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.

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)
)
)
)
)
)
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)

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