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HQ 223158

July 1, 1991

DRA-2-01-CO:R:C:E 223158 DHS

CATEGORY: DRAWBACK

Mr. James F. Holt
Jim Holt & Son, Inc.
11448 52nd Road N.
West Palm Beach, Florida 33411-9035

RE: The use requirement in substitution manufacturing drawback under 19 U.S.C. 1313(b); 19 CFR 191.32(a)(3)

Dear Mr. Holt:

This is in response to your letter, dated April 19, 1991, in which you request a ruling regarding the effect upon the receipt of drawback under 19 U.S.C. 1313(b) when a corporation has filed for a reorganization of the corporation under Chapter 11 of the bankruptcy statute.

FACTS:

You have stated that a U.S. corporation has been conducting drawback operations under an approved drawback contract (T.D. 85- 110). During 1989 and 1990 the corporation used in their production process a quantity of imported, duty paid merchandise as required by the drawback provisions.

In January, 1991, this corporation filed a petition for reorganization under Chapter 11 with the U.S. Bankruptcy Court. A Chief Executive Officer was appointed to operate the corporation by the Court on March 1, 1991. You state that the corporation has not changed its name, factory location or the manufacturing operations.

Now that the corporation has filed for reorganization, it plans to produce articles for exportation using substituted merchandise of the same kind and quality as imported.

ISSUE:

Under 19 U.S.C. 1313(b), may imported, duty-paid merchandise used in manufacture by a corporation prior to filing for reorganization under Chapter 11 of the bankruptcy statute be designated as a basis for drawback on articles manufactured by the same corporation after filing for bankruptcy?

LAW AND ANALYSIS:

The use requirement under 19 U.S.C. 1313(b) does not require the ownership of the duty-paid designated and substituted merchandise by the manufacturer or producer. See, C.S.D. 90-94. It does require that the same legal entity use both the designated and the substituted merchandise in the manufacture or production of articles. See, C.S.D. 86-11.

With respect to this principle, we note that the right to drawback is a transferable property interest and may be passed to a successor-in-interest. See, C.S.D. 79-354 and C.S.D. 79-257.

Limitations have been placed on the transferability of this right. For instance, in C.S.D. 89-12, dated December 15, 1988, we concluded that merchandise used in manufacture by a division of one corporation may not be designated as a basis for drawback on articles manufactured by another corporation after the latter has acquired the division.

We noted in that case that imported designated merchandise used by a corporation prior to merger or consolidation was not a basis for drawback since a merger or consolidation creates a new and distinct entity.

With respect to the applicable provisions of the bankruptcy code, we bring your attention to the following provisions.

The contents of the property of the estate is set forth in 11 U.S.C. 541. This section provides that the commencement of a case under section 301, 302 or 303 of title 11 creates an estate. Such estate is comprised of the property outlined in the section, wherever located and by whomever held. In pertinent part, this property includes all legal and equitable interests of the debtor in property as of the commencement of the case except as provided in subsection (b) and (c)(2) of this section. The estate also comprises any interest in property that the estate acquires after the commencement of the case.

The rights, powers, and duties of a debtor in possession under the bankruptcy code is addressed in 11 U.S.C. 1107(a). This section provides that a debtor in possession shall have all the rights, ..., and powers, and shall perform all the functions and duties, ..., of a trustee serving in a case under this chapter, subject to any limitations on a trustee under this chapter, and to such limitations or conditions as the court prescribes.

Finally, 11 U.S.C. 1141 states that the confirmation of a plan vests all the property of the estate in the debtor, except as otherwise provided in the plan or the order confirming the plan. It is released from all claims and interests of creditors, equity security holders and general partners.

We are not aware of the present status of the bankruptcy proceeding as it applies to this corporation. Nor is there sufficient information to determine the interest of the estate or debtor with respect to the property involved. Based upon the information provided, and the provisions and cases stated above, it is our belief that a new legal entity has not been established by filing for reorganization under Chapter 11. Therefore, there is nothing in the provisions which would prevent the drawback rights from applying to the corporation in issue. The imported designated merchandise used by the corporation prior to filing for reorganization may be designated as a basis for drawback on articles manufactured by the same corporation after filing.

A contrary result would be obtained, as required by the above cited provisions and cases, if any additional information, order by the court, or plan confirming that a different legal entity has been established.

Holding:

Based upon the foregoing, the imported designated merchandise used by the corporation prior to filing for reorganization may be designated as a basis for drawback on articles manufactured by the same corporation after filing subject to the provisions above.

Sincerely,


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