LIQ-9-CO:R:C:E 223909 C

Regional Director, Regulatory Audit Division
U.S. Customs Service
Pacific Region
One World Trade Center
Long Beach, California 90831-0700

RE: Request for internal advice concerning computation of lost revenue (lost duties) to be tendered to Customs in a prior disclosure situation under 19 U.S.C. 1592(c)(4); offsets; lost revenue; lost duties; final liquidation; 19 U.S.C. 1514

Dear Mr. Allen:

This responds to the referenced internal advice request (your memorandum AUD-8-O:R JO, dated February 24, 1992). We have reviewed all relevant materials and our response follows.


An importer, through counsel, submitted, over a period of time, several prior disclosure notices to the district director under 19 U.S.C. 1592(c)(4), admitting therein to filing entries that did not accurately reflect the value of entered merchandise. These undervaluations produced underpayments of duty. In accordance with the prior disclosure provision, the importer tendered estimated lost duties. Subsequently, the importer notified Customs that there had been some misclassifications involved in the same entries that were subject to the prior disclosures already filed, as well as to those yet to be filed. These misclassifications caused duties to be higher than they should have been in some cases and lower than they should have been in other cases. Thus, the misclassifications led to both underpayments and overpayments of duty. These classification errors were not identified by the importer as section 1592(a) violations, nor did Customs find them to be violations. Subsequently filed prior disclosure notices calculated lost duties based on the correct duty rate (classification), not the duty rate applied at liquidation. In addition, the importer notified Customs that its tender of lost duties made before discovery of the classification errors should be recalculated in order to take into account higher and lower duties paid as a consequence of the misclassifications. Based on the importer's recalculation, its tender was excessive by $555,000. The essence of the importer's position is that the correct duty rate (classification) should be applied to both the value reported in the original entries as well as the undervaluation later disclosed. Customs position is that the duty rate (classification) that was applied at liquidation should be applied to the undervaluation in order to determine the lost duties.


In determining lost duties to be tendered to Customs in a prior disclosure situation, in accordance with 19 U.S.C. 1592(c)(4), is it proper to offset the duties lost as a consequence of the section 1592(a) violation by reducing therefrom the amount of an overpayment of duty made as a consequence of an error not related to the 1592(a) violation and not found to be the basis of a separate section 1592(a) violation?


The prior disclosure provision, 19 U.S.C. 1592(c)(4), is implemented by Customs Regulation 162.74(h):

"A person who disclosed the circumstances of the violation shall tender any actual loss of duties at the time of the disclosure or within 30 days after the district director notifies the person in writing of his calculation of the actual loss of duties." (Emphasis added.) 19 C.F.R. 162.74(h).

Under section 162.71(a)(1) of the Customs Regulations, "actual loss of duties" is defined as follows:

" . . . the duties of which the Government has been deprived by reason of the violation in respect of entries on which liquidation had become final." (Emphasis added.) 19 C.F.R. 162.71(a)(1).

The foregoing regulatory provisions were applied by Customs in a 1988 ruling involving similar facts. After quoting the regulations as above, Customs held that "the loss of duties resulting from a violation of section 1592 cannot represent the net difference between overpayments and underpayments relating to the merchandise involved in the violation." (Emphasis in original.) (See Customs Ruling Letter 654902, January 19, 1988.) This means that the actual loss of duties is strictly limited to the duties the Government was deprived of by reason of the violation. It is not calculated by determining the amount of duties the Government was deprived of and then subtracting from that amount the amount of any overpayments arising from mistakes unrelated to the section 1592(a) violation. (See also ruling 653324, dated June 21, 1983, wherein it was held, in part, that underpayments of duty (in contrast to overpayments of duty) consequent of undeclared assists that were not the basis of section 1592(a) violations could not be considered in calculations under either section 1592(c) or 1592(d) (copy attached).)

We agree with the reasoning you provided in taking the position that the duty rate (classification) to be applied to the undervaluation is the rate applied at liquidation. As you explained, the classification decision, which determines the duty rate, had become final since it was not protested within 90 days of the liquidation as required under 19 U.S.C. 1514(c)(2). To allow the classification error to be corrected at this stage would be to permit what is in effect an extension of the statutory time limitation of the protest procedure. Customs can collect duties owed as a consequence of a section 1592(a) violation, where liqudation has become final, only because such collection, and any recalculation involved, is authorized under the statute. This action is strictly limited, however, to losses deriving directly from section 1592(a) violations. Since the classification errors are not 1592(a) violations, they cannot be taken into account in the calculation of lost duties (to be tendered) under section 1592(c)(4). The only means under the Customs laws to correct these mistakes was the protest procedure or, if applicable, the reliquidation provision of 19 U.S.C. 1520(c)(1). Since the classification decisions were not protested, they have become final and binding on the importer and the Government.


In determining lost duties to be tendered to Customs in a prior disclosure situation, in accordance with 19 U.S.C. 1592(c)(4), the calculation shall take into account only the duties the Government was deprived of by reason of the section 1592(a) violation. There shall not be allowed any offsets based on overpayments deriving from other errors in the same entries not identified as section 1592(a) violations.


John Durant, Director
Commercial Rulings Division