UNITED STATES OF AMERICA v. TOURTELLOT
Filing
16
MEMORANDUM OPINION and ORDER re: Debtor's Objection to Claim for Administrative Expense And Motion For Determination of ABI's Federal Excise Taxes. IT IS THEREFORE ORDERED that the Debtor's Objection to Claim for Administrative Expe nse And Motion For Determination of ABI's Federal Excise Taxes (Doc. 6 -4) is DENIED to the extent stated herein, and this matter is REFERRED to the Bankruptcy Court for further proceedings consistent with this Memorandum Opinion and Order. Signed by JUDGE THOMAS D. SCHROEDER on 11/6/2012. (Solomon, Dianne)
IN THE UNITED STATES DISTRICT COURT
FOR THE MIDDLE DISTRICT OF NORTH CAROLINA
UNITED STATES OF AMERICA,
Plaintiff,
v.
PETER L. TOURTELLOT, TRUSTEE,
Defendant.
)
)
)
)
)
)
)
)
)
1:12-CV-413
(Bank. No. 09-50141)
MEMORANDUM OPINION AND ORDER
THOMAS D. SCHROEDER, District Judge.
This matter arose in the Bankruptcy Court and is before
this court upon withdrawal of reference pursuant to 28 U.S.C.
§ 157(d). 1
(Doc.
15.)
At
issue
is
the
“Application
for
Administrative Expenses” (“Claim”) filed by the United States
Department
of
Treasury’s
Alcohol
and
Tobacco
Tax
and
Trade
Bureau (“TTB” or Government) seeking payment of post-petition
federal
excise
taxes
on
large
cigars
sold
by
the
Debtor,
Alternative Brands, Inc. (“Debtor”), as well as the “Objection
to Claim for Administrative Expense And Motion For Determination
of
ABI’s
Federal
Excise
Taxes”
(“Objection”)
Debtor’s Chapter 11 bankruptcy trustee.
6-4 (Objection).)
1
filed
by
the
(Doc. 6-1 (Claim); Doc.
For the reasons set forth below, the court
The court specifically withdrew reference from the Bankruptcy Court
“for the purpose of this court’s determination of the application of
26 U.S.C. §§ 5701 and 5702(l) to the Government’s claim for
administrative expenses to the extent it is made the subject of the
Trustee’s objection.” (Doc. 15 at 10-11.)
denies
the
Objection
and
returns
the
case
to
the
Bankruptcy
Court for determination of the Claim.
I.
BACKGROUND
A.
Procedural Background
The Debtor manufactures tobacco products, including large
cigars. 2
On
companies
filed
January
Bankruptcy Code.
for
28,
2009,
protection
the
Debtor
under
and
Chapter
its
related
11
of
the
The bankruptcy case has taken several twists
and turns which, while not relevant here, led to the appointment
of Defendant Peter L. Tourtellot as Chapter 11 Trustee for the
Debtor (“Trustee”).
Plan
of
After the filing of the Trustee’s Joint
Reorganization,
the
TTB
filed
its
Claim
against the
Debtor for alleged unpaid excise taxes relating to its large
cigars for an audit period of April 1, 2009, through July 31,
2011.
The dispute before the court relates to the calculation of
excise
taxes
under
federal
law.
The
Internal
Revenue
Code
imposes a federal excise tax on large cigars manufactured in or
imported into the United States for the domestic market.
The
tax is set, with a limitation not relevant here, at a percentage
of “the price for which [the product is] sold.”
2
26 U.S.C.
A “cigar” is “any roll of tobacco wrapped in leaf tobacco or in any
substance containing tobacco.”
26 U.S.C. § 5702(a). “Large cigars”
are cigars “weighing more than 3 pounds per thousand.”
Id.
§ 5701(a)(2).
The only other type of cigar is “small cigars,”
“weighing not more than 3 pounds per thousand.” Id. § 5701(a)(1).
2
§ 5701(a)(2).
The parties disagree as to whether assessments
against the Debtor under the Fair and Equitable Tobacco Reform
Act of 2004, 7 U.S.C. § 518 et seq. (“FETRA”), must be included
in determining the price of the large cigars upon which the
excise tax is calculated.
Inclusion of the FETRA assessment
increases the price of the product and thus the amount of excise
tax
owed.
Here,
assessments
in
the
the
Debtor
price
it
included
charged
its
estimated
customers
of
its
FETRA
large
cigars but excluded the assessments in calculating its federal
excise tax under 26 U.S.C. § 5701(a)(2).
TTB argues that the
Debtor’s FETRA assessments must be included in the cigar price
for
determining
federal
excise
taxes
and
that
the
Debtor’s
failure to do so resulted, together with “other issues,” in an
underpayment of $2,117,924.98 during the audit period. 3
B.
The Fair and Equitable Tobacco Reform Act of 2004
Given the nature of the parties’ dispute as to whether the
Debtor’s FETRA assessments must be included in, or are expressly
excluded from, the “price for which [large cigars are] sold” and
thus on which the federal excise tax is calculated, a review of
FETRA is helpful.
Congress enacted FETRA, also referred to as the tobacco
buy-out, as Title VI of the American Jobs Creation Act of 2004,
3
The Debtor reports paying $13,833,891 in federal excise taxes and
$6,908,751 in FETRA assessments on its large cigars during the audit
period. (Doc. 6-5 at 1.)
3
Pub. L. 108-357, 118 Stat. 1418, 1524 et seq., to terminate
long-standing federal tobacco and price support programs.
Pub. L. 108-357, Title VI, Subtitle A.
See
To ease the transition
away from a system of quotas, price controls, and subsidies in
existence
since
the
Great
Depression,
FETRA
provides
for
transitional payments to tobacco quota holders and to producers
of
tobacco.
See
id.
Subtitle
B;
Prime
Time
Int’l
Co.
v.
Vilsack, 599 F.3d 678, 679-80 (D.C. Cir. 2010) (noting FETRA’s
purpose).
it
FETRA, like the quota and price support loan programs
replaces,
is
codified
in
Title
7
(“Agriculture”)
of
the
United States Code.
To finance these transitional payments to quota holders and
tobacco
producers,
FETRA
imposes
assessments
on
tobacco
manufacturers and importers for a ten-year period from fiscal
year 2005 through fiscal year 2014.
518d(b), (k).
Trust
Fund,
Commodity
See 7 U.S.C. §§ 518a(e)(2),
These assessments are deposited into the Tobacco
which
Credit
is
administered
Corporation,
Department of Agriculture. 4
a
by
the
federally-chartered
the
U.S.
Id. §§ 518d(b)(3), 518e(a).
The
4
corporation
within
See Neese v. Johanns, 518 F.3d 215, 217 n.3 (4th Cir. 2008); 15
U.S.C. § 714 (creating a “body corporate to be known as Commodity
Credit Corporation . . . , which shall be an agency and
instrumentality of the United States, within the Department of
Agriculture, subject to the general supervision and direction of the
Secretary of Agriculture”).
4
total amount expended by the Secretary of Agriculture 5 from the
Tobacco Trust Fund over the ten-year transition period may not
exceed $10.14 billion.
In
determining
assessment,
the
Commodity
7 U.S.C. § 518f.
a
particular
Secretary
of
Credit
manufacturer’s
Agriculture,
Corporation,
imposes
or
acting
quarterly
importer’s
through
assessments
under a two-step procedure set out in 7 U.S.C. § 518d.
§ 518d(b)(1).
total
7 U.S.C.
First, the Secretary makes an allocation of the
amount
classes
the
required
of
tobacco
for
quarterly
products,
one
assessments
of
which
among
is
six
“cigar
manufacturers and importers,” 6 based on each class’s share of
“gross domestic volume.”
See id. § 518d(c)(1) & (2).
“Gross
domestic volume” is the volume of domestic products “removed”
(as
defined
in
26
U.S.C.
§ 5702,
that
is,
removed
from
the
factory or from internal revenue bond, or released from customs
custody) 7
and
not
exempt
from
5
tax
under
chapter
For purposes of FETRA, “Secretary” means the
Agriculture.
Pub. L. 108-357 § 621(11) (codified
§ 518(11)).
52
of
the
Secretary of
at 7 U.S.C.
6
The remaining classes of tobacco products are cigarettes, snuff,
roll-your-own tobacco, chewing tobacco, and pipe tobacco.
7 U.S.C.
§ 518d(c)(1).
7
While “removed” is not defined in section 5702, “removal” and
“remove” are.
Both “removal” and “remove” mean “the removal of
tobacco products . . . from the factory or from internal revenue bond
under section 5704 . . . or release from customs custody.” 26 U.S.C.
§ 5702(j).
5
Internal Revenue Code.
Id. § 518d(a)(2). 8
FETRA set out the
initial allocation among the six classes for fiscal year 2005
and directed the Secretary of Agriculture to periodically adjust
the
class
allocation
percent
annual
of
percentages
for
thereafter.
cigar
the
manufacturers
total
quarterly
adjustments
thereafter.
FETRA
and
§
the
importers
assessment
Id.
set
and
518d(c);
initial
at
2.783
provides
see
7
for
C.F.R.
§ 1463.5(c) (division of national assessment among each class of
tobacco adjusted annually). 9
If the Secretary determines that
the assessment imposed will be insufficient to carry out the
buyout payments required during a fiscal year, FETRA directs him
to assess such additional amounts as deemed necessary.
7 U.S.C.
§ 518d(c)(3).
Second, the assessment for each class of tobacco product is
allocated
on
a
pro-rata
basis
by
each
manufacturer’s
and
importer’s share of gross domestic volume that was “removed” in
8
Section 518d(a)(2)(B) also exempts products taxed under the
Harmonized Tariff Schedule of the United States, which is not relevant
here.
9
The allocation by class is determined “by each class’s share of the
excise taxes paid using the tax rates that applied in fiscal year
2005.” 7 C.F.R. § 1463.5(a). Setting the excise tax rates to those
for fiscal year 2005 benefits cigar manufacturers, as new excise tax
rates adopted in 2009 were proportionately raised more for cigars and
roll-your-own tobacco than for other classes.
Tobacco Transition
Payment Program; Tobacco Transition Assessments, 75 Fed. Reg. 7692101, 76922 (Dec. 10, 2010) (final rule amending 7 C.F.R. § 1463.5).
See Philip Morris USA Inc. v. Vilsack, --- F. Supp. 2d ---, No.
3:11CV87-HEH, 2012 WL 4788571 (E.D. Va. Oct. 9, 2012) (upholding use
of 2005 rates).
6
the prior quarter.
gross
domestic
volume.
Id. § 518d(b)(1) & (e)(1).
sales
is
Id. § 518d(g)(2).
calculated
based
on
The volume of
gross
domestic
For cigars and cigarettes, the gross
domestic volume is measured by “the number of cigarettes and
cigars.”
Id.
518d(g)(3)(A). 10
§
Thus,
a
large
cigar
manufacturer’s or importer’s FETRA assessment is based on the
number of units sold. 11
At
this
point,
manufacturer’s
or
the
calculation
importer’s
of
assessment
a
particular
for
each
tobacco
quarterly
payment period is straightforward: (1) the total amount of the
assessment for the quarterly payment period for the class of
product as a whole is multiplied by (2) the market share of the
manufacturer or importer, as calculated with respect to that
payment period, of the class of tobacco product.
Id. § 518d(f);
7
share
C.F.R.
§
1463.7.
“Market
share”
is
“the
of
each
manufacturer or importer of a class of tobacco product . . . of
10
The Secretary of Agriculture has taken the position that the
determination by number rather than weight -- the “per stick” method - is mandated for all cigars, large and small alike, by 7 U.S.C.
§ 518d(g)(3)(A).
See 7 C.F.R. § 1463.7(b)(1), (c).
But see Prime
Time Int’l Co. v. Vilsack, 599 F.3d 678, 681, 683 (D.C. Cir. 2010)
(remanding a small cigar manufacturer’s challenge to its FETRA
assessment to the district court with instructions to remand to the
Department of Agriculture for further proceedings because FETRA did
not appear subject to a single interpretation in this respect).
11
As will be seen, this differs from the determination of excise tax
for large cigars under 26 U.S.C. § 5701(a)(2), which is based on a
percentage of “price,” subject to a tax cap of 40.26 cents per large
cigar. Thus, inclusion of FETRA assessments in “price” will increase
excise tax liability for large cigars under section 5701(a)(2).
7
the
total
product
volume
during
assessment.”
cigar
of
the
domestic
base
sales
period
for
7 U.S.C. § 518d(a)(3).
manufacturer
held
33-1/3%
of
of
a
the
class
fiscal
of
tobacco
year
for
an
Thus, for example, if a
the
cigar
market
and
the
allocation for the class of cigar manufacturers and importers
was 3%, the manufacturer would be assessed 33-1/3% times 3%, or
1%, of the total assessment for all tobacco products.
Thirty days prior to the end of each quarter during the
calendar year, domestic manufacturers and importers of tobacco
products
are
to
receive
notice
from
the
Commodity
Credit
Corporation of, among other things, the national assessment, the
percentage of the national assessment allocated to each class
and the total amount of assessment for each class, the adjusted
market share of the domestic manufacturer or importer, and the
individual manufacturer’s or importer’s assessment.
§ 1463.8.
7 C.F.R.
The assessed amount must be paid by the last day of
the quarter.
7 C.F.R. § 1463.9.
Challenges to any assessment
must be made to the Secretary of Agriculture under procedures
established by the Secretary, with further review by a district
court after exhaustion of an agency appeals process.
7 U.S.C.
§ 518d(i), (j).
The Secretary of Agriculture is required to use the funds
in the Tobacco Trust Fund to make contract payments to tobacco
quota
holders
and
producers
8
of
quota
tobacco.
Id.
§ 518e(b)(1)(A).
Thus, tobacco manufacturers and importers make
payments to the Tobacco Trust Fund held by the Commodity Credit
Corporation from which the Secretary of Agriculture, through the
Commodity Credit Corporation, makes payments to tobacco quota
holders
and
producers.
7
U.S.C.
§
518e(a)(1),
court
turns
(b)(1)(A);
7
C.F.R. §§ 1463.9, 1463.100(a).
With
this
background,
the
to
the
issues
presented by the parties.
II.
ANALYSIS
A.
Internal
Cigars
Federal
pursuant
to
excise
26
regulations.
Revenue
Code:
taxes
U.S.C.
§§
for
Federal
large
5701(a)(1)
Excise
cigars
and
Tax
are
5702(l)
on
Large
calculated
and
related
Both sections are contained within chapter 52 of
the Internal Revenue Code.
Section 5701(a)(2) currently imposes
an excise tax on large cigars “equal to 52.75 percent of the
price for which sold but not more than 40.26 cents per cigar.”
26
U.S.C.
§
5701(a)(2)
(emphasis
added).
Determination
“price” is set forth in section 5702(l), which provides:
Determination of price on cigars.-In
determining
5701(a)(2)-
price
for
purposes
of
section
(1)
there shall be included any charge incident to
placing the article in condition ready for use,
(2)
there shall be excluded –
9
of
(A)
(B)
(3)
the amount of the tax imposed by this
chapter or section 7652, and
if stated as a separate charge, the
amount of any retail sales tax imposed
by any State or political subdivision
thereof or the District of Columbia,
whether the liability for such tax is
imposed on the vendor or vendee, and
rules similar to the rules of section 4216(b)
shall apply.
26 U.S.C. § 5702(l). 12
The excise taxes imposed on manufacturers
and importers by section 5701 are determined, like the FETRA
assessments, at the time of “removal” of the large cigars.
Id.
§ 5703(b)(1). 13
The Trustee asserts principally that FETRA assessments are
expressly
excluded
from
the
“price”
of
large
cigars
under
section 5702(l)(2)(A) and, alternatively, are not included in
the “price” in the first place under section 5702(l)(1).
Government disputes both contentions.
The
The parties agree that
the treatment of the FETRA assessment in connection with the
federal
excise
tax
on
large
cigars
is
a
matter
of
first
impression.
12
Section 7652, referenced in section 5702(l)(2)(A), governs tobacco
product shipments from Puerto Rico and the Virgin Islands. 26 U.S.C.
§ 7652. It is not relevant to the present case.
13
Each manufacturer of tobacco products must file, for each factory,
a semimonthly tax return for each return period on Form 5000.24. 27
C.F.R. § 40.162; see 26 U.S.C. § 6302 (“Mode or Time of Collection”).
The semimonthly return must be filed not later than the fourteenth day
after the last day of the return period. 27 C.F.R § 40.165(a).
10
B.
Exclusion Under 26 U.S.C. § 5702(l)(2)
The Trustee argues first that the FETRA assessment is a tax
excluded
from
“price
5702(l)(2)(A).
The
for
which
Government
sold”
argues
pursuant
that
to
the
section
only
taxes
excluded from “price” are State and local sales taxes and taxes
imposed under chapter 52 of the Internal Revenue Code, which
FETRA assessments on their face are not.
1.
FETRA Assessment as a Tax
For the Trustee to prevail, he must first demonstrate that
the FETRA assessment is a “tax.”
Here, the Trustee points to a
number of cases in other contexts which he asserts hold various
fees
and
United
assessments
States,
582
to
F.2d
be
taxes.
1126
(7th
See,
Cir.
e.g.,
1978)
Robertson
(drug
v.
transfer
taxes); Wyoming Trucking Ass’n, Inc. v. Bentsen, 82 F.3d 930
(10th Cir. 1996) (gasoline excise tax); Burris v. City of Little
Rock,
941
F.2d
717
(8th
Cir.
1991)
constituted “tax” under Tax Injunction Act).
(sewer
assessments
Cf. Nat’l Fed’n of
Indep. Bus. v. Sebelius, --- U.S. ---, 132 S. Ct. 2566 (2012)
(holding that the Patient Protection and Affordable Care Act’s
provision
for
a
“shared
responsibility
payment”
for
those
failing to comply with the individual mandate to purchase health
insurance imposes a “penalty” on those failing to do so for
purposes of the Anti-Injunction Act but a “tax” on those without
insurance for purposes of the Congress’ taxing power).
11
Most
pertinent,
the
Trustee
relies
on
International
Tobacco Partners, Ltd. v. U.S. Department of Agriculture (In re
International
Tobacco
Partners,
Ltd.),
468
B.R.
582
(Bankr.
E.D.N.Y. 2012), where the court engaged in extensive analysis
and held that, in the context of assessing priority of claims in
a
bankruptcy
proceeding
pursuant
to
Bankruptcy
Code
§ 507(a)(8)(E), the FETRA assessment should be construed as an
excise tax (as opposed to a regulatory fee).
As a result, the
court found, the Secretary of Agriculture’s claim for unpaid
FETRA assessments had priority over other claims.
However, the
Trustee readily acknowledges that the District Court for the
Middle District of Florida, applying a different test in the
context of a constitutional challenge (under the Takings Clause,
Due Process Clause, and equal protection) construed FETRA not to
be a “tax” but rather a “fee,” because its primary purpose was
regulatory.
See Swisher Int’l, Inc. v. Johanns, No. 3:05-cv-
871-J16-TEM, 2007 WL 4200816, at *7 (M.D. Fla. Nov. 27, 2007)
(noting that the FETRA assessment “does not conform neatly to
the ‘classic’ definitions of ‘tax’ and ‘regulatory fee’”), aff’d
on other grounds, 550 F.3d 1046 (11th Cir. 2008).
As the Government notes, the International Tobacco case was
decided
in
a
different
context
but,
as
the
Government
must
concede, the Swisher court’s conclusion was dicta because the
issue was ultimately resolved on the ground that there was no
12
unconstitutional
directly
on
“taking.”
point.
Consequently,
Whether
or
not
the
neither
FETRA
case
is
assessment
constitutes a “tax” raises complex considerations and is not
easily answered.
The court need not engage in the extensive
analysis prerequisite to such a determination, however, because
even assuming, without deciding, that the assessment constitutes
a
tax,
for
the
reasons
that
follow
it
is
not
“imposed”
by
chapter 52 of the Internal Revenue Code, as required by section
5702(l)(2)(A). 14
2.
Section
“price,”
Taxes Imposed by Chapter 52
5702(l)(2)(A)
the
tax
must
be
requires
that
“imposed
by
this
chapter 52 of the Internal Revenue Code.
“levy or exact (a tax or duty).”
to
be
excluded
chapter,”
from
meaning
“Impose” means to
Black’s Law Dictionary 824
(9th ed. 2009); see U.S. Const. art. I, § 8, cl. 1 (giving
Congress the power to “lay and collect Taxes, Duties, Imposts
and Excises”).
The court’s aim in analyzing section 5702(l)(2)(A), as in
all matters addressing statutory interpretation, is to implement
14
The court need not consider, therefore, TTB’s reliance on its
document entitled “Frequently Asked Questions,” in which the TTB
advises that large cigar manufacturers and importers may not exclude
FETRA assessments from the taxable price of their product on the
grounds that the exclusions in section 5702(l)(2) are exclusive and
that FETRA “assessment payments are not taxes imposed under the IRC
[Internal Revenue Code], or State or local taxes.”
(Doc. 10-1 at 5
(TTB, Tobacco FAQs, T25).)
13
the intent of Congress.
F.3d
602,
607
(4th
See United States v. Abdelshafi, 592
Cir.
2010).
The
court
must
“first
and
foremost . . . examin[e] the plain language of the statute.”
United States v. Passaro, 577 F.3d 207, 213 (4th Cir. 2009).
“Absent ambiguity or a clearly expressed legislative intent to
the contrary,” a statute must be accorded its plain meaning.
Abdelshafi,
language
of
‘ordinary,
Congress
592
F.3d
at
a
statute,
607.
[the
contemporary,
intended
“In
court]
common
[them]
to
interpreting
give[s]
meaning,
bear
the
absent
some
the
plain
terms
their
an
indication
different
import.’”
Stephens ex rel. R.E. v. Astrue, 565 F.3d 131, 137 (4th Cir.
2009) (quoting N.C. ex rel. Cooper v. Tenn. Valley Auth., 515
F.3d 344, 351 (4th Cir. 2008)).
As
the
Government
points
out,
the
FETRA
assessment
is
codified in Title 7 (§ 518d), which is enforced by the Secretary
of Agriculture; it is not contained in chapter 52, which is
enforced by the Secretary of the Treasury.
The Trustee responds
that FETRA’s codification in Title 7 does not carry the force of
law,
citing
1
U.S.C.
§
112,
which
provides
that
the
United
States Statutes at Large, not the United States Code, is “legal
evidence of laws . . . therein contained, in all the courts of
the
United
States.”
As
a
consequence,
the
Trustee
notes
correctly, the court is not bound by the codification of the
FETRA assessment in Title 7, Chapter 21C, and FETRA must be
14
determined in the context of the entirety of the American Jobs
Creation
Act
of
2004. 15
He
contends
that
the
court
should
consider the assessment as imposed by chapter 52 of the Internal
Revenue Code, based on the reasoning of Guest v. Commissioner,
175 F.2d 868 (5th Cir. 1949), and a subsequent Tax Court case,
Marx v. Commissioner, 13 T.C. 1099 (1949).
Because these cases
are central to the Trustee’s argument, a close examination of
them is in order.
Guest
additional
arose
5
out
percent
of
application
wartime
tax
on
of
the
income
World
-–
War
termed
II
the
“victory tax” -- and a savings provision, set forth in thensection 456 of the Internal Revenue Code, that limited total
taxes on the income of a single year to 90 percent “over the tax
imposed by this chapter [chapter 1].”
to tax years beginning 1943.
The victory tax applied
In 1943, however, Congress also
15
To be sure, the United States Statutes at Large are “legal evidence
of the law” as provided by 1 U.S.C. § 112, and the titles of the
United States Code only serve as “prima facie” evidence of the law
unless they are enacted as “positive law,” in which case they too
serve as legal evidence of the laws. Tax Analysts v. Internal Revenue
Serv., 214 F.3d 179, 182 n.1 (D.C. Cir. 2000); see 1 U.S.C. § 204(a)
(“[W]henever titles of such Code [of Laws of the United States] shall
have been enacted into positive law the text thereof shall be legal
evidence of the laws therein contained, in all the courts of the
United States.”).
Title 7 has not been enacted into positive law.
See 1 U.S.C.A. § 204, United States Code Titles as Positive Law. In
this case, therefore, the court is not bound by the codifier’s
placement of FETRA in Title 7. Cf. United States v. Welden, 377 U.S.
95, 98 n.3 (1964) (holding that when Congress has not enacted a
codification as positive law, a change of arrangement by the codifier
without the approval of Congress, which places portions of what was
originally a single section in two separate sections, “should be given
no weight”).
15
passed the Current Tax Payment Act of 1943.
The purpose of the
Current Tax Payment Act of 1943 was to relieve taxpayers from
the burden of making two full years’ payments in one year (1943)
as part of bringing forward the payment of income taxes so that
all taxpayers would be put as nearly as possible upon a current
basis through implementation of federal income tax withholding.
This was accomplished by provisions that in effect collected a
full tax for 1942 or 1943, whichever was larger, and forgave the
equivalent of 75 percent of the tax for the smaller of the two
years.
Knox v. Comm’r, 10 T.C. 550, 553-54 (1948).
The tax
imposed by section 6(a) of the Current Tax Payment Act of 1943,
which applied when the tax for 1942 was not greater than the tax
for 1943 (which was the case in Guest), was expressly neither
part of the victory tax nor codified under chapter 1.
section
6(a)
tax
increased
the
taxpayer’s
chapter
Yet the
1
tax
liability by 25 percent of the forgiven liability for year 1942.
Current Tax Payment Act of 1943, Pub. L. No. 43-68, § 6(a), 57
Stat. 126, 145.
Although section 456 was silent as to how to
treat the tax under section 6(a), the Internal Revenue Service
adopted a regulation requiring that the victory tax’s 90 percent
limitation be computed without regard to the additional tax,
thus increasing the taxpayer’s liability when making the Current
Tax Payment Act of 1943 computations.
16
Amy Guest applied the section 6(a) additional tax to her
victory tax to compute her 90 percent limitation and thus to
take advantage of the forgiveness provisions of the Tax Payment
Act
of
1943,
deficiency.
and
the
Internal
Revenue
Service
assessed
a
Guest challenged the deficiency in the Tax Court.
The Tax Court first noted that section 6(a) not only was not
enacted as part of chapter 1 but “was not designed to be even an
amendment to the chapter, nor indeed to the code itself.”
Guest
v. Comm’r, 10 T.C. 750, 752 (1948), rev’d, 175 F.2d 868 (5th
Cir. 1949).
The court noted, however, that the tax added by
section 6 “in certain respects” was treated as an integral part
of chapter 1 tax liability and “in all probability some of the
provisions of chapter 1 are applicable to the tax imposed by
section 6.”
Id. at 752-53.
But, the court stated further,
since the additional tax was “‘imposed’ in a technical sense by
section 6, and not by chapter 1, the question of what taxes
Congress
intended
percent
limitation
Ultimately,
the
to
include
remains
court
at
in
the
best
concluded
computation
ambiguous.”
that
the
of
Id.
additional
the
90
at
753.
tax
was
imposed by section 6(a), not chapter 1, and, therefore, was not
subject
to
section
456’s
imposed by” chapter 1.
limitation
and
the
to
“the
tax
Id. at 753-54.
The Fifth Circuit reversed.
Commissioner
applicable
Tax
Court,
17
The court observed that the
for
certain
purposes,
had
previously
recognized
the
taxpayer’s income tax.
section
6(a)
tax
to
be
Guest, 175 F.2d at 870.
part
of
a
The court
concluded that the specific provisions of the statute confirmed
that the section 6(a) increase in Guest’s income tax liability
for 1943 was part of her chapter 1 tax for that year.
Thus, it
held, in applying the 90 percent limitation on her victory tax
liability, the tax imposed by chapter 1 must be computed “with
full regard to Section 6(a) of the Current Tax Payment Act of
1943.”
Id. at 869.
Six months after the Fifth Circuit’s ruling in Guest, the
Tax Court stated in Marx v. Commissioner, 13 T.C. 1099, 1103
(1949), that “[i]t seems unreasonable to suppose that Congress,
in enacting the forgiveness feature of the Current Tax Payment
Act [of 1943] in Section 6, intended thereby to exclude some of
the
tax
liability
of
a
taxpayer
from
the
computation
of
a
deficiency or from the computation of a rebate, the definitions
of which include the words ‘imposed by this chapter.’”
13 T.C.
at 1103; see McKenna v. Granger, 109 F. Supp. 592, 593 (W.D. Pa.
1953) (quoting Marx).
The court explained that the “Current Tax
Payment Act of 1943[] intended generally to forgive rather than
increase taxes,” and “[a] method of computation to accomplish
these ends was provided in section 6.”
Marx, 13 T.C. at 1103.
Consequently, the Tax Court concluded, the language of section 6
“may not be entirely clear, but it was apparently intended [by
18
Congress] to amend the tax-imposing provisions of chapter 1,”
and thus the section 6 tax “represents tax imposed by chapter 1,
since it is computed from chapter 1 tax.”
Marx, 13 T.C. at
1103.
Guest and Marx are distinguishable from the instant case.
In both Guest and Marx, the relief provisions of the Current Tax
Payment Act of 1943 were integrally and directly related to the
computation of the taxpayer’s income tax liability under the
victory tax (and its 90 percent limitation), and the intended
relief
under
the
Tax
Payment
Act
of
1943
would
have
been
frustrated had it not been read together with section 456’s 90
percent
limitation.
Moreover,
both
the
victory
tax
and
the
section 6(a) tax were to be administered by the Internal Revenue
Service, a bureau of the Department of the Treasury, as overseen
by the Secretary of the Treasury.
Here, the specific statutory provisions of FETRA do not
demonstrate
that
the
chapter 52 taxes.
Secretary
of
assessments
are
part
of
the
Debtor’s
The Trustee is quick to point out that the
Agriculture
asserted
in
Swisher
that
FETRA
assessments are “no different in the final analysis [] than the
excise taxes its [sic] [Swisher] pays pursuant to the Internal
Revenue Code.”
Swisher, 2007 WL 4200816, at *6.
that
assessment
the
FETRA
functions
no
But to say
differently
from
an
excise tax, as this court has assumed for purposes of this case,
19
is
far
from
saying
Nevertheless,
Congress
the
intended
specifically
administer
that
Trustee
that
designated
and
collect,
it
is
asks
the
be
this
FETRA
the
“imposed”
court
by
to
assessment,
Secretary
considered
of
“an
chapter
conclude
which
52.
that
Congress
Agriculture
integral
part”
to
of
chapter 52, which Congress directed the Commissioner of Internal
Revenue (under the Secretary of the Treasury) to administer and
collect.
See 26 U.S.C. §§ 5703-06, 5708-16; id. § 7701(a)(11)
(defining “Secretary” in Title 26 as “Secretary of the Treasury
or his delegate”).
Such a leap is unsupported by the statute. 16
16
It is also unsupported by the legislative history. Before FETRA,
producer contributions and purchaser and importer assessments funded
capital accounts known as the “No Net Cost Tobacco Fund.”
See 7
U.S.C. §§ 1445, 1445-1, 1445-2, 1445-3 (2002). The purpose of the No
Net Cost Tobacco Program Act of 1982 was “to provide for the operation
of the tobacco price support and production adjustment program in such
a manner as to result in no net cost to taxpayers.” Pub. L. 97-218,
96 Stat. 197. The House bill leading to FETRA, as passed for Senate
consideration, provided for buyout payments to be made from the United
States Treasury not to exceed the lesser of an amount equal to the
taxes received by the Treasury under chapter 52 of the Internal
Revenue Code during a five-year period, or $9.6 billion.
2003 Cong.
U.S. H.R. 4520, § 725 (June 17, 2004), received by the Senate June 18,
2004, and placed on Senate calendar June 21, 2004 (108th Cong. 2d
Sess.). Thus, payments would be made from the Treasury, although the
amount would depend primarily on the amount of excise taxes paid under
section 5701(a). By the time of the House Conference Report, however,
funding through a new assessment on tobacco manufacturers and
importers was proposed.
H.R. Conf. Rep. 108-755, reprinted in 2004
U.S.C.C.A.N. 1341, 1518, 2004 WL 2335174 (reporting on Conference
Agreement).
The final version of FETRA, enacted as part of the
American Jobs Creation Act of 2004, adopted the funding mechanism
which employed the assessment program currently administered by the
Secretary of Agriculture.
Thus, the legislation as enacted, which
imposed FETRA assessment payments on manufacturers and importers
separately from the excise tax payments required under chapter 52, was
intended to free the Government from making net expenditures from the
Treasury.
20
Drawing from the Tax Court’s statement in Marx that the
section 6 tax “represents tax imposed by chapter 1, since it is
computed from chapter 1 tax,” Marx, 13 T.C. at 1103 (emphasis
added), the Trustee argues that FETRA assessments are chapter 52
taxes because they are computed from chapter 52 information.
FETRA does refer to chapter 52 for purposes of determining the
manufacturer’s
“gross
FETRA
domestic
allocation.
volume,”
for
Specifically,
purposes
of
it
defines
calculating
the
allocation among tobacco product classes and a manufacturer’s
allocation within its class, as the volume of tobacco products
that are “removed (as defined by section 5702 of title 26)” and
“not exempt from tax under chapter 52 at the time of their
removal
under
that
(“Definitions”).
chapter.”
7
U.S.C
§
518d(a)(2)(A)
FETRA also requires that when manufacturers
and importers file returns and forms with Treasury’s TTB that
relate to (1) tobacco products removed into domestic commerce
(defined by section 5702 of the Internal Revenue Code) and (2)
the payment of taxes under chapter 52, they also submit a copy
to the Secretary of Agriculture.
Id. § 518d(h)(2).
But these references to chapter 52 are solely to identify
the
sources
of
information
required
by
the
Secretary
of
Agriculture to calculate the “volume of domestic sales” from
which the FETRA assessment is calculated.
The fact that FETRA
bases its allocation on the volume information contained in the
21
returns
and
forms,
required
to
certify,
under
section
assessments
5701,
which
for
manufacturers
purposes
however,
“imposed”
of
does
under
and
importers
are
computing
excise
taxes
thereby
render
FETRA
Rather,
such
not
chapter
52.
information serves a dual purpose: computation of federal excise
taxes, and computation of the FETRA assessment.
FETRA differs from Marx.
In this way,
In Marx, the additional tax under
section 6(a) was computed directly from the chapter 1 income
tax;
here,
FETRA
refers
to
chapter
52
only
for
purposes
of
determining the volume information for computation of the FETRA
assessment.
Given the structure of the FETRA scheme and the excise tax
provisions
conclude
for
that
assessments
be
large
cigars,
Congress
treated
it
could
like
would
not
have
intended
other
excise
be
a
taxes
stretch
that
on
products and, thus, treated as imposed by chapter 52.
to
FETRA
tobacco
Indeed,
chapter 52 is part of Subtitle E to Title 26, which governs
“Alcohol,
Tobacco,
specifically
large cigars.
(cigarettes,
and
addresses
Certain
taxes
on
other
tobacco
Excise
Taxes”
products,
and
including
For all tobacco products other than large cigars,
snuff,
roll-your-own
tobacco,
chewing
tobacco,
small cigars, and pipe tobacco), Congress imposed federal excise
taxes based on units sold.
(f), and (g).
26 U.S.C. § 5701(a)(1), (b), (e),
Only for large cigars are excise taxes imposed
22
based on price.
26 U.S.C. § 5701(a)(2).
Thus, to the extent
the FETRA assessment is included in a large cigar’s price, it is
the
only
tobacco
product
for
which
the
FETRA
assessment
increases the federal excise tax burden in this fashion.
In this light, it might appear incongruous that in enacting
FETRA Congress would have intended to single out large cigars
for such an increase in federal excise taxes.
FETRA itself
distinguishes the various classes of tobacco products only for
purposes of the allocation of the total amount of assessments
for a given year.
See 7 U.S.C. § 518d(c).
Indeed, FETRA does
not mention “large cigars” at all, and FETRA assessments are not
calculated based on their price.
It may well be that Congress
never considered FETRA’s effect on the excise tax imposed on
large
cigars
under
section
5701(a)(2).
Yet,
mere
oversight
aside, the Trustee points to nothing in the legislative history
or
the
statutes
which
leads
to
the
conclusion
that
Congress
intended FETRA’s assessments on large cigars to be considered
imposed by chapter 52.
federal
excise
tax,
In fact, for purposes of determining
Congress
has
long
differently from other tobacco products.
treated
large
cigars
It is not this court’s
province to engage in policy determinations as to the propriety
of such treatment. 17
17
The Trustee has not raised any constitutional challenge to the tax
treatment of large cigars in this case, so none is considered here.
23
As noted above, the Trustee correctly observes that FETRA
does not specify where its transition payment provisions (set
out in Subtitle B to Title VI of Public Law 108-357) were to be
codified.
It
is
noteworthy
that
Subtitle
A
of
FETRA
(“Termination of Tobacco Quota Program and Related Provisions”)
amended or deleted legislation that previously had been codified
in Title 7 (“Agriculture”).
And, as noted, FETRA assessments
are to be administered by the Secretary of Agriculture and a
corporation within the Department of Agriculture, the Commodity
Credit Corporation.
The transition payments replace the quota
program
provisions
and
related
already
codified
in
Title
7.
Moreover, the enforcement mechanisms and penalties for failure
to
comply
with
the
FETRA
Agriculture,
requirements
Secretary
of
not
bureaus.
7 U.S.C. § 518d(h)(3).
the
are
Treasury
vested
or
any
in
the
of
its
At a minimum, these factors
are inconsistent with a conclusion that Congress intended that
the FETRA assessments be considered imposed by chapter 52. 18
In addition, a determination that the FETRA assessment is
imposed by chapter 52 of the Internal Revenue Code would be at
18
Admittedly, the preamble to the enrolled bill forwarded to the President
for signing did state: “To amend the Internal Revenue Code of 1986 to remove
impediments in such Code and make our manufacturing service, and hightechnology businesses and workers more competitive and productive both at
home and abroad.”
H.R. 4520 (October 21, 2004) (enrolled bill).
Although
much of the American Jobs Creation Act of 2004 addressed amendments to the
Internal Revenue Code, the Act was not limited to amendments to the Code.
Further, this language also appeared in H.R. 4502 as introduced, which
contemplated funding through the Treasury and prior to amendments which led
to assessments on tobacco manufacturers and importers.
See 2003 Cong. U.S.
H.R. 4520, 108th Cong., 2d Sess. (June 4, 2004) (introduced in the House).
24
odds with the approach Congress articulated in the American Jobs
Creation Act of 2004 for when to construe an amendment as one to
the Internal Revenue Code. 19
Creation
Act
of
2004
Section 1(b) of the American Jobs
provides
that,
“[e]xcept
as
otherwise
expressly provided, whenever in this Act an amendment or repeal
is
expressed
in
terms
of
an
amendment
to,
or
repeal
of,
a
section or other provision, the reference shall be construed to
be made to a section or other provision of the Internal Revenue
Code of 1986.”
In accord with this, whenever the Act amends or
adds a new section intended to be incorporated into the Internal
Revenue Code, it names a section or part of the Internal Revenue
Code and then states that it “is amended by inserting after
section [specified Code section] the following new section” or
“is amended by adding at the end the following new section,”
followed by the new Internal Revenue Code section number and
text. 20
FETRA Subtitle B (codified at 7 U.S.C. §§ 518-518f), by
contrast,
makes
no
reference
that
it
is
“amending”
or
19
Following the statutory provision of 1 U.S.C. § 204 is provided a
list of U.S. Code Titles enacted as positive law, which is followed by
the heading “Title 26. Internal Revenue Code” and the sentence: “The
sections of Title 26, United States Code, are identical to the
sections of the Internal Revenue Code.”
Because chapter 52 is
contained in Title 26, it is apparent that Congress’s reference to the
Internal Revenue Code in the American Jobs Creation Act of 2004 should
be construed as a reference to Title 26 and its chapters.
20
See Pub. L. 108-357, §§ 102, 244, 245, 246, 301, 302, 303, 338,
339, 422, 801, 805, 811, 812, 842, 848, 854, 859, 861, 863, 866, 881,
884, 908.
25
“repealing” anything. 21
Pub. L. 108-357, §§ 621-627, 118 Stat.
1524-34.
stated
Congress’s
means
for
identifying
when
provisions of the American Jobs Creation Act of 2004 should be
construed as amendments to the Internal Revenue Code is simply
not employed in the FETRA-related provisions at issue here.
In
summary,
while
reasonable
minds
could
differ
as
to
whether there are good reasons for Congress to have excluded the
FETRA
assessment
from
calculation
of
federal
excise
tax
for
large cigars, the court concludes that the Trustee has failed to
bridge the gap from a conclusion that the FETRA assessment is a
tax to a finding that the tax is “imposed” by chapter 52.
This
conclusion requires the court to turn to the Trustee’s second
argument: that the FETRA assessment is not included as a “charge
incident
to
placing
the
article
in
condition
ready
for
use”
under section 5702(l)(1).
C.
Charges Included Under 26 U.S.C. § 5702(l)(1)
The
Trustee
assessment
is
argues
not
in
the
“included”
alternative
under
section
that
the
5702(l)(1)
FETRA
as
a
“charge incident to placing the article in condition ready for
use.”
He raises two grounds: (1) the FETRA assessment is in the
nature of a “transportation, delivery or other charge” excluded
under
26
U.S.C.
§ 4216(a)
because
21
it
is
incurred
after
the
Subtitle A, moreover, does refer to amendments and repeals
approximately 24 times, but in doing so refers to legislation codified
in Title 7, not chapter 52.
26
cigars are “in condition packed ready for shipment”; and (2) the
expense of FETRA assessments is not an expense associated with
manufacturing, importing, or selling cigars.
(Doc. 3 at 30-31
(Ex. C, Memorandum in Support of Debtor’s Objection to Claim for
Administrative Expenses and Motion for Determination of ABI’s
Federal Excise Taxes, at 18-19).)
If the FETRA assessment is
not a section 5702(l)(1) charge, the Trustee asserts, then it is
not included in the price of large cigars to begin with and
cannot
be
section
the
basis
for
5701(a)(2).
computing
The
federal
Government
excise
contends
tax
that
under
FETRA
assessments fall within the broad statutory language of “charge
incident to placing [large cigars] in condition ready for use”
and
are
not
otherwise
excluded
from
price
under
26
U.S.C.
§ 4216(a).
As a preliminary matter, the Government argues that the
phrase “there shall be included any charge incident to placing
[the large cigars] in condition ready for use” is illustrative
and not limiting, noting that Internal Revenue Code § 7701(c)
defines “includes” and “including” as “not be[ing] deemed to
exclude other things otherwise within the meaning of the term
defined.”
26 U.S.C. § 7701(c).
The Government also cites In re
Joplin, 882 F.2d 1507, 1511 (10th Cir. 1989), which addressed
the term “including” within the meaning of 26 U.S.C. § 651(a).
27
From this, the Government asserts, section 5702(l) should be
given an expansive reading.
But
section
“includes”
Joplin.
or
5701(a)(2)
“including,”
uses
as
the
found
in
“included,”
section
7701(c)
not
and
“Includes” and “including” are often used in statutes
to provide examples of a general term.
be
word
included”
different.
as
used
in
section
The phrase “there shall
5702(l)(1),
in
contrast,
is
It describes what to do with the item in question
(i.e., include it or not), not whether some unspecified item is
of the type to be considered for inclusion.
use
of
“includes”
definition
and
reflects
“including”
this
but
distinction.
not
Section 7701(c)’s
“included”
Thus,
the
in
its
dependent
language “any charge incident to placing [the large cigars] in
condition ready for use” describes the entire scope of what is
“included” in the price for purposes of section 5702(l)(1). 22
This conclusion does not mean that only direct expenses (or
charges) related to the large cigars in question are included.
22
At the June 7, 2012 hearing, the Trustee suggested that an
evidentiary hearing would assist the court in determining whether the
FETRA assessment was a “charge incident to placing [large cigars] in
condition ready for use.”
The court declined the suggestion, noting
that the question was one of law and that what the Debtor considered
“incident to” would not be helpful to the court in determining the
present issue, which focuses on what Congress intended. See Stephens
ex rel. R.E. v. Astrue, 565 F.3d 131, 137 (4th Cir. 2009) (noting a
question of statutory interpretation is “a quintessential question of
law”). Further, the evidence to have been presented undoubtedly would
focus on preparation and packaging of cigars, manufacturing costs, and
the like, as well as the timing of those events, all of which were
sufficiently covered in the Trustee’s briefing (see, e.g., Doc. 3 at
30-31).
28
All charges “incident to” making the large cigars in condition
ready for use are included in “price.”
Black’s Law Dictionary
defines “incident” as “[d]ependent upon, subordinate to, arising
out of, or otherwise connected with (something else, usu. of
greater
importance)”
(emphasis
Dictionary 830 (9th ed. 2009).
added).
F.3d
309,
313
(4th
Cir.
Black’s
Law
Phrases such as “arising out of”
and “connected with” are expressly broad.
248
See
2001)
Cf. Long v. Silver,
(referring
to
arbitration
clause for “[a]ny and all disputes . . . arising out of or in
connection with” as “very broad”).
viewed
as
otherwise
whether
the
connected
FETRA
with
Thus, the question can be
assessment
“placing
[the
arises
large
out
of
or
cigars]
in
is
a
condition ready for use.”
“Condition” simply refers to a “state
of
quality
being;
an
essential
Dictionary 335 (9th ed. 2009).
or
status.”
Black’s
Law
“[Condition] ready for use,”
therefore, refers to a large cigar fit for its intended use
(i.e., to be smoked) which is in a form (package) which can be
directed to the buyer.
The
Trustee
relies
on
the
application
of
26
U.S.C.
§ 4216(a), although it is not specifically referenced in section
5702(l). 23
The TTB similarly relies on section 4216(a) inasmuch
23
Section 5702(l)(3) references section 4216(b), which applies “[i]f
there is any question concerning the applicable sale price for tax
purposes.”
27 C.F.R. § 40.22(b)(1).
Section 4216(b), however,
addresses “constructive sales price” for cigars sold by a manufacturer
at retail, sold on consignment, or sold (otherwise through an arm’s
29
as
one
of
its
Industry
Circulars
applies
determinations of large cigar “price.”
that
section
to
See Dep’t of Treasury,
TTB, Industry Circular No. 2011-03 (April 26, 2011) (referencing
Industry Circular 91-3, which concluded that in determining the
“price” of large cigars “rules similar to 26 U.S.C. § 4216(a)
and
the
regulations
issued
thereunder
will
apply”). 24
Both
parties obviously draw different conclusions from that statute.
Section 4216(a) provides:
In determining, for purposes of this chapter, the
price for which an article is sold, there shall be
included any charge for coverings and containers of
length transaction) at less than the fair market price and does not
appear to apply to the matter before the court.
24
By comparison, TTB’s regulations for computing the tax imposed on
large cigars under section 5701(a)(2) define “sale price” (a term not
used in that statute) as “the price for which the large cigars are
sold by the manufacturer.”
27 C.F.R. § 40.22(a) (“Determination of
sale price of large cigars”).
Manufacturers are required to keep a
record of tobacco products removed and “must make entries in this
record at the time of removal” and, for each removal must show, for
large cigars, “the sale price.”
Id. § 40.184(a); see id. § 40.187
(requiring manufacturer “who removes large cigars from the factory
[to] keep such records as are necessary to establish and verify the
price for which the cigars are sold, in accordance with § 40.22”).
Similar provisions apply with respect to large cigar importers.
See
27 C.F.R. §§ 41.11, 41.39, 41.81, 41.181.
To be sure, an
administrative agency’s interpretation of its statute does not control
a court’s interpretation; in the absence of clear congressional
direction,
the
court
must
still
determine
if
the
agency’s
interpretation is permissible.
See United States v. Mead Corp., 533
U.S. 218, 230-31 & n.12 (2001); Chevron, U.S.A., Inc. v. Natural Res.
Def. Council, Inc., 467 U.S. 837, 842-43 (1984); Hosh v. Lucero, 680
F.3d 375, 378-79 (4th Cir. 2012). Agency interpretations that do not
contain the force of law, like agency manuals and policy statements,
are afforded respect by the courts “to the extent that they possess
the ‘power to persuade.’”
Minor v. Bostwick Laboratories, Inc., 669
F.3d 428, 438 (4th Cir. 2012) (citing Christensen v. Harris Cnty., 529
U.S. 576, 587 (2000) (quoting Skidmore v. Swift & Co., 323 U.S. 134,
140 (1944))).
30
whatever nature, and any charge incident to placing
the article in condition packed ready for shipment,
but there shall be excluded the amount of tax imposed
by this chapter [chapter 32], whether or not stated as
a separate charge.
A transportation, delivery,
insurance, installation, or other charge (not required
by the foregoing sentence to be included) shall be
excluded from the price only if the amount thereof is
established to the satisfaction of the Secretary in
accordance with the regulations.
26
U.S.C.
highlighted
§
4216(a)
language,
(emphasis
the
added). 25
Trustee
Focusing
argues
that
the
on
the
FETRA
assessment is not an expense incidental to placing the cigars
“in condition packed ready for shipment” but, instead, is an
“after-the-fact government exaction” and is in the nature of a
transportation, delivery, or other charge.
(Doc. 6-5 at 19.)
Noting that the Debtor’s loading dock is within its factory and
that cigars at the loading dock are “packed ready for shipment,”
the Trustee contends that as of that time the cigars have not
been “removed” for purposes of section 5701(a)(2) yet are “in a
condition ready for use.”
The Trustee asserts that, like a
transportation
charge,
or
delivery
the
FETRA
assessment
is
incurred after the large cigars have been shipped and therefore
cannot be necessary for packaging the large cigars and readying
them for shipment or use. 26
25
Chapter 32, to which section 4216(a) refers, imposes excise taxes
on a host of products, including coal (26 U.S.C. § 4121), vaccines
(id. § 4131), and sporting goods (id. § 4161).
26
The TTB’s March 19, 1991 Industry Circular 91-3, in referencing
section 4216(a) and regulations issued thereunder, provides:
31
In
one
sense,
it
could
be
said
that
because
the
FETRA
assessment is calculated based on the Debtor’s cigars that were
removed during the prior quarter, it is not assessed as a direct
cost of the large cigars actually sitting on the loading dock.
However,
the
Debtor
assessments
in
its
(presumably
in
order
does
price
to
include
for
the
maintain
estimates
large
a
of
cigars
stable
on
price),
passed on as part of those products’ sale price.
its
FETRA
the
dock
which are
In this sense,
therefore, the assessment is a cost of sale for the products
sitting on the loading dock.
The
Trustee’s
attempt
to
equate
the
assessment
with
transportation, delivery or other charge is not persuasive.
a
As
The “price” for which cigars are sold includes the total
consideration for the cigars in the form of money, services
or other things.
Any charge which is made incident to
placing the cigars in condition ready for use is included
in the sale price.
That is, any charge which is required
by a manufacturer or importer to be paid as a condition of
its sale of the cigars (and which is not attributable to an
expense falling within one of the exclusions described
below) is includable in the taxable sales price.
(Doc. 10-1 (original emphasis deleted and emphasis added).)
The
“exclusions described below” include federal excise tax imposed under
26 U.S.C. §§ 5701 and 5702, retail sales taxes, and “[a]ctual expenses
of [sic] charges incurred for transportation, delivery, insurance, and
other expenses in connection with the delivery of cigars to a
purchaser pursuant to a bona fide sale [which] shall be excluded from
the sale price in computing the tax.”
(Doc. 10-1.)
“A charge or
expense not within the scope of the above described items, whether or
not separately stated, may not be excluded in computing taxable sale
price unless it can be shown that the charge or expense is not
properly to be included as a manufacturing, importing or selling
expense or is in no way incidental to placing the cigar in condition
packed ready for shipment.” (Id.)
32
the Supreme Court noted in F.W. Fitch Co. v. United States, 323
U.S. 582, 584-85 (1945), those exceptions were intended to cover
costs that are not necessarily a component of the f.o.b. (“free
on board”) selling price.
Transportation, delivery, insurance,
and installation costs are not necessarily part of the selling
price as the product is sitting on the manufacturer’s dock and
are excluded if properly established.
Id. at 586.
The phrase
“other charge” is limited “to expenses similar in character to
those
incurred
installation.”
for
transportation,
Id.
at
584-85
delivery,
(holding
that
insurance
and
advertising
and
selling expenses incurred by a manufacturer “clearly fall within
the class of charges which Congress intended to be included in
the
tax
wholesale
base”
as
selling
“they
enter
price”).
Of
into
the
critical
composition
import,
the
of
the
Court,
noting the legislative history, concluded that “any additional
charge which a purchaser would not be required to pay if he
accepted delivery of the article at the factory or place of
production may be so excluded.”
27
Id. at 584. 27
Here, the Debtor
Indeed, consistent with F.W. Fitch, the agency’s regulations for
section 4216 state that transportation costs related to moving the
product from a factory or port of entry to a warehouse or other
facility in connection with the delivery of the product are not
considered incurred in connection with its delivery and must be
included in sale price for computing tax liability.
The regulations
also provide that “other charges” may not be excluded from taxable
sale price “unless it can be shown by adequate records that the charge
or expense properly is not to be included as a manufacturing or
selling expense or is in no way incidental to placing the article in
33
includes
its
estimated
FETRA
assessments
in
the
price
a
purchaser would be required to pay wherever accepting delivery.
Followed to its logical conclusion, moreover, the Trustee’s
argument leads to the inevitable result that all taxes (federal,
state, and local) are outside the ambit of charges “incident to
placing the article in condition ready for use” because they may
not be calculated until after the product is made ready for use
and, in fact, removed.
This conclusion would render superfluous
(or redundant) section 5702(l)(2), which specifically excludes
certain taxes -- those imposed by chapter 52 as well as retail
sales taxes imposed by any State or political subdivision, if
stated separately, even though they may be imposed post-removal
–- from inclusion as part of “price.” 28
If such taxes were not
included in the “price” calculation under section 5702(l)(2) in
the first place, there would be little need for Congress to have
excluded them in subsection (2).
Notably, section 5702(l)(2)
does not exclude all taxes paid by the manufacturer or importer,
only
those
specified.
And,
other
selling
expenses
incurred
after removal (such as national advertising) are not excluded,
either.
See, e.g., 26 U.S.C. § 4216(e).
condition packed ready for shipment.”
(c).
28
26 C.F.R. § 48.4216(a)-2 (b) &
By exempting only state and local retail sales taxes when “stated
as a separate charge,” this provision necessarily contemplates
inclusion of certain taxes that are paid as part of the price sold.
34
For all these reasons, therefore, the court concludes that
the FETRA assessment is a charge incurred “incident to” placing
large cigars in a condition ready for use within the meaning of
section 5702(l)(1).
D.
Additional Disputes between the Parties
The Trustee’s Objection asserts that the Debtor is entitled
to
a
net
taxes.
refund
of
$272,464.10
for
(Doc. 3 at 9 (Ex. B at 3).)
overpaid
federal
excise
The parties have discussed
various alleged refunds, credits, and offsets due.
(See, e.g.,
Doc. 6-4 at 3; Doc. 6-5 at 19-20; Doc. 10 at 14; Doc. 13 at 7.)
The
court
need
not
resolve
the
specific
dollar
amounts
or
offsets now but leaves it for further consideration following
referral of this matter to the Bankruptcy Court.
To the extent
the parties have raised additional issues as to the technical
calculation of FETRA assessments and/or excise taxes, they are
outside the scope of the limited issue for which the referral
was withdrawn and may be addressed by the Bankruptcy Court in
accord with this Memorandum Opinion and Order.
III. CONCLUSION
For the reasons stated above, the court finds that FETRA
assessments
are
included
in,
and
are
not
excluded
from, the
determination of price for the purpose of computing the excise
tax
imposed
by
26
U.S.C.
§ 5701(a)(2).
The
court’s
holding
applies to all large cigar sales by the Debtor, both during and
35
outside the period at issue here.
to
the
Bankruptcy
determination
of
Court
the
for
amount
This matter will be referred
further
of
excise
proceedings,
tax
including
subject
to
the
Government’s Claim, consistent with this Memorandum Opinion and
Order.
IT
See 11 U.S.C. § 505(a)(1).
IS
THEREFORE
ORDERED
that
the
Debtor’s
Objection
to
Claim for Administrative Expense And Motion For Determination of
ABI’s Federal Excise Taxes (Doc. 6-4) is DENIED to the extent
stated herein, and this matter is REFERRED to the Bankruptcy
Court for further proceedings consistent with this Memorandum
Opinion and Order.
/s/
Thomas D. Schroeder
United States District Judge
November 6, 2012
36
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