By Robert M. Tobiassen, Compliance Consultant and former Chief Counsel, TTB
Forward by John Hinman: We asked Rob why TTB was structured the way it was, what we can expect to happen as the 2019 budget is implemented and what kind of TTB enforcement policies will be in place going forward. He responded with the history and status of the agency, and his prognosis for the future, based on his long experience in Washington DC. This article is must reading for every professional in the alcoholic beverage industry who interfaces with the TTB.
Disruption is the descriptive word du jour used by every industry experiencing change and challenges in its global supply chain, manufacturing models, distribution channels, and attracting and retaining consumers. The Trump Administration is similarly disrupting Executive Branch agencies through its political appointees, program change mandates, and budget reallocations. TTB is not exempt from this disruption and the fiscal year 2019 proposed budget foreshadows a possible second divorce for ATF and TTB that could alter the culture of TTB. Industry members and other stakeholders learned lessons from the first agency divorce in 2003, specifically about how criminal law enforcement agencies function. It behooves everyone today to pay heed to these lessons of history as the proposed budget moves forward.
The 2019 Budget Proposal – Move All Alcohol Enforcement to the TTB, which would have more money and more people
The release of the President’s Proposed Budget for Fiscal Year 2019 confirmed what reputable news media reported earlier of a plan under consideration by the Trump Administration to strip the Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF), Department of Justice, of its authority to investigate tobacco and alcohol smuggling. The New York Times in an article picked up by The Hill, a local political themed newspaper in Washington, DC, cites a senior administration official as the source of its information. According to this official, ATF’s core mission is preventing violent crimes and has treated tobacco smuggling as a “backwater” mandate.
The Department of Justice budget summary explains:
ATF would transfer the entirety of its alcohol and tobacco regulatory and enforcement responsibilities to the Alcohol and Tobacco Tax and Trade Bureau (TTB) in the Department of the Treasury. This transfer would enable the ATF to hone its focus on activities that protect U.S. communities from violent criminals and criminal organizations, while consolidating duplicative alcohol and tobacco enforcement mechanisms within the TTB.
Correspondingly, the Department of the Treasury budget summary explains:
In addition, the Budget proposes to transfer all alcohol and tobacco responsibilities from the Department of Justice’s Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF) to Treasury’s Alcohol and Tobacco Tax and Trade Bureau (TTB). This transfer would leverage TTB’s resources and expertise relating to the alcohol and tobacco industries and allow ATF to continue to focus on its firearms and explosives mandates, enabling both agencies to more efficiently and effectively carry out their core mission of protecting the public.
This is not the first proposal to move the tobacco and alcohol jurisdiction of ATF to another agency. For the past two sessions of Congress, Representative Jim Sensenbrenner of Wisconsin has introduced the ATF Elimination Act that would transfer the tobacco and alcohol role of ATF to the Drug Enforcement Administration.
The First Divorce – The Homeland Security Act of 2002
Under the Homeland Security Act of 2002, the old ATF was abolished and two new bureaus were established—one in the Department of Justice and one in the Department of the Treasury. For those of us working at the old ATF in 2002, we called it a divorce as we divided up assets, property like furniture, the “bank account” resulting from our single budget, employees, and decided who would take the archives with the old surnames of ATF, IRS, Alcohol Tax Unit, Federal Alcohol Control Administration, and Bureau of Prohibition. Given that the old ATF was created in 1972 grew out of a “shot-gun wedding” with its origins in 1968, the metaphor seemed appropriate. I call this the “first divorce.”
The Second Divorce – the 2019 Budget
Moving forward to the 2019 Proposed Budget, the stripping of the new ATF of the residual tobacco and alcohol criminal enforcement jurisdiction and the proposed transfer of these functions to TTB is the “second divorce” if these responsibilities ultimately end up at TTB.
This article looks at the lessons from the circumstances of the first divorce and asks are there lessons to be learned about whether TTB is the best fit for these criminal enforcement duties or how should the ATF alcohol and tobacco criminal enforcement functions be best integrated into the existing TTB program structure for both efficiency and employee morale.
As to be expected, some history is needed.
Taxes and Guns Drove the early Organization of the Agency
I started my career as a lawyer in 1978 with ATF Chief Counsel. People often asked me how alcohol, tobacco, and firearms did all get lumped into one bureau. The simply answer is taxes. The National Firearms Act of 1934 was the first Federal gun control legislation. It imposed a making tax and a transfer tax on machine guns, silencers, short barrel shotguns—essentially gangster type weapons. Congress enacted the NFA under its taxing power rather than the interstate and foreign commerce power under the Constitution because of the Supreme Court’s narrow view of the latter cause at that time. The NFA is an excise tax as are the alcohol and tobacco excise taxes. These excise taxes were administered and enforced by the Bureau of Internal Revenue (the pre-1953 name of the Internal Revenue Service (IRS)). At this time, the IRS also enforced the Federal Alcohol Administration Act (FAA Act) because the FAA Act enforcement was transferred to the Secretary of the Treasury in 1940.
Merging the corporate cultures of a criminal enforcement agency and an industry supportive regulatory agency operating under the same roof created a practical challenge
Congress enacted the Federal Firearms Act of 1938 (FFA) addressing licensing, recordkeeping, and established categories of prohibited persons. The Alcohol Tax Unit (ATU) of the Bureau of Internal Revenue enforced the FFA. The Omnibus Crime Control and Safe Streets Act of 1968, revised the FFA and designated the Secretary of the Treasury to administer and enforce the new provisions. Following the assassinations of Dr. Martin Luther King, Jr. and Bobby Kennedy, Congress enacted the Gun Control Act of 1968 and later the Organized Crime Control Act of 1970. These new responsibilities went to the IRS because of its firearms experience in enforcing the NFA and the FFA. The renamed Alcohol, Tobacco and Firearms Division of the IRS was headed by an Assistant Commissioner and had a regional field structure headed by Assistant Regional Commissioners.
The significance of the enhanced firearms law enforcement and the new explosives law enforcement cannot be overstated. This is the “shot gun wedding” referred to above. Prior to 1968, the enforcement of the NFA and FFA was not an extensive part of the Division in the IRS. The Division was principally a tax revenue function and regulator of the alcohol and tobacco industries. After 1968, the Division was a major criminal law enforcement entity. For the next 20 years, the Division and then the Bureau of Alcohol, Tobacco and Firearms worked hard to rebrand itself from a regulatory and revenue agency to a criminal law enforcement agency. There was always a certain hierarchical tension between the Regulatory Enforcement programs and the Criminal Enforcement programs. Being a major regulator and tax collection entity and being a major criminal law enforcement entity juxtaposes two very different “corporate cultures” and poses many senior executive management challenges and sometimes confusion about the ultimate mission of the agency. Special Agents are very different personalities than are Tax Auditors and Inspectors conducting compliance and tax inspections. More on that later.
Building a New Bureau in the Confusing World of the Nixon Administration
On top of the mission changes that the Alcohol, Tobacco and Firearms Division in IRS was going through, within four years of the enactment of the Gun Control Act of 1968, a new challenge arose. The Nixon Administration decided to carve the work of the Division out from IRS and establish a new and separate bureau within the Treasury Department. Rather than going through the Congress to establish the new bureau, the Bureau of Alcohol, Tobacco and Firearms (ATF) was created by Treasury Department Order No. 120-01 (formerly No. 221), dated June 6, 1972, signed by the Acting Secretary of the Treasury Charles E. Walker (who was the Deputy Secretary of the Treasury) and was effective on July 1, 1972. The actual processing for filing the alcohol, tobacco and firearms excise tax returns and claims and the depositing and collecting of these taxes remained with the IRS until 1987 when it was transferred to ATF by regulations.
The reasons for the Nixon Administration’s interest in creating ATF are not known. One can speculate. John Caulfield was the first Assistant Administrator (Criminal Enforcement). Reportedly, the White House wanted to appoint either G. Gordon Liddy or Mr. Caulfield as the first Director of ATF. IRS Commissioner Randolph W. Thower resisted the efforts to make Mr. Libby the Director. Operation Sandwedge (involving Mr. Caulfield) and Operation Gemstone (involving Mr. Liddy) were part of President Nixon’s pre-1972 re-election campaign tactics to surveil and target the President’s opponents. The question remains whether in 1972, was there a goal to have a criminal law enforcement entity with nation-wide investigative authority under the control of the White House “plumbers” unit? Suffice it to say that at the time of an agency’s creation, it is not helpful to have fights over the leadership.
Given its overall history, at the time of its establishment in 1972, ATF was generally viewed as a regulatory and civil law enforcement entity rather than a criminal enforcement entity but growing towards that focus. ATF spend the next few decades rebranding itself as a major criminal law enforcement agency with a collateral alcohol and tobacco regulatory, tax, and civil enforcement authority on the margins. The rebranding was very successful though the image was under constant attack by the firearms lobbyist and tarnished by the WACO investigation. The alcohol industry was very supportive of ATF, while the tobacco industry was not vocal one way or the other.
The rebranded Bureau in the 21st Century – “I don’t think we are in Kansas anymore”
Fast forward now to 2001.
By the beginning of the 21st Century, ATF was viewed as a major Federal criminal law enforcement entity that, for historic reasons, had a smaller regulatory and revenue function linked to it. After the events on September 11, 2001, the White House developed its homeland security plan that was unfolded as the Homeland Security Act of 2002 legislation. While ATF was not included in the original legislation, the other criminal law enforcement components in the Treasury Department—Secret Service, Federal Law Enforcement Training Center, and the Customs Service—were included.
Treasury Secretary Paul O’Neil did not favor the Treasury Department having a criminal law enforcement program so having involuntarily lost the other major criminal enforcement components of Treasury, he was fine with most of ATF going to the Department of Justice. Similarly, the criminal law enforcement cadre at ATF was happy to go to a “real” criminal law enforcement Executive Branch Department like Justice. The reality, however, was that ATF still held a core tax revenue function that should be retained by the Treasury Department. Additionally, the alcohol industry supported keeping the alcohol and tobacco regulatory and tax functions in the Treasury Department. No industry wants to say it is regulated by the Department of Justice. But more important, the alcohol industry and likely the tobacco industry realized the criminal law enforcement mandate of ATF had sidelined the resources and interest in the alcohol and tobacco programs so much that ATF could not fulfill its role in providing tax guidance, issuing basic permits, approving labels, monitoring advertisements, and investigating or preventing unfair trade practices, among other things, in a timely and efficient manner. These programs facilitated commerce and international trade for the alcohol and tobacco industries. If these regulatory programs stayed with ATF being moved to the Department of Justice, the valid concern was present that ATF would only marginalize further these regulatory programs.
At the time of the first divorce in 2003, these concerns were validated. First, under the ATF budget, for fiscal year 2003, 13 percent of the congressionally passed budget was for alcohol and tobacco functions being transferred to the TTB but ATF was allocating less than 13 percent of the dollars of its budget to these programs. Because the divorce was final on January 23, 2003, the Office of Management and Budget required (and rightly so) that the joint checking account (as I call the budget) be closed and two separate bank accounts be opened. Some at ATF felt we should keep the budget joint for the remainder of the fiscal year. TTB ended up signing a support service agreement with ATF for Human Resources and other support functions that TTB was not fully prepared to handle and ATF received millions of needed dollars under this agreement. Second, the TTB authorized employee level was around 559 positions (called “full time equivalent (FTE) positions”), but TTB had around 121 vacancies on January 23, 2003, which again shows that ATF did not properly staff the alcohol and tobacco regulatory programs with FTEs assigned by the budget to these regulatory programs. Finally, property asset questions arose. TTB sought no interest in the new headquarters building being constructed for ATF in Washington, DC because the Homeland Security Act of 2002 transferred it to the new Bureau of Alcohol, Tobacco, Firearms and Explosives. TTB asserted its claim (and need) for a portion of the ATF National Laboratory in Beltsville, Maryland and this necessitated detailed discussions over the next few years on how to protect the integrity of both TTB and ATF operations in separate areas of the common laboratory building.
The Lessons for 2019 – the Budget and the Culture, will the culture change from a Regulatory focus to an enforcement focus?
So, what are the lessons to be learned here that could apply should the ATF functions be transferred to TTB as proposed in the 2019 Proposed Budget. Many relate to the alimony that ATF should pay to TTB in this second divorce. But importantly some relate to whether gaining an enlarged criminal law enforcement role will change the culture of TTB.
First, there must be transfer of assets to support the new responsibilities of TTB. When Congress enacts a new program, it provides funding for that new mandate. However, when one agency assumes the existing responsibilities of another agency, then there needs to be a reallocation from relinquishing agency to the acquiring agency of budget dollars, appropriate equipment, and several FTE employee positions. TTB Administrative John Manfreda has wisely always evaluated the ability to get the needed resources when a new program is taken on by TTB. A review of the Summary Tables containing budget dollars at the end of the 2019 Proposed Budget does not reveal whether TTB will get a budget increase to cover these new responsibilities.
Second, there must be a valid, objective, and complete evaluation of any equipment or property assets held by ATF in carrying out these responsibilities that should be transferred to TTB. This includes an assessment of whether there are activities supporting these ATF functions at the National Laboratory for which space and personnel should be transferred to TTB.
Third, and importantly, how many FTEs will TTB get from ATF to carry out these new responsibilities. Presumably most of these FTEs will be special agent positions though some should go to the Office of Management and the Office of Chief Counsel to handle the addition support work. This raises the question of whether TTB should bring on board any ATF special agents (assuming a special agent wants to transfer) or hire its own new special agents. Over the past decade, TTB has utilized a few special agents in its Office of Field Operations. Initially, they came from the IRS Criminal Investigation Division on an annual support services reimbursable agreement. Since I left TTB, I believe some special agents have been hired as TTB employees.
TTB has conducted its own and assisted other Federal agencies in criminal investigations and prosecutions so TTB has developed experience in these operations. The unknown here is as TTB expands its criminal investigation footprint will it adversely affect the TTB mission and programs or impact employee morale in the non-criminal enforcement activities of TTB. Again, Special Agents are very different personalities than are Tax Auditors and Investigators conducting compliance work. Will an increase in the special agent ranks change the culture of TTB? Criminal investigations, prosecutions, and convictions receive high profile news coverage much more than sound tax collections and compliance successes. In the current law and order environment, will this increase criminal work change TTB’s focus? Finally, several senior executive positions in TTB will open sooner than later. If a special agent moves into one of those positions, will that person refocus the mission and culture of TTB?
Fourth, will the “shot gun wedding” problem be avoided because the new criminal enforcement responsibilities are related to the core industries of alcohol and tobacco that TTB is accustomed to and knows, unlike the 1968 and 1970 problem you were mixing alcohol and tobacco regulatory and tax roles with criminal enforcement of firearms and explosives, including arson, roles. Clearly TTB has gained experience in criminal enforcement investigations and prosecutions in the alcohol and tobacco areas.
What are the current ATF functions that would be transferred to TTB and how closely do they correspond to the criminal matters that TTB has worked?
There are four crimes in the United States Criminal Code that would transfer to TTB.
First, the interstate and foreign travel or transportation in aid of racketeering enterprises covers the unlawful activity of a business enterprise involving liquor on which the Federal excise tax has not been paid. 18 USC Section 1952.
Second, the Racketeer Influenced and Corrupt Organizations (RICO) applies because section 1952 is a predicate offense for a RICO violation. 18 USC Chapter 96 (section 1961, et seq).
Third, Trafficking in Contraband Cigarettes and Smokeless Tobacco would transfer to TTB from the Attorney General. 18 USC Chapter 114 (sections 2341 through 2346).
Fourth, the restrictions and conditions on the transportation of intoxicating, vinous, and fermented liquors would transfer to TTB from the Attorney General. 18 USC Chapter 59 (sections 1261 through 1265).
Will this compatibility prevent the “balkanization” formed and found in the old ATF? The TTB Annual Report for Fiscal Year 2017 notes that National Response Teams (NRT) have been deployed in two unfair trade practice investigations. When I was at ATF, the NRTs were activated to response to a major disaster or terrorist incident. They had a control center staffed 24/7 with special agents, inspectors, and lawyers, among others. It is unclear whether the adoption by TTB of the NRT concept, in some form, evidences a culture change to a more criminal law enforcement mentality.
Finally, the TTB stakeholders in the alcohol and tobacco industries should closely follow this resource allocation. Based on lessons from the past, these stakeholders want no return to the old ATF days when the budget resources for regulatory and tax programs were lessened to fund the higher profile criminal enforcement function.
Tomorrow Will Come the Unknown – Be Vigilant
No one can deny that the first 18 years of the 21st Century have played out in ways – both big and small –that none of us imagined in the late 1990s. For us then, the “Y2K bug” was the biggest fear and challenge. Were we wrong!
Each Administration leaves its fingerprints on the Executive Branch organization in order to faithfully execute the laws of the United States. Washington, DC is oddly both in a stagnant world and in a windy world of change. Change may be afoot for TTB and it behooves all TTB stakeholders to watch and make their views to Congress and the Executive Office of the President, Office of Management and Budget known. These stakeholders know how to do this as last year the alcohol industry got $5 million added to the TTB budget to enforce the unfair trade practice laws and more recently succeeded in the enactment of the Craft Beverage Modernization Act in the Tax Cuts and Jobs Act.
“Eternal vigilance is the price of liberty”.…as well as many other things.
 Trump Envisions an A.T.F. Without the A or T, January 19, 2018, at https://www.nytimes.com/2018/01/19/us/politics/atf-authorities-tobacco-liquor-smuggling.html
 White House to Propose Cutting the “Alcohol” and “Tobacco” Out of ATF:Report January 19, 2018, at http://thehill.com/homenews/administration/369803-white-house-to-propose-cutting-the-alcohol-and-tobacco-out-of-atf
 Efficient, Effective, Accountable-An American Budget for Fiscal Year 2019 (hereinafter referred to as the “2019 Proposed Budget), page 72, at https://www.whitehouse.gov/wp-content/uploads/2018/02/budget-fy2019.pdf
 2019 Proposed Budget, page 92, at https://www.whitehouse.gov/wp-content/uploads/2018/02/budget-fy2019.pdf
 Press Release: Rep Sensenbremmer Introduces the ATF Elimination Act at https://sensenbrenner.house.gov/press-releases-statements?ID=9C39C80F-232A-4C39-BBD6-4C764ADABDAF
 Public Law 107-296, November 25, 2002, Section 1111 (6 USC 531), 116 Stat. 2274, at https://www.dhs.gov/xlibrary/assets/hr_5005_enr.pdf
 Transferring the FAA Act Enforcement to the Secretary of the Treasury through the Bureau of Internal Revenue. Reorganization Plan No. III of 1940, section 2, effective June 30, 1940, at 5 Federal Register 2108 and 54 Statutes at Large 1232.
 Public Law 90-351, June 19, 1968.
 Public Law 90-618, October 22, 1968. The Gun Control Act of 1968 repealed the FFA and replaced it with more extensive provisions.
 Public Law 91-450, October 14, 1970. This law included the Federal regulation explosive materials and was modeled after many provisions of the Gun Control Act of 1968.
 Apart from being an economist, tax expert, and later lobbyist, Mr. Walker was known for his firing in 1971, of G. Gordon Liddy as a special assistant to the Secretary of the Treasury for Mr. Liddy’s public opposition to the gun control laws under Treasury’s jurisdiction. Mr. Liddy was later recruited by the Nixon White House and was part of the “plumber’s” unit involved with the Watergate Affair. See, New York Times at https://www.nytimes.com/2015/07/02/us/politics/charls-walker-treasury-official-and-business-lobbyist-is-dead-at-91.html
 Treasury Department Order No. 221, 37 Federal Register 11696 (June 10, 1972).
 Treasury Department Order No. 120-01, paragraph 4(b) and T.D. ATF-251, 52 FR 19311 (May 22, 1987).
 “How Guns Get to Town: Tracing the Southern Connection” by Steven D. Brill, The New York Magazine, April 8, 1974, page 42, at https://books.google.com/books?id=G-kCAAAAMBAJ&pg=PA42&lpg=PA42&dq=john+caulfield+and+atf&source=bl&ots=r_MFcHJjew&sig=twD0g-ORznKsSFiF7eGm5mNFxL8&hl=en&sa=X&ved=0ahUKEwj0k7Sq7a3ZAhVLmuAKHR60C58Q6AEIPDAD#v=onepage&q=john%20caulfield%20and%20atf&f=false
 This is not surprising. The alcohol industry had much more contact with ATF because the internal revenue law provisions on distilled spirits, wine and beer are much more extensive than those applicable to tobacco. Additionally, the alcohol beverage industry was regulated under the Federal Alcohol Administration Act on basic permits, labeling, advertising, and unfair trade practices. There was no counterpart for the tobacco industry.
 New York – North County Man Pleads Guilty to Contraband Cigarette Charges (Justice Department Press Release, dated February 14, 2018 at https://www.justice.gov/usao-ndny/pr/north-country-man-pleads-guilty-contraband-cigarette-charges The defendant was also charged with failing to pay over $247,000 in Federal excise taxes on cigarettes so TTB had primary jurisdiction on this charge and ancillary jurisdiction for the Contraband Cigarette charge.
Virginia-Two Virginia Companies and Three Individuals Indicted on Cigarette Smuggling Charges (Justice Department Press Release, dated October 3, 2017 at https://www.justice.gov/usao-ndwv/pr/two-virginia-companies-and-three-individuals-indicted-cigarette-smuggling-charges
California – Korean National Pleads Guilty to Conspiring to Defraud the United States by Diverting Millions of Untaxed Cigarettes (Justice Department Press Release, dated October 4, 2017) at https://www.justice.gov/usao-cdca/pr/korean-national-pleads-guilty-conspiring-defraud-united-states-diverting-millions
New York-Navy Employee Pleads Guilty to Accepting More than $250,000 in Cash Bribes from Unauthorized Liquor Buyers (Justice Department Press Release, dated August 1, 2017) at https://www.justice.gov/opa/pr/naval-employee-pleads-guilty-accepting-more-250000-cash-bribes-unauthorized-liquor-buyers
Pennsylvania-Dominican Man Indicted for Federal Tobacco Excise Fraud (Justice Press Release dated June 28, 2017) at https://www.justice.gov/usao-mdpa/pr/dominican-man-indicted-federal-tobacco-excise-fraud
California-Man Who Illegally Imported Chinese Cigarettes Sentenced to Prison (Justice Department Press Release, dated April 17, 2017) at https://www.justice.gov/usao-cdca/pr/man-who-illegally-imported-chinese-cigarettes-sentenced-prison
Maryland-Liquor Wholesaler and Three Employees Indicted for $9 million Scheme to Smuggle Liquor from Maryland to New York (Justice Department Press Release, dated May 24, 2016) at https://www.ttb.gov/news/liquor-wholesaler-indicted.shtml
Virginia-Former President of Cherokee Tobacco and Firebird Manufacturing Sentenced to Five Years for Tax Evasion and Ordered to $3.6 million to TTB (TTB Press Release FY-16-05, dated January 13, 2016) at https://www.ttb.gov/press/fy16/press-release-fy-16-05-farley.pdf