Section 63.997. Performance test and compliance assessment requirements for control devices.
40 CFR § 63.997 - Performance test and compliance assessment requirements for control devices.
§ 63.997 Performance test and compliance assessment requirements for control devices.
(a)Performance tests and flare compliance assessments. Where §§ 63.985 through 63.995 require, or the owner or operator elects to conduct, a performance test of a control device or a halogen reduction device, or a compliance assessment for a flare, the requirements of paragraphs (b) through (d) of this section apply.
(b)Prior test results and waivers. Initial performance tests and initial flare compliance assessments are required only as specified in this subpart or a referencing subpart.
(1) Unless requested by the Administrator, an owner or operator is not required to conduct a performance test or flare compliance assessment under this subpart if a prior performance test or compliance assessment was conducted using the same methods specified in § 63.997(e) or § 63.987(b)(3), as applicable, and either no process changes have been made since the test, or the owner or operator can demonstrate that the results of the performance test or compliance demonstration, with or without adjustments, reliably demonstrate compliance despite process changes. An owner or operator may request permission to substitute a prior performance test or compliance assessment by written application to the Administrator as specified in § 63.999(a)(1)(iv).
(2) Individual performance tests and flare compliance assessments may be waived upon written application to the Administrator, per § 63.999(a)(1)(iii), if, in the Administrator's judgment, the source is meeting the relevant standard(s) on a continuous basis, the source is being operated under an extension or waiver of compliance, or the owner or operator has requested an extension or waiver of compliance and the Administrator is still considering that request.
(3) Approval of any waiver granted under this section shall not abrogate the Administrator's authority under the Act or in any way prohibit the Administrator from later canceling the waiver. The cancellation will be made only after notification is given to the owner or operator of the source.
(c)Performance tests and flare compliance assessments schedule.
(1) Unless a waiver of performance testing or flare compliance assessment is obtained under this section or the conditions of a referencing subpart, the owner or operator shall perform such tests as specified in paragraphs (c)(1)(i) through (vii) of this section.
(vii) When the promulgated emission standard in a referencing subpart is more stringent than the standard that was proposed, the owner or operator of a new or reconstructed source subject to that standard for which construction or reconstruction is commenced between the proposal and promulgation dates of the standard shall comply with performance testing requirements within 180 days after the standard's effective date, or within 180 days after start-up of the source, whichever is later. If a promulgated standard in a referencing subpart is more stringent than the proposed standard, the owner or operator may choose to demonstrate compliance initially with either the proposed or the promulgated standard. If the owner or operator chooses to comply with the proposed standard initially, the owner or operator shall conduct a second performance test within 3 years and 180 days after the effective date of the standard, or after start-up of the source, whichever is later, to demonstrate compliance with the promulgated standard.
(2) The Administrator may require an owner or operator to conduct performance tests and compliance assessments at the regulated source at any time when the action is authorized by section 114 of the Act.
(3) Unless already permitted by the applicable title V permit, if an owner or operator elects to use a recovery device to replace an existing control device at a later date, or elects to use a different flare, nonflare control device or recovery device to replace an existing flare, nonflare control device or final recovery device at a later date, the owner or operator shall notify the Administrator, either by amendment of the regulated source's title V permit or, if title V is not applicable, by submission of the notice specified in § 63.999(c)(7) before implementing the change. Upon implementing the change, a compliance demonstration or performance test shall be performed according to the provisions of paragraphs (c)(3)(i) through (v) of this section, as applicable, within 180 days. The compliance assessment report shall be submitted to the Administrator within 60 days of completing the determination, as provided in § 63.999(a)(1)(ii).
(d)Performance testing facilities. If required to do performance testing, the owner or operator of each new regulated source and, at the request of the Administrator, the owner or operator of each existing regulated source, shall provide performance testing facilities as specified in paragraphs (d)(1) through (5) of this section.
(1)Sampling ports adequate for test methods applicable to such source. This includes, as applicable, the requirements specified in (d)(1)(i) and (ii) of this section.
(5) Any other facilities that the Administrator deems necessary for safe and adequate testing of a source.
(e)Performance test procedures. Where §§ 63.985 through 63.995 require the owner or operator to conduct a performance test of a control device or a halogen reduction device, the owner or operator shall follow the requirements of paragraphs (e)(1)(i) through (v) of this section, as applicable.
(i)Continuous unit operations. For continuous unit operations, performance tests shall be conducted at maximum representative operating conditions for the process, unless the Administrator specifies or approves alternate operating conditions. During the performance test, an owner or operator may operate the control or halogen reduction device at maximum or minimum representative operating conditions for monitored control or halogen reduction device parameters, whichever results in lower emission reduction. Operations during periods of start-up, shutdown, and malfunction shall not constitute representative conditions for the purpose of a performance test.
(iii)Combination of both continuous and batch unit operations. For a combination of both continuous and batch unit operations, performance tests shall be conducted at maximum representative operating conditions. For the purpose of conducting a performance test on a combined vent stream, maximum representative operating conditions shall be when batch emission episodes are occurring that result in the highest organic HAP emission rate (for the combined vent stream) that is achievable during the 6-month period that begins 3 months before and ends 3 months after the compliance assessment (e.g. TRE calculation, performance test) without causing any of the situations described in paragraphs (e)(1)(iii)(A) through (C) of this section.
(C) Necessitating that the owner or operator make product in excess of demand.
(iv)Alternatives to performance test requirements.Performance tests shall be conducted and data shall be reduced in accordance with the test methods and procedures set forth in this subpart, in each relevant standard, and, if required, in applicable appendices of 40 CFR parts 51, 60, 61, and 63 unless the Administrator specifies one of the provisions in paragraphs (e)(1)(iv)(A) through (E) of this section.
(E) Approves the use of an equivalent method.
(v)Performance test runs. Except as provided in paragraphs (e)(1)(v)(A) and (B) of this section, each performance test shall consist of three separate runs using the applicable test method. Each run shall be conducted for at least 1 hour and under the conditions specified in this section. For the purpose of determining compliance with an applicable standard, the arithmetic means of results of the three runs shall apply. In the event that a sample is accidentally lost or conditions occur in which one of the three runs must be discontinued because of forced shutdown, failure of an irreplaceable portion of the sample train, extreme meteorological conditions, or other circumstances, beyond the owner or operator's control, compliance may, upon the Administrator's approval, be determined using the arithmetic mean of the results of the two other runs.
(A) For control devices used to control emissions from transfer racks (except low throughput transfer racks that are capable of continuous vapor processing but do not handle continuous emissions or multiple loading arms of a transfer rack that load simultaneously), each run shall represent at least one complete tank truck or tank car loading period, during which regulated materials are loaded, and samples shall be collected using integrated sampling or grab samples taken at least four times per hour at approximately equal intervals of time, such as 15-minute intervals.
(B) For intermittent vapor processing systems used for controlling transfer rack emissions (except low throughput transfer racks that do not handle continuous emissions or multiple loading arms of a transfer rack that load simultaneously), each run shall represent at least one complete control device cycle, and samples shall be collected using integrated sampling or grab samples taken at least four times per hour at approximately equal intervals of time, such as 15-minute intervals.
(2)Specific procedures. Where §§ 63.985 through 63.995 require the owner or operator to conduct a performance test of a control device, or a halogen reduction device, an owner or operator shall conduct that performance test using the procedures in paragraphs (e)(2)(i) through (iv) of this section, as applicable. The regulated material concentration and percent reduction may be measured as either total organic regulated material or as TOC minus methane and ethane according to the procedures specified.
(i)Selection of sampling sites. Method 1 or 1A of 40 CFR part 60, appendix A, as appropriate, shall be used for selection of the sampling sites.
(A) For determination of compliance with a percent reduction requirement of total organic regulated material or TOC, sampling sites shall be located as specified in paragraphs (e)(2)(i)(A)(1) and (e)(2)(i)(A)(2) of this section, and at the outlet of the control device.
(1) With the exceptions noted below in paragraphs (e)(2)(i)(A)(2) and (3), the control device inlet sampling site shall be located at the exit from the unit operation before any control device.
(2) For process vents from continuous unit operations at affected sources in subcategories where the applicability criteria includes a TRE index value, the control device inlet sampling site shall be located after the final recovery device.
(3) If a vent stream is introduced with the combustion air or as a secondary fuel into a boiler or process heater with a design capacity less than 44 megawatts, selection of the location of the inlet sampling sites shall ensure the measurement of total organic regulated material or TOC (minus methane and ethane) concentrations, as applicable, in all vent streams and primary and secondary fuels introduced into the boiler or process heater.
(B) For determination of compliance with a parts per million by volume total regulated material or TOC limit in a referencing subpart, the sampling site shall be located at the outlet of the control device.
(ii)Gas volumetric flow rate. The gas volumetric flow rate shall be determined using Method 2, 2A, 2C, 2D, 2F, or 2G of 40 CFR part 60, appendix A, as appropriate.
(iii)Total organic regulated material or TOC concentration. To determine compliance with a parts per million by volume total organic regulated material or TOC limit, the owner or operator shall use Method 18 or 25A of 40 CFR part 60, appendix A, as applicable. The ASTM D6420-99 may be used in lieu of Method 18 of 40 CFR part 60, appendix A, under the conditions specified in paragraphs (e)(2)(iii)(D)(1) through (3) of this section. Alternatively, any other method or data that have been validated according to the applicable procedures in Method 301 of appendix A of 40 CFR part 63 may be used. The procedures specified in paragraphs (e)(2)(iii)(A), (B), (D), and (E) of this section shall be used to calculate parts per million by volume concentration. The calculated concentration shall be corrected to 3 percent oxygen using the procedures specified in paragraph (e)(2)(iii)(C) of this section if a combustion device is the control device and supplemental combustion air is used to combust the emissions.
(A)Sampling time. For continuous unit operations and for a combination of both continuous and batch unit operations, the minimum sampling time for each run shall be 1 hour in which either an integrated sample or a minimum of four grab samples shall be taken. If grab sampling is used, then the samples shall be taken at approximately equal intervals in time, such as 15 minute intervals during the run.
(B)Concentration calculation. The concentration of either TOC (minus methane or ethane) or total organic regulated material shall be calculated according to paragraph (e)(2)(iii)(B) (1) or (2) of this section.
(1) The TOC concentration (CTOC) is the sum of the concentrations of the individual components and shall be computed for each run using Equation 2.
CTOC = Concentration of TOC (minus methane and ethane), dry basis, parts per million by volume.
x = Number of samples in the sample run.
n = Number of components in the sample.
Cji = Concentration of sample components j of sample I, dry basis, parts per million by volume.
(2) The total organic regulated material (CREG) shall be computed according to Equation 2 in paragraph (e)(2)(iii)(B)(1) of this section except that only the regulated species shall be summed.
(C)Concentration correction calculation. The concentration of TOC or total organic regulated material, as applicable, shall be corrected to 3 percent oxygen if a combustion device is the control device and supplemental combustion air is used to combust the emissions.
(1) The emission rate correction factor (or excess air), integrated sampling and analysis procedures of Method 3B of 40 CFR part 60, appendix A, or American Society of Mechanical Engineers (ASME) PTC 19-10-1981-Part 10 (available for purchase from: ASME International, Three Park Avenue, New York, NY 10016-5990, 800-843-2763 or 212-591-7722), shall be used to determine the oxygen concentration. The sampling site shall be the same as that of the organic regulated material or organic compound samples, and the samples shall be taken during the same time that the organic regulated material or organic compound samples are taken.
(2) The concentration corrected to 3 percent oxygen (Cc) shall be computed using Equation 3.
Cc = Concentration of TOC or organic regulated material corrected to 3 percent oxygen, dry basis, parts per million by volume.
Cm = Concentration of TOC (minus methane and ethane) or organic regulated material, dry basis, parts per million by volume.
%O2d = Concentration of oxygen, dry basis, percentage by volume.
(D) To measure the total organic regulated material concentration at the outlet of a control device, use Method 18 of 40 CFR part 60, appendix A, or ASTM D6420-99. If you have a combustion control device, you must first determine which regulated material compounds are present in the inlet gas stream using process knowledge or the screening procedure described in Method 18. In conducting the performance test, analyze samples collected at the outlet of the combustion control device as specified in Method 18 or ASTM D6420-99 for the regulated material compounds present at the inlet of the control device. The method ASTM D6420-99 may be used only under the conditions specified in paragraphs (e)(2)(iii)(D)(1) through (3) of this section.
(1) If the target compound(s) is listed in Section 1.1 of ASTM D6420-99 and the target concentration is between 150 parts per billion by volume and 100 parts per million by volume.
(2) If the target compound(s) is not listed in Section 1.1 of ASTM D6420-99 but is potentially detected by mass spectrometry, an additional system continuing calibration check after each run, as detailed in Section 10.5.3 of ASTM D6420-99, must be followed, met, documented, and submitted with the performance test report even if you do not use a moisture condenser or the compound is not considered soluble.
(3) If a minimum of one sample/analysis cycle is completed at least every 15 minutes.
(E) To measure the TOC concentration, use Method 18 of 40 CFR part 60, appendix A, or use Method 25A of 40 CFR part 60, appendix A, according to the procedures in paragraphs (e)(2)(iii)(E)(1) through (4) of this section.
(1) Calibrate the instrument on the predominant regulated material compound.
(2) The test results are acceptable if the response from the high level calibration gas is at least 20 times the standard deviation for the response from the zero calibration gas when the instrument is zeroed on its most sensitive scale.
(3) The span value of the analyzer must be less than 100 parts per million by volume.
(4) Report the results as carbon, calculated according to Equation 25A-1 of Method 25A of 40 CFR part 60, appendix A.
(iv)Percent reduction calculation. To determine compliance with a percent reduction requirement, the owner or operator shall use Method 18, 25, or 25A of 40 CFR part 60, appendix A, as applicable. The method ASTM D6420-99 may be used in lieu of Method 18 of 40 CFR part 60, appendix A, under the conditions specified in paragraphs (e)(2)(iii)(D)(1) through (3) of this section. Alternatively, any other method or data that have been validated according to the applicable procedures in Method 301 of appendix A of 40 CFR part 63 may be used. The procedures specified in paragraphs (e)(2)(iv)(A) through (I) of this section shall be used to calculate percent reduction efficiency.
(A)Sampling time. The minimum sampling time for each run shall be 1 hour in which either an integrated sample or a minimum of four grab samples shall be taken. If grab sampling is used, then the samples shall be taken at approximately equal intervals in time, such as 15-minute intervals during the run.
(B)Mass rate of TOC or total organic regulated material. The mass rate of either TOC (minus methane and ethane) or total organic regulated material (EI, Eo) shall be computed as applicable.
(1) Equations 4 and 5 shall be used.
EI, Eo = Emission rate of TOC (minus methane and ethane) (ETOC) or emission rate of total organic regulated material (ERM) in the sample at the inlet and outlet of the control device, respectively, dry basis, kilogram per hour.
K2 = Constant, 2.494 × 10−6 (parts per million)−1 (gram-mole per standard cubic meter) (kilogram per gram) (minute per hour), where standard temperature (gram-mole per standard cubic meter) is 20 °C.
Cij, Coj = Concentration on a dry basis of organic compound j in parts per million by volume of the gas stream at the inlet and outlet of the control device, respectively. If the TOC emission rate is being calculated, Cij and Coj include all organic compounds measured minus methane and ethane; if the total organic regulated material emissions rate is being calculated, only organic regulated material are included.
Mij, Moj = Molecular weight of organic compound j, gram per gram-mole, of the gas stream at the inlet and outlet of the control device, respectively.
QI, Qo = Process vent flow rate, dry standard cubic meter per minute, at a temperature of 20 °C, at the inlet and outlet of the control device, respectively.
(C)Percent reduction in TOC or total organic regulated material for continuous unit operations and a combination of both continuous and batch unit operations. For continuous unit operations and for a combination of both continuous and batch unit operations, the percent reduction in TOC (minus methane and ethane) or total organic regulated material shall be calculated using Equation 6.
R = Control efficiency of control device, percent.
EI = Mass rate of TOC (minus methane and ethane) or total organic regulated material at the inlet to the control device as calculated under paragraph (e)(2)(iv)(B) of this section, kilograms TOC per hour or kilograms organic regulated material per hour.
Eo = Mass rate of TOC (minus methane and ethane) or total organic regulated material at the outlet of the control device, as calculated under paragraph (e)(2)(iv)(B) of this section, kilograms TOC per hour or kilograms total organic regulated material per hour.
(D)Vent stream introduced with combustion air or as secondary fuel. If the vent stream entering a boiler or process heater with a design capacity less than 44 megawatts is introduced with the combustion air or as a secondary fuel, the weight-percent reduction of total organic regulated material or TOC (minus methane and ethane) across the device shall be determined by comparing the TOC (minus methane and ethane) or total organic regulated material in all combusted vent streams and primary and secondary fuels with the TOC (minus methane and ethane) or total organic regulated material exiting the combustion device, respectively.
(E)Transfer racks. Method 25A of 40 CFR part 60, appendix A, may also be used for the purpose of determining compliance with the percent reduction requirement for transfer racks.
(1) If Method 25A of 40 CFR part 60, appendix A, is used to measure the concentration of organic compounds (CTOC), the principal organic regulated material in the vent stream shall be used as the calibration gas.
(2) An emission testing interval shall consist of each 15-minute period during the performance test. For each interval, a reading from each measurement shall be recorded.
(3) The average organic compound concentration and the volume measurement shall correspond to the same emissions testing interval.
(4) The mass at the inlet and outlet of the control device during each testing interval shall be calculated using Equation 7.
Mj = Mass of organic compounds emitted during testing interval j, kilograms.
F = 10−6 = Conversion factor, (cubic meters regulated material per cubic meters air) * (parts per million by volume)−1.
K = Density, kilograms per standard cubic meter organic regulated material.
Vs = Volume of air-vapor mixture exhausted at standard conditions, 20 °C and 760 millimeters mercury, standard cubic meters.
Ct = Total concentration of organic compounds (as measured) at the exhaust vent, parts per million by volume, dry basis.
Ei, Eo = Mass flow rate of organic compounds at the inlet (i) and outlet (o) of the control device, kilograms per hour.
n = Number of testing intervals.
Mij, Moj = Mass of organic compounds at the inlet (i) or outlet (o) during testing interval j, kilograms.
T = Total time of all testing intervals, hours.
(F) To measure inlet and outlet concentrations of total organic regulated material, use Method 18 of 40 CFR part 60, appendix A, or ASTM D6420-99, under the conditions specified in paragraphs (e)(2)(iii)(D)(1) through (3) of this section. In conducting the performance test, collect and analyze samples as specified in Method 18 or ASTM D6420-99. You must collect samples simultaneously at the inlet and outlet of the control device. If the performance test is for a combustion control device, you must first determine which regulated material compounds are present in the inlet gas stream (i.e., uncontrolled emissions) using process knowledge or the screening procedure described in Method 18. Quantify the emissions for the regulated material compounds present in the inlet gas stream for both the inlet and outlet gas streams for the combustion device.
(G) To determine inlet and outlet concentrations of TOC, use Method 25 of 40 CFR part 60, appendix A. Measure the total gaseous non-methane organic (TGNMO) concentration of the inlet and outlet vent streams using the procedures of Method 25. Use the TGNMO concentration in Equations 4 and 5 of paragraph (e)(2)(iv)(B) of this section.
(H) Method 25A of 40 CFR part 60, appendix A, may be used instead of Method 25 to measure inlet and outlet concentrations of TOC if the condition in either paragraph (e)(2)(iv)(H)(1) or (2) of this section is met.
(1) The concentration at the inlet to the control system and the required level of control would result in exhaust TGNMO concentrations of 50 parts per million by volume or less.
(2) Because of the high efficiency of the control device, the anticipated TGNMO concentration of the control device exhaust is 50 parts per million by volume or less, regardless of the inlet concentration.
(I) If the uncontrolled or inlet gas stream to the control device contains formaldehyde, you must conduct emissions testing according to paragraph (e)(2)(iv)(I)(1) or (2) of this section.
(1) If you elect to comply with a percent reduction requirement and formaldehyde is the principal regulated material compound (i.e., greater than 50 percent of the regulated material compounds in the stream by volume), you must use Method 316 or 320 of 40 CFR part 63, appendix A, to measure formaldehyde at the inlet and outlet of the control device. Use the percent reduction in formaldehyde as a surrogate for the percent reduction in total regulated material emissions.
(2) If you elect to comply with an outlet total organic regulated material concentration or TOC concentration limit, and the uncontrolled or inlet gas stream to the control device contains greater than 10 percent (by volume) formaldehyde, you must use Method 316 or 320 of 40 CFR part 63, appendix A, to separately determine the formaldehyde concentration. Calculate the total organic regulated material concentration or TOC concentration by totaling the formaldehyde emissions measured using Method 316 or 320 and the other regulated material compound emissions measured using Method 18 or 25/25A.
(3) An owner or operator using a halogen scrubber or other halogen reduction device to control process vent and transfer rack halogenated vent streams in compliance with a referencing subpart, who is required to conduct a performance test to determine compliance with a control efficiency or emission limit for hydrogen halides and halogens, shall follow the procedures specified in paragraphs (e)(3) (i) through (iv) of this section.
(i) For an owner or operator determining compliance with the percent reduction of total hydrogen halides and halogens, sampling sites shall be located at the inlet and outlet of the scrubber or other halogen reduction device used to reduce halogen emissions. For an owner or operator determining compliance with a kilogram per hour outlet emission limit for total hydrogen halides and halogens, the sampling site shall be located at the outlet of the scrubber or other halogen reduction device and prior to any releases to the atmosphere.
(ii) Except as provided in paragraph (e)(1)(iv) of this section, Method 26 or Method 26A of 40 CFR part 60, appendix A, shall be used to determine the concentration, in milligrams per dry standard cubic meter, of total hydrogen halides and halogens that may be present in the vent stream. The mass emissions of each hydrogen halide and halogen compound shall be calculated from the measured concentrations and the gas stream flow rate.
(iii) To determine compliance with the percent removal efficiency, the mass emissions for any hydrogen halides and halogens present at the inlet of the halogen reduction device shall be summed together. The mass emissions of the compounds present at the outlet of the scrubber or other halogen reduction device shall be summed together. Percent reduction shall be determined by comparison of the summed inlet and outlet measurements.
(iv) To demonstrate compliance with a kilogram per hour outlet emission limit, the test results must show that the mass emission rate of total hydrogen halides and halogens measured at the outlet of the scrubber or other halogen reduction device is below the kilogram per hour outlet emission limit specified in a referencing subpart.


Barry A. Short and Michael D. Mulligan, Lewis, Rice, Tucker, Allen & Chubb, St. Louis, Mo., for plaintiff.
Ludwig H. Adams, Trial Atty., Tax Division, Dept. of Justice, Washington, D. C., for defendant.
This case is now before the Court on plaintiff's motion for partial summary judgment. Plaintiff brought this suit pursuant to 28 U.S.C. § 1346(a) (1) seeking to recover an alleged overpayment of estate taxes on the estate of decedent Lee J. Sloan. The primary area of dispute between the parties, and the issue to which *654 the instant motion for partial summary judgment is directed, concerns the proper valuation of the stock of L.J.S. Investment Company held by decedent at the time of his death.
The essential facts do not appear to be in serious dispute. Though defendant in its memorandum in opposition to the instant motion has questioned the facts asserted in the affidavits plaintiff has submitted in support of this motion, and the conclusions plaintiff draws therefrom, no evidence has been submitted in opposition to those affidavits. It is clear that a party may not rest on mere denials or arguments of counsel when faced with a properly supported motion for summary judgment. Rule 56(e), Federal Rules of Civil Procedure. Neither may a party merely hope to cast doubt upon those facts through cross-examination at trial. Rather, the party opposing the motion must come forward with sufficient evidence to show there is a genuine issue for trial.
Decedent was the holder at the time of his death of two hundred sixty-five shares of stock of L.J.S. Investment Company. Four hundred sixty-six were outstanding at that time. The remaining shares were held by decedent's spouse, daughter, and grandchildren. L.J.S. Investment Company is the successor corporation of Sloan's Moving & Storage Company. In 1972, Sloan's had changed its business and its name.
In August 1964, all the shareholders of Sloan's executed a stock purchase agreement. This agreement prohibited inter vivos transfers of the stock outside of the immediate family of Lee Sloan, except in accordance with the provisions of the agreement. Upon the death of any shareholder, or upon the desire of any shareholder to transfer his shares outside Sloan's immediate family, the company and the other shareholders had the option to purchase the shares at a price determined in accordance with a formula set out in the agreement. The formula was a fair and reasonable method of determining the option price at the time it was adopted. Only if these options were not exercised could the stock be sold to others at a different price.
Prior to 1956, decedent owned all the stock of Sloan's. Between then and 1964, decedent had given a small amount of stock to members of his family as gifts. The stock purchase agreement was the result of the decedent's concern that the stock might come into the hands of non-family members. The agreement was designed to maintain family ownership and control of the company.
At the time of decedent's death, the formula set out in the agreement provided for a purchase price of zero. The price was based on prior years' income, and, with the exception of 1972, the company had lost money each of the preceding seven years. The company purchased decedent's stock for zero dollars shortly after his death in accordance with the stock purchase agreement.
Plaintiff, executrix of decedent's estate, valued the stock owned by decedent in accordance with the stock purchase agreement for purposes of his estate tax return. Defendant rejected this valuation method, valued the stock at $144,319.00, and assessed a deficiency accordingly. Plaintiff paid the deficiency, filed an administrative claim for a refund, and brought this suit when no results were obtained in the administrative proceeding.
The affidavits filed by plaintiff in support of the instant motion establish that the stock purchase agreement was established for a valid business purpose and that the price determined thereunder was fair and reasonable at the time of its adoption. Clearly, maintenance of family ownership and control is a legitimate business purpose. Estate of Bischoff v. Commissioner, 69 T.C. 32 (1977); Estate of Reynolds v. Commissioner, 55 T.C. 172 (1970); Slocum v. United States, 256 F. Supp. 753 (S.D.N.Y.1966); Estate of Littick v. Commissioner, 31 T.C. 181 (1958). As stated earlier, defendant has not controverted these affidavits, or otherwise cast doubt upon the facts asserted therein. The existence of this valid business purpose negates defendant's vague assertions that the agreement was a device to pass decedent's *655 property to the natural objects of his bounty for less than adequate consideration.
Plaintiff's evidence shows that the agreement was in full force and effect at the time of decedent's death, and defendant does not contend that the agreement herein is not enforceable. See State v. Sho-me Power Co-operative, 356 Mo. 832, 204 S.W.2d 276 (1947). And it is clear from the terms of the agreement that, either during his lifetime or upon his death, decedent's shares could be sold only for the price fixed by the agreement. This Court sees no reason, therefore, for disregarding the price as determined in accordance with the stock purchase agreement.
It now seems well established that the value of property may be limited for estate tax purposes by an enforceable agreement which fixes the price to be paid therefor, and where the seller if he desires to sell during his lifetime can receive only the price fixed by the contract and at his death his estate can receive only the price theretofore agreed on.
Estate of Weil v. Commissioner, 22 T.C. 1267, 1273-1274 (1954). See, also, Estate of Bischoff, supra; Estate of Nicolo Fiorito v. Commissioner, 33 T.C. 440 (1959); Brodrick v. Gore, 224 F.2d 892 (10th Cir. 1955); May v. McGowan, 194 F.2d 396 (2d Cir. 1952); Citizens Fidelity Bank & Trust Company v. United States, 209 F. Supp. 254 (W.D.Ky. 1962); Provident Nat. Bank v. United States, 581 F.2d 1081, 1086 (3rd Cir. 1978).
That the actual fair market value of the shares may have been, and undoubtedly was, higher than the price set by the agreement does not dictate a contrary conclusion. For no matter what the actual fair market value of the stock, decedent during his life, and his executrix after his death, could receive no more for it than called for in the agreement. May v. McGowan, supra; Lomb v. Sugden, 82 F.2d 166 (2d Cir. 1936); Wilson v. Bowers, 57 F.2d 682 (2d Cir. 1932). The option price is therefore the proper value for estate tax purposes.
Plaintiff's motion for partial summary judgment will therefore be granted.


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Makoviychuk M.I., Zvezdin N.Yu., Paporkov V.A., Prokaznikov A.V. Complex magneto-optical response from three dimensional structures like magnetophotonic crystals. // Proceed. Eighth Int. Workshop “Relaxed, Nonlinear and Acoustic Optical Processes and Materials” – RNAOPM-2016. (June 1 – 4, 2016, Lutsk, Ukraine). – Lutsk: Volyn University Press “Vezha”, 2016. – P.193 – 195.
Маковийчук М.И. Фликкер-шумовые биохимические МЭМС сенсоры // Proceed. Seventh Int. Workshop “Relaxed, Nonlinear and Acoustic Optical Processes and Materials”– RNAOPM-20146. (June 1 – 4, 2016, Lutsk, Ukraine). – Lutsk: Volyn University Press “Vezha”, 2016. – P.214 – 216.
Морозов О.В., Морозов А.О., Амиров И.И. Мониторинг процесса глубокого реактивного ионного травления методом лазерной интерферометрии. // 5-ая Международная научно-техническая конференция «Технологии микро- и наноэлектроники в микро- и наносистемной технике». Труды конференции. (13-15 апреля 2016 г.) Москва, Россия, с. 84.
Зимин С.П., Горлачев Е.С., Мокров Д.А., Амиров И.И., Гременок В.Ф., Иванов В.А. Особенности роста наноструктур по механизму «пар-жидкость-кристалл» на поверхности пленок SnS при плазменной обработке. // 5-ая Международная научно-техническая конференция «Технологии микро- и наноэлектроники в микро- и наносистемной технике». Труды конференции. (13-15 апреля 2016 г.) Москва, Россия, 2016, с. 125.
Уваров И.В., Наумов В.В., Королева О.М., Ваганова Е.И., Амиров И.И. Бистабильный МЭМС-переключатель с механизмом активного размыкания электродов. // 5-ая Международная научно-техническая конференция «Технологии микро- и наноэлектроники в микро- и наносистемной технике». Труды конференции. (13-15 апреля 2016 г.) Москва, Россия, 2016, с. 139.
Уваров И.В., Морозов О.В., Изюмов М.О., Лемехов С.С., Козлов А.Н., Амиров И.И. Анализ изготовления чувствительного элемента микроакселерометра. // 5-ая Международная научно-техническая конференция «Технологии микро- и наноэлектроники в микро- и наносистемной технике». Труды конференции. (13-15 апреля 2016 г.) Москва, Россия, 2016, с. 217.
Маковийчук М.И. Методические и технологические особенности изготовления фликкер-шумовых биохимических МЭМС сенсоров. // Материалы 46-ого Международного научно-методического семинара "Флуктуационные и деградационные процессы в полупроводниковых приборах". М.: МНТОРЭС им. А.С. Попова, НИУ «МЭИ»,2016. - С. 66 - 71.
S. P. Zimin, E. S. Gorlachev, V. F. Gremenok, K. Bente, D. A. Mokrov, I. Amirov and V. V. Naumov. Plasma-assisted self-formation of nanotip arrays on the surface of Cu(In,Ga)Se2 thin films. Abstracts of the 20th International Conference on Ternary and Multinary Compounds (ICTMC), 5-9 September, 2016, Halle (Germany).- P. REF108.
Маковийчук М.И. Фликкер-шумовые биохимические мультисенсорные системы. // Тезисы докладов XXVIII Симпозиума «Современная химическая физика» (19 -30 сентября 2016г., г. Туапсе). - М.: «Парк - медиа», 2016. - С.89.
S. Krivelevich. Simple models of Tristate transistors. // Proceedings of International conference “Micro- and Nanoelectronics – 2016”. (ICMNE-2016) October 3-7, 2016, Moscow–Zvenigorod, Russia. – O1-07.
I. Amirov, A. Shumilov, A. Kupriyanov, V. Naumov. Nanoscale patterning using redeposition on sidewall microstructure. // Proceedings of International conference “Micro- and Nanoelectronics – 2016”. (ICMNE-2016) October 3-7, 2016, Moscow–Zvenigorod, Russia. – O3-05.
Yu. Denisenko, V. Rudakov. Formation of nanoporous structure in silicon substrate using two-stage annealing process. // Proceedings of International conference “Micro- and Nanoelectronics – 2016”. (ICMNE-2016) October 3-7, 2016, Moscow–Zvenigorod, Russia. – P1-19.
O.S. Trushin, E. Glazkov, E. Granato, S.-C. Ying. Critical thickness for dislocation nucleation in Ge1-xSix/Si(100) heteroepitaxial system. // Proceedings of International conference “Micro- and Nanoelectronics – 2016”. (ICMNE-2016) October 3-7, 2016, Moscow–Zvenigorod, Russia. – P1-05.
I.S. Zarev, N.Yu. Zvezdin, V.A.Paporkov, A.V. Prokaznikov. Analysis of contribution from various order diffraction maxima to complex magnetooptical Kerr effect from three-dimensional structures like magnetophotonic crystals. // Proceedings of International conference “Micro- and Nanoelectronics – 2016”. (ICMNE-2016) October 3-7, 2016, Moscow–Zvenigorod, Russia. – P1-14.
N. Savinski, U. Logachev. Modelling energy gaps of graphene nanoribbons (GNRs) by DFT. // Proceedings of International conference “Micro- and Nanoelectronics – 2016”. (ICMNE-2016) October 3-7, 2016, Moscow–Zvenigorod, Russia. – P1-43.
N. Savinski, D. Puhov, M. Lebedev, S. Vasilev, O. Trushin, M. Soloviev, A. Surovtsev. Electrochemical exfoliation for the scalable production of high-quality graphene. // Proceedings of International conference “Micro- and Nanoelectronics – 2016”. (ICMNE-2016) October 3-7, 2016, Moscow–Zvenigorod, Russia. – P1-44.
V. Ovcharov, A. Kurenya, V. Rudakov, V. Prigara. Silicon wafer temperature switching waves in a lamp-based chamber. // Proceedings of International conference “Micro- and Nanoelectronics – 2016”. (ICMNE-2016) October 3-7, 2016, Moscow–Zvenigorod, Russia. – P1-46.
V. Prigara, V. Ovcharov, V. Rudakov, A. Kurenya. Critical parameters of lamp-based annealing in high-power flux of incoherent radiation. // Proceedings of International conference “Micro- and Nanoelectronics – 2016”. (ICMNE-2016) October 3-7, 2016, Moscow–Zvenigorod, Russia. – P1-47.
O.V. Morozov, A.V. Postnikov. Influence of reactor wall conditions on the silicon etching rate in SF6 plasma processing. // Proceedings of International conference “Micro- and Nanoelectronics – 2016”. (ICMNE-2016) October 3-7, 2016, Moscow–Zvenigorod, Russia. – P1-48.
I. Amirov, M. Izuymov, L. Mazaletsky. Сleaning of Si sidewall surface of high aspect ratio trenches in oxygen and hydrogen peroxide plasma. // Proceedings of International conference “Micro- and Nanoelectronics – 2016”. (ICMNE-2016) October 3-7, 2016, Moscow–Zvenigorod, Russia. – P1-49.
I. Amirov, R. Selyukov, V. Naumov. Effect of low energy ion-plasma treatment on the internal stresses in three-layer Pt/Ti/SiO2 microcantelevers. // Proceedings of International conference “Micro- and Nanoelectronics – 2016”. (ICMNE-2016) October 3-7, 2016, Moscow–Zvenigorod, Russia. – P1-50.
A.A. Popov, A.E. Berdnikov, A.A. Mironenko, V.N. Gusev. Model of Nanodiode Conductivity as Description of I-V Features of ReRAM in Conductive State. // Proceedings of International conference “Micro- and Nanoelectronics – 2016”. (ICMNE-2016) October 3-7, 2016, Moscow–Zvenigorod, Russia. – P2-13.
O.S. Trushin, N. Barabanova, E. Granato, S.C. Ying. Exploring energy landscape of magnetic nanostructures with Nudged Elastic Band Micromagnetics. // Proceedings of International conference “Micro- and Nanoelectronics – 2016”. (ICMNE-2016) October 3-7, 2016, Moscow–Zvenigorod, Russia. – P2-19.
I.V. Uvarov, V.V. Naumov, O.M. Koroleva, E.I. Vaganova, I.I. Amirov. A low actuation voltage bistable MEMS switch: Design, fabrication and preliminary testing. // Proceedings of International conference “Micro- and Nanoelectronics – 2016”. (ICMNE-2016) October 3-7, 2016, Moscow–Zvenigorod, Russia. – P2-30.
S.P. Zimin, E.S. Gorlachev, D.A. Mokrov, I.I. Amirov, V.V. Naumov, V.F. Gremenok, Y.-D. Chung, W.Y. Kim, S.H. Chai. Formation of Cu(In,Ga)Se2 Nanorods for Solar Cell Applications. Материалы V Междунар. науч. конф., Минск, 2016 г. С. 139.

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Having sought civil Customs penalties against an importer under Section 592 of the Tariff Act on grounds of fraud, the government could not, in suing to recover those penalties in the United States Court of International Trade, allege in the alternative that the violations occurred by means of gross-negligence or negligence, the Court recently held. The decision at least raises the possibility that the government may have outsmarted itself in pursuing the penalty.
The defendant in United States v. Toth, Slip Op. 06-61 (June 20, 2016) was charged with evading antidumping duties on imported crawfish tail meat by misclassifying it as langostino. Customs brought administrative proceedings against the defendant and his company under Section 592 of the Tariff Act of 1930, as amended [19 U.S.C. §1592], charging them with evading duties by means of fraud. After administrative proceedings failed to produce a result, the government brought suit to collect the Section 592 penalties, charging fraud, and in the alternative, alleging that the violations occurred by means of gross negligence, or simple negligence.
The defendants moved to dismiss the counts of the complaint claiming gross negligence and negligence, citing the Federal Circuit’s 2015 decision in United States v. Nitek Electronics, Inc. In Nitek, the Federal Circuit ruled, in a surprising but welcome decision for importers, that Customs was limited, in bringing suit, to pursuing penalties for the level of culpability charged administratively. Since the government had charged Toth with fraud administratively, and since Toth’s defense before the agency had been addressed to a fraud charge, Customs was limited to pursuing judicial relief based on the fraud allegations. The agency had not exhausted administrative remedies as to gross negligence or negligence claims.
The Court’s ruling in the Toth case left the government with a heavy burden to meet in order to collect a penalty.
Section 592 of the Tariff Act provides for the imposition of civil penalties on persons who, by means of fraud, gross negligence or negligence, enter or attempt to enter merchandise into the United States by means of false and material statements or acts, or by means of material omissions. The maximum penalty depends on the loss of revenue and the level of culpability. In cases of simple negligence, the maximum penalty is twice the loss of revenue; in gross negligence cases, four times the loss of revenue; and in cases of fraud, an amount equal to the domestic value of the merchandise concerned. In no case, however, may a Section 592 civil penalty exceed the domestic value of the merchandise.
In cases to collect a Section 592 penalty, the Court of International Trade does not simply enforce the agency’s claim. Instead, it makes findings de novo, on the basis of the record before the court, concerning whether the violation and claimed level of culpability has been proven, and what, if anything, the amount of the penalty should be.
In addition to a sliding scale of penalties, Section 592 also provides different allocations of the burden of proof in CIT cases to collect a penalty. Where simple negligence is alleged, the government need only establish the facts claimed to constitute the violation; the burden rests on the person charged to show that the violation did not result from negligence – a failure to use the level of care expected of a reasonably prudent person. In cases claiming gross negligence – a “wanton disregard” for one’s obligations under the Customs laws – the government has the burden of proving the violation, and the gross negligence by a preponderance of the evidence.
Fraud cases confront the government with the most difficult road to secure a penalty. Fraud claims must generally be pleaded “with particularity”, and the government bears the burden of proving the fraud through “clear and convincing evidence”.
Following the CIT’s Toth decision, the government now faces the hefty burden of pleading and proving fraud. It runs the risk that, if the evidence only shows a grossly negligent violation, it will walk away empty-handed. It might be unable to recover any penalties, nor establish the predicate for forcing to importer to repay any “withheld duties”.
Typically, the government’s motivation for charging fraud is to seek a higher penalty, especially in cases where the conduct is egregious, or undermines an important trade policy, such as enforcement of antidumping orders. But the “greater culpability = higher penalty” rationale does not always hold true in cases involving antidumping duties, which are frequently set at 100% ad valorem or higher. When a duty rate is 100%, for example, the greatest penalty which could be collected under Section 592 is one time the loss of revenue – less than the maximum penalty for cases arising out of simple negligence. So charging a greater level of culpability in such cases would not bring the government a higher penalty.
The government might therefore have outsmarted itself in the Toth case – charging a higher level of culpability and assuming a greater burden of proof than it might have needed to in order to secure the maximum penalty and recovery of withheld duties.
Perhaps the government will carry the day with its fraud charge in the Toth case. Had the government merely charged simple negligence, they might have been exposed to a defense of “it wasn’t negligence, it was intentional fraud”, but this seems unlikely. But facing a higher burden of proof – and with a claim of misclassification, which is often a matter of negligence – the government has exposed itself to the possibility that the defendant in Toth might walk away scot-free.
Apparently realizing this possibility, the government asked the Court to remand the Toth case to Customs, presumably so the agency could conduct administrative proceedings to charge a penalty at a lesser level of negligence or gross negligence. Saying the request “showed great chutzpah”, the court denied the request, pointing out that there was no final agency decision respecting negligence to remand.
Before the Federal Circuit’s Nitek decision, the government assumed it could sue for penalties, asserting the different levels of culpability in the alternative. That is no longer the case, and as a consequence, the stakes for the government to charge a violator carefully have increased dramatically.
Last year, U.S. Customs and Border Protection (CBP) caused quite a stir when it proposed amendments to Form 5106, the basic form typically filed by a Customhouse broker to provide basic information concerning an importer of record – name and address, type of entity and taxpayer ID/importer number. Stung by a number of identity thefts perpetrated with the use of CBP’s Automated Commercial System (ACS), CBP proposed a huge expansion of the information gathered on the CF 5106, requesting the names and titles of individuals within the company with knowledge of the company’s import operations and financial dealings – as well as these persons’ Social Security numbers or passport information.
Members of the trade community filed more than a score of comments with CBP, making it perfectly clear that under no circumstances did they want their individual identification information loaded into CBP’s notoriously insecure ACS system.
Now, CBP is back with another alteration of CF 5106, and is seeking public comments through August 27, 2015. But the proposed form still raises significant questions and problems.
Under the proposal, Customs Form 5106, would be renamed the Create/Update Importer Identity Form, and would still require greatly expanded information concerning importers, particularly corporate ones. The form still has a place for individuals Social Security Numbers or passport data, but Customs now says that providing this information is optional. But the importer would still need to provide the names of officers or employees having “importing and financial business knowledge of the company”.
The form 5106 would be required to be signed with a certification of accuracy, and an acknowledgment that submission of false information can subject the company to a felony under 28 U.S.C. §1001 for providing false statements to a government officials.
The requirement that an importer identify “officers” having “importing and financial business knowledge” of corporate operations is both vague and overbroad, because of the coupling of “importing” and “financial business” knowledge. In a large corporation, it is possible that an officer of the company may have a tangential knowledge of importing operations, but not an in-depth knowledge. At the same time, the officer may have extensive knowledge of the financial and business structure of the company. Linking “importing and financial business knowledge” together in this way is problematic.
Secondly, the document is required to be signed with a certification of truth, and that if the information is not accurate, the company could be liable for a felony under 28 U.S.C. §1001 (providing false statements to a government officer). There is clearly the concern that, if names of company officials are provided in the CF 5106 under the terms currently provided, they would become immediate “targets” in any Customs investigation of import violations, and could be used by Customs as leverage against the company.
Suppose, for example, an official says that he or she has knowledge of the “importing and financial business” of a company. Assume, further that one afternoon, a Customs official stopped by to quiz this person on a particular Customs issue the importer is being investigated for. If the official says (honestly) “I have no idea what you’re talking about”, would Customs take this as evidence that the importer made a false statement when it signed the CF 5106 and claimed the person had knowledge? The proposed terms of the certification language are simply too broad for comfort.
It also seems likely that any individuals identified in the proposed form would be subject to interviews, depositions and potentially to liability in the event Customs investigates or even audits the importer.
Of course, in a dynamic company, as people change positions, the importer would be compelled to update the CF 5106 form more frequently than it does today.
Other questions on the proposed CF 5106 also appear to be unnecessary. This includes, for example, the requirement to provide “principal banking information”(Box 3G). Since Customs does not have a statutory lien on the company’s assets, there is no need for divulging the location of financial assets. Similar, information concerning articles of incorporation (Boxes 3H and 3I) are readily searchable public records.
The requirement for an entry self--filer to furnish its filer code (Box 3D) could be confusing if a company will both self-file and file under various broker codes. The requirement that the filer provide information regarding “related businesses” (Box 3F) would be incredibly unwieldy for many large, publicly-traded companies, which may have hundreds of related entities, many of which may themselves file CF 5106, and would have to repeat the same information.
Customs is accepting public comments through August 26, 2015. We would be happy to prepare comments on behalf of interested parties.
H.R. 1295, The Trade Preferences Extension Act of 2015 (“the Act”), was introduced in the House on March 14, 2015, and extends the GSP, the African Growth and Opportunity Act (AGOA) and duty preferences for Haiti. The Act states that notwithstanding section 1514 (19 U.S.C. 1514) or any other provision of law, any entry of a covered article eligible for preferential treatment under title V of the Trade Act of 1974 that was made after July 31, 2013 and before the effective date of the Act which is July 29, 2015, shall be liquidated or reliquidated as though such entry occurred on the effective date of the Act.
The Act, as passed and signed by the President, reinstates GSP through December 31, 2017. U.S. Customs and Border Protection has recently provided for an application and automation process for retroactive renewal of GSP. If an ABI entry summary was filed with payment of estimated duties using the Special Program Indicator (SPI) for GSP (with the letter "A," "A+," or "A*") as a prefix to the tariff number, no further action by the filer is required; filings with the SPI "A," "A+," or "A*" will be treated as confirming requests for refunds. If an ABI entry summary was filed with payment of estimated duties without the use of the SPI "A," "A+," or "A*" as a prefix to the tariff number, a refund of duties deposited must be requested in writing as described below for non-ABI entry summaries.
3. The amount requested to be refunded for each line item and the total amount owed (not including interest) for all entry summaries.
Customs also noted that GSP reauthorization provides retroactive benefits only to goods from a country that is a beneficiary of the GSP program as of July 29, 2015. Retroactive application of GSP does not apply to countries such as Bangladesh and Russia that lost eligibility between July 31, 2013 and July 29, 2015.
We recommend that your company identify any records which might be necessary for Customs to locate or reconstruct subject entries so that retroactive refunds can be claimed at once through a letter application if needed. NPLLP would be happy to make these applications on your company’s behalf.
The CIT’s latest penalty decision is another headscratcher.
Call it the Mystery of the Missing Legal Doctrine – a whodunit worthy of Sherlock Holmes and John Watson. And we’re talking the contemporary Benedict Cumberbatch/Martin Freeman Holmes and Watson. This missing doctrine was in plain sight during the time of Conan Doyle’s Victorian Holmes, and even when Basil Rathbone portrayed the great detective on film during the 1940s. But the doctrine – still on the legal books, basically unchanged in 2015 – seems to be disappearing in 2015.
[Cue intro music and credits; the scene moves to the sandwich shop next to 221B Baker Street, while Holmes pores over a printout].
[Cue flashback sequence; Holmes voiceover].
“The case of United States v. Horizon Products International Inc. was before the Bailey. Horizon had imported hardwood flooring. Some of the flooring had an outer layer which qualified it for duty free treatment. Most of the flooring, however, had an outer layer which attracted an 8% duty rate. Horizon and its Customhouse broker had entered all of the goods under the duty free provision.
“Customs timely liquidated some of the entries with a duty increase, which Horizon paid. But the agency then billed Horizon for a substantial amount of duty in respect of entries that had already been liquidated and made final, and demanded Section 592 penalties as well. Horizon declined to pay those. The case proceeded to Court, the government bringing suit for penalties and withheld duties.
“The Government would like the court to infer that all the responsibility for the erroneous entries rests on the shoulders of Horizon, but the court could just as easily infer that the customs broker shares a portion (if not all) of the responsibility. Customs brokers, after all, have statutory and regulatory responsibilities to classify merchandise correctly. E.g., 19 C.F.R. § 111.29 (requiring customs brokers to “exercise due diligence . . . in preparing or assisting in the preparation and filing of records relating to any customs business matter”); see also 19 C.F.R. § 152.11 (“Merchandise shall be classified in accordance with the [HTSUS] . . . .”); 19 U.S.C. § 1641(d) (allowing Customs to penalize a broker who “has violated any provision of any law enforced by [Customs] or the rules or regulations issued under any such provision”); United States v. Santos, 36 CIT ___, ___, 883 F. Supp. 2d 1322, 1327-30 (2012) (sustaining as reasonable a § 1641 penalty on a motion for default judgment against broker who allegedly misclassified imported goods).
“Horizon had not admitted to negligence, and thus had not admitted to a violation of Section 592 of the Tariff Act! The Court is going to hold a trial to determine if Horizon was negligent. Yet, the Court has already held Horizon liable for the duties!"
SHOULD YOUR COMPANY INDEMNIFY ITS IMPORT MANAGER?
Recent court decisions have made an already scary importing environment even scarier. Companies may be well-advised to consider protecting their import personnel.
Your company’s long-serving import manager edges nervously into your office with an unusual request; she would like the company to provide her with an indemnity and hold harmless agreement. She also wants the company to agree to pay for her legal fees to defend Customs penalty claims.
“Is there a specific problem you’re concerned with?” you ask.
Well, yes. But that might not be the end of the story. By law, Customs duties are the personal debt of the “importer of record” of imported merchandise, who must be the “owner” or “purchaser” of the goods. In virtually all commercial transactions, the importer of record is a corporation. Moreover, the importer of record is tasked with the legal duty to exercise “reasonable care” to ensure that information appearing on Customs entries is not only factually accurate, but legally correct as well. Indeed, your corporation probably hired its import manager as part of its effort to exercise “reasonable care”, and protect the company from penalty and duty liability.
So why does your import manager need a personal indemnity when she only works on corporate transactions? The answer lies in a recent, controversial decision of the United States Court of Appeals for the Federal Circuit – one which the U.S. Supreme Court recently declined to review.
The controversial en banc decision of the Federal Circuit in United States v. Trek Leather, Inc., held that employees and officers of corporate importer may be held liable, either individually or “jointly and severally” with their corporate employers, for penalties arising under Section 592 of the Tariff Act of 1930 [19 U.S.C. §1592] resulting from corporate negligence or gross negligence in importing transactions. No intent is required on the part of the employee or the corporation. Nor, the Federal Circuit held, was there any need to “pierce the corporate veil” before proceeding against the individual.
Since Customs penalties under Section 592 are among the harshest provided in American law – with penalties being set at multiples of the duties allegedly withheld from the government or even the value of the merchandise itself – the Trek Leather case has been keeping import managers awake at night for some time now.
Trek Leather could be the poster child for the old saying “bad facts make made law”. It started simply enough, as an undeclared “assists” case, before metamorphosing into a procedural mess. Trek Leather, a New York corporation, ordered mens’ suits from a foreign manufacturer. It provided the manufacture, free of charge, with the fabric used to make the suits. By law, the value of the fabric “assist” thus provided was required to be included in the dutiable value of the imported suits. Trek failed to do this, declaring to Customs only the charges shown on the “cut, make & trim” (CMT) invoice from the manufacturer, thereby understating the amount of duties owed to the government.
Customs charged both Trek Leather and its President, Harish Shadadpuri, with violating Section 592 of the Tariff Act by entering goods by means of false statements or material omissions. The defendants were charged with violating the law, in the alternative, by negligence, gross negligence and intentional fraud. Before the Court of International Trade, Trek Leather agreed to be held liable for gross negligence; Shadadpuri did not. The Court, however, held both company and individual liable “jointly and severally” for hundreds of thousands of dollars in gross negligence penalties.
Shadapuri appealed, arguing that since Trek Leather was the corporate importer, the government could not hold him liable as an owner of officer without first “piercing the corporate veil”, which the CIT had not done. A divided 2-1 panel of the Federal Circuit agreed, dismissing the charges against Shadapuri.
Not so fast, said the full Federal Circuit. The Court vacated the panel’s decision, and indicated that it would hear the appeal en banc (with all active Circuit judges participating), without a hearing. The court solicited briefs on three issues – none of which, as it turned out, featured at all ‘’ in the decision the en banc court finally issued.
In its en banc decision, the Federal Circuit artfully ducked the issues of “piercing the corporate veil”,by deciding the case on a basis nobody had suggested or argued. It held that, while Trek Leather had “entered” the goods by means of false statements or material omissions, Shadadpuri was separately and individually liable for “introducing” the merchandise by means of false statements. The act constituting the unlawful “introduction”? He had provided Trek’s Customhouse broker with the negligently incomplete invoices.
According to the Federal Circuit, the answer is “yes”. And since was decided, the government has filed at least one penalty suit against a corporate importer, indicating that, while it investigated two of the company’s officers, it is – for now – electing not to name them as defendants, but reserves the right to do so.
Setting aside the questionable wisdom of holding corporate employees individually liable for negligence committed in a corporate tax return (Customs entry) filed by the corporation and involving corporate property, the Trek Leather/Shadadpuri decision puts both corporations and employees in a difficult position. A corporate import manager or Customs compliance director knows all the strengths and weaknesses of a company’s import activities. It is not difficult to imagine a situation where the government might use the thread of a personal assessment against a corporate employee as an incentive for the employee to testify against its employer. An employee who is uncertain whether the corporation will support her, financially and otherwise, might be more tempted to testify against her employer.
Another trend which makes the world of importing a scary place is the dramatic increase in “whistleblower” litigation involving Customs and trade issues. Corporate insiders and outsiders have been filing qui tam cases under the “reverse false claims” provisions of the Federal False Claims Act, charging companies with evading Customs duties – both ordinary and special (antidumping and countervailing) duties.
In some cases, the claims are filed by competitors – for example a claim against Toyo Ink Corporation, alleging that the company had evaded antidumping duties on imports of a dye chemical, resulted in a $45 million settlement – with over $7 million of that recovery going to the whistleblower. In other cases, corporate insiders have initiated these cases. For example, in 2014, the former import manager of Colorado-based Otter Products LLC., upset that the company refused to disclose to Customs some dutiable “assists”, initiated a whistleblower case that the company settled for approximately $4 million. In another recent case, a company called Customs Fraud Investigations, Inc. – apparently formed solely to hunt out Customs violations – failed in an effort to have Victaulic, Inc., penalized for the alleged failure to mark imported pipe fittings. But no doubt, the importer’s costs of defending the case were substantial.
Customs-related whistleblower cases will not stop soon. Virtually every industry which has petitioned for the imposition of antidumping or countervailing duty duties has a heartfelt belief that Customs is not collecting the proper amount of such duties. Many domestic companies believe that their importing competitors are evading duties or engaged in other unlawful actions. Whistleblower suits have been filed, all under seal, at least initially. The government has the choice to prosecute each case itself, or to decline to take the case, and let the relator unseal its complaint and prosecute the case itself. In either case, the relator – the whistleblower – receives a share of any amounts recovered.
This brings us back to your corporate import manager or Customs compliance director, who needs to operate in this strange and scary new environment. He or she is privy to all of the company’s Customs and trade secrets and risks, and now has reason to be concerned about personal liability for corporate Customs penalties. If the employee has the benefit of a corporate indemnity, he or she is less likely to be subject to Customs threats. And he or she is less likely to become the whistleblower many companies fear.
Importing companies who elect to provide key employees with indemnity against Section 592 penalties and withheld duty claims will need to give careful consideration to the terms of any such indemnity. Will it cover only penalties and duties, or will it cover the employee’s legal costs? The possibility of “joint and several” liability places companies and their importing employees in a position of potential conflict of interest should Customs initiate a Section 592 investigation. What duties of cooperation will be placed on the employee? If the corporation is found guilty of an intentional violation of Section 592, will it cover the employee if the employee is found to have “aided and abetted” such violation? [In light of the Trek Leather decision, there would seem little need for Customs to pursue “aiding and abetting” claims if it can hold employees directly liable for violating the “introduction” provisions of Section 592].
An indemnity must also be structured in such a way that the corporation retains the right to terminate the employee if she is not performing her duties correctly. A corporation can only act through its agents and employees, and there will certainly be cases where a claim that Section 592 was violated by means of negligence or gross negligence will be based on improper or incorrect behavior by particular corporate employees.
Some in-house Customs compliance employees are also licensed Customhouse brokers. Where the conduct of these employees come under scrutiny, there may be additional concerns that Customs will take action to suspend or revoke the employee’s license – another issue which indemnity agreements need to address.
And of course, a corporation’s retained outside Customs brokers also have a duty to exercise “reasonable care” with respect to a client’s imports. Brokers submit corporate documents to Customs all the time, without being able to verify the accuracy of the documents beforehand. They are just as subject to a Section 592 assessment as is the importer or the importer’s in-house import manager. Brokers using the National Customs Brokers and Forwarders Association of America (NCBFAA) standard terms and conditions of service have already placed indemnity clauses in their contracts.
Customs officials may publicly promise restraint in bringing Section 592 cases against corporate employees or agents, but they are better judged by the statements the agency made to the courts in the Trek Leather/Shadapuri litigation, where the agency took the position that individual liability is direct, not subject to corporate veil-piercing and absolute.
Corporate employees working in import operations are increasingly subject to external pressures and liability concerns. Their employers ignore these conditions at their peril. The next few years are likely to see a significant redefinition of employer-employee and principal-agent relations in these circumstances.
On June 29, 2015, Congress and President Obama reinstated the Generalized System of Preferences (GSP), which provides duty-free treatment for selected goods from “beneficiary developing countries.” The GSP had previously expired on July 31, 2013.
The new legislation provides for retroactive refunds of duties paid on GSP-eligible goods for the two years the program had lapsed.
H.R. 1295, the Trade Preferences Extension Act of 2015 (“the Act”), renews GSP through December 31, 2017 and also extends the African Growth and Opportunity Act (AGOA) and duty preferences for Haiti.
The Act states that notwithstanding section 1514 (19 U.S.C. 1514) or any other provision of law, any entry of a covered article eligible for preferential treatment under title V of the Trade Act of 1974 that was made after July 31, 2013 and before the effective date of the Act which is July 29, 2015, shall be liquidated or reliquidated as though such entry occurred on the effective date of the Act. The enactment date for purposes of the Act is June 29, 2015 and the effective date is 30 days after which is July 29, 2015.
As of this date, Customs has not issued a directive or procedure for making such refund claims. In previous administrative messages, (CSMS 14-326 and 14-286) Customs has indicated that importers could continue to use Special Program Indicator (SPI) “A” to claim GSP on their entries, so that in the event of a retroactive renewal, CBP could process refunds automatically. However, it is not yet known what procedure will be used for refund claims. We will alert clients when the new procedure is known.
The law provides that refunds of duty deposits will be paid, without interest, within 90 days after liquidation or reliquidation of GSP-eligible entries, so an entry-by-entry liquidation or reliquidation scheme is clearly contemplated.
The Acts also amends GSP to allow the designation of certain cotton articles as eligible articles, but only if made in “least developed developing countries” (LDDCs). The affected provisions are HTSUS Subheadings 5201.00.18, 5201.00.28, 5201.00.38, 5202.99.30, or 5203.00.30, as GSP eligible, but only if made in “least developed developing countries” (LDDCs).
Moreover, the law authorizes the President to designate certain luggage and travel articles as GSP-eligible, specifically items classified under HTSUS Subheadings 4202.11.00, 4202.12.40, 4202.21.60, 4202.21.90, 4202.22.15, 4202.22.45, 4202.31.60, 4202.32.40, 4202.32.80, 4202.92.15, 4202.92.20, 4202.92.45, or 4202.99.90, and articles classifiable under statistical reporting number 4202.12.2020, 4202.12.2050, 4202.12.8030, 4202.12.8070, 4202.22.8050, 4202.32.9550, 4202.32.9560, 4202.91.0030, 4202.91.0090, 4202.92.3020, 4202.92.3031, 4202.92.3091, 4202.92.9026, or 4202.92.9060. As of this writing, no such designations have been made.
As a consequence of reinstatement of the GSP, the United States Trade Representative (USTR) will need to undertake an expedited review of “competitive need limitation” removals and waivers for the GSP, with results due by October 1, 2015. The competitive need limit provides for articles to lose GSP eligibility when certain import volumes are reached. The President has power to waive these limitations, and allow products to continue as GSP eligible, under certain conditions.
USTR will also undertake its statutory annual review of GSP, accepting petitions to designate new articles as eligible, or remove articles from eligibility. The final results of this review will be due on July 1, 2016.
Pending receipt of Customs’ instructions on how retroactive refunds should be applied for, companies will want to identify any records which might be necessary for Customs to locate or reconstruct subject entries so that retroactive refunds can be claimed once the GSP re-authorization takes effect. Our firm will be happy to make these applications on your company’s behalf.
 The law also reauthorizes Trade Adjustment Assistance programs, and makes technical changes to the antidumping and countervailing duty laws.
 This means that Customs will not accept duty free entries for GSP-eligible items until July 29, 2015.
Numerous importers have recently raised questions concerning Customs’ initiative regarding the establishment of Centers of Excellence and Expertise (CEEs) to handle transactions in discrete industry-defined areas of responsibilities. This memorandum provides background information on CEEs and their current operational status.
CEEs are an attempt by Customs to centralize decision-making, on an industry-specific basis, regardless of the ports of entry at which imports are made. The intent is to harmonize and centralize decisions concerning the admissibility, classification, appraisement and regulation of goods on an “industry-specific” basis, rather than on a “port-by-port” basis, as has historically been the case.
For now, the CEE program is supposedly voluntary and account-based, and is being implemented on a “test” basis. Assuming the test is successful, however, Customs intends to make the CEEs a model for future processing of commercial transactions by large accounts, and, possibly, all importers.
Historically, the Tariff Act of 1930 has distributed decisionmaking to local Customs officials at the port of entry where goods are imported. Entry documents must be filed at the port where the goods arrived, or are being entered for consumption. Port officials control decisions relating to release of the merchandise, as well as determining the classification, appraisement, and rate and amount of duty owing on individual entries of goods at the port of entry.
Similarly, protests against liquidation of merchandise are filed with, and typically decided by, Customs officials at the individual port(s) of entry. Import Specialist teams at dozens of service ports divide responsibility for the classification and appraisement of various categories of goods (and often exhibit different levels of expertise in the commodities for which they are responsible).
Although the Constitution mandates that duties be assessed uniformly throughout the United States, the result of the “port-specific” processing system has been anything but. It is not uncommon for identical or similar goods, being imported through different ports of entry, to be classified or appraised differently, or for Import Specialists to make inconsistent decisions at the time entries are liquidated, or when protests are submitted.
The automation of Customs processes has provided an opportunity to for the agency to de-couple entry processing from geography. Remote location filing has largely eliminated the need for importers to retain Customs brokers in each port where they make entry, and electronic platforms allow Customs to distribute work among officials in various locations.
Agriculture & Prepared Products, coordinated from Miami, specializes in agriculture, aquaculture, animal products, vegetable products, prepared foods, beverages, alcohol, tobacco or similar industries.
Apparel, Footwear & Textiles, coordinated from San Francisco, specializes in wearing apparel, footwear, textile mill, textile mill products, or similar industries.
Automotive & Aerospace, coordinated from Detroit, specializes in automotive, aerospace, or other transportation equipment and related parts industries.
Base Metals, coordinated from Chicago, specializes in steel, steel mill products, ferrous and nonferrous metal, or similar industries.
Consumer Products & Mass Merchandising, coordinated from Atlanta, specializes in household goods, consumer products, or similar industries and mass merchandisers of products typically sold for home use.
Electronics, coordinated from Los Angeles, specializes in information technology, integrated circuits, automated data processing equipment, and consumer electronics.
Industrial & Manufacturing Materials, coordinated from Buffalo, specializes in plastics, polymers, rubber, leather, wood, paper, stone, glass, precious stones and precious metals, or similar industries.
Machinery, coordinated from Laredo, specializes in tools, machine tools, production equipment, instruments, or similar industries.
Petroleum, Natural Gas & Minerals, coordinated from Houston, specializes in petroleum, natural gas, petroleum related products, minerals, and mining industries.
Pharmaceuticals, Health & Chemicals, coordinated from New York, specializes in pharmaceuticals, health-related equipment, and products of the chemical and allied industries.
For now, participation in the CEE program is voluntary, and is done on an account basis. Each importer can associate only with one CEE. Thus, for example, if a petroleum importer were associated with the Petroleum, Gas and Minerals CEE in Houston, but imported t-shirts, the post-entry work associated with the t-shirts would be handled by the Petroleum, Gas & Minerals CEE.
There are no laws or regulations governing the operation of CEEs. For the time being, the work of the CEEs is probably exempt from rulemaking, since it involves Customs’ internal allocation of work among its employees. However, if CEEs become the principal mode for Customs operations, changes to the Tariff Act and implementing regulations are likely to be required.
Customs is phasing in the operation of CEEs over time. At present, CEE participants continue to file entries at individual ports of entry, and release decisions are made by local Customs officials at the ports. Post-entry work, such as the liquidation of entries, and issuance of Form 28 requests for information and Form 29 Notices of Action, is being handled by the industry-specific CEEs.
Over time, entry and post-entry work will likely be migrated to CEEs. If the project is successful, it will likely become the principal model for Customs’ handling of commercial transactions.
In this regard, two recent developments affect CEEs, particularly three of them -- Electronics in Los Angeles, Pharmaceuticals and Chemicals in New York, and Petroleum and Minerals in Houston.
On September 11, 2014, CBP Commissioner Kerlikowske issued a Delegation Order [Exhibit A] which gave the directors of the CEEs the same powers as Port Directors of Customs, with certain exceptions. The CEE Directors and Port Directors will exercise this authority concurrently. While decisions relating to the control, movement, examination and release of merchandise will remain with the Port Director at the port where goods were imported, authority for post-entry functions – such as issuing demands for redelivery, handling post-entry processing, decisions regarding country of origin marking, stamping, packing, classification and appraisement of merchandise, and the processing of petitions, protests, post-entry amendments, recordkeeping matters, financial matters and the like.
On January 28, 2015, Customs announced its “Phase I accelerated rollout” under which the CEE Directors of the Electronics, Pharmaceuticals and Petroleum CEEs were given the trade authority over subject entries previously handled by port directors at various ports listed in Exhibit B.
IV. CEEs: WHO’S DOING WHAT?
Bear in mind that these processes apply for now, only to companies which have started CEE accounts and are participating voluntarily in the program.
That being said, we have noted cases where post-entry work for companies not enrolled in the CEE program is being handled by CEE teams. Decisions are rendered through the ports, so that there is no visibility of this to the importer.
Transactions for industries which do not have CEEs, and for non-participating companies, will continue to be handled by the ports where the entries are filed.
Please do not hesitate to contact us if there are any questions concerning CEEs or their operation.
Liberal treatment of communications with Customs as constituting a “protest” may be a thing of the past, for in Ovan International Limited v. United States, Slip. Op. 15-17 (February 23, 2015), the CIT held that, in order to be considered a valid protest, a document must be labeled as such, and must contain all the information required by the Customs laws and regulations.
At a Georgetown Law School conference last week, Customs Headquarters officials gleefully embraced the new decision and indicated that they will begin applying it aggressively.
Historically, the courts have ruled that protests do not require detailed precision, but merely need to advise Customs of the nature of the importer’s objection, such that the Customs officer can undertake an inquiry and correct any errors made in liquidation of an entry.
Importers wishing to protest a Customs decision will need to pay special attention to ensure that protests are complete and valid, and should consider using only the Customs and Border Protection (CBP) Form 19 Protest, or its electronic equivalent.
One Entry, One Article, One Claim – What Wasn’t Clear?
Carriage House Motor Cars, the owner of a 1958 Rolls Royce Silver Sea Cloud automobile, exported the vehicle to Europe for sale at an auction. When the vehicle failed to sell, the company re-imported the vehicle, claiming duty-free entry under Harmonized Tariff Schedule (HTS) subheading 9801.00.25. After seeking information from the vehicle importer and its broker, Customs on February 22, 2013 liquidated the entry, classifying the car under HTS Subheading 8703.23.00, and assessing duties at the rate of 2.5% ad valorem.
On April 9, 2013—46 days after liquidation – Carriage House submitted to Customs an Affidavit of its owner, together with a number of exhibits, clearly contesting the assessment of duty. When Customs did not respond to this filing (surprise!), the importer filed a protest on CBP form 19, albeit 189 days after liquidation. This protest was denied as untimely.
Before the CIT, the importer alleged that its April 9, 2013 Affidavit and exhibits should be treated as a “protest”. In this regard, the importer noted that the Courts have long employed a rule of liberally construing filings as protests, requiring “only that the protest be distinct and specific enough to show that the objection was taken… was at the time of filing the protest in the mind of the importer and sufficient to notify the collector of its true nature and character to the end that he might then ascertain the precise facts and have adequate opportunity to correct mistakes and cure defects”. [citing United States v. M. Rice & Co., 257 U.S. 536, 539-40 (1922)]. There was one car, one Customs entry, one issue – how could Customs not understand that the duty assessment was being protested?
But the CIT had other ideas.
The CIT, per Senior Judge R. Kenton Musgrave, held that compliance with the Customs laws and regulations regarding protests was mandatory for a written submission to be treated as a valid protest.
The Court then went on to note the detailed requirements for protests established by Section 174.13(a) of the Customs Regulations, which require among other things, that a protest be captioned as such, provide the name and address of the protesting party, the importer number, the date of entry and liquidation of the entry, the existence of prior protests, and a declaration as to whether the merchandise has been the subject of a drawback claim [regulation reproduced below].
Thus, despite the fact that only one entry, one article of commerce, one importer and one claim was at stake, and the fact that the Affidavit undoubtedly communicated to Customs the nature of the importer’s contention, the Court held that because this filing did not meet all regulatory requirements for protests, it could not be entertained as such. The Court dismissed the lawsuit for lack of jurisdiction.
The lesson for importers is that the age of raising protests by means of letters, memos, and other submissions that do not meet the formal requirements of the Customs laws and regulations is over. To have a submission treated as a valid protest, all of the numerous regulatory requirements must be satisfied.
Customs Form 19, whether in paper form or electronic, contains fields for all of the required information. If this form is used, the only possible issues could be the clarity with which the claim is stated. Trade practitioners should counsel their clients to set creativity aside when challenging decisions and just “use the form”.
§ 174.13 Contents of protest.
(9) A declaration, to the best of the protestant's knowledge, as to whether the entry is the subject of drawback, or whether the entry has been referenced on a certificate of delivery or certificate of manufacture and delivery so as to enable a party to make such entry the subject of drawback (see §§181.50(b) and 191.81(b) of this chapter).
In Best Key Textiles Co. v. United States, No. 2014-1327 (February 3, 2015), the recipient of a ruling concerning the tariff classification of metalized yarn challenged Customs decision to revoke the ruling as being Arbitrary, capricious, an abuse of discretion, and not otherwise in accordance with law, in violation of the Administrative Procedure Act. The plaintiff contended that it had lost $200 million in customer orders as a result of the revocation, and asked the court to review both the substance of the ruling and the process by which it was revoked. The ruling recipient could not file a protest on the classification of its yarn, since the revocation ruling assigned it a lower rate of duty than applied to metalized yarn. The plaintiff=s damage was not in the payment of Customs duties, but in the loss of business, it contended.
After initially dismissing the case for lack of subject matter jurisdiction, the CIT reconsidered and reinstated the case, and upheld the revocation ruling. Best Key appealed to the Federal Circuit.
In its decision, the Federal Circuit ignored the merits of the plaintiffs claim altogether, and told the CIT to reinstate its earlier ruling dismissing the action for lack of subject matter jurisdiction. The plaintiff was not trying to vindicate its own rights, the appellate court said, but the rights of its customers who would be assessed with higher duties on garments made with the yarn. The plaintiff's remedy, the Court held, would be to go into the garment business, import garments and pay the higher duty, and then slog through the traditional protest procedure B a years-long undertaking which, in any event, would not lead to review of the contested ruling. The plaintiff did not have a case which could be heard under the CIT's 28 U.S.C. '1581(I) residual jurisdiction which, the Court indicated, must be strictly construed.The decision should be alarming to the trade community, since it suggests that Customs rulings, and their revocation or modification, are not judicially reviewable or perhaps reviewable only in the Federal District Courts.