federal register

5643

Tuesday

February 3, 1998

Part III

Department of the

Treasury

Fiscal Service

31 CFR Part 203

Payment of Federal Taxes and the

Treasury Tax and Loan Program; Final

Rule
5644 Federal Register / Vol. 63, No. 22 /Tuesday, February 3, 1998 /Rules and Regulations

DEPARTMENT OF THE TREASURY

Fiscal Service

31 CFR Part 203

RIN–1510–AA37

Payment of Federal Taxes and the

Treasury Tax and Loan Program

AGENCY: Financial Management Service,

Fiscal Service, Treasury.

ACTION: Final rule.

SUMMARY: The Financial Management

Service is issuing this final rule to

implement provisions of the North

American Free Trade Agreement

Implementation Act (NAFTA), as

amended. NAFTA requires the

development and implementation of an

electronic funds transfer (EFT) system

for the collection of certain depository

taxes. This regulation implements the

Electronic Federal Tax Payment System

(EFTPS) by prescribing rules for

financial institutions and Federal

Reserve Banks that use EFT mechanisms

to process Federal tax payments through

the EFTPS. The EFTPS began operation

in the fall of 1996.

This regulation also updates the rules

governing the changes to the Treasury’s

investment program that were

necessitated by the implementation of

this EFT system.

EFFECTIVE DATE: March 5, 1998.

ADDRESSES: Cynthia L. Johnson,

Director, Cash Management Policy and

Planning Division, Financial

Management Service, LCB 420, 401 14th

Street, S.W., Washington, D.C. 20227.

FOR FURTHER INFORMATION CONTACT:

Michael G. Dressler, Senior Financial

Program Specialist; Cynthia L. Johnson,

Director, Cash Management Policy and

Planning Division, 401 14th Street,

S.W., Washington, D.C. 20227, at (202)

874–6590; or Randall S. Lewis,

Principal Attorney, at (202) 874–6680. A

copy of this final rule is available for

downloading on the Financial

Management Service home page at the

following address: http://

www.fms.treas.gov/regs.html.

SUPPLEMENTARY INFORMATION:

Background

This regulation is authorized by the

North American Free Trade Agreement

Implementation Act (NAFTA), Public

Law 103–182, Section 523, 107 Stat.

2057, 2161 (1993), the substantive

provisions of which are codified at 26

U.S.C. 6302(h). NAFTA mandates that

the Secretary of the Treasury (Secretary)

phase-in the collection of a minimum

percentage of certain types of depository

taxes by electronic funds transfer (EFT)

and develop and implement an EFT

system for the collection of such taxes.

The Secretary has delegated

responsibility to the Internal Revenue

Service (IRS) for the former and to the

Financial Management Service (FMS)

for the latter. With the enactment of

NAFTA, the FMS achieved its

longstanding goal to collect depositary

taxes electronically. This regulation

implements the FMS’ Electronic Federal

Tax Payment System (EFTPS), which

began operation on October 28, 1996.

On September 30, 1996, the FMS

published in the Federal Register a

notice of proposed rulemaking (NPRM)

that would govern the deposit of Federal

taxes using EFT mechanisms (61 FR

51186). The NPRM also proposed rules

updating Treasury’s investment program

to reflect the impact of the new

electronic system. The original closing

date for the submission of comments

was November 21, 1996. However, the

FMS published a notice in the Federal

Register extending that date to January

13, 1997 (61 FR 59211).

Comments on the Proposed Rule

The title of this part has been changed

in two steps for two reasons. The first

change from ‘‘Treasury Tax and Loan

Depositaries’’ to the NPRM designation

as ‘‘Treasury Tax and Loan Depositaries

and the Payment of Federal Taxes’’

reflects the importance of the addition

of the EFTPS. Secondly, the title used

in this Final Rule reverses the order in

the NPRM title to shift the emphasis

from the Treasury Tax and Loan (TT&L)

depositaries to the payment of Federal

taxes through the EFTPS because under

this Final Rule at § 203.9, ‘‘a financial

institution does not need to be

designated as a TT&L depositary in

order to process electronic Federal tax

payments.’’

Two sections of the NPRM, §§ 203.4

and 203.5, have been combined in this

Final Rule as § 203.4 causing all

sections of the Final Rule after § 203.4

to be renumbered. For clarity, each

section citation in this Final Rule is

identified as either an NPRM or Final

Rule citation. For example, the NPRM

§ 203.11 was the section covering

Enrollment. All references to the NPRM

section on Enrollment will identify it as

NPRM § 203.11 (emphasis added). In the

Final Rule, the section covering

Enrollment is § 203.10. Therefore, all

references to the Enrollment section of

the Final Rule will identify it as

§ 203.10 in the Final Rule (emphasis

added).

By the close of the January 13, 1997,

comment period, the FMS received

comments on the NPRM from twelve

organizations: six financial institutions

and six industry trade associations. The

following includes a discussion of the

significant and most heavily commented

upon issues:

Conformance With Industry Automated

Clearing House (ACH) Rules

Commenters expressed concern with

certain NPRM provisions that would

require financial institutions to adhere

to a set of rules different from private

industry ACH rules. Eleven of the

twelve commenters advocated the

adoption of the National Automated

Clearing House Association (NACHA)

Operating Rules for ACH processing,

enrollment, compensation, and/or credit

reversals for electronic Federal tax

payments.

Currently, the FMS is proposing a

revision of 31 CFR Part 210 which

considers adoption of NACHA rules

wherever practicable. The revision as

proposed would address the role of

NACHA rules in all Federal payments

and collections made through the ACH

system. However, as the examples that

follow illustrate, Part 203 requires

certain exceptions to the wholesale

adoption of industry rules due to EFTPS

program considerations. Therefore, ACH

entries governed by Part 203 are not

subject to any provisions of Part 210

that are inconsistent with Part 203.

The FMS understands the

commenters’ interest in having a

uniform set of rules governing both

commercial and Federal transactions

and has recognized these concerns by

revising this Final Rule to conform with

commercial operating rules to the extent

practicable. For example, the FMS has

revised the Final Rule to conform to

commercial operating rules for both

ACH credit reversals and the waiting

period between the origination of a

prenotification entry and the first

payment.

However, Treasury, as an executive

agency within the Federal Government,

is constrained from the wholesale

adoption of commercial operating rules.

For example, the Internal Revenue Code

provisions governing the disclosure of

returns and return information preclude

Treasury from adopting the commercial

operating rules for electronic

enrollments. In addition, the FMS is

constrained from adopting commercial

operating rules that would require

Treasury to pay interest for payments

erroneously made by financial

institutions. Specifically, such interest

is not recoverable from the United

States unless expressly provided by

statute. The FMS has not identified any

statute that would authorize Treasury to

pay such interest.
Federal Register / Vol. 63, No. 22 /Tuesday, February 3, 1998 /Rules and Regulations 5645

Enrollment and Enrollment Liabilities

Section 203.11(a) of the NPRM

provided that the taxpayer may enroll in

EFTPS using either a paper-based or

electronic enrollment method. Section

203.11(b)(2) of the NPRM allowed a

financial institution to assist its

customers by offering electronic

enrollment. However, even if the

financial institution offered electronic

enrollment, a representative of the

financial institution would have to

verify and sign an enrollment form, and

provide a paper copy of the completed

form to the taxpayer for the taxpayer’s

signature and submission to the

Treasury Financial Agent (TFA).

Five commenters were concerned that

no details were provided on how an

electronic enrollment process would

work and recommended that the FMS

adopt procedures developed by NACHA

to transmit enrollment data through the

ACH using the standard entry class

code, ‘‘ENR.’’ One commenter suggested

enrolling taxpayers through the EFTPS

home page on the Internet.

Additionally, five commenters

questioned the need for a paper copy of

the enrollment form to be submitted to

the TFA when an electronic enrollment

option is used. One commenter further

recommended that the FMS send back

an acknowledgment file including an

acknowledgment number that could

take the place of the taxpayer’s written

signature.

Section 203.10 of the Final Rule

deletes all references to electronic

enrollments since such electronic

processes would not eliminate the IRS’

need for a paper copy of an enrollment

form signed by the taxpayer. Currently,

the IRS requires the taxpayer’s written

signature for all enrollments in EFTPS.

The written taxpayer signature provides

the IRS with the requisite authority to

disclose to the TFAs and to the

taxpayer’s financial institution the

confidential taxpayer return information

necessary to effect enrollment and

payment transactions, provides the

TFAs with the authority to initiate

debits to the taxpayer’s account, and

provides the IRS with authority to

resolve issues related to enrollments

and payments. Until an all electronic

enrollment process becomes feasible for

IRS tax payments, taxpayers will

continue to enroll in the EFTPS by

means of paper enrollment forms.

Notwithstanding the deletion of the

hybrid electronic/paper enrollment

process from this Final Rule, the FMS

understands that the IRS is undertaking

efforts towards accepting electronic

signatures. Treasury also will continue

to work with entities such as NACHA to

determine the feasibility of using the

ENR enrollment standard entry class

code for EFTPS enrollments, and may

look at other options for an all

electronic enrollment process in the

future.

NPRM § 203.11(c) provided that if a

taxpayer enrolled for the ACH debit

method, ‘‘* * * an authorized

representative of the financial

institution shall verify the accuracy of

the financial institution routing number,

taxpayer account number, and taxpayer

account type * * * [and] shall sign the

enrollment form attesting to the

accuracy of the financial institution

information.’’

Five commenters suggested that it is

unnecessary and inappropriate for

Treasury to require a financial

institution to sign the enrollment form

to verify bank routing and account

numbers. The commenters stated that

there is no way to verify that the

signature is an authorized signature of a

bank representative and that the

banking information would be verified

in the prenotification process. Another

commenter supported the requirement

for financial institutions to sign the

enrollment form since it provides

taxpayers with an opportunity to talk to

their financial institutions and to ask

questions.

The FMS agrees with both sets of

comments, and has balanced both

interests in the Final Rule. Specifically,

§ 203.10(c) of the Final Rule deletes the

requirement that a financial institution

sign the enrollment form, but requires

the financial institution to verify certain

information upon the specific request of

the taxpayer. A financial institution may

perform such verification by telephone.

One commenter requested additional

information on the status of an

enrollment if the form is not signed by

a representative of the taxpayer’s

financial institution, and asked what, if

any, liability is assumed by the financial

institution if the form is unsigned or

signed with inaccurate information.

Because the Final Rule deletes the

requirement that an authorized financial

institution representative sign the

enrollment form, such enrollment forms

will be processed without a financial

institution signature, and the financial

institutions will not accrue any

liabilities if authorized representatives

do not sign such forms. However, the

FMS may hold such financial

institutions liable under § 203.14(a) of

the Final Rule if taxpayers request

verification of banking data, and the

financial institutions fail to identify

incorrect banking data that result in a

late tax payment.

One commenter recommended that

Treasury modify the enrollment form to

require a taxpayer to obtain the

signature of a financial institution

representative as evidence of permission

to use ACH credit origination services to

make EFTPS payments. The FMS

recognizes the importance of a taxpayer

discussing the provision of ACH credit

services with its financial institution

before the taxpayer sends the

enrollment form. Accordingly, the FMS

has revised the enrollment form to

instruct taxpayers electing the ACH

credit option to verify in advance

whether the financial institution is

capable of providing ACH credit

origination services.

One commenter inquired whether a

taxpayer could enroll via a

prenotification entry. The

prenotification entry cannot be used to

enroll a taxpayer because it does not

provide all the required information.

Taxpayers must enroll as prescribed in

§ 203.10 of the Final Rule.

Prenotification

NPRM § 203.13(b)(1) required

financial institutions that receive an

ACH debit entry to ‘‘timely verify the

information contained in the ACH

prenotification entry.’’ Three

commenters sought clarification on

what information the financial

institution is required to verify in the

prenotification or zero dollar entry it

receives. One financial institution

commenter asked whether financial

institutions must verify the taxpayer

identification number (TIN). Section

203.12(b)(1) of the Final Rule clarifies

that financial institutions need to verify

the account number and account type,

and not the TIN. Moreover, because the

TFAs will not originate zero dollar

entries, financial institutions will need

to verify only information in

prenotification entries.

NPRM § 203.13(c)(1) provided that the

financial institution ‘‘shall originate an

ACH credit prenotification entry that

may be in the form of a zero dollar

entry’’ and that credit entries may not be

initiated less than 10 calendar days after

the date the prenotification was

transmitted. Some commenters

expressed a preference for

prenotification entries and some

expressed a preference for zero dollar

entries. Two commenters opposed the

mandatory use of prenotification

entries, and one favored it. Several

commenters pointed out that the

NACHA rules make prenotification

entries optional. They noted that it

would require computer system

modifications to identify Federal tax

payments in several situations: where a
5646 Federal Register / Vol. 63, No. 22 /Tuesday, February 3, 1998 /Rules and Regulations

file could contain Federal tax payments

among many other types of payments,

and where the credits are triggered by

customers themselves. Nine

commenters were critical of the 10

calendar day waiting period between

origination of a prenotification or zero

dollar entry and the first payment.

Several pointed out that the NACHA

rules were changed in March, 1997, to

require a six business day waiting

period between prenotification entries

and the first payment.

The FMS recognizes the merits of

these comments and has revised the

Final Rule. Specifically, § 203.12(c)(1) of

the Final Rule clarifies that the FMS

will accept either an ACH

prenotification entry containing the TIN

in the entry detail record (no addenda)

or the zero dollar entry with the TIN in

the addenda record. The TFA will use

the information to verify with the IRS

that the TIN is valid and corresponds

with an enrolled taxpayer. The FMS has

limited the requirement that financial

institutions originate prenotification

entries for ACH credits. Under the Final

Rule, a prenotification or zero dollar

entry is not required unless specifically

requested by the taxpayer. Financial

institutions should note, however, that

guidance sent from the TFAs following

enrollment suggests that taxpayers

instruct their financial institutions to

originate zero dollar transactions or

prenotification entries prior to the first

payment. Consequently, financial

institutions will have to be able to

originate such entries. The FMS also has

deleted the 10 calendar day waiting

period between the origination of a

prenotification entry and the first

payment in light of the NACHA rules.

Prenotification Liabilities

The FMS received a number of

inquiries regarding what liability, if any,

is assumed by financial institutions in

the prenotification process. In the

context of ACH debits, the TFA will

initiate a prenotification, not a zero

dollar entry, for each taxpayer enrolling

for ACH debit. Sections 203.12(b)(1) and

(2) of the Final Rule require the

financial institution receiving an EFTPS

prenotification to ‘‘timely verify the

account number and account type

contained in the ACH prenotification

entry [and] timely and properly return

a prenotification entry that contains an

invalid account number or account type,

or is otherwise erroneous or

unprocessable.’’ In addition, § 203.14(a)

in the Final Rule clarifies NPRM

§ 203.15(a) by providing that the FMS

may assess interest where a financial

institution failed to respond to an ACH

prenotification entry as required in

§§ 203.12(b) and 203.12(c) of the Final

Rule, where such failure resulted in a

late tax payment. In the context of ACH

credits, the FMS may hold a financial

institution liable under § 203.14(a) of

the Final Rule if a late tax payment

results from the financial institution’s

failure to initiate a taxpayer-requested

prenotification or zero dollar entry. The FMS believes that the potential

imposition of such liabilities on

financial institutions during the

prenotification process is fair, equitable,

and a logical outgrowth of the NPRM.

Specifically, the preamble to the NPRM

notified readers that the liability

provisions generally were geared

towards placing liability for errors on

the party making the errors. The FMS

believes that this principle serves two

important purposes here. First, it is an

incentive for financial institutions to

process EFTPS payments in accordance

with this Part, which will help ensure

that depository taxes are credited to the

TGA on tax due date. Second, it makes

the United States whole for the lost

value of funds resulting from late tax

payments. For example, a financial

institution receiving an ACH debit

prenotification entry may have little or

no incentive to review and return timely

a prenotification entry containing an

invalid account number if it can do so

without any financial exposure.

Acknowledgments

NPRM § 203.13(c)(4) required

financial institutions originating ACH

credit tax payments to provide a

transaction trace number to their

customers upon request. One

commenter stated that the process for

assigning and providing a trace number

is unclear and the numbers provided by

financial institution proprietary systems

may not be sufficient. The intent of this provision was to

ensure that taxpayers have the means to

trace their tax payments at the IRS if

there is some discrepancy or problem.

For example, in originating ACH credit

entries, financial institutions transmit to

the IRS transaction trace numbers, that

are included in the IRS master file. If

there is a question between the IRS and

the taxpayer as to the timeliness of a tax

payment, the taxpayer may obtain the

transaction trace number from its

financial institution, and provide it to

the IRS, which will then trace the

payment. The FMS seeks to protect the

interests of taxpayers by ensuring that

they have a means of tracing their tax

payments while at the same time

affording financial institutions

maximum flexibility in providing

taxpayers with the means to do so.

Accordingly, § 203.12(c)(4) of the Final

Rule requires financial institutions to

provide their customers, upon request,

either transaction trace numbers or

some other method to trace the tax

payment.

Four commenters recommended that

Treasury implement a system to provide

electronic acknowledgments for ACH

credit tax payments and three

commenters recommended that

Treasury utilize the new ACH

acknowledgments (‘‘ACK’’ and ‘‘ATX’’)

developed by NACHA. The FMS

currently is considering the operational

implications of developing and utilizing

the new NACHA acknowledgments.

Two of the commenters expressed

concern over a perceived system bias

between the ACH debit and the ACH

credit acknowledgment process. The

FMS believes that there is no system

bias, and that taxpayers can easily

obtain ACH acknowledgment numbers

for both ACH debit and credit

transactions. Specifically, EFTPS

provides a taxpayer initiating an ACH

debit through the telephone or personal

computer with an automated response

acknowledgment number at the end of

the reporting session. Taxpayers

initiating an ACH credit transaction may

obtain an ACH credit acknowledgment

number by placing a toll-free call to the

EFTPS Customer Service Centers on the

tax due date.

ACH credit deadlines

NPRM § 203.13(c)(3) and the

preamble to the NPRM left open the

possibility of a deadline different from

that currently required for ACH credit

entries. In the preamble to the NPRM,

the FMS suggested that if a different

ACH credit deadline were required, that

deadline would be approximately 11:00

p.m. on the day before the entry was to

settle. All of the commenters suggested

that establishing an ACH credit deadline

for EFTPS payments that is different

from the standard deadline already in

place for such entries would impose

significant operational problems for

financial institutions and/or confuse

taxpayers/customers. The commenters

were concerned that financial

institutions would be unaware that ACH

files originated by its customers would

contain such tax payment credit entries

subject to an earlier deadline. Several

commenters suggested that the

establishment of a separate deadline for

EFTPS ACH credit payments may serve

as a disincentive for financial

institutions to offer such services to

their taxpaying customers.

Section 203.12(c)(3) of the Final Rule

remains substantively unchanged. The

FMS needs the flexibility to change

ACH credit deadlines for purposes of

maximizing the timely investment of tax
Federal Register / Vol. 63, No. 22 /Tuesday, February 3, 1998 /Rules and Regulations 5647

receipts. However, the FMS emphasizes

that it has no current plans to impose a

deadline different from the existing

standard ACH processing schedules.

Moreover, the FMS would ensure that

financial institutions are provided with

sufficient advance notice of any

deadline changes so that they may

undertake any necessary steps to

continue to process timely ACH credit

entries on behalf of their customers.

While the FMS recognizes the

possibility that any deadline change

may cause some financial institutions to

cease offering such services to their

customers, the FMS believes that the

marketplace would fill any void.

ACH Credit Reversals

NPRM § 203.13(d) required advance

IRS approval for all corrections of ACH

credit entries. In general, the

commenters opposed obtaining

approval from the IRS for reversals of

ACH credit entries, remarking that

obtaining approval from IRS is

cumbersome; the requests must be done

manually and quickly; and that IRS

could not respond quickly enough to

prevent financial institutions from

losing the value of funds. Several

commenters suggested that the reversals

be governed by NACHA rules, which at

that time did not require ACH credit

originators to notify receivers when

initiating an ACH credit reversal. The FMS recognizes the merits of

these comments, and has revised the

Final Rule. Specifically, § 203.12(d) of

the Final Rule eliminates the need to

obtain advance approval from the IRS

before originating an ACH credit

reversal. A December 1997 NACHA rule

change requires an ACH originator to

notify a receiver when making a

reversing entry to the receiver’s account.

For the reasons stated above, the Final

Rule does not require that IRS be

notified when an ACH credit reversal is

initiated. However, financial

institutions are reminded of ACH record

retention rules, and need to be able to

provide documentation per the

requirements of the procedural

instructions.

Same-day payments

NPRM § 203.14(a) proposed a 2:00

P.M. FRB head office local zone time

(LZT) deadline for all three same-day

tax payment methods (Fedwire value,

Fedwire non-value, and Direct Access).

One commenter requested that the

Fedwire deadline for Federal tax

payments be the same as the normal

Fedwire national deadline currently

established for third party transactions

(6:00 p.m. ET). The FMS believes that a uniform

same-day payment cutoff time is

necessary to maximize and meet the

needs of Treasury’s investment program.

Under this program, Treasury invests

tax payments with the taxpayers’

financial institutions in open-ended

interest-bearing obligations or ‘‘note

balances.’’ In order for these financial

institutions to receive these

investments, Treasury must designate

and employ them separately as Treasury

Tax and Loan (TT&L) note depositaries.

The 2:00 p.m. LZT cutoff time is

necessary to ensure that EFTPS tax

payments transmitted by these financial

institutions via Fedwire non-value and

Direct Access are credited to their TT&L

note balances on the same day, thereby

maximizing Treasury’s investment

opportunities. Specifically, Fedwire

non-value and Direct Access

transactions are settled through the

Federal Reserve’s TT&L system. The

2:00 p.m. LZT cutoff is necessary to

provide time for the TT&L system to

process these two non-value

transactions, and create the investment

entries to credit the note depositaries’

balances.

The FMS has decided to apply this

same cutoff time to the Fedwire value

payment method because it is in the

interest of the Treasury’s investment

program that Fedwire value not be

favored over the Fedwire non-value and

Direct Access options. Specifically, tax

payments remitted via the Fedwire

value method are credited to Treasury’s

General Account at the FRB and cannot

be invested with note option

depositaries that day, thereby delaying

Treasury’s investment opportunities. If

the cutoff time for the Fedwire value

payment method was later than for the

two non-value payment methods,

informal conversations with financial

institutions and the TFAs indicate that

Fedwire value likely would be favored

over the Fedwire non-value and Direct

Access payment methods which would

have detrimental effects on the

Treasury’s investment program. Consequently, the FMS has decided to

retain the 2:00 p.m. LZT cutoff time for

all three same day payment methods.

However, §§ 203.13(a), (e)(1)(i), and

(e)(3) of the Final Rule delete specific

references to this cutoff time, and

instead refer to the procedural

instructions that will contain the 2:00

p.m. LZT cutoff time. Furthermore, the FMS currently is

contemplating the adoption of a uniform

national cutoff time of 5:00 p.m. Eastern

Time (ET) for all same-day payments

with a potential implementation date of

mid-1999. The possibility of a uniform

cutoff time stems from the Riegle-Neal

Interstate Banking and Branching

Efficiency Act of 1994, Public Law 103–

328, 108 Stat. 2338 (1994). Under this

law, a financial institution will have a

single Federal Reserve account where its

master account is located. The location

of this master account will determine

the cutoff time for all same-day Federal

tax payments. If the FMS maintains the

2:00 p.m. LZT cutoff time, financial

institutions with a master account

located on the West Coast would enjoy

a competitive advantage in attracting

customers over financial institutions

with a master account on the East Coast

due to the additional three hours for

making a same-day Federal tax

payment. In order to prevent unfair

business advantages among financial

institutions, the FMS is considering an

FRB recommendation to implement a

uniform national cutoff time of 5:00

p.m. ET for all same-day payments. If

the FMS decides to adopt such a

uniform national cutoff time, the FMS

will ensure that financial institutions

will be provided adequate advance

notice to make any necessary system

changes.

In the preamble to the NPRM, the

FMS requested comments on restricting

the use of the Fedwire non-value and

Direct Access same-day payment

methods to TT&L note depositaries. One

commenter supported FMS’ underlying

intent and five commenters opposed

such restrictions. The FMS has decided

against imposing any restrictions, and

all three same-day mechanisms are

available for use by any financial

institution capable of originating these

transactions.

Two commenters expressed concern

over limiting the use of same-day

payment mechanisms to certain

categories of taxpayers. This Final Rule

does not prescribe which payment

methods taxpayers must use.

NPRM §§ 203.14(b), (c), and (d)

provided that upon the request of the

taxpayer, the taxpayer’s financial

institution shall provide the taxpayer

with reference numbers for same-day

transactions (the Input Message

Accountability Data (IMAD) number

and the Electronic Tax Application

(ETA) reference number). For example,

for Fedwire transactions, the ETA

reference number is assigned once the

payment has been received by the

Federal Reserve’s ETA. This number is

provided to the TFAs and the IRS at the

end of each business day and is

available to originating financial

institutions from their local FRB upon

request only. Taxpayers wishing to

receive the IMAD or ETA reference

numbers on a day subsequent to the

transaction date also may obtain such

reference numbers by contacting the

EFTPS Customer Service Centers. One
5648 Federal Register / Vol. 63, No. 22 /Tuesday, February 3, 1998 /Rules and Regulations

commenter suggested that the IMAD

and ETA reference numbers for sameday payments should be provided to the

taxpayer automatically.

The FMS does not accept this

comment, and as a result, §§ 203.13(b),

(c), and (d) of the Final Rule remain

substantively unchanged. The FMS has

weighed the needs of the taxpayers in

receiving such reference numbers

against the burdens that would be

imposed upon financial institutions if

the Final Rule were to require financial

institutions to provide taxpayers with

such numbers automatically. This Final

Rule balances the needs of both parties

by requiring financial institutions to

provide their customers with such

reference numbers upon the specific

request of their customers. The FMS

believes that to mandate that financial

institutions provide their customers

with these reference numbers in

instances where the customer may not

seek such numbers would be unduly

burdensome on financial institutions

given certain operational constraints.

Taxpayers seeking such reference

numbers on a continuous basis should

tailor their contracts with their financial

institutions to meet their needs.

NPRM § 203.14(e) defined the

circumstances in which the FRB or the

IRS could reverse or cancel a same-day

payment. Two commenters

recommended that taxpayers be

contacted before the FRB or the IRS

cancel or reject a same-day payment.

The FMS does not accept these

comments. Therefore, section 203.13(e)

of the Final Rule remains substantively

unchanged. Due to the time critical

nature of the same-day payment

mechanism, it is neither feasible nor

practicable to notify the taxpayer before

a same-day payment is reversed or

canceled. Specifically, all same-day

payments are edited by the FRB’s ETA,

which will automatically reverse sameday tax payments that are late, e.g., that

are received after the ETA deadline, or

that are timely but do not contain

enough information to identify the

taxpayer. The FRB also reverses sameday payments at the direction of the

IRS, which may direct a reversal in

situations where a payment cannot be

posted in the IRS database because the

TIN is invalid, or where a taxpayer or

financial institution have requested the

funds be returned because of an

overpayment. The FRB also may reverse

or cancel tax payments at the request of

the originating financial institution if

the request is received prior to the ETA

cutoff time on the transaction date.

In all cases, the FMS believes that it

is the responsibility of financial

institutions to notify their customers if

same-day payments are returned or

canceled. This is especially important

where timely same-day payments are

returned or canceled so that customers

may attempt to correct the payment

prior to the cutoff time.

Interest Assessments for Lost Value of

Funds

NPRM § 203.12(c) provided that

Treasury will not pay interest on any

payments erroneously paid to Treasury

and subsequently refunded to the

financial institution. Several

commenters asked that Treasury

compensate financial institutions for the

time value of funds held.

The FMS rejects these comments, and,

as a result, section 203.11(c) of the Final

Rule remains substantively unchanged.

It is a well settled principle that interest

is not payable by the United States

unless expressly provided by statute or

in a contract authorized by law. This

principle extends equally to situations

where notions of equity would seem to

militate in favor of the United States

paying interest. Congress has expressly

authorized the payment of interest for

tax refunds when the IRS pays without

being sued and when a taxpayer

receives a judgment from a court for any

overpayment of internal revenue taxes.

See 26 U.S.C. 6402 and 28 U.S.C. 2411

respectively.

Because the FMS has not identified

any statutory provision that authorizes

it to pay interest to financial institutions

that make erroneous payments that

subsequently are refunded by Treasury,

the FMS is unable to compensate

financial institutions for their lost value

of funds.

NPRM § 203.15 set forth the

circumstances and procedures for the

assessment, calculation, and collection

of interest from financial institutions for

purposes of making the United States

whole for the lost value of funds

resulting from late tax payments. One

commenter suggested that only

taxpayers be held liable for late tax

payments. Other commenters opposed

the interest assessment provisions. One

commenter recommended that financial

institutions only be penalized if they

transmit a certain number of late tax

payments each year.

The FMS does not accept these

comments, and § 203.14 of the Final

Rule remains substantively unchanged

on these points. The legislative scheme

underlying EFTPS is to ensure that

certain depository taxes are credited to

the TGA on the tax due date. If an

EFTPS tax payment is not credited to

the TGA on the tax due date, the IRS

will impose a penalty on the taxpayer

pursuant to 26 U.S.C. 6656. However,

IRS Revenue Ruling 94–46 (July 6, 1994)

provides that the IRS will abate this

penalty if the taxpayer establishes that

the instructions the taxpayer provided

to its financial institution were timely

and correct, and that it had sufficient

funds to make the tax payment. For

example, the FMS understands that if

the taxpayer did everything right in

initiating an ACH credit payment, but

the taxpayer’s financial institution

failed to originate the payment timely,

which resulted in a late tax payment,

the IRS will abate the penalty imposed

upon the taxpayer. However, under

these circumstances, the United States

will have lost the value of funds from

the date the taxpayer specified that its

payment should settle to the TGA to the

time the late tax payment actually

settled to the TGA.

As a result, the FMS believes that to

implement successfully the legislative

scheme underlying EFTPS, it may be

necessary in these circumstances to

hold a financial institution liable for the

lost value of funds. Specifically, if a

financial institution is not held liable

for its mistakes which result in a late tax

payment, a financial institution may

have less incentive to process timely

such tax payments for credit to the TGA

on the tax due date. The interest

assessment in most instances simply

recovers the imputed value of funds

erroneously retained by the financial

institution. The FMS further believes

that financial institutions can minimize

this risk by imposing conditions on

their customers, and by initiating

prenotification or zero dollar entries.

Nevertheless, the FMS will not assess

interest on financial institutions for

errors resulting in late tax payments

where such errors occur before the

effective date of this Final Rule.

Furthermore, § 203.14(b) of the Final

Rule limits a financial institution’s

interest liability to seven calendar days

for ACH debit transactions and 45

calendar days for both ACH credit and

same-day payment transactions. The

FMS has established this cap in

recognition of the fact that taxpayers

have a responsibility, upon learning of

their financial institution’s error, to

initiate a new payment transaction. The

seven calendar day cap for ACH debit

transactions stems from the fact that if

the taxpayer’s financial institution

returns the taxpayer’s ACH debit

transaction, the TFA will take

immediate steps to mail the taxpayer a

notification letter. The FMS believes

that upon receipt of this letter from the

TFA, the taxpayer has a responsibility to

initiate a new tax payment transaction.

The FMS also believes that this process

generally should take no longer than
Federal Register / Vol. 63, No. 22 /Tuesday, February 3, 1998 /Rules and Regulations 5649

seven calendar days from the date the

tax payment would have settled to the

TGA. The 45 day cap for ACH credit

and same-day payment transactions

stems from the fact that if the TFA

returns an ACH credit transaction or if

the FRB returns a same-day payment

transaction to the financial institution,

the taxpayer, at the latest, will learn of

the return upon receipt of its monthly

statement of account from its financial

institution. The 45 days is based upon

an estimated 30 day statement cycle,

and 15 days processing and mail time.

One commenter asked whether

Treasury will assess interest on

financial institutions when the late tax

payment is due to the ACH operator, a

system problem, a daylight overdraft, or

other causes. Whether the FMS will

assess interest on a financial institution

to make the United States whole for the

lost value of funds depends on the

specific facts and circumstances.

Financial institutions will have the right

to contest any interest assessment under

§ 203.16 of the Final Rule.

Several commenters asked for more

specific information on the interest

assessment process. The specific

procedures will be published in the

procedural instructions in the Treasury

Financial Manual (TFM).

NPRM § 203.15(c) provided that a

financial institution that processes tax

payments under this part is deemed to

authorize the FRB, acting as Treasury’s

fiscal agent, to debit its reserve account

for interest assessments. One

commenter suggested that Treasury

should not initiate a debit to a financial

institution’s reserve account. Another

commenter suggested that Treasury give

financial institutions an opportunity to

appeal the interest prior to paying it.

The FMS does not accept these

comments, and § 203.14(c) of the Final

Rule remains substantively unchanged.

The FMS believes that the operational

steps underlying the collection of

interest assessments will take several

months from the date of the late tax

payment due to the extensive IRS

research required. Because the FMS will

not assess ‘‘interest on interest,’’ the

FMS believes that affording a financial

institution an opportunity to contest the

assessment prior to collecting it only

would exacerbate the lost value of funds

to the United States, especially in light

of the cap on a financial institution’s

liability at § 203.14(b) of the Final Rule.

Moreover, § 203.14(c) of the Final Rule,

which authorizes the FMS to debit the

interest assessment from a financial

institution’s reserve account, is

consistent with the current process by

which FMS recovers the lost value of

funds from financial institutions in the

paper Federal Tax Deposit (FTD)

system. The FRB will send an electronic

message to the financial institution the

day prior to the day that the financial

institution’s reserve account is debited

for the interest assessment.

NPRM § 203.15(d) and § 203.14(d) of

the Final Rule provide that Treasury

will not assess interest on a financial

institution when the taxpayer has not

satisfied the conditions imposed by its

financial institution. Several

commenters asked what information a

financial institution would need to

provide to establish that the taxpayer

failed to meet the financial institution’s

conditions. The FMS has no pre-set

requirements; however, the FMS will

consider such information as the written

conditions themselves; a saved

electronic file; and/or a tape of

telephonic instructions showing the

time and the direction to initiate a

transaction. The FMS will not regulate

the agreements between the financial

institution and its customers, and

therefore, will not give guidance on the

conditions a financial institution may

impose.

One commenter asked if a financial

institution must disclose to the taxpayer

its proof that the taxpayer failed to

satisfy its requirements for making an

EFTPS payment. This part does not

regulate the exchange of information

between a taxpayer and its financial

institution.

Unauthorized Debits

NPRM § 203.16 prohibited financial

institutions from initiating debits to the

TGA unless they had prior written

permission. NPRM § 203.16 also

provided that financial institutions that

do initiate such unauthorized debit

entries are liable for the amount of the

debit and an interest charge at the

Federal funds rate plus two percent, and

are deemed to authorize the Federal

Reserve Bank to debit their reserve

accounts for the amount of the debit

plus interest.

One commenter pointed out that a

customer theoretically could initiate a

debit to the TGA by using a customer

delivery system, and that a financial

institution would suffer an undue

burden if it had to ensure that its

customers could not initiate such debits.

The FMS does not accept this comment,

and § 203.15 of the Final Rule is

substantively unchanged on this point.

The FMS believes that financial

institutions are responsible for how they

allow their customers to key in

transaction information. This approach

is consistent with commercial operating

rules, which generally provide that

originating depository financial

institutions warrant that their entries are

authorized by both the originator and

the receiver.

However, should such a situation

occur, the TFA will attempt to return

the unauthorized debit entry in time for

same-day settlement. If this return is

made on the same day, there will be no

need to recover the principal nor will

there be any interest charge. If the return

is not accomplished in the same day,

the financial institution shall be liable

to the Treasury for the amount of the

transaction and interest charges

calculated according to the procedural

instructions published in the TFM.

One commenter stated that reversals

should be excluded expressly from this

section. The FMS agrees and has

clarified § 203.15(a) of the Final Rule.

One commenter recommended that

the interest charge assessed for an

unauthorized ACH debit be lowered to

the Federal funds rate. The FMS does

not accept this comment and § 203.15(d)

of the Final Rule remains substantively

unchanged. This higher rate is intended

to deter unauthorized debits from the

TGA.

Appeal and Dispute Resolution

NPRM § 203.17 afforded financial

institutions the opportunity to appeal an

interest assessment under NPRM

§ 203.15 or an interest charge under

NPRM § 203.16. Several commenters

requested an explanation as to how this

process would work. The FMS will

provide greater detail on these processes

in its procedural instructions in the

TFM. Nevertheless, § 203.16 of the Final

Rule expands the administrative

remedies afforded financial institutions.

Specifically, if a financial institution is

unsuccessful in contesting an interest

assessment, it may appeal the

administrative denial to a higher level

Treasury official. This two-step

administrative review process is similar

to the one currently used for the paper

FTD system.

Compensation

NPRM § 203.19(a)(8) prohibited

financial institutions serving as TT&L

depositaries from accepting

compensation from taxpayers for

handling the deposit of tax payments in

the paper FTD system. Three

commenters suggested that the FMS

remove this prohibition. The FMS does

not accept this comment and § 203.18 of

the Final Rule is substantively

unchanged. While the FMS believes that

such comments may have merit, the

NPRM did not give affected parties

adequate notice of this possibility. As a

result, the FMS is constrained from

accepting these comments. However,
5650 Federal Register / Vol. 63, No. 22 /Tuesday, February 3, 1998 /Rules and Regulations

the FMS intends to issue an NPRM on

removing this prohibition.

Two commenters noted that the

NPRM was silent on whether financial

institutions could charge taxpayers for

processing tax payments under EFTPS.

These commenters recommended that

the FMS expressly authorize financial

institutions to charge their customers for

processing their EFTPS tax payments.

The FMS does not accept these

comments, and the Final Rule remains

silent on whether financial institutions,

acting as the taxpayers’ agents, can

charge their customers for processing

EFTPS payments.

The decision not to regulate the fees

financial institutions can charge under

EFTPS stems from the fact that the

EFTPS eliminates one of the benefits

currently provided financial institutions

under the paper-based FTD system.

Specifically, when a taxpayer makes its

tax payment under the FTD system, the

tax payment is deposited into a noninterest-bearing TT&L account at the

financial institution. The financial

institution retains the imputed value of

these funds until the next day when the

funds either are credited to the TGA or

are invested with the financial

institution in interest-bearing notes.

Under EFTPS, these tax payments will

no longer be deposited overnight into

such non-interest bearing accounts, and

the financial institutions will no longer

retain the value of these funds. The FMS

believes that it is best left to the

marketplace to decide what fees, if any,

financial institutions will charge their

customers. However, the FMS believes

that any fees for ACH credit or debit

entries will be insignificant.

Collateral

NPRM § 203.25(f)(1) was modeled on

existing § 203.14(f)(1) and provided that

in the event of a TT&L depositary’s

insolvency or closure, Treasury may

apply the collateral pledged to satisfy

any claim of the United States. The

NPRM preamble explained Treasury’s

longstanding interpretation that ‘‘any

claim of the United States’’ includes,

but is not limited to, claims arising out

of the depositary relationship for which

the collateral was originally pledged.

One commenter suggested that the

TT&L collateral only be used to satisfy

TT&L claims. The FMS does not accept

this comment, and the FMS’

interpretation of § 203.24(f)(1) of the

Final Rule remains unchanged. The

FMS believes that this interpretation is

necessary to protect the United States

from loss.

NPRM § 203.25 set forth Treasury’s

collateral security requirement for

financial institutions serving as TT&L

depositaries. One commenter asked how

a TT&L depositary would be notified of

the amount in the Note Option/Direct

Investment account so that it could

deposit sufficient collateral to secure the

deposits. This information appears in

the daily Federal Reserve account

activity statement, which the depositary

can access after 9:00 a.m. ET via Fedline

by using the Accounting Services

application and choosing the IAS

Account Inquiry option or by using the

TT&L application and choosing the Host

Account Activity Report. Section 203.24

of the Final Rule provides that note

option depositaries that participate in

the direct investment program are not

required to collateralize continuously

the pre-established maximum balance

but must be prepared to pledge

collateral on the day the direct

investment is placed.

One commenter sought confirmation

that same-day EFTPS payments initiated

by a financial institution serving as a

TT&L depositary that miss the cutoff

time are not required to be

collateralized. The preamble of the

NPRM stated that ‘‘financial institutions

processing tax payments under the

EFTPS . . . need not pledge collateral,

unless they elect to participate in

Treasury’s investment program.’’ EFTPS

payments, including those that the

depositary is unable to complete, are not

required to be collateralized.

Regulatory Analysis

These regulations are not a significant

regulatory action as defined in

Executive Order 12866. Accordingly, a

regulatory assessment is not required. It

is hereby certified that this revision will

not have a significant economic impact

on a substantial number of small

entities. Therefore, a regulatory

flexibility analysis is not required. This

regulation will not impose significant

costs on small entities. It is further

expected that such costs associated with

electronic tax payments will be offset by

cost savings resulting from reductions in

the paperwork burden and the

availability of a user-friendly electronic

tax collection system.

List of Subjects in 31 CFR Part 203

Banks, Banking, Electronic Funds

Transfers, Taxes.

For the reasons set out in the

preamble, 31 CFR part 203 is revised to

read as follows:

PART 203—PAYMENT OF FEDERAL

TAXES AND THE TREASURY TAX AND

LOAN PROGRAM

Subpart A—General Information

Sec.

203.1 Scope.

203.2 Definitions.

203.3 Financial institution eligibility for

designation as a Treasury Tax and Loan

depositary.

203.4 Designation of financial institutions

as Treasury Tax and Loan depositaries.

203.5 Obligations of the depositary.

203.6 Compensation for services.

203.7 Termination of agreement or change

of election or option.

203.8 Application of part and procedural

instructions.

Subpart B—Electronic Federal Tax

Payments

203.9 Scope of the subpart.

203.10 Enrollment.

203.11 Electronic payment methods.

203.12 Future-day reporting and payment

mechanisms.

203.13 Same-day reporting and payment

mechanisms.

203.14 Electronic Federal Tax Payment

System interest assessments.

203.15 Prohibited debits through the

Automated Clearing House.

203.16 Appeal and dispute resolution.

Subpart C—Federal Tax Deposits.

203.17 Scope of the subpart.

203.18 Tax deposits using Federal Tax

Deposit coupons.

203.19 Note option.

203.20 Remittance option.

Subpart D—Investment Program and

Collateral Security Requirements for

Treasury Tax and Loan Depositaries

203.21 Scope of the subpart.

203.22 Sources of balances.

203.23 Note balance.

203.24 Collateral security requirements.

Authority: 12 U.S.C. 90, 265–266, 332, 391,

1452(d), 1464(k), 1767, 1789a, 2013, 2122,

and 3102; 26 U.S.C. 6302; 31 U.S.C. 321, 323

and 3301–3304.

Subpart A—General Information

§ 203.1 Scope.

The regulations in this part govern the

processing of Federal tax payments by

financial institutions and the Federal

Reserve Banks (FRB) using electronic

payment or paper methods; the

designation of Treasury Tax and Loan

(TT&L) depositaries; and the operation

of the Department of the Treasury’s

(Treasury) investment program.

§ 203.2 Definitions.

As used in this part:

(a) Advice of credit means the

Treasury form used in the Federal Tax
Federal Register / Vol. 63, No. 22 /Tuesday, February 3, 1998 /Rules and Regulations 5651

Deposit system that is supplied to

depositaries to summarize and report

Federal tax deposits. The current form

is Treasury Form 2284. Advice of credit

information also may be delivered

electronically.

(b) Automated Clearing House (ACH)

credit entry means a transaction

originated by a financial institution in

accordance with applicable ACH

formats and applicable laws,

regulations, and procedural

instructions.

(c) Automated Clearing House (ACH)

debit entry means a transaction

originated by a Treasury Financial

Agent (TFA), in accordance with

applicable ACH formats and applicable

laws, regulations, and instructions.

(d) Business day means any day on

which the FRB of the district is open.

(e) Direct Access transaction means

same-day Federal tax payment

information transmitted by a financial

institution directly to the Electronic Tax

Application at an FRB using the Fedline

Taxpayer Deposit Application.

(f) Direct investment means placement

of Treasury funds with a depositary and

a corresponding increase in a

depositary’s note balance.

(g) Electronic Federal Tax Payment

System (EFTPS) means the system

through which taxpayers remit Federal

tax payments electronically.

(h) Electronic Tax Application (ETA)

means a sub-system of EFTPS that

receives, processes, and transmits sameday Federal tax payment information for

taxpayers. ETA activity is comprised of

Fedwire value transfers, Fedwire nonvalue transactions, and Direct Access

transactions.

(i) Electronic Tax Application (ETA)

reference number means the unique

number assigned to each ETA

transaction by an FRB.

(j) Federal funds rate means the

Federal funds rate published weekly by

the Board of Governors of the Federal

Reserve System.

(k) Federal Reserve account means an

account with reserve or clearing

balances held by a financial institution

at an FRB.

(l) Federal Reserve Bank of the district

means the FRB that services the

geographical area in which the financial

institution is located, or such other FRB

that may be designated in an FRB

operating circular.

(m) Federal Tax Deposit (FTD) means

a tax deposit or payment made using an

FTD coupon.

(n) Federal Tax Deposit coupon (FTD

coupon) means a paper form supplied to

a taxpayer by the Treasury for use in the

FTD system to accompany deposits of

Federal taxes. The current paper form is

Form 8109.

(o) Federal Tax Deposit system (FTD

system) means the paper-based system

through which taxpayers remit Federal

tax payments by presenting an FTD

coupon and payment to a depositary or

an FRB. The depositary prepares an

advice of credit summarizing all FTDs.

(p) Federal taxes means those Federal

taxes or other payments specified by the

Secretary of the Treasury as eligible for

payment through the procedures

prescribed in this part.

(q) Fedwire means the funds transfer

system owned and operated by the

FRBs.

(r) Fedwire non-value transaction

means the same-day Federal tax

payment information transmitted by a

financial institution to an FRB using a

Fedwire type 1090 message to authorize

a payment.

(s) Fedwire value transfer means a

Federal tax payment made by a financial

institution using a Fedwire type 1000

message.

(t) Financial institution means any

bank, savings bank, savings and loan

association, credit union, or similar

institution.

(u) Fiscal Agent means the Federal

Reserve acting as agent for the Treasury.

(v) Input Message Accountability Data

(IMAD) means a unique number

assigned to each Fedwire transaction by

the financial institution sending the

transaction to an FRB.

(w) Note option means that program

available to a TT&L depositary under

which Treasury invests in obligations of

the depositary. The amount of such

investments will be evidenced by an

open-ended interest-bearing note

balance maintained at the FRB of the

district.

(x) Procedural instructions means the

procedures contained in the Treasury

Financial Manual, Volume IV (IV TFM),

other Treasury instructions issued

through the TFAs, and FRB operating

circulars issued consistent with this

part.

(y) Recognized insurance coverage

means the insurance provided by the

Federal Deposit Insurance Corporation,

the National Credit Union

Administration, and by insurance

organizations specifically qualified by

the Secretary.

(z) Remittance option means that

program available to a depositary that

processes FTD payments, under which

the amount of deposits credited by the

depositary to the TT&L account will be

withdrawn by the FRB for deposit to the

Treasury General Account on the day

that the FRB receives the advices of

credit supporting such deposits.

(aa) Same-day payment means the

following ETA payment options:

(1) Direct Access transaction;

(2) Fedwire non-value transaction;

and

(3) Fedwire value transfer.

(bb) Secretary means the Secretary of

the Treasury, or the Secretary’s delegate.

(cc) Special direct investment means

the placement of Treasury funds with a

depositary and a corresponding increase

in a depositary’s note balance, where

the investment specifically is identified

as a ‘‘special direct investment’’ and

may be secured by collateral retained in

the possession of the depositary

pursuant to the terms of

§ 203.24(c)(2)(i).

(dd) Tax due date means the day on

which a tax payment is due to Treasury,

as determined by statute and Internal

Revenue Service (IRS) regulations.

(ee) Transaction trace number means

an identifying number assigned by the

taxpayer’s financial institution to each

ACH credit transaction.

(ff) Treasury Financial Agent (TFA)

means a financial institution designated

as an agent of Treasury for processing

EFTPS enrollments, receiving EFTPS

tax payment information, and

originating ACH debit entries on behalf

of Treasury as authorized by the

taxpayer.

(gg) Treasury General Account (TGA)

means an account maintained in the

name of the United States Treasury at an

FRB.

(hh) Treasury Tax and Loan (TT&L)

account means the Treasury account

maintained by a depositary in which

funds are credited by the depositary

after receiving and collateralizing FTDs.

(ii) Treasury Tax and Loan depositary

(depositary) means a financial

institution designated as a depositary by

the FRB of the district for the purpose

of maintaining a TT&L account and/or

note balance.

(jj) Treasury Tax and Loan (TT&L)

Program means the program for

collecting Federal taxes and investing

the Government’s excess operating

funds.

(kk) Treasury Tax and Loan (TT&L)

rate of interest means the Federal funds

rate less twenty-five basis points (i.e., 1⁄4

of 1 percent).

§ 203.3 Financial institution eligibility for

designation as a Treasury Tax and Loan

depositary.

(a) To be designated as a TT&L

depositary, a financial institution shall

be insured as a national banking

association, state bank, savings bank,

savings and loan, building and loan,

homestead association, Federal home

loan bank, credit union, trust company,
5652 Federal Register / Vol. 63, No. 22 /Tuesday, February 3, 1998 /Rules and Regulations

or a U.S. branch of a foreign banking

corporation, the establishment of which

has been approved by the Comptroller

of the Currency.

(b) A financial institution shall

possess the authority to pledge

collateral to secure TT&L account

balances and/or a note balance.

(c) In order to be designated as a

TT&L depositary for the purposes of

processing tax deposits in the FTD

system, a financial institution shall

possess under its charter either general

or specific authority permitting the

maintenance of the TT&L account, the

balance of which is payable on demand

without previous notice of intended

withdrawal. In addition, note option

depositaries shall possess either general

or specific authority permitting the

maintenance of a note balance, which is

payable on demand without previous

notice of intended withdrawal.

§ 203.4 Designation of financial

institutions as Treasury Tax and Loan

depositaries.

(a) Parties to the agreement. To be

designated as a TT&L depositary, a

financial institution shall enter into a

depositary agreement with Treasury’s

fiscal agent, the FRB. By entering into

this agreement, the financial institution

agrees to be bound by this part, and

procedural instructions issued pursuant

to this part.

(b)(1) Application procedures. An

eligible financial institution seeking

designation as a depositary and,

thereby, the authority to maintain a

TT&L account and/or a note balance

shall file with the FRB, Financial

Management Service Form 458,

‘‘Financial Institution Agreement and

Application for Designation as a TT&L

Depositary,’’ and Financial Management

Service Form 459, ‘‘Resolution

Authorizing the Financial Institution

Agreement and Application for

Designation as a TT&L Depositary,’’

certified by its board of directors.

Financial Management Service Forms

458 and 459 are available upon request

from the FRB of the district.

(2) Depositaries processing tax

payments in the FTD system are

required to elect either the remittance or

the note option.

(c) Designation. Each financial

institution satisfying the eligibility

requirements and the application

procedures will receive from the FRB

notification of its specific designation as

a TT&L depositary. A financial

institution is not authorized to maintain

a TT&L account or note balance until it

has been designated as a TT&L

depositary by the FRB.

§ 203.5 Obligations of the depositary.

A depositary shall:

(a) Administer a note balance, if not

participating in the FTD System.

(b) Administer a TT&L account and, if

applicable, a note balance, if

participating in the FTD System.

(c) Comply with the requirements of

Section 202 of Executive Order 11246,

entitled ‘‘Equal Employment

Opportunity’’ (3 CFR, 1964–1965 Comp.

p. 339) as amended by Executive Orders

11375 and 12086 (3 CFR, 1966–1970

Comp., p. 684; 3 CFR, 1978 Comp. p.

230), and the regulations issued

thereunder at 41 CFR Chapter 60.

(d) Comply with the requirements of

Section 503 of the Rehabilitation Act of

1973, as amended, and the regulations

issued thereunder at 41 CFR part 60–

741, requiring Federal contractors to

take affirmative action to employ and

advance in employment qualified

individuals with disabilities.

(e) Comply with the requirements of

Section 503 of the Vietnam Era

Veterans’ Readjustment Assistance Act

of 1972, as amended, 38 U.S.C. 4212,

Executive Order 11701 (3 CFR 1971–

1975 Comp. p. 752), and the regulations

issued thereunder at 41 CFR parts 60–

250 and 61–250, requiring Federal

contractors to take affirmative action to

employ and advance in employment

qualified special disabled veterans and

Vietnam-era veterans.

§ 203.6 Compensation for services.

Except as provided in the procedural

instructions, Treasury will not

compensate financial institutions for

servicing and maintaining the TT&L

account, or for processing tax payments

through the EFTPS or the FTD system.

§ 203.7 Termination of agreement or

change of election or option.

(a) Termination by Treasury. The

Secretary may terminate the agreement

of a depositary at any time upon notice

to that effect to that depositary, effective

on the date set forth in the notice.

(b) Termination or change of election

or option by the depositary. A

depositary may terminate its depositary

agreement, or change its option or

election, consistent with this part and

the procedural instructions, by

submitting notice to that effect in

writing to the FRB effective at a

prospective date set forth in the notice.

§ 203.8 Application of part and procedural

instructions.

The terms of this part and procedural

instructions issued pursuant to this part

shall be binding on financial

institutions that process tax payments

and/or maintain a note balance under

this part. By accepting or originating

Federal tax payments, the financial

institution agrees to be bound by this

part and by procedural instructions

issued pursuant to this part.

Subpart B—Electronic Federal Tax

Payments

§ 203.9 Scope of the subpart.

This subpart prescribes the rules by

which financial institutions shall

process Federal tax payment

transactions electronically. A financial

institution does not need to be

designated as a TT&L depositary in

order to process electronic Federal tax

payments. In addition, a financial

institution that does process electronic

Federal tax payments under this subpart

does not thereby become a Federal

Government depositary and shall not

advertise itself as one because of that

fact.

§ 203.10 Enrollment.

(a) General. Taxpayers shall complete

an enrollment process with the TFA

prior to making their first electronic

Federal tax payment.

(b) Enrollment forms. The TFA shall

provide financial institutions and

taxpayers with enrollment forms upon

request. The taxpayer is responsible for

completing the enrollment form,

obtaining the verifications required on

the form, and returning the enrollment

form to the TFA.

(c) Verification. If the taxpayer elects

the ACH debit entry method of paying

taxes, an authorized representative of

the financial institution shall verify the

accuracy of the financial institution

routing number, taxpayer account

number, and taxpayer account type at

the request of the taxpayer.

§ 203.11 Electronic payment methods.

(a) General. Electronic payment

methods for Federal tax payments

available under this subpart include

ACH debit entries, ACH credit entries,

and same-day payments. Any financial

institution that is capable of originating

and/or receiving transactions for these

payment methods, by itself or through a

correspondent financial institution, may

do so on behalf of a taxpayer.

(b) Conditions to making an electronic

payment. Nothing contained in this part

shall affect the authority of financial

institutions to enter into contracts with

their customers regarding the terms and

conditions for processing payments,

provided that such terms and conditions

are not inconsistent with this subpart

and applicable law governing the

particular transaction type.

(c) Payment of interest for time value

of funds held. Treasury will not pay
Federal Register / Vol. 63, No. 22 /Tuesday, February 3, 1998 /Rules and Regulations 5653

interest on any payments erroneously

paid to Treasury and subsequently

refunded to the financial institution.

§ 203.12 Future-day reporting and

payment mechanisms.

(a) General. A financial institution

may receive an ACH debit entry,

originated by the TFA at the direction

of the taxpayer; or, a financial

institution may originate an ACH credit

entry, at the direction of the taxpayer.

Taxpayers will be credited for the actual

amount received by Treasury.

(b) ACH debit. A financial institution

receiving an ACH debit entry originated

by the TFA shall, as applicable:

(1) Timely verify the account number

and account type contained in an ACH

prenotification entry;

(2) Timely and properly return a

prenotification entry that contains an

invalid account number or account type,

or otherwise is erroneous or

unprocessable;

(3) Timely and accurately notify the

TFA of incorrect information on entries

received, using a Notification of Change

entry; and

(4) Timely and accurately return an

entry not posted, including but not

limited to, a return or a contested

dishonored return for acceptable return

reasons, as set forth in the procedural

instructions.

(c) ACH credit. A financial institution

originating an ACH credit entry at the

direction of a taxpayer shall:

(1) At the request of the taxpayer,

originate either an ACH prenotification

containing the taxpayer’s identification

number or a zero dollar ACH entry with

the appropriate addenda record.

Additional format information is

contained in the procedural

instructions;

(2) Format the ACH credit entry in the

ACH format approved by Treasury for

Federal tax payments;

(3) Originate an ACH credit entry by

the appropriate deadline, as specified by

the FRB or Treasury, whichever is

earlier, in order to meet the tax due date

specified by the taxpayer; and

(4) Provide the taxpayer, upon

request, a transaction trace number, or

some other method to trace the tax

payment.

(d) ACH credit reversals. Reversals

may be initiated for a duplicate or

erroneous file or entry. No advance

approval from, or notification to, the IRS

is required when originating an ACH

credit reversal. Documentation of

reversals shall be made available as set

forth in the procedural instructions.

§ 203.13 Same-day reporting and payment

mechanisms.

(a) General. A financial institution or

its authorized correspondent may

initiate same-day reporting and payment

transactions on behalf of taxpayers. A

same-day payment must be received by

the FRB of the district by the deadline

established by the Treasury in the

procedural instructions. Taxpayers will

be credited for the actual amount

received by Treasury.

(b) Fedwire value transfer. To initiate

a Fedwire value tax payment, the

financial institution shall be a Fedwire

participant and shall comply with the

FRB’s Fedwire format for tax payments.

The taxpayer’s financial institution shall

provide the taxpayer, upon request, the

IMAD and the ETA reference numbers

for a Fedwire value transfer. The

financial institution may obtain the ETA

reference number for Fedwire value

transfers from its FRB by supplying the

related IMAD number. Fedwire value

transfers settle immediately to the TGA

and thus are not credited to a

depositary’s note balance.

(c) Fedwire non-value transaction. By

initiating a Fedwire non-value

transaction, a financial institution

authorizes the FRB of the district to

debit its Federal Reserve account or, for

a TT&L depositary, to debit the Federal

Reserve account of the depositary or its

designated correspondent financial

institution, for the amount of the tax

payment specified in the transaction. To

initiate a Fedwire non-value transaction,

the financial institution shall be a

Fedwire participant and shall comply

with the FRB’s Fedwire format for tax

payments. The taxpayer’s financial

institution shall provide the taxpayer,

upon request, the IMAD and ETA

reference numbers for the Fedwire nonvalue transaction. The financial

institution may obtain the ETA

reference number for Fedwire non-value

transactions from its FRB by supplying

the related IMAD number.

(1) For a note option depositary using

a Fedwire non-value transaction, the tax

payment amount will be credited to the

depositary’s note balance on the day of

the transaction.

(2) For a remittance option depositary

using a Fedwire non-value transaction,

the tax payment amount will be debited

from the Federal Reserve account of the

depositary or the depositary’s

designated correspondent and credited

to the TGA on the day of the

transaction.

(3) For a non-TT&L depositary

financial institution using a Fedwire

non-value transaction, the tax payment

amount will be debited from the

financial institution’s Federal Reserve

account and credited to the TGA on the

day of the transaction.

(d) Direct Access Transaction. By

initiating a Direct Access transaction, a

financial institution authorizes the FRB

of the district to debit its Federal

Reserve account or, for a TT&L

depositary, to debit the Federal Reserve

account of the depositary or its

designated correspondent financial

institution for the amount of the tax

payment specified in the transaction.

The taxpayer’s financial institution shall

provide the taxpayer, upon request, the

ETA reference number for the Direct

Access transaction.

(1) For a note option depositary using

a Direct Access transaction, the tax

payment amount will be credited to the

depositary’s note balance on the day of

the transaction.

(2) For a remittance option depositary

or a non-TT&L depositary financial

institution using a Direct Access

transaction, the tax payment amount

will be debited from the Federal Reserve

account of the financial institution or its

designated correspondent financial

institution, and credited to the TGA on

the day of the transaction.

(e) Cancellations and reversals. In

addition to cancellations due to

insufficient funds in the financial

institution’s Federal Reserve account,

the FRB may reverse a same-day

transaction:

(1) If the transaction:

(i) Is originated by a financial

institution after the deadline established

by the Treasury in the procedural

instructions;

(ii) Has an unenrolled taxpayer

identification number; or

(iii) Does not meet the edit and format

requirements set forth in the procedural

instructions; or,

(2) At the direction of the IRS, for the

following reasons:

(i) Incorrect taxpayer name;

(ii) Overpayment; or

(iii) Unidentified payment; or,

(3) At the request of the financial

institution that sent the same-day

transaction, if the request is made prior

to the deadline established by Treasury

in the procedural instructions on the

day the payment was made.

(f) Other than as stated in paragraph

(e) of this section, Treasury is not

obligated to reverse all or any part of a

payment.

§ 203.14 Electronic Federal Tax Payment

System interest assessments.

(a) Circumstances subject to interest

assessments. Treasury may assess

interest on a financial institution in

instances where a taxpayer that failed to

meet a tax due date proves to the IRS
5654 Federal Register / Vol. 63, No. 22 /Tuesday, February 3, 1998 /Rules and Regulations

that the delivery of tax payment

instructions to the financial institution

was timely and that the taxpayer

satisfied the conditions imposed by the

financial institution pursuant to

§ 203.11(b). Treasury also may assess

interest where a financial institution

failed to respond to an ACH

prenotification entry on an ACH debit as

required in § 203.12(b) or failed to

originate an ACH prenotification or zero

dollar entry on an ACH credit as

described in § 203.12(c) which then

resulted in a late payment.

(b) Calculation of interest assessment.

Any interest assessed under this section

will be at the TT&L rate. The interest

will be assessed from the day the

taxpayer specified that its payment

should settle to the Treasury until the

receipt of the payment by Treasury,

subject to the following limitations: For

ACH debit transactions, interest will be

limited to no more than seven calendar

days; for ACH credit and same-day

transactions, interest will be limited to

no more than 45 calendar days. The

limitation of liability in this paragraph

does not apply to any interest

assessment in which there is an

indication of fraud, the presentation of

a false claim, or misrepresentation or

embezzlement on the part of the

financial institution or any employee or

agent of the financial institution.

(c) Authorization to assess interest. A

financial institution that processes

Federal tax payments made by

electronic payment methods under this

subpart is deemed to authorize the FRB

to debit its Federal Reserve account or

the account of its designated

correspondent financial institution for

any interest assessed under this section.

Upon the direction of Treasury, the FRB

shall debit the Federal Reserve account

of the financial institution or the

account of its designated correspondent

financial institution for the amount of

the assessed interest.

(d)(1) Circumstances not subject to

the assessment of interest. (1) Treasury

will not assess interest on a taxpayer’s

financial institution if a taxpayer fails to

meet a tax due date because the

taxpayer has not satisfied conditions

imposed by the financial institution

pursuant to § 203.11(b) and the financial

institution has not contributed to the

delay. The burden is on the financial

institution to establish, pursuant to the

procedures in § 203.16, that the taxpayer

has not satisfied the conditions and that

the financial institution has not

contributed to the delay.

(2) Treasury will not assess interest on

a financial institution if the delay

causing the interest assessment is due to

the FRB or the TFA and the financial

institution did not contribute to the

delay. The burden is on the financial

institution to establish, pursuant to the

procedures in § 203.16, that it did not

cause or contribute to the delay.

§ 203.15 Prohibited debits through the

Automated Clearing House.

(a) General. The Treasury has

instituted operational safeguards to

scrutinize all entries that remove funds

from the TGA. In the event funds are

removed from the TGA without

authority, this section sets forth the

liability of financial institutions

originating such entries. Accordingly, a

financial institution shall not originate

an ACH transaction to debit the TGA

without the prior written permission of

Treasury. Unauthorized entries under

this section do not include reversal

entries of previously initiated ACH

credits authorized in § 203.12(d).

(b) Liability. A financial institution

that originates an unauthorized ACH

entry that debits the TGA shall be liable

to Treasury for the amount of the

transaction and shall be liable for

interest charges as specified in

paragraph (d) of this section.

(c) Authorization to recover principal

and assess interest charge. By initiating

unauthorized debits to the TGA through

the ACH, a financial institution is

deemed to authorize the FRB to debit its

Federal Reserve account or the account

of its designated correspondent

financial institution for any principal

and, if applicable, an interest charge

assessed by Treasury under this section.

(d) Interest charge calculation. The

interest charge shall be at a rate equal

to the Federal funds rate plus two

percent. The interest charge shall be

assessed for each calendar day from the

day the TGA was debited to the day the

TGA is recredited with the full amount

of principal due.

§ 203.16 Appeal and dispute resolution.

(a) Contest. A financial institution

may contest any interest assessed under

§ 203.14, any principal or interest

assessed under § 203.15, or any late fees

assessed under § 203.20. The financial

institution shall submit information

supporting its position and the relief

sought. The information must be

received, in writing, by the Treasury

officer or fiscal agent identified in the

procedural instructions, no later than 90

calendar days after the date the FRB

debits the reserve account of the

financial institution under §§ 203.14,

203.15, or 203.20. The Treasury officer

or fiscal agent will: uphold the

assessment, or reverse the assessment,

or modify the assessment, or mandate

other action.

(b) Appeal. The financial institution

may appeal the decision to Treasury as

set forth in the procedural instructions.

No further administrative review of the

Treasury’s decision is available under

this Part.

(c) Recoveries. In the event of an over

or under recovery of either interest,

principal, or late fees, Treasury will

instruct the FRB to credit or debit the

Federal Reserve account of the financial

institution or its designated

correspondent financial institution, as

appropriate.

Subpart C—Federal Tax Deposits

§ 203.17 Scope of the subpart.

This subpart applies to all

depositaries that accept FTD coupons

and governs the acceptance and

processing of those coupons.

§ 203.18 Tax deposits using Federal Tax

Deposit coupons.

(a) FTD coupons. A depositary that

accepts FTD coupons, through any of its

offices that accept demand and/or

savings deposits, shall:

(1) Accept from a taxpayer, cash, a

postal money order drawn to the order

of the depositary, or a check or draft

drawn on and to the order of the

depositary, covering an amount to be

deposited as Federal taxes when

accompanied by an FTD coupon on

which the amount of the deposit has

been properly entered in the space

provided. A depositary may accept, at

its discretion, a check drawn on another

financial institution, but it does so at its

option and absorbs for its own account

any float and other costs involved.

(2) Issue a counter receipt when

requested to do so by a taxpayer that

makes an FTD deposit over the counter.

(3) Place a stamp impression on the

face of each FTD coupon in the space

provided. The stamp shall reflect the

date on which the tax deposit was

received and the name and location of

the depositary. The timeliness of the tax

payment will be determined by

reference to the date stamped by the

depositary on the FTD coupon.

(4) Credit, on the date of receipt, all

FTD deposits to the TT&L account and

administer that account pursuant to the

provisions of this part.

(5) Forward, each day, to the IRS

Center servicing the geographical area in

which the depositary is located, the FTD

coupons for all FTD deposits received

that day. The FTD coupons shall be

accompanied by an advice of credit

reflecting the total amount of all FTD

coupons.

(6) Establish an adequate record of all

FTD deposits prior to transmittal to the
Federal Register / Vol. 63, No. 22 /Tuesday, February 3, 1998 /Rules and Regulations 5655

IRS Center so that the depositary will be

able to identify deposits in the event tax

deposit coupons are lost in shipment.

For tracking purposes, a record shall be

made of each FTD deposit showing, at

a minimum, the date of deposit, the

taxpayer identification number, and the

amount of the deposit. The depositary’s

copy of the advice of credit may be used

to provide the necessary information if

individual deposits are listed separately,

showing date, taxpayer identification

number, and amount.

(7) Deliver its advices of credit to the

FRB by the cutoff hour designated by

the FRB for receipt of advices.

(8) Not accept compensation from

taxpayers for accepting FTDs and

handling them as required by this

section.

(b) FTD deposits with Federal Reserve

Banks. An FRB shall:

(1) Accept an FTD directly from a

taxpayer when such tax deposit is:

(i) Mailed or delivered by a taxpayer;

and

(ii) Provided in the form of cash or a

check or postal money order payable to

the order of that FRB; and,

(iii) Accompanied by an FTD coupon

on which the amount of the tax deposit

has been properly entered in the space

provided.

(2) Issue a counter receipt, when

requested to do so by a taxpayer that

makes an FTD over the counter; and,

(3) Place, in the space provided on the

face of each FTD coupon accepted

directly from a taxpayer, a stamp

impression reflecting the name of the

FRB and the date on which the tax

deposit will be credited to the TGA.

Timeliness of the Federal tax payment

will be determined by this date.

However, if a deposit is mailed to an

FRB, it shall be subject to the ‘‘Timely

mailing treated as timely filing and

paying’’ clause of the Internal Revenue

Code, 26 U.S.C. 7502; and,

(4) Credit the TGA with the amount

of the tax payment;

(i) On the date the payment is

received, if payment is made in cash; or,

(ii) On the date the proceeds of the tax

payment are collected, if payment is

made by postal money order or check.

§ 203.19 Note option.

(a) Late delivery of advices of credit.

If an advice of credit does not arrive at

the FRB before the designated cutoff

hour for receipt of such advices, the

FRB will post the funds to the note

balance as of the next business day after

the date on the advice of credit. This is

the date on which funds will begin to

earn interest for Treasury.

(b) Transfer of funds from TT&L

account to the note balance. For a

depositary selecting the note option,

funds equivalent to the amount of

deposits credited by a depositary to the

TT&L account shall be withdrawn by

the depositary and credited to the note

balance on the business day following

the receipt of the tax payment.

§ 203.20 Remittance option.

(a) FTD late fee. If an advice of credit

does not arrive at the FRB before the

designated cutoff hour for receipt of

such advices, an FTD late fee in the

form of interest at the TT&L rate will be

assessed for each day’s delay in receipt

of such advice. Upon the direction of

Treasury, the FRB shall debit the

Federal Reserve account of the financial

institution or the account of its

designated correspondent financial

institution for the amount of the late fee.

(b) Withdrawals. For a depositary

selecting the Remittance Option, the

amount of deposits credited by a

depositary to the TT&L account will be

withdrawn upon receipt by the FRB of

the advices of credit. The FRB will

charge the depositary’s Federal Reserve

account or the account of the

depositary’s designated correspondent

financial institution.

Subpart D—Investment Program and

Collateral Security Requirements for

Treasury Tax and Loan Depositaries

§ 203.21 Scope of the subpart.

This subpart provides rules for TT&L

depositaries on crediting note balances

under the various payment methods;

debiting note balances; and pledging

collateral security.

§ 203.22 Sources of balances.

Depositaries electing to participate in

the investment program can receive

Treasury’s investments in obligations of

the depositary from the following

sources:

(a) FTDs that have been credited to

the TT&L account pursuant to subpart C

of this part;

(b) EFTPS ACH credit and debit

transactions, Fedwire non-value

transactions, and Direct Access

transactions pursuant to subpart B of

this part; and

(c) Direct investments and special

direct investments pursuant to subpart

D of this part.

§ 203.23 Note balance.

(a) Additions. Treasury will invest

funds in obligations of depositaries

selecting the note option. Such

obligations shall be in the form of openended, interest-bearing notes; and

additions and reductions will be

reflected on the books of the FRB of the

district.

(1) FTD system. A depositary

processing tax deposits using the FTD

system and electing the note option

shall debit the TT&L account and credit

its note balance as stated in § 203.19(b).

(2) EFTPS.

(i) ACH debit and ACH credit. A note

option depositary processing EFTPS

ACH debit entries and/or ACH credit

entries shall credit its note balance for

the value of the transactions on the date

that an exchange of funds is reflected on

the books of the Federal Reserve Bank

of the district. Financial institutions

may refer to the procedural instructions

for information on how to ascertain the

amount of the credit to the note balance.

(ii) Fedwire non-value and Direct

Access. A note option depositary

processing Fedwire non-value and/or

Direct Access transactions pursuant to

subpart B of this part shall credit its

note balance and debit its customer’s

account for the value of the transactions

on the date ETA receives and processes

the transactions.

(b) Other additions. Other funds from

Treasury may be offered from time to

time to certain note option depositaries

through direct investments, special

direct investments, or other investment

programs.

(c) Note balance withdrawals. The

amount of the note balance shall be

payable on demand without prior

notice. Calls for payment on the note

will be by direction of the Secretary

through the FRBs. On behalf of

Treasury, the FRB shall charge the

reserve account of the depositary or the

depositary’s designated correspondent

on the day specified in the call for

payment.

(d) Interest. A note shall bear interest

at the TT&L rate. Such interest is

payable by a charge to the Federal

Reserve account of the depositary or its

designated correspondent in the manner

prescribed in the procedural

instructions.

(e) Maximum balance.

(1) Note option depositaries. A

depositary selecting the note option

shall establish a maximum balance for

its note by providing notice to that effect

in writing to the FRB of the district. The

maximum balance is the amount of

funds for which a note option

depositary is willing to provide

collateral in accordance with

§ 203.24(c)(1). The depositary shall

provide the advance notice required in

the procedural instructions before

reducing the established maximum

balance unless it is a reduction resulting

from a collateral re-evaluation as

determined by the depositary’s FRB.

That portion of any advice of credit or

EFTPS tax payment, which, when
5656 Federal Register / Vol. 63, No. 22 /Tuesday, February 3, 1998 /Rules and Regulations

posted at the FRB, would cause the note

balance to exceed the maximum balance

amount specified by the depositary, will

be withdrawn by the FRB that day.

(2) Direct investment depositaries. A

note option depositary that participates

in direct investment shall set a

maximum balance for direct investment

purposes which is higher than its peak

balance normally generated by the

depositary’s advices of credit and

EFTPS tax payment inflow. The direct

investment note option depositary shall

provide the advance notice required in

the procedural instructions before

reducing the established maximum

balance.

(3) Special direct investment

depositaries. Special direct investments,

while credited to the note balance, shall

not be considered in setting the amount

of the maximum balance or in

determining the amounts to be

withdrawn where a depositary’s

maximum balance is exceeded.

§ 203.24 Collateral security requirements.

Financial institutions that process

EFTPS tax payments, but are not TT&L

depositaries, have no collateral

requirements under this part. Financial

institutions that are note option

depositaries or remittance option

depositaries have collateral security

requirements, as follows:

(a) Note option.

(1) FTD deposits and EFTPS tax

payments. A depositary shall pledge

collateral security in accordance with

the requirements of paragraphs (c)(1),

(d), and (e) of this section in an amount

that is sufficient to cover the preestablished maximum balance for the

note, and, if applicable, the closing

balance in the TT&L account which

exceeds recognized insurance coverage.

Depositaries shall pledge collateral for

the full amount of the maximum

balance at the time the maximum

balance is established. If the depositary

maintains a TT&L account, the

depositary shall pledge collateral

security before crediting deposits to the

TT&L account.

(2) Direct investments. A note option

depositary that participates in direct

investment is not required to pledge

collateral continuously in the amount of

the pre-established maximum balance.

However, each note option depositary

participating in direct investment shall

pledge, no later than the day the direct

investment is placed, the additional

collateral in accordance with paragraphs

(c)(1), (d), and (e) of this section to cover

the total note balance including those

funds received through direct

investment. If a direct investment

depositary has a history of frequent

collateral deficiencies, it shall fully

collateralize its maximum balance at all

times.

(3) Special direct investments. Before

special direct investments are credited

to a depositary’s note balance, the note

option depositary shall pledge collateral

security, in accordance with the

requirements of paragraphs (c)(2) and (e)

of this section, to cover 100 percent of

the amount of the special direct

investments to be received.

(b) Remittance option. Prior to

crediting FTD deposits to the TT&L

account, a remittance option depositary

shall pledge collateral security in

accordance with the requirements of

paragraph (c)(1), (d), and (e) of this

section in an amount which is sufficient

to cover the balance in the TT&L

account at the close of business each

day, less recognized insurance coverage.

(c) Deposits of securities.

(1) Collateral security required under

paragraphs (a)(1), (2), and (b) of this

section shall be deposited with the FRB

of the district, or with a custodian or

custodians within the United States

designated by the FRB, under terms and

conditions prescribed by the FRB.

(2)(i) Collateral security required

under paragraph (a)(3) of this section

shall be pledged under a written

security agreement on a form provided

by the FRB of the district. The collateral

security pledged to satisfy the

requirements of paragraph (a)(3) of this

section may remain in the pledging

depositary’s possession and the fact that

it has been pledged shall be evidenced

by advices of custody to be incorporated

by reference in the written security

agreement. The written security

agreement and all advices of custody

covering collateral security pledged

under that agreement shall be provided

by the depositary to the FRB of the

district. Collateral security pledged

under the agreement shall not be

substituted for or released without the

advance approval of the FRB of the

district, and any collateral security

subject to the security agreement shall

remain so subject until an approved

substitution is made. No substitution or

release shall be approved until an

advice of custody containing the

description required by the written

security agreement is received by the

FRB of the district.

(ii) Treasury’s security interest in

collateral security pledged by a

depositary in accordance with

paragraph (c)(2)(i) of this section to

secure special direct investments is

perfected without Treasury taking

possession of the collateral security for

a period not to exceed 21 calendar days

from the day of the depositary’s receipt

of the special direct investment.

(d) Acceptable securities. Unless

otherwise specified by the Secretary,

collateral security pledged under this

section may be transferable securities,

owned by the depositary free and clear

of all liens, charges, or claims, of any of

the classes listed in the procedural

instructions. Collateral values will be

assigned by the FRB of the district.

(e) Assignment of securities. A TT&L

depositary that pledges acceptable

securities which are not negotiable

without its endorsement or assignment

may furnish, in lieu of placing its

unqualified endorsement on each

security, an appropriate resolution and

irrevocable power of attorney

authorizing the FRB to assign the

securities. The resolution and power of

attorney shall conform to such terms

and conditions as the FRB shall

prescribe.

(f) Effecting payments of principal

and interest on securities pledged as

collateral.

(1) General. If the depositary fails to

pay, when due, the whole or any part

of the funds received by it for credit to

the TT&L account, and/or if applicable,

its note balance; or otherwise violates or

fails to perform any of the terms of this

part, or fails to pay when due amounts

owed to the United States or the United

States Treasury; or if the depositary is

closed for business by regulatory action

or by proper corporate action, or in the

event that a receiver, conservator,

liquidator or any other officer is

appointed; then the Treasury, without

notice or demand, may sell, or

otherwise collect the proceeds of all or

part of the collateral, including

additions and substitutions; and apply

the proceeds, to satisfy any claims of the

United States against the depositary. All

principal and interest payments on any

security pledged to protect the note

balance (if applicable) and/or the TT&L

account (if applicable), due as of the

date of the insolvency or closure, or

thereafter becoming due, shall be held

separate and apart from any other assets

and shall constitute a part of the

pledged security available to satisfy any

claim of the United States.

(2) Payment procedures.

(i) Subject to the waiver in paragraph

(f)(2)(iii) of this section, each depositary

(including, with respect to such

depositary, an assignee for the benefit of

creditors, a trustee in bankruptcy, or a

receiver in equity) shall immediately

remit each payment of principal and/or

interest received by it with respect to

collateral pledged pursuant to this

section to the FRB of the district, as

fiscal agent of the United States, and in
Federal Register / Vol. 63, No. 22 /Tuesday, February 3, 1998 /Rules and Regulations 5657

any event shall so remit no later than 10

days after receipt of such a payment.

(ii) Subject to the waiver in paragraph

(f)(2)(iii) of this section, each obligor on

a security pledged by a depositary

pursuant to this section, upon

notification that the Treasury is entitled

to any payment associated with that

pledged security, shall make each

payment of principal and/or interest

due with respect to such security

directly to the FRB of the district, as

fiscal agent of the United States.

(iii) The requirements of paragraphs

(f)(2)(i) and (ii) of this section are hereby

waived for only so long as a pledging

depositary avoids both termination from

the program under § 203.7; and also,

those circumstances identified in

paragraph (f)(1) which may lead to the

collection of the proceeds of collateral

or the waiver is otherwise terminated by

Treasury.

Dated: January 27, 1998.

Richard L. Gregg,

Acting Commissioner.

[FR Doc. 98–2494 Filed 2–2–98; 8:45 am]

BILLING CODE 4810–35–P