommends that the current regulations at §§ 19.562 and 19.563 be moved to the claims subpart within part 19. We disagree with this suggestion. These sections deal with the determination of losses in bond and are appropriately located in the subpart for losses and shortages.

Loss of spirits from packages.

DISCUS recommends amendment of the current regulation at § 19.563 by replacing a reference to the regulation at § 19.561(b) with a reference to the IRC at 26 U.S.C. 5008(a)(1)(A). Apparently, they recommended this change because they had earlier proposed to eliminate

§ 19.561 from the regulations altogether. Since we did not eliminate § 19.561, (now proposed § 19.461), there is no need to replace the reference to it with a reference to the statute.

Losses after tax determination.

DISCUS recommends elimination of § 19.564, Losses after tax determination, because it is redundant with the statute and other rules, and it recommends the transfer of part of the text to § 19.43, Claims relating to spirits lost after tax determination. In the proposed regulations, we have retained this section at § 19.464; however, we have substantially shortened it, and it now refers to subpart J where claims for losses after tax determination are covered. TTB proposes to continue this provision because it is inappropriate to require readers of these regulations to reference both the IRC and the regulations when seeking guidance on an issue.

Subpart S—Containers and Marks

Proposed subpart S covers requirements for containers and marks that are covered in the current regulations at subpart R. In the new subpart S, much of the information regarding containers and marks has been rearranged and put into a more logical order. In addition, we propose several amendments to the regulations governing containers and marks.

Industrial versus nonindustrial.

The current regulations in subpart R list requirements that apply to spirits for “industrial” use and separate requirements that apply to spirits for “nonindustrial” use. However, the terms “industrial” use and “nonindustrial” use are not explained within subpart R. The proposed regulations in subpart S define those terms in a new section which appears at § 19.472.

Tanks, pipelines.

In its comments on part 19, DISCUS proposes that the current regulations at § 19.586, Tanks, and § 19.587, Pipelines, be deleted because they are redundant with other sections of the regulations. We agree that they are redundant, and propose such deletion in the proposed regulations.

Filling containers.

In the current regulation at § 19.582, there is a limitation on filling containers during processing operations. This regulation limits filling to containers of not more than 10 gallons. We deleted this limitation in the proposed regulation at § 19.474 because we foresee instances where a processor may have a need to fill containers in excess of 10 gallons. In addition, the current regulation at § 19.583, imposes a 10-gallon limitation for the filling of containers with Specially Denatured Alcohol (SDA). We are not aware of any reason for this limitation, and in the proposed regulation at § 19.475 we propose deleting the size reference because SDA may be filled into containers with a larger capacity.

Marks on packages of tax-paid industrial spirits.

In Notice No. 870, ATF proposed to amend the regulation in § 19.605 by requiring that proof, tare, and proof gallons be marked on packages of spirits withdrawn on determination of tax. In its response to Notice No. 870, DISCUS opposes this proposal because it would be burdensome on proprietors that ship to manufacturers of nonbeverage products. DISCUS also states that the information required in ATF's proposed § 19.605 is already required under § 19.749, Bottling and packaging record, and § 19.769, Package gauge record. After consideration of the DISCUS comments, we did not include this proposal from Notice No. 870 in this new proposed rule.

Subpart T—Liquor Bottle, Label, and Closure Requirements

Under the current regulations in part 19, issues relating to liquor bottles and label requirements are found in subpart S and issues relating to closure requirements are found in subpart T. In the proposed regulations, these subjects will be covered in the new subpart T. Below is a summary of the changes that we propose to make in the new regulations.

Scope.

The current regulation at § 19.631, Scope, states that the regulations in §§ 19.632 through 19.639 only apply to bottles with a capacity of 200 ml or more unless it is specifically stated that the section applies to bottles of less than 200 ml. In our revision of the subpart, we deleted several sections of regulations, and the only sections that remain apply to all bottle sizes. Therefore, the “scope” section of the proposed regulations at § 19.631 is no longer needed and has been deleted.

Bottles authorized.

The current regulation at § 19.632 states that liquor bottles, including bottles of less than 200 ml, must conform to the standards of fill in 27 CFR part 5. This section was rewritten and deletes the reference to 200 ml because there are no special rules that apply to bottles of less than 200 ml. As proposed, the new regulation at § 19.511 simply states that all liquor bottles for domestic purposes must conform to the standards of fill at 27 CFR part 5.

Distinctive liquor bottles.

We have rewritten the current regulation at § 19.633 to remove the reference to bottle sizes less than 200 ml. The requirements of this section apply to all bottle sizes and now appears in the proposed regulations at § 19.513.

Receipt and storage of liquor bottles.

The current regulation at § 19.634 provides rules for the receipt and storage of liquor bottles. We could find no consumer or revenue protection reason to retain this section, and we deleted it from the proposed regulations.

Bottles to be used for display purposes.

The current regulation at § 19.635 provides recordkeeping rules for those instances in which liquor bottles are provided for display purposes. We could find no reason to treat these bottles differently than others so we are proposing to delete this provision from the proposed subpart. Records of receipt and use of all liquor bottles are covered in the proposed regulation at § 19.603.

Bottles for testing purposes.

We propose to delete the current regulation at § 19.636. As stated above, we could find no reason to retain this as a separate section of regulations. Records of receipt and use of liquor bottles are covered in the proposed regulation at § 19.603.

Bottles not constituting approved containers.

We rewrote the current regulation at § 19.637 to remove the reference to bottle sizes less than 200 ml because there are no special rules that apply to bottles of less than 200 ml. This section applies to all bottle sizes and now appears at proposed § 19.512.

Disposition of stocks of liquor bottles.

We deleted the current regulation at § 19.638 in the proposed regulations. We could find no consumer or revenue protection reason to retain this as a separate section. Records of receipt, use, and disposition of liquor bottles are covered in the proposed regulation § 19.603.

Use and resale of liquor bottles.

We deleted the current regulation at § 19.639 in the proposed regulations. We could find no consumer or revenue protection reason to retain this as a separate section. Records of receipt, use, and disposition of liquor bottles are covered in the proposed regulation § 19.603.

Statements required on labels under an exemption from label approval.

The current regulation at § 19.642 contains a general requirement whereby labels that are exempt from label approval must contain certain items of information. The regulations at §§ 19.643 through 19.650 discuss those specific items of information. Further, most of the text in

§§ 19.643 through 19.650 mirrors text found in 27 CFR part 5.

In our proposed regulation at § 19.517, we have merged most of the information in the current regulations at §§ 19.642 through 19.650 and created a section which lists the specific information that must appear on a label exempt from label approval. Further, we propose to no longer publish in one part of the regulations identical provisions from other parts of the regulations. Thus, we propose stating that the mandatory information under § 19.517 must conform to specific, cited sections of 27 CFR part 5 and § 19.518 of part 19 without duplicating the actual text of those regulations in § 19.517.

Closures.

The current regulations at §§ 19.661 and 19.662 contain the closure requirements that apply to each bottle or container of spirits having a capacity of one gallon or less. Under the current regulations, distilled spirits containers must have a closure that leaves a portion of the closure on the container when opened. In addition, the closure must be constructed in such a manner that it must be broken to gain access to the contents. These regulations implement the IRC at 26 U.S.C. 5301(d). DISCUS proposes that the closure requirement at § 19.662 be amended to allow for closures that are removed completely if the closure shows when it has been subject to tampering.

In our proposed regulation at § 19.523, we require that the container have a closure that must be broken to gain access to the contents. However, we have deleted the requirement that a portion of the closure remain on the container when opened. This particular feature of the current regulation is not a requirement of the IRC at 26 U.S.C. 5301(d). Further, we have received several requests for an alternate method or procedure from this particular requirement, and we see no continued need for this feature on the closure.

Labels for export and Puerto Rico.

In the current regulations at §§ 19.395 and 19.396, we discuss the label requirements that apply to spirits for export and spirits for shipment to Puerto Rico. These requirements have been incorporated into our proposed regulations at §§ 19.519 and 19.520.

Subpart U—Reserved

We propose to reserve subpart U for possible future use.

Subpart V—Records and Reports

The current regulations in part 19 require that the proprietor of a distilled spirits plant maintain a comprehensive system of records relating to operations at the plant. The primary aim of this records system is to account for all taxable spirits and products that are produced, received, stored, processed, and removed from the plant. Further, the regulations require that the proprietor account for taxable products by maintaining a system of records arranged into separate accounts within each plant. Depending on the scope of operations conducted at the plant, this records system may include a production account, a storage account, a processing account, and a denaturation account. In addition, there are a number of daily records and summary records prescribed for activities occurring within each account. These recordkeeping requirements are based on the IRC at 26 U.S.C. 5146, 5201, 5207, 5211, 5291, 5555, 5603, 6001, 6011, and 6061.

Under the current regulations, recordkeeping and report requirements are covered in subpart W. In the proposed regulations, these subjects will be covered in a new subpart V.

We are proposing several amendments to the regulations covering recordkeeping and reporting requirements for distilled spirits plants. Some of the proposed amendments are based on recommendations made by DISCUS. Other proposed amendments are the result of TTB's internal review of the current recordkeeping and report requirements for distilled spirits plants.

DISCUS Recommendations.

The following is a summary of the recordkeeping changes proposed in the petition submitted by DISCUS.

•

Commercial records.

DISCUS recommends an increased reliance on the commercial records that are maintained by distilled spirits plants as opposed to the detailed government records that are currently required in subpart W. In its petition for the revision of part 19, DISCUS asserts:

The Bureau's responsibility to protect the revenue can be fulfilled by reliance on commercial records maintained by DSPs in the ordinary course of business or summaries of such records, typically computerized, which show “what goes in” and “what goes out” of the plant.

Further, in its markup of part 19, DISCUS proposes the deletion of a substantial number of the records currently required by subpart W.

•

Elimination of separate accounts.

Closely related to its proposal to increase the use of commercial records, DISCUS also proposes the elimination of the three separate accounts currently required in subpart W. DISCUS asserts:

Records of activities not impacting upon “what goes in” and “what goes out” are unnecessary and thus would not be required. These include,

inter alia,

records of gauges, measurements of product, and movements at each interim step of the plant's operations.

In support of this proposal, DISCUS submitted numerous proposed amendments to the recordkeeping requirements in subpart W involving the elimination of many of the current recordkeeping requirements and replacing those requirements with a recordkeeping system based on a single DSP account for all spirits.

•

Daily versus monthly records.

Under the current recordkeeping regulations, a distilled spirits plant proprietor is required to record each activity or transaction as it occurs, summarize those activities on a daily basis, and then report those activities in a monthly summary report. DISCUS proposes that DSPs no longer be required to record information on a daily basis. Instead, they propose that information be recorded on a monthly basis. In its petition, DISCUS states:

Other unnecessary and burdensome recordkeeping regulations also would be modified. For example, ordinary business records and summaries used for Part 19 compliance would not be required to show information on a daily basis, but instead generally on a monthly basis.

DISCUS asserts that these changes would not have an adverse effect on TTB's ability to audit operations at DSPs.

•

Format, storage, and reproduction.

In regard to the format, storage, and reproduction of records, DISCUS states:

Under this modernized regulatory scheme, proprietors no longer would be required to maintain information in any prescribed format, would be able to store records at any of the proprietor's facilities, and would not need prior approval from the Bureau to reproduce records.

DISCUS recommends that the regulations governing format, storage, and reproduction of records at 27 CFR 19.721 and 19.723 be amended.

TTB's Proposed Changes to the Regulations.

In response to the recommendations made by DISCUS and based on TTB's analysis of the current recordkeeping requirements, we propose several amendments to the regulations in the new proposed subpart V.

•

Restructuring and plain language changes.

One of the first changes that we propose is to restructure and reorder much of the information in subpart V. For example, recordkeeping information that was contained within some of the longer sections within the subpart has been divided-up into shorter, individual sections within the subpart. We believe this change will make for easier reader

access. We have also incorporated plain language principles into our rewriting of the subpart to make the revised regulations easier to read and understand.

•

Commercial records.

As a general principle, TTB agrees with increased reliance on the commercial records maintained by a DSP, as opposed to records that are specifically created to satisfy government recordkeeping requirements. We also agree that the proprietor's commercial records should contain most of the information necessary to track the receipt and disposition of spirits as well as certain key transactions within the plant. With this principle in mind, we state in the proposed regulation at § 19.572 that required records may consist of documents created in the ordinary course of business rather than records created to expressly to meet the requirements of this part, if those documents:

(1) Contain all of the details that this part requires;

(2) Are consistent with the general standards of clarity and accuracy; and

(3) Can be readily understood by TTB personnel.

Separate accounts.

The current regulations require that a proprietor maintain a system of records arranged into separate accounts. This may include a production account, a storage account, a processing account, and a denaturation account, as applicable. DISCUS recommends that the recordkeeping regulations be substantially abbreviated and provide for a single account at the DSP.

In our review of the IRC requirements regarding the “records” that must be maintained by a DSP under 26 U.S.C. 5207, we find that a DSP must keep records of “production activities,” “storage activities,” “denaturation activities,” and “processing activities.” Also, 26 U.S.C. 5207 provides a list of required records that must be maintained for each of these activities. Thus, we modeled the current DSP recordkeeping regulations after 26 U.S.C. 5207, and we propose to continue to require that records be maintained with a separate account for each activity.

Further, the requirement to maintain separate accounts within a DSP is specifically addressed in the legislative history of the Trade Agreements Act of 1979 (Pub. L. 96-39), which implemented the current system for operating distilled spirits plants. The legislative history of the Trade Agreements Act of 1979 states in part:

The new all-in-bond system will substantially simplify the qualification and use of distilled spirits plant premises, by eliminating the requirement that separate facilities, for the various distilling operations be established and maintained within a plant. Since the tax under the all-in-bond system will be determined at the conclusion of the distilled spirits operations, there is no longer any need for these physical delineation and separation requirements. Under the all-in-bond system, these separate activities will be accounted for only by recordkeeping accounts such as for production, storage, processing and finished goods. Tanks, vats, rooms or buildings may be used for multiple purposes, with the type and identification of the spirits being maintained by the appropriate records.

Thus, the legislative history of the Trade Agreements Act of 1979 clearly shows that while Congress established the all-in-bond system with its efficiencies, Congress intended to maintain a system of separate recordkeeping accounts for the different operations within a distilled spirits plants.

Based on the language of the IRC and the legislative history of the Trade Agreements Act of 1979, we propose to continue the requirement to establish separate accounts within the DSP. However, we also propose to eliminate any current recordkeeping requirements and items of information that are not necessary for the protection of the revenue or that do not aid in the tracking of spirits for consumer protection purposes.

•

Daily versus monthly records.

As discussed earlier, DISCUS recommends that proprietors no longer be required to show information in their records on a daily basis. Instead, DISCUS proposes that information be shown on a monthly basis. After careful consideration, we decided against making this proposal. TTB would be unable to audit activities at a plant if only monthly summaries of activities are available. To continue to audit activities at the plants, TTB needs access to the daily transaction records. Thus, daily records must continue to be maintained.

•

Format, storage, and reproduction.

The proposed regulations do not require that records be maintained in any particular format or media. Required records may be kept on paper, on microfilm or microfiche, or on a computer or other electronic media. The only requirement is that records must be readily retrievable in hard-copy format for review by TTB officers as necessary. Further, we have eliminated the requirement at § 19.725 to obtain TTB approval to reproduce required records.

•

Computer-generated reports and forms.

Over the past several years, TTB has approved several alternate methods or procedures that allow companies to submit computer-generated paper reports and forms. DISCUS recommends that this option be extended to all DSPs. TTB has no objection to receiving computer-generated reports and transaction forms. Accordingly, the proposed regulation at § 19.634 states that TTB will accept both computer-generated reports of operations and transaction forms that are made using a computer printer on plain white paper and that match the TTB report or form. Further, use of these reports and forms will not have to be pre-approved by TTB if they conform to the following standards:

(1) The computer-generated report or form must approximate the physical layout of the corresponding TTB report or form, although the typeface may vary;

(2) The text on the computer-generated report or form and each line entry must exactly match the official TTB report or form; and

(3) Each penalty of perjury statement specified for the TTB report or form must be produced in its entirety.

•

Electronic submission of forms.

Closely related to the subject of computer-generated reports is the matter of electronic submission of forms and electronic signatures. We addressed this issue in a separate rulemaking action. On October 10, 2003, TTB issued Treasury decision T.D. TTB-5 (68 FR 58600, October 10, 2003) in which we allow for the submission of certain forms to TTB electronically through a TTB-approved electronic document receiving system. We believe that by providing this option to submit certain forms electronically, we can substantially reduce the costs associated with submitting and maintaining paper documents.

•

Location of records.

Formerly, the IRC at 26 U.S.C. 5207 required that records be kept on the premises of the distilled spirits plant where the operations covered by the records are conducted. This section of law was amended in 1997 by Public Law 105-34 and IRC section 5207 no longer requires that records be maintained at the plant. Accordingly, the proposed regulation at § 19.573 allows required records to be maintained at either the distilled spirits plant where operations or transactions occur or a central recordkeeping location. However, when records are to be kept at a central recordkeeping location, the proposed regulations at § 19.574 will require that they be made available at the plant premises during inspections and audits.

•

Transfer record for shipments from customs custody.

Notice No. 870 advised that the transfer record for spirits being received from customs

custody is mentioned in § 19.770 in a way that implies that the transfer record would be prepared under § 19.770. However, 27 CFR 27.138 prescribes the information for the transfer record covering such transfers, and that information is different in several ways from the information required for domestic transfers by § 19.770. Notice No. 870 proposed to amend § 19.770 to clarify that the record required for transfer of spirits from customs custody must be prepared in accordance with § 27.138.

DISCUS does not comment on this proposal, and we incorporated this proposed change into the new, proposed regulation at § 19.621(c).

•

Miscellaneous changes.

In its part 19 mark-up, DISCUS proposes the elimination of § 19.775, Record of securing devices, and § 19.776, Record of scale tests. We agree with this recommendation, and these sections have been deleted from the proposed regulations. In addition, we propose to eliminate § 19.726, Authorized abbreviations to identify spirits. We see no need to prescribe the abbreviations used by proprietors on forms or records.

•

Reports.

Currently, distilled spirits plant proprietors submit monthly reports of operations. These reports include: Monthly Report of Production Operations, TTB F 5110.40; Monthly Report of Storage Operations, TTB F 5110.11; Monthly Report of Processing Operation, TTB F 5110.28; and Monthly Report of Processing (Denaturing) Operations, TTB F 5110.43. DISCUS recommends that the monthly reports be changed to quarterly reports and also suggested that three of the reports be merged into a single report.

We disagree with this recommendation. Our Office of Field Operations (FO) relies on monthly submission of detailed information for its pre-audit analysis and monitoring of plant operations. FO finds that having separate reports, rather than a merged report, is in the best interests of protecting the revenue because its staff is better able to assess specific operations within the distilled spirits plant and identify specific operations for particular attention during an audit. In addition, TTB recently simplified the submission of monthly report data with the implementation of TTB Pay.gov, and this simplification should address some of the concerns raised by DISCUS.

Subpart W—Production of Vinegar by the Vaporizing Process

Under the current regulations, production of vinegar by the vaporizing process is covered at subpart X. In these proposed regulations, we cover the production of vinegar under proposed subpart W. DISCUS does not recommend any changes to the regulations in this subpart, and we did not make any substantive changes to these regulations.

Subpart X—Distilled Spirits for Fuel Use

Under the current regulations, distilled spirits for fuel use is covered in subpart Y. In these proposed regulations, this subject will be covered under a new subpart X. Proposed subpart X will cover the requirements for establishing and operating a distilled spirits plant that will produce, process, store, use, or distribute distilled spirits exclusively for fuel use.

DISCUS does not propose any changes to this subpart. However, TTB proposes to make several changes to the regulations in subpart X. Similar to the changes made in other subparts, we have rearranged the information in subpart X into a more logical order. Also, we combined some sections to provide more clarity, added new sections, and renumbered the regulations within this subpart.

Definitions.

We amended the definitions that appear in the current regulations at § 19.911, Meaning of terms, by deleting or replacing terms that no longer apply. We also deleted several terms that are defined in the proposed regulations at § 19.1, Definitions. The definitions for this subpart appear in the proposed regulations at § 19.662.

Letterhead applications.

In the proposed regulations, we now include an allowance for letterhead applications and letterhead notices for changes affecting permits.

Bonds.

In the proposed regulations at §§ 19.699 and 19.700, we provide information that explains bonds and sureties in more detail. We also provide an improved explanation of how the amount of the bond must be computed.

Bonds for some small plants.

The IRC, at 26 U.S.C. 5181(c)(3), provides that no bond is required for an “eligible distilled spirits plant” and that such plants may nonetheless receive shipments of spirits “in bond” under 26 U.S.C. 5212. An “eligible distilled spirits plant” is defined in 26 U.S.C. 5181(c)(4) as “a plant which is used to produce distilled spirits exclusively for fuel use and the production from which does not exceed 10,000 proof gallons per year.” This definition requires a plant to produce distilled spirits in order to be an “eligible distilled spirits plant.”

Although the Bureau formerly interpreted 26 U.S.C. 5181(a)(1) to require that all alcohol fuel plants must produce distilled spirits, this interpretation has been amended, and the Bureau now holds that a person may establish an alcohol fuel plant solely for the receipt and processing of distilled spirits for fuel use. Nevertheless, such a plant does not meet the definition of “eligible distilled spirits plant” quoted above. Therefore, a plant that would only receive and process distilled spirits and has no production capability must have a bond, regardless of size in order to be eligible to receive spirits “in bond” under 26 U.S.C. 5212. The proposed regulations at §§ 19.673, 19.699, and 19.700 will now provide for the bonding of small alcohol fuel plants that do not produce distilled spirits for fuel use.

Importing spirits.

TTB allows persons qualified as an alcohol fuel producer under the 26 U.S.C. 5181 to receive imported alcohol from customs custody. However, such importations are not covered in the current regulations in subpart Y. In the proposed regulations, we added a new section at § 19.742 that covers the transfer of spirits from customs custody to an alcohol fuel plant. This new section incorporates the procedures for importation of spirits that were discussed in Notice No. 870 and Industry Circular 80-6, “Distilled Spirits for Fuel Use”.

Application for transfer of spirits in bond.

26 U.S.C. 5212 provides for the transfer in bond of bulk distilled spirits between bonded premises without payment of tax. In addition, 26 U.S.C. 5005(c)(1) provides that the consignee proprietor of a distilled spirits plant is liable for the tax on all distilled spirits that are in transit to the consignee's premises from the time of removal from the consignor's premises pursuant to an application made by the consignee of the shipment.

Based upon the provision within IRC section 5005(c)(1), which assigns liability for the shipment to the consignee based upon an application made by the consignee, distilled spirits plant proprietors qualified under 26 U.S.C 5171 are required to file an Application for Transfer of Spirits and/or Denatured Spirits in Bond on TTB F 5110.16 and receive authorization from TTB prior to the transfer of spirits in bond. This requirement appears in the current regulations at § 19.506.

The application by the consignee proprietor on TTB F 5100.16 is filed in triplicate with TTB's Director, National Revenue Center. If the application is approved, the Director of our National Revenue Center will complete Part II on all copies of the form, retain one copy of the form, and return the remaining

copies to the applicant. The applicant will deliver one of the approved copies to the consignor and retain one copy for his files. The approved application remains in effect until the bond terminates or where there is less than a maximum bond, the approved application will terminate when the penal sum of the bond is changed.

TTB's current regulations governing alcohol fuel plants do not require that the consignee proprietor submit an application to receive spirits in bond on form TTB F 5100.16, Application for Transfer of Spirits and/or Denatured Spirits in Bond. This appears to be an oversight in the current regulations and represents a jeopardy to the revenue because the law at 26 U.S.C. 5005(c)(1) assigns tax liability for the shipment to the consignee only when the spirits are shipped “pursuant to an application made by him.”

Therefore, we propose to amend the regulations governing transfers in bond involving alcohol fuel plants and require that the proprietor of an alcohol fuel plant who wishes to receive spirits by transfer in bond must file an application with TTB on form TTB F 5100.16 and receive approval from TTB prior to the transfer. This requirement appears in the proposed regulations at §§ 19.403, 19.405, 19.406, 19.733, 19.734, and 19.735.

Authorized materials.

The listing of materials authorized for rendering spirits unfit for beverage use is found in the current regulations at § 19.1005. This listing has been updated to include several additional denaturants and is located in the proposed regulations at § 19.746, Authorized materials.

Subpart Y—Paperwork Reduction Act

The Office of Management and Budget (OMB) assigns control numbers to our information collection requirements. Subpart Y is a listing of those sections of the proposed 27 CFR part 19 regulations that impose an information collection requirement along with the assigned OMB control number.

II. Derivation Table for Proposed Part 19

The following table shows the derivation of the new sections of regulations. It is cross-referenced between the new section numbers in the proposed 27 CFR part 19 regulations contained in this notice and the old section numbers in the current part 19 regulations.

Requirements of

proposed section:

Are derived from

current section:

19.0

19.1

Subpart A

19.1

19.11

19.2

19.2

19.3

19.3

19.4

19.57

19.5

19.58

Subpart B

19.11

19.81

19.12

19.86

19.13

19.75

19.14

19.4

19.15

19.61

19.16

19.724

19.17

19.82

19.18

19.83

19.19

19.79

19.20

19.77

19.26

19.62

19.27

19.62

19.28

19.73

19.29

19.70, 19.74

19.31

19.63

19.32

19.65

19.33

19.66

19.34

19.71

19.35

19.71

19.36

19.67

19.37

19.67

19.38

19.78

19.45

19.100

Subpart C

19.51

New

19.52

19.131

19.53

19.132

19.54

19.133

19.55

19.68, 19.72

19.56

19.134

19.58

19.97

19.59

19.98

19.60

19.99

Subpart D

19.71

19.151

19.72

19.151

19.73

19.152

19.74

19.168

19.75

19.166

19.76

19.153

19.77

19.170, 19.324

19.78

19.156

19.79

19.169

19.80

19.154

19.81

19.155

19.91

19.157

19.92

19.158

19.93

19.167

19.94

19.165

19.95

19.159

19.96

19.161

19.97

19.162

19.98

19.160

19.99

19.163

Subpart E

19.111

New

19.112

19.180

19.113

19.182

19.114

19.184

19.115

19.185

19.116

19.186, 19.187

19.117

19.188

19.118

19.189

19.119

19.190

19.120

19.191

19.121

19.192

19.122

19.193

19.123

19.153(b)

19.126

19.180

19.127

19.181

19.128

19.182

19.129

19.183

19.130

19.184

19.131

19.185

19.132

19.186, 19.187

19.133

19.188

19.134

19.189

19.135

19.191

19.141

19.201

19.142

19.202

19.143

19.203 through 19.206

19.144

19.207

19.147

19.211

Subpart F

19.151

19.231, 19.232

19.152

19.231

19.153

19.233

19.154

19.234

19.155

19.235

19.156

19.236

19.157

19.237

19.161

19.231, 19.232

19.162

19.241

19.163

19.242

19.164

19.243

19.165

19.244

19.166

19.245

19.167

19.246

19.168

19.247, 19.248

19.169

19.248

19.170

19.249

19.171

19.250

19.172

19.251

19.173

19.252

Subpart G

19.181

New

19.182

19.273

19.183

19.273

19.184

19.273

19.185

19.273

19.186

19.276

19.187

19.274

19.188

19.277

19.189

19.278

19.190

19.279

19.191

19.280

19.192

19.281

19.193

19.282

Subpart H

19.201

19.49(a)

19.202

19.50

19.203

19.50

19.204

19.49

19.205

19.49(c) and (d)

19.206

19.49(b)(2)

19.207

19.51

19.208

19.51

19.209

19.51

19.210

19.52

19.211

19.53

19.212

19.54

19.214

19.54

Subpart I

19.221

New

19.222

19.21 through 19.23

19.223

19.24

19.225

19.25, 19.515, 19.526

19.226

19.517

19.227

19.515

19.229

New

19.230

19.515(b), 19.522(b)

19.231

19.516

19.233

19.522(c), 19.523(b)

19.234

19.522(a), 19.523(a)

19.235

19.522, 19.523

19.236

19.523

19.237

19.523

19.238

19.525

19.239

19.519

19.240

19.524

19.242

19.520

19.243

19.521

19.245

New

19.246

19.34

19.247

19.35

19.248

19.36

19.249

19.37

19.250

19.38

19.253

19.31

19.254

19.32

19.256

19.26

19.257

19.518

19.258

19.486

Subpart J

19.261

New

19.262

19.44

19.263

19.41

19.264

19.42

19.265

19.43

19.266

19.45

19.267

19.46

19.268

19.76

19.269

19.487

Subpart K

19.281

New

19.282

19.84

19.283

19.92

19.284

19.91, 19.92(a), 19.93

19.285

19.92(a)

19.286

19.91(a)

19.287

19.91(b)

19.288

19.503

19.289

19.319

Subpart L

19.291

New

19.292

19.311

19.293

19.312

19.294

19.314

19.295

19.315

19.296

19.312

19.297

19.313

19.301

19.316

19.302

19.317

19.303

19.318

19.304

19.319

19.305

19.320

19.306

19.321

19.307

19.322

19.308

19.326

19.309

19.327

19.310

19.328

19.312

19.329

19.314

19.331

19.315

19.332

19.316

19.333

Subpart M

19.321

19.341

19.322

19.342

19.324

19.344

19.325

19.345

19.326

19.346

19.327

19.347

19.328

19.348

19.329

19.349

19.331

19.343

19.333

19.353

Subpart N

19.341

19.371

19.342

19.372

19.343

19.373

19.344

19.374

19.346

19.376

19.348

19.378

19.351

19.381

19.352

19.382

19.353

19.383

19.354

19.384, 19.400

19.355

19.385

19.356

19.386

19.357

19.387

19.358

19.388

19.359

19.389

19.360

19.390

19.361

19.391

19.362

19.392

19.363

19.393

19.364

19.394

19.365

19.397

19.366

19.398

19.371

19.401

19.372

19.402

Subpart O

19.381

19.451

19.382

19.452

19.383

19.454

19.384

19.451, 19.456

19.385

19.455

19.386

19.457

19.387

19.453

19.388

19.461

19.389

19.462

19.390

19.463

19.391

19.459

19.392

19.460

19.393

19.458

19.394

19.464

19.395

19.471

19.396

19.451

Subpart P

19.401

New

19.402

19.505

19.403

19.506

19.404

19.507

19.405

19.508

19.406

19.509

19.407

19.510

19.409

19.481

19.410

19.482

19.411

19.483

19.414

19.484

19.415

19.485

19.418

19.531

19.419

19.532

19.420

19.533

19.421

19.534

19.424

19.536

19.425

19.537

19.426

19.538

19.427

19.540

19.428

19.541

19.431

19.502

19.434

19.701

19.435

19.702

19.436

19.703

19.437

19.704

19.441

19.96

Subpart Q

19.451

New

19.452

19.681, 19.682

19.453

New

19.454

19.683 through 19.686

19,455

19.687

19.457

19.688

19.459

19.691

Subpart R

19.461

19.561

19.462

19.562

19.463

19.563

19.464

19.564

19.465

19.565

Subpart S

19.471

New and 19.581

19.472

New

19.473

19.581

19.474

19.582

19.475

19.583

19.476

19.584

19.477

19.585

19.478

19.588

19.479

19.589

19.482

19.592

19.483

19.595

19.484

19.596(a) and (c)

19.485

19.593

19.486

19.599

19.487

19.597

19.488

19.596(b) and (c)

19.489

19.607

19.490

19.594

19.491

19.601

19.492

19.602

19.493

19.604

19.494

19.605

19.495

19.606

19.496

19.608

19.497

19.610

19.498

19.611

19.499

19.612

Subpart T

19.511

19.632

19.512

19.637

19.513

19.633

19.516

19.641

19.517

19.642 through 19.650

19.518

19.645

19.519

19.395

19.520

19.396

19.523

19.661, 19.662

19.525

19.663

Subpart U—Reserved

Subpart V

19.571

19.721

19.572

19.721, 19.731

19.573

19.723(a)

19.574

19.723(a) and (b)

19.575

19.723(c)

19.576

19.723(b)

19.577

19.721(c), 19.723(c)

19.578

19.721(d)

19.580

19.731

19.581

19.731(b), 19.732

19.582

19.722

19.584

19.736

19.585

19.736

19.586

19.736

19.590

19.740

19.591

19.741

19.592

19.742

19.593

19.743

19.596

19.746

19.597

19.747

19.598

19.748

19.599

19.749

19.600

19.750

19.601

19.751

19.602

19.748(b)

19.603

19.747

19.604

19.747

19.606

19.752

19.607

19.753

19.611

19.761

19.612

19.762

19.613

19.763

19.614

19.764

19.615

19.765

19.616

19.766

19.617

19.767

19.618

19.768

19.619

19.769

19.620

19.770

19.621

19.770

19.622

19.773

19.623

19.774

19.624

19.778

19.625

19.779

19.626

19.780

19.627

New

19.631

19.791

19.632

19.792

19.634

New

Subpart W

19.641

19.821

19.643

19.822

19.644

19.823

19.645

19.824

19.646

19.825

19.647

19.826

19.648

19.827

19.649

19.828

19.650

19.829

19.651

19.830

Subpart X

19.661

New and 19.901

19.662

19.907

19.663

19.901, 19.902

19.665

19.903

19.666

19.903

19.667

19.904

19.669

19.905

19.670

19.906

19.672

New

19.673

19.910, 19.912, 19.913, 19.918

19.674

19.913

19.675

19.910, 19.914, 19.918

19.676

19.910, 19.915 through 19.918

19.677

19.916

19.678

19.911

19.679

19.910

19.680

19.910

19.683

19.919

19.684

19.920

19.685

19.921

19.686

19.922

19.687

19.923

19.688

19.924

19.689

19.925

19.690

19.926

19.692

19.930

19.693

19.930

19.695

19.945

19.697

19.950

19.699

19.955, 19.958, 19.959

This text is long and has been trimmed here. Open the source document for the complete record.