SLIP OP. 08-55
UNITED STATES COURT OF INTERNATIONAL TRADE
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DURFEY, et al., :
:
Plaintiffs, :
: Before: Pogue, Judge
v. : Court No. 06-00316
:
:
UNITED STATES SEC’Y :
OF AGRICULTURE, :
:
Defendant. :
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[Defendant’s remand determination remanded.]
Dated: May 22, 2008
Akin Gump Strauss Hauer & Feld LLP (Spencer Stewart Griffith, Bernd
G. Janzen, Bryce V. Bittner) for the Plaintiffs.
Gregory G. Katsas, Acting Assistant Attorney General; Jeanne E.
Davidson, Director, Patricia M. McCarthy, Assistant Director,
Commercial Litigation Branch, Civil Division, U.S. Department of
Justice (Delisa M. Sanchez); Jeffrey Kahn, Attorney, Office of the
General Counsel, Department of Agriculture (of Counsel) for
Defendant United States Secretary of Agriculture.
OPINION AND ORDER
Pogue, Judge: This case returns to court after a voluntary remand
to the Department of Agriculture (“Department”). Upon remand,
Defendant United States Secretary of Agriculture (“the
Secretary”)found Plaintiffs Ted and Pam Durfey DBA Lighthouse Ranch
(“the Durfeys” or “Plaintiffs”) ineligible for Trade Adjustment
Assistance (“TAA”) benefits,1 claiming that Plaintiffs failed to
1
See Trade Adjustment Assistance Reform Act of 2002, Pub. L.
(continued...)
Court No. 06-00316 Page 2
show that they had suffered a decrease in net farm income from the
pre-adjustment year of 2003 to the applicable marketing year of
2004.
Jurisdiction
The Court has jurisdiction over this matter pursuant to 19
U.S.C. § 2395(c) (2000) amended by 19 U.S.C. § 2395(c) (Supp. II
2002).
Standard of Review
In reviewing a challenge to a Department of Agriculture
determination of eligibility for TAA benefits, the court will
uphold the Department’s determination if the factual findings are
supported by substantial evidence on the record and the
Department’s legal determinations are otherwise in accordance with
law. 19 U.S.C. § 2395(b);2 see also Former Employees of Shaw Pipe,
Inc. v. United States Sec’y of Labor, 21 CIT 1282, 1284-5, 988 F.
Supp. 588, 590 (1997) (stating that substantial evidence is “more
than a mere scintilla,” but must be “sufficient evidence to
reasonably support a conclusion” (internal quotations and citations
omitted). In such a review, the court must also consider whether
the underlying determination demonstrates that the Department has
1
(...continued)
No. 107-210, Title I, Subtitle c § 141, 116 Stat. 953 (2002); see
also 19 U.S.C. § 2401 (Supp. II 2002) et seq.
2
Except where otherwise noted, all references to the U.S.
Code are to the 2000 edition.
Court No. 06-00316 Page 3
“examine[d] the relevant data and articulate[d] a satisfactory
explanation for its action including a rational conection between
the facts found and the choice made.” Motor Vehicle Mfrs. Ass’n
v. State Farm Mut. Auto Ins. Co., 463 U.S. 29, 43 (1983) (internal
quotations omitted).
Background
We remanded this case to the Secretary with instructions that
Plaintiffs submit any additional evidence relevant to the
Department’s determination of eligibility for TAA benefits. As
well as the documents previously submitted, the Durfeys submitted
additional documents supplied by their CPA which, they contend,
properly document their net farm income when calculated on an
accrual basis.
In its remand determinations the Department held the Durfeys
to be ineligible for TAA benefits on the basis that their “net farm
income . . . as reported to the Internal Revenue Service (“IRS”),
did not decrease from the pre-adjustment year . . . on the basis of
the amended tax returns filed by the Durfeys.” Confidential
Reconsideration Upon Remand of the Application of Ted Durfey at 1
(“Remand Determination”). To reach this conclusion the Department
“compared line 36, ‘Net farm profit or (loss)' on the 2003 and 2004
Schedule F’s for concord grapes [submitted by the Durfeys], which
the agency believes is the best evidence of net farm income.”
Court No. 06-00316 Page 4
Remand Determination at 2. The use of line 36 of tax returns is
taken by the Department to be “consistent with the definition of
net farm income in the regulations and [to accord] with the
generally accepted definition of net income.” Id.
Plaintiffs reply that the Secretary failed to consider
additional relevant evidence, supplied by their CPA, which would
have shown the Durfeys to have met the required standard of
declining net farm profit from the pre-adjustment year of 2003 to
the marketing year of 2004. In failing to consider this evidence,
Plaintiffs contend, the Department acted in violation of the TAA
statute, the Department’s own regulations, and relevant judicial
precedent.
Discussion
The Department’s regulations require that an applicant for TAA
benefits must submit, “[c]ertification that net farm or fishing
income was less than that of the producer’s pre-adjustment year.”
This requirement may be met either by providing “[s]upporting
documentation from a certified public accountant or attorney” (7
C.F.R. § 1580.301(e)(6)(i)) or “[r]elevant documentation and other
supporting financial data, such as financial statements, balance
sheets, and reports prepared for or provided to the Internal
Revenue Service or another U.S. Government agency.” 7 C.F.R. §
1580.301(e)(6)(ii). The disjunctive nature of this requirement is
clear and specific; it indicates that the Department must, in
Court No. 06-00316 Page 5
making its decisions, consider “supporting financial data”, whether
or not such data was ever provided to the IRS. Consequently, the
Department may not, without acting in violation of its own
regulations, insist that it will consider only one type of
evidence, that is, documents provided to the IRS. See Steen v.
United States, 468 F.3d 1357, 1363 (Fed. Cir. 2006)(a determination
of net farm income “is not to be made solely on the basis of tax
return information if other information is relevant to determining
the producer’s net income . . . .”)
Here Plaintiffs submitted their tax returns for 2003 and 2004.
As noted by the Secretary, while Plaintiffs’ tax returns show a net
farm loss in both 2003 and 2004, the loss in 2004 was less than
that in 2003. On the basis of this evidence, the Secretary
determined that the Durfeys had not suffered a decline in net farm
income from the pre-adjustment to the adjustment year and so were
not eligible for TAA benefits. Remand Determination at 2.
The Durfeys, however, contend that their tax returns, as
submitted to the IRS, which were prepared on a “cash basis,”3 did
3
In defining these accounting methods, the IRS’ regulations
provide that
[g]enerally, under the cash receipts and disbursements
method in the computation of taxable income, all items
which constitute gross income (whether in the form of
cash, property, or services) are to be included for the
taxable year in which actually or constructively
received. Expenditures are to be deducted for the
taxable year in which actually made.
(continued...)
Court No. 06-00316 Page 6
not accurately represent their finances in the years in question
due to the nature of the grape-producers’ co-op, of which they are
members. Therefore, in addition to their tax returns, the Durfeys
also submitted to the Department a report prepared by their CPA
which, they claim, converts their tax returns for the relevant
years from a cash to an accrual basis and which shows that they
suffered a net farm loss from the pre-adjustment year of 2003 to
the marketing year of 2004.
The Department, in its remand determination, gave several
reasons for not considering the documentation provided by
Plaintiffs’ CPA. First, it claims that the method used by
Plaintiffs’ CPA is not an acceptable one as it would, the
Department claims, require the Department to wait several years
past the applicable marketing year to determine whether the
3
(...continued)
26 C.F.R. § 1.446-1(c)(1)(i)(2006) (emphasis added). In
contrast,
under an accrual method, income is to be included for the
taxable year when all the events have occurred that fix
the right to receive the income and the amount of the
income can be determined with reasonable accuracy. Under
such a method, a liability is incurred, and generally is
taken into account for Federal income tax purposes, in
the taxable year in which all the events have occurred
that establish the fact of the liability, the amount of
the liability can be determined with reasonable accuracy,
and economic performance has occurred with respect to the
liability.
26 C.F.R. § 1.446-1(c)(1)(ii)(A)(2006) (emphasis added).
Court No. 06-00316 Page 7
applicant was eligible for TAA benefits or not.4 Remand
Determination at 2-3 More importantly, the Department seems to
insist that, whatever method of accounting is used, the numbers
used to determine TAA eligibility must be from documents “reported
to the Internal Revenue Service.” Because the Durfeys used a cash
accounting method to report their net farm income to the IRS, the
Department claims, it need not consider any other possible
accounting method. Id. at 5.
On the first issue the Department is mistaken for two reasons.
Initially, the Department appears to mischaracterize the nature of
the accounting method used by Plaintiffs’ CPA. The method of
accounting used by the Durfeys’ CPA is presented as a version of
the accrual method, a method clearly acceptable for TAA purposes.
Anderson v. United States Sec’y of Agric., 30 CIT __,__, 462 F.
Supp. 2d 1333, 1336 (2006). However, even if the method used by
Plaintiffs’ CPA does differ from a standard accrual method, such a
difference does not excuse the Department from its duty to subject
the data provided by the applicant to actual review. As the
Federal Circuit noted in Steen, TAA eligibility determinations are,
“not to be made solely on the basis of tax return information if
4
The Department’s remand discussion in this regard includes
no finding of fact or conclusion regarding the adequacy of
Plaintiffs’ filing at the time of its remand consideration. As
Plaintiffs have not requested that the Department “wait until net
farm income for the three years beyond the applicable program
marketing year is reported to the IRS,” the Department’s
hypothetical does not address the issues presented.
Court No. 06-00316 Page 8
other information is relevant to determining the producer’s net
income . . . .” Steen, 468 F.3d at 1363. Steen is directly
applicable here. The Department is required to actually consider
the “other information” provided by Plaintiffs’ CPA in determining
their TAA eligibility. In failing to do so the Department has
acted in violation of its own regulations and thus in a manner that
is not in accordance with law.
The Department is also mistaken on the second point. As we
have earlier held, the Department may not limit its investigation
to the materials submitted by an applicant to the IRS. The Court
has held that, in its ruling in Steen, the Federal Circuit,
“clearly did not intend for its opinion to be read to render the
pro forma use of the net income line from the IRS’s Schedule C in
accordance with law in all circumstances.” Anderson v. United
States Sec’y of Agric., 30 CIT ___, ___, 469 F. Supp. 2d 1300, 1301
(2006). To hold otherwise would be to so limit the language of 7
C.F.R. § 1580.301(e)(6)(i), which allows applicants to support
their applications for TAA benefits with “supporting documents from
a CPA,” as to render that language a nullity, essentially
collapsing this arm of the regulation into 7 C.F.R. §
1580.301(e)(6)(ii).
In Steen, the Federal Circuit held that “[i]n [that] case” the
Secretary did not commit error in relying on Mr. Steen’s tax
returns to determine his eligibility for TAA benefits. This was
Court No. 06-00316 Page 9
due to the fact that Mr. Steen had not alleged that his tax returns
distorted his net fishing income for the relevant years. Steen 468
F.3d at 1363-4. However, when an applicant alleges that other
documentation is relevant for calculating his or her net farm or
fishing income, the Federal Circuit stated, “the regulations make
it reasonably clear that the determination of net farm income . .
. is not to be made solely on the basis of tax return information
. . .” Id. at 1363. Given that the Durfeys here have clearly
alleged that their tax forms distort the true nature of their net
farm income the Department may not simply refuse to consider the
documentation offered by Plaintiffs’ CPA. In insisting otherwise
the Department has confused tax reporting methodology with
supporting documentation permitted by its own regulations.
Finally, in refusing to consider the documentation provided by
Plaintiffs’ CPA, the Department has failed to meet its duty to make
a “reasonable inquiry” into whether the offered documents would
affect an applicant’s eligibility for TAA benefits. See, Dus &
Derrick, Inc. v. United States Sec’y of Agric., 31 CIT ___, ___,
469 F. Supp. 2d 1326, 1337 (CIT 2007). Here the Department gives
no evidence at all of having engaged in a “reasonable inquiry” as
to whether the documents supplied by the Durfey’s CPA support their
application for TAA benefits. Without such inquiry, however, the
Department’s determination cannot be based on substantial evidence.
Court No. 06-00316 Page 10
CONCLUSION
For the foregoing reasons, the court remands this matter for
further consideration consistent with this opinion. The agency
shall have until July 22, 2008, to provide its second remand
determination. Plaintiffs shall submit comments on the remand
determination no later than August 12, 2008, and the government
shall submit rebuttal comments no later than August 22, 2008.
SO ORDERED.
/s/Donald C. Pogue
Donald C. Pogue, Judge
Dated: May 22, 2008
New York, N.Y.