United States v. Tourtellot, 1:12–CV–413.

CourtUnited States District Courts. 4th Circuit. Middle District of North Carolina
Writing for the CourtTHOMAS D. SCHROEDER
Citation483 B.R. 72
PartiesUNITED STATES of America, Plaintiff, v. Peter L. TOURTELLOT, Trustee, Defendant.
Docket NumberNo. 1:12–CV–413.,1:12–CV–413.
Decision Date06 November 2012


Lawrence P. Blaskopf, Department of Justice, Washington, DC, for Plaintiff.

John A. Northen, Vicki L. Parrott, Northen Blue, L.L.P., Chapel Hill, NC, for Defendant.


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”) filed by the Debtor's Chapter 11 bankruptcy trustee. (Doc. 6–1 (Claim); Doc. 6–4 (Objection).) For the reasons set forth below, the court denies the Objection and returns the case to the Bankruptcy Court for determination of the Claim.

I. BACKGROUNDA. Procedural Background

The Debtor manufactures tobacco products, including large cigars.2 On January 28, 2009, the Debtor and its related companiesfiled for protection under Chapter 11 of the Bankruptcy Code. 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). After the filing of the Trustee's Joint Plan of 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.” 26 U.S.C. § 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, the Debtor included its estimated FETRA assessments in the price it charged customers of its 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, Pub.L. 108–357, 118 Stat. 1418, 1524 et seq., to terminate long-standing federal tobacco and price support programs. SeePub.L. 108–357, Title VI, Subtitle A. 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). FETRA, like the quota and price support loan programs it 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. See7 U.S.C. §§ 518a(e)(2), 518d(b), (k). These assessments are deposited into the Tobacco Trust Fund, which is administered by the federally-chartered Commodity Credit Corporation, a corporation within the U.S. Department of Agriculture. 4Id. §§ 518d(b)(3), 518e(a). The 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. 7 U.S.C. § 518f.

In determining a particular manufacturer's or importer's assessment, the Secretary of Agriculture, acting through the Commodity Credit Corporation, imposes quarterly assessments under a two-step procedure set out in 7 U.S.C. § 518d. 7 U.S.C. § 518d(b)(1). First, the Secretary makes an allocation of the total amount required for quarterly assessments among six classes of tobacco products, one of which is “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 tax under chapter 52 of the 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 percentages thereafter. FETRA set the initial allocation for cigar manufacturers and importers at 2.783 percent of the total quarterly assessment and provides for annual adjustments thereafter. Id. § 518d(c); see7 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 the prior quarter. Id. § 518d(b)(1) & (e)(1). The volume of gross domestic sales is calculated based on gross domestic volume. Id. § 518d(g)(2). 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, the calculation of a particular tobacco manufacturer's or importer's assessment for each 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 C.F.R. § 1463.7. “Market share” is “the share of each manufacturer or importer of a class of tobacco product ... of the total volume of domestic sales of the class of tobacco product during the base period for a fiscal year for an assessment.” 7 U.S.C. § 518d(a)(3). Thus, for example, if a cigar manufacturer held 33–1/3% of 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. 7 C.F.R. § 1463.8. 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 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), (b)(1)(A); 7 C.F.R. §§ 1463.9, 1463.100(a).

With this background, the court turns to the issues presented by the parties.

II. ANALYSISA. Internal Revenue Code: Federal Excise Tax on Large Cigars

Federal excise taxes for large cigars are calculated pursuant to 26 U.S.C. §§ 5701(a)(1) and 5702( l ) and related regulations. 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 of “price” is set forth in section 5702( l ), which provides:

Determination of price on cigars.—

In determining price for purposes of section 5701(a)(2)

(1) there shall be included any charge incident to placing ...

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