[Federal Register Volume 62, Number 168 (Friday, August 29, 1997)]
[Proposed Rules]
[Pages 45778-45783]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-23039]


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LEGAL SERVICES CORPORATION

45 CFR Part 1630


Cost standards and procedures

AGENCY: Legal Services Corporation.

ACTION: Proposed rule.

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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 Non-profit 
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 Sec. 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 Sec. 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 Sec. 1630.2(c). Instead, the 
rule addresses the recovery of derivative income in Secs. 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

[[Page 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 Sec. 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 
Sec. 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

[[Page 45780]]

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 Non-LSC 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).

[[Page 45781]]

Sec. 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.


Sec. 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 
Corporation-supported 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.


Sec. 1630.3  Burden of proof.

    The recipient shall have the burden of proof under this part.


Sec. 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

[[Page 45782]]

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 low-income 
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.


Sec. 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.


Sec. 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.


Sec. 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

[[Page 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.


Sec. 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.


Sec. 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.


Sec. 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.


Sec. 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.


Sec. 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.


Sec. 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