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HQ 222252

September 4, 1990

WAR-3-03-CO:R:C:E 222252 C


Regional Director, Regulatory Audit Division U.S. Customs Service
Northeast Region
10 Causeway Street
Boston, MA 02222-1056

RE: 19 U.S.C. 1312; 19 CFR 19.17, 19.23, 19.24; smelting and refining warehouses; withdrawal credited to another port; theoretical transfers; your internal advice request; matter of Phelps Dodge Copper Products Company

Dear Mr. Battaglioli:

This responds to the referenced February 13, 1990, internal advice request submitted by the Regulatory Audit Division, Northeast Region (WAR-1-0:RA MDH). The request was forwarded to this office by the Office of Regulatory Audit by memorandum of February 26, 1990 (MAN-1-CO:RA:C MJK).

The internal advice (IA) request posed several questions regarding the operation of class 7 smelting and refining warehouses. They are set forth below - rephrased for this memorandum - and answered in order of their presentation (in the IA request). Each question is considered separately, without relation to other questions or facts related to other questions.

First, the following brief explanation of the facts, as we understand them: The scenario includes three separate corporate entities: 1) Phelps Dodge Corporation (PDC), a New York corporation; 2) Phelps Dodge Refining Corporation (PDRC), a New York corporation and subsidiary of PDC; and 3) Phelps Dodge Industries, Inc. (PDI), a Delaware corporation and subsidiary of PDC which operates, as a division, Phelps Dodge Copper Products Company (PDCPC). There are three separate bonded warehouses involved, each secured by a separate bond: 1) a rod mill in Norwich, CT, operated by PDI/PDCPC under a bond in the name of PDCPC; 2) a rod mill in El Paso, TX, also operated by PDI/PDCPC under a bond in the name of PDCPC; and 3) a refinery in El Paso, TX, operated by PDRC under a bond in its name. The transactions in question involve the latter two corporate entities above, not the parent company (PDC). Your questions pertain to theoretical transfers under {19.24, Customs Regulations (CR), bond credits for exportations from a bonded warehouse under {19.23, CR, and eligibility for operation as a class 7 smelting and refining warehouse under {19.17, CR, and 19 U.S.C. 1312.

1. Does the bonded merchandise have to be physically on hand at the bonded warehouse in order to file a theoretical transfer of the bond liability (charge) to another warehouse?

Your memorandum indicated that X pounds of material were theoretically transferred from warehouse A to warehouse B, when the quantity of such bonded material on hand at warehouse A on the date of theoretical transfer was less than X pounds. You referred to {19.24(a), CR, which provides that a theoretical transfer may be made, without physical shipment of the material, from one bonded warehouse to another "provided enough like metal in any form is on hand at the establishment to which theoretical transfer is made to satisfy the new bond obligations."

It is clear, as you suggested, that {19.24(a) contemplates that the material to be theoretically transferred from plant A to plant B is in fact physically present at plant A at the time of the theoretical transfer. Although the regulation focuses its attention on the amount of like metal on hand at the recipient plant, it is self-evident that in order to make a theoretical transfer from plant A to any other plant, there must be material on hand at plant A to be theoretically transferred. The theoretical aspect of such a transaction is that a transfer can be made without actual shipment of the material. That is, it is a theoretical, rather than literal, transfer. This does not mean, however, that there need not be bonded material on hand - physically present - at plant A at the time the transfer is made. Whether a theoretical or actual physical transfer, there must be material on hand at the transferring warehouse to be transferred (to the recipient warehouse).

Practically, this means that a warehouse operator cannot dispose of bonded material one day, by taking it out of a bonded warehouse, and then, some time later, attempt to theoretically transfer that same material to another warehouse. This scenario would result in there being no bonded material at plant A to be theoretically transferred to plant B. The pre-theoretical transfer disposition of the bonded material would be an improper admission into the Customs territory without a withdrawal for consumption and payment of duty.

2.) Can bonded material in warehouse A, secured by bond A, be theoretically transferred to warehouse B, secured by bond B?

Your memorandum indicated that material in warehouse A, secured by bond A, was theoretically transferred to warehouse B, secured by bond B, and to warehouse C, secured by bond C. Further, warehouses A and B were operated by the same corporate entity, while warehouse C was operated by a different corporate entity. The question is whether or not theoretical transfers from one bonded warehouse to another bonded warehouse are permissible when, in the one case, one company operates both warehouses involved under separate bonds or, alternatively, each warehouse involved is operated by a separate entity under separate bonds.

The language of the statute appears to permit theoretical transfers in both situations: The charges against a (smelting and refining warehouse) bond may be cancelled in whole or in part:
(3) upon the transfer of the bond charges to another bonded smelting or refining warehouse by physical shipment of [qualifying material] . . ., or . . .
(5) upon the transfer to another bonded smelting or refining warehouse without physical shipment of metal of bond charges . . .

19 U.S.C. 1312(b)(3) and (5).

The language of the statute does not limit transfers from one bonded warehouse to another bonded warehouse on the basis of who operates the warehouses involved. Consequently, it appears that PDI/PDCPC's theoretical transfers from the Norwich plant to PDI/PDCPC's rod mill in El Paso and PDRC's refinery in El Paso are permissible if conducted according to law and regulations. This means that, at the time of the theoretical transfer, there must be, as above, bonded material on hand at the transferring plant in a quantity at least equal to the quantity theoretically transferred, and, where the transferring and recipient plants are secured by separate bonds, there must be on hand at the recipient plant a sufficient quantity of unbonded like material to cover the new bond obligations. (Where two or more plants are covered by one blanket bond, it is not critical that the recipient plant have a sufficient quantity of unbonded like material on hand, so long as all covered plants together have an aggregate quantity that will cover the bond obligation, as provided in 19 CFR

3.) Can exportations of product from plant A, secured by bond A, be credited to bond B which secures plant B?

Charges against a class 7 warehouse bond can be cancelled upon the withdrawal for exportation of qualifying bonded material or product. 19 U.S.C. 1312(b)(1). The simple case is where bonded material or product is withdrawn from the warehouse for export and the bond securing that warehouse is credited, or reduced, accordingly. Section 19.23, CR, which implements 19 U.S.C. 1312(b)(1), permits application of the credit to a warehouse other than the one from which the withdrawal for exportation was made. This regulation is consistent with the language of 19 U.S.C. 1312(b)(1). The question is whether or not such "cross-crediting" is permissible when the warehouses involved in the transaction (withdrawal warehouse and warehouse receiving the credit) are secured by separate bonds.

The scenario in the instant case involves two separate warehouses operated by separate owners/proprietors under separate bonds. A withdrawal for exportation from warehouse A, secured by bond A, is sought to be credited to bond B, securing warehouse B. In short, bond B cannot be credited for withdrawals (for exportation) from warehouse A. The reason is best explained by example:

Qualifying material or product is withdrawn and exported from warehouse A. The quantity of bonded merchandise in warehouse A therefore is reduced accordingly. If the credit for that withdrawal is not applied to the bond securing warehouse A, the quantity of bonded material in warehouse A will be less than the charges against the bond. This will necessitate the filing of a consumption entry and payment of duty. Likewise, upon application of the credit against bond B, securing warehouse B, the bond charges will be reduced without a concomitant reduction in the quantity of bonded material on hand at warehouse B. The bonded inventories at both warehouses will be out of balance with their respective bond charges.

The foregoing scenario is inconsistent with the statutory scheme governing class 7 warehouses, which is based on control of bonded metal inventories for the purpose of maintaining a balance between such inventories and bond charges. Statutory language should not be interpreted to produce absurd, inconsistent or anomalous consequences.

One might suggest that bonded and unbonded quantities can be manipulated at both the warehouse of withdrawal and the warehouse of receipt in order to maintain a balance between bonded inventories and bond charges, but there is no authority, outside of 19 U.S.C. 1312(b)(5) and 19 CFR 19.24 pertaining to theoretical transfer, for such a manipulation.

The theoretical transfer would effectively produce the net results sought to be accomplished by the transaction in question. A theoretical transfer could be made from warehouse B to warehouse A (provided enough like unbonded metal is on hand to cover the new bond charges). The bond charges at warehouse B would be reduced accordingly, along with bonded inventory. The bond charges at warehouse A would increase, as would bonded inventory (while unbonded inventory would be reduced). Then, X amount of bonded material could be withdrawn for export from warehouse A, the credit for such withdrawal being applied to warehouse A. If the bond securing warehouse A also covers warehouse Z, the credit could be applied to warehouse Z.

Interpreting 19 U.S.C. 1312(b)(1) as applying only to situations where two or more class 7 warehouses are operated under one and the same bond produces a simpler and more manageable program. It is also an interpretation that is reflected consistently in {19.23, CR. That regulation, by its terms, applies the credit to other warehouse "entries" and "quantities" (of bonded inventories), not to bond charges. The suggestion is that the regulation does not contemplate a separate bond in place at the warehouse to which credit is applied. Although the one bond securing the two or more warehouses would have to be adjusted upon withdrawal for exportation, only the entries and quantities at the warehouse(s) receiving the credit would have to be addressed.

Based on the foregoing interpretation of 19 U.S.C. 1312(b)(1) and 19 CFR 19.23, we believe that the credits for withdrawals for exportation from PDRC's refinery can only be applied to the bond that secures that refinery.

4.) Can copper cathode be theoretically transferred from one bonded warehouse to another when the only material on hand at the recipient plant is copper anode?

The statute provides that, without physical shipment of metal, a theoretical transfer of bond charges representing a "quantity of dutiable metal contained in imported metal-bearing materials" may be made so long as "there is on hand . . . [at the recipient plant] sufficient like metal in any form to satisfy the transferred bond charges." (Emphasis added.) 19 U.S.C.

It appears to us that the key requirement is that the material theoretically transferred and the material on hand at the recipient plant must contain the same, dutiable prime metal that was contained in the imported material. Here, the imported material is copper cathode, the material on hand at the recipient plant is copper anode, the dutiable prime metal contained in the imported material is copper, and the prime metal contained in the copper anode is copper. Under these circumstances, we believe that the copper anode adequately represents "like metal in any form," despite the fact that the transferring plant could not use it in its production process.

5.) Does PDI/PDCPC's rod mill at Norwich, CT, qualify as a class 7 warehouse if operations there are limited to the manufacture or production of copper rod using imported copper cathode?

Your memorandum indicated that copper cathode is imported and admitted into PDI/PDCPC's Norwich rod mill where copper rod is produced. You indicated that no smelting or refining takes place at that rod mill. You also stated that copper is smelted at PDC's copper smelting plant in Tyrone, New Mexico, from where the copper anode product is transferred to PDRC's El Paso refinery. There it is refined into copper cathode which is then shipped to PDI/PDCPC's El Paso and Norwich rod mills.

On the basis of the information supplied, we only generally make the following points. It is quite clear that a warehouse can be bonded as a class 7 warehouse only if the smelting and/or refining of qualifying metal-bearing materials takes place in the qualifying ways for the qualifying purposes. 19 U.S.C. 1312. It is safe to conclude therefore that if no smelting or refining processes are conducted at the Norwich plant, it cannot be qualified as a class 7 warehouse. PDC's smelter in New Mexico does not qualify PDI/PDCPC's plant in Norwich for class 7 warehouse treatment. Furthermore, the manufacture of smelted or refined products into other articles is prohibited in a class 7 warehouse.

Based on the foregoing, we conclude the following: Whether the Norwich plant receives copper cathode upon direct importation or from PDRC's refinery, if no smelting or refining takes place there, it should not be operating as a class 7 bonded warehouse; in any event, manufacturing is not permitted in a class 7 warehouse.

We hope that the foregoing is useful to you in your handling of the matter in question. If you have any further questions, please contact this office.


Harvey B. Fox
Director, Office of Regulations

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