Lady Kim T. Inc. v. United States Secretary of Agriculture

Slip Op. 06-183

UNITED STATES COURT OF INTERNATIONAL TRADE

BEFORE: SENIOR JUDGE NICHOLAS TSOUCALAS
________________________________________
:
LADY KIM T. INC. :
:
Plaintiff, : Court No. 05-00511
:
v. :
:
UNITED STATES SECRETARY OF :
AGRICULTURE :
:
Defendant. :
________________________________________:

Held: United States Department of Agriculture’s final determination
remanded for further consideration.

Neville Peterson, LLP, (Curtis Walter Knauss; Laura Martino)
for Lady Kim T. Inc., Plaintiff.

Peter D. Keisler, Assistant Attorney General, David M. Cohen,
Director, Patricia M. McCarthy, Assistant Director, Commercial
Litigation Branch, Civil Division, United States Department of
Justice (Michael L. Dierberg); of counsel: Jeffrey Kahm, Office of
the General Counsel, United States Department of Agriculture, for
the United States Secretary of Agriculture, Defendant.

December 15, 2006

OPINION AND ORDER

This matter is before the Court on motion for judgment on the

agency record brought by Plaintiff, Lady Kim T. Inc. (“Plaintiff”

or “Lady Kim”) pursuant to USCIT Rule 56.1. Plaintiff challenges

the final determination of the Foreign Agricultural Service of the

United States Department of Agriculture (“Defendant” or “the
Court No. 05-00511 Page 2

Department”) denying its application for trade adjustment assistance

(“TAA”) benefits.1 For the reasons set forth below, the Court

remands this matter for further action in conformity with this

opinion.

JURISDICTION & STANDARD OF REVIEW

The Court has jurisdiction over this matter pursuant to 19

U.S.C. § 2395(c) (2000) amended by 19 U.S.C. § 2395 (Supp. II 2002).

The Court will uphold the Department’s determination if its factual

findings are supported by substantial record evidence. See 19

U.S.C. § 2395; Cabana v. United States Sec’y of Agric., 30 CIT __,

427 F. Supp. 2d 1232 (2006). Substantial evidence is “more than a

mere scintilla. It means such relevant evidence as a reasonable

mind might accept as adequate to support a conclusion.” Universal

Camera Corp. v. NLRB, 340 U.S. 474, 477 (1951) (quoting Consol.

Edison Co. v. NLRB, 305 U.S. 197, 229 (1938)). The Court will

uphold the Department’s legal determinations if they are otherwise

“in accordance with law.” See Former Employees of Elec. Data Sys.

Corp. v. U.S. Sec’y of Labor, 28 CIT __, __, 350 F. Supp. 2d 1282,

1286 (2004); see also Trinh v. U.S. Sec’y of Agric., 29 CIT __, __,

395 F. Supp. 2d 1259, 1265 (2005) (“The court, in reviewing a

challenge to one of Agriculture’s determinations regarding

1
See Trade Adjustment Assistance Reform Act of 2002, Pub.
L. No. 107-210, Title I, Subtitle C § 141, 116 Stat. 953 (2002); see
also 19 U.S.C. § 2401 et seq.
Court No. 05-00511 Page 3

eligibility for trade adjustment assistance, will uphold the

challenged determination if the factual findings are supported by

substantial evidence on the record and its legal determinations are

otherwise in accordance with law.”).

BACKGROUND

On December 15, 2004, the Secretary certified a TAA petition

filed by the Louisiana Shrimp Association and invited eligible

shrimp farmers to apply for benefits. See Trade Adjustment

Assistance for Farmers, 69 Fed. Reg. 77,708 (Dep’t Agric. Dec. 15,

2004) (notice). Thereafter, Plaintiff, a Subchapter S Corporation,

applied for TAA benefits for the 2003 marketing year. See

Application for Trade Adjustment Assistance for Lady Kim T. Inc.,

(February 14, 2005) (“Application”), Administrative Record (“AR”)

1. As part of its application, Plaintiff provided various business

records, as well as copies of its 2002 and 2003 Internal Revenue

Service (“IRS”) Form 1120S income tax returns (“returns”).2 See

Pl. Submission, AR at 12–29. On Form 1120S, “Total Income (loss)”

is reported on line 6. See Form 1120S, www.irs.gov (last visited

2
As a Subchapter S corporation, Lady Kim filed its tax
returns using IRS Form 1120S. Form 1120S is entitled “U.S. Income
Tax Return for an S Corporation.” See Form 1120S, www.irs.gov (last
visited December 15, 2006).

As directed by IRS Form 1120S, “Total Income (loss)” is
calculated by adding “gross profit,” “net gain (loss)” and “other
income (loss).” See id. “Ordinary income (loss) from trade or
business activities” is determined by subtracting “Total deductions”
from “Total income.” Id.
Court No. 05-00511 Page 4

December 15, 2006). Line 6 appears in the section of the return

entitled “Income.” Id. “Ordinary income (loss) from trade or

business activities” is reported on line 21, and appears in the

section of Form 1120S labeled “Deductions.” Id. On its 2002

return, Lady Kim reported a total income of $19,665 in line 6. See

Br. Supp. Pl.’s Mot. J. Agency R. (“Pl.’s Br.”) at 7. It reported

an ordinary income of $-96,356 in line 21. See Def.’s Resp. Pl.’s

Mot. J. Agency Rec. (“Def.’s Response”) at 3. On its 2003 return,

Plaintiff reported a total income of $3,037 on line 6, and an

ordinary income of $-59,226 on line 21. See Pl.’s Br. at 8; Def.’s

Resp. at 4. Lady Kim also certified that, based upon the

documentation provided, its 2003 net fishing income declined from

the petition’s pre-adjustment year. See Application, AR 1; Form

1120S 2003 return, AR 12; Form 1120S 2002 return, AR 13.

The Department denied Lady Kim’s application by letter dated

July 6, 2005 (“final determination”). See Letter from Ronald Ford,

Deputy Director, Import Policies and Program Division, Foreign

Agricultural Services, United States Department of Agriculture, to

Lady Kim T. Inc. (July 6, 2005), AR 58. The letter stated, in

relevant part, that the USDA “reviewed the information that [Lady

Kim] provided to the Farm Service Agency with [its] application and

made a final determination that [Lady Kim is] ineligible for a cash

payment. [Lady Kim has] been denied a TAA cash benefit because [its]

net fishing income for 2003 was greater than [its] net fishing
Court No. 05-00511 Page 5

income for 2002.” See id. Plaintiff filed a timely appeal

challenging the final determination with this Court.

Plaintiff sets forth several arguments in support of its

appeal. Its primary contention, however, is that the Department’s

final determination is not supported by substantial record

evidence.3 See Pl.’s Br. at 5. Specifically, Plaintiff insists

that the Department erred by not omitting depreciation from its

calculation of net fishing income. Id. (“Agriculture’s negative

determination did not omit depreciation from its calculation of net

farm income in contravention of the statute.”). It maintains that

an examination of line 6 of its proffered tax returns indicates that

it experienced a reduction in net income from 2002 to 2003. This,

it claims “fulfill[s] the intent of the statute and also make[s]

plaintiff eligible for TAA benefits.” Id. at 8. Plaintiff further

argues that the controlling statute, here, 19 U.S.C. § 2401e(a)(1),

directs that the Department make a determination as to net farm

income and that nothing on the record “shows whether [the

3
Plaintiff makes several ancillary arguments, none of which
the Court need address to reach its conclusion. See e.g., Pl.’s Br.
at 9 (arguing that “Agriculture’s implicit inclusion of depreciation
in its net income is not reasonable under the statute and GAAP
[Generally Accepted Accounting Principles] because depreciation does
not affect the vitality of plaintiff . . . .”); see also id. at 10
(quoting Selivanoff v. United States Sec’y of Agric., 30 CIT __, __,
Slip. Op. 06-55 at 7 (Apr. 18, 2006) (not published in the Federal
Supplement)) (reiterating the argument set forth in Selivanoff,
regarding the Department’s purported subdelegation of the
determination of net farming income from itself to the IRS).
Court No. 05-00511 Page 6

Department] undertook the required analysis[.]” Id. at 11. As a

result, Plaintiff seeks remand.

Defendant disagrees, and argues that the denial of TAA benefits

was both supported by substantial evidence and otherwise in

accordance with law. See Def.’s Resp. at 5. It maintains that a

comparison of line 21 of Plaintiff’s 2002 and 2003 tax returns

reflects that Plaintiff’s net income did not decrease from 2002 to

2003. Consequently, it contends that Plaintiff was not entitled to

TAA benefits. Id. at 7. Defendant further responds that it

“appropriately took into account depreciation and other expenses.”

Id. Along these lines, Defendant argues that because § 2401e(a)(1)

does not define the phrase net fishing income, Chevron deference to

its regulations is warranted. Id. at 8 (“Neither the statute nor

the regulation compels the agency to define net income so as to

exclude depreciation. The statute does not define net income, but

rather leaves the definition of net income to the discretion of the

USDA.”). In response to Plaintiff’s argument that the Department

make a determination of net income, the Department contends that it

is not obligated to perform “some sort of investigation or ad hoc

analysis of” an applicant’s finances. Id. at 10 (citing Pl.’s Br.

at 8). As such, Defendant requests that the final determination be

sustained.
Court No. 05-00511 Page 7

DISCUSSION

I. Statutory and Regulatory Framework

Following certification4 by the Department, in order to be

eligible for TAA benefits a producer must meet certain criteria.

This criteria is set forth in 19 U.S.C. § 2401e(a), and is entitled

“Qualifying requirements for agricultural commodity producers.” The

statute instructs, in relevant part, that, in general:

Payment of a [sic] adjustment assistance
under this part shall be made to an adversely
affected agricultural commodity producer
covered by a certification under this part .
. . if the following conditions are met:
. . .
(C) The producer’s net farm income

4
A group of producers of a particular agricultural
commodity who feel that they have been adversely affected by imports
of certain agricultural products may file a petition with the
Secretary of Agriculture seeking certification of eligibility for
adjustment assistance. See 19 U.S.C. § 2401a(a). The Secretary is
required to grant the petition if he determines:

(1) that the national average price for the
agricultural commodity . . . produced by the
group for the most recent marketing year for
which the national average price is available
is less than 80 percent of the average of the
national average price for such agricultural
commodity . . . ; and

(2) that the increase in imports of articles
like or directly competitive with the
agricultural commodity . . . produced by the
group contributed importantly to the decline in
price described in paragraph (1).

19 U.S.C. § 2401a(c) (Supp. II 2002). See generally Steen v. United
States, 468 F.3d 1357, __, No. 06-1109, 2006 U.S. App. LEXIS 28675,
at *16–18 (Fed. Cir. Nov. 20, 2006) (detailing the workings of the
statutory TAA scheme).
Court No. 05-00511 Page 8

(as determined by the Secretary [of
Agriculture]) for the most recent
year is less than the producer’s
net farm income for the latest year
in which no adjustment assistance
was received by the producer under
this part.

§ 2401e(a)(1) (Supp. II 2002). The statute, however, does not

define the phrase “net farm income.” See Cabana, 30 CIT at __, 427

F. Supp. 2d at 1236.

In instances where Congress has “explicitly left a gap for the

agency to fill,” the agency’s regulations are usually “given

controlling weight” and afforded considerable discretion. Id. at

1235 (citing Chevron U.S.A. Inc. v. Natural Res. Def. Council, Inc.,

467 U.S. 837 (1984)). The Secretary of Agriculture promulgated

formal regulations implementing the statute and clarifying its

application. See Trade Assistance for Farmers, 68 Fed. Reg. 50,048

(Dep’t Agric. Aug. 20, 2003) (final rule); 7 C.F.R. § 1580.102

(2006). Therein, the Secretary explained that the statute applies

not only to farmers but also to certain fisherman. 68 Fed. Reg. at

50,048. In the instant matter, the relevant regulation is 7 C.F.R.

§ 1580.301 (“regulation”). Paralleling the language of the

statute, the regulation requires a producer applying for TAA

monetary benefits to certify, inter alia, that his “net farm or

fishing income was less than that during the producer’s pre-

adjustment year.” § 1580.301(e)(4). The regulation defines net

fishing income as “net profit or loss . . . reported to the Internal
Court No. 05-00511 Page 9

Revenue Service for the tax year that most closely corresponds with

the marketing year under consideration.” § 1580.102. In

demonstrating its net income, the regulation permits a producer to

submit “(i) [s]upporting documentation from a certified public

accountant or attorney, or (ii) [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.” § 1580.301(e)(6).

II. Pursuant to 19 U.S.C. § 2401e, the Department Shall Determine
the Producer’s Net Income and Explain the Basis for Its
Determination

For the reasons set forth below, the Court finds that the

Department’s final determination is not supported by substantial

record evidence. The Court will only sustain a determination if it

is reasonable and supported by the record as a whole, including

whatever fairly detracts from the substantiality of the evidence.

See Universal Camera Corp., 340 U.S. at 488. Because the record

fails to support the final determination, this matter is remanded

to the Department.

A. The Statute Requires that the Secretary “Determine” Net Income

To qualify for TAA benefits, § 2401e(a)(1)(C) directs that a

producer’s net income be “determined” by the Secretary. See

§ 2401e(a)(1)(C). Indeed, “Congress [has] mandated that the

Secretary determine net farm income, not merely determine the
Court No. 05-00511 Page 10

meaning of net farm income; rote reliance upon a single line item

‘reported to the Internal Revenue Service’ without further analysis

. . . will not suffice.” Selivanoff v. United States Sec’y of

Agric., 30 CIT __, __, Slip. Op. 06-55 at 7 (Apr. 18, 2006) (not

published in the Federal Supplement)(emphasis is original). The

United States Court of Appeals for the Federal Circuit (“CAFC”)

concurred in dicta in Steen v. United States. See Steen v. United

States, 468 F.3d 1357, __, No. 06-1109, 2006 U.S. App. LEXIS 28675,

at *16–18 (Fed. Cir. Nov. 20, 2006) There, the CAFC indicated that

“the regulations make it reasonably clear that the determination of

net farm income or net fishing income is not to be made solely on

the basis of tax return information if other information is

relevant5 to determining the producer’s net income from all farming

or fishing sources.” Id. at *17. The CAFC further explained that

“the regulations are not solely and inflexibly linked to the

producer’s tax returns for this purpose.” Id. at *18.

The caselaw of both the CAFC and this Court suggest that

something more than simply looking, and citing to, a line on a tax

return is necessary. See id.; Selivanoff, 30 CIT at __, Slip Op.

06-55 at 7. Indeed, both Steen and Selivanoff seem to contemplate

a certain level of analysis in order for the Secretary to make a

5
In the instant matter, the Court does not comment on the
relevance of the additional information submitted by Plaintiff. In
reaching its final determination, it is the Department’s role to
first consider said relevance.
Court No. 05-00511 Page 11

determination. See Steen, 468 F.3d at __, 2006 U.S. App. LEXIS

28675, at *17; Selivanoff, 30 CIT at __, Slip Op. 06-55 at 7. In

the instant matter, the Court is unable to discern whether the

Department “determined,” in accordance with § 2401e(a), if

Plaintiff’s net income for 2003 was less than that of 2002. The

record is devoid of any information indicating to the Court whether

the Secretary determined, rather than relied upon a single line

item, in concluding that Lady Kim’s net income was greater in 2003

than in 2002. Moreover, the record does not reflect whether the

Secretary performed the requisite analysis in reaching its

conclusion. On remand, therefore, the Department is directed to set

forth an analysis demonstrating that it determined, rather than

stated or referenced, Plaintiff’s net income.6 See

§ 2401e(a)(1)(C). See generally Bando Chem. Indus., Ltd. v. United

States, 17 CIT 798, 799 (1993) (not reported in the Federal

Supplement) (finding that an agency must present a “reviewable . .

. basis” for its determination.).

B. The Department Must Explain the Basis for Its Determination

Once the Secretary has determined net fishing income, the

Department must explain its reasons for reaching its determination.

6
It should be noted, however, that the Court does not
suggest that in reaching a determination, the Department need
conduct an independent exploratory investigation into the net income
of a producer. In conformity with the statutory and regulatory
scheme, the Department need rely only on the information submitted
to it by the producer. See § 1580.102.
Court No. 05-00511 Page 12

The United States Supreme Court has “frequently reiterated” that

whenever an agency exercises its discretion, the “agency must

cogently explain why it has exercised its discretion in a given

manner . . . .” Motor Vehicle Mfrs. Ass’n v. State Farm Mut. Auto.

Ins. Co., 463 U.S. 29, 48 (1983). Indeed, a “fundamental

requirement of administrative law is that an agency set forth its

reasons for decision.” Tourus Records, Inc. v. DEA, 259 F.3d 731,

737 (Fed. Cir. 2001) (internal quotations omitted).

In the final determination denying TAA benefits, the Department

set forth the following:

This is to inform you that the Foreign
Agricultural Service has disapproved your 2003
Louisiana shrimp marketing year application for
a cash benefit under the Trade Adjustment
Assistance for Farmers program (TAA).

We have reviewed the information you provided
to the Farm Service Agency with your
application and have made a final determination
that you are ineligible for a cash payment.

You have been denied a TAA cash benefit because
your net fishing income for 2003 was greater
than your net fishing income for 2002.

Final Determination, AR 58. As the final determination reflects,

the Department merely stated that Lady Kim was denied TAA benefits,

and that the net fishing income in 2003 was greater than in 2002.

This is not a cogent explanation. See Int’l Imaging Materials, Inc.

v. United States, 30 CIT __, __, Slip Op. 06-11 at 13 (Jan. 23,

2006) (not published in the Federal Supplement). Indeed, the
Court No. 05-00511 Page 13

Department simply stating a self-serving conclusion to support its

determination does not constitute an explanation. See Selivanoff,

30 CIT at __, Slip Op. 06-55 at 11–12 (remanding to the Department

of Agriculture where the “negative determination letter . . . states

simply that his application for TAA benefits was denied ‘because the

documentation you provided the Farm Service Agency indicates that

your 2003 net fishing income was greater than your 2001 net fishing

income.’ The letter does not detail why that is so.”) (citation

omitted). In its final determination, the Department failed to

explain how it came to its conclusion that Lady Kim’s net fishing

income for 2003 was greater than that of 2002. The Department

offered no insight into which line on Plaintiff’s tax return it had

based its decision upon. More specifically, the Department offered

no explanation as to why it found it appropriate to rely upon a line

in a tax return which included a deduction for depreciation.

Instead, the Department simply stated its findings.

Despite a lack of explanation in its final determination, in

its briefs to this Court, Defendant attempts to explain the

rationale for its decision. See Def.’s Resp. at 5–12. Any

explanation offered by Defendant, here, however, is a post hoc

rationalization, and thus is an insufficient basis for the Court to

reach a decision on the legality of the final determination.

Anderson v. United States Sec’y of Agric., 30 CIT __, __, Slip Op.

06-161 at 19 (Nov. 1, 2006). Indeed, the Supreme Court has stated
Court No. 05-00511 Page 14

that:

[A] reviewing court, in dealing with a
determination or judgment which an
administrative agency alone is authorized to
make, must judge the propriety of such action
solely by the grounds invoked by the agency.
If those grounds are inadequate or improper,
the court is powerless to affirm the
administrative action by substituting what it
considers to be a more adequate or proper
basis. To do so would propel the court into
the domain which Congress has set aside
exclusively for the administrative agency.

SEC v. Chenery Corp., 332 U.S. 194, 196 (1947). Because “courts may

not accept appellate counsel’s post hoc rationalizations for agency

action” the Court does not consider Defendant’s explanation first

set forth in its briefs to this Court. See Burlington Truck Lines

Inc. v. United States, 371 U.S. 156, 168 (1962). Accordingly, the

Court relies only upon the information as set forth in the

Department’s final determination. See e.g., Final Determination,

AR 58.

The Court, therefore, finds that the Department failed to

adequately explain its rationale for the final determination denying

Plaintiff TAA benefits. This Court has repeatedly indicated that

an “agency must explain its rationale . . . such that a court may

follow and review its line of analysis, its reasonable assumptions,

and other relevant considerations.” Allegheny Ludlum Corp. v.

United States, 29 CIT __, __, 358 F. Supp. 2d 1334, 1344 (2005).

Indeed, “[e]xplanation is necessary . . . for this court to perform
Court No. 05-00511 Page 15

its statutory review function.” Dastech Int’l Inc. v. United

States, 21 CIT 469, 475, 963 F. Supp. 1220, 1226 (1997). In the

instant matter, the Department failed to adequately explain its

reasons for reaching its decision. Accordingly, remand to the

Department for further explanation is appropriate. See Int’l

Imaging Materials, Inc., 30 CIT at __, Slip Op. 06-11 at 13

(remanding to the agency where it simply stated, rather than

explained its reasons for reaching its decision.).

CONCLUSION

Based on the foregoing, the Court remands this matter to the

Department for action in accordance with this opinion. On remand,

the Department is directed to explain the rationale for its decision

to deny Plaintiff’s application for TAA benefits. In so doing, the

Department shall be able to demonstrate the analysis necessary for

it to determine whether Plaintiff’s net income was greater in 2003

than in 2002. Remand results are due on March 15, 2007; comments

are due on April 16, 2007; and replies to such comments are due on

April 27, 2007.

/s/ Nicholas Tsoucalas
NICHOLAS TSOUCALAS
SENIOR JUDGE

Dated: December 15, 2006
New York, NY