[Federal Register: May 8, 2008 (Volume 73, Number 90)] [Proposed Rules] [Page 26199-26307] From the Federal Register Online via GPO Access [wais.access.gpo.gov] [DOCID:fr08my08-36] [[Page 26199]] ----------------------------------------------------------------------- Part II Department of the Treasury ----------------------------------------------------------------------- Alcohol and Tobacco Tax and Trade Bureau ----------------------------------------------------------------------- 27 CFR Part 19 Proposed Revision of Distilled Spirits Plant Regulations (2001R-194P); Proposed Rule [[Page 26200]] ----------------------------------------------------------------------- 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 [[Page 26201]] TTB. While Federal law allows for the limited home production of wine and beer, no such exemption exists for distilled spirits. DSPs are regulated under the provisions of two laws, the Internal Revenue Code of 1986 (IRC) (Title 26 of the United States Code) and the Federal Alcohol Administration Act (FAA Act) (Title 27 of the United States Code). The IRC imposes an excise tax on distilled spirits, requires plants to register, requires plants to obtain permits not otherwise required by the FAA Act, and imposes strict controls over the operation of DSPs. The FAA Act imposes a requirement to obtain a basic permit and contains various consumer-protection provisions, including provisions related to the formulation, labeling, and advertising of alcohol beverages. The FAA Act also controls various trade practices within the alcohol industry. Under these two laws, TTB regulates the distilled spirits industry in the United States. Each law authorizes the Secretary of the Treasury to prescribe regulations to carry out and enforce its provisions, and the Secretary has delegated this authority to TTB. The TTB regulations concerning DSPs are contained in title 27 of the Code of Federal Regulations, Part 19, Distilled Spirits Plants (27 CFR part 19). Major Regulatory Provisions A DSP consists of one or more of the following: production, storage, processing, denaturation, and bottling facilities. A DSP may be a large and complex plant, having all facilities, a simple storage facility consisting of only one building, or a small bottling facility with storage facilities. Production facilities are usually accompanied by some storage facilities. Bottling facilities are often accompanied by storage facilities, and must by law be accompanied by either a production or a storage facility. However, large storage facilities are often not accompanied by either of the other two types. Registration. Before commencing operations, the DSP proprietor must obtain an approved notice of registration. This application for registration includes: documents to set up distilling apparatus, environmental impact forms, personnel questionnaires, signature authorities, and a statement of security. Permits. Under the FAA Act, all persons who intend to engage in the business of: (a) Distilling spirits; (b) rectifying, blending, or bottling (processing) distilled spirits; or (c) warehousing and bottling distilled spirits, must file for a basic permit. To maintain control over the industrial use of distilled spirits, the IRC requires that an operating permit be obtained before commencing the production, warehousing, or bottling of alcohol for industrial use. Specifically, a permit is required for: Distilling for industrial use. Bonded warehousing of spirits for industrial use. Denaturation of spirits. Bonded warehousing of spirits (without bottling) for non- industrial use. Bottling or packaging of spirits for industrial use. Any other distilling, warehousing, or bottling operations not required to be covered by a basic permit under the FAA Act. DSP Bonded Premises. The physical premises of a DSP are divided into two technical categories: ``bonded premises,'' and unbonded or ``general premises.'' All activities relating to the distilling, storage, and processing (blending and mixing) of distilled spirits must be conducted on bonded premises. All activities relating to taxpaid alcohol beverages conducted at the distilled spirits plant must be conducted on general premises. Operations as a distiller, warehouseman, or processor may be conducted only on the bonded premises of a DSP by a person qualified to carry on such operations under 27 CFR part 19 and who has obtained the basic permits required by 27 CFR part 1, or, as appropriate, the operating permit required by part 19. However, certain other activities, such as those of apothecaries, customs bonded warehousemen, manufacturers of nonbeverage products, and users of specially denatured alcohol, may be carried on outside of DSPs. The continuity of a DSP must be unbroken except for separations that may include public waterways, thoroughfares, or carrier rights-of- way. In most instances, DSPs are also prohibited from being located in a dwelling house, in a shed, yard, or enclosure connected with a dwelling house, on board a vessel or boat, on premises where beer or wine is produced, in a retail liquor establishment, or where any other business is conducted. Bonds. Normally, the distilled spirits tax is not collected while spirits are held on the ``bonded'' premises of a distilled spirits plant. The potential tax liability of the spirits held on bonded premises is guaranteed by an operations bond, and taxable removals are covered by a withdrawal bond. The bond is a legally binding, written agreement involving three parties: the taxpayer, the surety (insurance or bonding company), and the U.S. Government. The purpose of the bond is to protect the financial interest of the Government. If for any reason, the taxpayer fails to pay the tax, then the surety (insurance or bonding company) is obliged to pay, up to the limit of the bond. Other Requirements. In addition to registering, obtaining a permit, and providing a bond, plants are required to comply with a number of regulations relating to plant security; the production, storage, and processing of spirits; recordkeeping; inspection and audit; and filing of reports. These requirements are outlined in 27 CFR part 19. Recordkeeping Accounts. All operations at a DSP are accounted for within three recordkeeping accounts: Production, Storage, and Processing. Since the facilities (tanks and rooms) of a DSP may be used for multiple purposes, the accountability of spirits must be maintained by appropriate records within the three accounts instead of physical separation. Payment of Taxes. The Federal excise tax on distilled spirits attaches to the spirits as soon as they are produced, and the distilled spirits plant is held liable for the tax on all distilled spirits held in the bond premises. The amount of Federal excise tax that a distilled spirits plant must pay is based upon the taxable removal of the spirits from the bonded premises. There are two basic methods of paying the tax on distilled spirits withdrawn from bonded premises-deferred payment and prepayment. Under the deferred payment system, the proprietor may withdraw spirits from bond after tax determination but before payment of tax. The excise tax paid is based on the amount of spirits removed from bond during each return period. Under the prepayment system, the proprietor must pay the distilled spirits tax after tax determination but before withdrawal of the spirits from bonded premises. Most DSP proprietors use the deferred payment system. Currently, the Federal excise tax rate on distilled spirits is $13.50 per proof gallon. The term ``proof gallon'' is unique to this particular commodity and means: a liquid gallon that contains 50 percent ethyl alcohol. Although the tax rate for distilled spirits is $13.50 per proof gallon, many distilled spirits products are actually taxed at a lower rate. Many products contain wine and/or flavors, and the IRC at 26 U.S.C. 5010 provides a credit for the wine and flavors content of the product. These credits effectively [[Page 26202]] reduce the rate of excise tax paid on distilled spirits products that contain wine and flavors. Nontaxable Transactions. Certain types of shipments to and from a distilled spirits plant are permitted without payment of tax. Examples are: Shipments of bulk (unbottled) spirits from one registered distilled spirits plant to another. (Bottled spirits are not eligible for untaxed transfer in bond between plants.) Shipments of bulk imported spirits from U.S. Customs and Border Protection custody to a distilled spirits plant. (Only bulk imported spirits are eligible for this type of transfer.) Direct exports of products from the United States. Shipments to users of industrial alcohol (certain permit holders who use alcohol for medical, research, or industrial purposes). B. Notice No. 870 and the Petition To Amend 27 CFR Part 19 On November 30, 1998, ATF issued a notice of proposed rulemaking, Notice No. 870 (63 FR 65720), that solicited comments on proposed changes to several sections of the regulations in 27 CFR part 19. The proposed changes included: (1) Delegations of authority, (2) removing a special tax provision, (3) liberalizing the requirement for approval of certain changes in plant personnel or procedures, (4) reducing the paperwork when plant premises are alternated with other premises, (5) providing for alternation of distilled spirits plant and brewery premises, (6) allowing denaturation and manufacture of articles to be done in a single, unified process, (7) specifying marks for packages of industrial spirits withdrawn taxpaid, (8) clarifying regulations that refer to a transfer record, and (9) incorporating a provision of an ATF Industry Circular regarding alcohol fuel into the regulations. In addition to these proposed changes, ATF asked for comments regarding the general recordkeeping system for distilled spirits plants prescribed in part 19. In response to Notice No. 870, ATF received extensive comments from the Distilled Spirits Council of the United States (DISCUS), a trade association representing distilled spirits industry members with interests in the U.S. market. While DISCUS provided comments on the specific issues raised in Notice No. 870, it also asked that ATF consider a broad range of regulatory changes to part 19. Essentially, in its comments on part 19, DISCUS asked ATF to initiate a complete revision of part 19. In support of its petition, DISCUS provided ATF with sample regulations that consisted of a ``markup'' version of 27 CFR part 19, along with numerous copies of variances (alternate methods or procedures) that ATF granted to members of the distilled spirits industry over the years. Suggested amendments included a broad range of issues, including, but not limited to, reduced recordkeeping requirements for distilled spirits plants, greater use of commercial records, reduced reporting requirements, reduced requirements for reporting changes affecting the DSP's registration, liberalized use of DSP premises, storage of distilled spirits on bonded premises through ``constructive segregation'' based on commercial records, and adoption of alternative methods in the regulations for universal applicability. In response to Notice No. 870, ATF also received comments from Equistar Chemicals, LP. Equistar is a producer of industrial ethyl alcohol, and its comments addressed issues in Notice No. 870 related to industrial alcohol. Equistar also commented on other issues affecting distilled spirits plants such as the amendment of plant registrations, recordkeeping, denaturation, and gauging. After reviewing the comments received in response to the Notice No. 870, ATF concluded that the amendments proposed in the 1998 NPRM were not extensive enough to address the changes that have taken place in the industry since the last major revision to the distilled spirits plant regulations took place over 20 years ago when ATF implemented the Distilled Spirits Tax Revision Act of 1979, commonly referred to as ``All in Bond.'' As the successor agency to ATF, TTB undertook a comprehensive review of the distilled spirits plant regulations in 27 CFR part 19 and the comments received in response to Notice No. 870. This notice of proposed rulemaking is the result of that review, and this notice supersedes Notice No. 870. We believe the proposed amendments will modernize the requirements for operating distilled spirits plants and make the regulations easier to understand, thereby allowing proprietors of such plants to operate in a more efficient manner. A discussion of our new proposal to amend part 19 in a more comprehensive way follows. C. General Changes Proposed in This Notice The following summarizes the general changes we propose to make to 27 CFR part 19. Plain Language On June 1, 1998, the President issued a memorandum that requires Federal agencies to write regulations in ``plain language.'' We fully support this initiative, and we have written these proposed regulations in the plain language style. In an effort to make these regulations easier to understand, we made several plain language changes to the part 19 regulations: We use the active voice in the regulations, whenever possible; We use shorter sentences, paragraphs, and sections; and We minimize the use of jargon and unnecessary technical terms. Structure of Part 19 In its comments on part 19, DISCUS points out that part 19 is ``excessively long, overcomplicated and very difficult to read.'' Further, it stated that the regulations are ``divided into 25 subparts, with many related and overlapping provisions included in two or more subparts.'' DISCUS recommends ``consolidating and re-grouping a number of regulatory provisions which are closely related, eliminating regulations which merely are redundant of each other or the statute, adding cross-references to related regulations, and clarifying regulatory language.'' We reviewed the various sections and subparts in the current part 19 and determined that much of the basic structure for part 19 needs to be amended. Under the current structure, information is not always located where a reader would logically expect to find it. For example, under the current regulations, information regarding distilled spirits taxes is found in two separate subparts, Subpart C, Taxes, and Subpart P, Transfers and Withdrawals. Subpart C contains much of the basic information about distilled spirits taxes, including the methods for calculating tax credits under the IRC at 26 U.S.C. 5010. However, information regarding determination of taxes and the filing of tax returns is located in subpart P. Logically, all information associated with distilled spirits taxes should appear within the same subpart. The proposed regulations consolidate all of the information concerning distilled spirits taxes into a new Subpart I, Distilled Spirits Taxes. Similarly, we reviewed all of the major topics covered in part 19 and attempted to group them together in a more logical order. Accordingly, this proposed, amended version of part 19 has been restructured with new subparts and related [[Page 26203]] information has been consolidated, where appropriate, into a single subpart. In addition, duplicative sections have been eliminated. The intent of this restructuring is to assist the reader and make it easier to locate related topics within part 19. The proposed subparts are as follows: Subpart A--General Provisions Subpart B--Administrative and Miscellaneous Provisions Subpart C--Restrictions on Production, Location, and Use of Plants Subpart D--Registration of a Distilled Spirits Plant and Obtaining a Permit Subpart E--Changes to Registrations and Permits Subpart F--Bonds and Consents of Surety Subpart G--Construction, Equipment, and Security Requirements Subpart H--Special (Occupational) Tax Subpart I--Distilled Spirits Taxes Subpart J--Claims Subpart K--Gauging Subpart L--Production of Distilled Spirits Subpart M--Storage of Distilled Spirits Subpart N--Processing of Distilled Spirits Subpart O--Denaturing Operations and Manufacture of Articles Subpart P--Transfers, Receipts, and Withdrawals Subpart Q--Return of Spirits to Bonded Premises and Voluntary Destruction Subpart R--Losses and Shortages Subpart S--Containers and Marks Subpart T--Liquor Bottle, Label, and Closure Requirements Subpart U--Reserved Subpart V--Records and Reports Subpart W--Production of Vinegar by the Vaporizing Process Subpart X--Distilled Spirits for Fuel Use Subpart Y--Paperwork Reduction Act Redundancy With the Law In its comments on part 19, DISCUS recommends that several sections of the regulations be deleted because those sections are ``redundant with the law.'' DISCUS notes that many of the sections simply repeat provisions of law contained in title 26 of the IRC. DISCUS recommends we delete these redundant sections of part 19 or revise the regulations to simply reference the appropriate section of the IRC. TTB recognizes that some sections of the part 19 regulations repeat provisions of the IRC. However, we intend that the part 19 regulations provide users with a comprehensive and complete body of the requirements for operating a distilled spirits plant. By making part 19 a complete reference tool, persons researching a particular issue will not need access to both the IRC and the regulations. Therefore, when a provision of law affects operations at a distilled spirits plant, we included that provision in part 19. However, in some instances, we deleted sections of the regulations that simply repeated information found in other regulations within part 19. Alternate Methods or Procedures. Periodically, TTB allows industry members to use an alternate method or procedure in lieu of a specific regulatory requirement in part 19. The current regulation at 27 CFR 19.62 describes how DSP proprietors may apply for an alternate method or procedure. Section 19.62 also describes the criteria that TTB uses when evaluating such requests. Generally, TTB may approve the use of an alternate method or procedure when: Good cause has been shown for use of the alternate method or procedure, The alternate method or procedure is consistent with the intent of the regulation, and The alternate method or procedure is not contrary to the law. Over the years, DSP proprietors have applied for a wide range of alternate methods or procedures in lieu of the requirements stated in part 19. We have evaluated these requests on a case-by-case basis using the criteria established in 27 CFR 19.62, and we have approved many of these requests. Industry members commonly refer to these alternate methods or procedures as ``variances.'' As part of its comments on part 19, DISCUS submitted numerous copies of variances that have been granted to members of the distilled spirits industry. The variances submitted by DISCUS were divided into three general categories, recordkeeping, separation of premises, and ``other.'' In its comments, DISCUS asserts that ATF granted variances from many of the regulatory requirements and that it is not aware of any variance that has caused any problems with Federal excise tax compliance. DISCUS recommends that variances granted to individual plant proprietors be extended to all plants in the revised regulations. In response to this suggestion, TTB reviewed the individual variances submitted by DISCUS for possible applicability to all distilled spirits plants. We found that many variances did, in fact, have general applicability to all plants. As a result, we have incorporated many of those methods or procedures into the proposed regulations, where appropriate. For example: Several variances were issued that allowed for the use of computer-generated records. This proposal has been adopted into the revised regulations at Sec. 19.572 and is discussed later in this preamble under our discussion of Records in subpart V. Several variances were issued that allowed for computer- generated reports and computer-generated transaction forms. These proposals were adopted into the revised regulations at Sec. 19.634, and are discussed later in this preamble under our discussion of records in subpart V. A variance was issued that allows for the filing of letterhead notices to report certain changes at a plant. This procedure providing for the use of letterhead notices has been incorporated into the new subpart E and is explained more fully under our discussion of subpart E. Several variances were issued that allow for the use of ``commercial records'' to record transactions and/or operations. The use of documents created in the ordinary course of business, rather than documents created expressly to meet the requirements of part 19 is now provided for in the proposed regulations at Sec. 19.572 in subpart V. A variance was issued that allows modified ``abbreviations'' to be used. The proposed regulations will not prescribe any official abbreviations for use on forms and records to identify spirits, and the provisions of current Sec. 19.726, which prescribe official abbreviations have been deleted from the proposed regulations. However, we will continue to list authorized abbreviations for marking containers found in the current regulations at Sec. 19.612. A variance was issued that allows filled, capped, and labeled bottles to remain on the bottling line at the end of each work day if the same brand and size will be produced on the next bottling shift. This variance was incorporated into the proposed regulations at Sec. 19.358 and is discussed under subpart N. A variance that allows the bottling of liqueurs from a tank truck or tote was incorporated into the proposed regulations at Sec. 19.352 and is discussed under subpart N. A variance whereby certain small tanks are not required to be mounted on scales was incorporated into the proposed regulations at Sec. 19.183 and is discussed under subpart G. [[Page 26204]] Several variances have been approved that allow for the use of meters in gauging spirits for purposes other than tax determination. We are proposing significant changes in the new regulations that will allow for the use of accurate mass flow meters, without prior approval by TTB, for bulk tax determination gauges and other required gauges at a distilled spirits plant if the meters meet certain criteria for accuracy. During our review of the variances submitted by DISCUS, we also found several that were not appropriate for incorporation into the new, revised regulations. In some instances, we did not wish to apply the provisions of a particular alternate method or procedure to all DSP proprietors without regard to their compliance history and other factors. As such, proprietors may continue to apply for these types of alternate methods or procedures, and we will evaluate them on a case- by-case basis. For example, we have issued several variances to DSP proprietors regarding the timing and frequency of required inventories for bulk and cased spirits. In evaluating this type of variance, we frequently consider the compliance history of the particular plant, shortages and gains disclosed by past inventories, along with other factors. Accordingly, this type of authorization does not have general applicability and is not appropriate for inclusion in the new proposed regulations. However, we will continue to approve this type of request, when appropriate, on a case-by-case basis. In other instances, the subject matter of a particular variance only applied to a very specific situation at a single plant and was, therefore, not applicable to all plants. Accordingly, we did not incorporate this type of variance into the new proposed regulations. For example: We approved several variances in regard to case markings that did not have general application to the case markings used by other plants. We approved a ``business day'' for a plant that runs from 2 a.m. through 1:59 a.m. This type of variance does not have general applicability to other plants. In summary, we have incorporated a number of existing variances into the proposed regulations where appropriate, and when the variance would have general applicability to the industry. D. Specific Changes Proposed in This Notice The following is a discussion of the new, revised subparts in 27 CFR part 19 and the specific changes that we propose to make in the part 19 regulations. Subpart A--General Provisions Proposed subpart A includes several sections that have general applicability to part 19, including a revised definitions section, a section that defines the territorial extent of the regulations, and a section that identifies other regulations that relate to part 19. In the proposed definitions section at Sec. 19.1, we propose some minor amendments to the language used within this section to clarify the meaning of some terms. We also propose to add some new terms and delete an outdated term found in the current definitions section. We propose to add the terms ``accurate mass flow meter,'' ``general premises,'' ``letterhead application,'' ``letterhead notice,'' ``National Revenue Center,'' ``TTB officer,'' and ``we.'' We propose to delete the term ``region director.'' We also propose to move two sections currently located in subpart D, under the heading ``Activities Not Subject To This Part,'' to subpart A. The relocated sections are Sec. 19.4, Recovery and reuse of denatured spirits in manufacturing processes, and Sec. 19.5, Manufacturing products unfit for beverage use, which are currently found at Sec. Sec. 19.57 and 19.58, respectively. Subpart B--Administrative and Miscellaneous Provisions Proposed subpart B contains the administrative and miscellaneous provisions for part 19 that are currently found in subpart D. However, some sections of regulations that are located in the current subpart D have been relocated to other revised subparts, where appropriate. For example, we propose to move sections relating to gauging to the new proposed Subpart K, Gauging. Similarly, we propose to relocate sections relating to the conveyance of spirits or wines on plant premises to the new proposed Subpart C, Restrictions, Location, and Use of Plants. Proposed subpart B includes a ``penalty of perjury'' section that is currently located at Sec. 19.100. In its comments on part 19, DISCUS proposes the deletion of the requirement that documents be executed under penalties of perjury from several sections of regulations. DISCUS states that ``these penalties are unnecessary and excessive in light of the fact that a proprietor's permit is subject to revocation under the Federal Alcohol Administration Act for failure to comply with the Bureau's requirements.'' TTB did not adopt this proposal. The penalty of perjury statement is an important safeguard that places legal responsibility for the truthfulness of significant documents filed with TTB on the documents' signatories. Generally, we do not require the ``penalty of perjury'' statement on most documents and records. Its use is generally restricted to claims, tax returns, applications, and similar documents. The IRC at 26 U.S.C. 6065 states, ``Except as otherwise provided by the Secretary, any return, declaration, statement, or other document required to be made under any provisions of the internal revenue laws or regulations shall contain or be verified by a written declaration that it is made under penalties of perjury.'' Consistent with the IRC at 26 U.S.C. 6065 and along with the other tax collection agencies within the Department of the Treasury, TTB requires that such documents be signed under penalties of perjury. The penalty of perjury provision in the proposed regulations is located at Sec. 19.45. Subpart C--Restrictions on Production, Location, and Use of Plants Proposed subpart C covers restrictions associated with the operation of a distilled spirits plant, along with the location and use of DSP premises. In its comments on part 19, DISCUS makes several recommendations affecting those sections of the current regulations that govern restrictions, locations, and use of DSP premises. We discuss these recommendations and our responses below. Restrictions regarding location. Currently, 27 CFR 19.131 provides that a distilled spirits plant may not be located on premises where beer or wine is produced, or liquors of any description are retailed, or (except as provided in Sec. 19.133) on premises where any other business is conducted. DISCUS contends that physical separation of commodities is meaningless and recommends that this restriction be amended to allow a distilled spirits plant to be located on such premises if the proprietor's records show the separate operations. We did not adopt this proposal because Federal law does not provide for ``constructive'' separation of premises by records only. The language of this regulation is derived directly from the language of the IRC at 26 U.S.C. 5178(a)(1)(B), which states that a distilled spirits plant shall not be located ``on premises where beer or wine is made or produced, or liquors of any description are retailed, or on premises where any other business is carried on (except when authorized under subsection (b)).'' This [[Page 26205]] provision appears in the proposed regulations at Sec. 19.52. Continuity of premises. Currently, the regulation at Sec. 19.132 provides that the physical continuity of a distilled spirits plant must be unbroken except for separation by public waterways, thoroughfares, or carrier rights-of-way. However, TTB may approve other separations of the plant premises when all parts of the plant are in the ``same general location.'' DISCUS recommends that the term ``same general location'' mean within 200 miles of the distilled spirits plant. We did not adopt this recommendation in the proposed regulations. Although DISCUS states that a ``200 mile rule'' would provide increased operational flexibility for proprietors, they do not explain how this would occur under their proposal and why that distance is more appropriate than any other. Over the years TTB has received a number of requests to establish non-contiguous distilled spirits plant premises. We have evaluated each of these requests on a case-by-case basis. In our evaluation of each request, we consider a number of factors, such as: Security and protection of the revenue, Distance between the main plant premises and the proposed non-contiguous premises, Whether the non-contiguous premises would cross State lines, Whether the non-contiguous premises will facilitate inspections and audits, and Whether establishment of non-contiguous premises would provide the proprietor with a means for delaying payment of taxes. We propose to retain the case-by-case analysis based on multiple factors, instead of adopting a 200 mile rule as proposed by DISCUS. As a general rule, we believe that the ``same general location'' must not be too large an area so that the revenue is placed at risk. Also, because a distance of 200 miles could extend over a multi-state area and would cross over into different field offices within TTB, such a distance would create administrative difficulties for TTB. This provision appears in the proposed regulations at Sec. 19.53. Other businesses. Currently, the regulation at Sec. 19.68 provides that TTB may authorize the carrying on of other businesses (not otherwise prohibited) on DSP premises under certain conditions. The other businesses should not pose a jeopardy to the revenue, hinder the effective administration of part 19, or be contrary to law. There is a similar section of regulations at Sec. 19.72. DISCUS recommends the removal of Sec. 19.68 since it is redundant with Sec. 19.72. We agree that Sec. Sec. 19.68 and 19.72 are very similar, and we have merged the two sections into a single section within the proposed regulations at Sec. 19.55. Bonded warehouses not on premises qualified for production of spirits. The current regulation at Sec. 19.134 allows for the establishment of a bonded warehouse on premises that are not qualified for the production of spirits, if the need for such is clearly established. DISCUS recommends the amendment of this section by adding language stating that the warehouse may be within 200 miles of the main plant. We did not adopt this recommendation for the same reasons discussed above under the heading, ``Continuity of Premises.'' This provision is found in the proposed regulations at Sec. 19.56. Taxpaid spirits or wines on bonded premises. The current regulation at Sec. 19.97 provides that spirits or wines on which the tax has been paid or determined may be conveyed across bonded premises but cannot be stored or remain on bonded premises, and must be kept separate and apart from spirits or wines on which the tax has not been paid or determined. DISCUS recommends the addition of new language to this section whereby the area where taxpaid spirits or wines are stored will not be considered bonded premises if the proprietor's records show that the tax has been paid or determined. They state that their proposal would ``shift the focus from the outdated requirement of physical segregation to a modernized, efficient approach based upon `constructive segregation.' '' We did not adopt this recommendation because the IRC does not allow for the separation of premises solely by records. The IRC at 26 U.S.C. 5612 clearly states that taxpaid or tax determined spirits cannot be stored on bonded premises. Further, the bonded area of a DSP is a clearly defined physical area of the plant with clearly defined boundaries. It is not an area defined only by records of the type of spirits stored on the premises. In our proposed regulations, this section is now found at Sec. 19.58. Conveyance of untaxed spirits or wines within a distilled spirits plant. Currently, the regulation at Sec. 19.98 provides that untaxed spirits or wines can be conveyed between different bonded areas of a plant and across areas of a plant that are not bonded. DISCUS recommends the amendment of this section by adding language whereby if the proprietor's records show the tax has not been paid or determined, then the untaxed spirits will be considered to be on bonded premises (constructive segregation). We did not adopt this recommendation because the regulation already allows for the transfer of untaxed spirits across areas of a plant that are not bonded. The amendment proposed by DISCUS would only incorporate the idea of ``constructive segregation'' into this section of the regulations. However, since the regulation already allows for transfers across areas of the plant that are not bonded, the amendment proposed by DISCUS is not necessary. This section of the regulations is now found at Sec. 19.59 in the proposed regulations. Spirits in customs custody. Currently, the regulation at Sec. 19.99 provides that spirits in customs custody may be conveyed across DSP premises under certain conditions. Those conditions include: The spirits may not be stored or allowed to remain on DSP premises. The spirits must be kept separate from other spirits on DSP premises. The means and route of conveyance must be approved. The proprietor must file a consent of surety. DISCUS recommends the addition of language to this section whereby if the proprietor's records show that spirits are in customs custody, then the area where the spirits are stored will not be considered part of the DSP premises. We did not adopt this DISCUS recommendation for several reasons. First, this section of regulations deals with conveyance of spirits in customs custody across DSP premises. It does not deal with the storage of such spirits on DSP premises. In addition, TTB bonded premises and customs bonded premises are two distinct types of bonded premises. TTB bonded premises are established under the laws and regulations administered by the Alcohol and Tobacco Tax and Trade Bureau, while customs bonded premises are established under a separate set of laws and regulations administered by U.S. Customs and Border Protection. As such, the premises cannot be co-located, and there is no basis in the law for constructive segregation of these bonded premises by records only. The bonded area of a DSP is a clearly defined physical area of the plant with clearly defined boundaries. It is not an area defined only by records. In our proposed regulations, this section is now found at Sec. 19.60. Production of distilled spirits for personal use. Frequently, TTB receives [[Page 26206]] questions from the general public asking whether the law allows for the production of distilled spirits in the home for personal use. Under Federal law (26 U.S.C. 5171), distilled spirits may only be produced at a registered distilled spirits plant. Therefore, we propose to add a new section to subpart C, which will explain that a person may not distill spirits at home for personal use. This new section is found in the proposed regulation at Sec. 19.51. Subpart D--Registration of a Distilled Spirits Plant and Obtaining a Permit The current regulations governing the qualification of a distilled spirits plant are found in subpart G. These regulations cover a number of issues, including the requirements for plant registration, operating permits, alternation of premises, and amending registrations and operating permits. Proposed subpart D covers the initial registration of a distilled spirits plant and procedures for obtaining an operating permit. We propose to assign regulations concerning changes after the original qualification of the plant to the new subpart E. In the proposed subpart D, we also propose to rearrange the information related to the qualification of a distilled spirits plant in a more logical order. For example, we propose to group all registration information together under a heading titled ``Requirements for Registering a Plant,'' while information relating to operating permits is grouped together under a separate heading titled ``Requirements for an Operating Permit Under the I.R.C.'' In the current regulations, much of the information regarding registration and operating permits is intermingled. We believe that separating these subjects will make it easier for readers to understand which requirements apply to plant registration and which requirements apply to operating permits. Other businesses. In its comments on part 19, DISCUS proposes the inclusion of a cross-reference at Sec. 19.152 of the current regulations, indicating that ``other businesses'' may be allowed under a separate section of the regulations. We adopted this proposal in the proposed regulations at Sec. [thns x p]19.73(b). Major equipment. DISCUS also recommends in its comments that the requirement to list major equipment on the application for registration, currently found at Sec. 19.166, be amended. First, it states that the regulation should be clarified to provide that ``major equipment'' must be identified in the registration only if it is ``set up'' and ``used for distillation, redistillation, or recovery of spirits.'' We adopted this suggestion in part. We do not see any need to list major equipment in the application that is not ``set up'' and used for the production, storage, or processing of spirits. Therefore, we have inserted language in the proposed regulations at Sec. 19.75, which requires that equipment be listed if it is ``set up'' and used for the production, storage, or processing of spirits. DISCUS also recommends that a paragraph be added to Sec. 19.166 stating that ``bulk containers of less than 101 wine gallon capacity and not meeting the criteria of a tank under Sec. 19.273 (such as perks and small totes) are not items of major equipment and are not required to be listed in the application for registration.'' This recommendation is reasonable because such containers are not items of major equipment, and we include it in the proposed regulation at Sec. 19.75. In addition, DISCUS recommends that the requirement to provide a ``statement of certification of accurate calibration'' for tanks found in the current regulations at Sec. Sec. 19.166 and 19.273(a)(6) be eliminated. This recommendation is reasonable and has been adopted in the proposed regulations because it only involves eliminating a requirement to include a ``statement of certification of accurate calibration'' in the notice of registration. The proposed regulation at Sec. 19.182 will continue to require that tanks be accurately calibrated. Registration file. The IRC at 26 U.S.C. 5171(c) requires that persons must apply for and receive a notice of registration before commencing business as a distilled spirits plant. In regard to the maintenance of the registration file, currently at Sec. 19.155, DISCUS recommends the addition of language to allow the registration file to be kept in computerized records. We did not adopt this proposal because registration documents are normally submitted to TTB in a hard-copy format and returned to the proprietor by TTB in hard-copy format. DISCUS also recommended the elimination of the requirement that the registration file be kept ``at the plant.'' We did not adopt this proposal because the file must be readily available for inspection by appropriate TTB officers. LLCs and LLPs. The current regulations governing qualification of a distilled spirits plant in subpart G only acknowledge three types of business organizations, sole proprietorships, partnerships, and corporations. In view of the increasing use of limited liability companies (LLCs) and limited liability partnerships (LLPs), we have included instructions for these types of business organizations in the proposed regulations at Sec. 19.93. Subpart E--Changes to Registrations and Permits Proposed subpart E includes the regulations governing changes to the distilled spirits plant registration, changes to operating permits, and alternation of plant premises. Similar to the changes that we propose in new subpart D, much of the information in the new subpart E is arranged in a more logical order. For example, matters affecting changes to registration are grouped together under the heading titled ``Rules for Amending a Registration,'' and matters affecting changes to operating permits are grouped together under the heading titled ``Rules for Amending an Operating Permit.'' In the current regulations, much of the information regarding changes to the registration and changes to the operating permit is intermingled. As with new subpart D, we believe that separating these subjects will make it easier for readers to understand the specific requirements that apply to amending either the plant registration or the operating permit. Letterhead notices and letterhead applications. In its comments on part 19, DISCUS makes several recommendations regarding how proprietors should apply for changes to a plant's registration or operating permit. Generally, DISCUS recommends that, in most instances, the regulations allow proprietors to request changes by filing a letterhead notice. In its petition, DISCUS states that: Subpart G provisions regarding changes in the information shown in the original registration should be revised to eliminate unnecessary prior submissions and prior approval requirements. Similar to our alternation proposals, 27 CFR 19.180, 19.82 and 19.183 (application for amended registration, change in name of proprietor and change of trade name, respectively) should be amended to provide that a proprietor file a letterhead notice reporting any change within 30 days after the change. Further, 27 CFR 19.184 and 19.185 (changes to largest stockholders and changes in officers and directors, respectively) should be revised to provide identical treatment (i.e., reported in the next amended registration) because there is no reason to treat these changes differently. TTB agrees that we should simplify the amendment of registrations and permits wherever possible. Accordingly, we are proposing to expand the use of both letterhead notices and letterhead applications for reporting changes to the registration and permit. We will allow the use of letterhead notices to report [[Page 26207]] minor changes affecting the registration or permit. We will allow for the use of letterhead applications for more substantive changes but these must be approved by TTB prior to the change. The use of amended applications, letterhead applications, and letterhead notices are discussed in the proposed regulations at Sec. Sec. 19.112 and 19.126. Changes in the statement of plant security. In the current regulation at Sec. 19.153(b), an application for amended plant registration (form TTB F 5110.41) must be filed each time there is a change in plant personnel or procedures contained in the statement of security. In Notice No. 870, ATF proposed to liberalize this requirement. Therefore, we propose that Sec. 19.153(b) be amended to require that a letterhead application be filed for changes in the security procedures listed in Sec. 19.153(a)(1)-(4), and that a letterhead notice be filed for changes in the personnel listed in Sec. 19.153(a)(5). Thus, the letterhead application or letterhead notice would replace the amended registration that was required each time that the information in Sec. 19.153(a)(1)-(5) changed. The plant registration would be updated on an annual basis to incorporate changes made during the preceding year. In its comments on Notice No. 870, Equistar Chemicals states that it endorses the proposed changes and would encourage any additional efforts to facilitate compliance through reducing nonessential paperwork. However, Equistar asks for some clarification of this proposal. It pointed out that the proposal allows companies to submit a ``letterhead application'' and ``letterhead notice'' for changes. Equistar states that it presumes that we intended companies to simply send an informal letter notifying the agency of procedure or personnel changes. The company asks for a clarification of these terms. In response to this request for clarification, TTB advises that the terms ``letterhead application'' and ``letterhead notice'' refer to a letter from a company representative, with signature authority, on company letterhead (see definitions). The ``letterhead application'' is subject to TTB approval prior to the change; however, the ``letterhead notice'' is not subject to prior approval. These terms are now fully explained in the proposed regulations at Sec. Sec. 19.112 and 19.126. Equistar also points out that ``the proposal requires a letterhead application for `changes in any of the information' listed in the sections of the Statement of Physical Security that address procedural changes.'' The company states that a requirement to advise us of ``any changes'' is overly broad and could encompass non-substantive as well as substantive changes. Equistar recommends that we maintain the rule's original language that covers changes in ``procedure'' rather than ``any changes.'' The current regulation governing changes in plant security, which appears at Sec. 19.153, has been rewritten to clarify the type of changes that may be reported to TTB by letterhead application or letterhead notice. In our proposed regulations, this section is now located at Sec. 19.123. In its response to Notice No. 870, DISCUS states that it supports the proposal whereby a distilled spirits plant would file a letterhead notice instead of an amended registration for changes in the information provided under 27 CFR 19.153(a)(5). However, DISCUS recommends the deletion of the word ``security'' from the proposed term ``security personnel listed in paragraph (a)(5).'' DISCUS states that the term ``security personnel'' is not used in paragraph (a)(5) and is not synonymous with the persons covered by paragraph (a)(5). We agree that the term ``security personnel'' is not an accurate term. Therefore, we propose deleting the word ``security'' from the proposed regulation at Sec. 19.76. DISCUS also recommends that the regulations conform their treatment of changes in Sec. 19.153(a)(1)-(4) to the proposed changes in paragraph (a)(5). DISCUS asks that the regulations allow these changes to be reported by a letterhead notice within 30 days after the changes. DISCUS states that the information required by paragraphs (a)(1)-(4) and (a)(5) concern the same issues, and ``no reason exists to subject subsection (a)(5) to different treatment than subsections (a)(1)- (a)(4).'' In response to this recommendation, TTB advises that the information at Sec. 19.153 is part of the data for an ``application'' for registration (27 CFR 19.152(k)). As such, the items of information provided under Sec. 19.153 are subject to pre-approval for initial qualification of a distilled spirits plant and continued qualification of each plant. Further, the items listed under Sec. 19.153(a)(1) through (4) represent crucial physical security features of a plant and must, therefore, be subject to prior approval by TTB. In contrast, the information required by Sec. 19.153(a)(5) is a listing of persons having responsibility for custody and access to keys for approved locks at the distilled spirits plant. Since plants are free to designate the persons responsible for such custody, this particular item of information is not something that needs to be pre-approved. Therefore, this item will be treated as a ``notification'' rather than an ``application.'' These changes now appear in the new, proposed regulations Sec. Sec. 19.76 and 19.123. Change in name of proprietor. The current regulation at Sec. 19.182 requires that the proprietor file an application to amend the registration and the operating permit whenever there is a change in the name of the proprietor. DISCUS recommends the amendment of that regulation to allow the filing of a letterhead notice within 30 days of the name change, and that the new information be included in the next application to amend the registration and the next application to amend the operating and/or basic permit filed by the proprietor. DISCUS also recommends deleting from the current regulations the phrase, ``Operations may not be conducted under the new name prior to approval of the amended registration and issuance of the amended permit.'' The provisions of the current regulation at Sec. 19.182 will be covered in the proposed regulations at Sec. Sec. 19.113 and 19.128, and the proposed regulations will no longer require the filing of amended applications. Instead, the proposed regulations will allow for the filing of a letterhead application. However, since a change in the proprietor's name is a substantive change, the proposed regulation will still prohibit operations conducted under the new name before TTB approves the letterhead application. Change of trade name. The current regulation at Sec. 19.183 requires that the proprietor file an application to amend the operating permit when there is a change in the trade name of the proprietor. Operations may not be conducted under the new trade name until the amended permit is approved. DISCUS recommends the amendment of the regulation to allow for the filing of a letterhead notice within 30 days of the change and no longer require an application to amend the operating permit. In the proposed regulation at Sec. 19.129, TTB will no longer require the filing of an amended application. Instead, the proposed regulation will allow for the filing of a letterhead application. However, since any change in the trade names used by the proprietor is a substantive change, the proposed regulations will still prohibit operations conducted under the new trade name prior to TTB's approval of the letterhead application. Change of stockholders. The current regulation at Sec. 19.184 allows for the filing of an annual report of changes in [[Page 26208]] major stockholders except where the sale or transfer of capital stock results in a change in control or management. In its comments on part 19, DISCUS recommends that the language of the regulation be amended to read, ``Changes in the list of stockholders furnished under the provision of Sec. 19.167(c)(1) shall be reported in the next application for amended registration on Form 5110.41 filed by the proprietor.'' In the proposed regulations at Sec. Sec. 19.114 and 19.130 we will allow a proprietor to submit an annual letterhead notice regarding changes in major stockholders. Under the proposed regulations, the changes must be incorporated in the next application filed, unless a change of control occurs. If a change in control takes place, Sec. 19.114 requires that the proprietor must file TTB F 5110.41, Registration of Distilled Spirits Plant, within 30 days of the change, and Sec. 19.130 requires that the proprietor must file TTB F 5110.25, Application for Operating Permit Under 5171(d), within 30 days of the change. Changes in officers and directors. The current regulation at Sec. 19.185 requires that a proprietor file an application for amended registration on Form 5110.41 when there is a change in the list of officers or directors. DISCUS recommends that the regulation be amended to state that the proprietor will report the change on the next application on TTB F 5110.41 for amended registration filed by the proprietor. In the proposed regulations at Sec. Sec. 19.115 and 19.131, we propose to allow a proprietor to submit a letterhead notice at the time of the changes and incorporate the changes in the next application for amended registration filed on form TTB F 5110.41 and the next form TTB F 5110.25 filed. Permit transfers. In its comment on Notice No. 870, Equistar Chemicals asked that ATF (BATF in its comment) examine ways to minimize the paperwork and notice requirements associated with ATF permits when a change of ownership occurs. Equistar states: BATF should examine ways to minimize the paperwork and notice requirements necessary to transfer BATF permit ownership in order to facilitate a smoother and less burdensome transition to the acquiring entity. Because the Securities and Exchange Commission (SEC) obtains copious records on publicly traded companies, perhaps BATF could coordinate efforts with SEC in cases where the acquiring entity is a publicly traded company and obtain company information through existing government databases. Alternatively, BATF could also prevent duplication by allowing companies to submit their annual reports in lieu of filling out numerous forms and applications. Such solutions would simultaneously facilitate BATF's access to companies' business information and alleviate the burden on companies who must currently submit new documentation of standard business information to each governmental branch who requests it. In general, TTB agrees that we should simplify the amendment of registrations and permits wherever possible. For this reason, we propose to expand the use of both letterhead notices and letterhead applications for reporting changes to the registration and the operating permit. However, in regard to utilizing SEC filings in cases where there is a change in ownership or control, there are several problems. First, much of the information that a proprietor submits in support of a plant registration or an operating permit is specific to distilled spirits operations. As such, this type of information, except for some similar items of information, is not required by agencies such as the SEC and so copies of such submissions would be inadequate for TTB purposes. Adoption of formulas. The current regulation at Sec. 19.187 provides for the adoption of formulas by a successor. DISCUS recommends in its comments on part 19 that the regulation refer to 27 CFR 5.28 and that the language in Sec. 19.187 which is redundant with Sec. 5.28 be removed. In the proposed regulations we eliminated Sec. 19.187 as a separate section of regulations and we have incorporated references to the adoption of formulas and Sec. Sec. 5.28 and 20.63 into the proposed regulations at Sec. Sec. 19.116 and 19.132. Changes in premises. The current regulation at Sec. 19.190 refers to several sections of regulations relating to alternation of premises. DISCUS recommends the amendment of these references to ensure the accuracy of cross-references to other appropriate sections in part 19. The accuracy of cross-references is important so we propose to amend the references at proposed Sec. 19.119 to reflect the new section numbers for alternation of premises. Change in operations. The current regulation at Sec. 19.191 requires that a DSP proprietor file an application to amend the registration and operating permit if the proprietor wishes to engage in a new business involving distilled spirits. This section also applies to conducting other businesses on DSP premises. DISCUS recommends the addition of language to the end of this section stating, ``Applications may be approved as provided in Sec. 19.72.'' In the proposed regulation at Sec. 19.120, we now include a reference to Sec. 19.55, which is the section of regulations relating to other businesses. Changes in