Branded Prescription Drug

language “paragraphs (a)(1)(i) and (3)” in
its place.
The additions read as follows:
§ 1.1366 –2 Limitations on deduction of
passthrough items of an S corporation to
its shareholders.
(a) * * *
(2) Basis of indebtedness—(i) In general. The term basis of any indebtedness
of the S corporation to the shareholder
means the shareholder’s adjusted basis (as
defined in § 1.1011–1 and as specifically
provided in section 1367(b)(2)) in any
bona fide indebtedness of the S corporation that runs directly to the shareholder.
Whether indebtedness is bona fide indebtedness to a shareholder is determined under general Federal tax principles and depends upon all of the facts and
circumstances.
(ii) Special rule for guarantees. A
shareholder does not obtain basis of indebtedness in the S corporation merely by
guaranteeing a loan or acting as a surety,
accommodation party, or in any similar
capacity relating to a loan. When a shareholder makes a payment on bona fide indebtedness of the S corporation for which
the shareholder has acted as guarantor or
in a similar capacity, then the shareholder
may increase the shareholder’s basis of
indebtedness to the extent of that payment.
(iii) Examples. The following examples illustrate the provisions of paragraph
(a)(2)(i) and (ii) of this section:
Example 1. Shareholder loan transaction. A is
the sole shareholder of S, an S corporation. S received a loan from A. Whether the loan from A to S
constitutes bona fide indebtedness from S to A is
determined under general Federal tax principles and
depends upon all of the facts and circumstances. See
paragraph (a)(2)(i) of this section. If the loan constitutes bona fide indebtedness from S to A, A’s loan to
S increases A’s basis of indebtedness under paragraph (a)(2)(i) of this section. The result is the same
if A made the loan to S through an entity that is
disregarded as an entity separate from A under
§ 301.7701–3 of this chapter.
Example 2. Back-to-back loan transaction. A is
the sole shareholder of two S corporations, S1 and
S2. S1 loaned $200,000 to A. A then loaned
$200,000 to S2. Whether the loan from A to S2
constitutes bona fide indebtedness from S2 to A is
determined under general Federal tax principles and
depends upon all of the facts and circumstances. See
paragraph (a)(2)(i) of this section. If A’s loan to S2
constitutes bona fide indebtedness from S2 to A, A’s

Bulletin No. 2014 –33

back-to-back loan increases A’s basis of indebtedness in S2 under paragraph (a)(2)(i) of this section.
Example 3. Loan restructuring through distributions. A is the sole shareholder of two S corporations, S1 and S2. In May 2014, S1 made a loan to S2.
In December 2014, S1 assigned its creditor position
in the note to A by making a distribution to A of the
note. Under local law, after S1 distributed the note to
A, S2 was relieved of its liability to S1 and was
directly liable to A. Whether S2 is indebted to A
rather than S1 is determined under general Federal
tax principles and depends upon all of the facts and
circumstances. See paragraph (a)(2)(i) of this section. If the note constitutes bona fide indebtedness
from S2 to A, the note increases A’s basis of indebtedness in S2 under paragraph (a)(2)(i) of this section.
Example 4. Guarantee. A is a shareholder of S,
an S corporation. In 2014, S received a loan from
Bank. Bank required A’s guarantee as a condition of
making the loan to S. Beginning in 2015, S could no
longer make payments on the loan and A made
payments directly to Bank from A’s personal funds
until the loan obligation was satisfied. For each payment A made on the note, A obtains basis of indebtedness under paragraph (a)(2)(ii) of this section.
Thus, A’s basis of indebtedness is increased during
2015 under paragraph (a)(2)(ii) of this section to the
extent of A’s payments to Bank pursuant to the
guarantee agreement.

fourth sentences and adding the language
“§ 1.1366 –2(a)(3)” in its place.
Par. 7. Section 1.1367–3 is amended by
adding two sentences to the end of the
paragraph to read as follows:

*****
Par. 5. Section 1.1366 –5 is revised to
read as follows:

Mark J. Mazur
Assistant Secretary of the Treasury
(Tax Policy).

§ 1.1366 –5 Effective/applicability date.
(a) Sections 1.1366 –1, 1.1366 –2(a)(1),
and 1.1366 –2(b) through 1.1366 – 4 apply
to taxable years of an S corporation beginning on or after August 18, 1998.
(b) Section 1.1366 –2(a)(2) applies to
indebtedness between an S corporation
and its shareholder resulting from any
transaction occurring on or after July 23,
2014. In addition, S corporations and their
shareholders may rely on § 1.1366 –
2(a)(2) with respect to indebtedness between an S corporation and its shareholder
that resulted from any transaction that occurred in a year for which the period of
limitations on the assessment of tax has
not expired before July 23, 2014.
(c) Sections 1.1366 –2(a)(3) through
(7), and this section apply on and after
July 23, 2014. For rules that apply before
that date, see 26 CFR part 1 (revised as of
April 1, 2014).

§ 1.1367–3 Effective/applicability date.
* * * Section 1.1367–1(h), Example
5(iii) applies on and after July 23, 2014.
The rules that apply before July 23, 2014
are contained in § 1.1367–3 in effect prior
to July 23, 2014 (see 26 CFR part 1 revised as of April 1, 2014).

John Dalrymple
Deputy Commissioner for
Services and Enforcement.
Approved May 27, 2014.

(Filed by the Office of the Federal Register on July 22, 2014,
8:45 a.m., and published in the issue of the Federal Register
for July 23, 2014, 79 F.R. 42675)

Section 9008.—Imposition
of Annual Fee on Branded
Prescription Pharmaceutical
Manufacturers and
Importers
2 26 CFR Part 5:1 Branded Prescription Drug Fee

TD 9684
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Parts 51 and 602

Branded Prescription Drug
Fee

§ 1.1367–1 [Amended]

AGENCY: Internal Revenue Service (IRS),
Treasury.

Par. 6. Section 1.1367–1(h) Example
5(iii) is amended by removing the language “§ 1.1366 –2(a)(2)” in the third and

ACTION: Final regulations, temporary
regulations, and removal of temporary
regulations.

345

August 11, 2014

SUMMARY: This document contains final regulations that provide guidance on
the annual fee imposed on covered entities
engaged in the business of manufacturing
or importing branded prescription drugs.
This fee was enacted by section 9008 of
the Patient Protection and Affordable
Care Act, as amended by section 1404 of
the Health Care and Education Reconciliation Act of 2010. This document also
withdraws the Branded Prescription Drug
Fee temporary regulations and contains
new temporary regulations regarding the
definition of controlled group that apply
beginning on January 1, 2015. The final
regulations and the new temporary regulations affect persons engaged in the business of manufacturing or importing certain branded prescription drugs. The text
of the temporary regulations in this document also serves as the text of proposed
regulations set forth in a notice of proposed rulemaking (REG–123286 –14) on
this subject in the Proposed Rules section
in this issue of the Bulletin.
DATES: Effective Date: These regulations are effective on July 28, 2014.
Applicability Date: For dates of applicability, see §§ 51.11, 51.11T, and 51.6302–
1(b).
FOR FURTHER INFORMATION
CONTACT: Celia Gabrysh at (202) 3176855 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained in these regulations has been reviewed and approved by the Office of
Management and Budget under control
number 1545-2209. The collection of
information in these final regulations is
in §§ 51.2(f)(2) and 51.7. Section
51.2(f)(2) requires consents to be maintained, in the case of a controlled group
that is not an affiliated group, by the
designated entity and each member of
the controlled group. Section § 51.7 requires a covered entity that chooses to
dispute its preliminary fee calculation to
provide certain information.
An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information un-

August 11, 2014

less the collection of information displays
a valid control number.
Books or records relating to a collection of information must be retained as
long as their contents may become material in the administration of any internal
revenue law. Generally, tax returns and
tax return information are confidential, as
required by section 6103 of the Internal
Revenue Code.
Background
This document contains final regulations that provide guidance under section
9008 of the Patient Protection and Affordable Care Act, Public Law 111–148 (124
Stat. 119 (2010)), as amended by section
1404 of the Health Care and Education
Reconciliation Act of 2010, Public Law
111–152 (124 Stat. 1029 (2010)) (collectively the ACA). All references in this
preamble to section 9008 are references to
section 9008 of the ACA. Section 9008
did not amend the Internal Revenue Code
(Code) but cross-references specified
Code sections.
On November 29, 2010, the IRS released Notice 2010 –71, 2010 –50 IRB
822, which proposed an approach to implementing the section 9008 fee and requested comments on the proposed approach. The proposed approach included
an opportunity to report certain information to the IRS relevant to the fee calculation and provided that the IRS would
provide each covered entity with notice of
a preliminary fee calculation. This notice
was modified and superseded by Notice
2011–9, 2011– 6 IRB 459, which was released on January 14, 2011.
On August 18, 2011, the Federal Register published temporary regulations relating to the fee on branded prescription
drugs (TD 9544, 76 FR 51245). The Federal Register also published on the same
day a notice of proposed rulemaking
(REG–112805–10, 76 FR 51310) crossreferencing the temporary regulations (the
proposed regulations).
In response to the proposed regulations, the Department of the Treasury
(Treasury Department) and the IRS received a variety of comments from the
public. All written comments are available at www.regulations.gov or upon request. The Treasury Department and the
IRS held a public hearing on November

346

9, 2012. After considering the public
comments and the hearing testimony,
the final regulations adopted by this
Treasury decision are generally consistent with the proposed regulations and
also reflect certain minor changes as described in this preamble. The corresponding temporary regulations are removed. The final regulations and the
new temporary regulations are discussed
in this preamble.
All references to section 505 are references to section 505 of the Federal Food,
Drug, and Cosmetic Act (21 U.S.C.
353(b)). Unless otherwise indicated, all
other references to subtitles, chapters,
subchapters, and sections in this preamble
are references to subtitles, chapters, subchapters, and sections in the Code and
related regulations. All references to “fee”
in the final regulations are references to
the fee imposed by section 9008 of the
ACA.
Effect on Other Documents
The following publications are obsolete as of July 28, 2014:
Notice 2010 –71, 2010 –51 IRB 822,
and Notice 2011–9, 2011– 6 IRB 459.
Explanation of Provisions and
Summary of Comments
Definitions
Manufacturer or importer
Section 9008(d)(1) defines covered entity as any manufacturer or importer with
gross receipts from branded prescription
drug sales. Section 9008(e) defines
branded prescription drug sales to mean
sales of branded prescription drugs to any
specified government programs or pursuant to coverage under such programs.
These programs are the Medicare Part B
program, the Medicare Part D program,
the Medicaid program, any program under
which branded prescription drugs are procured by the Department of Veterans Affairs, any program under which branded
prescription drugs are procured by the Department of Defense, and the TRICARE
retail pharmacy program (collectively, the
Programs).
The temporary regulations defined a
manufacturer or importer of a branded
prescription drug as the person identified

Bulletin No. 2014 –33

in the Labeler Code of the National Drug
Code (NDC). The NDC is a unique identifier that is assigned to all drug products
approved by the Food and Drug Administration (FDA), including a branded prescription drug. The Labeler Code is the
first five numeric characters of the NDC
or the first six numeric characters when
the available five-character code combinations are exhausted.
Commenters asked the IRS to allocate
drug sales to an entity other than the person identified in the Labeler Code of a
drug’s NDC when a covered entity transfers a drug to another covered entity during the sales year or engages in a transaction, such as a reorganization or a
bankruptcy, that results in a different entity selling the drug. The final regulations
do not adopt this request. A rule that uses
the Labeler Code to identify the manufacturer or importer of a branded prescription
drug provides certainty for both covered
entities and the IRS. The FDA maintains a
database that is available on the FDA
website with information about each
NDC, including its Labeler Code, which
is assigned by the FDA. The IRS refers to
this database to identify the person in the
NDC’s Labeler Code. The IRS encourages covered entities to review and update
their NDC data with the FDA to reflect
changes in the manufacturer or importer
of a branded prescription drug.
Covered Entity and Adjustment Amount
To be a covered entity, a manufacturer or importer must have gross receipts from branded prescription drug
sales. Section 9008(b)(1) requires the
IRS to calculate each covered entity’s
fee each fee year using sales data from
the preceding calendar year. Pursuant to
section 9008(g), the Centers for Medicare and Medicaid Services of the Department of Health and Human Services
(CMS), the Department of Veterans Affairs (VA), and the Department of Defense (DOD) (collectively, the Agencies) provide sales data to the IRS. For
purposes of calculating the fee, the temporary regulations used the second calendar year preceding the fee year as the
sales year. This rule is necessary because CMS cannot complete its data
processing within the necessary time

Bulletin No. 2014 –33

frame. The temporary regulations further provided that, because the use of
the second preceding year as the sales
year, rather than the immediately preceding year, may affect the amount of
the fee paid by a covered entity, the
annual fee due in every year after 2011
will include an adjustment amount. This
amount will be added (or subtracted), as
appropriate, to (or from) the fee otherwise payable by the covered entity in the
fee year in which the adjustment is calculated. Because CMS cannot complete
its data processing any earlier, the final
regulations adopt this approach.
A commenter asserted that, under the
temporary regulations, a former covered
entity may not be eligible for an adjustment amount if the entity does not have
any sales in subsequent years and is,
therefore, no longer a covered entity.
According to the commenter, if a covered entity owes a fee in 2013 based on
2011 sales, but has no sales in 2012 or
later years, then that entity would not
qualify as a covered entity in 2014 because the temporary regulations do not
provide a mechanism for the entity to
receive an adjustment amount for 2013.
The commenter suggested that if an adjustment amount results in a net credit to
the covered entity’s fee, the IRS should
treat the adjustment amount as an overpayment. The final regulations do not
adopt this suggestion. However, the final regulations clarify that an entity is
treated as a covered entity for any year
in which the entity has branded prescription drug sales and for any year for
which those sales must be taken into
account in calculating the fee and determining the adjustment amount. Therefore, an entity’s status as a covered entity begins in the first year it has branded
prescription drug sales to the Programs
even though the fee does not take those
sales immediately into account, and
continues until all sales for that entity
have been taken into account for both
fee calculation and adjustment amount
purposes.
For example, assume that an entity had
sales in 2011 with no sales in earlier or
later years. The entity is a covered entity
beginning in 2011. The entity is not liable
for a fee in 2011 or 2012 since those fee
years are based on 2009 and 2010 sales,

347

respectively. In 2013, the entity is liable
for the fee based on its 2011 sales. Furthermore, the entity is liable for the adjustment amount for the difference between the 2012 fee for the entity
computed using 2010 sales, which is $0,
and what the 2012 fee would have been
using 2011 sales. Even though the entity
does not have any sales in 2012 or later
years, it will continue to be a covered
entity in 2014 because its 2011 sales must
be taken into account for purposes of determining the adjustment amount relating
to the 2013 fee that applies to the 2014 fee
year. The entity will not be a covered
entity after 2014 because its 2011 sales
will not be taken into account after 2014.
The final regulations include this example.
Controlled Group
In accordance with the statute, the temporary regulations provided that a covered
entity includes a controlled group. The
temporary regulations defined the term
controlled group to mean a group of at
least two covered entities that are treated
as a single employer under section 52(a),
52(b), 414(m), or 414(o). Under the final
regulations, this definition applies through
December 31, 2014. Therefore, this definition applies for purposes of determining
who is in the controlled group through the
2016 fee year because the fee for the 2016
fee year is based upon data from the 2014
sales year. In this Treasury decision, the
Treasury Department and the IRS are also
issuing new temporary regulations (the
2014 temporary regulations), that define
the term controlled group to mean a group
of two or more persons, including at least
one person that is a covered entity, that are
treated as a single employer under section
52(a), 52(b), 414(m) or 414(o). This new
definition applies beginning on January 1,
2015. Therefore, this definition applies for
purposes of determining who is in the
controlled group beginning with the 2017
fee year because the fee for the 2017 fee
year is based upon data from the 2015
sales year. The broader definition of controlled group in the 2014 temporary regulations is supported by the statutory language and is consistent with how
controlled group rules with similar statutory language are applied, including how
controlled group is defined in § 57.2(c)(1)

August 11, 2014

for purposes of the health insurance providers fee under ACA section 9010. The
Treasury Department and the IRS expect
that the broader definition in the 2014
temporary regulations will primarily impact joint and several liability for the fee
and will not otherwise affect the administration of the fee. The final regulations
include conforming changes to the provision for joint and several liability to clarify that joint and several liability applies
to all members of the controlled group
under either definition of controlled
group, whichever applies.
Designated Entity
The temporary regulations required
each controlled group that files a Form
8947, “Report of Branded Prescription
Drug Information,” to have a designated
entity. A designated entity is the person
within the controlled group that acts on
behalf of the controlled group with regard to the fee. The temporary regulations further provided that if the controlled group, without regard to foreign
corporations included under section
9008(d)(2)(B), is also an affiliated group
that files a consolidated return for federal income tax purposes, the designated
entity is the common parent of the affiliated group identified on the tax return
filed for the sales year. If the controlled
group is not an affiliated group that files
a consolidated return, the temporary
regulations allowed the controlled group
to select its designated entity. However,
if the controlled group did not select a
designated entity, the IRS would select a
member of the controlled group as the
designated entity.
The final regulations modify the temporary regulations to better coordinate
with the consolidated return regulations.
Specifically, the final regulations provide
that the designated entity of a controlled
group, without regard to foreign corporations included under section 9008(d)(2)(B),
that is a consolidated group (within the
meaning of § 1.1502–1(h)) is the agent for
the group (within the meaning of
§ 1.1502–77).

The temporary regulations required the
designated entity to state under penalties
of perjury that all the covered entities that
are members of the controlled group have
consented to the selection of the designated entity. The final regulations adopt
this requirement and further require each
member of the controlled group to maintain a record of its consent. The final regulations also require the designated entity
to maintain a record of all of the members’ consents. Under the final regulations, this consent requirement does not
apply to a controlled group that is a consolidated group (within the meaning of
§ 1.1502–1(h)). If a controlled group that
is not a consolidated group does not select
a designated entity, the final regulations
provide that the IRS will select a designated entity and all covered entities in the
controlled group will be deemed to have
consented to the IRS’s selection of a designated entity.
Orphan Drug Sales
Section 9008(e)(3) provides that the
term branded prescription drug sales
does not include sales of any drug or
biological product with respect to which
a credit was allowed for any taxable
year under section 45C. Section
9008(e)(3) also provides that this exclusion does not apply with respect to any
such drug or biological product after the
date on which such drug or biological
product is approved by the FDA for
marketing for any indication other than
the treatment of the rare disease or condition with respect to which such credit
was allowed. In accordance with the
statute, the temporary regulations generally defined the term orphan drug to
mean any branded prescription drug for
which any person claimed a section 45C
credit and that credit was allowed for
any taxable year. The temporary regulations further provided that an orphan
drug does not include any drug for
which there has been a final assessment
or court order disallowing the full section 45C credit taken for the drug. Additionally, in accordance with the statute, the temporary regulations provided

that an orphan drug does not include any
drug for any sales year after the calendar
year in which the FDA approved the
drug for marketing for any indication
other than the treatment of a rare disease
or condition for which a section 45C
credit was allowed, regardless of
whether a section 45C credit was allowed for the drug before, in the same
year as, or after this FDA approval.
Commenters requested that the final
regulations treat a drug as an orphan
drug if the section 45C credit was “allowable”; that is, the section 45C credit
could have been claimed, but was not
actually claimed. Another commenter
requested that the final regulations extend orphan drug treatment to any drug
for which the section 45C credit was
allowable but for which a research tax
credit under section 41 was claimed
with respect to a taxable year ending on
or before December 31, 2010. Several
commenters also reasoned that the statutory exception for orphan drugs should
be extended to any drug that has been
designated by the FDA as an orphan
drug. Commenters also requested that
the final regulations extend the orphan
drug exclusion to drug sales for therapies that have only been approved to
treat orphan diseases, and to all products
that are FDA-approved for marketing
solely for rare diseases and conditions.
The final regulations do not adopt these
suggestions because the plain language
of section 9008(e)(3) requires that the
drug be an orphan drug for which the
section 45C credit was actually allowed
rather than merely allowable. The terms
“allowed” and “allowable” have separate and distinct meanings throughout
the Code. For example, under section
1016(a)(2), a taxpayer may adjust basis
to the extent the amount was “allowed”
as a deduction in computing taxable income but not less than the amount “allowable.”1 In addition, the overwhelming weight of authority under the case
law interprets the term “allowed” in the
Code to require the taxpayer to have
actually taken the amount into account

1
Likewise, under section 1250(b)(3), if a taxpayer can establish that the amount “allowed” as a deduction was less than the amount “allowable,” then the amount taken into account for
purposes of a depreciation adjustment is the amount “allowed.” See also section 36B(c)(1)(D) and section 42(j)(5)(A)(i).

August 11, 2014

348

Bulletin No. 2014 –33

for tax purposes.2 The FDA’s mere classification of a drug as an orphan drug is
not a determining factor because the
plain language of section 9008(e)(3) applies the exclusion only to sales of drugs
for which a section 45C credit was in
fact allowed.
Commenters also requested that orphan drug status be given to a drug for
which a section 45C credit was allowed,
even though the drug had been subsequently approved by the FDA for marketing for an indication other than the
treatment of a rare disease or condition
for which a section 45C credit was allowed. The final regulations do not
adopt this suggestion because the plain
language of section 9008(e)(3) indicates
that if a drug is ever approved for an
indication other than the treatment of a
rare disease or condition for which a
section 45C credit was allowed, whether
before, in the same year as, or after a
section 45C credit was allowed for the
drug, sales of that drug are not considered sales of an orphan drug beginning
in the following sales year. However, a
drug will retain its orphan drug status if
the drug subsequently receives approval
only for another indication for a rare
disease or condition for which a section
45C credit was allowed.
Pre-1984 Generic Drugs
Section 9008(e)(2)(A) defines the term
branded prescription drug to include any
prescription drug the application for
which was submitted to the FDA under
section 505(b). The final regulations track
the statutory language in defining the term
branded prescription drug. Neither the
statute nor the final regulations specifically refer to or address the treatment of
generic drugs.
On September 24, 1984, Congress enacted the Drug Price Competition and Patent Restoration Act of 1984, Public Law
98 – 417 (1984) (the 1984 Act). The 1984
Act added section 505(j) to provide an
expedited approval process for generic
drugs. Because an applicant submits an
application for approval of a generic drug
after the 1984 Act under section 505(j)
rather than section 505(b), such a drug is

not a branded prescription drug for purposes of the branded prescription drug fee.
It has come to our attention that, before
the 1984 Act, an applicant submitted an
application for approval of any prescription drug under section 505(b), and no
separate statutory process existed for approval of a generic drug. The Treasury
Department and the IRS request comments on whether a special rule is appropriate regarding the treatment of generic
drugs for which applications were submitted under section 505(b) prior to the 1984
Act, including comments on how to distinguish generic drugs for which applications were submitted under section 505(b)
prior to the 1984 Act from other prescription drugs for which applications were
submitted under section 505(b) prior to
the 1984 Act in a manner that is both
administrable and consistent with section
9008. Any special rule regarding the treatment of these generic drugs would be prospective only.
Comments with regard to this issue
should be submitted in writing and can be
mailed to the Office of Associate Chief
Counsel (Passthroughs and Special Industries), Re: REG–112805–10, CC;PSI:B7,
Room 5314, 1111 Constitution Avenue,
NW, Washington, DC 20224. All comments received will be available for public
inspection at http://www.regulations.gov
(IRS REG–112805–10).
Information Requested From Covered
Entities
The temporary regulations gave each
covered entity the opportunity to provide
information relevant to the determination
of the fee by annually submitting Form
8947, including information regarding rebates. Commenters asked that CMS include all rebate data in its reports to the
IRS, rather than have the IRS collect rebate data from the covered entities on
Form 8947. CMS now includes rebate
data for Medicare and federal Medicaid in
its reports. Therefore, the final regulations
eliminate the provision for separate reporting of Medicare and federal Medicaid
rebates by covered entities and Form 8947
no longer requests information on these
rebates. However, CMS does not include

Medicaid state supplemental rebate data.
Until CMS can include Medicaid state
supplemental rebate data in its reports to
the IRS, covered entities will continue to
have the opportunity to submit this rebate
data on Form 8947. Therefore, the final
regulations retain the provision that permits separate reporting of Medicaid state
supplemental rebate data by covered entities.
A commenter asked whether to include
state-only pharmaceutical program rebates on Form 8947 as Medicaid Drug
Rebates. According to CMS, state-only
pharmaceutical programs are not part of
the Medicaid Drug Rebate Program or the
federal Medicaid program. Therefore, the
final regulations specify that the Medicaid
Drug Rebate Program’s calculated
branded prescription drug fee does not
include state-only pharmaceutical sales or
rebates. Accordingly, a covered entity
may not report on its Form 8947 or error
report a rebate paid by the covered entity
in connection with a state-only pharmaceutical program.
A commenter asked that the final regulations provide that a covered entity may
submit an incomplete Form 8947. The
final regulations do not adopt this suggestion. Submission of Form 8947 is voluntary. A covered entity that chooses to file
Form 8947, however, must state, under
penalties of perjury, that to the best of the
filer’s knowledge and belief, the information provided on Form 8947 is true, correct, and complete. As in the past, a covered entity may correct and supplement
information it submitted on Form 8947, if
necessary, by submitting one or more error reports as part of the dispute resolution
process.
Information Provided by the Agencies
Section 9008(g) requires each Program
to calculate and provide sales data based
on the methodologies described in section
9008(g). Section 9008(b)(3) requires the
IRS to use the data provided by the Programs to calculate the fee. In accordance
with the statute, the temporary regulations
required the Agencies to provide data to
the IRS on branded prescription drug sales
that occurred during the sales year by Pro-

2

See Virginian Hotel Corporation of Lynchburg v. Helvering, 319 U.S. 523, 526 (1943); Flood v. United States, 33 F.3d 1174, 1178 n.5 (9th Cir. 1994); Lenz v. Commissioner, 101 T.C.
260, 265 (1993); Hightower v. Commissioner, T.C. Memo 1982–559.

Bulletin No. 2014 –33

349

August 11, 2014

gram and NDC. The temporary regulations also set forth the methodologies used
by the Agencies for calculating the sales
amounts for each Program.
Commenters raised questions about the
descriptions in the temporary regulations
of the methodologies used by the Agencies, asked that these descriptions be clarified, suggested alternative methods of
calculating Program sales data, and requested additional data. In response to
these comments, the final regulations
adopt certain suggestions to include revised descriptions of the data and computations the Agencies use to calculate
branded prescription drug sales as described in the following sections for each
Program. In addition, this preamble provides further background on the methodologies used by the Agencies as described
in the following sections for each Program. Because the Agencies have the responsibility to compute and report the
data described in the statute, the Treasury
Department and the IRS coordinated extensively with the Agencies in preparing
the additional background information in
the preamble and the revised descriptions
in the final regulations.
Medicare Part D
The temporary regulations provided
that, to determine branded prescription
drug sales amounts for Medicare Part D,
CMS will aggregate the ingredient cost
reported in the “Ingredient Cost Paid”
field and the units reported in the “Quantity Dispensed” field of the Prescription
Drug Event (PDE) records at the NDC
level for each sales year. Section
9008(g)(1)(A) requires Medicare Part D
sales amounts to be reduced by “any perunit rebate, discount, or other price concession provided by the covered entity.”
Commenters asked that the final regulations clarify how CMS determines these
net sales amounts. The final regulations
adopt this suggestion. The final regulations clarify that CMS will aggregate the
“Ingredient Cost Paid” field on the PDE
records at the NDC level, reduced by discounts, rebates, and other price concessions provided by the covered entity. To
obtain this information, CMS uses two
main data sources to determine net sales
amounts: the PDE records and the De-

August 11, 2014

tailed Direct and Indirect Remuneration
(DIR) Report. CMS obtains information
for these two data sources from Medicare
Part D sponsors.
The final regulations specifically define
“discounts, rebates, and other price concessions provided by the covered entity”
to include, in part, DIR. DIR is any and all
rebates, subsidies, or other price concessions from any source (including manufacturers, pharmacies, enrollees, or any
other person) that serve to decrease the
costs incurred by the Medicare Part D
sponsor (whether directly or indirectly)
for the Medicare Part D drug. See 42 CFR
423.308. Thus, DIR includes discounts,
chargebacks, rebates, cash discounts, free
goods contingent on a purchase agreement, up-front payments, and coupons.
DIR also includes goods in kind, free or
reduced-price services, grants, legal judgment amounts, settlement amounts from
lawsuits or other legal action, and other
price concessions or similar benefits.
However, DIR does not include price concessions that CMS does not consider to
directly or indirectly impact drug costs
incurred by the Medicare Part D sponsor.
The final regulations further provide
that DIR includes both DIR reported on
the PDE records at the point of sale and
DIR reported on the Detailed DIR Report.
The temporary regulations provided that,
if CMS does not have Medicare Part D
rebate information for a sales year, then
the IRS will reduce the branded prescription drug sales reported for Medicare Part
D by rebates reported by covered entities
on Form 8947. This procedure was necessary for fee year 2011 because CMS did
not have the information necessary to report Medicare Part D sales data net of
DIR. To provide this data to the IRS at the
individual drug level as the statute requires, CMS began to collect DIR at the
NDC level from Medicare Part D sponsors for use in the 2012 fee year, which
Medicare Part D sponsors report to CMS
on the Detailed DIR Report. Medicare
Part D sponsors also report DIR on the
PDE records at the point of sale, though
these amounts tend to be nominal. Therefore, since fee year 2012, CMS has been
reporting its Medicare Part D sales data to
the IRS net of all DIR by deducting from
the Ingredient Cost both DIR reported on
the PDE records at the point of sale and

350

DIR reported on the Detailed DIR Report.
The final regulations reflect this approach.
As stated earlier in this preamble, the final
regulations also eliminate the provision
for separate reporting of Medicare Part D
rebates by covered entities on Form 8947.
A commenter requested that the final
regulations clarify the treatment of coverage gap discount amounts. The final regulations adopt this suggestion effective for
fee years beginning in 2014. The Medicare Part D coverage gap, also known as
the “donut hole,” is a gap in prescription
drug coverage that is being closed due to
the Affordable Care Act. Part of closing
the coverage gap is the Coverage Gap
Discount Program described in section
1860D–14A of the Social Security Act,
which requires a 50-percent manufacturerpaid discount on covered brand-name
drugs in certain instances. For fee years
2012 and 2013, CMS did not deduct coverage gap discount amounts from the Ingredient Cost. This comment, however,
prompted CMS to recharacterize coverage
gap discount amounts as a type of rebate,
discount, or other price concession for
purposes of the fee calculation. Therefore,
beginning with the final fee calculation for
fee year 2014, CMS will report Medicare
Part D sales data to the IRS that is net of
coverage gap discount amounts. The final
regulations reflect this change.
The final regulations also remove the
reference to the “Quantity Dispensed”
field of the PDE records. This field has no
impact on sales because CMS totals the
ingredient cost at the NDC level and determines DIR reported on the PDE records
at the point of sale and DIR reported on
the Detailed DIR Report at the NDC level.
Thus, the unit of reference used by CMS
is consistently at the NDC level.
Commenters suggested that the final
regulations require CMS to exclude sales
in Puerto Rico in determining sales
amounts for Medicare Part D. The final
regulations do not adopt this suggestion.
Section 9008(g) requires each Agency to
report to the IRS the total branded prescription drug sales for each covered entity for each Program. Section 9008 does
not provide any exclusion for sales in
Puerto Rico or any other territory. When
calculating its branded prescription drug
sales data for Medicare Part D, CMS includes sales, DIR reported on the PDE

Bulletin No. 2014 –33

records at the point of sale, and DIR reported on the Detailed DIR Report for all
sales in the United States and its territories, including the Commonwealth of
Puerto Rico.
Medicare Part B
The temporary regulations provided
that CMS will determine branded prescription drug sales under Medicare Part
B using two data sources. First, CMS will
use the data reported by manufacturers
pursuant to section 1847A(c) of the Social
Security Act (42 U.S.C. 1395w–3a(c)) to
calculate the annual weighted average
sales price (ASP) for each Healthcare
Common Procedure Coding System
code (HCPCS code) for the sales year.
Second, CMS will use the Medicare Part
B National Summary Data File located
at http://www.cms.gov/Research-Statistics-Data-and-Systems/Files-for-Order/
NonIdentifiableDataFiles/PartBNationalSummaryDataFile.html to obtain the
number of allowed billing units per
HCPCS code for claims incurred during
the sales year. The temporary regulations
further provided separate detailed methods for CMS to use this data to determine
Medicare Part B sales amounts depending
on whether (1) the HCPCS code consists
solely and exclusively of branded prescription drugs manufactured by a single
entity, (2) the HCPCS code consists of a
mixture of branded prescription drugs
made by different manufacturers and/or a
mixture of branded prescription and generic drugs, or (3) CMS is unable to establish a reliable proportion of sales attributable to each NDC assigned to the
HCPCS code.
Under the third method in the temporary regulations, if CMS is unable to establish a reliable proportion of sales attributable to each NDC assigned to the
HCPCS code, CMS will calculate Medicare Part B sales by using Medicare Part
D utilization percentages. A commenter
requested that CMS develop a more accurate backup method. The final regulations
do not adopt this suggestion. In CMS’s
view, the existing backup method is sufficiently reliable. Additionally, CMS did
not anticipate frequent use of this approach and has not needed to use the
backup method for any fee calculation to

Bulletin No. 2014 –33

date. The final regulations do, however,
include a more detailed explanation of
how CMS uses HCPCS codes as well as
an example.
Commenters also expressed concern
about whether Medicare Part B is capturing complete data on what are sometimes
referred to as non-separately payable
drugs. Non-separately payable drugs may
not be directly correlated with a single
specific HCPCS code. Some nonseparately payable drugs are associated
with more than one HCPCS code or are
bundled with services, such as dialysis.
CMS recognizes this concern and makes
extensive effort to gather as complete a
data set as possible. CMS will continue to
work with the data available to capture
non-separately payable drugs.
Medicaid
The temporary regulations provided
that CMS will determine branded prescription drug sales as the per-unit Average Manufacturer Price (AMP) less the
Unit Rebate Amount (URA) that CMS
calculates based on manufacturer-reported
pricing data multiplied by the number of
units reported billed by the states to manufacturers. Specifically, the temporary
regulations provided that for any covered
entity identified in the first five (or six)
digits of an NDC during any of the four
quarters of a sales year, CMS uses the
following methodology to derive the
branded prescription sales amounts that
account for third-party payers:
Step 1. Report total dollars per NDC
for AMP minus URA, multiplied by the
units reported by a state or states;
Step 2. Determine the percentage of the
total amount reimbursed that is the Medicaid amount of that reimbursement; and
Step 3. Multiply the percentage of the
Medicaid amount of that reimbursement
by the dollar figure from step 1 (AMP
minus URA, multiplied by units) to get
the new adjusted sales dollar totals.
The final regulations clarify that CMS
will determine branded prescription drug
sales as the per-unit AMP less the URA that
CMS calculates based on manufacturerreported pricing data multiplied by the number of units reported as paid by the states
rather than as billed by the states.

351

Commenters requested that the final
regulations require Medicaid to use the
per-unit ingredient cost paid to pharmacies by the states as provided in section
9008(g)(3) instead of AMP in computing
total branded prescription drug sales. The
final regulations do not adopt this suggestion. Medicaid does not have the ability to
use the per-unit ingredient cost paid to
pharmacies by the states because Medicaid systems are not designed to track drug
sales data in this manner or obtain this
type of detailed information from the
states. Instead, Medicaid systems track
drug sales data using AMP. AMP is the
best alternative that Medicaid systems
permit and serves as a reasonable proxy
for the per-unit ingredient cost paid to
pharmacies by the states.
The temporary regulations provided
that Medicaid branded prescription drug
sales data will be based on the data reported to CMS during the sales year by
covered entities and the states for drugs
paid for by the states in the Medicaid
Drug Rebate Program during the sales
year. The final regulations clarify that the
sales data is based on the data that covered
entities report for the sales year rather
than the data that covered entities report
during the sales year because some reporting for a sales year may occur after that
year ends.
Commenters requested that the final
regulations clarify the meaning of the
phrase “drugs paid for by the states in the
Medicaid Drug Rebate Program” and
whether it includes units paid for under
managed care organization plans. In response to this request, the final regulations
specify that “drugs paid for by the states
in the Medicaid Drug Rebate Program”
includes all branded prescription drug
units for which the states bill rebates to
covered entities under the Medicaid Drug
Rebate Program. This program includes,
but is not limited to, units paid for under
various health care plans such as fee for
service, managed care organizations, and
drugs administered in a non-retail setting
such as drugs administered in a physician’s office, clinic, hospital or other setting. Under the Medicaid Drug Rebate
Program, states provide the required utilization data. States report separate totals
for each NDC for both fee-for-service and
managed care organization utilization

August 11, 2014

data. Also, as stated earlier in this preamble, the final regulations specify that the
Medicaid Drug Rebate Program’s calculated branded prescription drug fee does
not include state-only pharmaceutical program sales or rebates.
Commenters asked how a covered entity can ensure that a state has updated its
Medicaid data files to accurately reflect
state rebates. This issue is beyond the
scope of these regulations. However,
since 2011, in the context of the dispute
resolution process, CMS, IRS, and covered entities have devoted extensive resources to resolving discrepancies between a state’s reported rebate data that
CMS uses to compute Medicaid’s branded
prescription drug sales data for the IRS
and the rebate data that covered entities
receive from that state. To resolve these
discrepancies on a timely basis, CMS has
established a reconciliation process. To
maximize the effectiveness of this reconciliation process, however, a covered
entity must use the CMS reconciliation
process in a timeframe that allows discrepancies to be resolved before CMS
computes the branded prescription sales
data that it sends the IRS for purposes of
computing a covered entity’s preliminary fee calculation. A covered entity’s
timely use of the CMS reconciliation process will help minimize, if not eliminate,
the errors related to CMS’s Medicaid data
that a covered entity would otherwise include in its error report. The web address
for this resource is http://medicaid.gov/
Medicaid-CHIP-Program-Information/
By-Topics/Benefits/Prescription-Drugs/
Branded-Prescription-Drug.html.
This
CMS Medicaid Branded Prescription
Drug Fee program webpage also has additional information regarding Medicaid
sales data. Covered entities may e-mail
questions to CMS Medicaid regarding the
data used in this program at
[email protected] with “BPD”
in the e-mail subject line.
Department of Veterans Affairs
The temporary regulations provided
that VA will provide, by NDC, the total
amount paid (net of refunds and rebates,
when they are associated with a specific
NDC) for each branded prescription drug
procured by VA for its beneficiaries dur-

August 11, 2014

ing the sales year. For this purpose, a drug
is procured on the invoice (billing) date.
The temporary regulations further provided that the basis of this information
will be national procurement data reported
during the sales year by VA’s Pharmaceutical Prime Vendor to the VA Pharmacy
Benefits Management Service and National Acquisition Center.
A commenter requested that the final
regulations require that the amount of the
IFF and CRF be excluded from VA sales
either by requiring VA to exclude these
amounts from its sales data or by allowing
a covered entity to report these amounts
on its Form 8947. The final regulations do
not adopt this suggestion. According to
VA, these amounts are part of the total
price VA pays to its Pharmaceutical Prime
Vendor and are properly included in the
sales amount.
A commenter requested that the final
regulations confirm that VA sales data
does not include DOD, Coast Guard, Indian Health, or other purchases made under the Federal Supply Schedule. VA does
not include in its sales data purchases
made by other agencies. Because the
methodology in the regulations is already
limited to purchases made by VA, the
final regulations do not need further clarification.
Department of Defense
The temporary regulations provided
that, for DOD programs other than TRICARE, DOD will provide, by Labeler
Code, the manufacturer’s name, the NDC,
brand name, and the amount paid (net of
rebates or refunds) for each branded prescription drug procured by DOD during
the sales year. For this purpose, a drug is
procured based upon the date it was ordered.
A commenter requested that the final
regulations require that the amount of the
Industrial Funding Fee (IFF) and the Cost
Recovery Fee (CRF) be excluded from
DOD sales, either by requiring DOD to
exclude these fees from its sales data or by
allowing a covered entity to report these
fees on its Form 8947. The IFF and CRF
are administrative fees that are added to
the cost of purchasing under the Federal
Supply Schedule and National Contract
Service. The final regulations do not adopt

352

this suggestion. According to DOD, these
fee amounts are part of the total price
DOD pays to procure a drug and are properly included in the sales amount.
TRICARE
The temporary regulations provided
that DOD will provide, by Labeler
Code, the manufacturer’s name, the
NDC, brand name, and the amount paid
(net of rebates or refunds) for each
branded prescription drug procured by
DOD through the TRICARE retail pharmacy program (TRICARE) during the
sales year. For TRICARE, a drug is
procured based upon the date it was
dispensed. The amount paid is based on
the submitted ingredient cost paid, aggregated by NDC, for eligible TRICARE claims submitted during the program year, minus any refunds or rebates
for the corresponding claims.
Commenters expressed concern that
TRICARE’s drug sales overlap with DOD
and VA and asked that the final regulations address this perceived overlap. The
final regulations do not adopt this suggestion. No overlap exists because TRICARE
only reports sales from its retail pharmacy
network, which is distinct from sales reported by DOD and VA. TRICARE,
DOD, and VA separately maintain and
report their own drug sales data.
Section 51.4T(f) described the TRICARE and DOD methodologies for calculating sales data. Section 51.4(f) continues to describe the DOD methodology. A
new subsection, § 51.4(g), describes the
TRICARE methodology.
Fee Calculation Including Adjustment
As stated earlier in this preamble, because the use of the second preceding year
as the sales year, rather than the immediately preceding year, may affect the
amount of the fee paid by a covered entity,
the temporary regulations provided that
the annual fee due in every year after 2011
will include an adjustment amount. This
adjustment amount will be added (or subtracted), as appropriate, to (or from) the
fee otherwise payable by the covered entity in the fee year in which the adjustment
is calculated.

Bulletin No. 2014 –33

A commenter asked that the final regulations provide for a separate dispute resolution process for the adjustment amount
after the final fee calculation because errors reported in the dispute resolution process may not be resolved in time to be
reflected in the final fee calculation. The
final regulations do not adopt this suggestion. The adjustment amount is part of the
preliminary fee calculation. Therefore,
each covered entity has an opportunity to
raise disputes regarding the adjustment
amount during the existing dispute resolution process. Moreover, an adjustment
to one covered entity’s final fee calculation would necessitate a recalculation of
each covered entity’s prior final fee calculation because the fee is an allocated
fee. The final regulations clarify that the
IRS will not make adjustments to a final
fee calculation.
Because the amount of the fee under
the temporary regulations was based on
sales from the second preceding year,
commenters suggested that the final regulations allow a covered entity to reduce
its fee liability in the same year that the
covered entity experiences an event that
would significantly reduce its sales to
the Programs and make corresponding
adjustments in future years. Such events
may include a drug recall, a loss of
patent exclusivity, or bankruptcy. The
final regulations do not adopt this suggestion. The statute requires the IRS to
determine each covered entity’s branded
prescription drug sales on the basis of
reports submitted by the Agencies and
to uniformly apply the fee determination
rules to each covered entity’s sales data.
The methodology adopted in the final
regulations ensures that the applicable
fee amount is appropriately apportioned
among the covered entities.
In accordance with section 9008(f)(1),
the temporary regulations treated the fee
as an excise tax for purposes of subtitle
F. A commenter suggested that the final
regulations provide for interest payments for adjustment amounts that are
credited to a covered entity. The final
regulations do not adopt this suggestion.
Instead, the final regulations clarify that
an adjustment amount itself is neither an
overpayment nor an underpayment, but
rather a component of the current year’s
fee. Thus, for purposes of section 6601,

Bulletin No. 2014 –33

any increase in the current year’s fee
resulting from any adjustment amount,
along with the remainder of the fee, is
treated as due on the due date for the
current year’s fee. Conversely, for purposes of section 6611, any adjustment
amount that decreases the current year’s
fee is treated as a payment towards the
current fee amount made on the due date
of the current fee year.
Commenters asked that the final regulations clarify whether a covered entity
must file Form 843, “Claim for Refund
and Request for Abatement,” to request
that the IRS calculate an adjustment
amount when a covered entity anticipates
that it is entitled to a positive adjustment
amount. As stated earlier in this preamble,
a positive adjustment amount is not an
overpayment. Accordingly, in response to
this comment, the final regulations clarify
that a covered entity does not file Form
843 to obtain an adjustment amount. The
IRS automatically calculates adjustment
amounts. Additionally, the final regulations clarify that if a covered entity’s adjustment amount reduces the fee below
zero and results in an amount due to the
covered entity for the fee year, the IRS
will automatically pay this amount due to
the covered entity.
Another commenter suggested that the
final regulations clarify whether the period of limitations on filing a claim set
forth in section 6511 applies to the adjustment amount. Under the final regulations,
section 6511 applies to the fee, but not
separately to the adjustment amount, because the adjustment amount is merely a
component of the fee. For purposes of
section 6511, any adjustment amount that
decreases the current year’s fee is treated
as a payment towards the current fee
amount made on the due date of the current fee year.
Notification and Payment of Fee
The temporary regulations provided
that, no later than August 31st of each fee
year, the IRS will send each covered entity its final fee calculation for that fee
year. Several commenters suggested that
the IRS send the final fee notice in an
electronic format. The final regulations do
not adopt this suggestion because it is
outside the scope of these regulations.

353

However, the final regulations do not prohibit the IRS from using an electronic
format for the final fee notice. Moreover,
at the time these comments were submitted, the IRS was already sending a covered entity’s sales data with its preliminary fee notice on a separate CD-ROM in
Microsoft Excel format to each covered
entity that timely requested it. After receiving these comments, the IRS began
also sending a covered entity’s sales data
with its final notice on a separate CDROM in Microsoft Excel format if the
entity had made a timely request for the
CD-ROM to be sent with its preliminary
fee notice. More information about the
manner for notifying covered entities of
their preliminary and final fee calculations
is contained in Notice 2014 – 42.
In accordance with section 9008(a)(2),
the temporary regulations provided that
each covered entity must pay its final fee
by September 30th of the fee year. A commenter suggested that the final regulations
clarify whether section 7503 applies to the
deadline for fee payment. Section 7503
provides that if the last day for performing
an act required under the authority of the
internal revenue laws falls on a Saturday,
Sunday, or a legal holiday, the performance of the act is timely if the act is
performed on the next succeeding day that
is not a Saturday, Sunday, or a legal holiday. The final regulations do not provide
a special rule because section 9008(f)(1)
and the final regulations treat the fee as an
excise tax for purposes of subtitle F.
Therefore, section 7503 applies to the
deadline for fee payment.
Dispute Resolution Process
The temporary regulations provided
for a dispute resolution process that allows a covered entity to submit error reports in response to the preliminary fee
calculation for the IRS to consider before
performing the final fee calculation. The
temporary regulations described the information that covered entities must submit.
The final regulations adopt these provisions with the following minor changes
that will allow the IRS to more accurately
process a covered entity’s disputes.
The temporary regulations required
that a Form 2848, “Power of Attorney and
Declaration of Representative” must be

August 11, 2014

filed with an error report. The final regulations clarify that a Form 2848 is required only when the representative is not
an employee of the covered entity who is
authorized under section 6103 or designated on Form 8947 to discuss the information reported on Form 8947.
The temporary regulations required the
name, telephone number, and e-mail address (if available) of one or more employees or representatives with whom errors may be discussed. The final
regulations also require a fax number.
For Program errors, the temporary regulations required a covered entity to submit a separate error report for each Program with the asserted errors. For nonProgram errors, the temporary regulations
required a covered entity to submit one
error report with all of the non-Program
errors. To streamline the error reporting
process, the final regulations require a
covered entity to combine both Program
and non-Program errors on a single error
report, with each asserted error on a separate line.
Availability of IRS Documents.
The IRS notices, the revenue procedure, and the temporary regulations cited
in this preamble are published in the Internal Revenue Bulletin and are available
at www.irs.gov. The temporary regulations are also available in the Code of
Federal Regulations.
Special Analyses
It has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order 12866, as supplemented by
Executive Order 13563. Therefore, a
regulatory assessment is not required. It
also has been determined that section
553(b) of the Administrative Procedure
Act (5 U.S.C. chapter 5) does not apply
to these regulations. It is hereby certified that the collection of information in
these final regulations will not have a
significant economic impact on a substantial number of small entities. This
certification is based on the fact that the
only collection burden imposed by these
regulations is the requirement to maintain a record of consent to the selection
of a designated entity, and this collec-

August 11, 2014

tion burden applies only to designated
entities of controlled groups, which tend
to be large corporations, and their members. Therefore, a Regulatory Flexibility
Analysis under the Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required. Pursuant to section 7805(f), the
notice of proposed rulemaking was submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small
business, and no comments were received.
Drafting Information
The principal author of these regulations is Celia Gabrysh, Office of the Associate Chief Counsel (Passthroughs and
Special Industries). However, other personnel from the Treasury Department and
the IRS participated in their development.
*****
Reporting and recordkeeping requirements.
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR parts 51 and 602
are amended as follows:
PART 51—BRANDED
PRESCRIPTION DRUG FEE
Paragraph 1. The authority citation for
part 51 continues to read as follows:
Authority: 26 U.S.C. 7805; sec. 9008,
Public Law 111–347 (124 Stat. 119).
Section 51.8 also issued under 26
U.S.C. 6302(a).
Section 51.6302–1 also issued under
26 U.S.C. 6302(a).
Par. 2. Section 51.1 is added to read as
follows:
§ 51.1 Overview.
(a) The regulations in this part 51 are
designated “Branded Prescription Drug
Fee Regulations.”
(b) The regulations in this part 51 provide guidance on the annual fee imposed
on covered entities engaged in the business of manufacturing or importing
branded prescription drugs by section
9008 of the Patient Protection and Affordable Care Act (ACA), Public Law 111–
148 (124 Stat. 119 (2010)), as amended by
section 1404 of the Health Care and Education Reconciliation Act of 2010

354

(HCERA), Public Law 111–152 (124 Stat.
1029 (2010)). All references in these regulations to section 9008 are references to
section 9008 of the ACA, as amended by
section 1404 of HCERA. Unless otherwise indicated, all other section references
are to sections in the Internal Revenue
Code. All references to “fee” in these regulations are references to the fee imposed
by section 9008.
(c) Section 9008(b)(4) sets an applicable fee amount for each year, beginning
with 2011, that will be apportioned among
covered entities with aggregate branded
prescription drug sales of over $5 million
to government programs or pursuant to
coverage under such programs. Generally,
each covered entity is liable for a fee in
each fee year that is based on its sales of
branded prescription drugs in the sales
year that corresponds to the fee year in an
amount determined by the Internal Revenue Service (IRS) under the rules of this
part.
§ 51.1T [Removed]
Par. 3. Section 51.1T is removed.
Par. 4. Section 51.2T is revised to read
as follows:
§ 51.2T Explanation of terms
(temporary).
(a) through (e)(2) [Reserved]. For further guidance see § 51.2(a) through (e)(2).
(3) Controlled Group. The term controlled group means a group of two or
more persons, including at least one person that is a covered entity, that is treated
as a single employer under section 52(a),
52(b), 414(m), or 414(o).
(e)(4) through (m) [Reserved]. For further guidance see § 51.2(e)(4) through
(m).
Par. 5. Section 51.2 is added to read as
follows:
§ 51.2 Explanation of terms.
(a) In general. This section explains
the terms used in this part for purposes of
the fee imposed by section 9008 on
branded prescription drugs.
(b) Agencies. The term Agencies
means—

Bulletin No. 2014 –33

(1) The Centers for Medicare and Medicaid Services of the Department of
Health and Human Services (CMS);
(2) The Department of Veterans Affairs (VA); and
(3) The Department of Defense (DOD).
(c) Branded prescription drug—(1) In
general. The term branded prescription
drug means—
(i) Any prescription drug the application for which was submitted under section 505(b) of the Federal Food, Drug, and
Cosmetic Act (21 U.S.C. 355(b))
(FFDCA); or
(ii) Any biological product the license
for which was submitted under section
351(a) of the Public Health Service Act
(42 U.S.C. 262(a)).
(2) Prescription drug. The term prescription drug means any drug that is subject to section 503(b) of the FFDCA.
(d) Branded prescription drug sales.
The term branded prescription drug sales
means sales of branded prescription drugs
to any government program or pursuant to
coverage under any such government program. However, the term does not include
sales of orphan drugs.
(e) Covered entity—(1) In general. The
term covered entity means any manufacturer or importer with gross receipts from
branded prescription drug sales including—
(i) A single-person covered entity; or
(ii) A controlled group.
(2) Single-person covered entity. The
term single-person covered entity means a
covered entity that is not affiliated with a
controlled group.
(3) Controlled group— (i) On or before December 31, 2014. The term controlled group means a group of at least
two covered entities that are treated as a
single employer under section 52(a),
52(b), 414(m), or 414(o).
(ii) After December 31, 2014. For guidance regarding the definition of controlled
group after December 31, 2014, see
§ 51.2T(e)(3).
(4) Special rules for controlled groups.
For purposes of paragraph (e)(3) of this
section (related to controlled groups)—
(i) A foreign entity subject to tax under
section 881 is included within a group
under section 52(a) or 52(b); and
(ii) A person is treated as being a member of a controlled group if it is a member

Bulletin No. 2014 –33

of the group on the end of the day on
December 31st of the sales year.
(5) Covered entity status—(i) Rule. An
entity’s status as a covered entity begins
in the first fee year in which the entity has
branded prescription drug sales and continues each subsequent fee year until there
are no remaining branded prescription
drug sales for that entity to be taken into
account as described in § 51.5(c) or used
to calculate the adjustment amount described in § 51.5(e).
(ii) Example. The following example illustrates
the rule of paragraph (e)(5)(i) of this section:
(A) Facts. Entity A is a manufacturer with gross
receipts of more than $5 million from branded prescription drugs sales in 2011. Entity A does not have
any gross receipts from branded prescription drug
sales before or after 2011.
(B) Analysis. Entity A is a covered entity beginning in 2011 because it had gross receipts from
branded prescription drug sales in 2011. For the
2011 fee year, Entity A does not owe a fee because
the 2011 fee is based on sales data from the 2009
sales year. For the 2012 fee year, Entity A does
not owe a fee because the 2012 fee is based on
sales data from the 2010 sales year. Entity A
continues to be a covered entity for the 2012 fee
year because its branded prescription drug sales
from the 2011 sales year have not yet been taken
into account as described in § 51.5(c) and used to
calculate the adjustment amount described in
§ 51.5(e). For the 2013 fee year, Entity A continues to be a covered entity because a portion of its
branded prescription drug sales from the 2011
sales year are taken into account as described in
§ 51.5(c) for purposes of computing the 2013 fee.
For the 2013 fee year, Entity A is also liable for
the adjustment amount described in § 51.5(e) for
the difference between its 2012 fee computed using sales data from the 2010 sales year, which is
$0, and what the 2012 fee would have been using
sales data from the 2011 sales year. For the 2014
fee year, Entity A continues to be a covered entity
because a portion of its branded prescription drug
sales for the 2011 sales year are used to calculate
the adjustment amount described in § 51.5(e).
Therefore, for the 2014 fee year, Entity A will
receive an adjustment amount for the difference
between its 2013 fee computed using sales data
from the 2011 sales year, and what the 2013 fee
would have been using sales data from the 2012
sales year, which is $0. After the 2014 fee year,
there are no remaining branded prescription drug
sales to be taken into account as described in
§ 51.5(c) or used to calculate the adjustment
amount described in § 51.5(e) for Entity A. Accordingly, Entity A is not a covered entity after the
2014 fee year.

(f) Designated entity—(1) In general.
The term designated entity means the person within a controlled group that is designated to act for the controlled group
regarding the fee by—

355

(i) Filing Form 8947, “Report of
Branded Prescription Drug Information”;
(ii) Receiving IRS communications
about the fee for the group;
(iii) Filing an error report for the group,
if applicable, as described in § 51.7; and
(iv) Paying the fee to the government.
(2) Selection of designated entity—(i)
Controlled group selection of a designated entity. Except as provided in paragraph (f)(2)(ii) of this section, the controlled group may select a person as the
designated entity by filing Form 8947 in
accordance with the form instructions.
The designated entity must state under
penalties of perjury that all members of
the controlled group have consented to
the selection of the designated entity.
The designated entity must maintain a
record of all member consents. Each
member of a controlled group must
maintain a record of its consent to the
controlled group’s selection of the designated entity.
(ii) Requirement for affiliated groups;
agent for the group. If the controlled group,
without regard to foreign corporations included under section 9008(d)(2)(B), is also
an affiliated group whose common parent
files a consolidated return for federal income tax purposes, the designated entity is
the agent for the group (within the meaning
of § 1.1502–77 of this title).
(iii) IRS selection of a designated entity. Except as provided in paragraph
(f)(2)(ii) of this section, if a controlled
group does not select a designated entity
as provided in paragraph (f)(2)(i) of this
section, the IRS will select a member of
the controlled group as the designated
entity for the controlled group. If the
IRS selects the designated entity, then
all members of that controlled group
will be deemed to have consented to the
IRS’s selection of the designated entity.
(g) Fee year. The term fee year means
the calendar year in which the fee for a
particular sales year must be paid to the
government.
(h) Government programs. The term
government programs (collectively “Programs”), means—
(1) The Medicare Part B program;
(2) The Medicare Part D program;
(3) The Medicaid program;

August 11, 2014

(4) Any program under which branded
prescription drugs are procured by the Department of Veterans Affairs;
(5) Any program under which branded
prescription drugs are procured by the Department of Defense; and
(6) The TRICARE retail pharmacy
program.
(i) Manufacturer or importer. The term
manufacturer or importer means the person identified in the Labeler Code of the
National Drug Code (NDC) for a branded
prescription drug.
(j) NDC. The term NDC means the
National Drug Code. The NDC is a unique
identifier that is assigned to all drug products approved by the Food and Drug Administration (FDA), including a branded
prescription drug. The Labeler Code is the
first five numeric characters of the NDC
or the first six numeric characters when
the available five-character code combinations are exhausted.
(k) Orphan drugs—(1) In general. Except as provided in paragraph (k)(2) of
this section, the term orphan drug means
any branded prescription drug for which
any person claimed a section 45C credit
and that credit was allowed for any taxable year.
(2) Exclusions. The term orphan drug
does not include—
(i) Any drug for which there has been a
final assessment or court order disallowing the full section 45C credit taken for
the drug; or
(ii) Any drug for any sales year after
the calendar year in which the FDA
approved the drug for marketing for any
indication other than the treatment of a
rare disease or condition for which a
section 45C credit was allowed, regardless of whether a section 45C credit was
allowed for the drug before, in the same
year as, or after this FDA designation.
(3) FDA marketing approval for treatment of another rare disease or condition.
If a drug has prior FDA marketing approval for the treatment of a rare disease
or condition for which a section 45C
credit was allowed, and the FDA subsequently gives the drug marketing approval
for the treatment of another rare disease or
condition for which another section 45C
credit was also allowed, the drug retains
its status as an orphan drug provided the
FDA has never approved the drug for

August 11, 2014

marketing for any indication other than
the treatment of a rare disease or condition
for which a section 45C credit was allowed.
(4) Examples. The following examples
illustrate the rules of this paragraph (k):
Example 1: Allowance of section 45C credit and
later FDA marketing approval of drug for an indication other than the treatment of a rare disease or
condition. (i) Facts. Drug A is a branded prescription
drug that was not on the market before 2011. In
2011, a covered entity claimed a section 45C credit
for its qualified clinical testing expenses related to
Drug A. There was no final IRS assessment or court
order that disallowed the full credit for Drug A. In
2012, the FDA approved Drug A for marketing for
an indication other than the treatment of the rare
disease or condition for which the section 45C credit
was allowed and this indication was not for another
rare disease or condition for which a section 45C
was allowed.
(ii) Analysis. In 2011 and 2012, Drug A is an
orphan drug because: first, it was a branded prescription drug for which a person claimed a section 45C credit and for which that credit was
allowed for a taxable year; second, there was not
a final assessment or court order disallowing the
full credit taken for the drug; and third, before
2012, the FDA did not approve the drug for marketing for any indication other than the treatment
of a rare disease or condition for which a section
45C credit was allowed. However, Drug A is not
an orphan drug for the 2013 sales year or later
sales years because in 2012 the FDA approved
Drug A for marketing for an indication other than
the treatment of the rare disease or condition for
which the section 45C credit was allowed and this
indication was not for treatment of another rare
disease or condition for which a section 45C credit
was allowed.
Example 2: FDA marketing approval of drug
for an indication other than the treatment of a rare
disease or condition and later allowance of section 45C credit. (i) Facts. Drug B is a branded
prescription drug that was not on the market before 2011. In 2011, FDA approved Drug B for
marketing for the treatment of a rare disease or
condition and also approved Drug B for marketing
for an indication other than the treatment of a rare
disease or condition. In 2012, a covered entity
claimed a section 45C credit for its qualified clinical testing expenses related to Drug B. There was
no final IRS assessment or court order that disallowed the full credit for Drug B.
(ii) Analysis. In 2011, Drug B is not an orphan
drug because no section 45C credit was allowed and
because the FDA approved Drug B for an indication
other than the treatment of a rare disease or condition. In 2012, although the covered entity was allowed a section 45C credit for its qualified clinical
testing expenses related to Drug B and there was no
final IRS assessment or court order that disallowed
the full credit, Drug B still is not an orphan drug
because the FDA had approved the drug in 2011 for
marketing for an indication other than the treatment
of a rare disease or condition for which a section 45C
credit was allowed in 2012. Thus, Drug B is not an

356

orphan drug for the 2012 sales year or later sales
years.
Example 3: Allowance of section 45C credit and
subsequent allowance of section 45C credit with no
intervening FDA marketing approval of drug for an
indication other than the treatment of a rare disease
or condition for which a section 45C credit was
allowed. (i) Facts. Drug C is a branded prescription
drug that was not on the market before 2010. In
2010, a covered entity claimed a section 45C credit
for its qualified clinical testing expenses related to
Drug C. In 2012, a covered entity claimed an additional section 45C credit for its qualified clinical
testing expenses related to Drug C for marketing for
the treatment of a rare disease or condition different
than the one for which the section 45C credit was
claimed in 2010. There was no final IRS assessment
or court order that disallowed the full credit for Drug
C in 2010 or 2012. The FDA has not approved Drug
C for an indication other than the treatment of a rare
disease or condition for which a section 45C was
allowed.
(ii) Analysis. In 2010 and 2011, Drug C is an
orphan drug because: first, it was a branded prescription drug for which a person claimed a section 45C credit and for which that credit was
allowed for a taxable year; second, there was not
a final assessment or court order disallowing the
full credit taken for the drug; and third, FDA had
not approved the drug for marketing for any indication other than the treatment of a rare disease or
condition for which a section 45C credit was allowed. In 2012, Drug C retains its orphan drug
status because another section 45C credit was allowed and the FDA did not approve Drug C for
marketing for any indication other than the treatment of another rare disease or condition for
which a section 45C credit was allowed. Thus,
Drug C is an orphan drug for the 2013 sales year.

(l) Sales taken into account. The term
sales taken into account means branded
prescription drug sales after application
of the percentage adjustment table in
section 9008(b)(2) (relating to annual
sales less than $400,000,001). See
§ 51.5(a)(3).
(m) Sales year. The term sales year
means the second calendar year preceding the fee year. Thus, for example, for
the fee year of 2014, the sales year is
2012.
Par. 6. Section 51.3 is added to read as
follows:
§ 51.3 Information requested from
covered entities.
(a) In general. Annually, each covered
entity may submit a completed Form
8947, “Report of Branded Prescription
Drug Information,” in accordance with the
instructions for the form. Generally, the
form solicits information from covered
entities on NDCs, orphan drugs, desig-

Bulletin No. 2014 –33

nated entities, rebates, and other information specified by the form or its instructions.
(b) Due date. Form 8947 must be filed
by the date prescribed in guidance in the
Internal Revenue Bulletin.
§ 51.3T [Removed]
Par. 7. Section 51.3T is removed.
Par. 8. Section 51.4 is added to read as
follows:
§ 51.4 Information provided by the
Agencies.
(a) In general. For each sales year, the
IRS will compile a list of branded prescription drugs by NDC using the data
submitted on Forms 8947 and in error
reports submitted as part of the dispute
resolution process (described in § 51.7)
and, after applying appropriate due diligence, will provide this list to the Agencies. The Agencies will provide data to the
IRS on branded prescription drug sales
that occurred during the sales year by Program and NDC. The Agencies will provide data for use in preparing the preliminary fee calculation (described in §§ 51.5
and 51.6) and may revise or supplement
that data following review of error reports
submitted as part of the dispute resolution
process. The calculation methodology for
calculating the sales amounts for each
Program, including any reasonable estimation techniques and assumptions that
the Agencies expect to use, is described in
this section.
(b) Medicare Part D—(1) In general.
CMS will determine branded prescription drug sales under Medicare Part D
by aggregating the ingredient cost re-

HCPCS
J9876

Bulletin No. 2014 –33

ported in the “Ingredient Cost Paid”
field on the Prescription Drug Event
(PDE) records at the NDC level, reduced by discounts, rebates, and other
price concessions provided by the covered entity, for each sales year. CMS
will only include PDE data that Part D
sponsors have submitted by the PDE
submission deadline (within 6 months
after the end of the sales year) and that
CMS has approved for inclusion in the
Part D payment reconciliation.
(2) Discounts, rebates, and other price
concessions—(i) In general. For purposes
of paragraph (b)(1) of this section, the
term discounts, rebates, and other price
concessions means:
(A) Any direct and indirect remuneration (DIR) (within the meaning of paragraph (b)(2)(B) of this section), which
includes any DIR reported on the PDE
records at the point of sale and any DIR
reported on a Detailed DIR Report (within
the meaning of paragraph (b)(2)(C) of this
section); and
(B) Any coverage gap discount amount
(within the meaning of paragraph (b)(2)(D)
of this section).
(ii) Direct and indirect remuneration.
For purposes of paragraph (b)(2)(A)(i) of
this section, the term direct and indirect
remuneration (DIR) has the same meaning as found in the definition of actually
paid in 42 CFR 423.308.
(iii) Detailed DIR Report. For purposes
of paragraph (b)(2)(A)(i) of this section,
the term Detailed DIR Report means the
report containing any DIR (within the
meaning of paragraph (b)(2)(B) of this
section) that is collected yearly from Part
D sponsors at the NDC level.

NDC
12345-6789-01
12345-6789-02
12345-6789-03
12345-6800-80
12345-6800-90

357

(iv) Coverage gap discount amount.
For purposes of paragraph (b)(2)(A)(ii) of
this section, the term coverage gap discount amount means a 50-percent
manufacturer-paid discount on certain
drugs under the Coverage Gap Discount
Program described in section 1860D–14A
of the Social Security Act.
(c) Medicare Part B—(1) In general.
CMS will determine branded prescription
drug sales under Medicare Part B using
the following two data sources:
(i) CMS will use data reported by manufacturers pursuant to section 1847A(c) of
the Social Security Act to calculate the
annual weighted average sales price
(ASP) for each Healthcare Common Procedure Coding System (HCPCS) code for
the sales year.
(ii) CMS will use the Medicare Part B
National Summary Data File located at http://
www.cms.gov/NonIdentifiableDataFiles/03_
PartBNationalSummaryDataFile.asp to obtain the number of allowed billing units per
HCPCS code for claims incurred during the
sales year.
(2) Calculation—(i) In general. Using
the data described in paragraph (c)(1) of
this section, CMS will determine branded
prescription drugs sales under Medicare
Part B as described in paragraphs (c)(3),
(4), and (5) of this section. CMS reports
sales amounts per HCPCS billing code,
not per NDC. Therefore, a covered entity’s total Part B sales amounts for all
NDCs in a given HCPCS billing code
appears under only one NDC in each
HCPCS billing code and the covered entity’s remaining NDCs in the HCPCS billing code are listed with a sales amount of
zero.
(ii) Example of a Part B sales report:

Part B amount
$789,000
0
0
0
0

August 11, 2014

(3) HCPCS code; single entity. For
each HCPCS code consisting solely and
exclusively of branded prescription
drugs (as identified by their respective
NDCs) manufactured by a single entity,
CMS will multiply the annual weighted
ASP by the total number of allowed
billing units paid during the sales year to
determine the total sales for all NDCs
associated with the HCPCS code attributed to Medicare Part B.
(4) HCPCS code; multiple manufacturers and/or multiple drugs—(i) Step one.
For each HCPCS code consisting of a
mixture of branded prescription drugs
made by different manufacturers and/or a
mixture of branded prescription and generic drugs, CMS will determine—
(A) The annual weighted ASP for the
HCPCS code;
(B) The total number of allowed billing
units paid by Medicare Part B for each
HCPCS code during the sales year;
(C) The names of the entities engaged
in manufacturing each NDC assigned to
the HCPCS code; and
(D) Those entities (if any) identified in
paragraph (c)(4)(C) of this section that are
manufacturing branded prescription drugs
assigned to the HCPCS code.
(ii) Step two. Using the information
from paragraph (c)(4)(i) of this section,
CMS will then do the following:
(A) Calculate the proportion of sales,
expressed as a percentage, attributed to
each NDC assigned to the HCPCS code
by determining the percentage of total
sales reported to CMS by each manufacturer of NDC(s) that are assigned to the
HCPCS code. For example, if HCPCS
code JXXXX contains three drugs with a
total of $310,000 sales reported by manufacturers to CMS for the sales year, and
$100,000 was reported for Drug A,
$200,000 was reported for Drug B, and
$10,000 was reported for Drug C, the proportion of sales attributed to each NDC
will be 32.26 percent for Drug A, 64.52
percent for Drug B, and 3.22 percent for
Drug C; and
(B) For each NDC, multiply the product of the annual weighted ASP and the
total allowed billing units paid by Medicare Part B for the HCPCS code by the
proportion of sales calculated in paragraph (c)(4)(ii)(A) of this section to determine the sales reportable to the IRS (that

August 11, 2014

is, percentage ⫻ (annual weighted ASP ⫻
allowed units) ⫽ total sales reported to
IRS for the NDC). The sales for each
manufacturer’s NDCs assigned to a
HCPCS code are summed and the total
sales for each manufacturer’s NDCs in a
HCPCS code will be reported to the IRS.
(5) HCPCS code; unable to establish
a reliable proportion of sales. If CMS is
unable to establish a reliable proportion
of sales attributable to each NDC assigned to the HCPCS code using the
method
described
in
paragraph
(c)(4)(ii)(A) of this section, CMS will
use Medicare Part D utilization percentages in lieu of the proportion of sales
determined
under
paragraph
(c)(4)(ii)(A) of this section to perform
the calculation described in paragraph
(c)(4)(ii)(B) of this section.
(d) Medicaid. (1) CMS will determine the branded prescription drug sales
for Medicaid as the per-unit Average
Manufacturer Price (AMP) less the Unit
Rebate Amounts (URA) that CMS calculates based on manufacturer-reported
pricing data multiplied by the number of
units reported billed by states to manufacturers. This data will be based on the
data reported to CMS for the sales year
by covered entities and the states for
drugs paid for by the states in the Medicaid Drug Rebate Program for the sales
year. The data will include all branded
prescription drug units for which the
states bill rebates to covered entities under the Medicaid Drug Rebate Program.
This program includes, but is not limited
to, units paid for under various health
care plans such as fee for service, managed care organizations, and drugs administered in a non-retail setting such as
drugs administered in a physician’s office, clinic, hospital or other setting. The
Medicaid Drug Rebate Program’s calculated branded prescription drug fee does
not include state-only pharmaceutical
program sales or rebates.
(2) For any covered entity identified in
the first five (or six) digits of an NDC
during any of the four quarters of a sales
year, CMS will use the following methodology to derive the sales figures that
account for third-party payers, such as
Medicare Part B:

358

(i) Report total dollars per NDC for
AMP minus URA multiplied by the units
reported by a state or states.
(ii) Determine the percentage of the
total amount reimbursed that is the Medicaid amount of that reimbursement. For
example, if the total amount reimbursed is
$100,000, and the Medicaid amount reimbursed is $20,000, then the percentage is
20 percent.
(iii) Multiply the percentage of the
Medicaid amount of that reimbursement
(in the example in paragraph (d)(2)(ii) of
this section, 20 percent) by the dollar figure derived from paragraph (d)(2)(i) of
this section (AMP minus URA multiplied
by units) to get the new adjusted sales
dollar totals.
(e) Department of Veterans Affairs.
VA will determine branded prescription
drug sales to VA by providing, by NDC,
the total amount paid (net of refunds and
rebates, when they are associated with a
specific NDC) for each branded prescription drug procured by VA for its beneficiaries during the sales year. For this purpose, a drug is procured on the invoice
(billing) date. The basis of this information will be national procurement data reported during the sales year by VA’s
Pharmaceutical Prime Vendor to the VA
Pharmacy Benefits Management Service
and National Acquisition Center. VA
sales data includes the Industrial Funding
Fee and the Cost Recovery Fee because
these amounts are part of the price VA
pays to its Pharmaceutical Prime Vendor
to procure a drug.
(f) Department of Defense. DOD will
determine branded prescription drug sales
to DOD (for DOD programs other than
the TRICARE retail pharmacy program)
by providing, by Labeler Code, the manufacturer’s name, the NDC, brand name,
and the amount paid (net of rebates and or
refunds) for each branded prescription
drug procured by DOD (for DOD programs other than the TRICARE retail
pharmacy program) during the sales year.
For DOD programs other than the TRICARE retail pharmacy program, a drug is
procured based upon the date it was ordered. DOD includes the Industrial Funding Fee and the Cost Recovery Fee in its
drug sales data because these amounts are
part of the price DOD pays to procure a
drug.

Bulletin No. 2014 –33

(g) TRICARE. DOD will determine
branded prescription drug sales to DOD
for the TRICARE retail pharmacy program by providing, by Labeler Code, the
manufacturer’s name, the NDC, brand
name, and the amount paid (net of rebates
or refunds) for each branded prescription
drug procured by DOD through the TRICARE retail pharmacy program during
the sales year. For the TRICARE retail
pharmacy program, a drug is procured
based upon the date it was dispensed. The
amount paid is based on the submitted
ingredient cost paid, aggregated by NDC,
for eligible TRICARE retail pharmacy
claims submitted during the program year,
minus any refunds or rebates for the corresponding claims.
§ 51.4T [Removed]
Par. 9. Section 51.4T is removed.

Par. 10. Section 51.5 is added to read
as follows:
§ 51.5 Fee calculation.
(a) Fee components—(1) In general.
For every fee year, the IRS will calculate
a covered entity’s total fee as described in
this section. The IRS will determine a
covered entity’s total fee by applying, if
applicable, the adjustment amount described in paragraph (e) of this section to
the entity’s allocated fee described in
paragraph (d) of this section.
(2) Calculation of branded prescription drug sales. Each covered entity’s allocated fee for any fee year is equal to an
amount that bears the same ratio to the
applicable amount as the covered entity’s
branded prescription drug sales taken into
account during the sales year bears to the
aggregate branded prescription drug sales

Covered entity’s branded prescription drug
sales during the calendar year that are:
Not more than $5,000,000
More than $5,000,000 but not more than
$125,000,000
More than $125,000,000 but not more than
$225,000,000
More than $225,000,000 but not more than
$400,000,000
More than $400,000,000

(b) Determination of branded prescription drug sales. The IRS will compile
each covered entity’s branded prescription
drug sales for each Program by NDC.
Each NDC will be attributed to the covered entity identified in the Labeler Code
as of the end of the day on December 31st
of the sales year. For a covered entity that
is a controlled group, this includes all
NDCs in which a member of the covered
entity is identified. For this purpose, the
IRS may revise the list of NDCs as a
result of information received in the dispute resolution process, and the data the
IRS uses to produce the final fee calculation will include any revisions provided
by the Agencies at the completion of the
dispute resolution process. Each covered
entity’s branded prescription drug sales

Bulletin No. 2014 –33

of all covered entities taken into account
during the sales year.
(3) Applicable amount. The applicable
amounts for fee years are—
Fee year

Applicable amount

2011
2012
2013
2014
2015
2016
2017
2018
2019 and
thereafter

$2,500,000,000
$2,800,000,000
$2,800,000,000
$3,000,000,000
$3,000,000,000
$3,000,000,000
$4,000,000,000
$4,100,000,000
$2,800,000,000

(4) Sales taken into account. A covered
entity’s branded prescription drug sales
taken into account during any calendar
year are as follows:

Percentage of branded prescription drug sales
taken into account is
0 percent
10 percent
40 percent
75 percent
100 percent

will be reduced by its Medicaid state supplemental rebate amounts in the following
manner. If CMS has Medicaid state supplemental rebate information for a sales
year, CMS will report to the IRS branded
prescription drug sales for Medicaid net of
Medicaid state supplemental rebates. If
CMS does not have complete Medicaid
state supplemental rebate information for
a sales year, the IRS will reduce the
branded prescription drug sales that CMS
reported for Medicaid by Medicaid state
supplemental rebates reported by the covered entities on Form 8947.
(c) Determination of sales taken into
account. (1) For each sales year and for
each covered entity, the IRS will calculate
sales taken into account. The resulting

359

number is the numerator of the ratio described in paragraph (d)(1) of this section.
(2) For each sales year, the IRS will
calculate the aggregate branded prescription drug sales taken into account for all
covered entities. The resulting number is
the denominator of the ratio described in
paragraph (d)(2) of this section.
(d) Allocated fee calculation. For each
covered entity for each fee year, the IRS
will calculate the entity’s allocated fee by
multiplying the applicable amount from
paragraph (a)(2) of this section by a fraction—
(1) The numerator of which is the covered entity’s branded prescription drug
sales taken into account during the sales
year (described in paragraph (c)(1) of this
section); and

August 11, 2014

(2) The denominator of which is the
aggregate branded prescription drug sales
taken into account for all covered entities
during the same year (described in paragraph (c)(2) of this section).
(e) Adjustment amount—(1) In general. In addition to the allocated fee computed under paragraph (d) of this section,
the IRS will also automatically calculate
for each covered entity an adjustment
amount. An adjustment amount reflects
the difference between the allocated fee
determined for the covered entity in the
immediately preceding fee year, using
data from the second calendar year preceding that fee year, and what the allocated fee would have been for that entity
for the immediately preceding fee year
using data from the calendar year immediately preceding that fee year. For example, for 2014, the adjustment amount for a
covered entity will be the difference between the entity’s 2013 allocated fee, using 2011 data, and what the 2013 allocated fee would have been using 2012
data. Although the adjustment reflects a
revision of the prior year’s fee based on
data from the year immediately preceding
the prior fee year, the adjustment is only
taken into account by adding it to or subtracting it from the allocated fee computed
under paragraph (d) of this section for the
current fee year to arrive at the total fee
for the current fee year. An adjustment
amount is treated as a component of the
current year’s fee. For purposes of section
6601, any increase in the allocated fee
computed under paragraph (d) of this section for the current fee year resulting from
any adjustment amount, along with the
remainder of the fee, is treated as a fee
liability due on the due date for the current
year’s fee. For purposes of sections 6511
and 6611, any adjustment amount that decreases the allocated fee computed under
paragraph (d) of this section for the current fee year is treated as a payment towards the current fee liability made on the
due date of the current fee year.
(2) Amounts paid to a covered entity
because of an adjustment amount. If a
covered entity’s adjustment amount reduces the fee computed under paragraph
(d) of this section below zero and results
in an amount due to the covered entity for
the fee year, the IRS will pay this amount
due to the covered entity. A covered entity

August 11, 2014

does not file Form 843, Claim for Refund
and Request for Abatement, to receive this
amount owed to a covered entity.
§ 51.5T [Removed]
Par. 11. Section 51.5T is removed.
Par. 12 Section 51.6 is added to read as
follows:
§ 51.6 Notice of preliminary fee
calculation.
(a) Content of notice. For each sales
year, the IRS will make a preliminary
calculation of the fee for each covered
entity as described in § 51.5. The IRS will
notify each covered entity of its preliminary fee calculation for that sales year.
The notification to a covered entity of its
preliminary fee calculation will include—
(1) The covered entity’s allocated fee;
(2) The covered entity’s branded prescription drug sales, by NDC, by Program;
(3) The covered entity’s branded prescription drug sales taken into account
after application of § 51.5(a)(4);
(4) The aggregate branded prescription
drug sales taken into account for all covered entities;
(5) The covered entity’s adjustment
amount calculated as described in
§ 51.5(e); and
(6) A reference to the fee dispute resolution procedures set forth in guidance
published in the Internal Revenue Bulletin.
(b) Time of notice. The IRS will send
each covered entity notice of its preliminary fee calculation by the date prescribed
in guidance published in the Internal Revenue Bulletin.
§ 51.6T [Removed]
Par. 13. Section 51.6T is removed.
Par. 14. Section 51.7 is added to read
as follows:
§ 51.7 Dispute resolution process.
(a) In general. Upon receipt of its preliminary fee calculation, each covered entity will have an opportunity to dispute
this calculation by submitting to the IRS
an error report as described in this section.
The IRS will provide its final determina-

360

tion with respect to error reports no later
than the time the IRS provides a covered
entity with a final fee calculation.
(b) Error report information. To assert
that there have been one or more errors in
the drug sales data reported by a Program,
the mathematical calculation of the fee,
the rebate data, the listing of an NDC for
an orphan drug, or any other error, a covered entity must submit an error report
with each asserted error reported on a
separate line. The report must include the
following information—
(1) Entity name, address, and Employer Identification Number (EIN) as
previously reported on the Form 8947;
(2) The name, telephone number, fax
number, and e-mail address (if available)
of one or more employees or representatives of the entity with whom the IRS may
discuss the claimed errors. If the representative is not an employee of the covered
entity who is authorized under section
6103 or designated on Form 8947 to discuss the information reported on Form
8947 with the IRS, a Form 2848, “Power
of Attorney and Declaration of Representative,” must be filed with the error report;
(3) For an error in the drug sales data
reported by a Program, the name of the
Program that reported the data, the NDC,
the specific amount of sales data disputed,
the proposed corrected amount, an explanation of why the Agency should use the
proposed corrected data instead, and documentation of any Program drug sales
data or other information used to establish
the existence of any errors.
(4) For a mathematical calculation error, the specific calculation element(s) that
the entity disputes and its proposed corrected calculation;
(5) For a rebate data error, the NDC for
the drug to which it relates; a discussion
of whether the data used in the preliminary fee calculation matches previously
reported Form 8947 data on rebates; and,
if the data used in the preliminary fee
calculation does match the Form 8947
data, an explanation of why the Form
8947 data was erroneous and why the IRS
should use the proposed corrected data
instead;
(6) For the listing of an NDC for an
orphan drug, the name and NDC of the
orphan drug; a discussion of whether the
data used in the preliminary fee calcula-

Bulletin No. 2014 –33

tion matches previously reported Form
8947 data on orphan drugs; and, if the data
used in the preliminary fee calculation
does match the Form 8947 data, an explanation of why the Form 8947 data was
erroneous and why the IRS should use the
proposed corrected data instead;
(7) For any other asserted error, an
explanation of the nature of the error, how
the error affects the fee calculation, an
explanation of how the entity established
that an error occurred, the proposed correction to the error, and an explanation of
why the IRS or Agency should use the
proposed corrected data instead;
(8) If an entity is using data to establish
the existence of an error and that data was
not reported on Form 8947 or contained in
the notification of the preliminary fee calculation, a description of what the data is,
how the entity acquired the data, and who
maintains it; and
(9) Documentation of any rebate and
orphan drug data, or other information
used to establish the existence of any errors.
(c) Form, manner, and timing of submission. Each covered entity must submit
its error report(s) in the form and manner
that is prescribed in guidance published in
the Internal Revenue Bulletin. This guidance will also prescribe the date by which
each covered entity must submit its report(s).
(d) Finality. A covered entity must assert any basis for contesting its preliminary fee calculation during the dispute
resolution period. In the interest of providing finality to the fee calculation process, the IRS will not accept an error
report after the end of the dispute resolution period or alter the final fee calculation
on the basis of information provided after
the end of the dispute resolution period.
§ 51.7T [Removed]
Par. 15. Section 51.7T is removed.
Par. 16. Section 51.8 is added to read
as follows:
§ 51.8 Notification and payment of fee.
(a) Notification of final fee calculation.
No later than August 31st of each fee year,
the IRS will send each covered entity its
final fee calculation for that year. In any
fee year, the IRS will base its final fee

Bulletin No. 2014 –33

calculation on data provided to it by the
Agencies as adjusted pursuant to the dispute resolution process. The notification
to a covered entity of its final fee calculation will include—
(1) The covered entity’s allocated fee;
(2) The covered entity’s adjustment
amount calculated as described in § 51.5;
(3) The covered entity’s branded prescription drug sales, by NDC, by Program;
(4) The covered entity’s branded prescription drug sales taken into account
after application of § 51.5(a)(4);
(5) The aggregate branded prescription
drug sales taken into account for all covered entities; and
(6) The final determination with respect to error reports.
(b) Differences in preliminary fee calculation and final fee calculation. A covered entity’s final fee calculation may differ from the covered entity’s preliminary
fee calculation because of changes made
pursuant to the dispute resolution process
described in § 51.7. Even if a covered
entity did not file an error report described
in § 51.7, a covered entity’s final fee may
differ from a covered entity’s preliminary
fee because of a change in data reported
by the Agencies after resolution of error
reports, including a change in the aggregate prescription drug sales figure. A
change in aggregate prescription drug
sales data can affect each covered entity’s
fee because each covered entity’s fee is a
fraction of the aggregate fee collected
from all covered entities. A covered entity’s final fee may also differ from its
preliminary fee calculation because the
data used in the preliminary fee calculation may have contained inaccurate
branded prescription drug sales information that was corrected or updated at the
conclusion of the dispute resolution process.
(c) Payment of final fee. Each covered
entity must pay its final fee by September
30th of the fee year. For a controlled
group, the payment must be made using
the designated entity’s EIN as reported on
Form 8947. The fee must be paid by electronic funds transfer as required by
§ 51.6302–1. There is no tax return to be
filed for the fee.
(d) Joint and several liability. In the
case of a controlled group that is liable for

361

the fee, all members of the controlled
group are jointly and severally liable for
the fee. Accordingly, if a controlled
group’s fee is not paid, the IRS will separately assess each member of the group
for the full amount of the controlled
group’s fee.
§ 51.8T [Removed]
Par. 17. Section 51.8T is removed.
Par. 18. Section 51.9 is added to read
as follows:
§ 51.9 Tax treatment of fee.
(a) Treatment as an excise tax. The fee
imposed by section 9008 is treated as an
excise tax for purposes of subtitle F of the
Internal Revenue Code (Code) (sections
6001–7874). Thus, references in subtitle F
to “taxes imposed by this title,” “internal
revenue tax,” and similar references, are
also references to the fee imposed by section 9008. For example, the fee imposed
by section 9008 is assessed (section
6201), collected (sections 6301, 6321, and
6331), enforced (section 7402 and 7403),
subject to examination and summons (section 7602), and subject to confidentiality
rules (section 6103) in the same manner as
taxes imposed by the Code.
(b) Deficiency procedures. The deficiency procedures of sections 6211– 6216
do not apply to the fee imposed by section
9008.
(c) Limitation on assessment. The IRS
must assess the amount of the fee for any
fee year within three years of September
30th of that fee year.
(d) Application of section 275. The fee
is treated as a tax described in section
275(a)(6) (relating to taxes for which no
deduction is allowed).
§ 51.9T [Removed]
Par. 19. Section 51.9T is removed.
Par. 20. Section 51.10 is added to read
as follows:
§ 51.10 Refund claims.
Any claim for a refund of the fee must
be made by the person that paid the fee to
the government and must be made on
Form 843, “Claim for Refund and Request

August 11, 2014

for Abatement,” in accordance with the
instructions for that form.

Par. 25. Section 51.6302–1 is added to
read as follows:

§ 51.10T [Removed]

§ 51.6302–1 Method of paying the
branded prescription drug fee.

Par. 21. Section 51.10T is removed.
Par. 22. Section 51.11T is revised to
read as follows:
§ 51.11T Effective/applicability date.
(a) through (b) [Reserved]. For further
guidance see § 51.11(a) through (b).
(c) Section 51.2T(e)(3) applies to any
fee on branded prescription drug sales that
is due on or after January 1, 2015.
(d) The applicability of § 51.2T(e)(3)
expires on July 24, 2017.
Par. 23. Section 51.11 is added to read
as follows:
§ 51.11 Effective/applicability date.
(a) Except as otherwise provided in
this section, §§ 51.1 through 51.10 apply
on and after July 28, 2014.
(b) Section 51.2(e)(3) applies on July
28, 2014 through December 31, 2014.
(c) [Reserved]. For further guidance
see § 51.11T(c).
§ 51.12T [Removed]
Par. 24. Section 51.12T is removed.

August 11, 2014

(a) Fee to be paid by electronic funds
transfer. Under the authority of section
6302(a), the fee imposed on branded prescription drug sales by section 9008 and
§ 51.5 must be paid by electronic funds
transfer as defined in § 31.6302–1(h)(4)(i)
of this title, as if the fee were a depository
tax. For the time for paying the fee, see
§ 51.8.
(b) Effective/applicability date. This
section applies on and after July 28, 2014.
§ 51.6302–1T [Removed]
Par. 26. Section 51.6302–1T is removed.
PART 602—OMB CONTROL
NUMBERS UNDER THE
PAPERWORK REDUCTION ACT
Par. 27. The authority citation for part
602 continues to read as follows:
Authority: 26 U.S.C. 7805.
Par. 28. In § 602.101, paragraph (b) is
amended by:
1. Removing the entry for 51.8T from
the table; and

362

2. Adding entries, in numerical order,
for 51.2(f)(2)(ii) and 51.7 to the table
to read as follows:
§ 602.101 OMB Control numbers.
*****
(b) * * *
CFR part or section
where identified
and described

Current
OMB
control no.

*****
51.2(f)(2)(ii) ............. .......1545-2209
51.7........................... .......1545-2209
*****

John Dalrymple,
Deputy Commissioner for
Services and Enforcement.
Approved July 22, 2014.

Mark J. Mazur,
Assistant Secretary of the Treasury
(Tax Policy).
(Filed by the Office of the Federal Register on July 25, 2014
8:45 a.m., and published in the issue of the Federal Register
for July 28, 2014, 79 F.R. 43699)

Bulletin No. 2014 –33