20148 Federal Register / Vol. 63, No. 78 /Thursday, April 23, 1998 / Proposed Rules

Issued in Kansas City, Missouri, on April

16, 1998.

Michael Gallagher,

Manager, Small Airplane Directorate, Aircraft

Certification Service.

[FR Doc. 98–10749 Filed 4–22–98; 8:45 am]

BILLING CODE 4910–13–P

DEPARTMENT OF HEALTH AND

HUMAN SERVICES

Food and Drug Administration

21 CFR Part 102

[Docket No. 94P–0043]

Crabmeat; Amendment of Common or

Usual Name Regulation

AGENCY: Food and Drug Administration,

HHS.

ACTION: Proposed rule.

SUMMARY: The Food and Drug

Administration (FDA) is proposing to

amend the regulation for crabmeat by

adding the species Callinectes sapidus

(C. sapidus) to those listed in the

regulation and to provide that the

common or usual name of crabmeat

derived from this species is ‘‘Blue

crabmeat.’’ FDA is further proposing, on

its own initiative, to adopt common or

usual names for 18 additional crab

species. FDA is proposing these names

based on ‘‘The Seafood List’’ and the

information provided in the National

Blue Crab Industry Association (NBCIA)

petition. This proposal, which is in

response to a citizen petition submitted

by the NBCIA, is intended to allow

crabmeat packers to properly identify

their product so that consumers can

make informed decisions.

DATES: Written comments by July 7,

1998. See section IV of this document

for the proposed effective date of a final

rule based on this document.

ADDRESSES: Submit written comments

to the Dockets Management Branch

(HFA–305), Food and Drug

Administration, 12420 Parklawn Dr.,

rm. 1–23, Rockville, MD 20857.

FOR FURTHER INFORMATION CONTACT:

Anthony P. Brunetti, Center for Food

Safety and Applied Nutrition (HFS–

416), Food and Drug Administration,

200 C St. SW., Washington, DC 20204,

202–418–3160.

SUPPLEMENTARY INFORMATION:

I. Background

A. Crabmeat Labeling

The NBCIA, 1525 Wilson Blvd., suite

500, Arlington, VA 22209, filed a

petition on February 15, 1994, to amend

the common or usual name regulation

for crabmeat (§ 102.50 (21 CFR 102.50))

to provide that the common or usual

name of crabmeat derived from the

species C. sapidus is ‘‘Blue crabmeat.’’

Section 102.50 lists the following

genera and species of crabs and the

associated common or usual name of the

meat from these crabs: Chionoecetes

opilio, Chionoecetes tanneri,

Chionoecetes bairdii, and Chionoecetes

angulatus as Snow crabmeat; Erimacrus

isenbeckii as Korean variety crabmeat or

Kegani crabmeat; Lithodes aequispina as

Brown King crabmeat; Paralithodes

brevipes as King crabmeat or Hanasaki

crabmeat; and Paralithodes

camtschaticus and Paralithodes

platypus as King crabmeat. (Note: The

latter listing is currently incorrect in the

Code of Federal Regulations (CFR). The

CFR lists the common or usual names of

Paralithodes camtschaticus as King

crabmeat and Paralithodes Platypus.

This error is being corrected in this

document.)

FDA has been dealing with common

or usual name issues involving crabmeat

since 1954. In the Federal Register of

April 8, 1954 (19 FR 2013), FDA

announced its policy for the appropriate

labeling of imported canned crabmeat.

FDA later codified this policy and the

other common or usual names for

crabmeat in § 102.50 when it issued part

102—Common or Usual Names For

Nonstandardized Foods (21 CFR part

102) in 1973 (38 FR 6966, March 14,

1973).

Guidance on the appropriate labeling

of the crabmeats derived from species

that are not listed in § 102.50 is set forth

in the agency’s Compliance Policy

Guides (CPG 7108.04). Under this

guidance, products derived from

domestic sources that are labeled as

‘‘crabmeat,’’ without additional

qualification, are generally accepted as

being derived from C. sapidus (blue

crab), historically one of the most

common and widely recognized sources

of crabmeat in the United States. In

labeling other species of crab, the CPG

encourages the use of a prefix that
Federal Register / Vol. 63, No. 78 /Thursday, April 23, 1998 / Proposed Rules 20149

identifies the country where the crab

was caught (e.g., ‘‘Taiwan Crabmeat’’).

The NBCIA petition asserted that this

policy no longer ensures that the meat

of C. sapidus is unambiguously

identified. The petition argued that

consumers in the United States are

being misled because, while they have

come to expect that products that are

labeled only as ‘‘crabmeat’’ are derived

from C. sapidus, in many instances,

other, less desirable crabmeats are being

substituted, in whole or in part, for the

expected C. sapidus meat. Therefore,

the petitioner requested that FDA

establish by regulation that the common

or usual name ‘‘Blue crabmeat’’ applies

only to the meat of C. sapidus, thereby

ensuring that consumers will not be

misled about the source and nature of

the crabmeat.

B. Common or Usual Name Provisions

The common or usual name of a food

is the prevalent and meaningful name

by which consumers ordinarily identify

the food. This vernacular name may

lack the specificity of the scientific or

technical name of a food, but an

appropriate common or usual name

permits the public to distinguish

between similar foods that are available

in the marketplace. The common or

usual name of a food may be established

by a history of common usage or by

regulation. Section 102.5 requires that

the common or usual name of a food

accurately identify, in simple and direct

terms, the basic nature of the food and

its characterizing properties. The name

must be uniform among all identical or

similar products. In fact, under 21 CFR

101.3(b)(1), a food with a common or

usual name that has been established by

regulation is misbranded if it is not

identified by that name (see also section

403(b) of the Federal Food, Drug, and

Cosmetic Act (the act) (21 U.S.C.

343(b)).

Before proposing a common or usual

name regulation, FDA tries to ensure

that the name that it is considering is

not false or misleading within the

meaning of section 403(a) of the act, and

that the name conforms to the

provisions of § 102.5. Moreover, to

prevent confusion and deceptive

economic practices, the agency must

ensure that the name is not

inappropriately similar to one that has

already been established by regulation.

In the case of crabmeats, to conform

to these principles, the common or

usual name needs to clearly identify the

characterizing properties that

consumers in the United States

associate with the meat of a particular

species or group of crab species (e.g., see

59 FR 36103, July 15, 1994). In some

cases a geographical prefix serves this

purpose by alerting the consumer that

the meat is not that of domestic species.

C. Need to Establish a Common or

Usual Name by Regulation

Section 403(a)(1) of the act states that

a food shall be deemed to be

misbranded if its labeling is false or

misleading in any particular. Under

section 403(b), a food is misbranded if

it is offered for sale under the name of

another food. If a less valuable crabmeat

is substituted for the species

represented on the label or labeling, the

product is adulterated under section

402(b)(2) of the act (21 U.S.C. 342(b)(2)),

which states that a food shall be deemed

to be adulterated if any substance has

been substituted wholly or in part

thereof (i.e., economic adulteration).

Consequently, it is a clear violation of

the act when a food such as crabmeat is

not correctly identified on its label or in

its labeling.

The agency may provide guidelines

about how to label a class of foods, as

in the case of fish and crabmeat, so that

they are identified in a manner that

promotes honesty and fair dealing in the

interest of consumers. Nonetheless, false

or misleading labeling practices

sometimes arise that persuade FDA of

the need to require the use of a common

or usual name that will ensure that

consumers are able to make fair value

judgments about a food they buy. For

example, a regulation prescribing a

common or usual name may become

necessary when there is not consistent

adherence to a guideline on labeling

practice (e.g., to the recommendation in

CPG 7108.04 to provide the name of the

country of origin as a prefix to

‘‘crabmeat’’ for crabmeat other than that

of C. sapidus), when guidelines are not

available, or when the guidance

provided would not adequately resolve

differences that distinguish similar

foods, (e.g., the King crabmeats listed in

§ 102.50 that are harvested from the

same waters).

Such a situation has arisen with

respect to C. sapidus. As explained in

section II of this document, FDA has

become convinced that its admonition

to marketers to follow the guidance in

CPG 7108.04 is not being followed. As

a result, many consumers are not being

appropriately informed of the identity of

the crabmeat that they are buying.

Therefore, under § 102.19, FDA is

proposing to adopt ‘‘Blue crabmeat’’ as

the common or usual name of meat from

the species C. sapidus and to adopt

common or usual names for crabmeat

derived from 18 other species of crab of

which the agency is aware.

II. Grounds for the Petition

The NBCIA petition requested that

FDA amend § 102.50 to include the

species C. sapidus and to provide for the

use of ‘‘Blue crabmeat’’ as the common

or usual name of the meat of this

species.

The petition contended that it is

necessary for FDA to establish a

common or usual name regulation for

the following reasons:

(1) Even though C. sapidus is

commonly known as ‘‘blue crab,’’ there

has also been wide acceptance of the

generic term ‘‘crabmeat’’ to refer to its

meat because it is by far the most

commonly available type of crabmeat in

many areas of the United States. It has

become commonplace, however, to

import and repack, in the United States,

crabmeats that are generally of lower

value, primarily derived from non-C.

sapidus species, and to label them also

as ‘‘crabmeat.’’

(2) In some cases the imported

crabmeat is blended with higher value

domestic blue crabmeat and

misrepresented as being entirely C.

sapidus.

(3) Industry observations and Federal

and State enforcement activities provide

evidence that the country of origin of

imported crabmeat often does not

appear on the label after the meat has

been repacked in the United States,

even though U.S. Customs Service

regulations require that the labels of

imported products identify the country

of origin unless it has been substantially

transformed.

(4) In the absence of a regulation,

there are no binding rules to determine

which crabmeat products may be

appropriately identified by the name

‘‘blue crabmeat.’’

In support of its contention that the

imported meats of other crab species are

being substituted for and represented as

domestic C. sapidus, the petition

included a copy of a newspaper account

of a processor convicted in the State of

Virginia of misbranding imported

crabmeat by representing it as locally

harvested domestic crabmeat (i.e., C.

sapidus). The petition also included a

copy of an Import Alert issued by FDA

for the detention of misbranded

seafoods, including products identified

as blue crabmeat (No. 16–04—Revised,

December 6, 1988). The Import Alert

advised FDA inspectors to conduct

surveillance sampling and to review the

import documents of incoming seafoods

to prevent the unlawful entry of

‘‘various species of fish or other seafood

offered for entry into the United States

under the name of a fictitious, incorrect,

or substituted species.’’ The alert further
20150 Federal Register / Vol. 63, No. 78 /Thursday, April 23, 1998 / Proposed Rules

advised that inspectors should sample

entries of seafood labeled as a species

not common to the exporting country.

The alert included as guidance an

appendix listing seafoods associated

with previous misbranding events, and

the market names of species that might

be substituted, their scientific or likely

fictitious name, and the region or

country from which specific species are

normally available.

The petition asserted that ‘‘blue crab’’

is the appropriate common or usual

name to codify for C. sapidus because it

is the widely accepted common or usual

name for this species. FDA

acknowledges that it has been the

agency’s longstanding policy to accept

‘‘blue crab’’ as the common or usual

name for C. sapidus. The Import Alert,

as well as the CPG for the appropriate

labeling of crabmeats, demonstrate not

only FDA’s acceptance of the common

or usual name ‘‘blue crabmeat,’’ but also

attest to the measures the agency has

taken to deal with the ongoing problem

associated with the proper identification

and labeling of crabmeats. For example,

CPG 7188.04 states that ‘‘Product

labeled as ‘crabmeat,’ from domestic

sources, without qualification are

generally accepted to have been derived

from the blue crab, Callinectes

sapidus.’’ Similarly, the petition noted

that in the appendix of Import Alert No.

16–04—Revised, FDA identified ‘‘blue

crabmeat’’ as the market name for C.

sapidus and identified its source as the

Atlantic Ocean. Whenever possible,

FDA recommends the use of the

established common or usual name of a

food as the market name.

More recently, FDA identified C.

sapidus with the common name ‘‘blue

crab’’ in ‘‘The Seafood List,’’ which is

the agency’s guide to acceptable market

names and common names for the

species of food fish and invertebrates

sold in U.S. interstate commerce that do

not have common or usual names

established by regulation (57 FR 47144,

September 14, 1994). In compiling this

guide, FDA started with its own

information and experience, but the

agency relied primarily on consultation

with seafood experts and authoritative

works on seafood nomenclature.

FDA has confirmed that authoritative

nomenclature and trade publications

continue to accept ‘‘blue crab’’ as the

common or usual name for C. sapidus.

For example, the American Fisheries

Society Special Publication 17,

‘‘Common and Scientific Names of

Aquatic Invertebrates from the United

States and Canada: Decapod

Crustaceans,’’ addresses adherence to

uniform scientific and common

nomenclature of aquatic invertebrates

and recognizes only C. sapidus by the

common name ‘‘blue crab’’ (Ref. 1).

A nomenclature reference with an

international perspective, ‘‘Fish: FiveLanguage Dictionary of Fish,

Crustaceans and Molluscs,’’ also lists C.

sapidus as ‘‘blue crab’’ (Ref. 2).

Similarly, the ‘‘Multilingual Dictionary

of Fish and Fish Products,’’ identifies

‘‘blue crab (Atlantic-U.S.A.)’’ as C.

sapidus (Ref. 3).

Consequently, FDA agrees with the

petitioner that ‘‘blue crab’’ is the

common or usual name for C. sapidus.

That name is not only descriptive of the

remarkably distinctive blue coloration

of the animal’s claws, but it is the

meaningful and informative name that

has been established by common use.

III. The Proposed Regulation

The U.S. Government, including FDA,

is concerned about recurring incidents

of misrepresentations about the content

of domestic products that are derived in

whole or in part from imported

crabmeat. The U.S. Customs Service

expressed this concern in a detailed

examination and ruling that addressed

the relationship between the extent of

domestic processing performed on

imported crabmeat (i.e., whether a

‘‘substantial transformation’’ has

occurred) and the requirement for

country of origin labeling on the

finished consumer product (Ref. 4). The

U.S. Customs Service ruling held that:

* * * the domestic processing of imported

crab meat by thawing, sorting, blending with

domestic crabmeat, canning and

pasteurization does not constitute a

substantial transformation. Accordingly, the

repacked crab meat is subject to the country

of origin marking requirements of 19 U.S.C.

1304 and 19 CFR 134 * * *.

The ruling also concluded that none of

the above processing operations ‘‘taken

individually or together is sufficient to

substantially transform the crab meat

into a product with a different name,

character or use.’’ (Ref. 4)

The U.S. Customs Service ruling

underscores the petitioner’s contention

that the labeling of imported crabmeats

is misleading, particularly with regard

to providing consumers with

information that will enable them to

distinguish these crabmeats from

domestic C. sapidus similarly labeled as

‘‘crabmeat.’’ In light of the record of

misbranding of imported crabmeat

products, including the agency’s own

efforts to detect and prevent such

abuses, FDA tentatively concludes that

the petitioner’s claims that consumers

are being misled are valid.

The agency agrees with the petitioner

that, in the absence of a regulation that

requires C. sapidus to be labeled as

‘‘Blue crabmeat,’’ there is nothing that

would require a conclusion that another

crabmeat is misbranded when it is

identified as ‘‘Blue crabmeat.’’ FDA also

agrees with the petitioner that the

generic ‘‘crabmeat’’ labeling of imports

misleads because it implies that the

crabmeat is domestic Blue crabmeat.

Moreover, the term ‘‘crabmeat’’ does not

adequately identify the food or allow

consumers to distinguish between

similar crabmeats that differ in value.

This proposal will remedy this

situation because, if the agency adopts

the proposed regulation, the meat of C.

sapidus is misbranded unless it is

labeled ‘‘Blue crabmeat,’’ and,

conversely, if crabmeats of other species

are labeled as ‘‘Blue crabmeat,’’ they

also will be misbranded. Thus, the

proposed action will protect consumers

from the confusing and misleading

labeling of C. sapidus meat and from

non-C. sapidus meat being labeled as

‘‘Blue Crabmeat.’’

Consequently, FDA tentatively finds

that the adoption of the common or

usual name ‘‘Blue crabmeat’’ for C.

sapidus meat will promote honesty and

fair dealing in the interest of the

consumer, and that this name accurately

identifies, in simple and direct terms,

the basic nature of the food and its

characterizing properties. Accordingly,

the agency tentatively concludes that

§ 102.50 should be amended to include

the name ‘‘Blue crabmeat’’ as the

common or usual name for the meat of

C. sapidus.

However, FDA is not persuaded that

this amendment will fully respond to

the labeling concerns raised and

reflected in the petition. Even if this

proposed action becomes final, the meat

of other crab species not listed in

§ 102.50 would continue to be labeled

simply as ‘‘crabmeat,’’ which many

consumers will interpret as meaning

that the meat is from C. sapidus. For this

reason and because of the persistent

misrepresentation of crabmeats, FDA

has tentatively concluded that the

amendment requested by the petitioner

is necessary but not sufficient to prevent

the continuing abusive crabmeat

labeling practices reviewed here.

Therefore, the agency is proposing, on

its own initiative, to amend § 102.50

more broadly than requested and to

provide that all crabmeats must be

identified on their label or labeling by

the common or usual name of the

species from which they are derived, as

identified by FDA in ‘‘The Seafood

List.’’

The extension of § 102.50 to include

the common or usual name of all

crabmeats is consistent with § 102.5(a):

‘‘Each class or subclass of food shall be

given its own common or usual name
Federal Register / Vol. 63, No. 78 /Thursday, April 23, 1998 / Proposed Rules 20151

that states, in clear terms, what it is in

a way that distinguishes it from

different foods.’’ Under this proposal,

consumers will have a means of

differentiating among these similar

foods. Products labeled simply as

‘‘crabmeat’’ will be misbranded.

Moreover, FDA tentatively concludes

that it is appropriate and consistent

with the efficient use of agency

resources, to include these additional

common or usual names in one

amendment to § 102.50, rather than to

continue to propose separate

rulemakings to codify these names on a

piecemeal basis, as it has since 1954.

As discussed under section II of this

document, FDA has already expended

considerable public resources to make

‘‘The Seafood List’’ available. It is an

authoritative compendium of seafood

nomenclature issued by FDA to promote

the consistent and informative labeling

of seafood species. To aid in their

proper identification, this publication

provides the scientific, ‘‘common,’’ and

recommended market names (and in

some cases regional vernacular names as

well) for all of the domestic and

imported species of finfish and

invertebrates (shrimp, shellfish, and

crustaceans) that are sold interstate in

significant amounts as food in the

United States.

The names entered under the

‘‘Market’’ heading in ‘‘The Seafood List’’

are the common or usual names of the

species that have been established by

common usage or by regulation. It is not

uncommon to find that closely related

species have the same common or usual

(market) name. This also is the case

with the species listed in § 102.50,

where the meat from three different

species of the Paralithodes genera share

the common or usual name ‘‘King

crabmeat.’’ The names under the

heading ‘‘Common’’ in ‘‘The Seafood

List’’ are the English language

equivalent of the scientific name, and

not the common or usual name,

although these two types of common

name frequently are very similar. When

a common or usual name has not been

established for a species, FDA

recommends the use of the listed

‘‘common’’ name as an appropriate

market name.

In addition to the common or usual

names of the 6 crabmeats (from 9

species) that are currently listed in

§ 102.50, ‘‘The Seafood List’’ identifies

the following 19 crab species by their

scientific and common or usual (market)

names: Callinectes sapidus (Blue crab),

Lithodes antarcticus (Centolla crab),

Lithodes murrayi (Centolla crab),

Paralomis granulosa (Deepsea crab),

Cancer magister (Dungeness crab),

Geryon fenneri (Golden crab), Cancer

borealis (Jonah crab), Neolithodes

brodiei (Lithodes crab), Geryon

quinquedens (Red crab), Cancer

irroratus (Rock crab), Cancer pagurus

(Rock crab), Jacquinotia edwardsii

(Spider crab), Maja squinado (Spider

crab), Menippi adina (Stone crab),

Menippi mercenaria (Stone crab),

Callinectes arcuatus (Swimming crab),

Callinectes toxotes (Swimming crab),

Portunus pelagicus (Swimming crab),

and Portunus puber (Swimming crab).

FDA tentatively finds that, given the

process that has gone into identifying

and verifying the scientific and common

or usual names of the crab species

included in ‘‘The Seafood List,’’ it is

appropriate to codify them in § 102.50

Crabmeat. Accordingly, FDA proposes

to add the scientific and corresponding

common or usual names of the 19 crab

species listed in ‘‘The Seafood List’’ to

§ 102.50.

FDA solicits public comment on

whether the agency should require, as it

has proposed, that all crabmeat labeling

include the use of an appropriate

common or usual name to provide

consumers with a more complete

identification of the crabmeats available

in the marketplace. FDA also solicits

comment on whether there are other

crab species that should be included in

§ 102.50, and, if there are, what the

common or usual names is of each of

these species.

If this proposal is finalized, anyone

engaged in the interstate commerce of a

crabmeat that is not listed in § 102.50

will have to petition FDA to include

that species in the common or usual

name regulation. The petition should

demonstrate either the existence of an

accepted common or usual name or

propose to establish an appropriate one.

In recent years, FDA has developed a

computer data base known as the

‘‘Regulatory Fish Encyclopedia’’ (RFE)

to help ensure that the economic

adulteration of seafoods can be detected

and confirmed by scientific methods. As

an aid to the identification of species by

FDA field investigators, industry, and

the public, the RFE is readily accessible

on the Internet (vm.cfsan.fda.gov/∼frf/

rfe0.html) and from FDA’s World Wide

Web site. The RFE makes available high

resolution, annotated color images of

more than 60 authenticated fish species,

as well as the unique electrophoretic

patterns of the flesh proteins of about

two-thirds of these species (i.e., their

‘‘biochemical fingerprints’’) (Ref. 5).

Thus, in addition to a visual comparison

of their anatomical features, an

authentic protein pattern of a species

that is displayed in the RFE can be

compared with one obtained by

isoelectric focusing methods from a

suspected substitute species to

determine whether misbranding and

economic adulteration have occurred.

FDA is in the early stages of collecting

and photographing authenticated

species of various crabs, including C.

sapidus; and the agency has plans to

determine the unique biochemical

pattern of their flesh proteins or, if

necessary because crabmeat is often

cooked, to determine the patterns of

their cellular DNA (deoxyribonucleic

acid) components for inclusion in the

RFE. Thus, the RFE resources, when

combined with requirements for the

unambiguous labeling of these foods as

proposed herein, will provide FDA with

an effective means of establishing the

identity of different crabmeats and

combating economic fraud.

Under the proposed action, crabmeats

that are labeled as ‘‘Blue crabmeat’’ and

found to consist in whole or in part of

crabmeat from other than C. sapidus

will be misbranded and may be

adulterated and will be subject to

compliance action by the agency.

Similarly, all other crabmeat will be

misbranded unless labeled in

accordance with the common or usual

(market) name given in § 102.50.

Therefore, after a careful review of the

petition and consideration of all of the

available information, FDA is proposing

to amend § 102.50 Crabmeat, by adding

the crabmeat of the species C. sapidus,

identified by the common or usual name

‘‘Blue crabmeat.’’ FDA is also proposing

to amend § 102.50 by adding the

scientific names of 18 additional crab

species and the associated 11 common

or usual names of their crabmeats as

identified in ‘‘The Seafood List.’’ For the

ease of the reader, FDA is proposing to

further revise the table in § 102.50 by

placing the ‘‘Common or usual name of

crabmeat’’ in the first column followed

by the ‘‘Scientific name of crab’’ in the

second column. FDA also is correcting

an inadvertent error that occurred in the

Federal Register of July 3, 1995 (60 FR

34459 at 34460), in the scientific name

column whereby the scientific name

Paralithodes Platypus was incorrectly

placed in the ‘‘Common or usual name

of crabmeat’’ column and the word

Platypus was incorrectly capitalized.

The impacts of this proposed rule on

U.S. consumers and businesses are

discussed in section V of this document.

However, this proposed rule may also

raise international trade issues that are

not discussed in section V of this

document. International trade issues

may arise because the labeling changes

necessitated by common or usual names

may increase the demand for certain

species of crab and decrease the demand
20152 Federal Register / Vol. 63, No. 78 /Thursday, April 23, 1998 / Proposed Rules

for other species of crab and because

different countries and regions may

harvest different species of crab. In

some cases, these changes in demand

will simply reflect preexisting

differences in the value consumers

place on the different species of crab.

However, in other cases, these changes

in demand might result from adverse

consumer attitudes towards certain of

the proposed common or usual names.

For example, some consumers might

find the name ‘‘Spider crabmeat’’

unappealing, creating an aversion to

Spider crabmeat that did not previously

exist. International trade effects caused

by adverse consumer attitudes toward

certain of the proposed common or

usual names would ordinarily be

considered a greater cause of concern

than international trade effects caused

by preexisting consumer preferences for

different species of crab. FDA requests

information on the international trade

effects of this rule.

IV. Effective Date

The agency periodically has

established by final rule in the Federal

Register uniform effective dates for

compliance with food labeling

requirements (see, e.g., the Federal

Register of December 27, 1996 (61 FR

68145)). FDA proposes that any final

rule that may issue based upon this

proposal become effective in accordance

with a uniform effective date for

compliance with food labeling

requirements, which is established by

final rule in the Federal Register and

which is not sooner than 1 year

following publication of any final rule

based upon this proposal. The final rule

would apply to affected products

initially introduced or initially

delivered for introduction into interstate

commerce on or after its effective date.

However, FDA notes that it generally

encourages industry to comply with

new labeling regulations as quickly as

feasible. Thus, when industry members

voluntarily change their labels, it is

appropriate that they respond to any

new requirements that have been

published as final regulations up to that

time. On the other hand, if any industry

members can foresee that the proposed

effective date will create particular

problems, they should bring these

problems to the agency’s attention in

comments on this proposal.

V. Analysis of Impacts

A. Executive Order 12866

FDA has examined the impacts of this

proposed rule under Executive Order

12866. Executive Order 12866 directs

Federal agencies to assess the costs and

benefits of available regulatory

alternatives and, when regulation is

necessary, to select regulatory

approaches that maximize net benefits

(including potential economic,

environmental, public health and safety

effects; distributive impacts; and

equity). According to Executive Order

12866, a regulatory action is

‘‘economically significant’’ if it meets

any one of a number of specified

conditions, including having an annual

effect on the economy of $100 million

or adversely affecting in a material way

a sector of the economy, competition, or

jobs. A regulation is considered

‘‘significant’’ under Executive Order

12866 if it raises novel legal or policy

issues. FDA finds that this proposed

rule is neither an economically

significant nor a significant regulatory

action as defined by Executive Order

12866. In addition, it has been

determined that this proposed rule is

not a major rule for the purpose of

congressional review.

1. Options

FDA has assessed the costs and

benefits of the following regulatory

alternatives: Take no action, take the

proposed action, or establish a common

or usual name only for crabmeat derived

from blue crab.

2. Benefits and Costs

a. Option one: Take no action. By

convention, the option of taking no

action is the baseline in comparison

with which the costs and benefits of the

other options are determined. Therefore,

neither costs nor benefits are associated

with taking no action.

b. Option two: Take the proposed

action.

i. Benefits. The benefit of the

proposed action is that consumers will

be able to more easily identify the

species source of crabmeat for which

this proposed rule establishes common

or usual names. The value consumers

place on being able to more easily

identify crabmeat derived from these

species of crab is not known. However,

in general terms, if consumer valuation

of crabmeat differs widely by species,

and consumers cannot differentiate

those species in the absence of the

proposed common or usual name

regulations, then consumers will derive

greater benefit from the establishment of

the proposed common or usual names.

If, in addition, consumers assume that

products labeled simply as containing

crabmeat contain a particular and

relatively valuable species of crab, then

the proposed common or usual names

will protect consumers from the

economic fraud associated with the

substitution of crabmeat derived from a

less valuable species of crab for that

crabmeat derived from the more

valuable species of crab. On the other

hand, if consumer valuation of crabmeat

does not differ widely by species, or if

consumers can already differentiate

species, e.g., because they are already

labeled in a manner consistent with the

proposed common or usual name

regulations, then consumers will place

relatively little value on the

establishment of the proposed common

or usual names.

FDA requests information about the

following: Whether consumers can

differentiate crabmeats derived from

different species of crabs and, if so,

how; whether consumers assume that

products labeled simply as containing

crabmeat contain a particular species of

crab; and whether consumers place

different values on crabmeats derived

from different species of crabs. The

agency also is interested in pricing data

for crabmeat from different species. In

particular, the agency is interested in

data that takes into account seasonal

availability and other factors that

complicate price comparisons. The

agency also requests information from

consumers, crabmeat packers, and

crabmeat product distributors about

their experiences with species

substitution practices, that is, where a

less valuable crabmeat is substituted for

a more valuable crabmeat.

ii. Costs. The primary social cost of

the proposed action is the cost of

changing the labels of crabmeat

products that are not already labeled in

a manner consistent with the proposed

common or usual names. Depending on

market conditions, these costs may be

borne by crabmeat processors, packers,

or repackers or may be passed on to

consumers in the form of higher prices.

This rule may also produce distributive

effects, that is, this rule may make some

firms and regions better off and some

firms and regions worse off.

Labeling costs were estimated using a

model developed for that purpose by

Research Triangle Institute (RTI) under

contract to FDA. The model allows one

to estimate labeling costs based on the

length of the compliance period, the

complexity of the labeling change, and

the Standard Industrial Code (SIC)

classifications of the affected firms. The

resulting labeling costs were comprised

of administrative, redesign, and

inventory costs. Total labeling costs are

calculated by multiplying

administrative costs by the number of

affected firms and by multiplying

redesign and inventory costs by the

number of affected product lines, or

Stock Keeping Units (SKU’s). SKU’s
Federal Register / Vol. 63, No. 78 /Thursday, April 23, 1998 / Proposed Rules 20153

differ from one another on the basis of

either product formulation or packaging.

The proposed effective date is the

next uniform effective date for labeling

regulations following the publication of

a final rule based on this proposal. This

effective date will provide a compliance

period of at least 1 year. The relevant

SIC codes appear to be 2091, Canned

and Cured Fish and Seafoods, and 2092,

Fresh or Frozen Packaged Fish. The

complexity of the required labeling

changes depends on the current labeling

of the affected products. If these

products are currently labeled in such a

way that only the ingredient list needs

to be changed, then the required

labeling changes will be relatively

simple. If these products are currently

labeled in such a way that both the

ingredient list and the principal display

panel must be changed, then the

required labeling changes will be

relatively complex. FDA has insufficient

information on the current labeling of

these products to estimate the

proportion of products requiring label

changes of different levels of

complexity. Therefore, labeling costs

will be estimated both for the case in

which all affected products require only

changes to the ingredient list and for the

case in which all affected products

require changes to both the ingredient

list and the principal display panel.

Actual labeling costs should fall

somewhere between these two

estimates.

The number of firms potentially

affected by the proposed rule was

determined using two data sources.

These data sources differ with respect to

data collection techniques, the

frequency with which the data are

updated, and so forth. Evaluation of the

strengths and weaknesses of these data

sources would be quite complex.

Therefore, both data sources have been

used.

One data source used to estimate the

number of potentially affected firms was

the Duns Market Identifiers data base. A

search of this data base identified 108

establishments associated with 92 firms

that appear to produce crab products of

the type that would be affected by this

proposed rule. In this case, the search

procedure involved identifying

establishments with either SIC 2091 or

2092 as their primary or secondary

activity and having the word ‘‘crab,’’ but

not the word ‘‘imitation,’’ in the

description of their activity. The

number of firms associated with these

establishments was determined by

further limiting the search to single

establishment firms or headquarters of

multiestablishment firms.

The other data source used to estimate

the number of potentially affected firms

was FDA Official Establishment

Inventory (OEI). The OEI is a list of all

establishments known to FDA.

A search of the OEI identified 594

establishments that are listed as either

manufactures of crab products or crab

repackers and that, therefore, could be

affected by the proposed rule. Based on

FDA experience, most of these plants

probably represent independent firms.

Based on these two data sources, the

number of firms that might be affected

by the proposed rule is estimated to be

in the range of 92 to 594 firms.

The potential number of SKU’s

involved was estimated using the

average number of distinct items per

brand for crab products listed in the A.

C. Nielsen Co. SCANTRACK Market

Planner data base. This data base listed

210 brands and 346 items, for an

average of 1.6 items per brand. Items are

defined with respect to both product

formulation and package size and,

therefore, should correspond to SKU’s.

This average number of items or SKU’s

per brand was then multiplied by the

estimated range of potentially affected

firms to get a range of potentially

affected SKU’s. This procedure assumes

that each firm is associated with only

one brand name. Although some large

firms may produce products under

multiple brand names, the assumption

of one brand name per firm is probably

reasonable for most firms. Under these

assumptions, the number of potentially

affected SKU’s is estimated to be

between 147 and 950.

Some of the firms and SKU’s that are

potentially affected by the proposed rule

might not actually be affected. In

particular, some firms producing crab

products might produce products

containing only those nine species of

crab for which common or usual names

are already required by § 102.50. The

products produced by these firms would

not require label changes. In addition,

some of the firms producing products

containing species of crab for which

common or usual names are being

proposed might already be using the

proposed common or usual name,

which would be consistent with existing

FDA labeling guidance provided in

‘‘The Seafood List.’’ Label changes

would also not be required for these

products. However, information is not

available on the number of products that

meet either of these conditions. To

address the uncertainty generated by the

absence of information on this issue,

labeling costs will be estimated as a

range with the low end of the range set

to $0. Although it is unlikely that no

products would require label changes,

and that the cost of relabeling would

actually be $0, it is possible that only a

few products may need to be relabeled,

and that relabeling costs might be quite

low.

For a compliance period of 1 year, the

RTI labeling cost model estimates the

administrative costs for changing only

the ingredient list and for changing both

the ingredient list and the principal

display panel to be $850 per firm for

firms having fewer than 10 employees

and to be $6,300 per firm for firms

having 10 or more employees.

Administrative costs are the same for

firms in both SIC 2091 and 2092. With

respect to firms listed in the Dun’s

Market Identifiers data base, 23 of the 92

firms are identified as having fewer than

10 employees. Data on the number of

employees is not available for firms

listed in the OEI. In the absence of other

information, it is reasonable to suppose

that the proportion of firms listed in the

OEI that have fewer than 10 employees

is the same as the proportion of firms

listed in Dun’s Market Identifiers. Under

this assumption, 149 of the 594 firms

listed in the OEI would have fewer than

10 employees. Based on these data and

assumptions, total potential

administrative costs are estimated to

between $0.5 million and $3 million.

Taking into account the fact that some

potentially affected products may not

contain the relevant species of crab or

may already be labeled appropriately,

administrative costs are estimated to be

between $0 and $3 million.

For a compliance period of 1 year, the

RTI labeling cost model estimates

combined redesign and inventory costs

for changing the ingredient statement

only to be $290 per SKU for firms in SIC

2091 and $714 per SKU for firms in SIC

2092. That model estimates combined

redesign and inventory costs for

changing the ingredient statement and

the principal display panel to be $1,740

per SKU for firms in SIC 2091 and

$4,284 per SKU for firms in SIC 2092.

Based on data from Dun’s Market

Identifiers, 17 potentially affected

number are listed in SIC 2091, 62 firms

are listed in SIC 2092, and 13 firms are

listed in both. For the purposes of

estimating costs, it seems reasonable to

distribute the 13 firms that are in both

SIC classes to one of the two relevant

SIC classes in the same proportion as

the firms found in only one of the

relevant SIC classes. Under this

assumption, 20 potentially affected

firms would be found in SIC 2091 and

72 affected firms would be found in SIC

2092. Based on 1.6 SKU’s per firm, this

implies that the number of potentially

affected SKU’s in SIC 2091 is 32 and the
20154 Federal Register / Vol. 63, No. 78 /Thursday, April 23, 1998 / Proposed Rules

number of potentially affected SKU’s in

SIC 2092 is 119.

The OEI does not list firms by SIC.

Therefore, it seems reasonable to

suppose that the proportions of the

relevant firms in SIC 2091 and SIC 2092

are the same as the proportions of the

relevant firms in Dun’s Market

Identifiers. Under this assumption, 128

of the potentially affected 594 firms

listed in the OEI would be in SIC 2091

and 466 of those firms would be in SIC

2092. Based on 1.6 SKU’s per brand

name, this implies that the number of

potentially affected SKU’s in SIC 2091

is 211 and the number of potentially

affected SKU’s in SIC 2092 is 768.

Based on the estimated number of

potentially affected SKU’s using Dun’s

Market Identifiers and the OEI, total

potential redesign and inventory costs

are estimated to be between $0 and $1

million for changing the ingredient

statement only and between $1 million

and $4 million for changing both the

ingredient statement and the principal

display panel. Taking into account the

fact that some potentially affected

products may not contain the relevant

species of crab or may already be

labeled appropriately, redesign and

inventory costs are estimated to be

between $0 and $4 million. Total

labeling costs, including administrative,

redesign, and inventory costs, are

estimated to be between $0 and $7

million.

Labeling costs will be higher if some

crabmeat products are currently made

using any one of a number of species of

crab. In that case, this proposed rule

would require multiple product labels

to be printed for products that currently

use only one generic ‘‘crabmeat’’ label.

Additional costs will be generated if

compliance with the proposed labeling

requirements involve other changes to

the current method of manufacturing

crabmeat products. However, FDA is not

aware of any such costs. It should be

noted that products may continue to be

made with blends or mixtures of

crabmeats, provided that each crabmeat

in the blend or mixture is identified

with its common or usual name. FDA

requests information on the degree to

which different crabmeats are used in

the same products, and on any costs that

may be generated by this proposed rule,

including labeling, manufacturing,

storage, and recordkeeping costs.

In addition to social costs, there may

be distributive effects associated with

establishing the proposed common or

usual names because the labeling

changes necessitated by common or

usual names may increase the demand

for certain species of crab and decrease

the demand for other species of crab. In

some cases, these changes in demand

will simply reflect preexisting

differences in the value consumers

place on the different species of crab.

However, in other cases, these changes

in demand might result from adverse

consumer attitudes towards certain of

the proposed common or usual names.

For example, some consumers might

find the name ‘‘Spider crabmeat’’

unappealing, creating an aversion to

Spider crabmeat that did not previously

exist. Distributive effects caused by

adverse consumer attitudes toward

certain of the proposed common or

usual names would ordinarily be

considered a greater cause of concern

than distributive effects caused by

preexisting consumer preferences for

different species of crab. FDA has

insufficient information to estimate

changes in the demand for various

species of crab or to determine the

degree to which any changes in demand

reflect either preexisting preferences or

consumer attitudes toward the words

used in the proposed common or usual

names. FDA requests information on the

distributive effects of this rule. In

addition, FDA requests information on

whether any of the proposed common or

usual names might reduce the demand

for a particular species of crab for

reasons unrelated to preexisting

preferences for that species of crab.

c. Option three: Establish a common

or usual name only for blue crabmeat.

i. Benefits. FDA cannot estimate the

difference in the benefits of this option

relative to the benefits of taking the

proposed action because FDA does not

have information on the value

consumers place on blue crabmeat

relative to crabmeat from other species

of crab, the degree to which consumers

can already differentiate products that

contain blue crabmeat from products

that contain crabmeat from other species

of crab, or the degree to which

consumers assume that products labeled

as ‘‘crabmeat’’ contain blue crabmeat.

FDA requests public comment and

information on these issues.

ii. Costs. The costs associated with

this option would be less than the costs

associated with taking the proposed

action because this option would affect

only a subset of the products that would

be affected by the proposed action.

Therefore, estimated labeling costs

would be less than $7 million and any

other costs associated with the proposed

action would also be less than they

would be under the proposed action.

FDA cannot estimate the difference in

costs more precisely because FDA has

information only on the number of

products that contain crabmeat, not on

the number of products than contain

blue crabmeat. FDA requests

information on the number of products

containing exclusively blue crabmeat or

on the proportion of all crabmeatcontaining products that contain blue

crabmeat.

B. Analysis of Impacts on Small

Businesses

FDA has examined the impacts of this

proposed rule under the Regulatory

Flexibility Act. The Regulatory

Flexibility Act (5 U.S.C. 601–612)

requires Federal agencies to consider

alternatives that would minimize the

economic impact of their regulations on

small businesses and other small

entities. FDA finds that this proposed

rule, if issued, might have a significant

impact on a substantial number of small

entities.

1. Options

FDA has assessed the impacts on

small entities of the following regulatory

alternatives:

Take no action, take the proposed

action, or establish a common or usual

name only for crabmeat derived from

blue crab.

a. Option one: Take no action. Taking

no action would have no impact on

small businesses.

b. Option two: Take the proposed

action. As discussed in the Executive

Order 12866 analysis, the primary cost

of taking the proposed action is the cost

of changing the labels of products that

contain the relevant species of crab and

that are not already labeled in a manner

consistent with the proposed common

or usual names for those species. This

cost was estimated to be between $0 and

$7 million for all firms. The Small

Business Administration’s definition of

a small business for the SIC codes

identified as relevant in the Executive

Order 12866 analysis, SIC codes 2091

and 2092, is a firm having 500 or fewer

employees. Under this definition, 88 of

the 92 firms identified in the Dun’s

Market Identifiers data base as

potentially affected by this proposed

rule are small businesses. As indicated

previously, the OEI does not contain

information on the number of

employees.

Based on this information, it is likely

that some portion of the costs estimated

for all firms will be borne by small

businesses. A more precise estimation of

the proportion of estimated total costs

borne by small firms would require

information that is not currently

available on the average difference in

the number of SKU’s (products and

product sizes) produced by large and

small firms. The estimated costs could

be significant for some small firms.
Federal Register / Vol. 63, No. 78 /Thursday, April 23, 1998 / Proposed Rules 20155

However, only relatively modest cost

reductions would be produced by

further lengthening the compliance

period, and any level of cost could be

significant for some small firms.

With respect to the distributive effects

discussed in the benefit-cost analysis of

this option, FDA has no information to

suggest systematic differences in the

species of crabs used by small and large

firms. Therefore, FDA has no reason to

suspect that any distributive effects will

have a net negative effect on small firms

as a class of firms. Of course, some of

the firms that may be negatively affected

by distributive effects may be small

firms.

c. Option three: Establish a common

or usual name for blue crab only This

option would reduce the impact of this

proposed rule on small businesses

because this option would affect only a

subset of the products that would be

affected by taking the proposed action.

FDA cannot estimate the reduction of

the impact on small businesses for two

reasons. First, FDA has information only

on the number of products that contain

crabmeat, not on the number of

products than contain blue crabmeat.

Therefore, FDA cannot determine the

degree to which total costs would be

reduced by this option. Second, FDA

has information only on the number of

small businesses that manufacture

products containing crabmeat, not on

the number of small businesses that

manufacture products containing blue

crabmeat. Therefore, FDA cannot

determine the proportion of the total

cost reduction that would accrue

specifically to those small businesses

that manufacture crabmeat products

without blue crabmeat. FDA requests

information on the number of products

that contain blue crabmeat and the

number of small businesses that

produce products containing blue

crabmeat. FDA also requests

information on the number of products

that contain crabmeat from other species

of crab, and the number of businesses

and small businesses that produce

products containing crabmeat from

other species of crab. Finally, FDA also

requests information on other

alternatives that might reduce the

burden of this proposed rule on small

businesses.

VI. Environmental Impact

The agency has determined under

§ 25.30(k) (21 CFR 25.30(k)) that this

action is of a type that does not

individually or cumulatively have a

significant effect on the human

environment. Therefore, neither an

environmental assessment nor an

environmental impact statement is

required. The purpose of the proposed

rule is to ensure that consumers are

informed about the identity of all

crabmeats, and this will not change the

intended use of this food product. The

proposed action is not expected to

increase the demand for blue crabmeat

because the competition in the

marketplace between blue crabmeat and

lower priced crabmeat from other

species of crabs can be expected to

control the demand for blue crabmeat.

However, because the impact of this

proposed rulemaking on consumer

demand for blue crabmeat is uncertain,

FDA solicits public comment on any

adverse effects the proposed labeling

provisions may have on blue crab

populations. The agency will evaluate

its tentative conclusion that the

proposed action warrants a categorical

exclusion under § 25.30(k) in light of

any relevant comments responding to

this proposal.

VII. References

The following references have been

placed on display in the Dockets

Management Branch (address above)

and may be seen by interested persons

between 9 a.m. and 4 p.m., Monday

through Friday.

1. Williams, Austin B., Lawrence G. Abele,

et al., ‘‘Common and Scientific Names of

Aquatic Invertebrates from the United States

and Canada: Decapod Crustaceans,’’

American Fisheries Society Special

Publication 17, pp. 41, 1989.

2. Organization for Economic Cooperation

and Development, ‘‘Multilingual Dictionary

of Fish and Fish Products,’’ 3d ed., Fishing

News Books, pp. 63, 1990.

3. Krane, W., ‘‘Five-Language Dictionary of

Fish, Crustaceans and Molluscs,’’ Van

Nostran Reinhold, pp. 32, 1986.

4. Letter to the District Director, U.S.

Customs Service, Department of the

Treasury, from Harvy B. Fox, Director, Office

of Regulations and Rulings, U.S. Customs

Service, Department of the Treasury,

Washington DC, regarding ‘‘Country of Origin

Marking of Canned Crabmeat,’’ August 6,

1989.

5. AOAC Official Methods of Analysis

980.16 Identification of Fish Species, Thin

Layer Polyacrylamide Gel Isoelectric

Focusing Method, p. 885, 1990.

VIII. Comments

Interested persons may on or before

July 7, 1998, submit to the Dockets

Management Branch (address above)

written comments regarding this

proposal. Two copies of any comments

are to be submitted, except that

individuals may submit one copy.

Comments are to be identified with the

docket number found in brackets in the

heading of this document. Received

comments may be seen in the office

above between 9 a.m. and 4 p.m.,

Monday through Friday.

List of Subjects in 21 CFR Part 102

Beverages, Food grades and standards,

Food labeling, Frozen foods, Oils and

fats, Onions, Potatoes, Seafood.

Therefore, under the Federal Food,

Drug, and Cosmetic Act and under

authority delegated to the Commissioner

of Food and Drugs, it is proposed that

21 CFR part 102 be amended as follows:

PART 102—COMMON OR USUAL

NAME FOR NONSTANDARDIZED

FOODS

1. The authority citation for 21 CFR

part 102 continues to read as follows:

Authority: 21 U.S.C. 321, 343, 371.

2. Section 102.50 is revised to read as

follows:

§ 102.50 Crabmeat.

The common or usual name of

crabmeat derived from each of the

following designated species of crabs

shall be as follows:

Common or usual name of crabmeat Scientific name of crab

Blue crabmeat Callinectes sapidus.

Brown King crabmeat Lithodes aequispina.

Centolla crabmeat Lithodes antarcticus and Lithodes murrayi.

Deepsea crabmeat Paralomis granulosa.

Dungeness crabmeat Cancer magister.

Golden crabmeat Geryon fenneri.

Jonah crabmeat Cancer borealis.

King crabmeat Paralithodes camtschaticus and Paralithodes platypus.

King crabmeat or Hanasaki crabmeat Paralithodes brevipes.

Korean variety crabmeat or Kegani crabmeat Erimacrus isenbeckii.
20156 Federal Register / Vol. 63, No. 78 /Thursday, April 23, 1998 / Proposed Rules

Common or usual name of crabmeat Scientific name of crab

Lithodes crabmeat Neolithodes brodiei.

Red crabmeat Geryon quinquedens.

Rock crabmeat Cancer irroratus and Cancer pagurus.

Snow crabmeat Chionoecetes angulatus, Chionoecetes bairdi, Chionoecetes opilio, and

Chionoecetes tanneri.

Spider crabmeat Jacquinotia edwardsii and Maja squinado.

Stone crabmeat Menippi adina and Menippi mercenaria.

Swimming crabmeat Callinectes arcuatus, Callinectes toxotes, Portunus pelagicus, and

Portunus puber.

Dated: April 17, 1998.

William K. Hubbard,

Associate Commissioner for Policy

Coordination.

[FR Doc. 98–10743 Filed 4–22–98; 8:45 am]

BILLING CODE 4160–01–F

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG–121268–97]

RIN 1545–AW10

Travel and Tour Activities of Tax

Exempt Organizations

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Notice of proposed rulemaking.

SUMMARY: This document contains

proposed regulations clarifying when

the travel and tour activities of tax

exempt organizations are substantially

related to the purposes for which

exemption was granted. These proposed

regulations are intended to augment the

guidance that currently exists with

respect to travel tours and the unrelated

business income tax.

DATES: Written comments and requests

for a public hearing must be received by

July 22, 1998.

ADDRESSES: Send submissions to:

CC:DOM:CORP:R (REG–121268–97),

room 5226, Internal Revenue Service,

POB 7604, Ben Franklin Station,

Washington, DC 20044. Submissions

may be hand delivered between the

hours of 8 a.m. and 5 p.m. to:

CC:DOM:CORP:R (REG–121268–97),

Courier’s Desk, Internal Revenue

Service, 1111 Constitution Avenue NW.,

Washington, DC. Alternatively,

taxpayers may submit comments

electronically via the internet by

selecting the ‘‘Tax Regs’’ option on the

IRS Home Page, or by submitting

comments directly to the IRS internet

site at http://www.irs.ustreas.gov/prod/

taxlregs/comments.html.

FOR FURTHER INFORMATION CONTACT:

Robin Ehrenberg, (202) 622–6080 (not a

toll-free number).

SUPPLEMENTARY INFORMATION:

Background

An organization generally exempt

from tax under section 501(a) of the

Internal Revenue Code (‘‘Code’’) must

pay tax on its unrelated business taxable

income, as defined in section 512.

Section 512(a)(1) defines unrelated

business taxable income (’’UBTI’’) as the

gross income derived by any

organization from any unrelated trade or

business (as defined in section 513)

regularly carried on by the organization,

less the deductions which are directly

connected with the conduct of the trade

or business. Gross income from an

unrelated trade or business and any

deductions directly connected to that

trade or business are both computed in

accordance with the general income tax

rules of chapter 1 of the Internal

Revenue Code, subject to the

modifications provided in section

512(b).

Section 513(a) generally defines an

unrelated trade or business as any trade

or business the conduct of which is not

substantially related (aside from the

need of an organization for income or

funds or the use it makes of the profits

derived) to the exercise or performance

by the organization of its charitable,

educational, or other purpose or

function constituting the basis for its

exemption under section 501.

A ‘‘trade or business’’ is defined in

Section 1.513–1(b) of the Income Tax

Regulations as having the same meaning

it has for purposes of section 162, and

‘‘generally includes any activity carried

on for the production of income from

the sale of goods or performance of

services.’’ The key test of whether an

activity constitutes a trade or business is

whether the activity was conducted

with a profit motive. See U.S. v.

American Bar Endowment, 477 U.S. 105

(1986); Professional Insurance Agents of

Michigan v. Commissioner 726 F.2d

1097 (6th Cir. 1983); National Water

Well Association v. Commissioner, 92

T.C. 75 (1989). The regulations further

provide that an activity conducted for

the production of income does not lose

its character as a business ‘‘merely

because [it is] carried on within a larger

aggregate of similar activities or within

a larger complex of other endeavors

which may, or may not, be related to the

exempt purposes of the organization.’’

This ‘‘fragmentation rule,’’ as it is

commonly known, may result in

different treatment of related activities

under the unrelated business income

tax.

Section 1.513–1(d)(2) of the Income

Tax Regulations provides that a trade or

business is ‘‘substantially related’’ to

exempt purposes only where the

conduct of the business activities has a

substantial causal relationship to the

achievement of the exempt purposes

(other than through the production of

income) of the organization conducting

the trade or business. Thus, a trade or

business is substantially related for

purposes of section 513 only if the

conduct of the trade or business

contributes importantly to the

accomplishment of the organization’s

exempt purposes.

In recent years, taxpayers and

Congress have asked the IRS to publish

guidance addressing questions relating

to the unrelated business income tax

treatment of income generated from

travel tours conducted by tax exempt

organizations. Although the IRS has

issued a number of revenue rulings

addressing situations in which tax

exempt organizations sponsor travel

tours, most of these rulings have

analyzed whether an organization that

offers travel tours as its primary activity

can qualify as a charitable or

educational organization described in

section 501(c)(3) of the Code.

Rev. Rul. 67–327, 1967–2 C.B. 187,

holds that an organization whose

purpose is to arrange group tours for

students and faculty of a university in

order to allow them to travel abroad

does not qualify for exemption because

the organization operates essentially as