96-14881. Taxpaid Distilled Spirits Used in Manufacturing Products Unfit for Beverage Use (73R-24P)

[Federal Register Volume 61, Number 120 (Thursday, June 20, 1996)]
[Rules and Regulations]
[Pages 31399-31427]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-14881]



=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF THE TREASURY

Bureau of Alcohol, Tobacco and Firearms

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

[T.D. ATF-379; Re Notice Nos. 634, 649, 748, and 758]
RIN 1512-AA20


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

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

ACTION: Final rule, Treasury decision.

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

SUMMARY: This final rule amends and recodifies the regulations on 
taxpaid distilled spirits used to manufacture nonbeverage products. The 
regulations formerly in 27 CFR part 197 (Drawback on Distilled Spirits 
Used in Manufacturing Nonbeverage Products) are recodified as a new 
part, designated 27 CFR part 17. In conjunction with the 
recodification, a number of changes to the drawback regulations have 
been made. Further, the regulations formerly in 27 CFR part 170, 
subpart U (Manufacture and Sale of Certain Compounds, Preparations, and 
Products Containing Alcohol) have been distributed between 27 CFR part 
19 and the new part 17; and conforming amendments have been made in 27 
CFR parts 70, 194, and 250. Significant changes from prior regulations 
are discussed below under SUPPLEMENTARY INFORMATION.

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

FOR FURTHER INFORMATION CONTACT: Steve Simon, Wine, Beer, and Spirits 
Regulations Branch, Bureau of Alcohol, Tobacco and Firearms, 650 
Massachusetts Avenue NW, Washington, DC 20226; [phone].

SUPPLEMENTARY INFORMATION:

Notices of Proposed Rulemaking

    On July 29, 1987, ATF published Notice No. 634 in the Federal 
Register (52 FR 28286). That notice proposed the recodification of 
regulations concerning nonbeverage drawback, including changes from the 
former regulations (27 CFR part 197). Public comment was requested 
concerning the proposed changes. A 90-day comment period was provided, 
which ended on October 27, 1987. In response to Notice No. 634, ATF 
received four written public comments. In addition, some review 
comments were received from ATF personnel after the publication of 
Notice No. 634.
    On December 8, 1987, ATF solicited additional public comments 
regarding the nonbeverage drawback regulations. On that date, ATF 
published Notice No. 649 (52 FR 46628), which requested comments 
specifically relating to drawback on nonbeverage products brought into 
the U.S. from Puerto Rico or the Virgin Islands. In conjunction, the 
comment period for Notice No. 634 was extended until January 8, 1988. 
No additional comments concerning Notice No. 634 were received pursuant 
to that extension.
    On August 31, 1992, ATF decided to republish the proposed 
recodification and amendment of 27 CFR part 197. Notice No. 748 was 
published in the Federal Register (57 FR 39536). Because more than 4 
years had elapsed since the end of the previous comment periods, the 
proposed regulations were republished in their entirety, with some 
additional changes, so that anyone else who wished to comment on them 
would have an opportunity to do so.
    Notice No. 748 prescribed a 30-day comment period, which was 
scheduled to end on September 30, 1992. On September 14, 1992, ATF was 
asked to extend this comment period for an additional 90 days. ATF 
partially granted this request. On October 1, 1992, Notice No. 758 (57 
FR 45357) extended the comment period for Notice No. 748 by an 
additional 30 days, until October 30, 1992. The full 90-day extension 
(as requested) was not granted, because most of the same regulatory 
issues had been previously aired for public comment during a sufficient 
length of time. Subsequent to the official ending of the comment 
period, comments that were received while it was still practicable to 
consider them were given consideration.
    In response to Notices No. 748 and 758, comments were received by 
letter, telephone, and personal visit from a total of twelve persons 
representing eleven entities (nine industry members and two industry 
groups). These comments are discussed carefully below, following the 
discussion of comments submitted previously under Notice No. 634.

Public Comments on Notice No. 634

    Comments relating to Notice No. 634 were received from four 
correspondents:
    1. One commenter proposed that Sec. 17.183 be liberalized to allow 
manufacturers to sell or transport byproducts from which alcohol may be 
recovered, without removing the alcohol or adding an appropriate 
substance to prevent the recovery of residual alcohol. The commenter 
was concerned particularly about economic loss from an inability to 
process ``spent'' vanilla beans for food use applications.
    ATF did not adopt this comment, because potable alcohol recovered 
from a nonbeverage manufacturer's byproduct would have been previously 
subject to drawback; thus less than 10% of the tax would remain paid. 
The possible recovery of such potable alcohol by unknown persons would 
present an unacceptable jeopardy to the revenue. Subject to formula 
approval and/or approval of an alternative procedure under Sec. 17.3, 
ATF could allow byproducts containing recoverable alcohol to be 
subjected to additional processing, on the manufacturer's premises, for 
food use applications.
    The basis for Sec. 17.183 in this final rule is ATF Ruling 81-8, 
1981-4 QB 24. That ruling provided a liberalized procedure for the 
disposition of spent vanilla beans, whereby they could be treated with 
any substance that the manufacturer deemed adequate to make

[[Page 31400]]

recovery of potable alcohol impractical. This procedure has been 
broadened in Sec. 17.183 to apply to the disposition of any byproduct 
from which alcohol can be recovered. However, under the broadened rule, 
prior approval from ATF must be obtained for treatment with substances 
not previously authorized.
    In Sec. 17.183(c), certain substances are authorized for treatment 
of spent vanilla beans. No further authorization is needed for the use 
of these substances, when disposing of spent vanilla beans. Approval is 
required if other substances will be added to such beans, or if other 
byproducts from which alcohol can be recovered will be disposed of. 
Manufacturers who have already received approval for other methods of 
disposal, not mentioned in Sec. 17.183, may continue to operate under 
such approval.
    2. Another commenter expressed support for some of the proposals of 
Notice No. 634, but he had reservations about several others. He 
requested that ATF review the nonbeverage industry's ``historical 
compliance track record'' before imposing new recordkeeping 
requirements concerning usage of finished products (Sec. 17.166); he 
questioned the revised definition of ``distilled spirits'' in 
Sec. 17.11 as being different from the definition of the same term in 
27 CFR part 5; and he sought a ``transition period'' for the 
implementation of new language in Sec. 17.161 (dealing with general 
requirements for records).
    ATF reviewed the compliance record of the nonbeverage manufacturing 
industry and determined that the new records in Sec. 17.166(b), 
concerning usage of nonbeverage products, are needed to verify that 
such products were manufactured in the amount claimed. The new records 
close a gap in the recordkeeping system of the former part 197. 
(However, see the further discussion of this issue below, in 
conjunction with a comment submitted pursuant to Notice No. 748.)
    The revised definition of ``distilled spirits'' was also kept 
unchanged, because the revised definition is consistent with the 
definition of ``distilled spirits'' in the Internal Revenue Code (26 
U.S.C. 5002(a)(8)). The nonbeverage drawback regulations are issued 
under the Internal Revenue Code, while 27 CFR part 5 is a regulation 
under the Federal Alcohol Administration Act. The revised definition in 
part 17 differs from the former definition in part 197 only by the 
deletion of the words ``fully taxpaid or tax determined at the 
distilled spirits rate.'' This change brings the definition closer both 
to 26 U.S.C. 5002(a)(8) and to the ordinary meaning of ``distilled 
spirits.'' Whenever taxpaid distilled spirits are specifically intended 
in part 17, the word ``taxpaid'' is stated. A new definition of 
``taxpaid'' is provided in Sec. 17.11.
    Finally, ATF determined that there is no need for a transition 
period for implementation of new language in Sec. 17.161, because the 
only substantive change brought about by that new language is 
liberalizing. That change makes it clear that normal business records, 
including invoices and cost accounting records, are adequate for 
regulatory purposes if they contain the required information. (ATF 
anticipates that ordinarily no records besides these normal business 
records need be maintained for purposes of compliance with the 
regulations.) Other new language in Sec. 17.161 does not impose a 
substantive requirement, but simply spells out the purposes of records.
    3. A third commenter pointed out what appeared to him to be 
contradictions in the proposed regulations. However, the apparent 
contradictions were actually the result of misunderstanding. In one 
instance, the commenter confused the terms ``eligible for drawback'' 
and ``subject to drawback.'' In order to prevent further confusion of 
this sort, definitions of both of these terms were included in Notice 
No. 748 and remain in this final rule (see Sec. 17.11).
    Another point of confusion concerned the difference between spirits 
contained in an intermediate product and spirits consumed in the 
manufacture of such a product. Spirits contained in an intermediate 
product are eligible for drawback, and become subject to drawback when 
the intermediate product is used in the manufacture of a nonbeverage 
product. However, spirits consumed in the manufacture of an 
intermediate product (which are not contained in that product when 
completed) never become subject to drawback. Drawback cannot be claimed 
on such spirits (see Secs. 17.154 and 17.155). Nevertheless, under 
Secs. 17.127 and 17.185, a manufacturer may treat the intermediate 
product as an unfinished nonbeverage product; then the consumed spirits 
may be included in a drawback claim.
    4. A fourth commenter took issue with the standard used by ATF to 
determine whether to grant drawback of tax on spirits used in 
nonbeverage products. He questioned the requirement that products 
produced with spirits must be ``unfit for beverage use.'' The commenter 
asked that this be changed to ``sale and use for (non) beverage 
purposes.''
    This commenter's requested change was not adopted, because the 
standard that must be met in order to receive drawback is expressly 
stated in the law (26 U.S.C. 5131(a)). Drawback may be granted only for 
``distilled spirits on which the tax has been determined, (used) in the 
manufacture or production of medicines, medicinal preparations, food 
products, flavors, flavoring extracts, or perfume, which are unfit for 
beverage purposes'' (emphasis added).

Public Comments on Notice No. 748

    The following paragraphs discuss the suggested changes that were 
submitted in response to Notice No. 748 (as amended by Notice No. 758). 
The comments are grouped topically, since in some cases several 
commenters proposed the same or similar recommendations.
    1. Section 17.136 states that ``A product is not a medicine, 
medicinal preparation, food product, flavor, flavoring extract, or 
perfume for nonbeverage drawback if its formula would violate a ban or 
restriction of the U.S. Food and Drug Administration (FDA) pertaining 
to such products.'' This reflects a longstanding ATF policy. See Rev. 
Rul. 58-350, 1958-2 CB 974; see also various regional industry 
memoranda in 1991 regarding FD&C Red No. 3, and the following Industry 
Circulars: 61-2, 62-33, 65-4, 70-12, 72-8, 72-28, 72-29, 73-6, and 76-
17.
    However, a group of commenters pointed out that the wording of 
Sec. 17.136 could be interpreted to prevent manufacturers from 
receiving drawback on products intended for export to countries with 
different food and drug requirements. Further, certain products for 
domestic use, such as tobacco flavors and animal feed flavors, are not 
subject to the same requirements as products intended for internal 
human consumption. Products may legally be made for such uses even 
though banned for human consumption.
    ATF appreciates this comment. Since the limitation of Sec. 17.136 
only applies to products that violate FDA bans or restrictions, it is 
not intended to prevent drawback in the situations mentioned by the 
commenters. In general, there would be no FDA violations in those 
situations. Therefore, language has been added to Sec. 17.136 in this 
final rule to clarify this point.
    2. Another suggestion pertained to Sec. 17.166(b). This new 
regulation requires records of ``other disposition'' of nonbeverage 
products--that is, disposition other than by sale. Former regulations 
in 27 CFR 197.130 only

[[Page 31401]]

required disposition records for products disposed of by sale; 
Sec. 17.166(b) closes this gap in the recordkeeping system.
    However, a change in Sec. 17.166(b)(1) introduced by Notice No. 
748, adding some language which had not been present in Notice No. 634, 
was a cause of concern for several commenters. This change added a 
proposed requirement that would have applied whenever a nonbeverage 
product is disposed of by being used as an ingredient in other 
products. The new language would have required disposition records, in 
such instances, to show the formula number of every other product in 
which the first product was used as an ingredient. The commenters 
stated that a requirement to show such formula numbers would be onerous 
for many flavor companies who frequently use their flavors as 
ingredients in many other flavors.
    The purpose of the proposed requirement added by Notice No. 748 was 
to enable an ATF inspector to follow the ``audit trail'' to the next 
product and compare its batch records, showing usage of the first 
product, with the first product's records of disposition. This 
inspection technique had been facilitated under the former regulations 
in part 197 by a requirement that supporting data (submitted with each 
claim) show, for each product manufactured, the formula number of each 
nonbeverage or intermediate product used as an ingredient. That 
requirement was eliminated from the simplified supporting data proposed 
by Notice No. 748 (and adopted by this final rule), but its absence 
would have been more than made up for by the proposed additional 
language in Sec. 17.166(b)(1).
    After carefully considering this public comment, ATF has decided 
that the benefits of the proposed additional requirement in 
Sec. 17.166(b)(1) may not be commensurate with the added burden to 
industry. Therefore, in this final rule, Sec. 17.166(b)(1) reads as it 
did in Notice No. 634, without the formula-number requirement added by 
Notice No. 748. However, ATF reserves the right to examine this issue 
further and possibly to propose another rulemaking, if experience shows 
that the formula-number requirement, or something similar, is needed 
for adequate administration of the law.
    3. Two commenters requested permission to continue using the old 
supporting data, as prescribed under Rev. Proc. 64-32, 1964-2 CB 951, 
and former regulations (27 CFR 197.110-197.119). Even though the new 
supporting data prescribed by this final rule is much simpler, some 
companies have computerized their system, and it would actually be a 
hardship for them to have to change.
    Section 17.147 allows modifications of the supporting data to be 
used without prior permission, if the modified form contains all of the 
required information. For the most part, the old supporting data 
contains all of the information required under this final rule. There 
are only a few new elements, which include: A certification that 
required physical inventories have been taken, separate data for 
different effective tax rates and for Puerto Rican and U.S. Virgin 
Islands spirits and imported rum, and certain explanatory information 
sometimes required in Part IV of the new form. Therefore, drawback 
claimants may continue to use the old supporting data as long as the 
new elements are included.
    4. Another comment stated an objection to the requirement for 
physical inventories (Sec. 17.167). The commenter claimed that physical 
inventories were not required under part 197. However, that is not so. 
Physical inventories were mentioned in Secs. 197.116-197.119, with the 
intent that they should be taken every claim period. Such inventories 
are necessary from time to time to ensure the accuracy of the book 
account. In line with the principles of the Administration's 
``Reinventing Government'' regulatory initiative, ATF has determined 
that claimants with bond coverage need not be required to take a 
physical inventory every month (as proposed in Notices No. 634 and 
748). Therefore, this final rule provides for quarterly physical 
inventories.
    5. Some other suggested improvements were related to the proposed 
revision of the formula form (previously numbered ATF F 1678, now ATF F 
5154.1). A draft version of this form was published in the same issue 
of the Federal Register as Notice No. 748 (see 57 FR 39564). First, the 
commenter requested additional space for addresses when a single form 
is filed for multiple plants; but this is not necessary, since adequate 
space is provided on the reverse of the form. (The reverse was not 
printed in the Federal Register, since it is virtually a blank page.) 
If the reverse is still not sufficient, a continuation on plain paper 
is acceptable.
    Also, the commenter suggested that ATF F 5154.1 be redesigned for 
computer-generated insertion of data. However, he did not propose any 
specific changes. If a claimant has a specific proposal for a computer-
generated form, it could be approved as an alternate procedure under 
Sec. 17.3. In a separate project, ATF has developed a computer program 
to facilitate the preparation of nonbeverage product formulas, which is 
available for use by industry members. For more information on this 
project, please contact the ATF Laboratory or the person listed above 
under FOR FURTHER INFORMATION CONTACT.
    6. Another suggestion proposed a simplified procedure for 
alternation of premises between a distilled spirits plant and a 
nonbeverage product manufacturing plant. This suggestion cannot be 
considered at this time, since it relates to other regulations that are 
not the subject of this rulemaking. This comment will be treated as a 
suggestion for future amendment of 27 CFR part 19.
    7. Another comment pointed out that the last sentence of 
Sec. 17.137 (requiring qualification as a distilled spirits plant) 
should be limited to products that are disapproved as ``fit for 
beverage use.'' This comment is well taken. Under Sec. 19.58, as 
amended by this final rule, exemption from qualification requirements 
is provided to manufacturers of various products that are unfit for 
beverage use, which nevertheless would not be approved for drawback 
because they are not medicines, medicinal preparations, flavors, 
flavoring extracts, food products, or perfume. Therefore, the suggested 
change has been made.
    8. Several comments addressed the procedure for determining whether 
products are fit or unfit for beverage use (Sec. 17.134). It was stated 
that the use of an organoleptic examination (taste test) performed by 
ATF is not sufficiently objective and ``can result in a very arbitrary 
tasting method with unpredictable results.''
    As an alternative to the method currently used, one commenter 
suggested the use of an independent testing panel funded by industry. 
The commenter opined that such a panel might be more ``objective'' and 
might alleviate the problem of delays in formula approvals caused by a 
backlog of submissions at the ATF Laboratory.
    Interestingly, this particular idea (absent the funding proposal) 
had been previously considered by ATF pursuant to a suggestion 
submitted by two ATF employees. At that time, ATF determined that the 
panel would have to be restricted to analysis of samples, since most 
industry members would be opposed to allowing an independent laboratory 
to see their formulas. Additionally, it was determined that training 
and certification by ATF would be necessary, thus minimizing any time 
and cost savings to the Government. These findings are still considered 
to be valid.

[[Page 31402]]

    Furthermore, ATF disagrees that a panel funded by industry would be 
any more objective than the taxpayer-funded ATF Laboratory. On the 
contrary, industry funding would seem to introduce a possibility for 
bias not currently present. ATF has no interest to be served by 
approving or disapproving any particular formula. Our only interest is 
to administer the law on an impartial basis. An element of subjectivity 
(but not bias) is unavoidably present due to the legal requirement that 
products be ``unfit for beverage use.'' This cannot be eliminated 
merely by shifting the responsibility for decision-making to another 
entity. Therefore, ATF has decided not to adopt this suggestion.
    Another commenter proposed a different alternative. This one 
suggested that ATF incorporate a ``standard reference method'' for 
organoleptic examination based on a method prescribed by the American 
Society for Testing and Materials (ASTM). The method recommended by the 
commenter is as follows:

    Samples: (1) Non-Beverage Test (NBT) sample(s)--Formulate six or 
fewer samples over a range of dilution levels of the NBT component 
in 15% ethanol. (2) Non-Beverage Reference (NBR) and Beverage 
Reference (BR) samples--From the list of ingredients and amounts in 
Table 1 (i.e. a table listing ingredients and their quantities 
recognized by ATF as usually sufficient to make products unfit for 
beverage use), select and formulate one sample for a NBR at 15% 
ethanol. Reduce the amount of the respective ingredient in the NBR 
sample to formulate a BR sample that would be deemed potable.
    Procedure: (1) Recruit a panel of at least 15 members previously 
screened as outlined below.
    (2) Each panelist is presented the NBR and BR samples as 
examples of a nonpotable and potable beverage, respectively.
    (3) Each panelist is then presented in random order each NBT 
sample for comparison in acceptablility to the NBR and BR sample.
    (4) Each panelist responds to the question, ``Is this sample 
more like the NBR or BR sample in acceptability?''
    (5) Count the number of panelists scoring each NBT sample as 
more like the BR sample in acceptability.
    (6) Use the statistical tables for the duo-trio difference test 
(from ASTM ``Manual on Sensory Testing Methods, STP 434'') to 
conclude which NBT samples are potable. Determine significance at 
the 95% confidence level.
    (7) Report the highest concentration of the nonbeverage 
component that is significant as an upper bound in concentration of 
the NBT component for potability.
    Panelist Screening: (1) Present both the NBR and BR samples to a 
prospective panelist.
    (2) Ask the question, ``Which sample is more acceptable to 
you?''
    (3) Screen out any panelists which select the NBR sample.

    ATF has reviewed this proposed method and finds it unacceptable for 
several reasons. First, the method does not test for the specific 
information needed for drawback determinations under 26 U.S.C. 5131. 
The proposal is, in effect, a test for determining what concentration 
of a single ``component'' is needed to render an ethanol solution 
nonpotable. However, in making drawback determinations, ATF is not just 
interested in the contribution to potability by a specific component; 
rather, ATF is interested in the resulting potability of a product, 
which may contain many components. Further, ATF is not interested in 
quantitating the level of concentration at which a solution becomes 
nonpotable; rather, ATF is just interested in determining, yes or no, 
whether a particular final product is fit for beverage use. In other 
words, the proposed method provides extraneous, unnecessary information 
while simultaneously failing to provide the particular information that 
ATF needs.
    Secondly, the proposed method does not even provide a definitive 
determination whether a particular sample is beverage or nonbeverage. 
It only provides a determination whether the sample is ``more like'' 
the ``beverage reference'' or the ``nonbeverage reference.'' If one of 
the two reference samples is closer than the other to the border 
separating beverage from nonbeverage, the test sample may in fact be 
``more like'' one of them even though it is on the opposite side of 
that border. For example, imagine that on a scale of 1-100, the 
separation between beverage and nonbeverage occurs at 50. If the 
beverage reference is at 40 and the nonbeverage reference is at 75, a 
test sample at 55 will taste ``more like'' the beverage reference even 
though the sample is in fact nonbeverage.
    Thirdly, the composition of the proposed panel would not be 
appropriate. As the example just given shows, it is important for the 
panel to understand the real difference between beverage and 
nonbeverage, not merely whether a sample is ``more like'' one or the 
other. This implies a panel with expertise, not just a panel of random 
individuals. Though not explicitly stated, it is implied that the 
proposed method would utilize randomly selected individuals. By 
contrast, the panelists used by ATF are all university-trained 
chemists, who receive a minimum of 1 year of special training at the 
ATF Laboratory before their vote is given full weight in drawback 
approval determinations. This ensures maximum consistency and 
continuity over time in application of the ``unfit for beverage use'' 
standard.
    Because ATF uses expert panelists, it is not necessary to empanel a 
minimum of 15. In most cases, a panel of two is sufficient for a 
definitive determination. If a sample is at all borderline, additional 
panelists are recruited up to a maximum of 12. At least \2/3\ of them 
must agree that the sample is unfit for beverage use. By this method, 
the eight chemists of the ATF Laboratory's Nonbeverage Section (aided 
when necessary by the eight chemists of the Beverage Alcohol Section) 
are able to examine about 2,400 samples per year. This is in addition 
to their other work, which includes chemical analyses and examination 
of thousands of formulas submitted without samples.
    Therefore, although ATF appreciates the effort put into devising 
the proposed new method, we have concluded that it is in no way 
superior to the method currently being used.
    Accordingly, Sec. 17.134 is adopted by this final rule without 
change from Notice No. 748. ATF hopes that the information in this 
section will be used by manufacturers to identify and ``weed out'' 
products that are clearly fit for beverage use.
    9. Finally, a commenter requested that ATF publish, in Sec. 17.137, 
a list of ingredients and their quantities that are recognized by the 
ATF Laboratory as usually sufficient to make products unfit for 
beverage use. The commenter was referring to the following Guidelines, 
which were distributed to attendees at an ATF-sponsored industry 
seminar:

----------------------------------------------------------------------------------------------------------------
                 Ingredient                                                 Amount                              
----------------------------------------------------------------------------------------------------------------
Citric Acid.................................  If ethanol less than 30%, acid = 0.1  x  ethanol content (% v/v) +
                                               0.5.                                                             
                                              If ethanol greater than 30%, acid = 0.1  x  ethanol content (% v/ 
                                               v).                                                              
Salt........................................  3.2 grams salt per 100 ml at 45% ethanol (more for greater        
                                               ethanol).                                                        
Vanillin....................................  1 oz. per gallon at 30% ethanol.                                  
Ethyl Vanillin..............................  0.4 oz. per gallon at 30% ethanol.                                

[[Page 31403]]

                                                                                                                
Propylene Glycol............................  Equal amounts by volume of propylene glycol and ethanol.          
Ethyl Acetate...............................  2.0% by volume at 90% ethanol.                                    
Maltol......................................  5% at 90% ethanol.                                                
Essential Oils..............................  Most are unfit at a level of 3% in 90% ethanol. An exception is   
                                               anise oil which needs 4.2%. Many 1% solutions of essential oils  
                                               are unfit.                                                       
Benzaldehyde................................  1.2 oz. benzaldehyde or bitter almond oil per gallon at 90%       
                                               ethanol.                                                         
----------------------------------------------------------------------------------------------------------------



    ATF agrees that this information should be widely distributed among 
nonbeverage industry members; however, the problem with publishing it 
in the regulations is that it can only be a guide, not applicable to 
all products. If it were contained in regulations, industry members 
would tend to assume that if their products met the guidelines, they 
would automatically be approved for drawback. No such guarantee can be 
provided. (For example, products meeting the citric acid guidelines may 
nonetheless be fit for beverage use if they contain sufficient sugar.) 
Therefore, ATF has decided to publish this information as a future 
Industry Circular, rather than as an amendment to the regulations.

Other Changes From Former Regulations

    Other changes, proposed in Notice No. 748, were not the subject of 
public comment. Except as noted, they have been adopted substantially 
as proposed.
    1. Adoption of Rulings. The holdings of certain Revenue Rulings and 
ATF Rulings are reflected in the final regulations, as follows: Rev. 
Rul. 55-689, 1955-2 CB 729 (Sec. 17.187); Rev. Rul. 56-239, 1956-1 CB 
715 (Sec. 17.135); Rev. Rul. 56-314, 1956-2 CB 1023 (Sec. 17.137); Rev. 
Rul. 56-335, 1956-2 CB 1024 (Sec. 17.181); Rev Rul. 56-336, 1956-2 CB 
1023 (Sec. 17.182); Rev. Rul. 56-367, 1956-2 CB 1026 
(Sec. 17.135(b)(2)); Rev. Rul. 56-394, 1956-2 CB 1021 (Sec. 17.152(c)); 
Rev. Rul. 56-395, 1956-2 CB 1025 (Sec. 17.186); Rev. Rul. 58-350, 1958-
2 CB 974 (Sec. 17.136); Rev. Rul. 63-87, 1963-1 CB 384 (Secs. 17.11: 
new definition of ``food products,'' and 17.133(d)); Rev. Rul. 69-138, 
1969-1 CB 327 (Secs. 17.126(b) and 17.152(a), (c), and (d)); ATF Rul. 
73-1, 1973 ATF CB 85 (Sec. 17.133(b)); ATF Rul. 74-2, 1974 ATF CB 27 
(Sec. 17.76); ATF Rul. 76-17, 1976 ATF CB 85 (Secs. 17.151 and 
17.152(b)); ATF Rul. 76-19, 1976 ATF CB 86 (Secs. 17.169 and 
17.185(b)); ATF Rul. 77-27, 1977 ATF CB 165 (Sec. 17.122); and ATF Rul. 
82-7, 1982-2 QB 46 (Sec. 17.11: new definition of ``medicines'').
    Rev. Rul. 57-369, 1957-2 CB 948, has been adopted in the 
instructions to the revised ATF Form 5154.1 (formerly Form 1678). Rev. 
Rul. 58-317, 1958-1 CB 586, is not reflected in the regulations; it is 
obsolete since iso-alcoholic elixir has been removed from the National 
Formulary. Rev. Rul. 58-428, 1958-2 CB 975, is also not reflected in 
the regulations, because the repeal of 26 U.S.C. 5082 has removed its 
authority. The holding of ATF Rul. 81-8, 1981-4 QB 24, has been 
modified in Sec. 17.183 (see discussion above, under ``Public Comments 
on Notice No. 634''). Revenue Procedure 64-32, 1964-2 CB 951, has been 
replaced by the new supporting data form (ATF Form 5154.2), per 
Sec. 17.147.
    2. Form number changes. The prescribed form entitled ``Formula and 
Process for Nonbeverage Products'' has been revised and renumbered from 
1678 to 5154.1. This will not require resubmission of any formulas 
previously approved on Form 1678. Similarly, the form number of the 
``Bond for Drawback Under 26 U.S.C. 5131'' is being changed from 1730 
to 5154.3, but this will not require resubmission of any bonds 
previously approved.
    3. Alternate methods or procedures. A new section (Sec. 17.3) has 
been added to provide for the employment of alternate methods or 
procedures, if approved by the Director pursuant to a showing of the 
conditions stated in the regulation.
    4. Incorporation by reference. Former Sec. 197.3 is not included in 
this final rule, because consultation with the Office of the Federal 
Register indicated that the use of the National Formulary, United 
States Pharmacopeia, and Homeopathic Pharmacopoeia of the United States 
does not amount to an incorporation by reference. Although Sec. 17.132 
makes a ``reference'' to these books, there is no ``incorporation'' of 
them into the regulations. There is merely an authorization, for 
manufacturers who so choose, to utilize formulas from them as approved 
formulas without the necessity of submitting ATF Form 5154.1.
    Incorporation by reference with the approval of the Director of the 
Federal Register under 5 U.S.C. 552(a)(1) is intended to be a 
substitute for the reprinting of material required to be published in 
the Federal Register under Sec. 552(a)(1)(A)-(E). However, the 
authorization for manufacturers to make use of the N.F., U.S.P., and 
H.P.U.S. on a voluntary basis does not entail a requirement for ATF to 
publish the contents of those books in the Federal Register. It is true 
that a manufacturer who has chosen to adopt a formula from the N.F., 
U.S.P., or H.P.U.S. may be subject to a $1,000 fine if he subsequently 
fails to follow it (Sec. 17.148). However, the enforcement of this 
requirement does not require publication of that formula, any more than 
similar enforcement of the manufacturer's own proprietary formulas 
requires their publication. The enforcement in each instance pertains 
to the manufacturer's choice of a formula, rather than to the contents 
of the N.F., U.S.P., and H.P.U.S. per se.
    5. Signature authority. Section 17.6, generalized from certain 
provisions in former Secs. 197.30 and 197.67(a), states the rule as to 
when evidence of signature authority is required.
    6. Delegations of authority. Authorities vested in the Director by 
part 17 may be delegated, through delegation orders, to subordinate 
officials. This possibility is reflected in the definition of 
``Director'' in Sec. 17.11 by addition of the words ``or his or her 
delegate.'' ATF's Alcohol and Tobacco Laboratory is specified in 
Secs. 17.121, 17.122, 17.126, 17.131, 17.132, and 17.136 as the 
recipient of certain documents, such as formulas. Accordingly, a new 
definition of ``Alcohol and Tobacco Laboratory,'' giving its address, 
is provided in Sec. 17.11.
    7. New and modified definitions. For clarity, some new definitions 
are added in Sec. 17.11. Besides those mentioned elsewhere in this 
preamble, there are new definitions of ``approved,'' ``CFR,'' 
``month,'' ``person,'' ``proof gallon,'' ``quarter,'' ``recovered 
spirits,'' and ``this chapter.'' With respect to the definitions of 
``month'' and ``quarter,'' claimants desiring to use slightly different 
time periods may apply under Sec. 17.3. (Existing approvals remain in 
effect.) The definitions of ``director of the service center,'' 
``district director'' (an I.R.S. official), ``total annual 
withdrawals,'' and ``year'' in former Sec. 197.5 have been deleted as 
unnecessary. The definitions of ``used'' and ``time distilled spirits 
are used'' are in regulations Secs. 17.151 and 17.152. The

[[Page 31404]]

definition of ``nonbeverage products'' in Sec. 17.11 has been modified 
to reflect the addition of perfume to the list of products that may be 
approved for drawback. (Pub. L. 103-465, Sec. 136(a).) Elsewhere in 
this final rule, wherever the types of nonbeverage products are listed, 
this addition of perfume is reflected as well. ATF is in the process of 
delegating authority under its new organizational structure; however, 
this process is not yet complete; therefore, the definition of 
``regional director (compliance)'' and the use of that term throughout 
this final rule are retained.
    8. Time for payment of special tax. A sentence has been added in 
Sec. 17.24 to clarify when a payment of special tax is considered late. 
Under 26 U.S.C. 5131, special tax is a prerequisite for drawback 
eligibility. Therefore, no penalty under 26 U.S.C. 5134(c) will be 
imposed as long as special tax is paid before completion of final 
action on the claim.
    9. Retention of special tax stamps. Former regulations did not 
specify a retention period for special tax stamps. These final 
regulations (Sec. 17.55) make the retention period the same as for 
other required records and documents (generally 3 years). The retention 
period for the list of multiple business locations, which was 2 years 
under former Sec. 197.28, has also been made the same as for other 
documents (Sec. 17.31).
    10. Reincorporation. A new Sec. 17.77 has been added, stating that 
when an existing corporation or corporations are reorganized into a new 
corporation, a new special tax must be paid. This new section is 
similar to regulations for liquor dealers in Sec. 194.163. Although 
Sec. 17.77 states the general rule, there may be exceptions. For 
instance, ATF has ruled that a reorganization under 26 U.S.C. 
368(a)(1)(F), consisting of a mere change in identity, form, or place 
of organization of one corporation, however effected, does not require 
a new special tax. If there is a question as to whether a new special 
tax is required, the ATF Tax Processing Center, [phone], should 
be consulted.
    11. Amount of bond for monthly claims. The wording of former 
Sec. 197.107 allowed for the possibility that the amount (or ``penal 
sum'') of a bond might be reduced due to frequent on-site inspections. 
This concept has become obsolete, since today no claimant is regularly 
inspected as frequently as quarterly. Therefore, under these final 
regulations (Sec. 17.102), bonds for monthly claims must cover the 
total drawback claimed during any quarter. It is not anticipated that 
this change will affect the required bond coverage of any current 
monthly claimant.
    12. Time for filing formulas. Language in former Sec. 197.95, 
respecting time for filing formulas, has been revised in Sec. 17.121(b) 
to express more clearly the statutory requirement of 26 U.S.C. 5131-
5134. Both formula and claim must be filed within ``6 months next 
succeeding the quarter in which the distilled spirits covered by the 
claim were used'' (26 U.S.C. 5134(b)). However, if there is any doubt 
about a product's eligibility for drawback, it is preferable that the 
formula be filed and approved before commencement of manufacture.
    13. Formulas for use at multiple plants. The revised formula form 
(ATF F 5154.1) permits a manufacturer to file a single formula for use 
at more than one plant, if the plants at which the formula will be used 
are listed on the form. This change is reflected in Sec. 17.121(c).
    14. Adoption of predecessor's formulas. Former Sec. 197.99 allowed 
the adoption of a predecessor's formulas (for continued use at the same 
plant, when its ownership changes) by filing a notice listing the 
formulas' serial numbers, names, and dates of approval. This final rule 
(Sec. 17.125(a)) only requires the notice of adoption to list the names 
and serial numbers. The notice must be filed with the regional director 
(compliance). Further, since copies of the articles of incorporation or 
other documents are necessary to prove the change of ownership, a 
sentence has been added to include this general requirement.
    15. Adoption of manufacturer's own formulas from another plant. 
Adoption of a company's own formulas for use at another of its plants, 
including adoption by a parent company of formulas of its wholly owned 
subsidiary, and vice versa, is a new option provided by this final 
rule. (See Sec. 17.125(b).) Previous regulations did not provide for 
this. The procedure for this type of adoption is to submit a letterhead 
notice to the ATF Laboratory, accompanied by two photocopies of the 
formula to be adopted and some evidence of the relationship between the 
plants. After verifying the formulas, the ATF Laboratory will forward 
the notice to the regional director (compliance). The adopting plant is 
also required to reference the notice in its first claim relating to 
the adopted formula(s).
    16. Formulas for intermediate products. ATF needs to know all 
ingredients that will enter into the finished nonbeverage product. 
Therefore, these final regulations (Sec. 17.126) require the submission 
of formulas on ATF Form 5154.1 (formerly 1678) for intermediate 
products, unless the formula for an intermediate product is written as 
part of the approved formula for the nonbeverage product(s) in which 
the intermediate product will be used. (If the formula for the 
intermediate product is written as part of the nonbeverage product's 
formula, the intermediate product is treated as an unfinished 
nonbeverage product; see discussion below.)
    17. Self-manufactured ingredients optionally treated either as 
intermediate products or as unfinished nonbeverage products. Spirits 
consumed in the manufacture of intermediate products are not subject to 
drawback, both under former regulations (Sec. 197.119) and this final 
rule (Sec. 17.155). If spirits are recovered in the manufacture of 
intermediate products, drawback may be claimed, but only if and when 
the spirits are subsequently reused in the manufacture of a nonbeverage 
product (Sec. 197.118 in former regulations and Sec. 17.153(a) in this 
final rule). These restrictions are necessary for protection of the 
revenue, because when spirits are consumed or recovered in the 
manufacture of an intermediate product, it could be difficult or 
impossible to correlate the quantity of such spirits with the 
production of a batch of finished nonbeverage product in which the 
intermediate was used.
    However, in some instances, the manufacture of an intermediate 
product requires consumption of significant quantities of spirits that 
are not ultimately contained in that intermediate product. The 
inability to claim drawback on such spirits would be a hardship. 
Therefore, manufacturers have been permitted to resubmit their formulas 
to show production of the intermediate product as an integral part of 
the formula for the related nonbeverage product. If this is done, the 
former intermediate product is regarded instead as an unfinished 
nonbeverage product; consequently, spirits necessarily consumed (or 
recovered) in its manufacture are regarded as consumed (or recovered) 
in the manufacture of a nonbeverage product and are subject to 
drawback. This procedure protects the Federal revenue, because each 
batch of unfinished nonbeverage product is restricted to use in a 
specific batch of a predetermined finished product and must be so used 
within the time period specified in the approved nonbeverage product's 
formula.
    Although this procedure was available under former regulations, 
many manufacturers were not aware of it, because it was not described 
in the

[[Page 31405]]

regulations. In order to inform manufacturers of this procedure, it is 
described in Secs. 17.127 and 17.185 of these final regulations. 
Manufacturers are given the option to designate their self-manufactured 
alcoholic ingredients as either intermediate products or unfinished 
nonbeverage products. There are advantages and disadvantages that go 
with each choice.
    The advantage of designating an ingredient as an unfinished 
nonbeverage product is that spirits recovered or consumed in the 
manufacture of the ingredient are subject to drawback in the same way 
as other spirits recovered or consumed in the manufacture of 
nonbeverage products. The disadvantages of this designation are: (1) 
Each batch of the ingredient must be used within a limited time in a 
single batch of a predetermined nonbeverage product. (2) The ingredient 
cannot be transferred to another plant under Sec. 17.185(b). (This 
restriction is due to the necessity of a single, unified batch record, 
which must be maintained at the place of production.)
    Conversely, the advantages of designating an ingredient as an 
intermediate product are: (1) Several batches may be accumulated, 
stored indefinitely, and used in the manufacture of any nonbeverage 
product whose formula calls for their use. Less (or more) than a full 
batch of such a product may be used to produce a batch of a finished 
nonbeverage product. (2) Ingredients designated as intermediate 
products may be transferred to another branch or plant of the same 
manufacturer under Secs. 17.169 and 17.185. (3) For manufacturers who 
already have intermediate product formulas on file, another advantage 
of the ``intermediate product'' designation is that no new formula or 
procedural changes would be required. But the disadvantage of that 
designation is that spirits consumed or recovered in production of the 
intermediate product may not be claimed for drawback.
    18. Subpart U of 27 CFR part 170. Subpart U of 27 CFR part 170, 
which provided exemptions from special tax and qualification 
requirements for manufacturers and sellers of certain products that are 
unfit for beverage use, is being revoked, but the material from that 
subpart has not been entirely eliminated. Material related exclusively 
to drawback manufacturers has been incorporated in the new part 17. 
Some material has been eliminated, either as unnecessary or as covered 
by other regulations. The remaining material has been relocated into 
subpart D of part 19 (see new Sec. 19.58; this section is grouped under 
a new centerheading, ``Activities Not Subject to this Part,'' along 
with former Sec. 19.69, which is redesignated as Sec. 19.57). 
Conforming amendments have also been made in 27 CFR parts 70 and 194. 
Former Sec. 170.613(a)(6) (``Salted wines'') was previously 
incorporated into 27 CFR 24.215 by T.D. ATF-299 (55 FR 24974). Sections 
in part 17 containing language from former subpart U of part 170 are: 
Secs. 17.132, 17.133, and 17.168.
    19. Submission of quantitative formulas. This change strengthens 
requirements respecting submission of formulas for nonbeverage drawback 
products. Regulations allow formulas prescribed by the United States 
Pharmacopeia (U.S.P.), the National Formulary (N.F.), and the 
Homeopathic Pharmacopoeia of the United States (H.P.U.S.) to be used 
without the prior filing and approval of quantitative formulas. This 
procedure has been allowed because of the descriptive nature of these 
formulas and their consistency over the years. At present, however, the 
N.F. and U.S.P. are deleting their requirements for specific quantities 
of ingredients in some of their formulas, except for the active 
ingredients. Such non-descriptive formulas are not adequate for 
regulatory purposes, since alcohol is usually a vehicle rather than an 
active ingredient and is therefore not stated as a specific quantity 
within such formulas. Drawback of tax under 26 U.S.C. 5134 is claimed 
and allowed on exact amounts of alcohol used in the manufacture of 
nonbeverage products according to the quantity specified in the 
approved formula.
    Therefore, Sec. 17.132 in this final rule is worded so that ATF may 
require submission of quantitative formulas on ATF Form 5154.1 
(formerly 1678), Formula and Process for Nonbeverage Products, for 
preparations which appear in the N.F., U.S.P., or H.P.U.S. whenever it 
is determined that such submission is necessary to maintain control 
over alcohol used and to insure that the products meet the statutory 
requirements for drawback eligibility. It is expected that the list of 
preparations for which approval of quantitative formulas will be 
required under this regulation will be published as an ATF ruling in 
the ATF Bulletin.
    20. Drawback status of U.S.P., N.F., and H.P.U.S. preparations. 
Preparations listed in the U.S.P., N.F., and H.P.U.S. are generally 
exempt from the requirement to file quantitative formulas (former 
Sec. 197.96; Sec. 17.132 in this final rule), but this exemption does 
not necessarily entail approval for drawback. The statutory standard of 
``unfit for beverage purposes'' remains and must be enforced (26 U.S.C. 
5131(a)).
    Former regulations in part 197 were silent concerning the drawback 
status of U.S.P., N.F., and H.P.U.S. products. However, this issue 
should be addressed, so that manufacturers may properly plan. 
Therefore, Sec. 17.132 in this final rule states that formulas listed 
in the U.S.P., N.F. and H.P.U.S. are approved for drawback except as 
otherwise provided by regulation or ATF ruling. Alcohol, U.S.P. 
(including dehydrated alcohol and dehydrated alcohol injection), 
alcohol and dextrose injection, U.S.P., and tincture of ginger, 
H.P.U.S., are specifically declared in this regulation to be fit for 
beverage use.
    Similarly, H.P.U.S. preparations made at dilutions higher than 
``4X'' (i.e. one part in 10,000) are presumed to be fit for beverage 
use. Manufacturers of such products may contest this presumption by 
submitting appropriate evidence that a specific product is unfit for 
beverage use. The reason for the initial presumption is that the ATF 
Laboratory has determined that even for H.P.U.S. products containing 
certain poisonous materials, dilutions of greater than ``4X'' are fit 
for beverage use. ATF neither confirms nor disputes the medicinal value 
of such products, but the dilution one part of active ingredients in 
10,000 parts or more of alcohol and water has been found to result in a 
product that would be suitable for consumption as a beverage. 
Therefore, it has been ATF's position to deny drawback for H.P.U.S. 
products diluted to greater than ``4X.'' These final regulations 
reflect this position in Sec. 17.132(b).
    21. Liquor-filled candies. Paragraph (c) of Sec. 17.133 states 
ATF's longstanding policy that candies with alcoholic fillings may be 
regarded as nonbeverage products only if the fillings meet the 
requirements for alcoholic sauces, as stated in Sec. 17.133(a). Since 
some States may prohibit or restrict the manufacture or sale of liquor-
filled candies, a sentence in the introductory text of Sec. 17.133 
cautions applicants that formula approval does not authorize violation 
of State law.
    22. Use or sale of products for beverage purposes. The last 
sentence of Sec. 17.134 (adapted from former Secs. 170.615 and 170.618) 
makes it clear that drawback approval may be revoked if a product is 
found being used or sold for beverage purposes.
    23. Manufacturers who are also users of denatured alcohol. Since no 
tax is paid on denatured spirits, it would be conducive to fraud on the 
revenue for a single manufacturer to produce the same product out of 
both specially denatured alcohol and taxpaid alcohol

[[Page 31406]]

on which drawback may be claimed. Section 17.135(a) prohibits this 
practice.
    24. Claims for credit by manufacturers of nonbeverage products. 
Drawback manufacturers who also operate a distilled spirits plant may 
find it more convenient to claim nonbeverage drawback in the form of a 
credit to offset distilled spirits taxes owed by the distilled spirits 
plant. Therefore, Sec. 17.142(b) permits such a procedure.
    25. Changes in supporting data requirements. Under the regulations 
published in this document, the supporting data required to accompany 
claims has been simplified. The new supporting data is described by ATF 
Form 5154.2, which is authorized by these regulations. Use of this 
Government form is not mandatory; Sec. 17.147 permits the use of any 
alternative format that clearly shows all the required information.
    The new supporting data has eliminated material that is not 
necessary to the processing of drawback claims. Former Part II 
(``Distilled Spirits Received'') is gone. So is former Part V 
(``Intermediate Products Account'') except for the totals in column 
(i), which are incorporated into the Distilled Spirits Account. Part 
III has been shortened from 16 columns to 8, and is redesignated as 
``Production of Nonbeverage Products.'' Most of the simplification in 
Part III results from elimination of detailed information on use of 
specific finished products. Use of eligible spirits will be reported in 
three columns (``Kind,'' ``Drawback Rate,'' and ``Amount''), and use of 
ineligible spirits will not be reported, except for recovered spirits.
    Information no longer reported in the supporting data must still be 
recorded in the manufacturer's records, as prescribed in subpart H of 
part 17. The regional director (compliance) is authorized, under 
Secs. 17.147(a) and 17.123, to require additional supporting data if 
necessary in a particular case.
    Some new information has been added to the supporting data. 
Information about the place of origin of Puerto Rican and Virgin 
Islands spirits and other imported rum is required, because ATF needs 
this information in order to implement the Caribbean Basin Economic 
Recovery Act (Pub. L. 98-67, Title II). Separate reporting is required 
for spirits taxpaid at different effective tax rates through 
application of the wine and flavor tax credit of 26 U.S.C. 5010, 
because such spirits are subject to drawback at different rates. (The 
drawback rate is $1.00 less than the rate at which distilled spirits 
tax was paid, as provided in 26 U.S.C. 5134.)
    26. Public Law 98-369. This document reflects certain changes made 
by Public Law 98-369 (Deficit Reduction Act of 1984). Those changes 
are: (1) Addition of 26 U.S.C. 5206(d), relating to obliteration of 
marks, and (2) imposition of a $1,000 penalty for nonfraudulent 
violations of drawback law and regulations, unless the manufacturer 
establishes reasonable cause for a violation. Sections affected are: 
Secs. 17.148 and 17.184.
    With respect to the $1,000 penalty, the statute requires that the 
penalty be imposed ``for each failure to comply'' with law or 
regulations. This means that a separate penalty can be imposed for each 
product listed on a claim. For example, if several products were not 
manufactured according to formula, but were still unfit for beverage 
use, a $1,000 penalty could be imposed for each nonconforming product. 
If the amount claimed on any such product is less than $1,000, the 
penalty is limited to the amount claimed.
    Recordkeeping violations can also result in imposition of a penalty 
for each separate product. However, if the violations are so serious 
that they prevent the manufacturer from establishing either the 
unfitness of a product for beverage use or the quantity of the product 
that was made, then the penalty provision would not apply. Each claim 
must be considered on its own merits, and the burden of proving 
entitlement to drawback is always on the manufacturer. If this burden 
is not met with respect to any product, the claim for drawback relating 
to that product would be denied.
    The preceding comments also apply to products manufactured without 
submission of a formula. If the manufacturer can sustain the burden of 
proof, the claim would be approved subject to the penalty. However, 
without a formula, it is unlikely that this burden could be sustained 
other than by examination of batch records. ATF is not obliged to send 
an inspector to examine batch records when a manufacturer refuses to 
comply with the requirement to submit a formula.
    With respect to timely filing, a late-filed claim or formula counts 
as just one ``failure to comply.'' So if the only noncompliance is 
lateness in filing a claim, the maximum penalty would be $1,000. Late-
filed formulas result in a separate penalty for each late formula. 
Special tax paid subsequent to final action on a claim also results in 
a $1,000 penalty. It should be noted that in no case will a claim be 
paid more than 6 years after the quarter in which the products were 
manufactured, due to the statute of limitations of 28 U.S.C. 2401.
    Finally, the penalty provision does not apply in a case of fraud. 
Fraud is considered to be a deliberate violation with intent to 
deceive. If there is fraud, the entire claim will be denied, and the 
manufacturer may be subject to other civil and criminal penalties as 
well.
    27. Changes in recordkeeping requirements. Items deleted from the 
supporting data have been incorporated into the records required by 
subpart H of part 17 to be maintained at each nonbeverage premises. 
Certain formerly required records that are duplicative of the 
information provided by the supporting data have been deleted from 
subpart H. The holding of Industry Circular 79-5 with respect to 
records of raw materials and finished products has been clarified and 
incorporated in the regulations (see Secs. 17.164 and 17.165). An 
amendment to Sec. 19.780, specifying that the record required by that 
section must show the contents of each container, will facilitate the 
use of that record by nonbeverage manufacturers in complying with 
Sec. 17.162 in instances where a shipment consists of non-uniform 
containers.
    28. Gains in spirits received or on hand. This final rule requires 
gains in spirits received, as disclosed by the receiving gauge, and 
gains in spirits on hand, as disclosed by physical inventory, to be 
deducted from the claim covering the period in which the gain occurs. 
Deduction is appropriate in these circumstances, since a gain indicates 
either receipt of ineligible (untaxpaid) spirits or an excessive claim 
in a previous period. Regulations stating this requirement are in 
Secs. 17.147(d), 17.162(d), and 17.167(a).
    With respect to spirits received, Sec. 17.162(d) sometimes allows a 
gain to be avoided by recording the shipping plant's taxpayment gauge 
as the quantity received. For spirits received in a tank car or tank 
truck, this is only allowed when the drawback manufacturer's receiving 
gauge is within 0.2% of the taxpayment gauge. (This duplicates 
Sec. 197.130a(a) in former regulations.) If the taxpayment gauge was 
inaccurate within the 0.2% limitation, the discrepancy will tend to 
resolve itself as a gain or loss on the drawback manufacturer's next 
physical inventory.
    If the gauge of spirits received in a tank car or tank truck 
differs from the taxpayment gauge by more than 0.2%, the receiving 
gauge must be recorded in the manufacturer's records as the quantity 
received. This rule is based on the assumption that if the discrepancy 
is that great, the receiving gauge is more likely to be accurate. Under 
Sec. 17.162(d), any gain disclosed in such

[[Page 31407]]

circumstances must be immediately recorded as such and deducted from 
the manufacturer's next claim.
    29. Evidence of taxpayment. A new provision in Sec. 17.163 requires 
manufacturers to obtain commercial invoices or other documentation when 
spirits are purchased from wholesale and retail liquor dealers. This 
new requirement will help provide evidence of taxpayment of the 
spirits.
    In addition, Sec. 17.163 requires all manufacturers to obtain 
evidence of the effective tax rate paid on spirits other than alcohol, 
grain spirits, neutral spirits, distilled gin, and straight whisky. 
Spirits other than those kinds may contain wine and/or flavoring 
material that brings the effective tax rate below the normal distilled 
spirits rate ($13.50 per proof gallon). The effective tax rate is 
significant for nonbeverage drawback, because the drawback rate is $1 
less than the rate at which tax was paid or determined (26 U.S.C. 
5134(a)).
    For shipments received from a distilled spirits plant, an effective 
tax rate below $13.50 per proof gallon must be noted on the record of 
shipment required by Sec. 19.780 to be forwarded to the nonbeverage 
manufacturer. For spirits purchased from wholesale or retail liquor 
dealers, the drawback claimant must obtain the evidence of effective 
tax rate from the bottler, producer, or importer. If the required 
evidence is not obtained, drawback will only be allowed based on the 
lowest effective tax rate possible for the kind of distilled spirits 
product used.
    30. Production (batch) records. Under Sec. 17.164, the production 
records for nonbeverage and intermediate products generally must be 
kept by batch. To enable an ATF officer to compare the ingredients used 
in each batch with the ingredients listed in the product's formula, the 
records must refer to ingredients by the same names as are used for 
them in the product's formula. Synonymous names may additionally be 
shown. Alcohol usage may be shown by weight or by volume, and the proof 
of the spirits must also be shown.
    The alcohol content of nonbeverage products must be tested ``at 
representative intervals.'' This requirement is a variable, because the 
appropriate interval will vary to a great degree depending on the type 
of product and the frequency with which it is manufactured. The purpose 
of testing alcohol content is to verify the accuracy of the formula and 
to monitor compliance with it. If a manufacturer feels unsure of how 
frequently alcohol content should be tested to accomplish this purpose 
for a particular product, advice may be requested from ATF. Whenever 
the manufacturer does make a test, the results must be recorded in the 
production records.
    31. Specifications for physical inventories. These final 
regulations (Sec. 17.167) specify that the ``on hand'' figures in the 
supporting data must be verified by physical inventories ``as of the 
end of each quarter in which nonbeverage products were manufactured for 
purposes of drawback.'' The words ``as of'' indicate that the inventory 
need not be taken exactly at the end of the quarter; but if it is taken 
at a slightly different time, the data must be worked backward or 
forward to the end of the quarterly period. The regulations also 
authorize the regional director (compliance) to require physical 
inventories of nonbeverage products and raw ingredients whenever such 
inventories are deemed necessary to ensure compliance with regulations.
    32. Recovered alcohol. Recordkeeping requirements for recovered 
alcohol, formerly in Sec. 170.617(c), are incorporated in new 
Sec. 17.168. The regulations as proposed in Notice No. 748 did not 
provide for destruction of recovered alcohol, although permission for 
such destruction could be granted under Sec. 17.3, subject to such 
recordkeeping and other conditions as the approving official might have 
deemed appropriate. Since the need for destruction of recovered alcohol 
is an eventuality that can be expected to occur from time to time, this 
final rule provides a standard procedure to replace the need for an 
application under Sec. 17.3. Section 17.168 provides standard 
recordkeeping requirements and Sec. 17.183 requires a notification, 
which will give ATF the option of witnessing the destruction.
    33. Records retention. Section 17.170 (corresponding to former 
Sec. 197.133) extends the records retention period from 2 years to 3 
years, for consistency with other ATF regulations. This change will 
ensure the availability of records to support any action that may be 
taken within the period of the statute of limitations prescribed by 26 
U.S.C. 6531. This section of law prescribes a 3-year statute of 
limitations for most offenses; but for certain offenses involving fraud 
or willful violation, the statute of limitations is 6 years. Therefore, 
as in other ATF regulations, Sec. 17.170 contains a provision that 
permits the regional director (compliance) to require a longer records 
retention period, not to exceed an additional 3 years.
    34. Inspection of records. In addition to the records specifically 
required by regulations, ATF officers are authorized under 26 U.S.C. 
5133 (as delegates of the Secretary of the Treasury) to inspect any 
records ``bearing upon the matters required to be alleged'' in drawback 
claims. This authority is reiterated in Sec. 17.171.
    In carrying out this authority, ATF will continue to protect 
proprietary information. For example, the production records in 
Sec. 17.164 do not require greater detail as to ingredients than is 
shown on a product's formula. If some secret ingredients of a product 
are referred to in general terms, such as ``essential oils,'' on the 
formula, then the required production record for that product would 
only need to show the quantity of ``essential oils'' used in the 
production of each batch. The production record would not have to 
specify the secret ingredients. If unusual circumstances should require 
an ATF officer to examine other records, such as master formulas that 
do specify the secret ingredients, Sec. 17.171 does not provide 
authority for copies of such formulas to be made without the consent of 
the proprietor. (However, such copies could be required by the Director 
or a regional director (compliance) under Sec. 17.123.)
    The law, in 18 U.S.C. 1905 and 26 U.S.C. 7213, imposes criminal 
penalties on any ATF officer who makes unauthorized disclosure of 
confidential business information obtained in the course of his or her 
employment. Further restrictions on disclosure are found in 26 U.S.C. 
6103, which generally prohibits unauthorized disclosure of returns and 
return information. ``Returns'' and ``return information'' in that 
section include drawback claims and the records and reports which 
support them.
    35. Discontinuance of business. A requirement has been added, in 
Sec. 17.187, for notification to ATF when a manufacturer permanently 
discontinues business. This will enable ATF to manage its files, and it 
is reasonable in view of the conditional exemption from basic permit 
and special (occupational) tax requirements for the sale of alcohol 
remaining on hand.
    36. Nonbeverage products from Puerto Rico and the Virgin Islands. 
Amendments to 27 CFR 250.173 and 250.309 allow use of the new 
supporting data form (ATF F 5154.2) and specify that claims and bonds 
shall be filed with the Chief, Puerto Rico Operations, for nonbeverage 
products brought into the U.S. from Puerto Rico and the Virgin Islands. 
Although Notice No. 748 only proposed to amend the place for filing 
drawback claims, the place for filing bonds should be amended as well, 
since bonds and claims are filed at the same

[[Page 31408]]

place. Other changes in part 250 are miscellaneous technical and 
conforming changes.

                     Distribution Table for Part 197                    
------------------------------------------------------------------------
              Former section                         New section        
------------------------------------------------------------------------
                                Subpart A                               
                                                                        
Sec.  197.1...............................  Sec.  17.1.                 
Sec.  197.2...............................  Sec.  17.2.                 
Sec.  197.3...............................  Deleted.                    
                                                                        
                                Subpart B                               
                                                                        
Sec.  197.5: (generally)..................  Sec.  17.11.                
``Director of the Service Center''........  Deleted.                    
``District Director''.....................  Deleted.                    
``Time distilled spirits used''...........  Sec.  17.152(a).            
``Total annual withdrawals''..............  Deleted.                    
``Used''..................................  Sec.  17.151.               
``Year''..................................  Deleted.                    
                                                                        
                                Subpart C                               
                                                                        
Sec.  197.25..............................  Sec.  17.21 & Sec.  17.22.  
Sec.  197.25a.............................  Sec.  17.22.                
Sec.  197.26..............................  Sec.  17.23.                
Sec.  197.27..............................  Sec.  17.24.                
Sec.  197.28..............................  Sec.  17.31.                
Sec.  197.29..............................  Sec.  17.32.                
Sec.  197.29a(a)..........................  Sec.  17.41.                
Sec.  197.29a(b)..........................  Sec.  17.42.                
Sec.  197.29a(c)..........................  Sec.  17.43.                
Sec.  197.30 (except last sentence).......  Sec.  17.33.                
Sec.  197.30 (last sentence)..............  Covered by Sec.  17.6.      
Sec.  197.31..............................  Sec.  17.34.                
                                                                        
                                Subpart D                               
                                                                        
Sec.  197.40..............................  Sec.  17.51.                
Sec.  197.40a.............................  Sec.  17.52.                
Sec.  197.41..............................  Sec.  17.54.                
Sec.  197.42..............................  Sec.  17.53.                
Sec.  197.43..............................  Sec.  17.61.                
Sec.  197.46..............................  Sec.  17.62.                
Sec.  197.47..............................  Sec.  17.63.                
Sec.  197.47a.............................  Sec.  17.55.                
Sec.  197.48..............................  Sec.  17.71.                
Sec.  197.49..............................  Sec.  17.72.                
Sec.  197.50..............................  Sec.  17.73.                
Sec.  197.51..............................  Sec.  17.74.                
Sec.  197.52..............................  Sec.  17.81.                
Sec.  197.53..............................  Sec.  17.82.                
Sec.  197.54..............................  Sec.  17.83.                
Sec.  197.57..............................  Sec.  17.91.                
Sec.  197.58..............................  Sec.  17.92.                
Sec.  197.59..............................  Sec.  17.93.                
                                                                        
                                Subpart E                               
                                                                        
Sec.  197.65..............................  Sec.  17.101 (up to last    
                                             sentence).                 
Sec.  197.66..............................  Sec.  17.103.               
Sec.  197.67..............................  Secs.  17.105, 17.6.        
Sec.  197.68..............................  Sec.  17.104.               
Sec.  197.69..............................  Sec.  17.106.               
Sec.  197.70..............................  Sec.  17.144 (2nd sentence).
Sec.  197.71..............................  Sec.  17.101 (last          
                                             sentence).                 
Sec.  197.72..............................  Sec.  17.107.               
Sec.  197.73..............................  Sec.  17.108.               
Sec.  197.75..............................  Sec.  17.111.               
Sec.  197.76..............................  Sec.  17.112.               
Sec.  197.77 (except last sentence).......  Sec.  17.113.               
Sec.  197.77 (last sentence)..............  Covered by Sec.  17.108     
                                             (last sentence).           
Sec.  197.79..............................  Covered by Sec.  17.111.    
Sec.  197.80..............................  Sec.  17.114.               
                                                                        
                                Subpart F                               
                                                                        
Sec.  197.95 (sentences 1-2, 6, 8-9)......  Sec.  17.121.               
Sec.  197.95 (sentences 3 & 4)............  Sec.  17.131.               
Sec.  197.95 (5th sentence)...............  Sec.  17.137.               
Sec.  197.95 (7th sentence)...............  Sec.  17.122.               
Sec.  197.95 (last sentence)..............  Deleted.                    
Sec.  197.96..............................  Sec.  17.132(a).            
Sec.  197.97..............................  Sec.  17.123.               
Sec.  197.98..............................  Sec.  17.124.               
Sec.  197.99..............................  Sec.  17.125(a).            
                                                                        
                                Subpart G                               
                                                                        
Sec.  197.105.............................  Sec.  17.141.               
Sec.  197.106 (up to proviso).............  Sec.  17.142(a).            
Sec.  197.106 (proviso, except next-to-     Sec.  17.143.               
 last sentence).                                                        
Sec.  197.106 (next-to-last sentence).....  Sec.  17.146(b).            
Sec.  197.107 (except first & last          Sec.  17.102.               
 sentences).                                                            
Sec.  197.107 (first & last sentences)....  Sec.  17.144 (first & last  
                                             sentences).                
Sec.  197.108.............................  Sec.  17.145.               
Sec.  197.109.............................  Sec.  17.146(a).            
Sec.  197.110.............................  Sec.  17.147.               
Sec.  197.111.............................  New supporting data form.   
Sec.  197.112-113.........................  Sec.  17.162(a).            
Sec.  197.114.............................  Sec.  17.162(b).            
Sec.  197.115.............................  Sec.  17.147 & new          
                                             supporting data form.      
Sec.  197.116 (except last sentence)......  New supporting data form.   
Sec.  197.116 (last sentence); also Sec.    Sec.  17.167(a).            
 197.117 (2nd sentence), Sec.  197.118                                  
 (2nd sentence), & Sec.  197.119 (2nd                                   
 sentence).                                                             
Sec.  197.117 (first sentence)............  New supporting data form.   
Sec.  197.117 (3rd & 4th sentences).......  Sec.  17.153(b).            
Sec.  197.117 (last sentence).............  Sec.  17.153(c).            
Sec.  197.118 (first sentence)............  New supporting data form.   
Sec.  197.118 (last sentence).............  Sec.  17.153(a).            
Sec.  197.119 (first sentence)............  Deleted; covered by new     
                                             supporting data form and   
                                             Sec.  17.164(b).           
Sec.  197.119 (last sentence).............  Sec.  17.155.               
                                                                        
                                Subpart H                               
                                                                        
Sec.  197.130 (introduction)..............  Sec.  17.161 (first         
                                             sentence).                 
Sec.  197.130(a)-(d)......................  Covered by Sec.  17.162(a)- 
                                             (c).                       
Sec.  197.130(e)-(g)......................  Sec.  17.164(b).            
Sec.  197.130(h)-(j)......................  Sec.  17.166(a).            
Sec.  197.130a(a).........................  Sec.  17.162(d).            
Sec.  197.130a(b).........................  Sec.  17.164(d).            
Sec.  197.130b............................  Sec.  17.163 (a) & (c).     
Sec.  197.131.............................  Sec.  17.166(c).            
Sec.  197.132 (except last clause)........  Sec.  17.161 (from 2nd      
                                             sentence to end).          
Sec.  197.132 (last clause)...............  Covered by Sec.  17.171.    
Sec.  197.133 (except last sentence)......  Sec.  17.170.               
Sec.  197.133 (last sentence).............  Sec.  17.171.               
------------------------------------------------------------------------


                      Derivation Table for Part 17                      
------------------------------------------------------------------------
                New section                            Source           
------------------------------------------------------------------------
                                Subpart A                               
                                                                        
Sec.  17.1................................  Sec.  197.1.                
Sec.  17.2................................  Sec.  197.2.                
Sec.  17.3................................  NEW.                        
Sec.  17.4................................  NEW.                        
Sec.  17.5................................  NEW.                        
Sec.  17.6................................  NEW (cf. Secs.  197.30 and  
                                             197.67(a)).                
                                                                        
                                Subpart B                               
                                                                        
Sec.  17.11: (generally)..................  Sec.  197.5.                
    ``Alcohol & Tobacco Laboratory''......  NEW.                        
    ``Approved''..........................  NEW.                        
    ``CFR''...............................  NEW.                        
    ``Eligible''..........................  NEW.                        
    ``Food products''.....................  Rev. Rul. 63-87.            
    ``Medicines''.........................  ATF Rul. 82-7.              
    ``Month''.............................  NEW.                        
    ``Person''............................  NEW.                        
    ``Proof gallon''......................  NEW.                        
    ``Quarter''...........................  NEW.                        
    ``Recovered spirits''.................  NEW.                        
    ``Subject to drawback''...............  NEW.                        
    ``Taxpaid''...........................  NEW.                        
    ``This chapter''......................  NEW.                        
                                                                        
                                Subpart C                               
                                                                        
Sec.  17.21...............................  Sec.  197.25.               
Sec.  17.22...............................  Sec.  197.25a.              
Sec.  17.23...............................  Sec.  197.26.               
Sec.  17.24...............................  Sec.  197.27.               
Sec.  17.31...............................  Sec.  197.28.               
Sec.  17.32...............................  Sec.  197.29.               
Sec.  17.33...............................  Sec.  197.30.               
Sec.  17.34...............................  Sec.  197.31.               
Sec.  17.41...............................  Sec.  197.29a(a).           
Sec.  17.42...............................  Sec.  197.29a(b).           
Sec.  17.43...............................  Sec.  197.29a(c).           
                                                                        
                                Subpart D                               
                                                                        
Sec.  17.51...............................  Sec.  197.40.               
Sec.  17.52...............................  Sec.  197.40a.              

[[Page 31409]]

                                                                        
Sec.  17.53...............................  Sec.  197.42.               
Sec.  17.54...............................  Sec.  197.41.               
Sec.  17.55...............................  Sec.  197.47a.              
Sec.  17.61...............................  Sec.  197.43.               
Sec.  17.62...............................  Sec.  197.46.               
Sec.  17.63...............................  Sec.  197.47.               
Sec.  17.71...............................  Sec.  197.48.               
Sec.  17.72...............................  Sec.  197.49.               
Sec.  17.73...............................  Sec.  197.50.               
Sec.  17.74...............................  Sec.  197.51.               
Sec.  17.75...............................  NEW.                        
Sec.  17.76...............................  ATF Rul. 74-2.              
Sec.  17.77...............................  NEW.                        
Sec.  17.81...............................  Sec.  197.52.               
Sec.  17.82...............................  Sec.  197.53.               
Sec.  17.83...............................  Sec.  197.54.               
Sec.  17.91...............................  Sec.  197.57.               
Sec.  17.92...............................  Sec.  197.58.               
Sec.  17.93...............................  Sec.  197.59.               
                                                                        
                                Subpart E                               
                                                                        
Sec.  17.101..............................  Secs.  197.65 & 197.71.     
Sec.  17.102..............................  Sec.  197.107 (except first 
                                             & last sentences).         
Sec.  17.103..............................  Sec.  197.66.               
Sec.  17.104..............................  Sec.  197.68.               
Sec.  17.105..............................  Sec.  197.67.               
Sec.  17.106..............................  Sec.  197.69.               
Sec.  17.107..............................  Sec.  197.72.               
Sec.  17.108..............................  Sec.  197.73.               
Sec.  17.111..............................  Secs.  197.75 & 197.79.     
Sec.  17.112..............................  Sec.  197.76.               
Sec.  17.113..............................  Sec.  197.77.               
Sec.  17.114..............................  Sec.  197.80.               
                                                                        
                                Subpart F                               
                                                                        
Sec.  17.121..............................  Sec.  197.95 (sentences 1-2,
                                             6, 8-9).                   
Sec.  17.122..............................  Sec.  197.95 (7th sentence) 
                                             & ATF Rul. 77-27.          
Sec.  17.123..............................  Sec.  197.97.               
Sec.  17.124..............................  Sec.  197.98.               
Sec.  17.125(a)...........................  Sec.  197.99.               
Sec.  17.125(b)...........................  NEW.                        
Sec.  17.126(a)...........................  NEW.                        
Sec.  17.126(b)...........................  Rev. Rul. 69-138.           
Sec.  17.127..............................  NEW.                        
Sec.  17.131..............................  Sec.  197.95 (3rd & 4th     
                                             sentences).                
Sec.  17.132(a)...........................  Sec.  197.96.               
Sec.  17.132(b)...........................  Sec.  170.616.              
Sec.  17.133..............................  Sec.  170.613(a) (7)-(9),   
                                             Rev. Rul. 63-87 & ATF Rul. 
                                             73-1.                      
Sec.  17.134..............................  NEW.                        
Sec.  17.135..............................  Rev. Ruls. 56-239 & 56-367. 
Sec.  17.136..............................  Rev. Rul. 58-350.           
Sec.  17.137..............................  Sec.  197.95 (5th sentence) 
                                             & Rev. Rul. 56-314.        
                                                                        
                                Subpart G                               
                                                                        
Sec.  17.141..............................  Sec.  197.105.              
Sec.  17.142(a)...........................  Sec.  197.106 (up to        
                                             proviso) & ATF Order       
                                             1100.95A.                  
Sec.  17.142(b)...........................  NEW.                        
Sec.  17.143..............................  Sec.  197.106 (proviso,     
                                             except next-to-last        
                                             sentence).                 
Sec.  17.144..............................  Secs.  197.70 & 197.107     
                                             (first & last sentence).   
Sec.  17.145..............................  Sec.  197.108.              
Sec.  17.146..............................  Secs.  197.106 (next-to-last
                                             sentence) & 197.109.       
Sec.  17.147(a)...........................  Sec.  197.110.              
Sec.  17.147(b)...........................  Sec.  197.115 (last         
                                             sentence).                 
Sec.  17.147 (c) & (d)....................  NEW.                        
Sec.  17.148..............................  NEW.                        
Sec.  17.151..............................  Sec.  197.11 (``Used'').    
Sec.  17.152(a)...........................  Sec.  197.11 (``Time        
                                             distilled spirits are      
                                             used'').                   
Sec.  17.152(b)...........................  ATF Rul. 76-17.             
Sec.  17.152(c)...........................  Rev. Ruls. 56-394 & 69-138. 
Sec.  17.152(d)...........................  Rev. Rul. 69-138.           
Sec.  17.153..............................  Secs.  197.117 (last three  
                                             sentences) & 197.118 (last 
                                             sentence).                 
Sec.  17.154..............................  Sec.  197.11 (``Intermediate
                                             products'').               
Sec.  17.155..............................  Sec.  197.119 (last         
                                             sentence).                 
                                                                        
                                Subpart H                               
                                                                        
Sec.  17.161..............................  Secs.  197.130              
                                             (introduction) & 197.132   
                                             (except last clause).      
Sec.  17.162(a)...........................  Secs.  197.112-113 & 197.130
                                             (a)-(d).                   
Sec.  17.162(b)...........................  Secs.  197.114 & 197.130 (a)-
                                             (d).                       
Sec.  17.162(c)...........................  NEW.                        
Sec.  17.162(d)...........................  Sec.  197.130a(a).          
Sec.  17.163 (a) & (c)....................  Sec.  197.130b.             
Sec.  17.163(b)...........................  NEW.                        
Sec.  17.164..............................  Secs.  197.130 (e)-(g) &    
                                             197.130a(b).               
Sec.  17.165..............................  Industry Circular 79-5.     
Sec.  17.166(a)...........................  Sec.  197.130 (h)-(j).      
Sec.  17.166(b)...........................  NEW.                        
Sec.  17.166(c)...........................  Sec.  197.131.              
Sec.  17.167(a)...........................  Secs.  197.116-119.         
Sec.  17.167(b)...........................  Industry Circular 79-5.     
Sec.  17.168..............................  Sec.  170.617(c).           
Sec.  17.169..............................  NEW.                        
Sec.  17.170..............................  Sec.  197.133 (except last  
                                             sentence).                 
Sec.  17.171..............................  Sec.  197.132 (last two     
                                             clauses), Sec.  197.133    
                                             (last sentence) & Industry 
                                             Circular 79-5.             
                                                                        
                                Subpart I                               
                                                                        
Sec.  17.181..............................  Rev. Rul. 56-335.           
Sec.  17.182..............................  Rev. Rul. 56-336.           
Sec.  17.183..............................  ATF Rul. 81-8 (modified).   
Sec.  17.184..............................  NEW.                        
Sec.  17.185 (a) & (c)....................  NEW.                        
Sec.  17.185(b)...........................  ATF Rul. 76-19.             
Sec.  17.186..............................  Rev. Rul. 56-395.           
Sec.  17.187..............................  Rev. Rul. 55-689.           
------------------------------------------------------------------------



Executive Order 12866

    It has been determined that this rule is not a significant 
regulatory action, because it will not: (1) Have an annual effect on 
the economy of $100 million or more or adversely affect in a material 
way the economy, a sector of the economy, productivity, competition, 
jobs, the environment, public health or safety, or State, local or 
tribal governments or communities; (2) Create a serious inconsistency 
or otherwise interfere with an action taken or planned by another 
agency; (3) Materially alter the budgetary impact of entitlements, 
grants, user fees, or loan programs or the rights and obligations of 
recipients thereof; or (4) Raise novel legal or policy issues arising 
out of legal mandates, the President's priorities, or the principles 
set forth in Executive Order 12866.

Paperwork Reduction Act

    The collections of information contained in this final regulation 
have been submitted to the Office of Management and Budget (OMB) in 
accordance with the Paperwork Reduction Act of 1980 (44 U.S.C. 3504(h)) 
and approved under control numbers 1512-0078, 1512-0079, 1512-0095, 
1512-0141, 1512-0188, 1512-0378, 1512-0379, 1512-0472, 1512-0492, 1512-
0500, and 1512-0514. The likely respondents and recordkeepers are 
businesses or other for-profit institutions, including small businesses 
or organizations.
    The collection of information under control number 1512-0078 is in 
Sec. 17.106. This information is required by ATF to obtain the surety's 
agreement to any changes in the terms of bonds. The collections of 
information under control number 1512-0079 are in Secs. 17.6 and 
17.105. This information is required when agents obtain authority to 
sign official documents on behalf of the principal.
    The collections of information under control number 1512-0095 are 
in Secs. 17.121, 17.126, 17.127, 17.132, and 17.136. This information 
is required by ATF to describe the formulas for nonbeverage and 
intermediate products. The information is used to ensure that drawback 
products meet the statutory requirements for approval as being 
medicines, medicinal preparations, food

[[Page 31410]]

products, flavors, flavoring extracts, or perfume that are unfit for 
beverage use.
    The collections of information under control number 1512-0141 are 
in Secs. 17.92, 17.93, 17.142, 17.145, and 17.146. The information on 
this claim form must be submitted to ATF by manufacturers claiming 
nonbeverage drawback or refund of special (occupational) tax. The 
information is used to determine whether the claim is valid.
    The collection of information under control number 1512-0188 is in 
Sec. 17.6. The information on this form provides ATF with notification 
of corporate officials authorized to sign documents on behalf of the 
corporation.
    The collections of information under control number 1512-0378 are 
in Secs. 17.3, 17.54, 17.111, 17.112, 17.122-17.125, 17.143, 17.168(a), 
17.183, and 17.187. This control number covers miscellaneous 
information required by ATF on an irregular basis to ensure compliance 
with law and regulations or to grant permission for the use of optional 
procedures.
    The collections of information under control number 1512-0379 are 
in Secs. 17.161-17.167, 17.168(b), 17.169, 17.170, 17.182, and 17.186. 
This information is required to support claims for drawback. The 
records kept by manufacturers at their plants are used by ATF 
inspectors conducting on-site inspections.
    The collections of information under control number 1512-0472 are 
in Secs. 17.31-17.34, 17.41, 17.53, 17.61, 17.63, 17.71, and 17.74. The 
information on this special tax return is required when paying special 
(occupational) tax. The collections of information under control number 
1512-0492 are in Secs. 17.42, 17.43, 17.52, and 17.55. This control 
number pertains to records associated with the preparation and filing 
of the special tax return. The collections of information under control 
number 1512-0500 are in Secs. 17.31-17.34, 17.41, and 17.53. This 
requirement is the same special tax return covered by control number 
1512-0472, except that the form is modified (simplified) for use by 
renewal taxpayers.
    The collection of information under control number 1512-0514 is in 
Secs. 17.147 and 17.182. This collection of information consists of 
supporting data required to accompany claims for drawback. The 
supporting data submitted to ATF is used to make a preliminary 
verification of claims before they are paid.
    The estimated total number of respondents and recordkeepers 
affected by these collections of information is 611. The estimated 
average annual burden is approximately 36 hours per respondent or 
recordkeeper. (This figure represents the additional time that would be 
required, beyond what a manufacturer would customarily spend on 
recordkeeping in the ordinary course of his business.) Comments on 
these collections of information, including comments relating to the 
accuracy of the burden estimate and suggestions for reducing this 
burden, were requested by Notices No. 634 and 748. Public comments 
pertaining to the collections of information prescribed by this final 
rule are discussed above, under the headings ``Public Comments on 
Notice No. 634'' and ``Public Comments on Notice No. 748.'' An agency 
may not conduct or sponsor, and a person is not required to respond to, 
a collection of information unless it displays a valid control number 
assigned by OMB.

Regulatory Flexibility Act

    The provisions of the Regulatory Flexibility Act relating to a 
final regulatory flexibility analysis (5 U.S.C. 603, 604) are 
applicable to this final rule. A final regulatory flexibility analysis 
has been prepared and reads as follows:

I. Rationale for Agency Action

    The law (26 U.S.C. 5131-5134) authorizes a drawback of internal 
revenue tax on alcohol used in the manufacture of certain nonbeverage 
products. This drawback shall be granted by the Department of the 
Treasury on receipt of a proper claim. To determine whether a claim is 
proper, regulations may require certain records to be kept and reports 
to be submitted by those claiming drawback, in order to establish their 
eligibility. That is, it must be shown that the alcohol on which 
drawback is claimed: (A) Was actually used, (B) was used in the 
manufacture of the particular products for which drawback is 
authorized, and (C) was originally taxpaid.
    The regulations dealing with nonbeverage drawback are therefore 
issued under this primary rationale: to protect the revenue. However, 
this rationale is modified by a secondary rationale, which is: to 
require only those items of information to be submitted or to be 
recorded which are actually necessary to establish eligibility for 
drawback. With respect to those items required to be submitted to the 
Bureau of Alcohol, Tobacco and Firearms (ATF), only those should be 
submitted which are actually used to maintain control over the approval 
of claims. With respect to those records required to be maintained at 
the claimant's premises, the claimant's own record system should be 
utilized at all possible times to avoid duplication.

II. Objective and Legal Basis for the Rule

    A. Objective basis. The objective basis of these regulations is 
that a dual control system is used to verify the propriety of claims: 
Initially, a sampling procedure in the regional office is used to 
screen the claims before they are paid; subsequently, periodic field 
inspections at the manufacturing premises provide the opportunity to 
audit more detailed records.
    At the regional offices, not every item on every report is checked 
every time; however, a sufficient number are checked in order to insure 
that there is no likelihood of fraud. Those reports which are checked 
must contain sufficient information to reveal undisguised fraud and/or 
honest mistakes. The information submitted should also permit detection 
of any problems which would result in scheduling an on-site inspection 
sooner than would otherwise be planned.
    During on-site inspections, ATF officers examine original batch 
records to verify compliance with approved formulas. A physical 
inventory is taken and records are examined to see whether they agree 
with the inventory. If necessary, a claim adjustment may be required.
    B. Legal basis. The legal basis of these regulations is found in 26 
U.S.C. 5131-5134 and 7805. These laws give the Secretary of the 
Treasury broad discretion to promulgate regulations, but the 
regulations must be limited to the function of revenue protection. 
Treasury Department Order No. 120-01 (dated June 6, 1972, effective 
July 1, 1972) delegated to the Bureau of Alcohol, Tobacco and Firearms 
the function of prescribing and administering such regulations.
    C. Estimate of number of small entities affected and types. It is 
estimated that this document will affect about 611 small entities which 
use taxpaid alcohol to manufacture nonbeverage products.

III. Detailed Estimate and Description of the Reporting, 
Recordkeeping and Compliance Requirements

    A. Reporting requirements. The most significant reporting 
requirements of this document pertain to the supporting data that is 
required to accompany each claim. The supporting data must include 
information regarding: the amount of taxpaid alcohol received, the 
amount of each product produced, the amount of taxpaid alcohol used and 
the

[[Page 31411]]

product in which used, the amount of alcohol recovered (if any), the 
amount of tax claimed as drawback, the amount of alcohol on hand at the 
beginning and end of each claim period, and an explanation of any 
discrepancies disclosed by physical inventory. Other reports which are 
required less frequently include: Statements of formula and process 
(which are necessary to establish that the products being manufactured 
are of the types for which drawback is authorized under law), bonds and 
consents of surety in the case of claimants filing monthly claims, 
samples of the product if needed to determine its nonbeverage 
character, a special tax return and registration (as required by law in 
26 U.S.C. 5131-5132), an application for an employer identification 
number in order to identify the special taxpayer, and information 
relating to any changes in the location or control of the business. If 
no drawback is claimed, then none of the requirements need be complied 
with. The reporting requirements affect all classes of nonbeverage 
drawback manufacturers. Some knowledge of chemistry is helpful in 
preparing the required formulas for submission, and an elementary 
knowledge of bookkeeping is needed to maintain the required accounts 
for submission.
    B. Recordkeeping requirements. The recordkeeping requirements of 
this regulation are designed to be supplementary to the reporting 
requirements. The records support and amplify the statements given in 
the required reports. Ultimately, the purpose is to facilitate 
verification of the amount of drawback claimed. No particular form of 
record is required; rather, the records may be kept in any format, so 
long as the information is clearly expressed. For the most part, these 
required records are merely ordinary business records which the 
manufacturer would normally maintain in the course of his business. 
However, it is still necessary for regulations to specify that these 
records must be kept; otherwise, a claimant under investigation might 
falsely deny keeping the records, and if there were no requirement that 
the records be kept, then it would be difficult to prove any violation 
against such a person. The records which this regulation requires 
claimants to keep are: Copies of the reports submitted, records of 
disposition of nonbeverage products, records of raw materials received, 
accounting for recovered alcohol, invoices of purchases, evidence of 
taxpayment, and batch records of ingredients used in each production 
batch. The regional director (compliance) may also require a 
manufacturer to keep inventory records of raw materials and nonbeverage 
products. All classes of nonbeverage drawback manufacturers are 
affected by these recordkeeping requirements. An elementary knowledge 
of bookkeeping is needed to prepare and record the prescribed accounts.
    C. Compliance requirements. The compliance requirements of this 
regulation are: To retain the special tax stamp at the place of 
business as evidence of payment of special tax; to observe the 
statutory time restrictions for filing of claims (six months following 
the close of the quarter within which the alcohol was used); to retain 
the required records for a period of at least 3 years; to obliterate 
taxpayment marks on emptied containers of distilled spirits (as 
required by 26 U.S.C. 5206); to use intermediate products, and alcohol 
recovered from nonbeverage products, for no purpose other than to 
manufacture nonbeverage products; to transfer intermediate products to 
no one except another branch or plant of the same manufacturer; to 
refrain from transferring unfinished nonbeverage products to any other 
premises; and to refrain from selling or transferring any recovered 
alcohol or material from which alcohol can be recovered, except as 
provided by regulation. All classes of nonbeverage drawback 
manufacturers are affected by these requirements. No special skills are 
needed for compliance.

IV. Conflicting, Duplicative or Overlapping Federal Rules

    Some of the requirements of these regulations may overlap 
requirements of the Internal Revenue Service (IRS). The reason for this 
is that the IRS requires certain financial and cost accounting records 
in order to establish income tax liability, and in some cases the same 
information may be required by this part in order to establish 
eligibility for drawback of excise tax. In case of such overlap, the 
proprietor would not be required to keep two separate sets of records; 
the same set of records could suffice to meet the requirements of both 
ATF and IRS regulations. There is no additional burden, because these 
records are merely those which anyone would keep in the ordinary course 
of business. The Food and Drug Administration (FDA) may also require 
certain records which duplicate or overlap the records required by 
these regulations. Such FDA records will also satisfy the ATF 
requirement, due to the fact that these regulations do not specify any 
particular format for the records, so long as the information is 
clearly presented and available to ATF inspectors.

V. Alternatives

    A. Multitiering. This concept is not used, because the large 
majority of manufacturers of nonbeverage products are small entities. 
Consequently, the regulatory requirements have been specifically 
designed in consideration of the needs of small establishments. Larger 
establishments should also be able to comply with these requirements 
without particular difficulties.
    B. Simplification of requirements. The requirements as they are 
established are felt to be at the minimum. These requirements are 
necessary in order to protect the revenue and detect fraud against the 
Treasury. In most cases, of course, no fraud exists. But the 
requirements must be imposed equally on all claimants, so that if and 
when fraud exists, it will be detected. This is the statutory mandate 
of 26 U.S.C. 5132.
    C. Performance standards. This concept was utilized as much as 
possible. For example, an ATF form for ``supporting data'' reports is 
provided--but the format presented on that form is not required. (Any 
desired format may be used if it provides the necessary information.) 
Similarly, the required records also may be kept in any convenient 
format. However, the needs of the Government, with respect to 
expeditious processing of claims and tax payments, mandate prescription 
of specific forms for submission of drawback claims and payment of 
special tax. A specific form is also prescribed for formula submission, 
in order to facilitate communication concerning the formula among the 
applicable ATF offices as well as between ATF and the claimant. A 
special regulations section authorizes variation from most requirements 
if good cause can be shown for a variation.
    D. Exemption of small entities. The law does not authorize 
exemption of any entity from the requirements.

VI. Issues Raised by Comments

    No comments directed to the issues addressed in the Initial 
Regulatory Flexibility Analyses of Notices No. 634 and 748 have been 
received from the public or the Chief Counsel for Advocacy of the Small 
Business Administration.

Drafting Information

    The principal drafter of this document was Steven C. Simon of the 
Wine, Beer, and Spirits Regulations Branch, Bureau of Alcohol, Tobacco 
and Firearms.

[[Page 31412]]

List of Subjects

27 CFR Parts 17 and 197

    Alcohol and alcoholic beverages, Authority delegations (Government 
agencies), Claims, Drugs, Excise taxes, Foods, Reporting and 
recordkeeping requirements, Spices and flavorings, Surety bonds.

27 CFR Part 19

    Administrative practice and procedure, Alcohol and alcoholic 
beverages, Authority delegations (Government agencies), Chemicals, 
Claims, Customs duties and inspection, Electronic fund transfers, 
Excise taxes, Exports, Gasohol, Imports, Labeling, Liquors, Packaging 
and containers, Puerto Rico, Reporting and recordkeeping requirements, 
Research, Security measures, Spices and flavorings, Stills, Surety 
bonds, Transportation, Vinegar, Virgin Islands, Warehouses, Wine.

27 CFR Part 70

    Administrative practice and procedure, Alcohol and alcoholic 
beverages, Authority delegations (Government agencies), Claims, Excise 
taxes, Firearms and ammunition, Government employees, Law enforcement, 
Law enforcement officers, Penalties, Seizures and forfeitures, Surety 
bonds, Tobacco.

27 CFR Part 170

    Alcohol and alcoholic beverages, Authority delegations (Government 
agencies), Claims, Customs duties and inspection, Disaster assistance, 
Excise taxes, Labeling, Liquors, Penalties, Reporting and recordkeeping 
requirements, Surety bonds, Wine.

27 CFR Part 194

    Alcohol and alcoholic beverages, Authority delegations (Government 
agencies), Beer, Claims, Excise taxes, Exports, Labeling, Liquors, 
Packaging and containers, Penalties, Reporting and recordkeeping 
requirements, Wine.

27 CFR Part 250

    Administrative practice and procedure, Alcohol and alcoholic 
beverages, Authority delegations (Government agencies), Beer, Claims, 
Customs duties and inspection, Drugs, Electronic funds transfers, 
Excise taxes, Foods, Liquors, Packaging and containers, Puerto Rico, 
Reporting and recordkeeping requirements, Spices and flavorings, Surety 
bonds, Transportation, Virgin Islands, Warehouses, Wine.

Issuance

    Accordingly, title 27 of the Code of Federal Regulations is amended 
as follows:
    Paragraph A. Title 27 CFR part 17 is added to read as follows:

PART 17--DRAWBACK ON TAXPAID DISTILLED SPIRITS USED IN 
MANUFACTURING NONBEVERAGE PRODUCTS

Subpart A--General Provisions

Sec.
17.1  Scope of regulations.
17.2  Forms prescribed.
17.3  Alternate methods or procedures.
17.4  OMB control numbers assigned under the Paperwork Reduction 
Act.
17.5  Products manufactured in Puerto Rico or the Virgin Islands.
17.6  Signature authority.

Subpart B--Definitions

17.11  Meaning of terms.

Subpart C--Special Tax

17.21  Payment of special tax.
17.22  Rate of special tax
17.23  Special tax for each place of business.
17.24  Time for payment of special tax.

Special Tax Returns

17.31  Filing of return and payment of special tax.
17.32  Completion of ATF Form 5630.5.
17.33  Signature on returns, ATF Form 5630.5.
17.34  Verification of returns.

Employer Identification Number

17.41  Requirement for employer identification number.
17.42  Application for employer identification number.
17.43  Preparation and filing of Form SS-4.

Subpart D--Special Tax Stamps

17.51  Issuance of stamps.
17.52  Distribution of stamps for multiple locations.
17.53  Correction of errors on stamps.
17.54  Lost or destroyed stamps.
17.55  Retention of special tax stamps.

Change in Location

17.61  General.
17.62  Failure to register.
17.63  Certificates in lieu of lost stamps.

Change in Control

17.71  General.
17.72  Right of succession.
17.73  Failure to register.
17.74  Certificates in lieu of lost stamps.
17.75  Formation of partnership or corporation.
17.76  Addition or withdrawal of partners.
17.77  Reincorporation.

Change in Name or Style

17.81  General.
17.82  Change in capital stock.
17.83  Sale of stock.

Refund of Special Tax

17.91  Absence of liability, refund of special tax.
17.92  Filing of refund claim.
17.93  Time limit for filing refund claim.

Subpart E--Bonds and Consents of Sureties

17.101  General.
17.102  Amount of bond.
17.103  Bonds obtained from surety companies.
17.104  Deposit of collateral.
17.105  Filing of powers of attorney.
17.106  Consents of surety.
17.107  Strengthening bonds.
17.108  Superseding bonds.

Termination of Bonds

17.111  General.
17.112  Notice by surety of termination of bond.
17.113  Extent of release of surety from liability under bond.
17.114  Release of collateral.

Subpart F--Formulas and Samples

17.121  Product formulas.
17.122  Amended or revised formulas.
17.123  Statement of process.
17.124  Samples.
17.125  Adoption of formulas and processes.
17.126  Formulas for intermediate products.
17.127  Self-manufactured ingredients treated optionally as 
unfinished nonbeverage products.

Approval of Formulas

17.131  Formulas on ATF Form 5154.1.
17.132  U.S.P., N.F., and H.P.U.S. preparations.
17.133  Food product formulas.
17.134  Determination of unfitness for beverage purposes.
17.135  Use of specially denatured alcohol (S.D.A.).
17.136  Compliance with Food and Drug Administration requirements.
17.137  Formulas disapproved for drawback.

Subpart G--Claims for Drawback

17.141  Drawback.
17.142  Claims.
17.143  Notice for monthly claims.
17.144  Bond for monthly claims.
17.145  Date of filing claim.
17.146  Information to be shown by the claim.
17.147  Supporting data.
17.148  Allowance of claims.

Spirits Subject to Drawback

17.151  Use of distilled spirits.
17.152  Time of use of spirits.
17.153  Recovered spirits.
17.154  Spirits contained in intermediate products.
17.155  Spirits consumed in manufacturing intermediate products.

Subpart H--Records

17.161  General.
17.162  Receipt of distilled spirits.
17.163  Evidence of taxpayment of distilled spirits.
17.164  Production record.
17.165  Receipt of raw ingredients.

[[Page 31413]]

17.166  Disposition of nonbeverage products.
17.167  Inventories.
17.168  Recovered spirits.
17.169  Transfer of intermediate products.
17.170  Retention of records.
17.171  Inspection of records.

Subpart I--Miscellaneous Provisions

17.181  Exportation of medicinal preparations and flavoring 
extracts.
17.182  Drawback claims by druggists.
17.183  Disposition of recovered alcohol and material from which 
alcohol can be recovered.
17.184  Distilled spirits container marks.
17.185  Requirements for intermediate products and unfinished 
nonbeverage products.
17.186  Transfer of distilled spirits to other containers.
17.187  Discontinuance of business.

    Authority: 26 U.S.C. 5010, 5131-5134, 5143, 5146, 5206, 5273, 
6011, 6065, 6091, 6109, 6151, 6402, 6511, 7011, 7213, 7652, 7805; 31 
U.S.C. 9301, 9303, 9304, 9306.

Subpart A--General Provisions


Sec. 17.1  Scope of regulations.

    The regulations in this part apply to the manufacture of medicines, 
medicinal preparations, food products, flavors, flavoring extracts, and 
perfume that are unfit for beverage use and are made with taxpaid 
distilled spirits. The regulations cover the following topics: 
obtaining drawback of internal revenue tax on distilled spirits used in 
the manufacture of nonbeverage products; the payment of special 
(occupational) taxes in order to be eligible to receive drawback; and 
bonds, claims, formulas and samples, losses, and records to be kept 
pertaining to the manufacture of nonbeverage products.


Sec. 17.2  Forms prescribed.

    (a) The Director is authorized to prescribe all forms, including 
bonds and records, required by this part. All of the information called 
for in each form shall be furnished as indicated by the headings on the 
form and the instructions on or pertaining to the form. In addition, 
information called for in each form shall be furnished as required by 
this part.
    (b) Requests for forms should be mailed to the ATF Distribution 
Center, PO Box 5950, Springfield, Virginia 22150-5950.


Sec. 17.3  Alternate methods or procedures.

    (a) General. The Director may approve the use of an alternate 
method or procedure in lieu of a method or procedure prescribed in this 
part if he or she finds that--
    (1) Good cause has been shown for the use of the alternate method 
or procedure;
    (2) The alternate method or procedure is within the purpose of, and 
consistent with the effect intended by, the method or procedure 
prescribed by this part, and affords equivalent security to the 
revenue; and
    (3) The alternate method or procedure will not be contrary to any 
provision of law, and will not result in any increase in cost to the 
Government or hinder the effective administration of this part.
    (b) Application. A letter of application to employ an alternate 
method or procedure shall be submitted to the regional director 
(compliance) for transmittal to the Director. The application shall 
specifically describe the proposed alternate method or procedure, and 
shall set forth the reasons therefor.
    (c) Approval. No alternate method or procedure shall be employed 
until the application has been approved by the Director. The Director 
shall not approve any alternate method relating to the giving of any 
bond or to the assessment, payment, or collection of any tax. The 
manufacturer shall, during the period of authorization, comply with the 
terms of the approved application and with any conditions thereto 
stated by the Director in the approval. Authorization for any alternate 
method or procedure may be withdrawn by written notice from the 
Director whenever in his or her judgment the revenue is jeopardized, 
the effective administration of this part is hindered, or good cause 
for the authorization no longer exists. The manufacturer shall retain, 
in the records required by Sec. 17.170, any authorization given by the 
Director under this section.


Sec. 17.4  OMB control numbers assigned under the Paperwork Reduction 
Act.

    (a) Purpose. This section collects and displays the control numbers 
assigned to the information collection requirements of this part by the 
Office of Management and Budget under the Paperwork Reduction Act of 
1980, Public Law 96-511.
    (b) OMB control number 1512-0078. OMB control number 1512-0078 is 
assigned to the following section in this part: Sec. 17.106.
    (c) OMB control number 1512-0079. OMB control number 1512-0079 is 
assigned to the following sections in this part: Secs. 17.6 and 17.105.
    (d) OMB control number 1512-0095. OMB control number 1512-0095 is 
assigned to the following sections in this part: Secs. 17.121, 17.126, 
17.127, 17.132, and 17.136.
    (e) OMB control number 1512-0141. OMB control number 1512-0141 is 
assigned to the following sections in this part: Secs. 17.92, 17.93, 
17.142, 17.145, and 17.146.
    (f) OMB control number 1512-0188. OMB control number 1512-0188 is 
assigned to the following section in this part: Sec. 17.6.
    (g) OMB control number 1512-0378. OMB control number 1512-0378 is 
assigned to the following sections in this part: Secs. 17.3, 17.54, 
17.111, 17.112, 17.122, 17.123, 17.124, 17.125, 17.143, 17.168(a), 
17.183, and 17.187.
    (h) OMB control number 1512-0379. OMB control number 1512-0379 is 
assigned to the following sections in this part: Secs. 17.161, 17.162, 
17.163, 17.164, 17.165, 17.166, 17.167, 17.168(b), 17.169, 17.170, 
17.182, and 17.186.
    (i) OMB control number 1512-0472. OMB control number 1512-0472 is 
assigned to the following sections in this part: Secs. 17.31, 17.32, 
17.33, 17.34, 17.41, 17.53, 17.61, 17.63, 17.71, and 17.74.
    (j) OMB control number 1512-0492. OMB control number 1512-0492 is 
assigned to the following sections in this part: Secs. 17.42, 17.43, 
17.52, and 17.55.
    (k) OMB control number 1512-0500. OMB control number 1512-0500 is 
assigned to the following sections in this part: Secs. 17.31, 17.32, 
17.33, 17.34, 17.41, and 17.53.
    (l) OMB control number 1512-0514. OMB control number 1512-0514 is 
assigned to the following sections in this part: Secs. 17.147 and 
17.182.


Sec. 17.5  Products manufactured in Puerto Rico or the Virgin Islands.

    For additional provisions regarding drawback on distilled spirits 
contained in medicines, medicinal preparations, food products, flavors, 
flavoring extracts, or perfume which are unfit for beverage purposes 
and which are brought into the United States from Puerto Rico or the 
U.S. Virgin Islands, see part 250, subparts I and Ob, of this chapter.


Sec. 17.6  Signature authority.

    No claim, bond, tax return, or other required document executed by 
a person as an agent or representative is acceptable unless a power of 
attorney or other proper notification of signature authority has been 
filed with the ATF office where the required document must be filed. 
The ATF officer with whom the claim or other required document is filed 
may, when he or she considers it necessary, require additional evidence 
of the authority of the agent or representative to execute the 
document. Except as otherwise provided by this part, powers of

[[Page 31414]]

attorney shall be filed on ATF Form 1534 (5000.8), Power of Attorney. 
Notification of signature authority of partners, officers, or employees 
may be given by filing a copy of corporate or partnership documents, 
minutes of a meeting of the board of directors, etc. For corporate 
officers or employees, ATF Form 5100.1, Signing Authority for Corporate 
Officials, may be used. For additional provisions regarding powers of 
attorney, see Sec. 17.105 and 26 CFR part 601, subpart E.

Subpart B--Definitions


Sec. 17.11  Meaning of terms.

    As used in this part, unless the context otherwise requires, terms 
have the meanings given in this section. Words in the plural form 
include the singular, and vice versa, and words indicating the 
masculine gender include the feminine. The terms ``includes'' and 
``including'' do not exclude things not listed which are in the same 
general class.
    Alcohol and Tobacco Laboratory. The Alcohol and Tobacco Laboratory, 
Bureau of Alcohol, Tobacco and Firearms, 1401 Research Boulevard, 
Rockville, Maryland 20850.
    Approved, or approved for drawback. When used with reference to 
products and their formulas, this term means that drawback may be 
claimed on eligible spirits used in such products in accordance with 
this part.
    ATF officer. An officer or employee of the Bureau of Alcohol, 
Tobacco and Firearms (ATF) authorized to perform any function relating 
to the administration or enforcement of this part.
    CFR. The Code of Federal Regulations.
    Director. The Director, Bureau of Alcohol, Tobacco and Firearms, 
the Department of the Treasury, Washington, DC 20226; or his or her 
delegate.
    Distilled spirits, or spirits. That substance known as ethyl 
alcohol, ethanol, spirits, or spirits of wine in any form (including 
all dilutions and mixtures thereof, from whatever source or by whatever 
process produced).
    Effective tax rate. The net tax rate, after reduction for any 
credit allowable under 26 U.S.C. 5010 for wine and flavor content, at 
which the tax imposed on distilled spirits by 26 U.S.C. 5001 or 7652 is 
paid or determined. For distilled spirits with no wine or flavors 
content, the effective tax rate equals the rate of tax imposed by 26 
U.S.C. 5001 or 7652.
    Eligible, or eligible for drawback. When used with reference to 
spirits, this term designates taxpaid spirits which have not yet been 
used in nonbeverage products.
    Filed. Subject to the provisions of Secs. 70.305 and 70.306 of this 
chapter, a claim for drawback or other document or payment submitted 
under this part is generally considered to have been ``filed'' when it 
is received by the office of the proper Government official; but if an 
item is mailed timely with postage prepaid, then the United States 
postmark date is treated as the date of filing.
    Food products. Includes food adjuncts, such as preservatives, 
emulsifying agents, and food colorings, which are manufactured and 
used, or sold for use, in food.
    Intermediate products. Products to which all three of the following 
conditions apply: they are made with taxpaid distilled spirits, they 
have been disapproved for drawback, and they are made by the 
manufacturer exclusively for its own use in the manufacture of 
nonbeverage products approved for drawback. However, ingredients 
treated as unfinished nonbeverage products under Sec. 17.127 are not 
considered to be intermediate products.
    Medicines. Includes laboratory stains and reagents for use in 
medical diagnostic procedures.
    Month. A calendar month.
    Nonbeverage products. Medicines, medicinal preparations, food 
products, flavors, flavoring extracts, or perfume, which are 
manufactured using taxpaid distilled spirits, and which are unfit for 
use for beverage purposes.
    Person. An individual, trust, estate, partnership, association, 
company, or corporation.
    Proof gallon. A gallon of liquid at 60 degrees Fahrenheit, which 
contains 50 percent by volume of ethyl alcohol having a specific 
gravity of 0.7939 at 60 degrees Fahrenheit (referred to water at 60 
degrees Fahrenheit as unity), or the alcoholic equivalent thereof.
    Quarter. A 3-month period beginning January 1, April 1, July 1, or 
October 1.
    Recovered spirits. Taxpaid spirits that have been salvaged, after 
use in the manufacture of a product or ingredient, so that the spirits 
are reusable.
    Regional director (compliance). The principal ATF regional official 
responsible for administering regulations in this part, or his or her 
delegate.
    Special tax. The special (occupational) tax on manufacturers of 
nonbeverage products, imposed by 26 U.S.C. 5131.
    Subject to drawback. This term is used with reference to spirits. 
Eligible spirits become ``subject to drawback'' when they are used in 
the manufacture of a nonbeverage product. When spirits have become 
``subject to drawback,'' they may be included in the manufacturer's 
claim for drawback of tax covering the period in which they were first 
used.
    Tax year. The period from July l of one calendar year through June 
30 of the following year.
    Taxpaid. When used with respect to distilled spirits, this term 
shall mean that all taxes imposed on such spirits by 26 U.S.C. 5001 or 
7652 have been determined or paid as provided by law.
    This chapter. Chapter I of title 27 of the Code of Federal 
Regulations.
    U.S.C. The United States Code.

Subpart C--Special Tax


Sec. 17.2l  Payment of special tax.

    Each person who uses taxpaid distilled spirits in the manufacture 
or production of nonbeverage products shall pay special tax as 
specified in Sec. 17.22 in order to be eligible to receive drawback on 
the spirits so used. Special tax shall be paid for each tax year during 
which spirits were used in the manufacture of a product covered by a 
drawback claim. If a claim is filed covering taxpaid distilled spirits 
used during the preceding tax year, and special tax has not been paid 
for the preceding tax year, then special tax for the preceding tax year 
shall be paid. Regardless of the portion of a tax year covered by a 
claim, the full annual special tax shall be paid. The manufacturer is 
not required to pay the special tax if drawback is not claimed.


Sec. 17.22  Rate of special tax.

    Effective January 1, 1988, the rate of special tax is $500 per tax 
year for all persons claiming drawback on distilled spirits used in the 
manufacture or production of nonbeverage products.


Sec. 17.23  Special tax for each place of business.

    A separate special tax shall be paid for each place where distilled 
spirits are used in the manufacture or production of nonbeverage 
products, except for any such place in a tax year for which no claim is 
filed, or no drawback is paid, on spirits used at that place.


Sec. 17.24  Time for payment of special tax.

    Special tax may be paid in advance of actual use of distilled 
spirits. Special tax shall be paid before a claimant may receive 
drawback. Special tax may be paid without penalty under 26 U.S.C. 
5134(c) at any time prior to completion of final action on the claim.

[[Page 31415]]

Special Tax Returns


Sec. 17.31  Filing of return and payment of special tax.

    Special tax shall be paid by return. The prescribed return is ATF 
Form 5630.5, Special Tax Registration and Return. Special tax returns, 
with payment of tax, shall be filed with ATF in accordance with 
instructions on the form.

(26 U.S.C. 609l, 6151)


Sec. 17.32  Completion of ATF Form 5630.5.

    (a) General. All of the information called for on Form 5630.5 shall 
be provided, including:
    (1) The true name of the taxpayer.
    (2) The trade name(s) (if any) of the business(es) subject to 
special tax.
    (3) The employer identification number (see Secs. 17.41-43).
    (4) The exact location of the place of business, by name and number 
of building or street, or if these do not exist, by some description in 
addition to the post office address. In the case of one return for two 
or more locations, the address to be shown shall be the taxpayer's 
principal place of business (or principal office, in the case of a 
corporate taxpayer).
    (5) The class of special tax to which the taxpayer is subject.
    (6) Ownership and control information: The name, position, and 
residence address of every owner of the business and of every person 
having power to control its management and policies with respect to the 
activity subject to special tax. ``Owner of the business'' shall 
include every partner if the taxpayer is a partnership, and every 
person owning 10% or more of its stock if the taxpayer is a 
corporation. However, the ownership and control information required by 
this paragraph need not be stated if the same information has been 
previously provided to ATF, and if the information previously provided 
is still current.
    (b) Multiple locations. A taxpayer subject to special tax for the 
same period at more than one location or for more than one class of tax 
shall--
    (1) File one special tax return, ATF Form 5630.5, with payment of 
tax, to cover all such locations and classes of tax; and
    (2) Prepare, in duplicate, a list identified with the taxpayer's 
name, address (as shown on the Form 5630.5), employer identification 
number, and period covered by the return. The list shall show, by 
States, the name, address, and tax class of each location for which 
special tax is being paid. The original of the list shall be filed with 
ATF in accordance with instructions on the return, and the copy shall 
be retained at the taxpayer's principal place of business (or principal 
office, in the case of a corporate taxpayer) for the period specified 
in Sec. 17.170.

(26 U.S.C. 6011, 7011)


Sec. 17.33  Signature on returns, ATF Form 5630.5.

    The return of an individual proprietor shall be signed by the 
proprietor; the return of a partnership shall be signed by a general 
partner; and the return of a corporation shall be signed by a corporate 
officer. All signatures must be original; photocopies are not 
acceptable. In each case, the person signing the return shall designate 
his or her capacity, as ``individual owner,'' ``member of 
partnership,'' or, in the case of a corporation, the title of the 
officer. Receivers, trustees, assignees, executors, administrators, and 
other legal representatives who continue the business of a bankrupt, 
insolvent, deceased person, etc., shall indicate the fiduciary capacity 
in which they act.


Sec. 17.34  Verification of returns.

    ATF Forms 5630.5 shall contain or be verified by a written 
declaration that the return is made under the penalties of perjury.

(68A Stat. 749 (26 U.S.C. 6065))
Employer Identification Number


Sec. 17.41  Requirement for employer identification number.

    The employer identification number (defined in 26 CFR 301.7701-12) 
of the taxpayer who has been assigned such a number shall be shown on 
each special tax return (ATF Form 5630.5), including amended returns 
filed under this subpart. Failure of the taxpayer to include the 
employer identification number on Form 5630.5 may result in assertion 
and collection of the penalty specified in Sec. 70.113 of this chapter.

(Secs. 1(a), (b), Pub. L. 87-397, 75 Stat. 828 (26 U.S.C. 6109, 
6723))


Sec. 17.42  Application for employer identification number.

    (a) An employer identification number is assigned pursuant to 
application on IRS Form SS-4, Application for Employer Identification 
Number, filed by the taxpayer. Form SS-4 may be obtained from any 
office of the Internal Revenue Service.
    (b) Each taxpayer who files a return on ATF Form 5630.5 shall make 
application on IRS Form SS-4 for an employer identification number, 
unless he or she has already been assigned such a number or made 
application for one. The application on Form SS-4 shall be filed on or 
before the seventh day after the date on which the first return on Form 
5630.5 is filed.
    (c) Each taxpayer shall make application for and shall be assigned 
only one employer identification number, regardless of the number of 
places of business for which the taxpayer is required to file Form 
5630.5.

(Sec. 1(a), Pub. L. 87-397, 75 Stat. 828 (26 U.S.C. 6109))


Sec. 17.43  Preparation and filing of Form SS-4.

    The taxpayer shall prepare and file the application on IRS Form SS-
4, together with any supplementary statement, in accordance with 
instructions on the form or issued in respect to it.

(Sec. 1(a), Pub. L. 87-397, 75 Stat. 828 (26 U.S.C. 6109))

Subpart D--Special Tax Stamps


Sec. 17.51  Issuance of stamps.

     Each manufacturer of nonbeverage products, upon filing a properly 
executed return on ATF Form 5630.5, together with the proper tax 
payment in the full amount due, shall be issued a special tax stamp 
designated ``Manufacturer of Nonbeverage Products.'' This special tax 
stamp shall not be sold or otherwise transferred to another person 
(except as provided in Secs. 17.71 and 17.72). If the Form 5630.5 
submitted with the tax payment covers multiple locations, the taxpayer 
shall be issued one appropriately designated stamp for each location 
listed in the attachment to Form 5630.5 required by Sec. 17.32(b)(2), 
but showing, as to name and address, only the name of the taxpayer and 
the address of the taxpayer's principal place of business (or principal 
office in the case of a corporate taxpayer).


Sec. 17.52  Distribution of stamps for multiple locations.

    On receipt of the special tax stamps, the taxpayer shall verify 
that a stamp has been obtained for each location listed on the retained 
copy of the attachment to ATF Form 5630.5 required by Sec. 17.32(b)(2). 
The taxpayer shall designate one stamp for each location and shall type 
on it the trade name (if different from the name in which the stamp was 
issued) and address of the business conducted at the location for which 
the stamp is designated. The taxpayer shall then forward each stamp to 
the place of business designated on the stamp.


Sec. 17.53  Correction of errors on stamps.

    (a) Single location. On receipt of a special tax stamp, the 
taxpayer shall

[[Page 31416]]

examine it to ensure that the name and address are correctly stated. If 
an error has been made, the taxpayer shall return the stamp to ATF at 
the address shown thereon, with a statement showing the nature of the 
error and setting forth the proper name or address. On receipt of the 
stamp and statement, the data shall be compared with that on ATF Form 
5630.5, and if an error on the part of ATF has been made, the stamp 
shall be corrected and returned to the taxpayer. If the Form 5630.5 
agrees with the data on the stamp, the taxpayer shall be required to 
file a new Form 5630.5, designated ``Amended Return,'' disclosing the 
proper name and address.
    (b) Multiple locations. If an error is discovered on a special tax 
stamp obtained under the provisions of Sec. 17.32(b), relating to 
multiple locations, and if the error concerns any of the information 
contained in the attachment to Form 5630.5, the taxpayer shall return 
the stamp, with a statement showing the nature of the error and the 
correct data, to his or her principal office. The data on the stamp 
shall then be compared with the taxpayer's copy of the attachment to 
Form 5630.5, retained at the principal office. If the error is in the 
name and address and was made by the taxpayer, the taxpayer shall 
correct the stamp and return it to the designated place of business. If 
the error was made in the attachment to Form 5630.5, the taxpayer shall 
file with ATF an amended Form 5630.5 and an amended attachment with a 
statement showing the error.


Sec. 17.54  Lost or destroyed stamps.

    If a special tax stamp is lost or accidentally destroyed, the 
taxpayer shall immediately notify the regional director (compliance). 
On receipt of this notification, the regional director (compliance) 
shall issue to the taxpayer a ``Certificate in Lieu of Lost or 
Destroyed Special Tax Stamp.'' The taxpayer shall keep the certificate 
available for inspection in the same manner as prescribed for a special 
tax stamp in Sec. 17.55.


Sec. 17.55  Retention of special tax stamps.

    Taxpayers shall keep their special tax stamps at the place of 
business covered thereby for the period specified in Sec. 17.170, and 
shall make them available for inspection by any ATF officer during 
business hours.

(Title II, sec. 201, Pub. L. 85-859, 72 Stat. 1348 (26 U.S.C. 5146))
Change in Location


Sec. 17.61  General.

    A manufacturer who, during a tax year for which special tax has 
been paid, moves its place of manufacture to a place other than that 
specified on the related special tax stamp, shall register the change 
with ATF within 90 days after the move to the new premises, by 
executing a new return on ATF Form 5630.5, designated as ``Amended 
Return.'' This Amended Return shall set forth the time of the move and 
the address of the new location. The taxpayer shall also submit the 
special tax stamp to ATF, for endorsement of the change in location.

(Title II, sec. 201, Pub. L. 85-859, 72 Stat. 1374 (26 U.S.C. 5143))


Sec. 17.62  Failure to register.

    A manufacturer who fails to register a change of location with ATF, 
as required by Sec. 17.61, shall pay a new special tax for the new 
location if a claim for drawback is filed on distilled spirits used at 
the new location during the tax year for which the original special tax 
was paid.


Sec. 17.63  Certificates in lieu of lost stamps.

    The provisions of Secs. 17.61 and 17.62 apply to certificates 
issued in lieu of lost or destroyed special tax stamps.
Change in Control


Sec. 17.71  General.

    Certain persons, other than the person who paid the special tax, 
may qualify for succession to the same privileges granted by law to the 
taxpayer, to cover the remainder of the tax year for which the special 
tax was paid. Those who may qualify are specified in Sec. 17.72. To 
secure these privileges, the successor or successors shall file with 
ATF, within 90 days after the date on which the successor or successors 
assume control, a return on ATF Form 5630.5, showing the basis of the 
succession.


Sec. 17.72  Right of succession.

    Under the conditions set out in Sec. 17.71, persons listed below 
have the right of succession:
    (a) The surviving spouse or child, or executor, administrator, or 
other legal representative of a taxpayer.
    (b) A husband or wife succeeding to the business of his or her 
living spouse.
    (c) A receiver or trustee in bankruptcy, or an assignee for the 
benefit of creditors.
    (d) The members of a partnership remaining after the death or 
withdrawal of a general partner.


Sec. 17.73  Failure to register.

    A person eligible for succession to the privileges of a taxpayer, 
in accordance with Secs. 17.71 and 17.72, who fails to register the 
succession with ATF, as required by Sec. 17.71, shall pay a new special 
tax if a claim for drawback is filed on distilled spirits used by the 
successor during the tax year for which the original special tax was 
paid.


Sec. 17.74  Certificates in lieu of lost stamps.

    The provisions of Secs. 17.71-73 apply to certificates issued in 
lieu of lost or destroyed special tax stamps.


Sec. 17.75  Formation of partnership or corporation.

    If one or more persons who have paid special tax form a partnership 
or corporation, as a separate legal entity, to take over the business 
of manufacturing nonbeverage products, the new firm or corporation 
shall pay a new special tax in order to be eligible to receive 
drawback.


Sec. 17.76  Addition or withdrawal of partners.

    (a) General partners. When a business formed as a partnership, 
subject to special tax, admits one or more new general partners, the 
new partnership shall pay a new special tax in order to be eligible to 
receive drawback. Withdrawal of general partners is covered by 
Sec. 17.72(d).
    (b) Limited partners. Changes in the membership of a limited 
partnership requiring amendment of the certificate but not dissolution 
of the partnership are not changes that incur liability to additional 
special tax.


Sec. 17.77  Reincorporation.

    When a new corporation is formed to take over and conduct the 
business of one or more corporations that have paid special tax, the 
new corporation shall pay special tax and obtain a stamp in its own 
name.
Change in Name or Style


Sec. 17.81  General.

    A person who paid special tax is not required to pay a new special 
tax by reason of a mere change in the trade name or style under which 
the business is conducted, nor by reason of a change in management 
which involves no change in the proprietorship of the business.


Sec. 17.82  Change in capital stock.

    A new special tax is not required by reason of a change of name or 
increase in the capital stock of a corporation, if the laws of the 
State of incorporation provide for such changes without creating a new 
corporation.


Sec. 17.83  Sale of stock.

    A new special tax is not required by reason of the sale or transfer 
of all or a controlling interest in the capital stock of a corporation.

[[Page 31417]]

Refund of Special Tax


Sec. 17.91  Absence of liability, refund of special tax.

    The special tax paid may be refunded if it is established that the 
taxpayer did not file a claim for drawback for the period covered by 
the special tax stamp. If a claim for drawback is filed, the special 
tax may be refunded if no drawback is paid or allowed for the period 
covered by the stamp.


Sec. 17.92  Filing of refund claim.

    Claim for refund of special tax shall be filed on ATF Form 2635 
(5620.8), Claim--Alcohol, Tobacco and Firearms Taxes. The claim shall 
be filed with the Chief, Tax Processing Center, PO Box 145433, 
Cincinnati, OH 45203. The claim shall set forth in detail sufficient 
reasons and supporting facts to inform the regional director 
(compliance) of the exact basis of the claim. The special tax stamp 
shall be attached to the claim.

(68A Stat. 791 (26 U.S.C. 6402))


Sec. 17.93  Time limit for filing refund claim.

    A claim for refund of special tax shall not be allowed unless filed 
within three years after the payment of the tax.

(68A Stat. 808 (26 U.S.C. 6511))

Subpart E--Bonds and Consents of Sureties


Sec. 17.101  General.

    A bond shall be filed by each person claiming drawback on a monthly 
basis. Persons who claim drawback on a quarterly basis are not required 
to file bonds. Bonds shall be prepared and executed on ATF Form 5154.3, 
Bond for Drawback Under 26 U.S.C. 5131, in accordance with the 
provisions of this part and the instructions printed on the form. The 
bond requirement of this part shall be satisfied either by bonds 
obtained from authorized surety companies or by deposit of collateral 
security. Regional directors (compliance) are authorized to approve all 
bonds and consents of surety required by this part.


Sec. 17.102  Amount of bond.

    The bond shall be a continuing one, in an amount sufficient to 
cover the total drawback to be claimed on spirits used during any 
quarter. However, the amount of any bond shall not exceed $200,000 nor 
be less than $1,000.


 Sec. 17.103  Bonds obtained from surety companies.

    (a) The bond may be obtained from any surety company authorized by 
the Secretary of the Treasury to be a surety on Federal bonds. Surety 
companies so authorized are listed in the current revision of 
Department of the Treasury Circular 570 (Companies Holding Certificates 
of Authority as Acceptable Sureties on Federal Bonds and as Acceptable 
Reinsuring Companies), and subject to such amendatory circulars as may 
be issued from time to time. Bonds obtained from surety companies are 
also governed by the provisions of 31 U.S.C. 9304, and 31 CFR part 223.
    (b) A bond executed by two or more surety companies shall be the 
joint and several liability of the principal and the sureties; however, 
each surety company may limit its liability, in terms upon the face of 
the bond, to a definite, specified amount. This amount shall not exceed 
the limitations prescribed for each surety company by the Secretary, as 
stated in Department of the Treasury Circular 570. If the sureties 
limit their liability in this way, the total of the limited liabilities 
shall equal the required amount of the bond.
     (c) Department of the Treasury Circular No. 570 is published in 
the Federal Register annually on the first workday in July. As they 
occur, interim revisions of the circular are published in the Federal 
Register. Copies of the circular may be obtained from: Surety Bond 
Branch, Financial Management Service, Department of the Treasury, 
Washington, DC 20227.

(Sec. 1, Pub. L. 97-258, 96 Stat. 1047 (31 U.S.C. 9304))


Sec. 17.104  Deposit of collateral.

    Except as otherwise provided by law or regulations, bonds or notes 
of the United States, or other obligations which are unconditionally 
guaranteed as to both interest and principal by the United States, may 
be pledged and deposited by principals as collateral security in lieu 
of bonds obtained from surety companies. Deposit of collateral security 
is governed by the provisions of 31 U.S.C. 9303, and 31 CFR part 225.

(Sec. 1, Pub. L. 97-258, 96 Stat. 1046 (31 U.S.C. 9301, 9303))


Sec. 17.105  Filing of powers of attorney.

    (a) Surety companies. The surety company shall prepare and submit 
with each bond, and with each consent to changes in the terms of a 
bond, a power of attorney in accordance with Sec. 17.6, authorizing the 
agent or officer who executed the bond or consent to act in this 
capacity on behalf of the surety. The power of attorney shall be 
prepared on a form provided by the surety company and executed under 
the corporate seal of the company. If other than a manually signed 
original is submitted, it shall be accompanied by certification of its 
validity.
    (b) Principal. The principal shall execute and file with the 
regional director (compliance) a power of attorney, in accordance with 
Sec. 17.6, for every person authorized to execute bonds on behalf of 
the principal.

(Sec. 1, Pub. L. 97-258, 96 Stat. 1047 (31 U.S.C. 9304, 9306))


Sec. 17.106  Consents of surety.

    The principal and surety shall execute on ATF Form 1533 (5000.18), 
Consent of Surety, any consents of surety to changes in the terms of 
bonds. Form 1533 (5000.18) shall be executed with the same formality 
and proof of authority as is required for the execution of bonds.


Sec. 17.107  Strengthening bonds.

    Whenever the amount of a bond on file and in effect becomes 
insufficient, the principal may give a strengthening bond in a 
sufficient amount, provided the surety is the same as on the bond 
already on file and in effect; otherwise a superseding bond covering 
the entire liability shall be filed. Strengthening bonds, filed to 
increase the bond liability of the surety, shall not be construed in 
any sense to be substitute bonds, and the regional director 
(compliance) shall not approve a strengthening bond containing any 
notation which may be interpreted as a release of any former bond or as 
limiting the amount of either bond to less than its full amount.


Sec. 17.108  Superseding bonds.

    (a) The principal on any bond filed pursuant to this part may at 
any time replace it with a superseding bond.
    (b) Executors, administrators, assignees, receivers, trustees, or 
other persons acting in a fiduciary capacity continuing or liquidating 
the business of the principal, shall execute and file a superseding 
bond or obtain the consent of the surety or sureties on the existing 
bond or bonds.
    (c) When, in the opinion of the regional director (compliance), the 
interests of the Government demand it, or in any case where the 
security of the bond becomes impaired in whole or in part for any 
reason whatever, the principal shall file a superseding bond. A 
superseding bond shall be filed immediately in case of the insolvency 
of the surety. If a bond is found to be not acceptable or for any 
reason becomes invalid or of no effect, the principal shall immediately 
file a satisfactory superseding bond.
    (d) A bond filed under this section to supersede an existing bond 
shall be marked by the obligors at the time of execution, ``Superseding 
Bond.'' When

[[Page 31418]]

such a bond is approved, the superseded bond shall be released as to 
transactions occurring wholly subsequent to the effective date of the 
superseding bond, and notice of termination of the superseded bond 
shall be issued, as provided in Sec. 17.111.
Termination of Bonds


Sec. 17.111   General.

    (a) Bonds on ATF Form 5154.3 shall be terminated by the regional 
director (compliance), as to liability on drawback allowed after a 
specified future date, in the following circumstances:
    (1) Pursuant to a notice by the surety as provided in Sec. 17.112.
    (2) Following approval of a superseding bond, as provided in 
Sec. 17.108.
    (3) Following notification by the principal of an intent to 
discontinue the filing of claims on a monthly basis.
    (b) However, the bond shall not be terminated until all outstanding 
liability under it has been discharged. Upon termination, the regional 
director (compliance) shall mark the bond ``canceled,'' followed by the 
date of cancellation, and shall issue a notice of termination of bond. 
A copy of this notice shall be given to the principal and to each 
surety.


Sec. 17.112   Notice by surety of termination of bond.

    A surety on any bond required by this part may at any time, in 
writing, notify the principal and the regional director (compliance) in 
whose office the bond is on file that the surety desires, after a date 
named, to be relieved of liability under the bond. Unless the notice is 
withdrawn, in writing, before the date named in it, the notice shall 
take effect on that date. The date shall not be less than 60 days after 
the date on which both the notice and proof of service on the principal 
have been received by the regional director (compliance). The surety 
shall deliver one copy of the notice to the principal and the original 
to the regional director (compliance). The surety shall also file with 
the regional director (compliance) an acknowledgment or other proof of 
service on the principal.


Sec. 17.113   Extent of release of surety from liability under bond.

    The rights of the principal as supported by the bond shall cease as 
of the date when termination of the bond takes effect, and the surety 
shall be relieved from liability for drawback allowed on and after that 
date. Liability for drawback previously allowed shall continue until 
the claims for such drawback have been properly verified by the 
regional director (compliance) according to law and this part.


Sec. 17.114   Release of collateral.

    The release of collateral security pledged and deposited to satisfy 
the bond requirement of this part is governed by the provisions of 31 
CFR part 225. When the regional director (compliance) determines that 
there is no outstanding liability under the bond, and is satisfied that 
the interests of the Government will not be jeopardized, the security 
shall be released and returned to the principal.

(Sec. 1, Pub. L. 97-258, 96 Stat. 1046 (31 U.S.C. 9301, 9303))

Subpart F--Formulas and Samples


Sec. 17.121   Product formulas.

    (a) General. Except as provided in Secs. 17.132 and 17.182, 
manufacturers shall file quantitative formulas for all preparations for 
which they intend to file drawback claims. Such formulas shall state 
the quantity of each ingredient, and shall separately state the 
quantity of spirits to be recovered or to be consumed as an essential 
part of the manufacturing process.
    (b) Filing. Formulas shall be filed with the Alcohol and Tobacco 
Laboratory on ATF Form 5154.1, Formula and Process for Nonbeverage 
Products. Filing shall be accomplished no later than 6 months after the 
end of the quarter in which taxpaid distilled spirits were first used 
to manufacture the product for purposes of drawback. If a product's 
formula is disapproved, no drawback shall be allowed on spirits used to 
manufacture that product, unless it is later used as an intermediate 
product, as provided in Sec. 17.137.
    (c) Numbering. The formulas shall be serially numbered by the 
manufacturer, commencing with number 1 and continuing thereafter in 
numerical sequence. However, a new formula for use at several plants 
shall be given the highest number next in sequence at any of those 
plants. The numbers that were skipped at the other plants shall not be 
used subsequently.
    (d) Distribution and retention of approved formulas. One copy of 
each approved Form 5154.1 shall be returned to the manufacturer. The 
formulas returned to manufacturers shall be kept in serial order at the 
place of manufacture, as provided in Sec. 17.170, and shall be made 
available to ATF officers for examination in the investigation of 
drawback claims.


Sec. 17.122  Amended or revised formulas.

    Except as provided in this section, amended or revised formulas are 
considered to be new formulas and shall be numbered accordingly. Minor 
changes may be made to a current formula on ATF Form 5154.1 with 
retention of the original formula number, if approval is obtained from 
the Director. In order to obtain approval to make a minor formula 
change, the person holding the Form 5154.1 shall submit a letter of 
application to the Alcohol and Tobacco Laboratory, indicating the 
formula change and requesting that the proposed change be considered a 
minor change. Each such application shall clearly identify the original 
formula by number, date of approval, and name of product. The 
application shall indicate whether the product is, has been, or will be 
used in alcoholic beverages, and shall specify whether the proposed 
change is intended as a substitution or merely as an alternative for 
the original formula. No changes may be made to current formulas 
without specific ATF approval in each case.


Sec. 17.123  Statement of process.

    Any person claiming drawback under the regulations in this part may 
be required, at any time, to file a statement of process, in addition 
to that required by ATF Form 5154.1, as well as any other data 
necessary for consideration of the claim for drawback. When pertinent 
to consideration of the claim, submission of copies of the commercial 
labels used on the finished products may also be required.


Sec. 17.124  Samples.

    Any person claiming drawback or submitting a formula for approval 
under the regulations in this part may be required, at any time, to 
submit a sample of each nonbeverage or intermediate product for 
analysis. If the product is manufactured with a mixture of oil or other 
ingredients, the composition of which is unknown to the claimant, a 1-
ounce sample of the mixture shall be submitted with the sample of 
finished product when so required.


Sec. 17.125  Adoption of formulas and processes.

    (a) Adoption of predecessor's formulas. If there is a change in the 
proprietorship of a nonbeverage plant and the successor desires to use 
the predecessor's formulas at the same location, the successor may, in 
lieu of submitting new formulas in its own name, adopt any or all of 
the formulas of the predecessor by filing a notice of

[[Page 31419]]

adoption with the regional director (compliance). The notice shall be 
filed with the first claim relating to any of the adopted formulas. The 
notice shall list, by name and serial number, all formulas to be 
adopted, and shall state that the products will be manufactured in 
accordance with the adopted formulas and processes. The notice shall be 
accompanied by a certified copy of the articles of incorporation or 
other document(s) necessary to prove the transfer of ownership. The 
manufacturer shall retain a copy of the notice with the related 
formulas.
    (b) Adoption of manufacturer's own formulas from a different 
location. A manufacturer's own formulas may be adopted for use at 
another of the manufacturer's plants. Further, a wholly owned 
subsidiary may adopt the formulas of the parent company, and vice 
versa. The procedure for such adoption shall be by filing a letterhead 
notice, accompanied by two photocopies of each formula to be adopted, 
with the Alcohol and Tobacco Laboratory for transmittal to the regional 
director (compliance). The notice shall list the numbers of all 
formulas to be adopted and shall indicate the plant where each was 
originally approved and the plant(s) where each is to be adopted. Some 
evidence of the relationship between the plants involved in the 
adoption shall be attached to the notice. The notice shall be 
referenced in Part IV of the supporting data (ATF Form 5154.2) filed 
with the first claim relating to the adopted formula(s).


Sec. 17.126  Formulas for intermediate products.

    (a) The manufacturer shall submit a formula on ATF Form 5154.1 to 
the Alcohol and Tobacco Laboratory for each self-manufactured 
ingredient made with taxpaid spirits and intended for the 
manufacturer's own use in nonbeverage products, unless the formula for 
any such ingredient is fully expressed as part of the approved formula 
for each nonbeverage product in which that ingredient is used, or 
unless the formula for the ingredient is contained in one of the 
pharmaceutical publications listed in Sec. 17.132.
    (b) Upon receipt of Form 5154.1 covering a self-manufactured 
ingredient made with taxpaid spirits, the formula shall be examined 
under Sec. 17.131. If the formula is approved for drawback, the 
ingredient shall be treated as a finished nonbeverage product for 
purposes of this part, rather than as an intermediate product, 
notwithstanding its use by the manufacturer. (For example, see 
Sec. 17.152(d).) If the formula is disapproved for drawback, the 
ingredient may be treated as an intermediate product in accordance with 
this part. Requirements pertaining to intermediate products are found 
in Sec. 17.185(b).
    (c) If there is a change in the composition of an intermediate 
product, the manufacturer shall submit an amended or revised formula, 
as provided in Sec. 17.122.


Sec. 17.127  Self-manufactured ingredients treated optionally as 
unfinished nonbeverage products.

    A self-manufactured ingredient made with taxpaid spirits, which 
otherwise would be treated as an intermediate product, may instead be 
treated as an unfinished nonbeverage product, if the ingredient's 
formula is fully expressed as a part of the approved formula for the 
nonbeverage product in which the ingredient will be used. A 
manufacturer desiring to change the treatment of an ingredient from 
``intermediate product'' to ``unfinished nonbeverage product'' (or vice 
versa) may do so by resubmitting the applicable formula(s) on ATF Form 
5154.1. Requirements pertaining to unfinished nonbeverage products are 
found in Sec. 17.185(c).
Approval of Formulas


Sec. 17.131  Formulas on ATF Form 5154.1.

    Upon receipt by the Alcohol and Tobacco Laboratory, formulas on ATF 
Form 5154.1 shall be examined and, if found to be medicines, medicinal 
preparations, food products, flavors, flavoring extracts, or perfume 
which are unfit for beverage purposes and which otherwise meet the 
requirements of law and this part, they shall be approved for drawback. 
If the formulas do not meet the requirements of the law and regulations 
for drawback products, they shall be disapproved.


Sec. 17.132  U.S.P., N.F., and H.P.U.S. preparations.

    (a) General. Except as otherwise provided by paragraph (b) of this 
section or by ATF ruling, formulas for compounds in which alcohol is a 
prescribed quantitative ingredient, which are stated in the current 
revisions or editions of the United States Pharmacopoeia (U.S.P.), the 
National Formulary (N.F.), or the Homeopathic Pharmacopoeia of the 
United States (H.P.U.S.), shall be considered as approved formulas and 
may be used as formulas for drawback products without the filing of ATF 
Form 5154.1.
    (b) Exceptions. Alcohol (including dehydrated alcohol and 
dehydrated alcohol injection), U.S.P.; alcohol and dextrose injection, 
U.S.P.; and tincture of ginger, H.P.U.S., have been found to be fit for 
beverage use and are disapproved for drawback. All attenuations of 
other H.P.U.S. products diluted beyond one part in 10,000 (``4 x '') 
are also disapproved for drawback, unless the manufacturer receives 
approval for a formula submitted on Form 5154.1 in accordance with this 
subpart. The formula for such attenuations shall be submitted with a 
sample of the product and a statement explaining why it should be 
classified as unfit for beverage use.


Sec. 17.133  Food product formulas.

    Formulas for nonbeverage food products on ATF Form 5154.1 may be 
approved if they are unfit for beverage purposes. Approval does not 
authorize manufacture or sale contrary to State law. Examples of food 
products that have been found to be unfit for beverage purposes are 
stated below:
    (a) Sauces or syrups. Sauces, or syrups consisting of sugar 
solutions and distilled spirits, in which the alcohol content is not 
more than 12 percent by volume and the sugar content is not less than 
60 grams per 100 cubic centimeters.
    (b) Brandied fruits. Brandied fruits consisting of solidly packaged 
fruits, either whole or segmented, and distilled spirits products not 
exceeding the quantity and alcohol content necessary for flavoring and 
preserving. Generally, brandied fruits will be considered to have met 
these standards if the container is well filled, the alcohol in the 
liquid portion does not exceed 23 percent by volume, and the liquid 
portion does not exceed 45 percent of the volume of the container.
    (c) Candies. Candies with alcoholic fillings, if the fillings meet 
the standards prescribed for sauces and syrups by paragraph (a) of this 
section.
    (d) Other food products. Food products such as mincemeat, plum 
pudding, and fruit cake, where only sufficient distilled spirits are 
used for flavoring and preserving; and ice cream and ices where only 
sufficient spirits are used for flavoring purposes. Also food adjuncts, 
such as preservatives, emulsifying agents, and food colorings, that are 
unfit for beverage purposes and are manufactured and used, or sold for 
use, in food.


Sec. 17.134  Determination of unfitness for beverage purposes.

    The Director has responsibility for determining whether products 
are fit or unfit for beverage purposes within the meaning of 26 U.S.C. 
5131. This determination may be based either on the content and 
description of the

[[Page 31420]]

ingredients as shown on ATF Form 5154.1, or on organoleptic 
examination. In such examination, samples of products may be diluted 
with water to an alcoholic concentration of 15% and tasted. Sale or use 
for beverage purposes is indicative of fitness for beverage use.


Sec. 17.135  Use of specially denatured alcohol (S.D.A.).

    (a) Use of S.D.A. in nonbeverage or intermediate products--(1) 
General. Except as provided in paragraph (b) of this section, the use 
of specially denatured alcohol (S.D.A.) and taxpaid spirits in the same 
product by a nonbeverage manufacturer is prohibited where drawback of 
tax is claimed.
    (2) Alternative formulations. No formula for a product on ATF Form 
5154.1 shall be approved for drawback under this subpart if the 
manufacturer also has on file an approved ATF Form 1479-A or Form 
5150.19, Formula for Article Made With Specially Denatured Alcohol or 
Rum, pertaining to the same product.
    (b) Use of S.D.A. in ingredients--(1) Purchased ingredients. 
Generally, purchased ingredients containing S.D.A. may be used in 
nonbeverage or intermediate products. However, such ingredients shall 
not be used in medicinal preparations or flavoring extracts intended 
for internal human use, where any of the S.D.A. remains in the finished 
product.
    (2) Self-manufactured ingredients. Self-manufactured ingredients 
may be made with S.D.A. and used in nonbeverage or intermediate 
products, provided--
    (i) No taxpaid spirits are used in manufacturing such ingredients; 
and
    (ii) All S.D.A. is recovered or dissipated from such ingredients 
prior to their use in nonbeverage or intermediate products. (Recovery 
of S.D.A. shall be in accordance with subpart K of part 20 of this 
chapter; recovered S.D.A., with or without its original denaturants, 
shall not be reused in nonbeverage or intermediate products.)

(Sec. 201, Pub. L. 85-859, 72 Stat. 1372, as amended (26 U.S.C. 
5273))


Sec. 17.136  Compliance with Food and Drug Administration requirements.

    A product is not a medicine, medicinal preparation, food product, 
flavor, flavoring extract, or perfume for nonbeverage drawback if its 
formula would violate a ban or restriction of the U.S. Food and Drug 
Administration (FDA) pertaining to such products. If FDA bans or 
restricts the use of any ingredient in such a way that further 
manufacture of a product in accordance with its formula would violate 
the ban or restriction, then the manufacturer shall change the formula 
and resubmit it on ATF Form 5154.1 to the Alcohol and Tobacco 
Laboratory. This section does not preclude approval for products 
manufactured solely for export or for uses other than internal human 
consumption (e.g. tobacco flavors or animal feed flavors) in accordance 
with laws and regulations administered by FDA. Under Sec. 17.123, 
manufacturers may be required to demonstrate compliance with FDA 
requirements applicable to this section.


Sec. 17.137  Formulas disapproved for drawback.

    A formula may be disapproved for drawback either because it does 
not prescribe appropriate ingredients in sufficient quantities to make 
the product unfit for beverage use, or because the product is neither a 
medicine, a medicinal preparation, a food product, a flavor, nor a 
flavoring extract. The formula for a disapproved product may be used as 
an intermediate product formula under Sec. 17.126. No drawback will be 
allowed on distilled spirits used in a disapproved product, unless that 
product is later used in the manufacture of an approved nonbeverage 
product. In the case of a product that is disapproved because it is fit 
for beverage use, any further use or disposition of such a product, 
other than as an intermediate product in accordance with this part, 
subjects the manufacturer to the qualification requirements of parts 1 
and 19 of this chapter.

Subpart G--Claims for Drawback


Sec. 17.141  Drawback.

    Upon the filing of a claim as provided in this subpart, drawback 
shall be allowed to any person who meets the requirements of this part. 
Drawback shall be paid at the rate specified by 26 U.S.C. 5134 on each 
proof gallon of distilled spirits on which the tax has been paid or 
determined and which have been used in the manufacture of nonbeverage 
products. The drawback rate is $1.00 less than the effective tax rate. 
Drawback shall be allowed only to the extent that the claimant can 
establish, by evidence satisfactory to the regional director 
(compliance), the actual quantity of taxpaid or tax-determined 
distilled spirits used in the manufacture of the product, and the 
effective tax rate applicable to those spirits. Special tax as a 
manufacturer of nonbeverage products shall be paid before drawback is 
allowed.


Sec. 17.142  Claims.

    (a) General. The manufacturer shall file claim for drawback with 
the regional director (compliance) for the region in which the place of 
manufacture is located. A separate claim shall be filed for each place 
of business. Each claim shall pertain only to distilled spirits used in 
the manufacture or production of nonbeverage products during any one 
quarter of the tax year. Unless the manufacturer is eligible to file 
monthly claims (see Secs. 17.143 and 17.144), only one claim per 
quarter may be filed for each place of business. The regional director 
(compliance) has the authority to approve or disapprove claims. Claims 
shall be filed on ATF Form 2635 (5620.8), Claim--Alcohol and Tobacco 
Taxes.
    (b) Manufacturers who are also proprietors of distilled spirits 
plants. If a manufacturer of nonbeverage products is owned and operated 
by the same business entity that owns and operates a distilled spirits 
plant, the manufacturer's claim for drawback may be filed for credit on 
Form 2635 (5620.8). After the claim is approved, the distilled spirits 
plant may use the claim as an adjustment decreasing the taxes due in 
Schedule B of ATF Form 5000.24, Excise Tax Return. Adjustments 
resulting from an approved drawback claim are not subject to interest. 
This procedure may be utilized only if the manufacturer of nonbeverage 
products and the distilled spirits plant have the same employer 
identification number.


Sec. 17.143  Notice for monthly claims.

    If the manufacturer has notified the regional director 
(compliance), in writing, of an intention to file claims on a monthly 
basis instead of a quarterly basis, and has filed a bond in compliance 
with the provisions of this part, claims may be filed monthly instead 
of quarterly. The election to file monthly claims shall not preclude a 
manufacturer from filing a single claim covering an entire quarter, or 
a single claim covering just two months of a quarter, or two claims 
(one of them covering one month and the other covering two months). An 
election for the filing of monthly claims may be withdrawn by the 
manufacturer by filing a notice to that effect, in writing, with the 
regional director (compliance).


Sec. 17.144  Bond for monthly claims.

    Each person intending to file claims for drawback on a monthly 
basis shall file with the regional director (compliance) an executed 
bond on ATF Form 5154.3, conforming to the provisions of subpart E of 
this part. A

[[Page 31421]]

monthly drawback claim shall not be allowed until bond coverage in a 
sufficient amount has been approved by the regional director 
(compliance). When the limit of liability under a bond given in less 
than the maximum amount has been reached, further drawback on monthly 
claims may be suspended until a strengthening or superseding bond in a 
sufficient amount is furnished.


Sec. 17.145  Date of filing claim.

    Quarterly claims for drawback shall be filed with the regional 
director (compliance) within six months after the quarter in which the 
distilled spirits covered by the claim were used in the manufacture of 
nonbeverage products. Monthly claims for drawback may be filed at any 
time after the end of the month in which the distilled spirits covered 
by the claim were used in the manufacture of nonbeverage products, but 
shall be filed not later than the close of the sixth month succeeding 
the quarter in which the spirits were used.


Sec. 17.146  Information to be shown by the claim.

    The claim shall set forth the following:
    (a) Whether the special tax has been paid.
    (b) That the distilled spirits on which drawback is claimed were 
fully taxpaid or tax-determined at the effective tax rate applicable to 
the distilled spirits.
    (c) That the distilled spirits on which the drawback is claimed 
were used in the manufacture of nonbeverage products.
    (d) Whether the nonbeverage products were manufactured in 
compliance with quantitative formulas approved under subpart F of this 
part. (If not, attach explanation.)
    (e) That the data submitted in support of the claim are correct.


Sec. 17.147  Supporting data.

    (a) Each claim for drawback shall be accompanied by supporting data 
presented according to the format shown on ATF Form 5154.2, Supporting 
Data for Nonbeverage Drawback Claims (or according to any other 
suitable format which provides the same information). Modifications of 
Form 5154.2 may be used without prior authorization, if the modified 
format clearly shows all of the required information that is pertinent 
to the manufacturing operation. Under Sec. 17.123, the regional 
director (compliance) may require additional supporting data when 
needed to determine the correctness of drawback claims.
    (b) Separate data shall be shown for eligible distilled spirits 
taxpaid at different effective tax rates. This requirement applies to 
all eligible spirits, including eligible recovered alcohol and eligible 
spirits contained in intermediate products.
    (c) Separate data shall be shown for imported rum, spirits from 
Puerto Rico containing at least 92% rum, and spirits from the U.S. 
Virgin Islands containing at least 92% rum. The total number of proof 
gallons of each such category used subject to drawback during the claim 
period shall also be shown, with separate totals for each effective tax 
rate. These amounts shall include eligible spirits and rum from 
intermediate products or recovered alcohol.
    (d) Any gain in eligible distilled spirits reported in the 
supporting data shall be reflected by an equivalent deduction from the 
amount of drawback claimed. Gains shall not be offset by known losses.


Sec. 17.148  Allowance of claims.

    (a) General. Except in the case of fraudulent noncompliance, no 
claim for drawback shall be denied for a failure to comply with either 
26 U.S.C. 5131-5134 or the requirements of this part, if the claimant 
establishes that spirits on which the tax has been paid or determined 
were in fact used in the manufacture of medicines, medicinal 
preparations, food products, flavors, flavoring extracts, or perfume, 
which were unfit for beverage purposes.
    (b) Penalty. Noncompliance with the requirements of 26 U.S.C. 5131-
5134 or of this part subjects the claimant to a civil penalty of $1,000 
for each separate product, reflected in a claim for drawback, to which 
the noncompliance relates, or the amount claimed for that product, 
whichever is less, unless the claimant establishes that the 
noncompliance was due to reasonable cause. Late filing of a claim 
subjects the claimant to a civil penalty of $1,000 or the amount of the 
claim, whichever is less, unless the claimant establishes that the 
lateness was due to reasonable cause.
    (c) Reasonable cause. Reasonable cause exists where a claimant 
establishes it exercised ordinary business care and prudence, and still 
was unable to comply with the statutory and regulatory requirements. 
Ignorance of law or regulations, in and of itself, is not reasonable 
cause. Each case is individually evaluated.

(Sec. 452, Pub. L. 98-369, 98 Stat. 819 (26 U.S.C. 5134(c))
Spirits Subject to Drawback


Sec. 17.151  Use of distilled spirits.

    Distilled spirits are considered to have been used in the 
manufacture of a product under this part if the spirits are consumed in 
the manufacture, are incorporated into the product, or are determined 
by ATF to have been otherwise utilized as an essential part of the 
manufacturing process. However, spirits lost by causes such as 
spillage, leakage, breakage or theft, and spirits used for purposes 
such as rinsing or cleaning a system, are not considered to have been 
used in the manufacture of a product.


Sec. 17.152  Time of use of spirits.

    (a) General. Distilled spirits shall be considered used in the 
manufacture of a product as soon as that product contains all the 
ingredients called for by its formula.
    (b) Spirits used in an ion exchange column. Distilled spirits used 
in recharging an ion exchange column, the operation of which is 
essential to the production of a product, shall be considered to be 
used when the spirits are entered into the manufacturing system in 
accordance with the product's formula.
    (c) Products requiring additional processing or treatment. Further 
manipulation of a product, such as aging or filtering, subsequent to 
the mixing together of all of its ingredients, shall not postpone the 
time when spirits are considered used, as determined under paragraph 
(a) of this section. This is true even if at the time of use there has 
not yet been a final determination of alcoholic content by assay. If, 
however, it is later found necessary to add more distilled spirits to 
standardize the product, such added spirits shall be considered as used 
in the period during which they were added.
    (d) Nonbeverage products used to manufacture other products. 
Nonbeverage products may be used to manufacture other nonbeverage (or 
intermediate) products. However, such subsequent usage of a nonbeverage 
product shall not affect the time when the distilled spirits contained 
therein are considered used. When distilled spirits are used in the 
manufacture of a nonbeverage product, the time of use shall be the 
point at which that product first contains all of its prescribed 
ingredients, and such use shall not be determined by the time of any 
subsequent usage of that product in another product.


Sec. 17.153  Recovered spirits.

    (a) Recovery from intermediate products. Eligible spirits recovered 
in the manufacture of intermediate products are not subject to drawback 
until such recovered spirits are used in the manufacture of a 
nonbeverage

[[Page 31422]]

product. (However, see Sec. 17.127 with respect to optional treatment 
of ingredients as unfinished nonbeverage products, rather than as 
intermediate products.) Spirits recovered in the manufacture of 
intermediate products shall be reused only in the manufacture of 
intermediate or nonbeverage products.
    (b) Recovery from nonbeverage products. Distilled spirits recovered 
in the manufacture of a nonbeverage product are considered as having 
been used in the manufacture of that product. If the spirits were 
eligible when so used, they became subject to drawback at that time. 
Upon recovery, such spirits may be reused in the manufacture of 
nonbeverage products, but shall not be reused for any other purpose. 
When reused, such recovered spirits are not again eligible for drawback 
and shall not be used in the manufacture of intermediate products.
    (c) Cross references. For additional provisions respecting the 
recovery of distilled spirits and related recordkeeping requirements, 
see Secs. 17.168 and 17.183.


Sec. 17.154  Spirits contained in intermediate products.

    Spirits contained in an intermediate product are not subject to 
drawback until that intermediate product is used in the manufacture of 
a nonbeverage product.


Sec. 17.155  Spirits consumed in manufacturing intermediate products.

    Spirits consumed in the manufacture of an intermediate product--
which are not contained in the intermediate product at the time of its 
use in nonbeverage products--are not subject to drawback. Such spirits 
are not considered to have been used in the manufacture of nonbeverage 
products. However, see Sec. 17.127 with respect to optional treatment 
of ingredients as unfinished nonbeverage products, rather than as 
intermediate products.

Subpart H--Records


Sec. 17.161  General.

    Each person claiming drawback on taxpaid distilled spirits used in 
the manufacture of nonbeverage products shall maintain records showing 
the information required in this subpart. No particular form is 
prescribed for these records, but the data required to be shown shall 
be clearly recorded and organized to enable ATF officers to trace each 
operation or transaction, monitor compliance with law and regulations, 
and verify the accuracy of each claim. Ordinary business records, 
including invoices and cost accounting records, are acceptable if they 
show the required information or are annotated to show any such 
information that is lacking. The records shall be kept complete and 
current at all times, and shall be retained by the manufacturer at the 
place covered by the special tax stamp for the period prescribed in 
Sec. 17.170.


Sec. 17.162  Receipt of distilled spirits.

    (a) Distilled spirits received in tank cars, tank trucks, barrels, 
or drums. For distilled spirits received in tank cars, tank trucks, 
barrels, or drums, the manufacturer shall record, with respect to each 
shipment received--
    (1) The date of receipt;
    (2) The name and address of the person from whom received;
    (3) The serial number or other identification mark (if any) of each 
tank car, tank truck, barrel, or drum;
    (4) The name of the producer or warehouseman who paid or determined 
the tax;
    (5) The effective tax rate (if other than the rate prescribed by 26 
U.S.C. 5001); and
    (6) The kind, quantity, and proof (or alcohol percentage by volume) 
of the spirits.
    (b) Distilled spirits received in bottles. For distilled spirits 
received in bottles, the manufacturer shall record--
    (1) The date of receipt;
    (2) The name and address of the seller;
    (3) The serial number of each case, if the bottles are received in 
cases;
    (4) The name of the bottler;
    (5) The effective tax rate (if other than the rate prescribed by 26 
U.S.C. 5001); and
    (6) The kind, quantity, and proof (or alcohol percentage by volume) 
of the spirits.
    (c) Distilled spirits received by pipeline. For distilled spirits 
received by pipeline, the manufacturer shall record--
    (1) The date of receipt;
    (2) The name of the producer or warehouseman who paid or determined 
the tax;
    (3) The effective tax rate (if other than the rate prescribed by 26 
U.S.C. 5001); and
    (4) The kind, quantity, and proof (or alcohol percentage by volume) 
of the spirits.
    (d) Determination of quantity. At the time of receipt, each 
manufacturer shall determine (preferably by weight) and record the 
exact number of proof gallons of distilled spirits received. The amount 
received in bottles may be determined by the required statements on the 
labels. The amount received in sealed drums with no evidence of leakage 
may be determined from the record of shipment, which is required by 
Sec. 19.780 of this chapter to accompany spirits received from a 
distilled spirits plant. If spirits are received in a tank car or tank 
truck, and the result of the manufacturer's gauge of the spirits is 
within 0.2 percent of the number of proof gallons reported on the 
record of shipment required by Sec. 19.780, then the number of proof 
gallons reported on that record may be recorded as the quantity 
received. Nevertheless, the receiving gauge shall be noted on the 
record of receipt. If, for any shipment, the amount recorded in the 
manufacturer's records as the quantity received is greater than the 
amount shown as taxpaid on the record required by Sec. 19.780, a 
deduction equivalent to the excess shall be made from the amount of 
drawback claimed in the manufacturer's claim covering that period. If 
no claim is filed for that period, then the deduction shall be made in 
the manufacturer's next claim. Losses in transit that exceed the 0.2 
percent limitation provided in this paragraph shall be determined and 
noted on the record of receipt. Such losses shall not be recorded as 
distilled spirits received.
    (e) Receipt of imported rum, or spirits from Puerto Rico or the 
Virgin Islands. If spirits are received which contain at least 92% rum, 
and which originate from Puerto Rico or the U.S. Virgin Islands, the 
record of receipt shall indicate the place of origin. If rum is 
received, the record shall indicate whether it is from Puerto Rico, 
from the U.S. Virgin Islands, imported from other countries, or 
domestic.
    (f) Shipments from distilled spirits plants. If spirits are 
received directly from the distilled spirits plant that paid or 
determined the tax, the manufacturer shall retain the record of 
shipment required by Sec. 19.780 of this chapter. To the extent that 
the information on that record duplicates the requirements of this 
section, retention of that record shall satisfy those requirements. If 
there are differences between the information on the record of shipment 
and the information required to be recorded by this section, the 
requirements of this section may be met by appropriate annotations on 
the record of shipment.


Sec. 17.163   Evidence of taxpayment of distilled spirits.

    (a) Shipments from distilled spirits plants. For each shipment of 
taxpaid spirits from the bonded premises of a distilled spirits plant, 
the manufacturer shall obtain the record of shipment prepared by the 
supplier under Sec. 19.780 of this chapter. This record shall be 
retained with the commercial invoice (if

[[Page 31423]]

the latter is a separate document) as evidence of taxpayment of the 
spirits. The record shall show the effective tax rate(s) (if other than 
the rate prescribed by 26 U.S.C. 5001) applicable to the shipment.
    (b) Purchases from wholesale and retail liquor dealers. 
Manufacturers shall obtain commercial invoices or other documentation 
pertaining to purchases of distilled spirits from wholesale and retail 
liquor dealers (including such dealership operations when conducted in 
conjunction with a distilled spirits plant). For spirits other than 
alcohol, grain spirits, neutral spirits, distilled gin, or straight 
whisky (as defined in the standards of identity prescribed by Sec. 5.22 
of this chapter), the manufacturer of nonbeverage products shall obtain 
evidence, from the producer or bottler of the spirits, as to the 
effective tax rate paid thereon.
    (c) Imported spirits. For imported spirits that were taxpaid 
through Customs, evidence of such taxpayment (such as Customs Forms 
7501 and 7505, receipted to indicate payment of tax, and the 
certificate of effective tax rate computation, if applicable) shall be 
secured from the importer and retained by the manufacturer.
    (d) Evidence of effective tax rate. If the evidence of effective 
tax rate, required by this section for distilled spirits products that 
may contain wine or flavors, is not obtained, drawback shall only be 
allowed based on the lowest effective tax rate possible for the kind of 
distilled spirits product used.


Sec. 17.164   Production record.

    (a) General. Each manufacturer shall keep a production record for 
each batch of intermediate product and for each batch of nonbeverage 
product. The production record shall be an original record made at the 
time of production by a person (or persons) having actual knowledge 
thereof. If any product is produced by a continuous process rather than 
by batches, the production record shall pertain to the total quantity 
of that product produced during each claim period.
    (b) Information to be shown. The record shall show the name and 
formula number of the product, the actual quantities of all ingredients 
used in the manufacture of the batch (including the proof or alcohol 
percentage by volume of all spirits), the date when eligible spirits 
were considered used (see Sec. 17.152), the effective tax rate 
applicable to those spirits (if other than the rate prescribed by 26 
U.S.C. 5001), and the quantity of product produced. The alcohol content 
of the product shall be shown if a test of alcohol content was made 
(see paragraph (e) of this section). Usage of eligible and ineligible 
spirits shall be shown separately. If spirits from Puerto Rico or the 
U.S. Virgin Islands, containing at least 92% rum, were used, the record 
shall indicate their place of origin. If rum was used, the record shall 
indicate whether it was from Puerto Rico, from the U.S. Virgin Islands, 
imported from other countries, or domestic. If spirits were recovered, 
the production record shall so indicate, and the record required by 
Sec. 17.168 shall be kept. If drawback is claimed on spirits consumed 
as an essential part of the manufacture of a nonbeverage product, which 
were not contained in that product at its completion, then the 
production record shall show the quantity of spirits so consumed in the 
manufacture of each batch.
    (c) Specificity of information. The production record shall refer 
to ingredients by the same names as are used for them in the product's 
formula. This includes formulas submitted to ATF and formulas contained 
in the publications listed in Sec. 17.132. Other names for the 
ingredients may be added in the production record, if necessary for the 
manufacturer's operations. Usage of ingredients (including spirits) may 
be shown in units of weight or volume.
    (d) Determining quantity of distilled spirits used. Each 
manufacturer shall accurately determine, by weight or volume, and 
record in the production records the quantity of all distilled spirits 
used. When the quantity used is determined by volume, adjustments shall 
be made if the temperature of the spirits is above or below 60 degrees 
Fahrenheit. A table for correction of volume of spirituous liquors to 
60 degrees Fahrenheit, Table 7 of the ``Gauging Manual,'' is available. 
See subpart E of part 30 of this chapter and Sec. 30.67. Losses after 
receipt due to leakage, spillage, evaporation, or other causes not 
essential to the manufacturing process shall be accurately recorded in 
the manufacturer's permanent records at the time such losses are 
determined.
    (e) Tests of alcohol content. At representative intervals, the 
manufacturer shall verify the alcohol content of nonbeverage products. 
The results of such tests shall be recorded.


Sec. 17.165   Receipt of raw ingredients.

    For raw ingredients destined to be used in nonbeverage or 
intermediate products, the manufacturer shall record, for each shipment 
received--
    (a) The date of receipt;
    (b) The quantity received; and
     (c) The identity of the supplier.


Sec. 17.166   Disposition of nonbeverage products.

    (a) Shipments. For each shipment of nonbeverage products, the 
manufacturer shall record--
    (1) The formula number of the product;
    (2) The date of shipment;
    (3) The quantity shipped; and
    (4) The identity of the consignee.
    (b) Other disposition. For other dispositions of nonbeverage 
products, the manufacturer shall record--
    (1) The type of disposition;
    (2) The date of disposition; and
    (3) The quantity of each product so disposed of.
    (c) Exception. The manufacturer need not keep the records required 
by paragraphs (a) and (b) of this section for any nonbeverage product 
which either contains less than 3 percent of distilled spirits by 
volume, or is sold by the producer directly to the consumer in retail 
quantities. However, when needed for protection of the revenue, the 
regional director (compliance) may at any time require the keeping of 
these records upon giving at least five days' notice to the 
manufacturer.


Sec. 17.167   Inventories.

    (a) Distilled spirits. The ``on hand'' figures reported in Part II 
of ATF Form 5154.2 shall be verified by physical inventories taken as 
of the end of each quarter in which nonbeverage products were 
manufactured for purposes of drawback. Spirits taxpaid at different 
effective tax rates shall be inventoried separately. The inventory 
record shall show the date inventory was taken, the person(s) by whom 
it was taken, subtotals for each product inventoried, and any gains or 
losses disclosed; and shall be retained with the manufacturer's 
records. The manufacturer shall explain in Part IV of the supporting 
data (Form 5154.2) any discrepancy between the amounts on hand as 
disclosed by physical inventory and the amounts indicated by the 
manufacturer's records. Any gain in eligible spirits disclosed by 
inventory requires an equivalent deduction from the claim with which 
the inventory is reported. Gains shall not be offset by known losses. 
If no claim is filed for a quarter (nor for any monthly period 
therein), then no physical inventory is required for that quarter.
    (b) Raw ingredients and nonbeverage products. When necessary for 
ensuring compliance with regulations and protection of the revenue, the 
regional director (compliance) may require a manufacturer to take 
physical inventories of finished nonbeverage products, and/or raw 
ingredients

[[Page 31424]]

intended for use in the manufacture of nonbeverage or intermediate 
products. The results of such inventories shall be recorded in the 
manufacturer's records. Any discrepancy between the amounts on hand as 
disclosed by physical inventory and such amounts as indicated by the 
manufacturer's records shall also be recorded with an explanation of 
its cause.


Sec. 17.168   Recovered spirits.

    (a) Each manufacturer intending to recover distilled spirits under 
the provisions of this part shall first notify the regional director 
(compliance). Any apparatus used to separate alcohol is subject to the 
registration requirements of 26 U.S.C. 5179 and subpart C of part 170 
of this chapter. Recovery operations shall only be conducted on the 
premises covered by the manufacturer's special tax stamp.
    (b) The manufacturer shall keep a record of the distilled spirits 
recovered and the subsequent use to which such spirits are put. The 
record shall show--
    (1) The date of recovery;
    (2) The commodity or process from which the spirits were recovered;
    (3) The amount in proof gallons, or by weight and proof (or alcohol 
percentage by volume) of distilled spirits recovered;
    (4) The amount in proof gallons, or by weight and proof (or alcohol 
percentage by volume) of recovered distilled spirits reused;
    (5) The commodity in which the recovered distilled spirits were 
reused; and
    (6) The date of reuse.
    (c) Whenever recovered spirits are destroyed (see Sec. 17.183), the 
record shall further show--
    (1) The reason for the destruction;
    (2) The date, time, location, and manner of destruction;
    (3) The number of proof gallons destroyed; and
    (4) The name of the individual who accomplished or supervised the 
destruction.


Sec. 17.169   Transfer of intermediate products.

    When intermediate products are transferred as permitted by 
Sec. 17.185(b), supporting records of such transfers shall be kept at 
the shipping and receiving plants, showing the date and quantity of 
each product transferred.


Sec. 17.170  Retention of records.

    Each manufacturer shall retain for a period of not less than 3 
years all records required by this part, a copy of all claims and 
supporting data filed in support thereof, all commercial invoices or 
other documents evidencing taxpayment or tax-determination of domestic 
spirits, all documents evidencing taxpayment of imported spirits, and 
all bills of lading received which pertain to shipments of spirits. In 
addition, a copy of each formula submitted on ATF Form 5154.1 shall be 
retained at each factory where the formula is used, for not less than 3 
years from the date of filing of the last claim for drawback under the 
formula. A copy of an approval to use an alternate method or procedure 
shall be retained as long as the manufacturer employs the method or 
procedure, and for 3 years thereafter. Further, the regional director 
(compliance) may require these records, forms, and documents to be 
retained for an additional period of not more than 3 years in any case 
where he or she deems such retention to be necessary or advisable for 
protection of the revenue.


Sec. 17.171  Inspection of records.

    All of the records, forms, and documents required to be retained by 
Sec. 17.170 shall be kept at the place covered by the special tax stamp 
and shall be readily available during the manufacturer's regular 
business hours for examination and copying by ATF officers. At the same 
time, any other books, papers, records or memoranda in the possession 
of the manufacturer, which have a bearing upon the matters required to 
be alleged in a claim for drawback, shall be available for inspection 
by ATF officers.

(Sec. 5133, 68A Stat. 623 (26 U.S.C. 5133); sec. 201, Pub. L. 85-
859, 72 Stat. 1348 (26 U.S.C. 5146)).

Subpart I--Miscellaneous Provisions


Sec. 17.181  Exportation of medicinal preparations and flavoring 
extracts.

    Medicinal preparations and flavoring extracts, approved for 
drawback under the provisions of this part, may be exported subject to 
19 U.S.C. 1313(d), which authorizes export drawback equal to the entire 
amount of internal revenue tax found to have been paid on the domestic 
alcohol used in the manufacture of such products. (Note: Export 
drawback is not allowed for imported alcohol under this provision of 
customs law.) Claims for such export drawback shall be filed in 
accordance with the applicable regulations of the U.S. Customs Service. 
Such claims may cover either the full rate of tax which has been paid 
on the alcohol, if no nonbeverage drawback has been claimed thereon, or 
else the remainder of the tax if nonbeverage drawback under 26 U.S.C. 
5134 has been or will be claimed.


Sec. 17.182  Drawback claims by druggists.

    Drawback of tax under 26 U.S.C. 5134 is allowable on taxpaid 
distilled spirits used in compounding prescriptions by druggists who 
have paid the special tax prescribed by 26 U.S.C. 5131. The 
prescriptions so compounded shall be shown in the supporting data by 
listing the first and last serial numbers thereof. The amount of 
taxpaid spirits used in each prescription need not be shown, but such 
prescriptions shall be made available for examination by ATF officers. 
If refills have been made of prescriptions received in a previous claim 
period, their serial numbers shall be recorded separately. Druggists 
claiming drawback as authorized by this section are subject to all the 
applicable requirements of this part, except those requiring the filing 
of quantitative formulas.


Sec. 17.183  Disposition of recovered alcohol and material from which 
alcohol can be recovered.

    (a) Recovered alcohol. Manufacturers of nonbeverage products shall 
not sell or transfer recovered spirits to any other premises without 
ATF authorization under Sec. 17.3. If recovered spirits are stored 
pending reuse, storage facilities shall be adequate to protect the 
revenue. If recovered spirits are destroyed, the record required by 
Sec. 17.168(c) must be kept. Spirits recovered from intermediate 
products may be destroyed without notice to ATF. Spirits recovered from 
nonbeverage products may be destroyed pursuant to a notice filed with 
the regional director (compliance) at least 12 days prior to the date 
of destruction. The notice shall state the reason for the destruction, 
the intended date of destruction, and the approximate quantity 
involved. The regional director (compliance) may impose specific 
conditions, including requiring that the destruction be witnessed by an 
ATF officer. Unless the manufacturer is otherwise advised by the 
regional director (compliance) before the date specified in the notice, 
the destruction may proceed as planned.
    (b) By-product material (general). By-product material from which 
alcohol can be recovered shall not be sold or transferred unless the 
alcohol has been removed or an approved substance has been added to 
prevent recovery of residual alcohol. Material from which alcohol can 
be recovered may also be destroyed on the manufacturer's premises by a 
suitable method. Except as provided in paragraph (c) of this section, 
prior written approval shall be obtained from the regional director 
(compliance) as to the adequacy, under this section, of any substance 
proposed

[[Page 31425]]

to be added to prevent recovery of alcohol, or of any proposed method 
of destruction.
    (c) Spent vanilla beans. Specific approval from the regional 
director (compliance) is not required when spent vanilla beans 
containing residual alcohol are destroyed on the manufacturer's 
premises by burning, or when they are removed from those premises after 
treatment with sufficient kerosene, mineral spirits, rubber hydrocarbon 
solvent, or gasoline to prevent recovery of residual alcohol.


Sec. 17.184  Distilled spirits container marks.

    All marks required by Part 19 of this chapter shall remain on 
containers of taxpaid distilled spirits until the contents are emptied. 
Whenever such a container is emptied, such marks shall be completely 
obliterated.

(Sec. 454, Pub. L. 98-369, 98 Stat. 820 (26 U.S.C. 5206(d)))


Sec. 17.185  Requirements for intermediate products and unfinished 
nonbeverage products.

    (a) General. Self-manufactured ingredients made with taxpaid 
spirits may be accounted for either as intermediate products or as 
unfinished nonbeverage products. The manufacturer may choose either 
method of accounting for such self-manufactured ingredients (see 
Sec. 17.127). However, the method selected determines the requirements 
that will apply to those ingredients, as prescribed in paragraphs (b) 
and (c) of this section.
    (b) Intermediate products. Intermediate products shall be used 
exclusively in the manufacture of nonbeverage products. Intermediate 
products may be accumulated and stored indefinitely and may be used in 
any nonbeverage product whose formula calls for such use. Intermediate 
products shall be manufactured by the same entity that manufactures the 
finished nonbeverage products. Intermediate products shall not be sold 
or transferred between separate and distinct entities. However, they 
may be transferred to another branch or plant of the same manufacturer, 
for use there in the manufacture of approved nonbeverage products. (See 
Sec. 17.169 for recordkeeping requirement.) For the purposes of this 
section, the phrase ``separate and distinct entities'' includes parent 
and subsidiary corporations, regardless of any corporate (or other) 
relationship, and even if the stock of both the manufacturing firm and 
the receiving firm is owned by the same persons.
    (c) Unfinished nonbeverage products. An unfinished nonbeverage 
product shall only be used in the particular nonbeverage product for 
which it was manufactured, and shall be entirely so used within the 
time limit stated in the approved ATF Form 5154.1. Spirits dissipated 
or recovered in the manufacture of unfinished nonbeverage products 
shall be regarded as having been dissipated or recovered in the 
manufacture of nonbeverage products. Spirits contained in such 
unfinished products shall be accounted for in the supporting data under 
Sec. 17.147 and inventoried under Sec. 17.167 as ``in process'' in 
nonbeverage products. Production of unfinished nonbeverage products 
shall be recorded as an integral part of the production records for the 
related nonbeverage products. Unfinished nonbeverage products shall not 
be transferred to other premises.


Sec. 17.186  Transfer of distilled spirits to other containers.

    A manufacturer may transfer taxpaid distilled spirits from the 
original package to other containers at any time for the purpose of 
facilitating the manufacture of products unfit for beverage use. 
Containers into which distilled spirits have been transferred under 
this section shall bear a label identifying their contents as taxpaid 
distilled spirits, and shall be marked with the serial number of the 
original package from which the spirits were withdrawn.


Sec. 17.187  Discontinuance of business.

    The manufacturer shall notify ATF when business is to be 
discontinued. Upon discontinuance of business, a manufacturer's entire 
stock of taxpaid distilled spirits on hand may be sold in a single sale 
without the necessity of qualifying as a wholesaler under part 1 of 
this chapter or paying special tax as a liquor dealer under part 194 of 
this chapter. The spirits likewise may be returned to the person from 
whom purchased, or they may be destroyed or given away.

PART 19--[AMENDED]

    Paragraph B. The regulations in 27 CFR part 19 are amended as 
follows:
    1. The authority citation for part 19 continues to read as follows:

    Authority: 19 U.S.C. 81c, 1311; 26 U.S.C. 5001, 5002, 5004-5006, 
5008, 5010, 5041, 5061, 5062, 5066, 5081, 5101, 5111-5113, 5142, 
5143, 5146, 5171-5173, 5175, 5176, 5178-5181, 5201-5204, 5206, 5207, 
5211-5215, 5221-5223, 5231, 5232, 5235, 5236, 5241-5243, 5271, 5273, 
5301, 5311-5313, 5362, 5370, 5373, 5501-5505, 5551-5555, 5559, 5561, 
5562, 5601, 5612, 5682, 6001, 6065, 6109, 6302, 6311, 6676, 6806, 
7011, 7510, 7805; 31 U.S.C. 9301, 9303, 9304, 9306.

    2. Part 19, subpart D, is amended to add Secs. 19.57-19.58 grouped 
under an undesignated center heading, to read as follows:
* * * * *

Subpart D--Administrative and Miscellaneous Provisions

Sec.

Activities Not Subject to This Part

19.57  Recovery and reuse of denatured spirits in manufacturing 
processes.
19.58  Use of taxpaid distilled spirits to manufacture products 
unfit for beverage use.
* * * * *

Subpart D--Administrative and Miscellaneous Provisions

Activities Not Subject to This Part


Sec. 19.57  Recovery and reuse of denatured spirits in manufacturing 
processes.

    The following persons are not, by reason of the activities listed 
below, subject to the provisions of this part, but they shall comply 
with the provisions of part 20 of this chapter relating to the use and 
recovery of spirits or denatured spirits:
    (a) Manufacturers who use denatured spirits, or articles or 
substances containing denatured spirits, in a process wherein any part 
or all of the spirits, including denatured spirits, are recovered.
    (b) Manufacturers who use denatured spirits in the production of 
chemicals which do not contain spirits but which are used on the permit 
premises in the manufacture of other chemicals resulting in spirits as 
a by-product.
    (c) Manufacturers who use chemicals or substances which do not 
contain spirits or denatured spirits (but which were manufactured with 
specially denatured spirits) in a process resulting in spirits as a by-
product.

(Sec 201, Pub. L. 85-859, 72 Stat. 1372, as amended (26 U.S.C. 
5273))


Sec. 19.58  Use of taxpaid distilled spirits to manufacture products 
unfit for beverage use.

    (a) General. Apothecaries, pharmacists, and manufacturers are not 
required to qualify as processors under 26 U.S.C. 5171 before 
manufacturing or compounding the following products, if the tax has 
been paid or determined on all of the distilled spirits contained 
therein:
    (1) Medicines, medicinal preparations, food products, flavors, 
flavoring extracts, and perfume, conforming to the standards for 
approval of nonbeverage drawback products found in Secs. 17.131-17.137 
of this chapter, whether or not drawback is

[[Page 31426]]

actually claimed on those products. Except as provided in paragraph (c) 
of this section, a formula need not be submitted if drawback is not 
desired.
    (2) Patented, patent, and proprietary medicines that are unfit for 
use for beverage purposes.
    (3) Toilet, medicinal, and antiseptic preparations and solutions 
that are unfit for use for beverage purposes.
    (4) Laboratory reagents, stains, and dyes that are unfit for use 
for beverage purposes.
    (5) Flavoring extracts, syrups, and concentrates that are unfit for 
use for beverage purposes.
    (b) Exceptions; products classed as beverages. Products specified 
under part 17 of this chapter as being fit for beverage use are 
alcoholic beverages. Bitters, patent medicines, and similar alcoholic 
preparations which are fit for beverage purposes, although held out as 
having certain medicinal properties, are also alcoholic beverages. Such 
products are required to be manufactured on the bonded premises of a 
distilled spirits plant, and are subject to the provisions of this 
part.
    (c) Formulas and samples; when required. On request of the 
Director, or when in doubt as to the classification of a product, the 
manufacturer shall submit to the Director the formula for and a sample 
of the product for examination to verify the manufacturer's claim of 
exemption from qualification requirements.
    (d) Change of formula; when required. If the regional director 
(compliance) finds at any time that any product manufactured under 
paragraph (a) of this section is being used for beverage purposes, or 
for mixing with beverage spirits other than by a processor, he or she 
shall notify the manufacturer to desist from manufacturing the product 
until the formula is changed to make the product not susceptible of 
beverage use and the change is approved by the Director. (However, the 
provisions of this paragraph shall not prohibit such products, which 
are unfit for beverage use, from being used in small quantities for 
flavoring drinks at the time of serving for immediate consumption.) 
Where, pursuant to notice, the manufacturer does not desist, or the 
formula is not so modified as to make the product unsusceptible of 
beverage use, the manufacturer shall immediately qualify as a 
processor.

(Sec. 805, Pub. L. 96-39, 93 Stat. 275, 278 (26 U.S.C. 5002, 5171))


Sec. 19.69  [Removed]

    3. Section 19.69 is removed.
    4. Section 19.780(c) (4) and (5) are revised to read as follows:


Sec. 19.780  Record of distilled spirits shipped to manufacturers of 
nonbeverage products.

* * * * *
    (c) * * *
    (4) Kind, proof, and quantity of distilled spirits in each 
container;
    (5) Number of containers of each size;
* * * * *

PART 70--[AMENDED]

    Paragraph C. The regulations in 27 CFR part 70 are amended as 
follows:
    1. The authority citation for part 70 is revised to read as 
follows:

    Authority: 5 U.S.C. 301 and 552; 26 U.S.C. 4181, 4182, 5146, 
5203, 5207, 5275, 5367, 5415, 5504, 5555, 5684(a), 5741, 5761(b), 
5802, 6020, 6021, 6064, 6102, 6155, 6159, 6201, 6203, 6204, 6301, 
6303, 6311, 6313, 6314, 6321, 6323, 6325, 6326, 6331-6343, 6401-
6404, 6407, 6416, 6423, 6501-6503, 6511, 6513, 6514, 6532, 6601, 
6602, 6611, 6621, 6622, 6651, 6653, 6656-6658, 6665, 6671, 6672, 
6701, 6723, 6801, 6862, 6863, 6901, 7011, 7101, 7102, 7121, 7122, 
7207, 7209, 7214, 7304, 7401, 7403, 7406, 7423, 7424, 7425, 7426, 
7429, 7430, 7432, 7502, 7503, 7505, 7506, 7513, 7601-7606, 7608-
7610, 7622, 7623, 7653, 7805.

    2. The concluding text of Sec. 70.321(a) is amended to read as 
follows:


Sec. 70.321  Registration of persons paying a special tax.

    (a) Persons required to register. * * *
* * * * *
    For provisions with respect to the registration of persons subject 
to the special tax imposed by section 5131, relating to the tax on 
persons claiming drawback on distilled spirits used in the manufacture 
of certain nonbeverage products, see section 5132 of the Internal 
Revenue Code and 27 CFR part 17 (Drawback on Taxpaid Distilled Spirits 
Used in Manufacturing Nonbeverage Products).
* * * * *


Sec. 70.411  [Amended]

    3. Section 70.411 is amended by removing paragraphs (c)(2)(v) and 
(c)(2)(vii), redesignating existing paragraph (c)(2)(vi) as paragraph 
(c)(2)(v), and by adding a new paragraph (c)(2)(vi) to read as follows:
* * * * *
    (c) * * *
    (2) * * *
    (vi) Floor stocks tax on alcoholic beverages and imported perfumes 
held for sale on January 1, 1991.
* * * * *
    4. Section 70.411(c)(17) is amended by replacing the words ``Part 
197'' with the words ``part 17''.
    5. Section 70.414(j) is revised to read as follows:


Sec. 70.414  Preparation and filing of claims.

* * * * *
    (j) Distilled spirits used in nonbeverage products. Procedural 
instructions in respect of claims for drawback of excise tax and claims 
for refund of special (occupational) tax, submitted by persons using 
distilled spirits in the manufacture of medicines, medicinal 
preparations, food products, flavors, flavoring extracts, or perfume, 
which are unfit for beverage purposes, are contained in part 17 of 
title 27 CFR.
* * * * *

PART 170--[AMENDED]

    Paragraph D. The regulations in 27 CFR part 170 are amended as 
follows:
    1. The authority citation for part 170 is revised to read as 
follows:

    Authority: 26 U.S.C. 5001, 5002, 5064, 5101, 5102, 5179, 5291, 
5301, 5362, 5601, 5615, 5687, 7805; 31 U.S.C. 9304, 9306.


Secs. 170.611-170.618  Subpart U [Removed and reserved]

    2. Subpart U is removed and reserved.

PART 194--[AMENDED]

     Paragraph E. The regulations in 27 CFR part 194 are amended as 
follows:
    1. The authority citation for part 194 is revised to read as 
follows:

    Authority: 26 U.S.C. 5001, 5002, 5111-5117, 5121-5124, 5142, 
5143, 5145, 5146, 5206, 5207, 5301, 5352, 5555, 5613, 5681, 5691, 
6001, 6011, 6061, 6065, 6071, 6091, 6109, 6151, 6311, 6314, 6402, 
6511, 6601, 6621, 6651, 6657, 7011, 7805.

    2. Section 194.33(b) is revised to read as follows:

Sec. 194.33  Sales of alcoholic compounds, preparations, or mixtures 
containing distilled spirits, wines, or beer.

* * * * *
    (b) Products unfit for beverage use. Products meeting the 
requirements for exemption from qualification under the provisions of 
Sec. 19.58 of this chapter shall be deemed to be unfit for beverage 
purposes for the purposes of this part.


Sec. 194.191  [Amended]

    3. Section 194.191(a) is amended by replacing the words ``Part 
170'' with the words ``Sec. 19.58''.

PART 197--[REMOVED]

    Paragraph F. Title 27 CFR part 197 is removed.

PART 250--[AMENDED]

    Paragraph G. The regulations in 27 CFR part 250 are amended as 
follows:
    1. The authority citation for part 250 continues to read as 
follows:


[[Page 31427]]


    Authority: 19 U.S.C. 81c; 26 U.S.C. 5001, 5007, 5008, 5010, 
5041, 5051, 5061, 5081, 5111, 5112, 5114, 5121, 5122, 5124, 5131-
5134, 5141, 5146, 5207, 5232, 5271, 5276, 5301, 5314, 5555, 6001, 
6301, 6302, 6804, 7101, 7102, 7651, 7652, 7805; 27 U.S.C. 203, 205; 
31 U.S.C. 9301, 9303, 9304, 9306.


Sec. 250.11  [Amended]

    2. The definition of ``Chief, Puerto Rico Operations'' in 
Sec. 250.11 is amended by replacing the words ``Room 329'' with the 
words ``Room 659''.
    3. The definition of ``Eligible article'' in Sec. 250.11 is amended 
by replacing the words ``flavor or flavoring extract'' with the words 
``flavor, flavoring extract or perfume''.


Sec. 250.51  [Amended]

    4. Paragraph (a) of Sec. 250.51 is amended by replacing the words 
``part 197'' with the words ``part 17''.
    5. Paragraph (c) of Sec. 250.51 is amended by replacing the words 
``5530.5 (1678)'' with the words ``5154.1 (formerly 1678)''.


Sec. 250.171  [Amended]

    6. The second sentence of Sec. 250.171 is amended by replacing the 
words ``part 197'' with the words ``part 17''.
    7. Section 250.172 is revised to read as follows:


Sec. 250.172  Bonds.

    (a) General. Persons bringing eligible articles into the United 
States from Puerto Rico and intending to file monthly claims for 
drawback under the provisions of this subpart shall obtain a bond on 
Form 5154.3. When the limit of liability under a bond given in less 
than the maximum amount has been reached, further drawback on monthly 
claims may be suspended until a strengthening or superseding bond in a 
sufficient amount has been furnished. For provisions relating to 
bonding requirements, subpart E of part 17 of this chapter is 
incorporated in this part, but references therein to a regional 
director (compliance) shall apply, for purposes of this part, to the 
Chief, Puerto Rico Operations.
    (b) Approval required. No person bringing eligible articles into 
the United States from Puerto Rico may file monthly claims for drawback 
under the provisions of this subpart until bond on Form 5154.3 has been 
approved by the Chief, Puerto Rico Operations. Bonds approved by a 
regional director (compliance) prior to the effective date of this 
provision shall remain in effect.
    8. In Sec. 250.173, the first sentence of paragraph (a), the 
introductory text of paragraph (c), and the first sentence of paragraph 
(d) are revised to read as follows:


Sec. 250.173  Claims for drawback.

    (a) General. Persons bringing eligible articles into the United 
States from Puerto Rico shall file claim for drawback on Form 2635 
(5620.8) with the Chief, Puerto Rico Operations. * * *
* * * * *
    (c) Supporting data. Each claim shall be accompanied by supporting 
data as specified in this paragraph. ATF Form 5154.2, Supporting Data 
for Nonbeverage Drawback Claims, may be used, or the claimant may use 
any suitable format that provides the following information:
* * * * *
    (d) Date of filing claim. Quarterly claims for drawback shall be 
filed with the Chief, Puerto Rico Operations, within the 6 months next 
succeeding the quarter in which the eligible products covered by the 
claim were brought into the United States. * * *


Sec. 250.221  [Amended]

    9. Paragraph (a) of Sec. 250.221 is amended by replacing the words 
``part 197'' with the words ``part 17''.
    10. Paragraph (c) of Sec. 250.221 is amended by replacing the words 
``5530.5 (1678)'' with the words ``5154.1 (formerly 1678)''.


Sec. 250.307  [Amended]

    11. The second sentence of Sec. 250.307 is amended by replacing the 
words ``Part 197'', wherever they occur, with the words ``part 17''.
    12. Section 250.308 is revised to read as follows:


Sec. 250.308  Bonds.

    (a) General. Persons bringing eligible articles into the United 
States from the Virgin Islands and intending to file monthly claims for 
drawback under the provisions of this subpart shall obtain a bond on 
Form 5154.3. When the limit of liability under a bond given in less 
than the maximum amount has been reached, further drawback on monthly 
claims may be suspended until a strengthening or superseding bond in a 
sufficient amount has been furnished. For provisions relating to 
bonding requirements, subpart E of part 17 of this chapter is 
incorporated in this part, but references therein to a regional 
director (compliance) shall apply, for purposes of this part, to the 
Chief, Puerto Rico Operations.
    (b) Approval required. No person bringing eligible articles into 
the United States from the Virgin Islands may file monthly claims for 
drawback under the provisions of this subpart until bond on Form 5154.3 
has been approved by the Chief, Puerto Rico Operations. Bonds approved 
by a regional director (compliance) prior to the effective date of this 
provision shall remain in effect.
    13. In Sec. 250.309, the first sentence of paragraph (a), the 
introductory text of paragraph (c), paragraph (c)(1) in its entirety, 
and the first sentence of paragraph (d) are revised to read as follows:


Sec. 250.309  Claims for drawback.

    (a) General. Persons bringing eligible articles into the United 
States from the Virgin Islands shall file claim for drawback on Form 
2635 (5620.8) with the Chief, Puerto Rico Operations. * * *
* * * * *
    (c) Supporting data. Each claim shall be accompanied by supporting 
data as specified in this paragraph. ATF Form 5154.2, Supporting Data 
for Nonbeverage Drawback Claims, may be used, or the claimant may use 
any suitable format that provides the following information:
    (1) The control number of the Special Tax Stamp and the tax year 
for which issued;
* * * * *
    (d) Date of filing claim. Quarterly claims for drawback shall be 
filed with the Chief, Puerto Rico Operations, within the 6 months next 
succeeding the quarter in which the eligible products covered by the 
claim were brought into the United States. * * *

    Signed: April 5, 1996.
Bradley A. Buckles,
Acting Director.
    Approved: May 9, 1996.
John P. Simpson,
Deputy Assistant Secretary, (Regulatory, Tariff and Trade Enforcement).
[FR Doc. 96-14881 Filed 6-19-96; 8:45 am]
BILLING CODE 4810-31-P