[Federal Register: May 8, 2008 (Volume 73, Number 90)]
[Proposed Rules]               
[Page 26199-26307]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr08my08-36]                         
 

[[Page 26199]]

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

Part II





Department of the Treasury





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



Alcohol and Tobacco Tax and Trade Bureau



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



27 CFR Part 19



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


[[Page 26200]]


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

DEPARTMENT OF THE TREASURY

Alcohol and Tobacco Tax and Trade Bureau

27 CFR Part 19

[Docket No. TTB-2008-0004]; [Notice No. 83]
RIN 1513-AA23

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

AGENCY: Alcohol and Tobacco Tax and Trade Bureau, Treasury.

ACTION: Notice of proposed rulemaking.

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

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

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

ADDRESSES: You may send comments on this notice to one of the following 
addresses:
     http://www.regulations.gov (via the online comment form 
for this notice as posted within Docket No. TTB-2008-0004 on 
Regulations.gov, the Federal e-rulemaking portal); or
     Mail: Director, Regulations and Rulings Division, Alcohol 
and Tobacco Tax and Trade Bureau, P.O. Box 14412, Washington, DC 20044-
4412; or
     Hand Delivery/Courier in lieu of Mail: Alcohol and Tobacco 
Tax and Trade Bureau, 1310 G Street, NW., Suite 200-E, Washington, DC 
20005.
    See the Public Participation section of this notice for specific 
instructions and requirements for submitting comments, and for 
information on how to request a public hearing.
    You may view copies of this notice and any comments we receive 
about this proposal at http://www.regulations.gov. A direct link to the 
appropriate Regulations.gov docket is available under Notice No. 83 on 
the TTB Web site at http://www.ttb.gov/spirits/spirits_
rulemaking.shtml. You also may view copies of this notice and any 
comments we receive about this proposal by appointment at the TTB 
Information Resource Center, 1310 G Street, NW., Washington, DC 20220. 
To make an appointment, call 202-927-2400.

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

SUPPLEMENTARY INFORMATION:

Table of Contents

Notice to Readers
Impact of the Homeland Security Act on this Rulemaking
I. Background Information for this Notice
    A. Distilled Spirits Plant Operations under Current Law
     Basic Definitions
     Federal Laws and Regulatory Authority
     Major Regulatory Provisions
    B. Petition to Amend 27 CFR Part 19
    C. General Changes Proposed in this Notice
     Plain Language
     Structure of Part 19
     Redundancy with the Law
     Alternate Methods or Procedures
    D. Specific Changes Proposed in this Notice
     Subpart A--General Provisions
     Subpart B--Administrative and Miscellaneous Provisions
     Subpart C--Restrictions on Production, Location, and 
Use of Plants
     Subpart D--Registration of a Distilled Spirits Plant 
and Obtaining a Permit
     Subpart E--Changes to Registrations and Permits
     Subpart F--Bonds and Consents of Surety
     Subpart G--Construction, Equipment, and Security 
Requirements ----
     Subpart H--Special (Occupational) Tax
     Subpart I--Distilled Spirits Taxes
     Subpart J--Claims
     Subpart K--Gauging
     Subpart L--Production of Distilled Spirits
     Subpart M--Storage of Distilled Spirits
     Subpart N--Processing of Distilled Spirits
     Subpart O--Denaturing Operations and Manufacture of 
Articles
     Subpart P--Transfers, Receipts, and Withdrawals
     Subpart Q--Return of Spirits to Bonded Premises and 
Voluntary Destruction
     Subpart R--Losses and Shortages
     Subpart S--Containers and Marks
     Subpart T--Liquor Bottle, Label, and Closure 
Requirements
     Subpart U--Reserved
     Subpart V--Records and Reports
     Subpart W--Production of Vinegar by the Vaporizing 
Process
     Subpart X--Distilled Spirits for Fuel Use
     Subpart Y--Paperwork Reduction Act
II. Derivation Table for Proposed Part 19
III. Public Participation
     Comments Invited
     Submitting Comments
     Confidentiality
     Public Disclosure
IV. Regulatory Analyses and Notices
     Paperwork Reduction Act
     Regulatory Flexibility Act
     Executive Order 12866
     Executive Order 13132
V. Drafting Information
VI. List of Subjects
VII. Authority and Issuance
     Text of the Proposed Rule

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

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

I. Background Information for This Notice

A. Distilled Spirits Plant Operations Under Current Law

    Distilled spirits taxation is a specialized area of Federal law. 
The following background material provides basic information about how 
distilled spirits plants operate and are regulated under Federal law.
Basis Definitions
    Distilled Spirits. The term ``distilled spirits'' refers to those 
products that contain ethyl alcohol and are generally the result of 
distillation. This term does not apply to wine and beer, which are 
products of fermentation. Examples of distilled spirits products 
include vodka, whiskey, gin, brandy, cordials, liqueurs, flavored 
brandies, and other similar products.
    Distilled Spirits Plants. The term ``Distilled Spirits Plant'' 
(DSP) refers to a plant at which distilled spirits are manufactured or 
produced, aged or stored, or packaged or bottled, either for beverage 
or industrial use.
Federal Laws and Regulatory Authority
    Federal law prohibits the manufacture or production of distilled 
spirits in the United States at other than a registered DSP that has 
received a permit from

[[Page 26201]]

TTB. While Federal law allows for the limited home production of wine 
and beer, no such exemption exists for distilled spirits.
    DSPs are regulated under the provisions of two laws, the Internal 
Revenue Code of 1986 (IRC) (Title 26 of the United States Code) and the 
Federal Alcohol Administration Act (FAA Act) (Title 27 of the United 
States Code). The IRC imposes an excise tax on distilled spirits, 
requires plants to register, requires plants to obtain permits not 
otherwise required by the FAA Act, and imposes strict controls over the 
operation of DSPs. The FAA Act imposes a requirement to obtain a basic 
permit and contains various consumer-protection provisions, including 
provisions related to the formulation, labeling, and advertising of 
alcohol beverages. The FAA Act also controls various trade practices 
within the alcohol industry.
    Under these two laws, TTB regulates the distilled spirits industry 
in the United States. Each law authorizes the Secretary of the Treasury 
to prescribe regulations to carry out and enforce its provisions, and 
the Secretary has delegated this authority to TTB. The TTB regulations 
concerning DSPs are contained in title 27 of the Code of Federal 
Regulations, Part 19, Distilled Spirits Plants (27 CFR part 19).
Major Regulatory Provisions
    A DSP consists of one or more of the following: production, 
storage, processing, denaturation, and bottling facilities. A DSP may 
be a large and complex plant, having all facilities, a simple storage 
facility consisting of only one building, or a small bottling facility 
with storage facilities. Production facilities are usually accompanied 
by some storage facilities. Bottling facilities are often accompanied 
by storage facilities, and must by law be accompanied by either a 
production or a storage facility. However, large storage facilities are 
often not accompanied by either of the other two types.
    Registration. Before commencing operations, the DSP proprietor must 
obtain an approved notice of registration. This application for 
registration includes: documents to set up distilling apparatus, 
environmental impact forms, personnel questionnaires, signature 
authorities, and a statement of security.
    Permits. Under the FAA Act, all persons who intend to engage in the 
business of: (a) Distilling spirits; (b) rectifying, blending, or 
bottling (processing) distilled spirits; or (c) warehousing and 
bottling distilled spirits, must file for a basic permit.
    To maintain control over the industrial use of distilled spirits, 
the IRC requires that an operating permit be obtained before commencing 
the production, warehousing, or bottling of alcohol for industrial use. 
Specifically, a permit is required for:
     Distilling for industrial use.
     Bonded warehousing of spirits for industrial use.
     Denaturation of spirits.
     Bonded warehousing of spirits (without bottling) for non-
industrial use.
     Bottling or packaging of spirits for industrial use.
     Any other distilling, warehousing, or bottling operations 
not required to be covered by a basic permit under the FAA Act.
    DSP Bonded Premises. The physical premises of a DSP are divided 
into two technical categories: ``bonded premises,'' and unbonded or 
``general premises.'' All activities relating to the distilling, 
storage, and processing (blending and mixing) of distilled spirits must 
be conducted on bonded premises. All activities relating to taxpaid 
alcohol beverages conducted at the distilled spirits plant must be 
conducted on general premises.
    Operations as a distiller, warehouseman, or processor may be 
conducted only on the bonded premises of a DSP by a person qualified to 
carry on such operations under 27 CFR part 19 and who has obtained the 
basic permits required by 27 CFR part 1, or, as appropriate, the 
operating permit required by part 19. However, certain other 
activities, such as those of apothecaries, customs bonded warehousemen, 
manufacturers of nonbeverage products, and users of specially denatured 
alcohol, may be carried on outside of DSPs.
    The continuity of a DSP must be unbroken except for separations 
that may include public waterways, thoroughfares, or carrier rights-of-
way. In most instances, DSPs are also prohibited from being located in 
a dwelling house, in a shed, yard, or enclosure connected with a 
dwelling house, on board a vessel or boat, on premises where beer or 
wine is produced, in a retail liquor establishment, or where any other 
business is conducted.
    Bonds. Normally, the distilled spirits tax is not collected while 
spirits are held on the ``bonded'' premises of a distilled spirits 
plant. The potential tax liability of the spirits held on bonded 
premises is guaranteed by an operations bond, and taxable removals are 
covered by a withdrawal bond.
    The bond is a legally binding, written agreement involving three 
parties: the taxpayer, the surety (insurance or bonding company), and 
the U.S. Government. The purpose of the bond is to protect the 
financial interest of the Government. If for any reason, the taxpayer 
fails to pay the tax, then the surety (insurance or bonding company) is 
obliged to pay, up to the limit of the bond.
    Other Requirements. In addition to registering, obtaining a permit, 
and providing a bond, plants are required to comply with a number of 
regulations relating to plant security; the production, storage, and 
processing of spirits; recordkeeping; inspection and audit; and filing 
of reports. These requirements are outlined in 27 CFR part 19.
    Recordkeeping Accounts. All operations at a DSP are accounted for 
within three recordkeeping accounts: Production, Storage, and 
Processing. Since the facilities (tanks and rooms) of a DSP may be used 
for multiple purposes, the accountability of spirits must be maintained 
by appropriate records within the three accounts instead of physical 
separation.
    Payment of Taxes. The Federal excise tax on distilled spirits 
attaches to the spirits as soon as they are produced, and the distilled 
spirits plant is held liable for the tax on all distilled spirits held 
in the bond premises. The amount of Federal excise tax that a distilled 
spirits plant must pay is based upon the taxable removal of the spirits 
from the bonded premises. There are two basic methods of paying the tax 
on distilled spirits withdrawn from bonded premises-deferred payment 
and prepayment. Under the deferred payment system, the proprietor may 
withdraw spirits from bond after tax determination but before payment 
of tax. The excise tax paid is based on the amount of spirits removed 
from bond during each return period. Under the prepayment system, the 
proprietor must pay the distilled spirits tax after tax determination 
but before withdrawal of the spirits from bonded premises. Most DSP 
proprietors use the deferred payment system.
    Currently, the Federal excise tax rate on distilled spirits is 
$13.50 per proof gallon. The term ``proof gallon'' is unique to this 
particular commodity and means: a liquid gallon that contains 50 
percent ethyl alcohol.
    Although the tax rate for distilled spirits is $13.50 per proof 
gallon, many distilled spirits products are actually taxed at a lower 
rate. Many products contain wine and/or flavors, and the IRC at 26 
U.S.C. 5010 provides a credit for the wine and flavors content of the 
product. These credits effectively

[[Page 26202]]

reduce the rate of excise tax paid on distilled spirits products that 
contain wine and flavors.
    Nontaxable Transactions. Certain types of shipments to and from a 
distilled spirits plant are permitted without payment of tax. Examples 
are:
     Shipments of bulk (unbottled) spirits from one registered 
distilled spirits plant to another. (Bottled spirits are not eligible 
for untaxed transfer in bond between plants.)
     Shipments of bulk imported spirits from U.S. Customs and 
Border Protection custody to a distilled spirits plant. (Only bulk 
imported spirits are eligible for this type of transfer.)
     Direct exports of products from the United States.
     Shipments to users of industrial alcohol (certain permit 
holders who use alcohol for medical, research, or industrial purposes).

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

    On November 30, 1998, ATF issued a notice of proposed rulemaking, 
Notice No. 870 (63 FR 65720), that solicited comments on proposed 
changes to several sections of the regulations in 27 CFR part 19. The 
proposed changes included: (1) Delegations of authority, (2) removing a 
special tax provision, (3) liberalizing the requirement for approval of 
certain changes in plant personnel or procedures, (4) reducing the 
paperwork when plant premises are alternated with other premises, (5) 
providing for alternation of distilled spirits plant and brewery 
premises, (6) allowing denaturation and manufacture of articles to be 
done in a single, unified process, (7) specifying marks for packages of 
industrial spirits withdrawn taxpaid, (8) clarifying regulations that 
refer to a transfer record, and (9) incorporating a provision of an ATF 
Industry Circular regarding alcohol fuel into the regulations.
    In addition to these proposed changes, ATF asked for comments 
regarding the general recordkeeping system for distilled spirits plants 
prescribed in part 19.
    In response to Notice No. 870, ATF received extensive comments from 
the Distilled Spirits Council of the United States (DISCUS), a trade 
association representing distilled spirits industry members with 
interests in the U.S. market. While DISCUS provided comments on the 
specific issues raised in Notice No. 870, it also asked that ATF 
consider a broad range of regulatory changes to part 19. Essentially, 
in its comments on part 19, DISCUS asked ATF to initiate a complete 
revision of part 19. In support of its petition, DISCUS provided ATF 
with sample regulations that consisted of a ``markup'' version of 27 
CFR part 19, along with numerous copies of variances (alternate methods 
or procedures) that ATF granted to members of the distilled spirits 
industry over the years. Suggested amendments included a broad range of 
issues, including, but not limited to, reduced recordkeeping 
requirements for distilled spirits plants, greater use of commercial 
records, reduced reporting requirements, reduced requirements for 
reporting changes affecting the DSP's registration, liberalized use of 
DSP premises, storage of distilled spirits on bonded premises through 
``constructive segregation'' based on commercial records, and adoption 
of alternative methods in the regulations for universal applicability.
    In response to Notice No. 870, ATF also received comments from 
Equistar Chemicals, LP. Equistar is a producer of industrial ethyl 
alcohol, and its comments addressed issues in Notice No. 870 related to 
industrial alcohol. Equistar also commented on other issues affecting 
distilled spirits plants such as the amendment of plant registrations, 
recordkeeping, denaturation, and gauging.
    After reviewing the comments received in response to the Notice No. 
870, ATF concluded that the amendments proposed in the 1998 NPRM were 
not extensive enough to address the changes that have taken place in 
the industry since the last major revision to the distilled spirits 
plant regulations took place over 20 years ago when ATF implemented the 
Distilled Spirits Tax Revision Act of 1979, commonly referred to as 
``All in Bond.''
    As the successor agency to ATF, TTB undertook a comprehensive 
review of the distilled spirits plant regulations in 27 CFR part 19 and 
the comments received in response to Notice No. 870. This notice of 
proposed rulemaking is the result of that review, and this notice 
supersedes Notice No. 870. We believe the proposed amendments will 
modernize the requirements for operating distilled spirits plants and 
make the regulations easier to understand, thereby allowing proprietors 
of such plants to operate in a more efficient manner. A discussion of 
our new proposal to amend part 19 in a more comprehensive way follows.

C. General Changes Proposed in This Notice

    The following summarizes the general changes we propose to make to 
27 CFR part 19.
Plain Language
    On June 1, 1998, the President issued a memorandum that requires 
Federal agencies to write regulations in ``plain language.'' We fully 
support this initiative, and we have written these proposed regulations 
in the plain language style. In an effort to make these regulations 
easier to understand, we made several plain language changes to the 
part 19 regulations:
     We use the active voice in the regulations, whenever 
possible;
     We use shorter sentences, paragraphs, and sections; and
     We minimize the use of jargon and unnecessary technical 
terms.
Structure of Part 19
    In its comments on part 19, DISCUS points out that part 19 is 
``excessively long, overcomplicated and very difficult to read.'' 
Further, it stated that the regulations are ``divided into 25 subparts, 
with many related and overlapping provisions included in two or more 
subparts.'' DISCUS recommends ``consolidating and re-grouping a number 
of regulatory provisions which are closely related, eliminating 
regulations which merely are redundant of each other or the statute, 
adding cross-references to related regulations, and clarifying 
regulatory language.''
    We reviewed the various sections and subparts in the current part 
19 and determined that much of the basic structure for part 19 needs to 
be amended. Under the current structure, information is not always 
located where a reader would logically expect to find it.
    For example, under the current regulations, information regarding 
distilled spirits taxes is found in two separate subparts, Subpart C, 
Taxes, and Subpart P, Transfers and Withdrawals. Subpart C contains 
much of the basic information about distilled spirits taxes, including 
the methods for calculating tax credits under the IRC at 26 U.S.C. 
5010. However, information regarding determination of taxes and the 
filing of tax returns is located in subpart P. Logically, all 
information associated with distilled spirits taxes should appear 
within the same subpart. The proposed regulations consolidate all of 
the information concerning distilled spirits taxes into a new Subpart 
I, Distilled Spirits Taxes. Similarly, we reviewed all of the major 
topics covered in part 19 and attempted to group them together in a 
more logical order. Accordingly, this proposed, amended version of part 
19 has been restructured with new subparts and related

[[Page 26203]]

information has been consolidated, where appropriate, into a single 
subpart. In addition, duplicative sections have been eliminated. The 
intent of this restructuring is to assist the reader and make it easier 
to locate related topics within part 19.
    The proposed subparts are as follows:
     Subpart A--General Provisions
     Subpart B--Administrative and Miscellaneous Provisions
     Subpart C--Restrictions on Production, Location, and Use 
of Plants
     Subpart D--Registration of a Distilled Spirits Plant and 
Obtaining a Permit
     Subpart E--Changes to Registrations and Permits
     Subpart F--Bonds and Consents of Surety
     Subpart G--Construction, Equipment, and Security 
Requirements
     Subpart H--Special (Occupational) Tax
     Subpart I--Distilled Spirits Taxes
     Subpart J--Claims
     Subpart K--Gauging
     Subpart L--Production of Distilled Spirits
     Subpart M--Storage of Distilled Spirits
     Subpart N--Processing of Distilled Spirits
     Subpart O--Denaturing Operations and Manufacture of 
Articles
     Subpart P--Transfers, Receipts, and Withdrawals
     Subpart Q--Return of Spirits to Bonded Premises and 
Voluntary Destruction
     Subpart R--Losses and Shortages
     Subpart S--Containers and Marks
     Subpart T--Liquor Bottle, Label, and Closure Requirements
     Subpart U--Reserved
     Subpart V--Records and Reports
     Subpart W--Production of Vinegar by the Vaporizing Process
     Subpart X--Distilled Spirits for Fuel Use
     Subpart Y--Paperwork Reduction Act
Redundancy With the Law
    In its comments on part 19, DISCUS recommends that several sections 
of the regulations be deleted because those sections are ``redundant 
with the law.'' DISCUS notes that many of the sections simply repeat 
provisions of law contained in title 26 of the IRC. DISCUS recommends 
we delete these redundant sections of part 19 or revise the regulations 
to simply reference the appropriate section of the IRC.
    TTB recognizes that some sections of the part 19 regulations repeat 
provisions of the IRC. However, we intend that the part 19 regulations 
provide users with a comprehensive and complete body of the 
requirements for operating a distilled spirits plant. By making part 19 
a complete reference tool, persons researching a particular issue will 
not need access to both the IRC and the regulations. Therefore, when a 
provision of law affects operations at a distilled spirits plant, we 
included that provision in part 19. However, in some instances, we 
deleted sections of the regulations that simply repeated information 
found in other regulations within part 19.
Alternate Methods or Procedures.
    Periodically, TTB allows industry members to use an alternate 
method or procedure in lieu of a specific regulatory requirement in 
part 19. The current regulation at 27 CFR 19.62 describes how DSP 
proprietors may apply for an alternate method or procedure. Section 
19.62 also describes the criteria that TTB uses when evaluating such 
requests. Generally, TTB may approve the use of an alternate method or 
procedure when:
     Good cause has been shown for use of the alternate method 
or procedure,
     The alternate method or procedure is consistent with the 
intent of the regulation, and
     The alternate method or procedure is not contrary to the 
law.
    Over the years, DSP proprietors have applied for a wide range of 
alternate methods or procedures in lieu of the requirements stated in 
part 19. We have evaluated these requests on a case-by-case basis using 
the criteria established in 27 CFR 19.62, and we have approved many of 
these requests. Industry members commonly refer to these alternate 
methods or procedures as ``variances.''
    As part of its comments on part 19, DISCUS submitted numerous 
copies of variances that have been granted to members of the distilled 
spirits industry. The variances submitted by DISCUS were divided into 
three general categories, recordkeeping, separation of premises, and 
``other.'' In its comments, DISCUS asserts that ATF granted variances 
from many of the regulatory requirements and that it is not aware of 
any variance that has caused any problems with Federal excise tax 
compliance. DISCUS recommends that variances granted to individual 
plant proprietors be extended to all plants in the revised regulations.
    In response to this suggestion, TTB reviewed the individual 
variances submitted by DISCUS for possible applicability to all 
distilled spirits plants. We found that many variances did, in fact, 
have general applicability to all plants. As a result, we have 
incorporated many of those methods or procedures into the proposed 
regulations, where appropriate. For example:
     Several variances were issued that allowed for the use of 
computer-generated records. This proposal has been adopted into the 
revised regulations at Sec.  19.572 and is discussed later in this 
preamble under our discussion of Records in subpart V.
     Several variances were issued that allowed for computer-
generated reports and computer-generated transaction forms. These 
proposals were adopted into the revised regulations at Sec.  19.634, 
and are discussed later in this preamble under our discussion of 
records in subpart V.
     A variance was issued that allows for the filing of 
letterhead notices to report certain changes at a plant. This procedure 
providing for the use of letterhead notices has been incorporated into 
the new subpart E and is explained more fully under our discussion of 
subpart E.
     Several variances were issued that allow for the use of 
``commercial records'' to record transactions and/or operations. The 
use of documents created in the ordinary course of business, rather 
than documents created expressly to meet the requirements of part 19 is 
now provided for in the proposed regulations at Sec.  19.572 in subpart 
V.
     A variance was issued that allows modified 
``abbreviations'' to be used. The proposed regulations will not 
prescribe any official abbreviations for use on forms and records to 
identify spirits, and the provisions of current Sec.  19.726, which 
prescribe official abbreviations have been deleted from the proposed 
regulations. However, we will continue to list authorized abbreviations 
for marking containers found in the current regulations at Sec.  
19.612.
     A variance was issued that allows filled, capped, and 
labeled bottles to remain on the bottling line at the end of each work 
day if the same brand and size will be produced on the next bottling 
shift. This variance was incorporated into the proposed regulations at 
Sec.  19.358 and is discussed under subpart N.
     A variance that allows the bottling of liqueurs from a 
tank truck or tote was incorporated into the proposed regulations at 
Sec.  19.352 and is discussed under subpart N.
     A variance whereby certain small tanks are not required to 
be mounted on scales was incorporated into the proposed regulations at 
Sec.  19.183 and is discussed under subpart G.

[[Page 26204]]

     Several variances have been approved that allow for the 
use of meters in gauging spirits for purposes other than tax 
determination. We are proposing significant changes in the new 
regulations that will allow for the use of accurate mass flow meters, 
without prior approval by TTB, for bulk tax determination gauges and 
other required gauges at a distilled spirits plant if the meters meet 
certain criteria for accuracy.
    During our review of the variances submitted by DISCUS, we also 
found several that were not appropriate for incorporation into the new, 
revised regulations. In some instances, we did not wish to apply the 
provisions of a particular alternate method or procedure to all DSP 
proprietors without regard to their compliance history and other 
factors. As such, proprietors may continue to apply for these types of 
alternate methods or procedures, and we will evaluate them on a case-
by-case basis.
    For example, we have issued several variances to DSP proprietors 
regarding the timing and frequency of required inventories for bulk and 
cased spirits. In evaluating this type of variance, we frequently 
consider the compliance history of the particular plant, shortages and 
gains disclosed by past inventories, along with other factors. 
Accordingly, this type of authorization does not have general 
applicability and is not appropriate for inclusion in the new proposed 
regulations. However, we will continue to approve this type of request, 
when appropriate, on a case-by-case basis.
    In other instances, the subject matter of a particular variance 
only applied to a very specific situation at a single plant and was, 
therefore, not applicable to all plants. Accordingly, we did not 
incorporate this type of variance into the new proposed regulations. 
For example:
     We approved several variances in regard to case markings 
that did not have general application to the case markings used by 
other plants.
     We approved a ``business day'' for a plant that runs from 
2 a.m. through 1:59 a.m. This type of variance does not have general 
applicability to other plants.
    In summary, we have incorporated a number of existing variances 
into the proposed regulations where appropriate, and when the variance 
would have general applicability to the industry.

D. Specific Changes Proposed in This Notice

    The following is a discussion of the new, revised subparts in 27 
CFR part 19 and the specific changes that we propose to make in the 
part 19 regulations.
Subpart A--General Provisions
    Proposed subpart A includes several sections that have general 
applicability to part 19, including a revised definitions section, a 
section that defines the territorial extent of the regulations, and a 
section that identifies other regulations that relate to part 19.
    In the proposed definitions section at Sec.  19.1, we propose some 
minor amendments to the language used within this section to clarify 
the meaning of some terms. We also propose to add some new terms and 
delete an outdated term found in the current definitions section. We 
propose to add the terms ``accurate mass flow meter,'' ``general 
premises,'' ``letterhead application,'' ``letterhead notice,'' 
``National Revenue Center,'' ``TTB officer,'' and ``we.'' We propose to 
delete the term ``region director.''
    We also propose to move two sections currently located in subpart 
D, under the heading ``Activities Not Subject To This Part,'' to 
subpart A. The relocated sections are Sec.  19.4, Recovery and reuse of 
denatured spirits in manufacturing processes, and Sec.  19.5, 
Manufacturing products unfit for beverage use, which are currently 
found at Sec. Sec.  19.57 and 19.58, respectively.
Subpart B--Administrative and Miscellaneous Provisions
    Proposed subpart B contains the administrative and miscellaneous 
provisions for part 19 that are currently found in subpart D. However, 
some sections of regulations that are located in the current subpart D 
have been relocated to other revised subparts, where appropriate. For 
example, we propose to move sections relating to gauging to the new 
proposed Subpart K, Gauging. Similarly, we propose to relocate sections 
relating to the conveyance of spirits or wines on plant premises to the 
new proposed Subpart C, Restrictions, Location, and Use of Plants.
    Proposed subpart B includes a ``penalty of perjury'' section that 
is currently located at Sec.  19.100. In its comments on part 19, 
DISCUS proposes the deletion of the requirement that documents be 
executed under penalties of perjury from several sections of 
regulations. DISCUS states that ``these penalties are unnecessary and 
excessive in light of the fact that a proprietor's permit is subject to 
revocation under the Federal Alcohol Administration Act for failure to 
comply with the Bureau's requirements.'' TTB did not adopt this 
proposal. The penalty of perjury statement is an important safeguard 
that places legal responsibility for the truthfulness of significant 
documents filed with TTB on the documents' signatories. Generally, we 
do not require the ``penalty of perjury'' statement on most documents 
and records. Its use is generally restricted to claims, tax returns, 
applications, and similar documents. The IRC at 26 U.S.C. 6065 states, 
``Except as otherwise provided by the Secretary, any return, 
declaration, statement, or other document required to be made under any 
provisions of the internal revenue laws or regulations shall contain or 
be verified by a written declaration that it is made under penalties of 
perjury.'' Consistent with the IRC at 26 U.S.C. 6065 and along with the 
other tax collection agencies within the Department of the Treasury, 
TTB requires that such documents be signed under penalties of perjury. 
The penalty of perjury provision in the proposed regulations is located 
at Sec.  19.45.
Subpart C--Restrictions on Production, Location, and Use of Plants
    Proposed subpart C covers restrictions associated with the 
operation of a distilled spirits plant, along with the location and use 
of DSP premises. In its comments on part 19, DISCUS makes several 
recommendations affecting those sections of the current regulations 
that govern restrictions, locations, and use of DSP premises. We 
discuss these recommendations and our responses below.
    Restrictions regarding location. Currently, 27 CFR 19.131 provides 
that a distilled spirits plant may not be located on premises where 
beer or wine is produced, or liquors of any description are retailed, 
or (except as provided in Sec.  19.133) on premises where any other 
business is conducted. DISCUS contends that physical separation of 
commodities is meaningless and recommends that this restriction be 
amended to allow a distilled spirits plant to be located on such 
premises if the proprietor's records show the separate operations. We 
did not adopt this proposal because Federal law does not provide for 
``constructive'' separation of premises by records only. The language 
of this regulation is derived directly from the language of the IRC at 
26 U.S.C. 5178(a)(1)(B), which states that a distilled spirits plant 
shall not be located ``on premises where beer or wine is made or 
produced, or liquors of any description are retailed, or on premises 
where any other business is carried on (except when authorized under 
subsection (b)).'' This

[[Page 26205]]

provision appears in the proposed regulations at Sec.  19.52.
    Continuity of premises. Currently, the regulation at Sec.  19.132 
provides that the physical continuity of a distilled spirits plant must 
be unbroken except for separation by public waterways, thoroughfares, 
or carrier rights-of-way. However, TTB may approve other separations of 
the plant premises when all parts of the plant are in the ``same 
general location.'' DISCUS recommends that the term ``same general 
location'' mean within 200 miles of the distilled spirits plant.
    We did not adopt this recommendation in the proposed regulations. 
Although DISCUS states that a ``200 mile rule'' would provide increased 
operational flexibility for proprietors, they do not explain how this 
would occur under their proposal and why that distance is more 
appropriate than any other.
    Over the years TTB has received a number of requests to establish 
non-contiguous distilled spirits plant premises. We have evaluated each 
of these requests on a case-by-case basis. In our evaluation of each 
request, we consider a number of factors, such as:
     Security and protection of the revenue,
     Distance between the main plant premises and the proposed 
non-contiguous premises,
     Whether the non-contiguous premises would cross State 
lines,
     Whether the non-contiguous premises will facilitate 
inspections and audits, and
     Whether establishment of non-contiguous premises would 
provide the proprietor with a means for delaying payment of taxes.
    We propose to retain the case-by-case analysis based on multiple 
factors, instead of adopting a 200 mile rule as proposed by DISCUS. As 
a general rule, we believe that the ``same general location'' must not 
be too large an area so that the revenue is placed at risk. Also, 
because a distance of 200 miles could extend over a multi-state area 
and would cross over into different field offices within TTB, such a 
distance would create administrative difficulties for TTB. This 
provision appears in the proposed regulations at Sec.  19.53.
    Other businesses. Currently, the regulation at Sec.  19.68 provides 
that TTB may authorize the carrying on of other businesses (not 
otherwise prohibited) on DSP premises under certain conditions. The 
other businesses should not pose a jeopardy to the revenue, hinder the 
effective administration of part 19, or be contrary to law. There is a 
similar section of regulations at Sec.  19.72. DISCUS recommends the 
removal of Sec.  19.68 since it is redundant with Sec.  19.72.
    We agree that Sec. Sec.  19.68 and 19.72 are very similar, and we 
have merged the two sections into a single section within the proposed 
regulations at Sec.  19.55.
    Bonded warehouses not on premises qualified for production of 
spirits. The current regulation at Sec.  19.134 allows for the 
establishment of a bonded warehouse on premises that are not qualified 
for the production of spirits, if the need for such is clearly 
established. DISCUS recommends the amendment of this section by adding 
language stating that the warehouse may be within 200 miles of the main 
plant. We did not adopt this recommendation for the same reasons 
discussed above under the heading, ``Continuity of Premises.'' This 
provision is found in the proposed regulations at Sec.  19.56.
    Taxpaid spirits or wines on bonded premises. The current regulation 
at Sec.  19.97 provides that spirits or wines on which the tax has been 
paid or determined may be conveyed across bonded premises but cannot be 
stored or remain on bonded premises, and must be kept separate and 
apart from spirits or wines on which the tax has not been paid or 
determined. DISCUS recommends the addition of new language to this 
section whereby the area where taxpaid spirits or wines are stored will 
not be considered bonded premises if the proprietor's records show that 
the tax has been paid or determined. They state that their proposal 
would ``shift the focus from the outdated requirement of physical 
segregation to a modernized, efficient approach based upon 
`constructive segregation.' ''
    We did not adopt this recommendation because the IRC does not allow 
for the separation of premises solely by records. The IRC at 26 U.S.C. 
5612 clearly states that taxpaid or tax determined spirits cannot be 
stored on bonded premises. Further, the bonded area of a DSP is a 
clearly defined physical area of the plant with clearly defined 
boundaries. It is not an area defined only by records of the type of 
spirits stored on the premises. In our proposed regulations, this 
section is now found at Sec.  19.58.
    Conveyance of untaxed spirits or wines within a distilled spirits 
plant. Currently, the regulation at Sec.  19.98 provides that untaxed 
spirits or wines can be conveyed between different bonded areas of a 
plant and across areas of a plant that are not bonded. DISCUS 
recommends the amendment of this section by adding language whereby if 
the proprietor's records show the tax has not been paid or determined, 
then the untaxed spirits will be considered to be on bonded premises 
(constructive segregation).
    We did not adopt this recommendation because the regulation already 
allows for the transfer of untaxed spirits across areas of a plant that 
are not bonded. The amendment proposed by DISCUS would only incorporate 
the idea of ``constructive segregation'' into this section of the 
regulations. However, since the regulation already allows for transfers 
across areas of the plant that are not bonded, the amendment proposed 
by DISCUS is not necessary. This section of the regulations is now 
found at Sec.  19.59 in the proposed regulations.
    Spirits in customs custody. Currently, the regulation at Sec.  
19.99 provides that spirits in customs custody may be conveyed across 
DSP premises under certain conditions. Those conditions include:
     The spirits may not be stored or allowed to remain on DSP 
premises.
     The spirits must be kept separate from other spirits on 
DSP premises.
     The means and route of conveyance must be approved.
     The proprietor must file a consent of surety.
    DISCUS recommends the addition of language to this section whereby 
if the proprietor's records show that spirits are in customs custody, 
then the area where the spirits are stored will not be considered part 
of the DSP premises.
    We did not adopt this DISCUS recommendation for several reasons. 
First, this section of regulations deals with conveyance of spirits in 
customs custody across DSP premises. It does not deal with the storage 
of such spirits on DSP premises.
    In addition, TTB bonded premises and customs bonded premises are 
two distinct types of bonded premises. TTB bonded premises are 
established under the laws and regulations administered by the Alcohol 
and Tobacco Tax and Trade Bureau, while customs bonded premises are 
established under a separate set of laws and regulations administered 
by U.S. Customs and Border Protection. As such, the premises cannot be 
co-located, and there is no basis in the law for constructive 
segregation of these bonded premises by records only. The bonded area 
of a DSP is a clearly defined physical area of the plant with clearly 
defined boundaries. It is not an area defined only by records. In our 
proposed regulations, this section is now found at Sec.  19.60.
    Production of distilled spirits for personal use. Frequently, TTB 
receives

[[Page 26206]]

questions from the general public asking whether the law allows for the 
production of distilled spirits in the home for personal use. Under 
Federal law (26 U.S.C. 5171), distilled spirits may only be produced at 
a registered distilled spirits plant. Therefore, we propose to add a 
new section to subpart C, which will explain that a person may not 
distill spirits at home for personal use. This new section is found in 
the proposed regulation at Sec.  19.51.
Subpart D--Registration of a Distilled Spirits Plant and Obtaining a 
Permit
    The current regulations governing the qualification of a distilled 
spirits plant are found in subpart G. These regulations cover a number 
of issues, including the requirements for plant registration, operating 
permits, alternation of premises, and amending registrations and 
operating permits.
    Proposed subpart D covers the initial registration of a distilled 
spirits plant and procedures for obtaining an operating permit. We 
propose to assign regulations concerning changes after the original 
qualification of the plant to the new subpart E.
    In the proposed subpart D, we also propose to rearrange the 
information related to the qualification of a distilled spirits plant 
in a more logical order. For example, we propose to group all 
registration information together under a heading titled ``Requirements 
for Registering a Plant,'' while information relating to operating 
permits is grouped together under a separate heading titled 
``Requirements for an Operating Permit Under the I.R.C.'' In the 
current regulations, much of the information regarding registration and 
operating permits is intermingled. We believe that separating these 
subjects will make it easier for readers to understand which 
requirements apply to plant registration and which requirements apply 
to operating permits.
    Other businesses. In its comments on part 19, DISCUS proposes the 
inclusion of a cross-reference at Sec.  19.152 of the current 
regulations, indicating that ``other businesses'' may be allowed under 
a separate section of the regulations. We adopted this proposal in the 
proposed regulations at Sec. [thns x p]19.73(b).
    Major equipment. DISCUS also recommends in its comments that the 
requirement to list major equipment on the application for 
registration, currently found at Sec.  19.166, be amended. First, it 
states that the regulation should be clarified to provide that ``major 
equipment'' must be identified in the registration only if it is ``set 
up'' and ``used for distillation, redistillation, or recovery of 
spirits.''
    We adopted this suggestion in part. We do not see any need to list 
major equipment in the application that is not ``set up'' and used for 
the production, storage, or processing of spirits. Therefore, we have 
inserted language in the proposed regulations at Sec.  19.75, which 
requires that equipment be listed if it is ``set up'' and used for the 
production, storage, or processing of spirits.
    DISCUS also recommends that a paragraph be added to Sec.  19.166 
stating that ``bulk containers of less than 101 wine gallon capacity 
and not meeting the criteria of a tank under Sec.  19.273 (such as 
perks and small totes) are not items of major equipment and are not 
required to be listed in the application for registration.'' This 
recommendation is reasonable because such containers are not items of 
major equipment, and we include it in the proposed regulation at Sec.  
19.75.
    In addition, DISCUS recommends that the requirement to provide a 
``statement of certification of accurate calibration'' for tanks found 
in the current regulations at Sec. Sec.  19.166 and 19.273(a)(6) be 
eliminated. This recommendation is reasonable and has been adopted in 
the proposed regulations because it only involves eliminating a 
requirement to include a ``statement of certification of accurate 
calibration'' in the notice of registration. The proposed regulation at 
Sec.  19.182 will continue to require that tanks be accurately 
calibrated.
    Registration file. The IRC at 26 U.S.C. 5171(c) requires that 
persons must apply for and receive a notice of registration before 
commencing business as a distilled spirits plant. In regard to the 
maintenance of the registration file, currently at Sec.  19.155, DISCUS 
recommends the addition of language to allow the registration file to 
be kept in computerized records. We did not adopt this proposal because 
registration documents are normally submitted to TTB in a hard-copy 
format and returned to the proprietor by TTB in hard-copy format. 
DISCUS also recommended the elimination of the requirement that the 
registration file be kept ``at the plant.'' We did not adopt this 
proposal because the file must be readily available for inspection by 
appropriate TTB officers.
    LLCs and LLPs. The current regulations governing qualification of a 
distilled spirits plant in subpart G only acknowledge three types of 
business organizations, sole proprietorships, partnerships, and 
corporations. In view of the increasing use of limited liability 
companies (LLCs) and limited liability partnerships (LLPs), we have 
included instructions for these types of business organizations in the 
proposed regulations at Sec.  19.93.
Subpart E--Changes to Registrations and Permits
    Proposed subpart E includes the regulations governing changes to 
the distilled spirits plant registration, changes to operating permits, 
and alternation of plant premises. Similar to the changes that we 
propose in new subpart D, much of the information in the new subpart E 
is arranged in a more logical order. For example, matters affecting 
changes to registration are grouped together under the heading titled 
``Rules for Amending a Registration,'' and matters affecting changes to 
operating permits are grouped together under the heading titled ``Rules 
for Amending an Operating Permit.''
    In the current regulations, much of the information regarding 
changes to the registration and changes to the operating permit is 
intermingled. As with new subpart D, we believe that separating these 
subjects will make it easier for readers to understand the specific 
requirements that apply to amending either the plant registration or 
the operating permit.
    Letterhead notices and letterhead applications. In its comments on 
part 19, DISCUS makes several recommendations regarding how proprietors 
should apply for changes to a plant's registration or operating permit. 
Generally, DISCUS recommends that, in most instances, the regulations 
allow proprietors to request changes by filing a letterhead notice. In 
its petition, DISCUS states that:

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

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

[[Page 26207]]

minor changes affecting the registration or permit. We will allow for 
the use of letterhead applications for more substantive changes but 
these must be approved by TTB prior to the change. The use of amended 
applications, letterhead applications, and letterhead notices are 
discussed in the proposed regulations at Sec. Sec.  19.112 and 19.126.
    Changes in the statement of plant security. In the current 
regulation at Sec.  19.153(b), an application for amended plant 
registration (form TTB F 5110.41) must be filed each time there is a 
change in plant personnel or procedures contained in the statement of 
security. In Notice No. 870, ATF proposed to liberalize this 
requirement. Therefore, we propose that Sec.  19.153(b) be amended to 
require that a letterhead application be filed for changes in the 
security procedures listed in Sec.  19.153(a)(1)-(4), and that a 
letterhead notice be filed for changes in the personnel listed in Sec.  
19.153(a)(5). Thus, the letterhead application or letterhead notice 
would replace the amended registration that was required each time that 
the information in Sec.  19.153(a)(1)-(5) changed. The plant 
registration would be updated on an annual basis to incorporate changes 
made during the preceding year.
    In its comments on Notice No. 870, Equistar Chemicals states that 
it endorses the proposed changes and would encourage any additional 
efforts to facilitate compliance through reducing nonessential 
paperwork. However, Equistar asks for some clarification of this 
proposal. It pointed out that the proposal allows companies to submit a 
``letterhead application'' and ``letterhead notice'' for changes. 
Equistar states that it presumes that we intended companies to simply 
send an informal letter notifying the agency of procedure or personnel 
changes. The company asks for a clarification of these terms.
    In response to this request for clarification, TTB advises that the 
terms ``letterhead application'' and ``letterhead notice'' refer to a 
letter from a company representative, with signature authority, on 
company letterhead (see definitions). The ``letterhead application'' is 
subject to TTB approval prior to the change; however, the ``letterhead 
notice'' is not subject to prior approval. These terms are now fully 
explained in the proposed regulations at Sec. Sec.  19.112 and 19.126.
    Equistar also points out that ``the proposal requires a letterhead 
application for `changes in any of the information' listed in the 
sections of the Statement of Physical Security that address procedural 
changes.'' The company states that a requirement to advise us of ``any 
changes'' is overly broad and could encompass non-substantive as well 
as substantive changes. Equistar recommends that we maintain the rule's 
original language that covers changes in ``procedure'' rather than 
``any changes.''
    The current regulation governing changes in plant security, which 
appears at Sec.  19.153, has been rewritten to clarify the type of 
changes that may be reported to TTB by letterhead application or 
letterhead notice. In our proposed regulations, this section is now 
located at Sec.  19.123.
    In its response to Notice No. 870, DISCUS states that it supports 
the proposal whereby a distilled spirits plant would file a letterhead 
notice instead of an amended registration for changes in the 
information provided under 27 CFR 19.153(a)(5). However, DISCUS 
recommends the deletion of the word ``security'' from the proposed term 
``security personnel listed in paragraph (a)(5).'' DISCUS states that 
the term ``security personnel'' is not used in paragraph (a)(5) and is 
not synonymous with the persons covered by paragraph (a)(5).
    We agree that the term ``security personnel'' is not an accurate 
term. Therefore, we propose deleting the word ``security'' from the 
proposed regulation at Sec.  19.76.
    DISCUS also recommends that the regulations conform their treatment 
of changes in Sec.  19.153(a)(1)-(4) to the proposed changes in 
paragraph (a)(5). DISCUS asks that the regulations allow these changes 
to be reported by a letterhead notice within 30 days after the changes. 
DISCUS states that the information required by paragraphs (a)(1)-(4) 
and (a)(5) concern the same issues, and ``no reason exists to subject 
subsection (a)(5) to different treatment than subsections (a)(1)-
(a)(4).''
    In response to this recommendation, TTB advises that the 
information at Sec.  19.153 is part of the data for an ``application'' 
for registration (27 CFR 19.152(k)). As such, the items of information 
provided under Sec.  19.153 are subject to pre-approval for initial 
qualification of a distilled spirits plant and continued qualification 
of each plant. Further, the items listed under Sec.  19.153(a)(1) 
through (4) represent crucial physical security features of a plant and 
must, therefore, be subject to prior approval by TTB. In contrast, the 
information required by Sec.  19.153(a)(5) is a listing of persons 
having responsibility for custody and access to keys for approved locks 
at the distilled spirits plant. Since plants are free to designate the 
persons responsible for such custody, this particular item of 
information is not something that needs to be pre-approved. Therefore, 
this item will be treated as a ``notification'' rather than an 
``application.'' These changes now appear in the new, proposed 
regulations Sec. Sec.  19.76 and 19.123.
    Change in name of proprietor. The current regulation at Sec.  
19.182 requires that the proprietor file an application to amend the 
registration and the operating permit whenever there is a change in the 
name of the proprietor. DISCUS recommends the amendment of that 
regulation to allow the filing of a letterhead notice within 30 days of 
the name change, and that the new information be included in the next 
application to amend the registration and the next application to amend 
the operating and/or basic permit filed by the proprietor. DISCUS also 
recommends deleting from the current regulations the phrase, 
``Operations may not be conducted under the new name prior to approval 
of the amended registration and issuance of the amended permit.''
    The provisions of the current regulation at Sec.  19.182 will be 
covered in the proposed regulations at Sec. Sec.  19.113 and 19.128, 
and the proposed regulations will no longer require the filing of 
amended applications. Instead, the proposed regulations will allow for 
the filing of a letterhead application. However, since a change in the 
proprietor's name is a substantive change, the proposed regulation will 
still prohibit operations conducted under the new name before TTB 
approves the letterhead application.
    Change of trade name. The current regulation at Sec.  19.183 
requires that the proprietor file an application to amend the operating 
permit when there is a change in the trade name of the proprietor. 
Operations may not be conducted under the new trade name until the 
amended permit is approved. DISCUS recommends the amendment of the 
regulation to allow for the filing of a letterhead notice within 30 
days of the change and no longer require an application to amend the 
operating permit.
    In the proposed regulation at Sec.  19.129, TTB will no longer 
require the filing of an amended application. Instead, the proposed 
regulation will allow for the filing of a letterhead application. 
However, since any change in the trade names used by the proprietor is 
a substantive change, the proposed regulations will still prohibit 
operations conducted under the new trade name prior to TTB's approval 
of the letterhead application.
    Change of stockholders. The current regulation at Sec.  19.184 
allows for the filing of an annual report of changes in

[[Page 26208]]

major stockholders except where the sale or transfer of capital stock 
results in a change in control or management. In its comments on part 
19, DISCUS recommends that the language of the regulation be amended to 
read, ``Changes in the list of stockholders furnished under the 
provision of Sec. 19.167(c)(1) shall be reported in the next 
application for amended registration on Form 5110.41 filed by the 
proprietor.''
    In the proposed regulations at Sec. Sec.  19.114 and 19.130 we will 
allow a proprietor to submit an annual letterhead notice regarding 
changes in major stockholders. Under the proposed regulations, the 
changes must be incorporated in the next application filed, unless a 
change of control occurs. If a change in control takes place, Sec.  
19.114 requires that the proprietor must file TTB F 5110.41, 
Registration of Distilled Spirits Plant, within 30 days of the change, 
and Sec.  19.130 requires that the proprietor must file TTB F 5110.25, 
Application for Operating Permit Under 5171(d), within 30 days of the 
change.
    Changes in officers and directors. The current regulation at Sec.  
19.185 requires that a proprietor file an application for amended 
registration on Form 5110.41 when there is a change in the list of 
officers or directors. DISCUS recommends that the regulation be amended 
to state that the proprietor will report the change on the next 
application on TTB F 5110.41 for amended registration filed by the 
proprietor.
    In the proposed regulations at Sec. Sec.  19.115 and 19.131, we 
propose to allow a proprietor to submit a letterhead notice at the time 
of the changes and incorporate the changes in the next application for 
amended registration filed on form TTB F 5110.41 and the next form TTB 
F 5110.25 filed.
    Permit transfers. In its comment on Notice No. 870, Equistar 
Chemicals asked that ATF (BATF in its comment) examine ways to minimize 
the paperwork and notice requirements associated with ATF permits when 
a change of ownership occurs. Equistar states:

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

    In general, TTB agrees that we should simplify the amendment of 
registrations and permits wherever possible. For this reason, we 
propose to expand the use of both letterhead notices and letterhead 
applications for reporting changes to the registration and the 
operating permit.
    However, in regard to utilizing SEC filings in cases where there is 
a change in ownership or control, there are several problems. First, 
much of the information that a proprietor submits in support of a plant 
registration or an operating permit is specific to distilled spirits 
operations. As such, this type of information, except for some similar 
items of information, is not required by agencies such as the SEC and 
so copies of such submissions would be inadequate for TTB purposes.
    Adoption of formulas. The current regulation at Sec.  19.187 
provides for the adoption of formulas by a successor. DISCUS recommends 
in its comments on part 19 that the regulation refer to 27 CFR 5.28 and 
that the language in Sec.  19.187 which is redundant with Sec.  5.28 be 
removed.
    In the proposed regulations we eliminated Sec.  19.187 as a 
separate section of regulations and we have incorporated references to 
the adoption of formulas and Sec. Sec.  5.28 and 20.63 into the 
proposed regulations at Sec. Sec.  19.116 and 19.132.
    Changes in premises. The current regulation at Sec.  19.190 refers 
to several sections of regulations relating to alternation of premises. 
DISCUS recommends the amendment of these references to ensure the 
accuracy of cross-references to other appropriate sections in part 19. 
The accuracy of cross-references is important so we propose to amend 
the references at proposed Sec.  19.119 to reflect the new section 
numbers for alternation of premises.
    Change in operations. The current regulation at Sec.  19.191 
requires that a DSP proprietor file an application to amend the 
registration and operating permit if the proprietor wishes to engage in 
a new business involving distilled spirits. This section also applies 
to conducting other businesses on DSP premises. DISCUS recommends the 
addition of language to the end of this section stating, ``Applications 
may be approved as provided in Sec. 19.72.''
    In the proposed regulation at Sec.  19.120, we now include a 
reference to Sec.  19.55, which is the section of regulations relating 
to other businesses.
    Changes in construction or use of buildings and equipment. The 
current regulation at Sec.  19.193 requires a DSP proprietor to submit 
a letterhead notice prior to a material change in construction or use 
of buildings or equipment and then incorporate the change into the next 
amendment of the notice of registration. DISCUS recommends the 
elimination of most of this section because it is redundant with the 
general instructions relating to applications for amended registration 
found at Sec.  19.180.
    We did not eliminate this section because we do not believe that it 
is redundant. Similar to the other sections in this subpart, it 
provides specific instructions for amending the registration. The 
provisions of current Sec.  19.193 appear in the proposed regulations 
at Sec.  19.122.
    Procedures for alternation of proprietors. The current regulation 
at Sec.  19.201 covers the procedures that proprietors must follow when 
DSP premises, or part of the premises, are alternated between different 
proprietors. Alternation of premises refers to the formal, legal 
transfer of operations from one proprietor to another proprietor. 
DISCUS proposes to amend this regulation by eliminating the requirement 
to provide a diagram of the area of the plant to be alternated. 
Further, DISCUS proposes that language be inserted into the regulation 
that would allow the proprietor's production, storage, and processing 
records to be used to document the alternation of proprietors.
    We did not adopt this DISCUS proposal. Records of production, 
storage, and processing are used to record the details of production, 
storage, and processing activities at a plant. These records are not 
designed to officially document the alternation of plant premises from 
one proprietor to another proprietor. Further, such records would not 
identify the actual bonded areas of the plant that are alternated; only 
a diagram can provide this information. However, we did substantially 
rewrite this section of the regulations to clarify the procedure for 
alternating proprietors. In addition, the requirement to file Form 
5110.34 has been replaced with the requirement to file a letterhead 
notice with TTB when such alternations occur. The proposed amended 
section appears at Sec.  19.141.
    Alternate operations. The current regulation at Sec.  19.202 
provides for the alternate use of plant premises and equipment for 
customs purposes whereby the premises of the plant are

[[Page 26209]]

converted from TTB bonded premises to Customs bonded premises. The 
current regulation also requires that the proprietor file a notice on 
Form 5110.34 whenever the plant premises are curtailed or extended for 
customs purposes. In Notice No. 870 ATF proposed to substitute a 
letterhead notice for the filing of Form 5110.34 each time that 
distilled spirits plant premises are alternated for customs purposes.
    The current regulations at Sec. Sec.  19.203 through 19.206 provide 
for the alternation of distilled spirits plant premises with bonded 
wine cellar premises, taxpaid wine bottling house premises, general 
premises, and premises for the manufacture of eligible flavors. The 
current regulations also require that the proprietor file a notice on 
Form 5110.34 whenever the premises are curtailed or extended for these 
purposes. In Notice No. 870, ATF proposed to simplify this requirement 
by amending Sec. Sec.  19.203 through 19.206 to provide that after a 
proprietor has received approval for the alternation plan that defines 
the boundary of the premises to be alternated, the alternation may take 
place pursuant to records kept in a logbook. In Notice No. 870, ATF 
listed the requirements for the proposed logbook record in a new 
section of regulations at Sec.  19.781. In Notice No. 870, ATF also 
proposed to allow for the alternation of distilled spirits plant and 
brewery premises under the same conditions. Alternation of distilled 
spirits plant premises and brewery premises is not provided for in the 
current regulations.
    In its comments on Notice No. 870, DISCUS expresses support for the 
proposal to eliminate the requirement to file Form 5110.34 each time 
that the premises are alternated. However, DISCUS does not support the 
proposal to require a proprietor to prepare a logbook containing the 
information required by proposed Sec.  19.781 each time that the 
proprietor alternates premises. DISCUS states that ``this proposal runs 
contrary to the objective of effective regulatory reform; [sic] to 
replace formal recordkeeping requirements with reliance upon commercial 
business records maintained in the ordinary course of business.'' 
Further, DISCUS contends that the proposal does not eliminate the 
requirements for prior submission and prior approval or the requirement 
to physically segregate products by type (wine, beer, spirits, or 
flavors). It asserts that the requirement in the regulations to 
segregate products is burdensome and that companies can track, 
distinguish, and identify products and operations by computer. DISCUS 
also asserts that `` `constructive segregation' of product by 
computerized records protects BATF's regulatory objectives, without the 
inefficient use of space and time and effort inherent in requiring 
physical separation.''
    DISCUS recommends that the regulations allow alternation under 
Sec. Sec.  19.202 through 19.206 if the distilled spirits plant 
proprietor files a letterhead notice reporting the alternation within 
30 days after the alternation takes place. It also proposes that the 
proprietor's ordinary business records be used to substantiate the 
alternation and that we eliminate the requirement to physically 
separate products as currently required.
    For the reasons discussed earlier in this notice, TTB is not 
adopting these recommendations regarding dependence upon company 
records for segregation of goods and reliance upon ``constructive 
segregation.'' As stated earlier, the IRC does not provide for the 
separation of premises solely by records. Further, the bonded area of a 
DSP is a clearly defined physical area of the plant with clearly 
defined boundaries. It is not an area defined only by commercial 
records.
    Therefore, in this current notice we propose a new section of 
regulations at Sec.  19.142 to provide for the alternation of premises 
for customs purposes whereby proprietors will file a letterhead notice 
with TTB prior to any alternation of premises. We have also eliminated 
the requirement to file Form 5110.34. We do not agree with the DISCUS 
proposal that would allow notices to be filed up to 30 days after the 
fact. Thus, the proposed regulation at Sec.  19.142 will require that 
the letterhead notice must be filed prior to alternation of premises 
for customs purposes.
    In addition, we propose a new, single section of regulations at 
Sec.  19.143 that will provide for extension and curtailment of 
distilled spirits plant bonded premises with either general premises, 
an adjacent bonded wine cellar, an adjacent taxpaid wine bottling 
house, an adjacent brewery, or facilities for the manufacture of 
eligible flavors. Under our proposed regulations, proprietors will 
document such alternations in the record prescribed in proposed Sec.  
19.627 at the time the alternation occurs, and we will not require the 
filing of a letterhead notice with TTB or the filing of form TTB F 
5110.34. The record prescribed in proposed Sec.  19.627 will allow for 
the use of commercial records, when the commercial records provide the 
same information required by Sec.  19.627 and are retrievable and 
available for inspection by TTB officers. Because of the variability of 
commercial records, we believe that there is a need to provide minimum 
standards for the commercial records that document alternation of 
premises. Further, the proposed regulation at Sec.  19.143 will still 
require the segregation of products. We disagree with the DISCUS 
recommendation that would allow for the ``constructive segregation'' of 
products based on computerized records. This is not an actual 
segregation of product as required by law at 26 U.S.C. 5178(a)(1)(B) 
and 5612 and could result in the commingling of taxpaid and non-taxpaid 
product.
Subpart F--Bonds and Consents of Surety
    Proposed subpart F covers the bonding of distilled spirits plants. 
For the most part, this subpart contains the same information found in 
current regulations at subpart H, except that the proposed regulations 
are written in plain language.
    However, the proposed regulation at Sec.  19.163 will allow persons 
who operate more than one distilled spirits plant serviced by TTB's 
National Revenue Center to give TTB a single area operations bond that 
covers the operations of two or more distilled spirits plants and 
adjacent bonded wine cellars located within the same geographic area. 
For practical purposes this means that, since TTB's National Revenue 
Center services the entire United States, a proprietor's operations 
bond may cover all of the proprietor's plants in the United States.
    DISCUS did not recommend any substantive changes to these 
regulations in its comments on part 19. However, it did recommend that 
the requirement to execute a bond under penalties of perjury be 
deleted. This recommendation is not being considered in this proposed 
rule for the reasons discussed earlier in this notice.
Subpart G--Construction, Equipment, and Security Requirements
    Under the current regulations in part 19, construction, equipment, 
and security issues are covered at subpart I. In the regulations 
proposed by this notice, those issues will be covered in the new 
proposed subpart G. The following is a discussion of the changes we 
that propose in the new subpart G.
    Construction of buildings. The current regulation at Sec.  19.271, 
Construction of buildings, will not be included in the proposed 
regulations. We found that it simply repeats requirements already found 
in Sec. Sec.  19.281(a) and 19.281(b).
    Equipment. The current regulation at Sec.  19.272, Equipment, will 
also be deleted. We found that it simply repeats

[[Page 26210]]

requirements found in several other sections of the current regulations 
including: Sec. Sec.  19.152(h), 19.152(k), 19.153, 19.166, and 
19.281(a), (c), and (d).
    Tanks. DISCUS recommends that the requirement to permanently mount 
scale tanks on scales should not apply to tanks that do not exceed a 
55-gallon capacity. This proposal is reasonable because such small 
tanks are intended to be portable and there is no need to mount them 
permanently on scales. Therefore, we adopted this recommendation in the 
proposed regulation at Sec.  19.183(b).
    Continuous distilling system. We propose to eliminate the current 
regulation at Sec.  19.275, Continuous distilling system, from the 
regulations in the new proposed subpart G. The requirement for a 
continuous distilling system is already covered in the proposed 
regulations at Subpart L, Production of Distilled Spirits, and we found 
Sec.  19.275 of the current regulations to be redundant.
    Meters. During the course of certain operations at distilled 
spirits plants, proprietors are required to measure the volume of 
distilled spirits. When measuring spirits for purposes other than tax 
determination, the regulations require that the spirits be measured in 
a tank or a conveyance using calibration charts. The current regulation 
at Sec.  19.277 also allows for the use of meters when measuring 
spirits for purposes other than tax determination. However, in order to 
use a meter, the proprietor must first submit an application to TTB, 
along with technical data regarding the meter they intend to use. TTB 
must approve the meter prior to its use at a plant.
    In its petition and markup of part 19, DISCUS proposes the 
elimination of the prior approval requirement for meters. DISCUS states 
that this requirement imposes unnecessary and time-consuming burdens on 
TTB resources and the industry and serves only to delay operations at a 
DSP. DISCUS states that the proprietor should be responsible for using 
and maintaining accurate equipment.
    After careful consideration of this proposal, TTB has decided to 
propose significant changes in the new proposed regulations whereby a 
proprietor may use mass flow meters for all required bulk gauges at a 
distilled spirits plant, including bulk tax determination gauges, if 
the meters meet certain criteria for accuracy. This will reduce the 
burden on industry members and TTB while ensuring the accuracy of bulk 
measurements.
    Accordingly, the proposed regulation at Sec.  19.188(c) provides 
that a proprietor may use a mass flow meter for tax determination of 
bulk spirits if the meter is certified by the manufacturer or other 
qualified person as accurate within a tolerance of +/-0.1%. For all 
other required gauges of bulk spirits at a distilled spirits plant, a 
proprietor may use a mass flow meter if it is certified by the 
manufacturer or other qualified person as accurate within a tolerance 
of +/-0.5%. For both tax determination gauges and all other required 
gauges, the proprietor must make corrections for the temperature of the 
spirits being measured in conjunction with the volumetric measurement 
of spirits by mass flow meter. The proprietor must also test mass flow 
meters at least every 6 months to ensure that they are accurate within 
the required tolerances.
    Miscellaneous changes. In addition to the changes proposed above, 
TTB also proposes to make several editorial changes in subpart G that 
will make the regulations easier to understand. For example, the 
current regulation at Sec.  19.273, Tanks, has been divided into 
several shorter sections covering: (a) The general requirements for 
tanks, (b) scale tanks, (c) graduation of scale tanks, and (d) testing 
for accuracy. The proposed, shorter sections are found at Sec. Sec.  
19.182, 19.183, 19.184, and 19.185.
Subpart H--Special (Occupational) Tax
    On October 22, 2004, the President signed into law the American 
Jobs Creation Act of 2004 (the Act), Public Law 108-357, 118 Stat. 
1418. Section 246 of the Act amended the IRC by providing that, during 
the 3-year period from July 1, 2005 through June 30, 2008, the rate of 
special (occupational) tax imposed under IRC sections 5081, 5091, 5111, 
5121, and 5131 is zero. The effect of this provision is that 
proprietors of distilled spirits plants, including alcohol fuel plants 
and certain other proprietors, are not subject to special 
(occupational) tax during the suspension period. However, although the 
tax rate for the occupations affected by the suspension is zero during 
the suspension period, the IRC still requires that persons engaging in 
those occupations must register annually and comply with all applicable 
recordkeeping requirements. On October 31, 2005, TTB issued Treasury 
decision T.D.TTB-36 (70 FR 62238) which implemented this provision of 
the Act by amending the special (occupational) tax regulations in part 
19 and other affected parts.
    On August 10, 2005, the President signed into law the Safe, 
Accountable, Efficient Transportation Equity Act: A Legacy for Users, 
Public Law 109-59, 119 Stat. 1144. Section 11125 of this act repeals 
the special (occupational) tax applicable to proprietors of distilled 
spirits plants. This provision will become effective on July 1, 2008.
    The special (occupational) tax regulations proposed in this notice 
are located in proposed subpart H and are based upon the American Jobs 
Creation Act of 2004. Thus, they provide for a suspension of the 
special (occupational) tax through June 30, 2008. However, prior to the 
effective date of section 11125 of the Safe, Accountable, Efficient 
Transportation Equity Act, TTB intends to develop and issue regulations 
for all parts in title 27 of the Code of Federal Regulations that are 
affected by the special tax repeal provisions of that act. Therefore, 
the regulatory text in the final rule associated with this notice of 
proposed rulemaking will reflect the statutory provisions that are in 
effect when that final rule is published.
Subpart I--Distilled Spirits Taxes
    Under the current regulations, information regarding payment of the 
distilled spirits taxes is found in two separate subparts, Subpart C, 
Taxes, and Subpart P, Transfers and Withdrawals. Subpart C contains 
much of the basic information about distilled spirits taxes, plus the 
methods for calculating tax credits under the IRC at 26 U.S.C. 5010. 
Information regarding determination of taxes and the filing of tax 
returns is located in subpart P.
    Logically, all information associated with distilled spirits taxes 
should appear in the same subpart. Therefore, the proposed regulations 
consolidate all of the information relating to distilled spirits taxes 
currently found in subparts C and P plus several other miscellaneous 
tax provisions currently located in other subparts into a new proposed 
Subpart I, Distilled Spirits Taxes.
    General sections. In addition to consolidating the tax information 
currently found in subpart C and P, we have created several new general 
sections within the proposed subpart I. These new sections discuss 
issues such as deferred payment and prepayment of taxes, and the tax 
credits provided under 26 U.S.C. 5010. These general sections are 
intended to give the reader a brief introduction to some of the more 
complex subject matter within proposed subpart I.
    Gallonage taxes. In its comments on part 19, DISCUS recommends the 
elimination of several sections of the current Subpart C regulations 
that appear under the heading ``gallonage taxes.'' This includes 
Sec. Sec.  19.21, 19.22,

[[Page 26211]]

19.23, 19.24, 19.25, and 19.26. DISCUS states that these sections are 
redundant with the IRC.
    TTB agrees that many of these sections of regulations repeat 
provisions of the IRC. However, as stated earlier in this notice, we 
intend that the regulations in part 19 provide users with a 
comprehensive and complete guide to the requirements for operating a 
distilled spirits plant, and where appropriate, we will repeat certain 
statutory requirements in the regulations. We do not wish to 
unnecessarily require readers of these regulations to reference both 
the IRC and the regulations when researching an issue. Therefore, we 
propose to retain most of the information provided in current 
Sec. Sec.  19.21, 19.22, 19.23, 19.24, 19.25, and 19.26 in proposed 
Subpart I.
    Inventory reserve account. In its markup of part 19, DISCUS also 
proposes the deletion of Sec.  19.38, which provides for an inventory 
reserve account. The inventory reserve account is one of the optional 
methods that a proprietor may use for applying effective tax rates 
under the IRC at 26 U.S.C. 5010. DISCUS offers no explanation for 
deleting this section. In the proposed regulations, we retained this 
section in order to provide industry members with another option in 
determining the method for applying effective tax rates.
Subpart J--Claims
    Under the current regulations in part 19, the subject of ``Claims'' 
is covered as a subcategory of subpart C, Taxes. In these proposed 
regulations, we have relocated the regulations related to claims into a 
new, separate subpart J. Most of the changes to the regulations in 
proposed subpart J are relatively minor and are intended to improve the 
language and thereby make the regulations easier to comprehend.
    Under the current regulations governing claims, only distilled 
spirits that were withdrawn from a domestic distilled spirits plant may 
be returned to a distilled spirits plant and a claim filed. We propose 
to amend the language of the regulations in proposed Subpart J, Claims, 
and in Subpart Q, Return of Spirits to Bonded Premises and Voluntary 
Destruction, to reflect the fact that imported bottled spirits that 
were taxpaid or tax determined when imported into the United States may 
be returned to a distilled spirits plant and a claim filed. This change 
reflects an amendment to the law at 26 U.S.C. 5008(c), which became 
effective on April 1, 1998.
Subpart K--Gauging
    We propose to establish a new subpart K that will amend and 
consolidate gauging instructions that are currently located in several 
different subparts within part 19 at Sec. Sec.  19.84, 19.91, 19.92, 
19.93, 19.319, and 19.503.
    We believe that placing gauging issues within a single subpart will 
assist the reader in locating gauging information that was formerly 
located within administrative and miscellaneous subparts. We have also 
restructured several of the sections relating to gauging to make them 
easier to understand. We also propose to amend several of the 
regulations relating to gauging.
    Meters. Under the current regulations at Sec.  19.277(c), TTB may 
authorize proprietors to use a meter for measuring quantities of 
spirits for purposes other than tax determination. In order to receive 
authorization to use a meter for this purpose, Sec.  19.277 requires 
that the proprietor make an application to the appropriate TTB officer 
that includes technical data about the meter such as make, model, and 
the accuracy tolerance. TTB must then evaluate the data to determine 
whether the meter is suitable for the intended use before approving its 
use. The current regulations do not provide for the use of meters for 
bulk tax determination gauges.
    Under the proposed regulations at Sec.  19.284, TTB would allow for 
the use of mass flow meters for both bulk tax determination gauges and 
all other bulk gauges that must be performed at a distilled spirits 
plant. Further, the proprietor's use of mass flow meters would not be 
subject to prior approval by TTB. Instead, the proposed regulations 
establish standards of accuracy that a mass flow meter must meet for 
use in bulk tax determination gauges and a separate standard of 
accuracy for all other bulk gauges. As proposed, a mass flow meter used 
for tax determination gauges must be certified by the manufacturer or 
other qualified person as accurate within a tolerance of 0.1%. A mass flow meter used for all other required gauges must 
be certified by the manufacturer or other qualified person as accurate 
within a tolerance of 0.5%.
    In its comments on part 19, DISCUS recommends amending the current 
regulation at Sec.  19.319(a) by deleting the requirement to use an 
``approved meter'' for volume determinations in the production gauge. 
We propose to change this requirement by substituting the term 
``accurate mass flow meter'' for the term ``approved meter.'' Thus, the 
volume determination on the production gauge can be made using an 
``accurate mass flow meter.'' This change appears in the proposed 
regulations at Sec.  19.289.
    For several years, TTB has seen an increased interest in the use of 
meters by proprietors of distilled spirits plants. Further, 
manufacturers of meters have improved the accuracy of their mass flow 
meters. The proposed regulations will give proprietors the opportunity 
to take advantage of the improved performance of mass flow meters and 
modernize operations at their plants without the need to seek prior 
approval from TTB.
    Spirits in receiving tanks. DISCUS recommends the deletion of a 
sentence from the current regulation at Sec.  19.319(a) that states, 
``Spirits in each receiving tank shall be gauged before reduction in 
proof and both before and after each removal of spirits therefrom.'' We 
did not adopt this recommendation because we need accurate measurements 
of spirits removed from production, including a measurement of the 
spirits before and after removal from the receiving tank. This 
provision is found in the proposed regulations at Sec.  19.289(a).
    Gauge record for packages filled. DISCUS also recommends the 
deletion of the requirement for a gauge record for each lot of packages 
filled, found in the current regulation at Sec.  19.319(d). We did not 
adopt this recommendation. We continue to need this type of information 
and we will continue to require a gauge record for each lot of packages 
filled. This provision is now found in the proposed regulations at 
Sec.  19.289(d).
    Other industry proposals. DISCUS also recommends that gauges no 
longer be required when spirits are filled into packages from storage 
tanks and when spirits are transferred between operational accounts. We 
did not adopt these changes in the proposed regulations. We believe 
that these gauges are still an important means of accounting for 
spirits within the plant.
    The current regulation at Sec.  19.91(b) covers the gauging of 
alcoholic flavoring materials when dumped. The regulation states that 
when proof of the flavoring materials is determined from a label or the 
manufacturer's statement, the proprietor must periodically test a 
sufficient number of samples and record the results in the gauge 
record. DISCUS recommends the elimination of the requirement to record 
those results in a gauge record. TTB has adopted this recommendation in 
the proposed regulations at Sec.  19.287. This is a relatively minor 
gauging requirement,

[[Page 26212]]

and we see no reason to require a record for such gauges.
    In its comment on Notice No. 870, Equistar Chemicals asks that the 
requirement in the current regulations at Sec.  19.503 and Sec.  30.43 
be clarified. The company states that the existing regulations appear 
to require the establishment of a separate tare for each package 
individually gauged. The term ``tare'' refers to the weight of an empty 
package. They propose that TTB allow for an average tare in order to 
facilitate packaging by reducing the time involved in recording a gauge 
and tare for each package. We did not adopt this recommendation. TTB 
requires an accurate gauge of spirits that are withdrawn from bonded 
premises. A package (drum, barrel, or similar container; see Sec.  19.1 
definition) is so large that the variance in tare can be significant. 
This means that the proprietor must establish the actual tare of each 
package to be withdrawn from bond. This requirement appears in the 
proposed regulations at Sec.  19.288.
Subpart L--Production of Distilled Spirits
    Under the current regulations in part 19, production of distilled 
spirits is covered at subpart J. In the regulations proposed by this 
notice, production issues will be covered in proposed subpart L. In its 
comments on part 19, DISCUS recommends several changes affecting the 
regulations that govern production of distilled spirits. Below is a 
summary of the recommended changes and TTB's evaluation of those 
recommendations. Also discussed is a proposed change to a regulation 
based on an amendment to the IRC at section 5222(b)(2).
    Notices. The current regulation at Sec.  19.311 requires a 
proprietor to file a notice on Form 5110.34 with the appropriate TTB 
officer prior to commencing, resuming, or suspending production 
operations. DISCUS recommends that the proprietor simply file a 
letterhead notice for such actions. This recommendation is reasonable 
because the filing of a letterhead notice accomplishes the same 
objective as the filing of a form. We adopted this recommendation in 
the proposed regulations at Sec.  19.292.
    Suspension of reports. DISCUS recommends that during periods when 
production operations are suspended, the regulations should not require 
proprietors to file reports of production under current subpart W. This 
recommendation is reasonable because TTB does not need to receive 
reports of no activity, and we adopted this recommendation in the 
proposed regulations at Sec. Sec.  19.292(c) and 19.632.
    Record of fermenting material. DISCUS recommends amendment of the 
current regulation at Sec.  19.314 by the deletion of the requirement 
to maintain a record of fermenting material removed from or used on 
bonded premises for other purposes. We did not adopt this 
recommendation. The IRC at 26 U.S.C. 5207(a)(1)(A) specifically 
requires that the proprietor maintain records of the receipt of 
materials intended for use in the production of distilled spirits, and 
the use thereof.
    Unfinished spirits. The current regulation at Sec.  19.316 
discusses the requirements for a continuous distillation system and 
redistillation of unfinished spirits. DISCUS recommends amendment of 
this section of regulation by the deletion of the requirement to 
determine the quantity and proof of unfinished spirits produced from 
distilling materials. We did not adopt this recommendation because this 
type of record is required by the IRC at 26 U.S.C. 5207(a)(1)(C).
    Entry gauge. DISCUS recommends amendment of the current regulation 
at Sec.  19.321 by the insertion of language that would allow the 
production gauge to be used as the entry gauge when spirits are 
deposited for storage or processing at the same plant and entered for 
redistillation at the same plant. This is a reasonable recommendation 
because a single gauge will be sufficient as the production gauge and 
the entry gauge and we adopted this recommendation in the proposed 
regulation at Sec.  19.306.
    Record of tests. DISCUS also recommends that the current regulation 
at Sec.  19.326 be amended by deleting a requirement to maintain a 
record of tests for the spirits content of chemicals produced by the 
production process. We did not adopt this recommendation. The 
proprietor is required by this section of regulations to test chemicals 
for spirits content. We believe that it is reasonable that the 
proprietor keep a record of such tests in order to document that the 
spirits content of chemicals removed from the premises does not exceed 
the 10 percent by volume limit imposed by the proposed regulation at 
Sec.  19.308.
    Production inventories. DISCUS recommends amendment of the current 
regulation at Sec.  19.329 by changing the requirement to conduct an 
inventory from a quarterly to an annual basis. We did not adopt this 
recommendation. For inventories that involve bulk liquids in tanks, one 
inventory per year is not adequate to accurately keep track of 
quantities on hand and detect losses in a timely manner. The shorter 
time period between inventories makes it easier for both TTB and a 
proprietor to reconcile any discrepancies and thereby protect the 
revenue. This requirement has been retained in the proposed regulations 
at Sec.  19.312.
    Receipts of beer. The current regulation at Sec.  19.312 provides 
that fermented material to be used in the production of spirits may 
include beer if it is produced at a brewery contiguous to the distilled 
spirits plant. Thus, under current regulations beer may only be 
received at a distilled spirits plant from a brewery that is contiguous 
to the plant. However, in 1997, Public Law 105-34 amended the IRC at 26 
U.S.C. 5222(b)(2) by removing the requirement that beer may only be 
received from contiguous brewery premises. Instead, 26 U.S.C. 
5222(b)(2) now provides that fermented material to be used in the 
production of distilled spirits may include beer conveyed without 
payment of tax from brewery premises and beer which has been lawfully 
removed from brewery premises upon determination of tax. This provision 
has been incorporated into the proposed regulations at Sec.  19.296.
Subpart M--Storage of Distilled Spirits
    Under the current regulations in part 19, the storage of distilled 
spirits is covered at subpart L. In these proposed regulations, issues 
related to the storage of distilled spirits will be covered under 
subpart M.
    In its comments on part 19, DISCUS recommends several changes to 
the regulations that govern the storage of distilled spirits. Below is 
a summary of the recommended changes and TTB's evaluation of those 
recommendations.
    Tanks. The current regulation at Sec.  19.342(b) states that if 
``spirits or wines are being deposited in a partially filled tank in 
storage on bonded premises, simultaneous withdrawals may not be made 
therefrom unless the flow of spirits or wines into and out of the tank 
is being measured by meters or other devices approved by the 
appropriate TTB officer which permit a determination of the quantity 
being deposited and the quantity being removed.'' DISCUS recommends 
that this subparagraph be deleted. We agree, and we have deleted this 
subparagraph from the proposed regulations because we consider this to 
be a common-sense issue rather than an issue that needs to be spelled 
out in the regulations. In addition, we believe that the requirement to 
conduct proper gauging is sufficiently covered in the proposed Subpart 
K, Gauging.
    Filling packages from tanks. The current regulation at Sec.  19.344 
states that

[[Page 26213]]

spirits or wines in a tank must be gauged before and after filling 
packages from the tank on bonded premises. DISCUS recommends that this 
section of regulations be deleted. We disagree with this 
recommendation. This type of gauge is needed in order to properly 
account for spirits in the storage account and thereby protect the 
revenue.
    Packages dumped for mingling. The current regulation at Sec.  
19.347 states that when packages are dumped for mingling, the 
proprietor must record such mingling on a tank record or tank summary 
record. DISCUS recommends that this section be eliminated. We disagree 
because the mingling of spirits needs to be documented on a record in 
order to properly account for spirits in the storage account and 
thereby protect the revenue.
    Mingling spirits or wines held in tanks. The current regulation at 
Sec.  19.349 states that when spirits of less than 190[deg] of proof or 
wines are mingled in a tank, the proprietor must perform a gauge and 
record the gauge on the tank record. DISCUS recommends that this 
section be deleted. We disagree because the result of such mingling 
needs to be gauged and documented on a record in order to account for 
spirits in the storage account.
    Storage inventories. The current regulation at Sec.  19.353 
requires each warehouseman to take a physical inventory of all spirits 
and wines in tanks at the close of each calendar quarter. DISCUS 
recommends that this requirement be changed to an annual inventory. We 
did not adopt this recommendation. One inventory per year is not 
adequate to accurately keep track of the quantity of spirits and wines 
on hand and detect losses in a timely manner. The shorter time period 
between inventories makes it easier for both TTB and a proprietor to 
reconcile any discrepancies and thereby protect the revenue.
Subpart N--Processing of Distilled Spirits
    Under the current regulations, processing operations other than 
denaturation and manufacture of articles is covered at subpart M. In 
these proposed regulations, the processing of distilled spirits will be 
covered under proposed subpart N. Denaturation of spirits and 
manufacture of articles will be covered under proposed subpart O.
    In its comments on part 19, DISCUS recommends several changes to 
the regulations that govern the processing of distilled spirits. Below 
is a summary of its recommended changes and TTB's evaluation of those 
recommendations.
    Receipt of spirits. DISCUS recommends amendment of the current 
regulation at Sec.  19.372(b) by adding a sentence allowing the 
shipper's gauge for bulk spirits to be used as the receiving gauge. We 
did not adopt this proposal. This suggested change would eliminate the 
receiving gauge for transfers in bond of bulk spirits and there would 
be no basis for determining whether a loss of spirits occurred during 
the shipment, thereby posing a jeopardy to the revenue.
    Bottling tanks. The current regulation at Sec.  19.382 requires 
that spirits be bottled from bottling tanks. However, TTB can authorize 
bottling from original packages or special containers if the proprietor 
files a notice with TTB explaining such need. DISCUS recommends that 
language be inserted into this section that would allow liqueurs to be 
bottled from a tank truck or tote without our prior approval. TTB has 
previously approved several requests for the bottling of liqueurs 
directly from tank trucks or totes because this is a reasonable method 
for handling products such as liqueurs and we adopted this 
recommendation in the proposed regulation at Sec.  19.352.
    Alcohol content and fill. The current regulation at Sec.  19.386 
requires that proprietors conduct proof and fill checks of bottled 
spirits at regular intervals and record the results of those tests. 
These tests are conducted to ensure that the actual proof and fill of 
bottled spirits agree with the alcohol content and quantity stated on 
the label. DISCUS recommends that proprietors no longer be required to 
record the results of those tests as required by Sec.  19.386(c). We 
did not adopt this recommendation in the proposed regulations. We 
believe that the recording of the proof and fill checks is important 
because it documents whether the proprietor is properly conducting the 
tests as required by the regulation.
    Completion of bottling. The current regulation at Sec.  19.387 
requires that when the contents of a bottling tank are not completely 
bottled at the end of the day, the proprietor must make entries on the 
bottling and packaging record covering the total quantity bottled that 
day. DISCUS recommends that this requirement be deleted from the 
regulations. We did not adopt this recommendation. The bottling and 
packaging record represents a record of bottling and packaging activity 
at the plant and the record should reflect the bottling and packaging 
activity that takes place on a daily basis.
    Bottles on the bottling line at the end of the work day. In its 
comments on part 19, DISCUS states that when the bottling of a 
particular product run is not completed by the end of the day and is to 
be resumed on the following work day, Sec.  19.388(a)(1) requires 
removal of all bottles on the line and packing them in cases that must 
be sealed. DISCUS recommends that TTB allow proprietors to keep filled 
bottles on the line at the end of the work day, if the same sized 
product will be produced on the next bottling shift. DISCUS states that 
proprietors can save substantial amounts of money if this proposal is 
adopted in the regulations. After careful consideration, we believe 
that this proposal is reasonable because it will save both time and 
expense for proprietors without jeopardizing the revenue. Therefore, we 
are proposing this change in the proposed regulation at Sec.  
19.358(b).
    Remnants. The current regulation at Sec.  19.389 covers remnant 
bottles that remain after the completion of bottling. Remnants are the 
few bottles that may remain after completion of bottling. This 
regulation requires that notations be made on the bottling record 
regarding remnant bottles. In their proposal, DISCUS recommends that we 
delete some of the recordkeeping provisions that relate to remnant 
bottles. Their suggestion is reasonable because it will eliminate 
paperwork for the proprietor without jeopardizing the revenue. We are 
proposing this change in the proposed regulation at Sec.  19.359.
    Filling packages. The current regulation at Sec.  19.390 requires 
that spirits filled into packages on processing premises be gauged and 
the results recorded on a package gauge record. DISCUS recommends that 
this requirement be eliminated. We did not adopt this recommendation 
because without such a gauge, there would be no record of the amount of 
spirits filled into packages.
    Daily summary record. The current regulation at Sec.  19.400 
requires that a daily summary record of bottling and packaging be 
prepared as required by Sec.  19.751. DISCUS recommends that this 
section be deleted. While no specific reason was given, this 
recommendation to delete Sec.  19.400 appears to be part of the general 
proposal by DISCUS to eliminate all daily records. We did not adopt 
this recommendation. Our reasons for maintaining daily records are 
explained in our discussion of Subpart V, Records and Reports.
    While we did not retain Sec.  19.400 as a separate section in the 
proposed regulations, it has been combined with the current regulation 
at Sec.  19.384, Preparation of bottling or packaging

[[Page 26214]]

record. The new combined section will now appear at Sec.  19.354.
    Bulk inventories. The current regulation at Sec.  19.401 requires 
that the proprietor conduct a physical inventory of bulk wine and 
spirits in the processing account at the close of each calendar 
quarter. DISCUS recommends that this requirement be changed to an 
annual inventory. We did not adopt this recommendation. One inventory 
per year is not adequate to accurately keep track of the quantity of 
spirits and wines on hand and detect losses in a timely manner. The 
shorter time period between inventories makes it easier for both TTB 
and a proprietor to reconcile any discrepancies and thereby protect the 
revenue.
    Inventory of bottled and packaged spirits. The current regulation 
at Sec.  19.402 requires that the proprietor conduct a physical 
inventory of bottled and packaged spirits twice each year. DISCUS 
recommends that this requirement be changed to once a year. We did not 
adopt this recommendation. There is already an allowance in the current 
regulation at Sec.  19.402 whereby the proprietor may request 
permission to conduct a single inventory each year. TTB believes that a 
single inventory may be adequate for some plants, but it is not 
adequate for others. Approval to take a single inventory may be 
obtained provided the proprietor maintains accurate records and an 
annual inventory will not make protecting the revenue more difficult. 
To require only one inventory per year in all cases in the regulations 
would weaken TTB's control and protection of the revenue in those 
plants where more than one inventory per year is desirable.
    Variations in fill. The current regulation at Sec.  19.386 provides 
criteria for slight variations in the alcohol content and the fill of 
bottled distilled spirits that may occur during bottling operations. 
Acceptable variations in alcohol content (proof) are well defined and 
very specific in the regulation at Sec.  19.386(b). However, this is 
not the case for variations in fill. As stated in Sec.  19.386(b), the 
proprietor must rebottle, recondition, or relabel spirits if the bottle 
contents do not agree with the label, ``except for such variation as 
may occur in filling conducted in compliance with good commercial 
practice with an overall objective of maintaining 100 percent fill for 
spirits bottled.'' We believe that this criteria could be improved and 
we propose to establish a standard whereby there must be approximately 
the same number of overfills and underfills for each lot bottled and in 
no case may the quantity in a bottle vary by more than plus or minus 
two percent from the quantity stated on the label. This new 
clarification appears in the proposed regulation at Sec.  19.356(b).
Subpart O--Denaturing Operations and Manufacture of Articles
    Under the current regulations in part 19, denaturing operations are 
covered under subpart N. In these proposed regulations, denaturing 
operations will be covered under proposed subpart O. In their 
individual responses to Notice No. 870, DISCUS and Equistar Chemicals 
proposed changes to the regulations governing denaturation. Below is a 
discussion of the recommended changes and TTB's evaluation of those 
recommendations.
    Gauge for denaturation. The current regulation at Sec.  19.454 
states that the measurement of spirits and denaturants shall be made by 
volume, weight, approved meter, or, when approved by the Director, by 
other devices or methods. In its markup of part 19, submitted in 
response to Notice No. 870, DISCUS recommends that the term 
``approved'' meter be deleted. We believe it is important to still 
require that distilled spirits plants use measurement devices that are 
accurate, and although we propose deleting the word ``approved'' as 
recommended by DISCUS, we are proposing to change the regulation to 
allow for the use of an ``accurate mass flow meter'' in the proposed 
regulation at Sec.  19.383. As discussed earlier in this notice, TTB 
proposes to allow for the use of ``accurate mass flow meters,'' without 
prior approval by TTB, if they meet certain criteria for accuracy.
    Denatured spirits inventory. DISCUS recommends the amendment of the 
regulation at Sec.  19.464 by changing the requirement to conduct an 
inventory from quarterly to annually. We did not adopt this 
recommendation in the proposed rule. The shorter time period between 
inventories makes it easier for both TTB and a proprietor to reconcile 
discrepancies and thereby protect the revenue.
    Denaturation and article manufacture. In Notice No. 870, ATF 
advised that under Sec.  19.454 gauging is required before and after 
denaturation. This prevents a distilled spirits plant from conducting 
denaturation and article manufacture in a single, unified process 
because the proprietor must gauge the spirits after denaturation and 
before making an article. In Notice No. 870, ATF proposed to amend the 
current regulation at Sec.  19.454 to provide proprietors with greater 
flexibility to conduct denaturation and article manufacture in a 
single, unified process. ATF also proposed to provide a prescribed 
method of computation to accurately determine the quantity of denatured 
spirits used and produced.
    Equistar Chemicals wrote in support of the proposal to allow for a 
unified process for denaturation and article manufacture. However, the 
company suggested that the regulations continue to allow for 
measurements by volume, meter, or other approved methods, and it 
suggested alternative language for Sec.  19.454. Equistar's suggestion 
is included in these proposed regulations with some modification; i.e., 
we will not prescribe a weight calculation as the sole means for 
determining the quantity of specially denatured alcohol produced when 
denaturation and article manufacture occur in a single process. These 
changes appear in the proposed regulations at Sec.  19.383.
    Filling containers from tanks. In its comments on Notice No. 870, 
Equistar recommends amendment of the current regulation at Sec.  
19.462, Filling of containers from tanks. This regulation requires 
companies to record a gauge measurement both before and after 
withdrawing spirits from a tank. Equistar suggests that the regulations 
eliminate the requirement for the first gauge measurement and simply 
allow the second, after-withdrawal gauge measurement to serve as the 
starting measurement for the second withdrawal. This proposal is 
reasonable because a single gauge may serve both purposes, and we are 
proposing to amend the regulations at Sec.  19.389 to reflect that 
change.
Subpart P--Transfers, Receipts, and Withdrawals
    Proposed subpart P will cover several issues, including transfers 
in bond, receipts from customs custody, withdrawals without payment of 
tax, withdrawal free of tax, samples of spirits, and securing of 
conveyances. Sections of the current regulations related to withdrawal 
on determination and payment of tax have been moved to proposed Subpart 
I, Distilled Spirits Taxes. Below is a discussion of several changes to 
the regulations that we are proposing in the new subpart P.
    General. We propose to add a new ``General'' section to the 
regulations that will identify the subject matter covered in the new 
subpart P. This new section appears in the proposed regulations at 
Sec.  19.401.
    Consignee premises. The current regulation at Sec.  19.510, 
Consignee premises, contains several references to Form 703. The Form 
703 was formerly used for the transfer in bond of wine, but it is now 
obsolete. References to the

[[Page 26215]]

Form 703 have been removed from the proposed regulations at Sec.  
19.407, Consignee premises.
    Receipt of Transfers in Bond by Consignees. The current regulation 
at Sec.  19.510 requires that when spirits, denatured spirits, or wines 
are received by transfer in bond, the consignee is required, among 
other things, to examine the conveyance, check the seals for tampering, 
gauge, and record the receipt of the shipment. TTB has always 
interpreted this section to mean that when the shipment arrives at the 
consignee premises or the carrier has completed its transportation of 
the shipment, such as when a rail carrier delivers a tank car to a rail 
siding on or adjacent to the plant premises, the transfer in bond is 
complete and the consignee must gauge and record the shipment as 
received.
    However, during the course of some recent on-site field audits, TTB 
has discovered a number of instances in which distilled spirits plant 
proprietors failed to timely gauge and record the receipt of bulk 
distilled spirits transferred in bond. Some proprietors have chosen to 
apply an alternate interpretation to the term, ``received,'' as used in 
the regulation, and they believe that they can delay required gauges 
and recordkeeping until after testing and formally accepting title to 
the spirits, which may take several weeks or longer after the date of 
actual delivery. In other words, some industry members have decided 
that the physical arrival of a shipment does not constitute receipt of 
the shipment, and they believe that they may decide when the shipment 
is ``received.''
    TTB believes that the meaning of the current regulation is clear 
and that the term ``received'' means that the shipment has physically 
arrived at its destination. In fact, the language of the current 
regulation also uses the phrase ``upon arrival at his premises''.
    However, in order to further clarify the meaning of the regulation, 
the proposed regulation at Sec.  19.407, which governs actions to be 
taken by a consignee upon receipt of a shipment, has been amended to 
emphasize the ``arrival'' of a shipment at the consignee's plant or at 
a location which represents the final destination for the carrier. 
Thus, it should be clear that shipments that physically arrive at the 
consignee's plant or rail sidings at or near the consignee's plant have 
been received and must be recorded as such. As proposed, the amended 
regulation at Sec.  19.407 will use the following phrase to describe 
the time when the shipment is received, ``[U]pon arrival of an in bond 
shipment at the consignee's premises or at the destination point 
specified in the carrier's transportation documents, the consignee must 
* * *.'' TTB believes that this amended language will clarify the 
current meaning of the regulation.
    Determination of tare. The current regulation at Sec.  19.503 
discusses determination of tare when packages are to be individually 
gauged for withdrawal from bonded premises. In the proposed 
regulations, this section has been moved to Subpart K, Gauging, and now 
appears at Sec.  19.288.
    Disposition of excess spirits. In the current regulation at Sec.  
19.539, there are instructions for Government agencies regarding the 
disposition of excess spirits that were withdrawn from a distilled 
spirits plant free of tax. This section has been deleted from the 
proposed regulations because these instructions are properly covered in 
27 CFR 20.246 and 22.176.
    Securing of Conveyances. The current regulation at Sec.  19.96 
requires that securing devices used on conveyances in which spirits are 
transferred in bond, or withdrawn free of tax or withdrawn without 
payment of tax, require approval by the appropriate TTB officer before 
use. However, securing devices that meet the criteria described in 
Sec.  19.96 do not require prior approval by TTB. Currently, the 
securing devices that do not require prior approval by TTB include cap 
seals and ball-strap-type (railroad) seals. The proposed regulation at 
Sec.  19.441 has been amended to also allow for the use of locking 
security cables without prior approval by TTB.
Subpart Q--Return of Spirits to Bonded Premises and Voluntary 
Destruction
    Under the current regulations in part 19, issues relating to the 
return of spirits to bonded premises and voluntary destruction are 
covered under subpart U. In these proposed regulations, these subjects 
will be covered in a new subpart Q. Below is a discussion of several 
changes to the regulations that we are proposing in the new subpart Q.
    Imported spirits. The Taxpayer Relief Act of 1997 amended the IRC 
at 26 U.S.C. 5008(c)(1) by allowing a credit or refund of tax to be 
granted for imported bottled spirits that are returned to a distilled 
spirits plant. The proposed regulation at Sec.  19.452 provides that a 
proprietor may return tax paid or tax determined spirits to bonded 
premises that were tax paid upon importation through U.S. Customs and 
Border Protection. As discussed earlier in this notice, conforming 
changes were also made in Subpart J, Claims.
    Returns to bond. The new subpart Q has been substantially revised 
to make clearer the types of spirits, denatured spirits, and articles 
that may be returned to bonded premises. In addition, we propose to 
replace several sections of regulations with a chart for easier 
reference and use. We have incorporated Sec. Sec.  19.683 through 
19.686 of the current regulations into the proposed chart at Sec.  
19.454.
    Voluntary destructions. In its suggested changes to part 19, DISCUS 
recommends that the section of regulations dealing with voluntary 
destructions at Sec.  19.691 include a subparagraph that references the 
filing of claims. We did not include this recommendation in the 
proposed regulations because the filing of claims is already covered in 
the new subpart J of the proposed regulations.
Subpart R--Losses and Shortages
    Under the current regulations in part 19, losses and shortages are 
covered in subpart Q. In the proposed regulations, these subjects will 
be covered in a new subpart R. In its comments on part 19, DISCUS 
recommends several changes affecting the regulations governing losses 
and shortages. Below is a summary of the suggested DISCUS changes and 
TTB's evaluation of those recommendations.
    Losses in general. DISCUS recommends the elimination Sec.  19.561 
of the current regulations because it is redundant with the statute. 
TTB agrees that this section of the regulations repeats provisions 
covered in the IRC. However, the regulations in part 19 are intended to 
provide users with a comprehensive and complete guide to the 
requirements for operating a distilled spirits plant. TTB does not 
consider it appropriate to require readers of these regulations to 
reference both the IRC and the regulations when seeking guidance on an 
issue. Therefore, the information provided in the current regulations 
at Sec.  19.561 will appear in the proposed regulations at Sec.  
19.461.
    Determination of losses in bond, loss of spirits from packages. 
DISCUS recommends that the current regulations at Sec. Sec.  19.562 and 
19.563 be moved to the claims subpart within part 19. We disagree with 
this suggestion. These sections deal with the determination of losses 
in bond and are appropriately located in the subpart for losses and 
shortages.
    Loss of spirits from packages. DISCUS recommends amendment of the 
current regulation at Sec.  19.563 by replacing a reference to the 
regulation at Sec.  19.561(b) with a reference to the IRC at 26 U.S.C. 
5008(a)(1)(A). Apparently, they recommended this change because they 
had earlier proposed to eliminate

[[Page 26216]]

Sec.  19.561 from the regulations altogether. Since we did not 
eliminate Sec.  19.561, (now proposed Sec.  19.461), there is no need 
to replace the reference to it with a reference to the statute.
    Losses after tax determination. DISCUS recommends elimination of 
Sec.  19.564, Losses after tax determination, because it is redundant 
with the statute and other rules, and it recommends the transfer of 
part of the text to Sec.  19.43, Claims relating to spirits lost after 
tax determination. In the proposed regulations, we have retained this 
section at Sec.  19.464; however, we have substantially shortened it, 
and it now refers to subpart J where claims for losses after tax 
determination are covered. TTB proposes to continue this provision 
because it is inappropriate to require readers of these regulations to 
reference both the IRC and the regulations when seeking guidance on an 
issue.
Subpart S--Containers and Marks
    Proposed subpart S covers requirements for containers and marks 
that are covered in the current regulations at subpart R. In the new 
subpart S, much of the information regarding containers and marks has 
been rearranged and put into a more logical order. In addition, we 
propose several amendments to the regulations governing containers and 
marks.
    Industrial versus nonindustrial. The current regulations in subpart 
R list requirements that apply to spirits for ``industrial'' use and 
separate requirements that apply to spirits for ``nonindustrial'' use. 
However, the terms ``industrial'' use and ``nonindustrial'' use are not 
explained within subpart R. The proposed regulations in subpart S 
define those terms in a new section which appears at Sec.  19.472.
    Tanks, pipelines. In its comments on part 19, DISCUS proposes that 
the current regulations at Sec.  19.586, Tanks, and Sec.  19.587, 
Pipelines, be deleted because they are redundant with other sections of 
the regulations. We agree that they are redundant, and propose such 
deletion in the proposed regulations.
    Filling containers. In the current regulation at Sec.  19.582, 
there is a limitation on filling containers during processing 
operations. This regulation limits filling to containers of not more 
than 10 gallons. We deleted this limitation in the proposed regulation 
at Sec.  19.474 because we foresee instances where a processor may have 
a need to fill containers in excess of 10 gallons. In addition, the 
current regulation at Sec.  19.583, imposes a 10-gallon limitation for 
the filling of containers with Specially Denatured Alcohol (SDA). We 
are not aware of any reason for this limitation, and in the proposed 
regulation at Sec.  19.475 we propose deleting the size reference 
because SDA may be filled into containers with a larger capacity.
    Marks on packages of tax-paid industrial spirits. In Notice No. 
870, ATF proposed to amend the regulation in Sec.  19.605 by requiring 
that proof, tare, and proof gallons be marked on packages of spirits 
withdrawn on determination of tax. In its response to Notice No. 870, 
DISCUS opposes this proposal because it would be burdensome on 
proprietors that ship to manufacturers of nonbeverage products. DISCUS 
also states that the information required in ATF's proposed Sec.  
19.605 is already required under Sec.  19.749, Bottling and packaging 
record, and Sec.  19.769, Package gauge record. After consideration of 
the DISCUS comments, we did not include this proposal from Notice No. 
870 in this new proposed rule.
Subpart T--Liquor Bottle, Label, and Closure Requirements
    Under the current regulations in part 19, issues relating to liquor 
bottles and label requirements are found in subpart S and issues 
relating to closure requirements are found in subpart T. In the 
proposed regulations, these subjects will be covered in the new subpart 
T. Below is a summary of the changes that we propose to make in the new 
regulations.
    Scope. The current regulation at Sec.  19.631, Scope, states that 
the regulations in Sec. Sec.  19.632 through 19.639 only apply to 
bottles with a capacity of 200 ml or more unless it is specifically 
stated that the section applies to bottles of less than 200 ml. In our 
revision of the subpart, we deleted several sections of regulations, 
and the only sections that remain apply to all bottle sizes. Therefore, 
the ``scope'' section of the proposed regulations at Sec.  19.631 is no 
longer needed and has been deleted.
    Bottles authorized. The current regulation at Sec.  19.632 states 
that liquor bottles, including bottles of less than 200 ml, must 
conform to the standards of fill in 27 CFR part 5. This section was 
rewritten and deletes the reference to 200 ml because there are no 
special rules that apply to bottles of less than 200 ml. As proposed, 
the new regulation at Sec.  19.511 simply states that all liquor 
bottles for domestic purposes must conform to the standards of fill at 
27 CFR part 5.
    Distinctive liquor bottles. We have rewritten the current 
regulation at Sec.  19.633 to remove the reference to bottle sizes less 
than 200 ml. The requirements of this section apply to all bottle sizes 
and now appears in the proposed regulations at Sec.  19.513.
    Receipt and storage of liquor bottles. The current regulation at 
Sec.  19.634 provides rules for the receipt and storage of liquor 
bottles. We could find no consumer or revenue protection reason to 
retain this section, and we deleted it from the proposed regu