45778 Federal Register / Vol. 62, No. 168 / Friday, August 29, 1997 / Proposed Rules

elsewhere in today’s Federal Register

for a detailed description of the State

Plan.

DATES: Comments on this proposed rule

must be postmarked by September 29,

1997. If no adverse comments are

received, then the direct final rule is

effective on October 28, 1997.

ADDRESSES: Comments should be

mailed to Thomas H. Diggs, Chief, Air

Planning Section (6PD–L), EPA Region

6, 1445 Ross Avenue, Dallas, Texas

75202–2733. Copies of the State’s plan

and other information relevant to this

action are available for inspection

during normal hours at the following

locations:

Environmental Protection Agency,

Region 6, Air Planning Section (6PD–

L), 1445 Ross Avenue, Suite 700,

Dallas, Texas 75202–2733.

Louisiana Department of Environmental

Quality, Air Quality Program, 7290

Bluebonnet Blvd., Baton Rouge,

Louisiana 70810.

Anyone wishing to review this plan at

the Region 6 EPA office is asked to

contact the person below to schedule an

appointment 24 hours in advance.

FOR FURTHER INFORMATION CONTACT: Lt.

Mick Cote, Air Planning Section (6PD–

L), EPA Region 6, telephone (214) 665–

7219.

SUPPLEMENTARY INFORMATION: See the

information provided in the Direct Final

notice which is located in the Rules

Section of this Federal Register.

List of Subjects in 40 CFR Part 62

Environmental protection,

Administrative practice and procedure,

Air pollution control, Intergovernmental

relations, Paper and paper products

industry, Reporting and recordkeeping

requirements, Sulfuric acid plants,

Sulfuric oxides.

Authority: 42 U.S.C. 7401–7671q.

Dated: August 11, 1997.

Jerry Clifford,

Acting Regional Administrator.

[FR Doc. 97–21816 Filed 8–28–97; 8:45 am]

BILLING CODE 6560–50–P

LEGAL SERVICES CORPORATION

45 CFR Part 1630

Cost standards and procedures

AGENCY: Legal Services Corporation.

ACTION: Proposed rule.

SUMMARY: This rule proposes substantial

revisions to the Legal Services

Corporation’s rule concerning the

Corporation’s cost standards and

procedures. The proposed revisions are

intended to conform the rule to

applicable provisions of the Inspector

General Act, the Corporation’s

appropriation’s act and relevant OMB

Circulars.

DATES: Comments should be received on

or before October 29, 1997.

ADDRESSES: Comments should be

submitted to the Office of the General

Counsel, Legal Services Corporation,

750 First St. NE., 11th Floor,

Washington, DC 20002–4250.

FOR FURTHER INFORMATION CONTACT:

Office of the General Counsel, (202)

336–8817.

SUPPLEMENTARY INFORMATION: This rule

proposes substantial revisions to the

Legal Services Corporation’s (‘‘LSC’’ or

‘‘Corporation’’) rule on cost standards

and procedures to conform the rule to

applicable provisions of Sec. 509 of

Public Law 104–134; the Inspector

General (‘‘IG’’) Act, 5 U.S.C. App. 3, as

amended; the Audit Guide for LSC

Recipients and Auditors (‘‘Audit

Guide’’); OMB Circular A–50, Audit

Followup (September 29, 1982); and

OMB Circular A–133, Audits of

Institutions of Higher Education and

Other Non-Profit Institutions (June 24,

1997) (this circular is applicable to LSC

recipients through Section I–2 of the

Audit Guide). In addition, the rule

borrows from other relevant OMB

circulars as appropriate; see OMB

Circular A–110, Uniform Administrative

Requirements for Grants and

Agreements with Institutions of Higher

Education, Hospitals, and Other Nonprofit Organizations (November 19,

1993); OMB Circular A–122, Cost

Principles for Nonprofit Organizations

(May 8, 1997). The Corporation’s

Operations and Regulations Committee

(‘‘Committee’’) of the LSC Board of

Directors (‘‘Board’’) held public hearings

on a draft proposed rule in Los Angeles,

California, on July 13, 1997 and, after

making revisions to the draft, adopted a

proposed rule for publication in the

Federal Register for public notice and

comment.

Generally, this rule sets out proposed

uniform standards for determining the

allowability of costs and provides a

proposed process for resolving

questioned costs. A section-by-section

analysis is provided below.

Section 1630.1 Purpose

The purpose of this proposed rule is

to provide uniform standards for

determining the allowability of costs

and to provide a process for the

resolution of questioned costs. This rule

proposes deleting language in the

current rule which explains that the

Corporation has considered the

standardized policies developed under

Federal experience and has adopted or

adapted many Federal policies as

appropriate for the legal services

system. Such language is better placed

in the rule’s preamble.

Section 1630.2 Definitions

Paragraph (a) defines allowed cost as

a cost that is determined in a

management decision to be eligible for

payment with LSC funds.

Paragraph (b) defines corrective action

as action taken by a recipient that

corrects deficiencies or makes

improvements. It also includes a

demonstration by the recipient that the

audit or other findings do not warrant

corrective action.

Paragraph (c) defines derivative

income. This definition replaces the

current § 1630.4(e) which defines

program income, a term used within the

Federal government for derivative

income. Derivative income is used in

this rule instead of program income

because it is more familiar to the legal

services community. Even though the

current rule defines program income,

the term is not used anywhere in the

rule. This proposed rule devotes a

section to derivative income, see

§ 1630.12.

Derivative income is defined as

income earned from LSC-funded

activities during the term of an LSC

grant or contract. It would include

interest earned on an LSC grant, fees for

services or income for sales or rentals of

real or personal property.

Paragraph (d) defines disallowed cost

as a cost that should not be charged to

LSC funds. It does not include reference

to derivative income as does the current

definition in § 1630.2(c). Instead, the

rule addresses the recovery of derivative

income in §§ 1630.7(b) and 1630.8.

Paragraph (e) defines final action as

the completion of all corrective actions

called for in a management decision.

When no corrective action is required

by Corporation management, the

management decision is the final action.

This term is not found in the current

rule.

Paragraph (f) defines management

decision as a written response by

management to findings and

recommendations in an audit or other

report and a recipient’s response to such

findings and recommendations. A

management decision includes any

corrective actions necessary to address

any findings and recommendations.

This term is not found in the current

rule.

Paragraph (g) defines questioned cost

as a cost charged to LSC funds that is
Federal Register / Vol. 62, No. 168 / Friday, August 29, 1997 / Proposed Rules 45779

questioned in a audit or other finding

because (1) there may have been a

violation of applicable law, (2) the costs

are unsupported by adequate

documentation, or (3) the costs appear

to be unnecessary or unreasonable. The

proposed definition expands the current

definition to incorporate current law,

which contemplates that, in addition to

Corporation management, the Office of

Inspector General (‘‘OIG’’), the General

Accounting Office (‘‘GAO’’), or a duly

authorized independent auditor or audit

organization may question a cost.

Paragraph (h) defines recipient for the

purposes of this part. No change has

been made from the current definition.

Section 1630.3 Burden of Proof

This section provides that the burden

of proof is on the recipient. A statement

in the current rule that the recipient has

the burden of showing that funds

expended are not subject to a restriction

is deleted in this rule as redundant and

unnecessary.

Section 1630.4 Standards Governing

Allowability of Costs Under Corporation

Grants or Contracts

Paragraph (a) of this section sets out

the nine standards that determine

whether an expenditure will be allowed

under a recipient’s grant or contract.

The standards are generally the same as

those in the current rule. However,

several changes are proposed. First, the

proposed rule modifies subparagraph

(a)(1) of the current rule to permit, in

limited circumstances, costs incurred

immediately prior to or immediately

after the term of the grant, provided the

costs are necessary to the performance

of the grant and the Corporation has

approved them pursuant to

§ 1630.5(b)(1) of the proposed rule.

These costs are not allowed under the

current rule. Allowing such costs is

consistent with Federal practice and the

Corporation’s new competitive grant

process and will enable new recipients

to incur necessary start-up costs

immediately prior to the onset of the

grant term and will permit current

recipients who are terminating their

relationship with LSC to incur

necessary close-out costs that occur

immediately after the conclusion of the

grant. Second, subparagraph (a)(2) of the

current rule has been modified and is

based on OMB Circular A–122. Third,

reference to the Audit Guide has been

deleted in subparagraph (a)(4), because

the latter does not set forth any rules or

guidelines governing the allowability of

costs. Fourth, subparagraph (a)(6) has

added the words ‘‘over time’’ to the

current language to clarify that it

addresses consistency over time, as

opposed to subparagraph (a)(5), which

addresses consistency among funding

sources. Finally, subparagraph (a)(9) has

added language to require recipients to

provide access to business records to the

OIG, the GAO, and other federally

funded auditors as required by section

509(h) of Pub. L. 104–134.

One of the standards in paragraph (a)

is that the cost be reasonable and

necessary for the performance of the

grant or contract. Paragraph (b) sets out

the factors that determine whether a

cost is reasonable. Generally, a prudent

person standard is established. This

paragraph clarifies that if a cost is

disallowed solely because it is

excessive, only the amount above that

which is reasonable will be disallowed.

Although this paragraph is generally the

same as the current rule, hortatory

language in the current rule that urges

careful scrutiny of costs has been

deleted because it has no practical effect

and provides no additional clarity about

what constitutes a reasonable cost.

Another standard in paragraph (a) is

whether a cost may be allocated to the

grant or contract. Paragraph (c) clarifies

when a cost may be allocated to a grant

or contract and includes new language

that provides that costs may be charged

to an LSC grant or contract directly or

indirectly. The new language is adapted

from OMB Circular A–122. The

Committee has deleted language in the

current rule that prohibits recipients

from shifting costs from non-LSC to LSC

grants or from one LSC grant to another

LSC grant, to overcome funding

deficiencies, or to avoid restrictions on

the use of funds. It is already clear in

other LSC regulations that certain

recipient funds may not be allocated to

prohibited or restricted activities, and

the Committee proposes to delete the

provision as redundant and

unnecessary. However, the Committee

seeks comment on the deletion of the

current § 1630.4(c)(2), which provides:

Any cost allocable to a particular grant or

contract or other cost objective under these

principles may not be shifted to other

Corporation grants or contracts to overcome

funding deficiencies, or to avoid restrictions

imposed by law or by the terms or conditions

of the grant or contract.

Paragraphs (d), (e) and (f) define

direct and indirect costs and specify

methods for allocating costs. Some

indirect costs will carry specific

allocation requirements. For example,

section 509(c) of Pub. L. 104–134

requires a pro rata distribution of audit

costs among a recipient’s funding

sources.

Paragraph (g) adapts language from

the Corporation’s Accounting Guide for

LSC Recipients and governs situations

where another funding source will not

allow the charging of indirect costs to

that funding source. In such a situation,

paragraph (g) provides an exception to

allow recipients to use a cost allocation

method that charges the LSC grant with

a proportional share of the other

funding source’s share of indirect costs.

Paragraph (h), which is unchanged

from the current rule, defines and

explains how to allocate applicable

credits. Applicable credits are defined

as receipts or reductions of expenditures

which operate to offset or reduce

expenses.

Paragraph (i) provides that OMB

Circulars shall provide guidance for

allowable costs unless the guidance is

inconsistent with other law applicable

to the Corporation.

Section 1630.5 Costs Requiring

Corporation Prior Approval

Paragraph (a) explains that recipients

may seek advance understandings from

the Corporation on the reasonableness

and allocability of a particular cost

before it is incurred.

Paragraph (b) requires prior approval

from the Corporation before certain

costs may be charged to Corporation

funds. Several changes have been made

from the current rule. The requirement

for prior approval of consultant

contracts has been deleted to be

consistent with OMB Circulars A–122

and A–110. In addition, provisions

requiring prior approval for pre-award

and post-award costs and capital

expenditures exceeding $10,000 to

improve real property have been added.

The reference to ‘‘combined purchase

price’’ has been deleted as confusing

and unnecessary. It is only the purchase

price of individual items that is

considered for the purposes of prior

approval. The combined purchase

requirement in the current rule

penalized programs that made

independent purchases of equipment

over a period of time and then belatedly

discovered that they had exceeded the

current rule’s $10,000 threshold. The

elimination of the combined purchase

provision does not alter the accounting

rules which determine when to treat

property purchases as capital

expenditures. For example, the

Accounting Guide for LSC Recipients

requires that purchases of property

items costing in excess of $1,000 be

treated as capital expenditures.

Paragraph (c) clarifies that the

Corporation’s approval or advance

understanding is valid for one year only

or for a greater time if specified by the

Corporation in its approval or

understanding. This provision is

highlighted in a single paragraph in this
45780 Federal Register / Vol. 62, No. 168 / Friday, August 29, 1997 / Proposed Rules

proposed rule. Its placement in the

current rule has often caused it to be

missed by recipients. Situations where

approval may be given for a period

greater than a year usually involve

multiple-year leases for equipment such

as photocopiers.

Section 1630.6 Effect of Absence of

Prior Approval

This section sets out the procedures

for granting or denying prior approval

and the effects of the absence of prior

approval. The proposed rule modifies

the structure of the current section to

provide greater clarity, but does not

substantively change the content of the

section.

Paragraph (a) explains that approval

will be granted for a cost if the recipient

has provided sufficient information to

show that the cost is consistent with

this part. When the Corporation denies

a request, this paragraph requires that

the recipient be provided a written

explanation of the grounds for denial.

Paragraph (b) provides a time limit of

sixty days for the Corporation to

respond to a request for prior approval.

If the Corporation fails to meet the

deadline, the Corporation may not assert

the absence of prior approval as grounds

to disallow the cost.

Paragraph (c) allows the Corporation

to seek additional information from the

recipient to make its determination on

the request for prior approval. Paragraph

(d) sets out the Corporation’s deadline

for responding to a request for prior

approval when the Corporation has

requested additional information from

the recipient.

Section 1630.7 Review and Appeal of

Questioned Costs

This section sets out the process for

reviewing and appealing questioned

costs. The proposed rule retains the

overall process contained in the current

rule, but makes several changes to be

consistent with the IG Act, Section 504

of Public Law 104–134, and OMB

Circular A–133.

Paragraph (a) expands the current rule

to include additional parties who are

authorized by current law to question

costs. The current rule recognizes only

the authority of Corporation

management to question costs. This

proposed rule also recognizes the

authority of the Inspector General, the

GAO, and authorized independent

auditors or audit organizations to

question costs. This paragraph provides

that the Corporation shall follow up on

any referred or identified questioned

costs to determine whether there is a

legal or factual basis for taking any

additional action.

If the Corporation determines there is

a basis for taking additional action,

paragraph (b) requires the Corporation

to provide the recipient with a notice of

its intent to disallow a cost. This

paragraph describes what information

must be in the notice and also

authorizes the Corporation to recover

any derivative funds resulting from the

activity to which the questioned cost is

attributable. Finally, this paragraph

states that the Corporation must take

action within three years of the time the

cost was incurred by the recipient. The

current rule allows the Corporation to

take action up to six years after a cost

has been incurred. The Committee

decided that six years is too long, even

considering the time needed for the

development of an audit or other report

and implementation of the

Corporation’s questioned cost

procedures. The Committee especially

seeks comments on the proposed change

to three years.

The rest of this section describes the

due process rights of recipients, which

include a right to appeal a management

decision to the President for questioned

costs that exceed $2,500. The $2,500

threshold is new. This section also

clarifies when management decisions on

questioned costs are final and makes it

clear that final decisions shall include

whatever action the recipient is required

to take to repay the questioned costs and

to prevent any recurrence of the

circumstances causing the disallowed

costs.

Section 1630.8 Recovery of Disallowed

Costs and Other Corrective Action

This section sets out the requirements

for and process by which the

Corporation collects disallowed costs

and ensures that a recipient take

applicable corrective action. It also

clarifies that final action occurs when

the recipient has repaid all disallowed

costs and has taken all required

corrective action.

Section 1630.9 Other Remedies; Effect

on Other Parts

Paragraph (a) has been updated and it

clarifies the relationship of this part to

parts 1606, 1623, 1625, and 1640 of the

Corporation’s regulations. Paragraph (b)

clarifies that a recovery of disallowed

costs under this part does not constitute

a termination (part 1606), suspension of

funding (part 1623) or a denial of

refunding (part 1625).

Section 1630.10 Applicability to

Subgrants

This section clarifies that this part

applies to expenditures under

subgrants.

Section 1630.11 Applicability to NonLSC Funds

Paragraph (a) has been updated and it

clarifies that costs for certain activities

may not be charged to various types of

a recipient’s non-LSC funds. This

paragraph uses the terms found in 45

CFR part 1610 which, sets out the

various prohibitions applicable to

recipients on their use of non-LSC funds

for certain activities.

Paragraph (b) allows the Corporation

to recover from a recipient’s LSC funds

any disallowed costs charged to a

recipient’s non-LSC funds.

Section 1630.12 Applicability to

Derivative Income

This is a new section intended to

clarify the applicability of this part to

derivative income. Paragraph (a) sets out

the allocation requirements for

derivative income. Paragraph (b)

clarifies that expenditures of LSC

derivative income are subject to the

same requirements that govern

expenditures of LSC grant funds,

including the cost allowability

requirements of this part.

Section 1630.13 Time

This section describes how time will

be computed for the purposes of this

part and provides for an extension of

time requirements for good cause.

List of Subjects in 45 CFR Part 1630

Accounting; Government contracts;

Grant programs; Legal services;

Questioned costs.

For reasons set forth in the preamble,

LSC proposes to revise 45 CFR part 1630

to read as follows:

PART 1630—COST STANDARDS AND

PROCEDURES

Sec.

1630.1 Purpose.

1630.2 Definitions.

1630.3 Burden of proof.

1630.4 Standards governing allowability of

costs under Corporation grants or

contracts.

1630.5 Costs requiring Corporation prior

approval.

1630.6 Effect of absence of prior approval.

1630.7 Review and appeal of questioned

costs.

1630.8 Recovery of disallowed costs and

other corrective action.

1630.9 Other remedies; effect on other

parts.

1630.10 Applicability to subgrants.

1630.11 Applicability to non-LSC funds.

1630.12 Applicability to derivative income.

1630.13 Time.

Authority: 42 U.S.C. 2996e, 2996f, 2996g,

2996h(c)(1), and 2996i(c).
Federal Register / Vol. 62, No. 168 / Friday, August 29, 1997 / Proposed Rules 45781

§ 1630.1 Purpose.

This part is intended to provide

uniform standards for allowability of

costs and to provide a comprehensive,

fair, timely, and flexible process for the

resolution of questioned costs.

§ 1630.2 Definitions.

(a) Allowed cost means a cost that the

Corporation, in a management decision,

has determined to be eligible for

payment from a recipient’s Corporation

funds.

(b) Corrective action means action

taken by a recipient that:

(1) corrects identified deficiencies

(2) produces recommended

improvements; or

(3) demonstrates that audit or other

findings are either invalid or do not

warrant recipient action.

(c) Derivative income means income

earned by a recipient from Corporationsupported activities during the term of

a Corporation grant or contract, and

includes, but is not limited to, income

from fees for services (including

attorney fee awards and reimbursed

costs), sales and rentals of real or

personal property, and interest earned

on Corporation grant or contract

advances.

(d) Disallowed cost means a

questioned cost that the Corporation, in

a management decision, has determined

should not be charged to a recipient’s

Corporation funds.

(e) Final action means the completion

of all actions that Corporation

management, in a management decision,

has concluded are necessary with

respect to the findings and

recommendations in an audit or other

report. In the event that Corporation

management concludes no corrective

action is necessary, final action occurs

when a management decision has been

made.

(f) Management decision means the

evaluation by Corporation management

of findings and recommendations in an

audit or other report and the recipient’s

response to the report, and the issuance

of a final, written decision by

management concerning its response to

such findings and recommendations,

including any corrective actions which

Corporation management has concluded

are necessary to address the findings

and recommendations.

(g) Questioned cost means a cost that

a recipient has charged to Corporation

funds which Corporation management,

the Office of Inspector General, the

General Accounting Office, or an

independent auditor or other audit

organization authorized to conduct an

audit of a recipient has questioned

because of an audit or other finding that:

(1) There may have been a violation

of a provision of a law, regulation,

contract, grant, or other agreement or

document governing the use of

Corporation funds;

(2) The costs are not supported by

adequate documentation; or

(3) The costs incurred appear

unnecessary or unreasonable and do not

reflect the actions a prudent person

would take in the circumstances.

(h) Recipient as used in this part

means any grantee or contractor

receiving funds from the Corporation

under sections 1006(a)(1) or 1006(a)(3)

of the Act.

§ 1630.3 Burden of proof.

The recipient shall have the burden of

proof under this part.

§ 1630.4 Standards governing allowability

of costs under Corporation grants or

contracts.

(a) General criteria. Expenditures by a

recipient are allowable under the

recipient’s grant or contract only if the

recipient can demonstrate that the cost

was:

(1) Actually incurred in the

performance of the grant or contract and

the recipient was liable for payment;

(2) Reasonable and necessary for the

performance of the grant or contract as

approved by the Corporation;

(3) Allocable to the grant or contract;

(4) In compliance with the Act,

applicable appropriations law,

Corporation rules, regulations,

guidelines, and instructions, the

Accounting Guide for LSC Recipients,

the terms and conditions of the grant or

contract, and other applicable law;

(5) Consistent with accounting

policies and procedures that apply

uniformly to both Corporation-financed

and other activities of the recipient;

(6) Accorded consistent treatment

over time;

(7) Determined in accordance with

generally accepted accounting

principles;

(8) Not included as a cost or used to

meet cost sharing or matching

requirements of any other federally

financed program, unless the agency

whose funds are being matched

determines in writing that Corporation

funds may be used for federal matching

purposes; and

(9) Adequately and

contemporaneously documented in

business records accessible during

normal business hours to Corporation

management, the Office of Inspector

General, the General Accounting Office,

and independent auditors or other audit

organizations authorized to conduct

audits of recipients.

(b) Reasonable costs. A cost is

reasonable if, in its nature or amount, it

does not exceed that which would be

incurred by a prudent person under the

circumstances prevailing at the time the

decision was made to incur the cost. If

a cost is disallowed solely on the

ground that it is excessive, only the

amount that is larger than reasonable

shall be disallowed. In determining the

reasonableness of a given cost,

consideration shall be given to:

(1) Whether the cost is of a type

generally recognized as ordinary and

necessary for the operation of the

recipient or the performance of the grant

or contract;

(2) The restraints or requirements

imposed by such factors as generally

accepted sound business practices,

arms-length bargaining, Federal and

State laws and regulations, and the

terms and conditions of the grant or

contract;

(3) Whether the individuals

concerned acted with prudence under

the circumstances, considering their

responsibilities to the recipient, its

clients and employees, the public at

large, the Corporation, and the Federal

government; and

(4) Significant deviations from the

established practices of the recipient

which may unjustifiably increase the

grant or contract costs.

(c) Allocable costs. A cost is allocable

to a particular cost objective, such as a

grant, project, service, or other activity,

in accordance with the relative benefits

received. Costs may be allocated to

Corporation funds either as direct or

indirect costs according to the

provisions of this section. A cost is

allocable to a Corporation grant or

contract if it is treated consistently with

other costs incurred for the same

purpose in like circumstances and if it:

(1) Is incurred specifically for the

grant or contract;

(2) Benefits both the grant or contract

and other work and can be distributed

in reasonable proportion to the benefits

received; or

(3) Is necessary to the overall

operation of the recipient, although a

direct relationship to any particular cost

objective cannot be shown.

(d) Direct costs. Direct costs are those

that can be identified specifically with

a particular final cost objective, i.e., a

particular grant award, project, service,

or other direct activity of an

organization. Costs identified

specifically with grant awards are direct

costs of the awards and are to be

assigned directly thereto. Direct costs

include, but are not limited to, the

salaries and wages of recipient staff who

are working on cases or matters that are
45782 Federal Register / Vol. 62, No. 168 / Friday, August 29, 1997 / Proposed Rules

identified with specific grants or

contracts. Salary and wages charged

directly to Corporation grants and

contracts must be supported by time

records.

(e) Indirect costs. Indirect costs are

those that have been incurred for

common or joint objectives and cannot

be readily identified with a particular

final cost objective. Any direct cost of a

minor amount may be treated as an

indirect cost for reasons of practicality

where the accounting treatment for such

cost is consistently applied to all final

cost objectives. Indirect costs include,

but are not limited to, the costs of

operating and maintaining facilities, and

the costs of general program

administration, such as the salaries and

wages of program staff whose time is

directly attributable to a particular grant

or contract. Such staff may include, but

are not limited to, executive officers and

personnel, accounting, secretarial and

clerical staff.

(f) Allocation of indirect costs. Where

a recipient has only one major function,

i.e., the delivery of legal services to lowincome clients, allocation of indirect

costs may be by a simplified allocation

method, whereby total allowable

indirect costs (net of applicable credits)

are divided by an equitable distribution

base and distributed to individual grant

awards accordingly. The distribution

base may be total direct costs, direct

salaries and wages, attorney hours,

numbers of cases, numbers of

employees, or another base which

results in an equitable distribution of

indirect costs among funding sources.

(g) Exception for certain indirect

costs. Some funding sources may refuse

to allow the allocation of certain

indirect costs to an award. In such

instances, a recipient may allocate a

proportional share of another funding

source’s share of an indirect cost to

Corporation funds, provided that the

activity associated with the indirect cost

is permissible under the LSC Act and

regulations.

(h) Applicable credits. Applicable

credits are those receipts or reductions

of expenditures which operate to offset

or reduce expense items that are

allocable to grant awards as direct or

indirect costs. Applicable credits

include, but are not limited to, purchase

discounts, rebates or allowances,

recoveries or indemnities on losses,

insurance refunds, and adjustments of

overpayments or erroneous charges. To

the extent that such credits relate to

allowable costs, they shall be credited as

a cost reduction or cash refund in the

same fund to which the related costs are

charged.

(i) Guidance. The Circulars of the

Office of Management and Budget shall

provide guidance for all allowable cost

questions arising under this part when

relevant policies or criteria therein are

not inconsistent with the provisions of

the Act, applicable appropriations law,

this part, the Accounting Guide for LSC

Recipients, Corporation rules,

regulations, guidelines, instructions,

and other applicable law.

§ 1630.5 Costs requiring Corporation prior

approval.

(a) Advance understandings. Under

any given grant award, the

reasonableness and allocability of

certain cost items may be difficult to

determine. In order to avoid subsequent

disallowance or dispute based on

unreasonableness or nonallocability,

recipients may seek a written

understanding from the Corporation in

advance of incurring special or unusual

costs. If a recipient elects not to seek an

advance understanding from the

Corporation, the absence of an advance

understanding on any element of a cost

does not affect the reasonableness or

allocability of the cost.

(b) Prior approvals. Without prior

written approval of the Corporation, no

cost attributable to any of the following

may be charged to Corporation funds:

(1) Costs incurred prior to or after the

completion of the term of the grant or

contract;

(2) Purchases and leases of

equipment, furniture, or other personal,

non-expendable property, if the current

purchase price of any individual item of

property exceeds $10,000;

(3) Purchases of real property; and

(4) Capital expenditures exceeding

$10,000 to improve real property.

(c) Duration. The Corporation’s

approval or advance understanding

shall be valid for one year, or for a

greater period of time which the

Corporation may specify in its approval

or understanding.

§ 1630.6 Effect of absence of prior

approval.

(a) The Corporation shall grant prior

approval of a cost if the recipient has

provided sufficient written information

to demonstrate that the cost would be

consistent with the standards and

policies of this part. If the Corporation

denies a request for approval, it shall

provide to the recipient a written

explanation of the grounds for denying

the request.

(b) Except as provided in paragraphs

(c) and (d) of this section, the

Corporation may not assert the absence

of prior approval as a basis for

disallowing a cost, if the Corporation

has not responded to a written request

for approval within sixty (60) days of

receiving the request.

(c) If additional information is

necessary to enable the Corporation to

respond to a request for prior approval,

the Corporation may make a written

request for additional information

within forty-five (45) days of receiving

the request for approval.

(d) If the Corporation has made a

written request for additional

information about a cost as provided by

paragraph (c) of this section, and if the

Corporation has not responded within

thirty (30) days of receiving in writing

all additional, requested information,

the Corporation may not assert the

absence of prior approval as a basis for

disallowing the cost.

§ 1630.7 Review and appeal of questioned

costs.

(a) When the Office of Inspector

General, the General Accounting Office,

or an independent auditor or other audit

organization authorized to conduct an

audit of a recipient has identified and

referred a questioned cost to the

Corporation, Corporation management

shall review the findings of the Office of

Inspector General, General Accounting

Office, or independent auditor or other

authorized audit organization, as well as

the recipient’s written response to the

findings, in order to determine

accurately the amount of the questioned

cost, the factual circumstances giving

rise to the cost, and the legal basis for

disallowing the cost. Corporation

management may also identify

questioned costs in the course of its

oversight of recipients.

(b) If Corporation management

determines that there is a basis for

disallowing a questioned cost, and if not

more than three years have elapsed

since the recipient incurred the cost,

Corporation management shall provide

to the recipient written notice of its

intent to disallow the cost. The written

notice shall state the amount of the cost

and the factual and legal basis for

disallowing it. If the activity to which

the cost is attributable directly resulted

in derivative income earned by the

recipient, the written notice shall also

state the amount of derivative income

and the factual and legal basis for

seeking to recover it.

(c) Within thirty (30) days of receiving

written notice of the Corporation’s

intent to disallow the questioned cost,

the recipient may respond with written

evidence and argument to show that the

cost was allowable, or that the

Corporation, for equitable, practical, or

other reasons, should not recover all or

part of the amount, or that the recovery
Federal Register / Vol. 62, No. 168 / Friday, August 29, 1997 / Proposed Rules 45783

should be made in installments. If the

recipient does not respond to the

Corporation’s written notice,

Corporation management shall issue a

management decision on the basis of

information available to it.

(d) Within sixty (60) days of receiving

the recipient’s written response to the

notice of intent to disallow the

questioned cost, Corporation

management shall issue a management

decision stating whether or not the cost

has been disallowed, the reasons for the

decision, and the method of appeal as

provided in this section. If Corporation

management has determined that the

cost should be disallowed, the

management decision shall also

describe the expected recipient action to

repay the cost, including the method

and schedule for collection of the

amount of the cost. The management

decision may also require the recipient

to make financial adjustments or take

other corrective action to prevent a

recurrence of the circumstances giving

rise to the disallowed cost.

(e) If the amount of a disallowed cost

exceeds $2,500, the recipient may

appeal in writing to the Corporation

President within thirty (30) days of

receiving the Corporation’s management

decision to disallow the cost. The

written appeal should state in detail the

reasons why the Corporation should not

disallow part or all of the questioned

cost. If the amount of a disallowed cost

does not exceed $2,500, or if the

recipient elects not to appeal the

disallowance of a cost in excess of

$2,500, the Corporation’s management

decision shall be final.

(f) Within thirty (30) days of receipt

of the recipient’s appeal of a disallowed

cost in excess of $2,500, the President

shall either adopt, modify, or reverse the

Corporation’s management decision to

disallow the cost. If the President has

had prior involvement in the

consideration of the disallowed cost, the

President shall designate another senior

Corporation employee who has not had

prior involvement to review the

recipient’s appeal. The President shall

also have discretion, in circumstances

where the President has not had prior

involvement in the disallowed cost, to

designate another senior Corporation

employee to review the recipient’s

appeal, provided that the senior

Corporation employee has not had prior

involvement in the disallowed cost.

(g) The decision of the President or

designee shall be final and shall be

based on the written record, consisting

of the Corporation’s notice of intent to

disallow the questioned cost, the

recipient’s response, the management

decision, the recipient’s written appeal,

any additional response or analysis

provided to the President or designee by

Corporation staff, and the relevant

findings, if any, of the Office of

Inspector General, General Accounting

Office, or other authorized auditor or

audit organization. Upon request, the

Corporation shall provide a copy of the

written record to the recipient.

§ 1630.8 Recovery of disallowed costs and

other corrective action.

(a) The Corporation shall recover from

the recipient, within the time limits and

conditions set forth in the Corporation’s

management decision, any disallowed

costs, plus any derivative income which

the recipient may have earned directly

as a result of activity attributable to the

disallowed cost. Recovery of the

disallowed cost and derivative income,

if any, may be in the form of a reduction

in the amount of future grant checks or

in the form of direct payment from the

recipient to the Corporation.

(b) The Corporation shall ensure that

a recipient which has incurred a

disallowed cost takes any additional,

necessary corrective action within the

time limits and conditions set forth in

the Corporation’s management decision.

The recipient shall have taken final

action when the recipient has repaid all

disallowed costs and has taken all

corrective action which the Corporation

has stated in its management decision is

necessary to prevent the recurrence of

circumstances giving rise to a

questioned cost.

§ 1630.9 Other remedies; effect on other

parts.

(a) In cases of serious financial

mismanagement, fraud, or defalcation of

funds, the Corporation may refer the

matter to the Office of Inspector

General, and may take appropriate

action pursuant to 45 CFR parts 1606,

1623, 1625, and 1640.

(b) The recovery of a disallowed cost

according to the procedures of this part

does not constitute a permanent

reduction in the annualized funding

level of the recipient, nor does it

constitute a termination of financial

assistance under 45 CFR part 1606, a

suspension of funding under 45 CFR

part 1623, or a denial of refunding

under 45 CFR part 1625.

§ 1630.10 Applicability to subgrants.

When disallowed costs arise from

expenditures incurred under a subgrant

of Corporation funds, the recipient and

the subrecipient will be jointly and

severally responsible for the actions of

the subrecipient, as provided by 45 CFR

part 1627, and will be subject to all

remedies available under this part. Both

the recipient and the subrecipient shall

have access to the review and appeal

procedures of this part.

§ 1630.11 Applicability to non-LSC funds.

(a) No cost attributable to a purpose

prohibited by the LSC Act, as defined by

45 CFR 1610.2(a), may be charged to

private funds, except for tribal funds

used for the specific purposes for which

they were provided. No cost attributable

to an activity prohibited by or

inconsistent with Section 504, as

defined by 45 CFR 1610.2(b), may be

charged to non-LSC funds, except for

tribal funds used for the specific

purposes for which they were provided.

(b) According to the review and

appeal procedures of 45 CFR 1630.7, the

Corporation may recover from a

recipient’s Corporation funds an amount

not to exceed the amount improperly

charged to non-LSC funds, plus any

income which the recipient may have

derived as a result of the activity in

question.

§ 1630.12 Applicability to derivative

income.

(a) Derivative income resulting from

an activity supported in whole or in part

with funds provided by the Corporation

shall be allocated to the fund in which

the recipient’s LSC grant is recorded in

the same proportion that the amount of

Corporation funds expended bears to

the total amount expended by the

recipient to support the activity.

(b) Derivative income which is

attributable to activities supported in

whole or in part by Corporation funds

is subject to the requirements of this

part, including the requirement of 45

CFR 1630.4(a)(4) that expenditures of

such funds be in compliance with the

Act, applicable appropriations law,

Corporation rules, regulations,

guidelines, and instructions, the

Accounting Guide for LSC Recipients,

the terms and conditions of the grant or

contract, and other applicable law.

§ 1630.13 Time.

(a) Computation. Time limits

specified in this part shall be computed

in accordance with Rules 6(a) and 6(e)

of the Federal Rules of Civil Procedure.

(b) Extensions. The Corporation may,

on a recipient’s written request for good

cause, grant an extension of time and

shall so notify the recipient in writing.

Dated: August 25, 1997.

Victor M. Fortuno,

General Counsel.

[FR Doc. 97–23039 Filed 8–28–97; 8:45 am]

BILLING CODE 7050–01–P