CIT Rules CBP Must Respond to 1592 Mitigation Petitions

(Note the January 2010 decision had also dismissed the CEO of Tip Top from the case, determining he was not personally liable. See ITT’s Online Archives or 02/09/10 news, 10020935, for BP summary.)

Case Concerns Negligence Claim against a 2002 Apparel Entry from Mexico

Tip Top had claimed HTS 9802¹ and then NAFTA duty-free treatment for a single 2002 shipment of men’s and boys’ denim cotton pants and shorts. CBP had sent a CBP Form 28 seeking documentation, and then a CBP Form 29 notice asserting a false claim, both with no response. CBP then sent a pre-penalty notice claiming 1952 negligence, which Tip Top responded to by stating its products were eligible for duty-free entry. CBP then liquidated the entry as dutiable, which Tip Top protested.

Tip Top Petitioned for Mitigation, Faulting its Freight Forwarder

CBP then issued a CBP Form 5955A penalty claim, citing Tip Top’s failure to respond to the CBP Form 28. Tip Top then filed a mitigation petition, arguing that the firm had an excellent compliance record. Tip Top also stated that the failure to respond to the CBP Form 28 was the fault of its freight forwarder, upon whom Tip Top relied to maintain the required records and respond to the request for information. (For full details see below².)

CBP Did Not Respond to Mitigation Petition, said Response Not Required

Years later, CBP issued an amended CBP Form 5955A penalty notice. It did not issue a written statement to Tip Top regarding its mitigation petition.

For the rehearing, CBP argued that a written statement was not required as (i) it had amended its original CBP Form 5955A penalty notice to Tip Top altering the legal basis for the penalty; (ii) Tip Top had never formally responded to the amended CBP Form 5955A penalty; (iii) Tip Top had never contended that CBP failed to follow administrative procedures; and (iv) Tip Top had failed to demonstrate substantial prejudice as a result.

CIT Says Statement Required by Statute, No Exception for Amended Claims

However the court ruled that if agency action on Tip Top’s petition was still pending at the time CBP issued the second CBP Form 5955A, and if no decision under 19 USC 1618 ( mitigation petition) was ever issued, then the requirements of 19 USC 1592(b)(2) and 19 CFR 171.21 -- that notice be given to the person requesting mitigation of the penalty -- were not satisfied.

According to the CIT, neither the statute nor the regulation provides an exception under which CBP, instead of issuing the written statement required by 19 USC 1592(b)(2) and 19 CFR 171.21, may instead issue a document purporting to bring an “amended” penalty claim alleging a different violation, even though the petition that is the subject of 171.21 has been timely filed.

Tip Top Case to Go to Trial

As CBP had brought this case to recover a civil penalty, duties and interest for alleged material false statements or acts regarding the entry, and as the CIT has not ruled on this issue, the CIT asked that a meeting be scheduled to identify the issues to be resolved at trial.

¹9802.00.9000 provides duty-free treatment for apparel goods assembled in Mexico from fabric components wholly formed and cut in the U.S., subject to certain conditions.

² Tip Top Pants had claimed HTS 9802 and then NAFTA duty-free treatment for a single 2002 shipment of men’s and boys’ denim cotton shorts and pants valued at $215,398.

First CBP 28, than CBP 29 asserting false claim. CBP had requested documentation on its entry, and when Tip Top did not respond, CBP issued a notice of proposed action on CBP Form 29, stating that it was proposing to disallow Tip Top’s 9802 duty-free claim due its failure to respond, but allowed an additional 20 days for Tip Top to supply the previously requested documentation. The CBP Form 29 also stated that Tip Top had made false claims under the 9802 program and was subject to possible penalties.

Pre-penalty notice listing penalty. CBP then issued a pre-penalty notice to Tip Top citing material false statements, acts and/or omissions, HTS 9802.00.9000, an alleged degree of culpability of 1592 negligence, and a proposed penalty of $55,636.90 (two times the potential loss of revenue). The basis for the contemplated penalty was Tip Top’s failure to respond to the CBP Form 28.

Even though the notice was a pre-penalty notice, and not a claim for a penalty, the notice stated that “ Importer had failed to respond resulting in entry being rate advanced in the sum of $27,818.45 and penalty assessment”.

Tip Top files response. At this point, Tip Top filed a response to the pre-penalty notice, stating among other things, that the apparel was entered duty-free under NAFTA, and that the entry in question was filed on the basis of a NAFTA blanket Certificate of Origin that covered the year 2002.

After liq, Tip Top files protest. Following liquidation of the entry, Tip Top filed a protest and request for further review regarding the denial of its 9802 or NAFTA claim, and CBP’s assessment of duties at 16.8%.

Penalty claim. CBP then issued a penalty claim on CBP Form 5955A for the $55,636.90, citing Tip Top’s failure to respond to the CBP Form 28. The accompanying cover letter cited Tip Top’s failure to timely supply a NAFTA Certificate of Origin as demonstrating negligence.

Mitigation petition faults forwarder. Tip Top then filed a petition seeking cancellation or substantial mitigation of the penalty. Among other reasons, Tip Top stated that the reason it did not respond to the CBP Form 28 was the fault of its freight forwarder, upon whom Tip Top relied to maintain the required records and respond to the request for information. Tip Top also claimed 9802 and NAFTA eligibility based on documents that were submitted late.

Years later, CBP issues amended penalty claim. Years later, CBP issued a second CBP Form 5955A, described as an amended penalty notice. The text was substantially the same but with an added sentence stating that “The fact that the fabric was cut and assembled in Mexico disqualifies you from claiming 9802.00.9000; therefore, your 9802 claim was false.” Six months later Tip Top paid CBP $33,842.45.

CIT Slip Op. 10-91 (dated 08/13/10)