These temporary regulations are being issued without prior notice and public procedure pursuant to the Administrative Procedure Act (5 U.S.C. 553). For this reason, the collection of information contained in these regulations has been reviewed and pending receipt and evaluation of public comments, approved by the Office of Management and Budget under control number 1545-2209.

An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the collection of information displays a valid control number.

For further information concerning this collection of information, and where to submit comments on the collection of information and the accuracy of the estimated burden, and suggestions for reducing this burden, please refer to the preamble to the cross-reference notice of proposed rulemaking on this subject in this issue of the Bulletin.

Books or records relating to a collection of information must be retained as long as their contents may become material in the administration of any internal revenue law. Generally, tax returns and tax return information are confidential, as required by 26 U.S.C. 6103.

This document adds the Branded Prescription Drug Fee Regulations to the Code of Federal Regulations (26 CFR Part 51) under section 9008 of the Patient Protection and Affordable Care Act (ACA), Public Law 111-148 (124 Stat. 119 (2010)), as amended by section 1404 of the Health Care and Education Reconciliation Act of 2010 (HCERA), Public Law 111-152 (124 Stat. 1029 (2010)). All references in this preamble to section 9008 are references to section 9008 of ACA, as amended by section 1404 of HCERA. Section 9008 did not amend the Internal Revenue Code (Code) but cross-references to specified Code sections.

Section 9008(a) imposes an annual fee on each covered entity engaged in the business of manufacturing or importing branded prescription drugs, to be paid not later than the annual date specified by the Secretary of the Treasury or his delegate (Secretary), but in no event later than September 30^th of each calendar year in which a fee must be paid (fee year).

Section 9008(d)(1) defines a covered entity as any manufacturer or importer with gross receipts from branded prescription drug sales. Section 9008(d)(2) provides a controlled group rule under which all persons treated as a single employer under section 52(a), 52(b), 414(m), or 414(o) of the Code are treated as a single covered entity. For this purpose, a foreign entity subject to tax under section 881 is included within a controlled group under section 52(a) or 52(b). Under section 9008(d)(3), all persons treated as a single employer under section 9008(d)(2) are jointly and severally liable for the fee.

Section 9008(e)(2) defines branded prescription drug as (i) any prescription drug the application for which was submitted under section 505(b) of the Federal Food, Drug, and Cosmetic Act (FFDCA) (21 U.S.C. 355(b)), or (ii) any biological product the license for which was submitted under section 351(a) of the Public Health Service Act (42 U.S.C. 262(a)). For this purpose, a prescription drug is any drug that is subject to section 503(b) of the FFDCA (21 U.S.C. 353(b)).

Section 9008(b) provides rules for determining the amount of the annual fee for each covered entity. Under section 9008(b)(4), the aggregate fee amount each year for all covered entities (referred to as the applicable amount) is $2.5 billion for fee year 2011; $2.8 billion for fee years 2012 and 2013; $3 billion for fee years 2014 through 2016; $4 billion for fee year 2017; $4.1 billion for fee year 2018; and $2.8 billion for fee year 2019 and thereafter. Section 9008(b)(1) requires the applicable amount for each year to be allocated, using a specified formula, among covered entities with aggregate branded prescription drug sales of over $5 million to specified government programs or pursuant to coverage under such programs. Section 9008(e)(4) provides that the specified government programs are the Medicare Part B program, the Medicare Part D program, the Medicaid program, any program under which branded prescription drugs are procured by the Department of Veterans Affairs, any program under which branded prescription drugs are procured by the Department of Defense, and the TRICARE retail pharmacy program (collectively, the Programs).

Specifically, section 9008(b)(1) provides that the annual fee for each covered entity is calculated by determining the ratio of (i) the covered entity’s branded prescription drug sales taken into account during the preceding calendar year to (ii) the aggregate branded prescription drug sales taken into account for all covered entities during the same year, and applying this ratio to the applicable amount. Sales taken into account means branded prescription drug sales after the application of the percentage adjustment table in section 9008(b)(2). The sales data is generally to be provided by the Centers for Medicare and Medicaid Services of the Department of Health and Human Services (CMS), the Department of Veterans Affairs (VA), and the Department of Defense (DOD) (collectively, the Agencies) pursuant to section 9008(g).

Section 9008(b)(3) requires the Secretary to determine the amount of each covered entity’s fee and permits the Secretary to rely on reports submitted by the Agencies and any other source of information available to the Secretary in determining that amount. Section 9008(i) also directs the Secretary to publish guidance necessary to carry out the purposes of the statute.

Section 9008(f) treats the fee as an excise tax with respect to which only civil actions for refunds under the provisions of subtitle F of the Code will apply. Thus, the fee may be assessed and collected using the procedures in subtitle F without regard to the restrictions on assessment in section 6213 (relating to petitions to the Tax Court). Section 9008(f) also characterizes the fee as a nondeductible tax under section 275 of the Code.

On November 29, 2010, the Internal Revenue Service (IRS) released Notice 2010-71, 2010-50 I.R.B. 822, which proposed an approach to implementing the section 9008 fee and requested comments on the proposed approach. The proposed approach included an opportunity to report certain information to the IRS relevant to the fee calculation and provided that the IRS would provide each covered entity with notice of a preliminary fee calculation. This notice was modified and superseded by Notice 2011-9, 2011-6 I.R.B. 459, which was released on January 14, 2011.

On April 29, 2011, the IRS released Rev. Proc. 2011-24, 2011-20 I.R.B. 787, which established a process for covered entities to submit claimed errors in their preliminary fee calculations for consideration before final fee calculations for 2011. On May 27, 2011, the IRS released Notice 2011-46, 2011-25 I.R.B. 887, to defer the due date for submission of error reports and the last possible date for sending final fee calculations for 2011.

The temporary regulations describe the rules related to the fee and the actions to be taken before the September 30^th due date of each year’s fee. The temporary regulations first provide a general overview of the rules and then provide an explanation of terms used in implementing the fee. Next, the temporary regulations describe the information requested from covered entities and provided by the Agencies. The temporary regulations then describe how the fee is calculated and provide for a subsequent adjustment. The temporary regulations then provide for a notice of the preliminary fee calculation, a dispute resolution process to allow covered entities to submit error reports relating to the preliminary fee calculation, and a notice of the final fee calculation. The temporary regulations also explain how to pay the fee, how the fee is treated for tax purposes, and how to make refund claims.

These temporary regulations are generally consistent with the approach proposed in previous IRS guidance. Certain modifications and additions were made in response to public comments that were received in response to the solicitation in Notice 2011-9. The changes and the public comments are discussed in more detail in this preamble.

The temporary regulations provide guidance on the annual fee imposed on covered entities engaged in the business of manufacturing or importing branded prescription drugs by section 9008. Generally, each covered entity with aggregate branded prescription drug sales of over $5 million to the Programs (or pursuant to the Programs) is liable for an annual fee in each fee year that is based on its sales of branded prescription drugs in the sales year that corresponds to the fee year in an amount determined by the IRS under these temporary regulations.

The temporary regulations define numerous key terms used in section 9008 and in these regulations, including agencies, branded prescription drug, covered entity, fee year, government programs, sales taken into account, and sales year. Explanations of several terms are discussed in more detail in this preamble.

Section 9008(d)(1) provides that covered entity means any manufacturer or importer with gross receipts from branded prescription drug sales. Consistent with the proposal in previous IRS guidance, the temporary regulations define a manufacturer or importer of a branded prescription drug as the person identified in the Labeler Code of the National Drug Code (NDC) for such a drug. The NDC is an identifier assigned by the FDA to a prescription drug. The Labeler Code is the first five numeric characters of the NDC or the first six numeric characters when the available five-character code combinations are exhausted.

Consistent with the proposal in previous IRS guidance, the temporary regulations provide that, in the case of a controlled group that is treated as a single covered entity under section 9008(d)(2), the controlled group may identify a person as the designated entity that acts for the controlled group concerning the section 9008 fee. However, the temporary regulations further provide that if the controlled group, without regard to foreign corporations included under section 9008(d), is also an affiliated group that filed a consolidated return for federal income tax purposes, the designated entity is the common parent of the affiliated group identified on the tax return filed for the sales year. If the controlled group is not an affiliated group that filed a consolidated return for federal income tax purposes, it may select a person as the designated entity on Form 8947, “Report of Branded Prescription Drug Information.” If the controlled group does not select a person as a designated entity on its Form 8947, the IRS will select a person as a designated entity for the controlled group and advise the filer accordingly.

Section 9008(e)(3) excludes orphan drug sales from the definition of branded prescription drug sales. Consistent with the proposal in previous IRS guidance, the temporary regulations define orphan drug, subject to certain exceptions, as any branded prescription drug for which any person claimed a section 45C credit and that credit was allowed for any taxable year. The temporary regulations further provide that an orphan drug does not include any drug for which there has been a final assessment or court order disallowing the full section 45C credit taken for the drug. Additionally, an orphan drug does not include any drug for any sales year after the calendar year in which the FDA approved the drug for marketing for any indication other than the treatment of a rare disease or condition for which a section 45C credit was allowed, regardless of whether a section 45C credit was allowed for the drug either before, at the same time, or after this FDA approval.

Several commentators suggested that a drug should be considered an orphan drug if the section 45C credit was “allowable”; that is, the section 45C credit could have been claimed, rather than was claimed. Other commentators suggested that orphan drug status should be given to a drug for which a section 45C credit was allowed even though the drug had been approved by the FDA for marketing for an indication other than the treatment of a rare disease or condition for which a section 45C credit was allowed.

The temporary regulations do not adopt these suggestions. The plain language of section 9008(e)(3) requires the section 45C credit to have actually been allowed rather than to have merely been allowable. In addition, the Treasury Department and the IRS interpret section 9008(e)(3) to mean that if a drug is ever approved for an indication other than the treatment of a rare disease or condition for which a section 45C credit was allowed, whether before, during, or after a section 45C credit was allowed for the drug, sales of that drug are not considered sales of an orphan drug. However, a drug will retain its orphan drug status if the drug receives approval for a subsequent indication for a rare disease or condition for which a subsequent section 45C credit was allowed.

Consistent with the proposal in previous IRS guidance, the temporary regulations give each covered entity the opportunity to provide information relevant to the determination of the section 9008 fee by annually submitting Form 8947, “Report of Branded Prescription Drug Information,” and providing the information specified by the form and instructions, including the NDCs for branded prescription drugs that the covered entity sold to the Programs (or pursuant to coverage under the Programs), Medicare and Medicaid rebate information, section 45C orphan drug information, members of controlled groups, and designated entity information.

One commentator suggested that the Treasury Department and the IRS confirm that submission of Form 8947 is voluntary. Section 51.3T(a) of the temporary regulations provides that a covered entity may file a completed Form 8947; thus, the submission of Form 8947 is voluntary.

Commentators expressed a preference for CMS to include all rebate data in their reports to the IRS rather than collecting rebate data from the covered entities on Form 8947. The IRS and CMS are continuing to work on this issue. Until CMS can report all the relevant rebate data, covered entities will continue to have the opportunity to submit rebate data as requested on Forms 8947 and in the format prescribed in the form instructions.

Several commentators suggested that the Treasury Department and the IRS provide guidance on how covered entities may amend their Form 8947 to correct errors or omissions in the information reported. A number of covered entities notified the IRS of corrections to their Forms 8947 in the error reports that they submitted as part of the dispute resolution process provided under Rev. Proc. 2011-24. That proved to be an efficient and effective way to relay corrections. Accordingly, under the temporary regulations, a covered entity may notify the IRS of any changes or additions to information it submitted on Form 8947 by submitting error reports in the dispute resolution process, discussed later in this preamble.

Consistent with the proposal in the previous IRS guidance, the temporary regulations provide that the IRS will (1) compile a list of branded prescription drugs by NDC using the data submitted on Forms 8947; (2) apply appropriate due diligence; and (3) provide the Agencies with the list. The temporary regulations describe the data the Agencies are to provide the IRS annually for each NDC on the list by Program. The temporary regulations further clarify that the IRS may revise the list of NDCs as a result of information received in the dispute resolution process, and that the data the IRS uses to produce the final fee determination includes any revisions provided by the Agencies at the completion of the dispute resolution process.

Commentators raised questions about the descriptions in previous IRS guidance of the methodology used by the Agencies to report branded prescription drug sales to the IRS and asked that these descriptions be clarified. In addition, some of the error reports submitted as part of the dispute resolution process under Rev. Proc. 2011-24 identified the need for clarification in describing Agency data. In response to the comments and the issues illuminated by the error reports, the temporary regulations provide revised descriptions of the data and computations for some of the Programs.

Commentators raised questions about the methodology proposed for computing branded prescription drug sales for Medicare Part B. Specifically, they questioned the use of Medicare-allowed charges to establish the sales rather than a computation based on the per-unit average sales price (ASP) and the units paid for under Medicare Part B as specified in section 9008(g)(2). Commentators also asked whether CMS would use ASP (that is, ASP plus 0%) or ASP plus 6% (which reflects amounts actually paid) in computing the sales figures. After considering the comments, CMS refined its calculation process. Thus, the temporary regulations provide that branded prescription drug sales for Medicare Part B will be computed based on ASP and units paid for under Medicare Part B.

Commentators also requested clarification about how sales will be calculated for branded prescription drugs that are not separately payable or reported. In the unusual situation where CMS is unable to establish a reliable proportion of sales by NDC, for example due to unavailable, inaccurate, or incomplete manufacturer sales data, the temporary regulations clarify that CMS has a back-up method that will use Medicare Part D utilization percentages in lieu of manufacturer data. It should be noted, however, that for the 2011 fee calculations, this back-up method was not required.

Commentators also expressed concerns about whether Medicare Part B is capturing complete data with respect to non-separately payable drugs, that is, drugs that are not directly correlated with a specific HCPCS Code. CMS recognizes the commentators’ concern and has made extensive efforts to gather as complete a data set as possible. CMS will continue to work with the data available to capture non-separately payable drugs.

Some commentators asked whether the sales data from Medicaid reflected sales where Medicaid was the secondary payer, resulting potentially in duplicate reporting where another one of the Programs (for example, Medicare Part B), was the primary payer. In response, CMS has revised the Medicaid methodology to exclude non-Medicaid payments, and the temporary regulations include a description of this aspect of the methodology. Commentators asked whether TRICARE sales data would be net of refunds and rebates associated with specific NDCs. The temporary regulations make clear that DOD will report for TRICARE the sales data for each NDC based on retail pharmacy claims submitted during the sales year, net of any refunds or rebates. Commentators questioned whether the VA sales data excluded purchases made at individual treatment facilities. The VA includes most of its purchases made at the individual medical treatment facility level in its data because most of these purchases are made via VA’s Pharmaceutical Prime Vendor. The description of VA sales data contained in the temporary regulation is revised from the description contained in earlier guidance to eliminate language suggesting that sales at the individual medical treatment facility level are not included and to clarify that the sales data is net of refunds and rebates.

The temporary regulations clarify that the IRS will compute the fee for a covered entity based on the branded prescription drug sales data for each NDC reported by the Agencies and any rebate data for each NDC reported by the covered entities. For purposes of computing the fee, each NDC will be assigned to the covered entity that owns the NDC as of the end of the day on December 31^st of the sales year. For a covered entity that is a controlled group, this includes all NDCs that a member of the covered entity owns as of the end of the day on December 31^st of the sales year. The temporary regulations provide that two years are relevant to the calculation of the section 9008 fee: the fee year, and the calendar year of the branded prescription drug sales, which will be used to determine the amount of the fee (the sales year). As proposed in previous IRS guidance, the temporary regulations use the second calendar year preceding the fee year as the sales year for purposes of calculating the section 9008 fee. The Treasury Department and the IRS have determined that, although DOD and VA are expected to have complete data on branded prescription drug sales for the calendar year immediately preceding the fee year within the time frame necessary to administer the fee, CMS is not expected to have comparable data because it cannot complete its data processing within the necessary time frame. Accordingly, the IRS will calculate the fee based on the branded prescription drug sales data provided by the Agencies for the second calendar year preceding the fee year. Because the use of the second preceding year as the sales year, rather than the immediately preceding year, may affect the amount of the fee paid by a covered entity, the annual fee due in every year after 2011 will include an adjustment amount. This adjustment amount will be added (or subtracted), as appropriate, to (or from) the fee otherwise payable by the covered entity in the fee year in which the adjustment is calculated.

The proposal in previous guidance was to compute the adjustment separately for each NDC. Commentators raised questions about the effect of the adjustment where a drug is owned by different covered entities in the second preceding year and immediately preceding year and asked whether the adjustment could be computed at the covered entity level rather than the NDC level. The Treasury Department and the IRS have considered these questions, and have decided to calculate the adjustment at the covered entity level.

The adjustment will reflect the difference between the fee determined for a covered entity in the immediately preceding fee year, using data from the second calendar year preceding that fee year, and what the fee for the covered entity would have been for the immediately preceding fee year using data from the calendar year immediately preceding the prior fee year. For example, for 2012, the adjustment amount for a covered entity will be the difference between the 2011 fee computed using 2009 sales data, and what the 2011 fee would have been using 2010 sales data. Although the adjustment reflects a revision of the prior year’s fee based on data from the sales year immediately preceding the prior fee year, the adjustment is only taken into account by adding it to or subtracting it from the fee computed for the current fee year.

Consistent with the proposal in the previous IRS guidance, the temporary regulations provide that the IRS will provide each covered entity with a notice of preliminary fee calculation each year that will include the covered entity’s preliminary fee calculation; the covered entity’s branded prescription drug sales, by NDC, for each Program; the covered entity’s branded prescription drug sales taken into account after application of section 9008(a)(2); the aggregate branded prescription drug sales taken into account for all covered entities; after the 2011 fee year, a preliminary adjustment amount; and a reference to the fee dispute resolution process set forth in guidance published in the Internal Revenue Bulletin. The date by which the IRS will send the preliminary fee calculation notice will be specified for future years in guidance published in the Internal Revenue Bulletin. For 2011, the IRS sent the notices by May 16, 2011. The Treasury Department and the IRS anticipate sending these notices earlier in future years.

Consistent with previous IRS guidance, the temporary regulations provide for a dispute resolution process that allows a covered entity to submit error reports in response to the preliminary fee calculation for the IRS to consider before performing a final fee calculation. The temporary regulations describe the information that covered entities must submit. The IRS will specify in guidance published in the Internal Revenue Bulletin the format for error report submissions and the date by which a covered entity must submit an error report(s). For 2011, a covered entity’s error report was required to be submitted no later than June 10, 2011. The Treasury Department and the IRS anticipate that covered entities will have more time to prepare and send their error reports to the IRS in future years.

Several commentators requested the ability to submit additional error reports after the IRS sends notification of the final fee determination. In the interest of providing finality to the fee calculation process, the temporary regulations do not adopt this suggestion.

Section 9008(a) provides that the annual fee must be paid not later than the annual date specified by the Secretary, but in no event later than September 30^th of each fee year. The temporary regulations provide that the IRS will send each covered entity its final fee calculation for that year no later than August 31^st and that the covered entity must pay the fee by September 30^th by electronic funds transfer. For 2011, the IRS will send covered entities notification of their 2011 final fee calculation by August 24^th. This notification will include the covered entity’s final fee; the covered entity’s branded prescription drug sales by NDC for each Program; the covered entity’s branded prescription drug sales taken into account after application of section 9008(a)(2); the aggregate branded prescription drug sales taken into account for all covered entities; after the 2011 fee year, an adjustment amount; and the final determination with respect to error reports.

There is no tax return to be filed for the section 9008 fee.

Section 9008(f)(1) provides that the branded prescription drug fee for purposes of subtitle F of the Internal Revenue Code shall be treated as an excise tax with respect to which only civil actions for refund under procedures of subtitle F shall apply. Thus, under the temporary regulations, the section 9008 fee is treated as an excise tax for purposes of subtitle F of the Code (sections 6001-7874) to which the deficiency procedures of sections 6211-6216 do not apply. The temporary regulations provide that the IRS must assess the amount of the section 9008 fee for any fee year within three years of September 30^th of that fee year.

The temporary regulations provide that any claim for refund must be filed on Form 843, “Claim for Refund and Request for Abatement.”

IRS notices and the revenue procedure cited in this preamble are published in the Internal Revenue Bulletin or Cumulative Bulletin and are available at IRS.gov.

It has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order 12866, as supplemented by Executive Order 13563. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (APA) (5 U.S.C. chapter 5) does not apply to these regulations. For applicability of the Regulatory Flexibility Act (5 U.S.C. chapter 6), please refer to the Special Analysis section in the preamble to the cross-referenced notice of proposed rulemaking in this issue of the Bulletin. Pursuant to section 7805(f) of the Code, these regulations have been submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small businesses.

Section 553(b) of the APA does not apply to these regulations because they are interpretative rules. Alternatively, the Treasury Department and the IRS have determined that good cause exists under section 553(b)(B) of the APA. That section provides that an agency is not required to publish a notice of proposed rulemaking in the Federal Register when the agency, for good cause, finds that notice and public comment thereon are impracticable, unnecessary, or contrary to the public interest. Due to the novel and complex issues raised by the branded prescription drug fee provision and the required coordination with other governmental agencies, the Treasury Department and the IRS have concluded that it would take significantly longer than the time between enactment (March 23, 2010) and the date of collection of the first fee (no later than September 30, 2011) to draft and issue a proposed rule with a comment period, review comments thoroughly, and then draft and issue a final rule. Accordingly, the Treasury Department and the IRS have determined that the notice and comment procedures are impracticable.

In the months following enactment of section 9008, the Treasury Department and the IRS, in coordination with other governmental agencies, developed the proposed methodologies and processes to compute, verify, assess and collect the annual fee amounts, and published notices and a revenue procedure in the Internal Revenue Bulletin describing the proposed approach and soliciting public comments. The Treasury Department and the IRS provided an extended comment period to give the covered entities an opportunity to review their preliminary fee calculations before submitting comments on the proposed approach. In addition, the Treasury Department and the IRS engaged in discussions with affected external stakeholders and extensively coordinated with other governmental agencies. Consequently, the Treasury Department and the IRS also have determined that additional notice and comment before implementation of the process set forth in these regulations is unnecessary.

Since Congress mandated that the IRS collect the applicable fee amount for the first fee year no later than September 30, 2011, it is necessary that these regulations be issued immediately in order to provide covered entities with the rules governing the fee and payment prior to issuance of final fee determinations. However, comments are being solicited in the cross-referenced notice of proposed rulemaking that is in this issue of the Bulletin and will be considered before final regulations are issued regarding the branded prescription drug fee.

Sec.

51.1T Overview (temporary).

51.2T Explanations of terms (temporary).

51.3T Information requested from covered entities (temporary).

51.4T Information provided by the agencies (temporary).

51.5T Fee calculation (temporary).

51.6T Notice of preliminary fee calculation (temporary).

51.7T Dispute resolution process (temporary).

51.8T Notification and payment of fee (temporary).

51.9T Tax treatment of fee (temporary).

51.10T Refund claims (temporary).

51.11T Effective/applicability date (temporary).

51.12T Expiration date (temporary).

51.6302-1T Method of paying the branded prescription drug fee (temporary).

Authority: 26 U.S.C. 7805; sec. 9008, Public Law 111-347 (124 Stat. 119).

Section 51.8 also issued under 26 U.S.C. 6302(a).

Section 51.6302-1 also issued under 26 U.S.C. 6302(a).

Par. 2. The authority citation for part 602 continues to read as follows:

Authority: 26 U.S.C. 7805.

Par. 3. In §602.101, paragraph (b) is amended by adding the following entry in numerical order to the table to read as follows:

The collection of information contained in these final regulations has been reviewed and approved by the Office of Management and Budget in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)) under control number 1545-1899. The collection of information in these final regulations is in §301.7502-1. This information is required in order for taxpayers to be able to establish the postmark date and prima facie evidence of delivery when using certified or registered mail.

An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a valid control number.

Books or records relating to a collection of information must be retained as long as their contents might become material in the administration of any internal revenue law. Generally, tax returns and return information are confidential, as required by 26 U.S.C. 6103.

This document contains regulations amending 26 CFR part 301 under section 7502 of the Internal Revenue Code (Code). Section 7502(a) first appeared as part of the recodification of the Code in 1954. Section 7502(a) is commonly known as the timely mailing/timely filing rule. Section 301.7502-1 of the Procedure and Administration Regulations provides rules for taxpayers to follow to qualify for favorable treatment under section 7502. There is a conflict among the Federal circuit courts of appeal as to whether the provisions in section 7502 provide the exclusive means to establish prima facie evidence of delivery of a document to the IRS or the United States Tax Court. Specifically, courts have reached differing conclusions regarding whether a taxpayer may raise a presumption of delivery of Federal tax documents to the IRS and the United States Tax Court only in situations in which the taxpayer uses registered or certified mail.

A notice of proposed rulemaking (REG-138176-02, 2004-2 C.B. 710) was published in the Federal Register (69 FR 56377) on September 21, 2004. The proposed regulations clarified that, other than direct proof of actual delivery, the exclusive means to establish prima facie evidence of delivery of Federal tax documents to the IRS and the United States Tax Court is to prove the use of registered or certified mail. Under section 7502(f)(3), the IRS may extend to a service provided by a PDS a rule similar to the prima facie evidence of delivery rule applicable to certified and registered mail. Prior to the publication of the notice of proposed rulemaking, the IRS had not received any comments or suggestions for extending this rule, even though the IRS and the Treasury Department previously requested comments in a prior notice of proposed rulemaking under section 7502. See Federal Register, 64 FR 2606 (January 15, 1999). Because the IRS was clarifying what documentation it will accept as proof of delivery, additional comments were sought on this issue. Accordingly, in the notice of proposed rulemaking, the IRS and the Treasury Department encouraged the public to make comments regarding whether the prima facie evidence of delivery rule should be extended to a service provided by a PDS.

Eighteen written comments were received in response to the notice of proposed rulemaking. Three commenters requested a public hearing. A notice of public hearing on proposed rulemaking was published in the Federal Register (69 FR 68282) on November 24, 2004. A public hearing was held on January 11, 2005. Three commenters appeared at the public hearing and commented on the notice of proposed rulemaking.

All comments were considered and are available for public inspection upon request. After consideration of the written comments and the comments provided at the public hearing, the proposed regulations under section 7502 are adopted as revised by this Treasury Decision. The public comments, public hearing, and the revisions are discussed in this preamble.

Four commenters expressed concern that the proposed regulations limited the proof to satisfy the timely mailing/timely filing rule of section 7502(a) rather than the prima facie evidence of delivery rule of section 7502(c). These final regulations do not limit the use of U.S. Mail, other delivery options offered by the United States Postal Service (USPS), or a PDS for purposes of satisfying the timely mailing/timely filing rule of section 7502(a). Instead, these final regulations clarify the prima facie evidence of delivery rule of section 7502(c).

Seven commenters suggested that the proposed regulations provide that evidence of proper use of a service offered by a PDS should establish prima facie evidence of delivery of Federal tax documents to the IRS and the United States Tax Court. Seven commenters observed that PDSs offered services similar to certified and registered mail, and that the services offered by the PDSs were as reliable as registered mail and certified mail. Two commenters noted that PDSs generally provide a greater level of detail with respect to tracking and delivery information than certified and registered mail for purposes of establishing proof of delivery. Three commenters expressed concern that it is inconsistent to permit individuals to rely upon PDSs to satisfy the timely mailing/timely filing rule of section 7502(a), but not for section 7502(c). One commentator observed that section 7502(f)(3) requires that the Treasury Secretary and the IRS consider PDS alternatives as substitutes for certified and registered mail.

After considering comments received on the proposed regulations, these final regulations provide that the Treasury Department and IRS will issue guidance that will establish the criteria to be used to designate PDSs for purposes of the prima facie evidence of delivery rule. Cf. Notice 2004-83, 2004-2 C.B. 1030) (listing PDSs that the Secretary has designated pursuant to section 7502(f)(2)) (see §601.601(d)(2)(ii)(b) of this chapter); Rev. Proc. 97-19, 1997-1 C.B. 644 (providing the criteria to determine whether a PDS qualifies as a designated private delivery service under section 7502(f) and the procedures under which a PDS can apply to become a designated PDS) (see §601.601(d)(2)(ii)(b) of this chapter). Thus, these final regulations provide that, other than direct proof of actual delivery, proof of proper use of registered or certified mail (registered or certified mail sender’s receipt), and proof of proper use of a PDS duly designated under criteria established by the IRS, are the sole means to establish prima facie evidence of delivery of documents that have a filing deadline prescribed by the internal revenue laws.

The existing regulations under section 7502 are being reorganized. Section 301.7502-1(e) will still be entitled “Delivery,” but will now focus on the requirement for actual delivery or the use of one of the means discussed above to establish a presumption of delivery. Former paragraph (e)(2) and the example in paragraph (e)(3) are moved to paragraph (b)(2) to consolidate the discussion of the effect of section 7502 on certain claims for refund.

Seven commenters suggested that the proposed regulations should permit additional services offered by the USPS to establish prima facie evidence of delivery of Federal tax documents to the IRS and the United States Tax Court. Commenters recommended that the following USPS services should be permitted to establish prima facie evidence of delivery: Priority Mail, Certificate of Mailing, Express Mail Receipt, Delivery Confirmation Receipt, and Signature Confirmation.

Section 7502 does not authorize the Treasury Department or the IRS to adopt a rule that would permit USPS services in addition to certified and registered mail to establish prima facie evidence of delivery. Congress has been clear when it intended to change section 7502 to allow proof of delivery by other means. In 1958, Congress amended section 7502 to provide the IRS with the authority to treat certified mail the same as registered mail. See Technical Amendments Act of 1958, Public Law No. 85-866 (72 Stat. 1606 (1958)). Congress also amended section 7502 to authorize the IRS to publish rules providing the extent to which a PDS is the equivalent of certified mail. See Taxpayer Bill of Rights 2, Public Law No. 104-168 (110 Stat. 1452 (1996)); Internal Revenue Service Restructuring and Reform Act of 1998, Public Law No. 105-206 (112 Stat. 685 (1998)). Similar legislation would be necessary to authorize the IRS to treat additional USPS services as prima facie evidence of delivery.

Two commenters expressed concern that certified and registered mail services are expensive and inconvenient in comparison to first class mail. These commenters suggested that regular first class mail should suffice to establish prima facie evidence of delivery. As described above, the prima facie evidence of delivery rule provides an exception to the actual delivery rule. Absent actual delivery, however, first class mail without additional services provides nothing, such as certified or registered mail receipt, to establish proof of delivery. Moreover, without legislative action, the Treasury Department and the IRS cannot adopt regulations extending the prima facie evidence of delivery rule to first class mail.

It has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order 12866, as supplemented by Executive Order 13563. Therefore, a regulatory assessment is not required. It has also been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations.

It is hereby certified that the collection of information contained in this regulation will not have a significant economic impact on a substantial number of small entities. Accordingly, a regulatory flexibility analysis is not required. Although the collection of information in this Treasury decision affects a substantial number of small entities, the economic impact on these small entities is not substantial. If a small entity uses registered or certified mail to file a document with the IRS, the additional burden (filling out the appropriate United States Postal Service forms) over and above using regular mail is not substantial. Furthermore, the extra cost to use registered or certified mail is not substantial as certified mail costs only $2.80 and registered mail can be used for as little as $10.60. Finally, the added burden of retaining the certified or registered mail sender’s receipt will be minimal as the receipt can be associated with the small entity’s copy of the document that it filed with the IRS.

Pursuant to section 7805(f) of the Code, the proposed rule that preceded this Treasury decision was submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small businesses.

Paragraph 1. The authority citation for part 301 is amended by removing the entry for §301.7502-1T to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

Par. 2. Section 301.7502-1 is amended by:

1. Revising paragraphs (b)(2) and (e).

2. Adding paragraphs (c)(3) and (g)(4).

The additions and revisions read as follows:

Section 501 of the Economic Growth and Tax Relief Reconciliation Act of 2001, P.L. 107-16 (115 Stat. 69) (EGTRRA), repealed the estate tax for the estates of decedents who died in 2010 (2010 Decedents). EGTRRA also repealed section 1014 and replaced it with section 1022. Section 1014 generally provides that the recipient’s basis in property passing from a decedent is the fair market value (FMV) of the property on the decedent’s date of death. Section 1022 generally provides that the recipient’s basis in property acquired from a decedent is the lesser of the decedent’s adjusted basis in the property and the FMV of the property on the decedent’s date of death.

Section 301(a) of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, P.L. 111-312 (124 Stat. 3296) (TRUIRJCA), repealed section 501 of EGTRRA and section 1022. The repeal of EGTRRA retroactively reinstated the estate tax for 2010 Decedents and also reinstated section 1014. TRUIRJCA also increased the applicable exclusion amount to $5,000,000 for 2010 Decedents. Section 301(c) of TRUIRJCA, however, allows the Executor of a 2010 Estate to elect not to have the estate tax provisions and section 1014 apply, but rather, to have the provisions of section 1022 apply (Section 1022 Election). With the election, the estate will pay no estate tax and in most cases the basis of the property acquired from the decedent will be determined under section 1022. In addition, the executor may allocate additional basis to certain property. See Rev. Proc. 2011-41, 2011-35 I.R.B. 188.

Under section 301(d) of TRUIRJCA, the due date for filing an estate tax return and for paying the estate tax for an estate of a decedent who died after December 31, 2009, and before December 17, 2010, is no earlier than September 17, 2011. The due date, therefore, for estates of decedents who died on or after January 1, 2010, and on or before December 16, 2010, is September 19, 2011, because September 17, 2011, falls on a Saturday. Under section 6075(a), the due date for filing an estate tax return for a decedent who died after December 16, 2010, is nine months after the date of the decedent’s death. Section 6151 provides that, when a tax return is required, the person required to make such return shall pay such tax at the time and place fixed for filing the return (determined without regard to any extension of time for filing the return).

Section 542 of EGTRRA provides that the return required under former section 6018 (Form 8939, which is filed to make a Section 1022 Election, to report the information required under section 6018, and to allocate additional basis under section 1022) shall be filed with the decedent’s final income tax return (for example: Form 1040, United States Individual Income Tax Return, or Form 1040-NR, United States Nonresident Alien Income Tax Return) or by such later date specified in regulations prescribed by the Secretary. Notice 2011-66, 2011-35 I.R.B. 184, which the Treasury Department and IRS intend to confirm in regulations, provides that Form 8939 is due on or before November 15, 2011.

Section 6081 provides that the Secretary may grant a reasonable extension of time for filing any return and that, except in the case of taxpayers who are abroad, no such extension may be for more than six months. In addition, section 6161(a) provides that the Secretary may extend the time for payment of the amount of the tax shown, or required to be shown, on any return for a reasonable period from the date fixed for payment thereof.

Because of the date Congress enacted TRUIRJCA and the length of time required to implement the legislative changes and to issue the Form 8939 with related instructions, the Executor of a 2010 Estate may not have sufficient time to make an informed decision as to whether or not to make a Section 1022 Election and to complete the required filings. Therefore, the Treasury Department and IRS believe it is reasonable to grant the estates of 2010 Decedents an automatic extension of time to file the estate tax return and an extension of time to pay the estate tax. Accordingly, the Treasury Department and IRS grant the Executor of a 2010 Estate who files a Form 4768 by the due date for filing Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, or Form 706-NA, United States Estate (and Generation-Skipping Transfer) Tax Return Estate of Nonresident not a Citizen of the United States, both an automatic six-month extension of time to file Form 706 or Form 706-NA pursuant to section 6081, and a six-month extension of time to pay the estate tax. The Executor of a 2010 Estate is not required to substantiate on the Form 4768 the reason for requesting an extension of time for payment of the estate tax to receive the six-month extension of time to pay the estate tax due. However, interest will accrue on the estate tax liability from the due date of the return, excluding extensions. See I.R.C. § 6601.

Except in the case of an executor abroad, under section 6081, the Treasury Department and IRS cannot grant additional extensions of time to file Form 706 or Form 706-NA to such estates, regardless of whether an executor files a Form 4768 requesting an additional extension of time to file. An executor, however, may apply for an additional extension of time to pay the estate tax under section 6161 if the executor files a Form 4768 on or before the extended due date of the payment of tax and provides the documentation required with such form. See I.R.C. § 6161.

The IRS will not impose late filing and late payment penalties under section 6651(a)(1) or (2) on estates of decedents who died after December 31, 2009, and before December 17, 2010, if the estate timely files Form 4768 and then files Form 706 or Form 706-NA and pays the estate tax by March 19, 2012. The IRS also will not impose late filing or late payment penalties under section 6651(a)(1) or (2) on estates of decedents who died after December 16, 2010, and before January 1, 2011, if the estate timely files Form 4768 and then files Form 706 or Form 706-NA and pays the estate tax within 15 months after the decedent’s date of death.

The due date for filing Form 8939 is changed from November 15, 2011, to January 17, 2012. Thus, a Section 1022 Election is timely if made on a Form 8939 filed by (and may be amended or revoked on or before) January 17, 2012. The Treasury Department and IRS will not grant any further extension of time to file Form 8939, to make the Section 1022 Election, or to amend or revoke the Section 1022 Election, except as provided in sections I.A, B, or D.1 or 2 of Notice 2011-66. Accordingly, as contemplated in section I.D.2 of Notice 2011-66, an executor may file an amended Form 8939 if the provisions of § 301.9100-2(b) are satisfied, by July 17, 2012.

Moreover, the penalty under section 6716 does not apply to the Executor of a 2010 Estate solely because the Form 8939 is filed after November 15, 2011, but on or before January 17, 2012. Similarly, a penalty under section 6716 does not apply to the Executor of a 2010 Estate solely because a statement required to be furnished to beneficiaries is provided after December 15, 2011, but on or before February 17, 2012.

If an executor makes a Section 1022 Election on a Form 8939 filed on or before January 17, 2012, and allocates the decedent’s available GST exemption (or makes an election under the GST tax) on an attached Schedule R or R-1, the allocation or election will be considered timely and effective as of the decedent’s date of death pursuant to section 2632. Alternatively, the automatic allocation rules under section 2632 will apply if the executor timely files the Form 8939 without attaching a Schedule R or R-1. If the executor does not make the Section 1022 Election or if the executor timely revokes a Section 1022 Election, then the automatic allocation rules under section 2632 will apply unless the executor timely files Form 706 or Form 706-NA with the Schedule R or R-1 attached.

This notice does not extend the due date for paying any income tax or for filing any income tax return for any individual, estate, or trust (for example, Form 1040, Form 1040-NR, or Form 1041, United States Income Tax Return for Estates & Trusts). In addition, this notice does not extend the due date for paying any gift tax or for filing any Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return. Finally, this notice does not extend the time to file an estate or inheritance tax return required by any state of the United States or to pay any estate or inheritance tax due to such state.

Section 6651(a)(2) generally provides that, in the case of any failure to pay the tax shown on any return required to be filed under subchapter A of chapter 61 on its due date, unless it is shown that the failure is due to reasonable cause and not willful neglect, an addition to tax shall apply. In addition, section 6662(a) imposes a 20 percent penalty on any portion of an underpayment of tax due to negligence, disregard of rules or regulations, or a substantial understatement of income tax. Section 6664(c) provides that no penalty under section 6662(a) shall be imposed on any portion of an underpayment if it is shown that there is a reasonable cause for such portion and that the taxpayer acted in good faith with respect to such portion.

Revenue Procedure 2011-41 provides a safe harbor for determining a recipient’s basis and other pertinent information such as the tax character and holding period of property acquired from a 2010 Decedent and whose executor makes a Section 1022 Election. However, when the recipient of property acquired from a decedent who disposed of such property during 2010 files the recipient’s income tax return, the recipient may not know whether the decedent’s executor will make the Section 1022 Election and, if so, the amount (if any) of Basis Increase (as defined in Rev. Proc. 2011-41) the executor will allocate to that property. Therefore, the recipient may not know the property’s basis or other pertinent information such as tax character and holding period. When filing the recipient’s income tax return and computing the income tax liability, the recipient will have to make a good faith estimate, based on the facts and circumstances, regarding such information with respect to the property acquired from the 2010 Decedent. Accordingly, to the extent that the recipient’s tax liability is increased, as shown on an amended return or otherwise, by reason of the application of section 1022 to the estate of a 2010 Decedent, the recipient’s reasonable cause and good faith will be presumed and the Treasury Department and IRS will not impose either the section 6651(a)(2) addition to tax for failure to pay, or the section 6662(a) penalty. The recipient should write across the top of the amended return “IR Notice 2011-76” to alert the IRS that the recipient meets these requirements for reasonable cause.

The collections of information contained in this notice of proposed rulemaking has been approved by the Office of Management and Budget in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d) and assigned control number 1545-2209.

Comments on the collection of information should be sent to the Office of Management and Budget, Attn: Desk Officer for the Department of the Treasury, Office of Information and Regulatory Affairs, Washington, DC 20503, with copies to the Internal Revenue Service, Attn: IRS Reports Clearance Officer, SE:W:CAR:MP:T:T:SP, Washington, DC 20224. Comments on the collection of information should be received by October 17, 2011. Comments are specifically requested concerning:

Whether the proposed collection of information is necessary for the proper performance of the functions of the Internal Revenue Service, including whether the information will have practical utility;

The accuracy of the estimated burden associated with the proposed collection of information;

How the quality, utility, and clarity of the information to be collected may be enhanced;

How the burden of complying with the proposed collections of information may be minimized, including through the application of automated collection techniques or other forms of information technology; and

Estimates of capital or start-up costs of operation, maintenance, and purchase of service to provide information.

The collection of information in this proposed regulation is in §51.7. This information is necessary to evaluate whether an error report regarding a preliminary fee calculation is valid and justifies an adjustment to the preliminary fee calculation. The likely respondents are manufacturers and importers of branded prescription drugs.

Estimated total annual reporting and/or recordkeeping burden: 1800 hours.

Estimated annual burden per respondent/recordkeeper: 40 hours.

Estimated number of respondents and/or record keepers: 45

Estimated frequency of responses: Annually.

An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the collection of information displays a valid control number.

Books or records relating to a collection of information must be retained as long as their contents may become material in the administration of any internal revenue law. Generally, tax returns and tax return information are confidential, as required by 26 U.S.C. 6103.

Temporary regulations in this issue of the Bulletin add a new part, Part 51, to subchapter D, Miscellaneous Excise Taxes. Part 51 provides guidance on the annual fee imposed on covered entities engaged in the business of manufacturing or importing branded prescription drugs by section 9008 of the ACA. The text of those regulations also serves as the text of these proposed regulations. The preamble to the temporary regulations explains the new part.

It has been determined that this notice of proposed rulemaking is not a significant regulatory action as defined in Executive Order 12866, as supplemented by Executive Order 13563. Therefore, a regulatory flexibility assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations. It is hereby certified that the collection of information in these regulations will not have a significant economic impact on a substantial number of small entities. This certification is based on the fact that these regulations primarily affect large corporations. Thus, Treasury Department and the IRS do not expect a substantial number of small entities to be effected. Therefore, a Regulatory Flexibility Analysis under the Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required. Pursuant to section 7805(f) of the Internal Revenue Code, this notice of proposed rulemaking has been submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

Before these proposed regulations are adopted as final regulations, consideration will be given to any written comments (a signed original and eight (8) copies) or electronic comments that are submitted timely to the IRS. Comments are requested on all aspects of the proposed regulations. In addition, the IRS and the Treasury Department specifically request comments on the clarity of the proposed regulations and how they may be made easier to understand. All comments will be available for public inspection and copying. A public hearing may be scheduled if requested in writing by any person that timely submits written comments. If a public hearing is scheduled, notice of the date, time, and place for the hearing will be published in the Federal Register.

The principal author of these regulations is Celia Gabrysh, Office of Associate Chief Counsel (Passthroughs and Special Industries). However, other personnel from the IRS and the Treasury Department participated in their development.

* * * * *

[The text of proposed §§51.1 through 51.11 is the same as the text of §§51.1T through 51.11T published elsewhere in this issue of the Bulletin.]

[The text of proposed §51.6302-1 is the same as the text of paragraphs (a) and (b) of §51.6302-1T published elsewhere in this issue of the Bulletin.]