CO:R:C:V 545031 GG

Mr. John Heinrich
District Director
U.S. Customs Service
300 S. Ferry Street
Terminal Island, CA 90731

RE: Request for Internal Advice 32/92; apportionment of assists

Dear Mr. Heinrich:

This is in response to your memorandum, dated March 31, 1992, which forwarded to our office the internal advice request referenced above. We regret the delay in responding.

The request was made on April 23, 1991, by the importer, Tonka Corporation ("Tonka"). Tonka has since been acquired by Hasbro, Inc. ("Hasbro"). Hasbro asks that we continue to process the request. It is unclear whether Tonka has retained its name since the merger; however, for purposes of this internal advice request we will assume that it has.


Tonka, prior to its acquisition, was the third largest toy importer in the United States. Tonka provided, and presumably still provides, free of charge or at reduced cost, tools, dies and molds to its overseas manufacturers of the toys it imports. These items, or assists, are used in the production of the imported merchandise. Tonka implies that they are used solely in connection with the manufacture of toys exported to the United States.

You state that the value of such assists was previously apportioned over the number of articles produced with the assists. The assist cost was added to the first entry of the applicable merchandise. You do not elaborate on how Tonka determined the number of articles it would produce with any particular assist.

Tonka concurrently used the IRS Alternative Depreciation System to apportion, for income tax purposes, the assists over the allowable time period. (The Alternative Depreciation System is used for any tangible property which during the taxable year is used predominantly outside the United States.) This system requires use of the straight line method of depreciation. The allowable time period was the "class life" of three and one-half (3 1/2) years. Additionally, a "half-year convention" was used to determine the manner in which the apportionment would be made. (A "half-year convention" means that only a half year of depreciation {computed using straight line} is allowed during the first tax year the goods are placed into service regardless of when first placed into service during the year. This prevents the obtaining of a full year's depreciation when placement was made at the end of a tax year.) The class life, the convention, and the depreciation method used were all in accordance with generally accepted accounting principles ("GAAP").

The IRS apportionments were as follows:

year #1 14.29% year #2 28.57% year #3 28.57% year #4 28.57% 100.00%

Tonka in its internal advice request asks Customs to approve its plan to apportion the value of tools, dies, and molds for Customs purposes in the same manner in which it apportions the assists for income tax purposes. You object to this because, in your opinion, Tonka has failed to prove that such an apportionment method would be reasonable and appropriate to the circumstances. You base this on the fact that the toy industry is volatile, and that toys on average are dropped after one year. A review of the life-cycle of two hundred forty-four of Tonka's toys, introduced over the last five years, shows an attrition rate of approximately 70%, meaning that at the end of the first year, 85% of the assist cost would remain uncaptured on 70% of the toys to which such costs applied. ISSUE:

Whether apportioning the value of assists according to a depreciation schedule approved by the IRS for income tax purposes is an acceptable apportionment method for Customs appraisement purposes?


For the purpose of this decision we assume that transaction value is the proper basis of appraisement. Transaction value is defined in Section 402(b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA; 19 U.S.C. 1401a(b)), as the price actually paid or payable for merchandise when sold for exportation to the United States, plus five enumerated statutory additions, one of which is the value of assists.

Here, there is no dispute over the fact that the tools, dies and molds provided by Tonka are assists; and it is conceded that they are dutiable. The only question is whether Tonka's proposed apportionment method is acceptable.

Customs has authority under Section 152.103(e)(1) of the Customs Regulations (19 CFR 152.103(3)(1)) to accept or reject a proposed apportionment method. See Headquarters Ruling Letter (HRL) 544194, dated May 23, 1988. An apportionment method may be accepted if it allows the apportionment of the value of assists to be made in a reasonable manner appropriate to the circumstances and in accordance with generally accounting principles (GAAP). See Statement of Administrative Action (SAA); 19 CFR 152.103(3)(1). Customs can accept Tonka's apportionment method only if it meets that standard.

Tonka's proposed apportionment method is not reasonable or appropriate to the circumstances for the following reason. The SAA, by providing that "once a value has been determined for [an assist], it is necessary to apportion that value to the imported merchandise", makes it clear that there must be a connection between the apportionment method selected and the imported articles. The SAA offers several suggestions for establishing this link, such as apportioning the full value of the assist over the first entry, or over the number of units produced up to the time of the first shipment, or over the entire anticipated production, in situations where all of the articles produced with the assist will be imported. Tonka's proposed apportionment method is unreasonable because it is based solely on the estimated useful life of the assist. There is no link between the proposed apportionment method and the imported merchandise.

The problem with the lack of connection between Tonka's proposed apportionment method and its imported toys becomes apparent when the fact that the class life of the molds usually is longer than the demand for the toys is examined. Tonka's plan to apportion the value of the assists over the longer 3 1/2 year estimated useful life of the molds means that much of the value of the assists will never be apportioned to the imported toys, and therefore will not be dutiable. However, Congress, by requiring the value of assists to be added to the price actually paid or payable, intended the value of assists to be dutiable. Thus, we do not allow apportionment of the entire value of an assist over the first duty free entry of merchandise or on an entry on which the importer intends to claim drawback. See HRL 542519, undated (TAA No. 35), and HRL 544194, dated May 23, 1988. It follows, therefore, that a proposed apportionment method that routinely allowed a portion of an assist's value to remain nondutiable would not be acceptable to Customs. For this reason, the use by Tonka of the IRS depreciation schedules to apportion the value of the tools, dies and molds to the imported toys is unreasonable and not appropriate to the circumstances. The fact that the method is in accordance with GAAP is immaterial.


Tonka's proposed apportionment method is unacceptable for Customs appraisement purposes because duty would routinely only be paid on a portion of the value of the tools, dies, and molds used to produce the imported toys. As such, the method, although approved by the IRS for income tax purposes and in accordance with GAAP, is not reasonable.

Please do not hesitate to contact us if you have further questions.

John Durant
Director, Commercial