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Taxation – Federal Excise – Administrative – FETRA – Large Cigars – First Impression – Bankruptcy

United States v. Tourtellot (Lawyers Weekly No. 12-03-1115, 36 pp.) (Thomas D. Schroeder, J.) 1:12-cv-00413; M.D.N.C.

Holding: Where the bankruptcy debtor included its costs under the Fair and Equitable Tobacco Reform Act of 2004 (FETRA) in the price it charged consumers for its cigars, the FETRA assessment must be included in the price of the cigars for purposes of determining the excise tax on the cigars.

The court overrules the trustee’s objection to the government’s claim for an administrative expense seeking payment of post-petition excise taxes.

The excise tax on large cigars is set as a percentage of “the price for which [the product is] sold.” 26 U.S.C. § 5701(a)(2).

The treatment of the FETRA assessment in connection with the federal excise tax on large cigars is a matter of first impression.

Even assuming, without deciding, that the FETRA assessment constitutes a tax, it is not “imposed” by chapter 52 of the Internal Revenue Code, as it would have to be under 26 U.S.C. § 57-2(l)(2)(A) in order to be excluded from “price for which sold.”

Section 5702(l)(2)(A) requires that, to be excluded from “price,” the tax must be “imposed by this chapter,” meaning chapter 52 of the Internal Revenue Code.

The FETRA assessment is codified in Title 7, which is enforced by the Secretary of Agriculture; it is not contained in chapter 52, which is enforced by the Secretary of the Treasury. Although the court is not bound by the codification of the FETRA assessment in Title 7, the provisions of FETRA do not demonstrate that its assessments are part of the debtor’s chapter 52 taxes. To say that the FETRA assessment functions no differently from an excise tax, as this court has assumed for purposes of this case, is far from saying that it is “imposed” by chapter 52.

The bankruptcy trustee argues that FETRA assessments are chapter 52 taxes because they are computed from chapter 52 information. But FETRA refers to chapter 52 only for purposes of determining the volume information for computation of the FETRA assessment.

FETRA does not specify where its transition payment provisions were to be codified; however, Subtitle A of FETRA amended or deleted legislation that had been codified in Title 7 (“Agriculture”). Furthermore, FETRA assessments are to be administered by the Secretary of Agriculture; transition payments replace the tobacco quota program already codified in Title 7; and the enforcement mechanisms for FETRA are vested in the Secretary of Agriculture. These factors are inconsistent with a conclusion that Congress intended that the FETRA assessments be considered imposed by chapter 52.

FETRA was included in the American Jobs Creation Act of 2004. Whenever the Act amends or adds a new section intended for the Internal Revenue Code, it names the relevant section or part of the Internal Revenue Code. By contrast, FETRA Subtitle B makes no reference that it is “amending” or “repealing” anything.

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.

In the alternative, the trustee argues that the FETRA assessment is not “included” under § 5702(l)(1) 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 it is incurred after the 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.

The 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 § 5702(l)(1). All charges “incident to” making the large cigars in condition ready for use are included in “price.” Thus, the question can be viewed as whether the FETRA assessment arises out of or is otherwise connected with “placing [the large cigars] in a condition ready for use.” “Condition ready for use” 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 argues that 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.

However, the debtor includes estimates of its FETRA assessments in its price for the large cigars on the dock, which are passed on as part of those products’ sale price. 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 a transportation, delivery or other charge is not persuasive. In F.W. Fitch Co. v. United States, 323 U.S. 582 (1945), the Court held that those exceptions were intended to cover costs that are not necessarily a component of the f.o.b. (“free on board”) selling price. The phrase “other charge” is limited to expenses similar in character to those incurred for transportation, delivery, insurance and installation. Of critical import, the Court 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.” Here, the debtor includes its estimated FETRA assessments in the price a purchaser would be required to pay wherever accepting delivery.

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 § 5702(l)(1).

The trustee’s objection is overruled.

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