Int'l Tobacco Partners, Ltd. v. United States Dep't of Agric. (In re Int'l Tobacco Partners, Ltd.)

• Decision Date: 06 April 2012
• Docket Number: Bankruptcy No. 10–74894–ast.,Adversary No. 10–9007–ast.
• Citation: 468 B.R. 582
• Parties: In re INTERNATIONAL TOBACCO PARTNERS, LTD., Debtor.International Tobacco Partners, Ltd., Plaintiff, v. United States Department of Agriculture and Thomas Vilsack as Secretary of the United States Department of Agriculture, Defendants.
• Court: U.S. Bankruptcy Court — Eastern District of New York

468 B.R. 582

In re INTERNATIONAL TOBACCO PARTNERS, LTD., Debtor.International Tobacco Partners, Ltd., Plaintiff,

v.United States Department of Agriculture and Thomas Vilsack as Secretary of the United States Department of Agriculture, Defendants.

Bankruptcy No. 10–74894–ast.

Adversary No. 10–9007–ast.

United States Bankruptcy Court, E.D. New York.

April 6, 2012.

Gary B. Sachs, Gary B. Sachs & Associates, PLLC, Uniondale, NY, for Plaintiff.

Eric H. Holder, Jr., U.S. Attorney's Office, Department of Justice, Washington, D.C., Vincent Lipari, U.S. Attorney's Office, Central Islip, NY, for Defendants.

MEMORANDUM OPINION ON CROSS MOTIONS FOR SUMMARY JUDGMENT

ALAN S. TRUST, Bankruptcy Judge.

Benjamin Franklin once wrote that “in this world nothing can be said to be certain, except death and taxes.” ¹ This case demonstrates that what constitutes a tax is not always certain.

Before the Court are cross motions for summary judgment (the “Motions”) filed by the Plaintiff/Debtor, International Tobacco Partners, Ltd. (the “Debtor”), and the Defendant, the United States Department of Agriculture (the “USDA”). Resolution of these Motions turns on the following three issues:

1. Whether quarterly assessments owed by an importer of tobacco products, such as Debtor, under a federal program designed to wean U.S. tobacco growers off their dependence on government subsidies and price controls constitute excise taxes for purposes of federal law;

2. If those assessments constitute excise taxes, when do then accrue; and

3. Whether quarterly assessments that cover both pre- and postpetition periods are entitled to priority status under Bankruptcy Code ² § 507(a)(8)(E)(ii) for the prepetition portion and to administrative claim status under § 503(B)(1)(B) for the postpetition portion.

For the reason set forth below, this Court holds that the assessments imposed against Debtor constitute excise taxes that accrue quarterly; that USDA's claim for prepetition assessments shall be treated as a priority claim under § 507(a)(8)(E)(ii) for amounts that accrued during the three-year period prior to the filing of the Debtor's petition, and as an unsecured claim for assessments that accrued more than three years prior to the petition date; and that USDA is entitled to file an administrative claim under § 503(b)(1)(B) for assessments that accrue postpetition.

Jurisdiction

This Court has jurisdiction over this core proceeding pursuant to 28 U.S.C. §§ 1334(b) and 157(b)(2)(A), (B), (I), and (O), and the Standing Order of Reference in effect in the Eastern District of New York dated August 28, 1986. This memorandum opinion constitutes the Court's findings of facts and conclusions of law to the extent Rule 7052 of the Federal Rules of Bankruptcy Procedure (the “Bankruptcy Rules”) so requires. FED. R. BANKR. P. 7052.

Facts and Background ³

Fair and Equitable Tobacco Reform Act

In October 2004, as part of the American Jobs Creation Act, Congress passed the federal Fair and Equitable Tobacco Reform Act of 2004 (“FETRA”). ⁴ See Pub.L. No. 108–357, Title VI, § 643, 118 Stat. 1536 (Oct. 22, 2004) (codified at 7 U.S.C. § 518, et seq.). Through FETRA, Congress sought to wean domestic tobacco farmers and producers (the “U.S. Tobacco Growers”) off their dependence upon a system of quotas, price controls and subsidies enacted during the Great Depression, and transition them to a system of free market pricing and competition. See 150 Cong. Rec. H8704–03, at *H8717–18, 2004 WL 2266992 (Oct. 7, 2004). Out of a concern that U.S. Tobacco Growers were at a competitive disadvantage, and to facilitate this transition, FETRA tasked the Commodity Credit Corporation (“CCC”), a government-owned corporation that operates under the auspices of USDA, with overseeing a ten-year program under which U.S. Tobacco Growers would receive annual payments (the “Tobacco Transition Payment Program”). These payments were designed by Congress to be revenue neutral; that is, instead of being direct government subsidies, payments were to be generated by redistributions of assessments levied against all domestic manufacturers of tobacco products and importers of foreign-produced tobacco (together the “Tobacco Manufacturers”). According to USDA, there are approximately 450,000 U.S. Tobacco Growers that receive annual payments under the Tobacco Transition Payment Program. See Declaration of Joy Harwood, Director of the Economic and Policy Analysis Staff, Farm Service Agency, USDA at ¶ 7 (the “Harwood Declaration”). [dkt item 18] The annual payments are made from a Tobacco Trust Fund, which is supposed to be funded through the quarterly assessments collected by CCC from the Tobacco Manufacturers (the “Assessments”). According to the legislative history, FETRA essentially operates as a “buyout” of U.S. Tobacco Growers by providing them with payments for ten years during which time Congress anticipated that U.S. Tobacco Growers would either become more competitive with the free market or would transition to new crops or would move to entirely different means of earning a living. See 150 Cong. Rec. H8704–03, at *H8717–18.

The program was designed to run from fiscal year 2005 to fiscal year 2014. Congress determined that the total amount to be distributed to U.S. Tobacco Growers under FETRA would be capped at $10.14 billion over the ten years. 7 U.S.C. § 518f. This $10.14 billion is also the amount that would be assessed against and collected from Tobacco Manufacturers under FETRA. Each Tobacco Manufacturer's individual Assessment would be calculated quarterly by CCC to determine that Tobacco Manufacturer's share of the aggregate assessment to be collected in that quarter.⁵ 7 U.S.C. § 518d(b).

FETRA established a two-step process for calculating each Tobacco Manufacturer's quarterly Assessment. In “Step A,” the total amount required to fund the Tobacco Transition Payment Program ($10.14 billion) is allocated among six classes of tobacco products: cigarettes, cigars, snuff, roll-your-own, chewing, and pipe. 7 U.S.C. § 518d(c)(1). For fiscal year 2005, FETRA set the allocation among these classes at specific percentages. Id. For the nine fiscal years thereafter, CCC makes an annual allocation based upon each class's share of the total U.S. market in tobacco products. § 518d(c)(2); 7 C.F.R. §§ 1463.4, 1463.5. In “Step B,” each Tobacco Manufacturer's individual Assessment is calculated pro rata based upon that Tobacco Manufacturer's share of the “gross domestic volume” ⁶ of tobacco products that were “removed” in a prior quarter, meaning either taken out of domestic inventory or, for imported products such as in this case, released from customs and made available for marketing in the United States.⁷ CCC makes the Step B calculation based upon information collected from Tobacco Manufacturers regarding their market share for that tobacco product. The final determination of each Tobacco Manufacturer's quarterly Assessment is calculated by multiplying its share of the gross domestic volume of tobacco products within a class as determined under Step B by the Assessment amount for that particular class of tobacco products as determined under Step A.⁸ § 518d(f). After the end of each quarter, CCC sends out Assessment notices, or invoices, to all Tobacco Manufacturers covering the previous quarter.⁹

FETRA requires that CCC impose an Assessment on each Tobacco Manufacturer that “sells tobacco products in domestic commerce in the United States during that fiscal year.” § 518d(b)(1). Therefore, a Tobacco Manufacturer can only avoid liability for quarterly Assessments by not selling tobacco products in U.S. domestic commerce during a given year.¹⁰

If a Tobacco Manufacturer fails to pay its quarterly Assessments, the regulations direct CCC to assess interest on any unpaid Assessments at the interest rates that CCC otherwise assesses for delinquent debts. ¹¹ The regulations also impose civil and criminal penalties on a party that knowingly fails to provide information or that provides false information that is required to be reported under the regulations. 7 C.F.R. § 1463.10. However, it appears that the payments to U.S. Tobacco Growers are not impacted by the payment or nonpayment of Assessments; that is, Congress committed to paying out $10.14 billion to U.S. Tobacco Growers regardless of the amount of Assessments actually collected from Tobacco Manufacturers.

Procedural History of Debtor's Bankruptcy Case and This Adversary Proceeding

Debtor filed a petition under Chapter 11 of the Bankruptcy Code on June 25, 2010 (the “Petition Date”). [main case 10–74894–ast, dkt item 1] According to the petition, Debtor is a Tobacco Manufacturer and is engaged in the business of importing discount and generic cigarettes and cigars and selling them throughout the United States through a network of distributors.

On July 19, 2010, USDA filed proof of claim number 3 (the “USDA Claim”) asserting a priority claim in the amount of $1,297,215.90 reflecting “Unpaid Assessments due in accordance with 7 U.S.C. 518d.” Annexed to the USDA Claim is a schedule of quarterly Assessments for each quarter beginning with the first quarter of fiscal year 2005 and ending with the May 31, 2010, which was the month ending prior to the Petition Date.

On December 16, 2010, Debtor commenced the instant adversary proceeding by filing a complaint (the “Complaint”) [dkt item 1], which is essentially an objection to the USDA Claim, and which seeks declaratory relief as follows: first, that amounts owed by Debtor to USDA under FETRA are not a tax because FETRA lacks a public purpose; second, if the amounts owed by Debtor to USDA under FETRA are taxes, then they should be deemed excise taxes under 11 U.S.C. § 507(a)(8)(E), which Debtor alleges limits the priority status of excise taxes to transactions occurring during the three years immediately preceding the Petition Date; third, that postpetition FETRA Assessments should not be accorded...