Alternating Proprietors At Bonded Wine Premises
To Wine Premises Proprietors and Others Concerned:
What is the purpose of this circular?
This circular announces the policy of the Alcohol and Tobacco Tax and Trade Bureau (TTB) with respect to the qualification of alternating proprietors and related issues affecting alternating proprietors, such as the small domestic producers' credit and the separation of operations.
As a result of the Homeland Security Act of 2002, the revenue collection function and certain other duties of the Bureau of Alcohol, Tobacco and Firearms (ATF) were transferred to TTB. In this circular, "we" refers to TTB.
Sections 7805 and 5041(c) of the Internal Revenue Code of 1986 (IRC) authorize the Secretary of the Treasury (Secretary) to administer the tax and qualification requirements for producing wine, including the qualification requirements for the small producers' wine tax credit. Sections 203-206 and 211 of the Federal Alcohol Administration Act (FAA Act) authorize the Secretary to carry out the provisions of the FAA Act with respect to qualification of wine producers and blenders, and labeling of wine. The Secretary has delegated these functions to TTB. Regulations in 27 CFR part 4 cover the labeling requirements under the FAA Act and regulations in 27 CFR part 24 cover the production, removal, taxpayment and tax credit requirements under the IRC. In these regulations, TTB sets out qualification requirements, including those for qualifying alternating proprietorships and for qualifying for the small domestic producers' wine tax credit, for which certain alternating proprietors may be eligible.
What is an "alternating proprietorship?"
An "alternating proprietorship" is a term we use to describe an arrangement where two or more persons take turns using the physical premises of a winemaking facility. In most situations, the proprietor of an existing bonded wine premises (the "host" proprietor) agrees to rent space and equipment to a new ("tenant") proprietor. This allows existing wineries to use excess capacity and gives new entrants to the wine business an opportunity to begin on a small scale without investing in equipment. ATF recognized the argument to legitimize these arrangements after discovering that winery proprietors were allowing unqualified individuals on their premises to use crushing and fermentation equipment. In the mid-1980's, ATF began granting alternate methods and procedures from the regulations to allow two qualified proprietors to alternate use of parts of wine premises and in 1990, ATF added §24.136 to its regulations to provide for a procedure for alternating proprietors.
Why is TTB issuing this circular?
We are issuing this circular because we received many inquiries regarding the qualification of alternating proprietors at existing wine premises. In some cases, we had denied some applications to establish alternating proprietorships or had allowed them only after applicants modified their premises. Applicants and their representatives questioned these actions, particularly since the authority to approve or disapprove a premises was delegated to the Area Supervisor, a local ATF officer. As a result, it may have appeared that some ATF offices did not authorize arrangements that were acceptable in other jurisdictions.
What are TTB's concerns?
As we consider applications from alternating proprietors, we have several areas of concern:
Need for permit
In some wine premises, there are numerous alternating proprietors.
Some applicants for alternating wine premises proprietorships had been "custom crush" customers of the host proprietor, meaning they provided the raw materials and possibly some instructions on the type of wine to be made to the producing winery, but did not participate in the winemaking process. The customer qualified as a wholesaler and received the finished, bottled wine to sell. In many cases, there is no change in the arrangements between the winemaker and the customer, yet the customer seeks to qualify as a tenant proprietor.
Other applicants for alternating proprietorships at an existing wine premises were wholesale customers who had even less involvement in the winemaking process.
In some of the agreements intended to establish alternating proprietorships, those seeking to become tenant proprietors agree that they will have no access to the wine premises, and that all production will be done by employees of the host proprietor.
Eligibility of alternating proprietors for small domestic producers' wine tax credit
This question is really separate from qualification, but some applications for alternating proprietorships appear to be efforts to split the production of one large proprietor into several smaller businesses in order to obtain the credit.
In 1990, the IRC was amended to provide a tax credit to benefit proprietors who produce less than 250,000 gallons of wine per year. The full credit is available to producers of less than 150,000 gallons of wine per year, with a maximum annual benefit of $90,000. The full credit of 90 cents per gallon is taken as a decreasing adjustment on the proprietor's tax return. For example, the credit reduces the net tax on a gallon of table wine from $1.07 to $0.17.
The IRC and its regulations give TTB, as the delegate of the Secretary of the Treasury, the authority to make rules to prevent the credit from benefiting a large producer and assure reduction of the credit for persons who produce more than 150,000 gallons of wine per year.
Under the eligibility requirements for the tax credit, groups of producers under common control must share the credit of a single producer. TTB has the responsibility to collect all the wine excise tax that is rightfully due, and we seek to avoid the potential for abuse of the credit in alternating proprietorships.
Suitability of the premises for sharing/ Awareness of the importance of keeping all parties' wine separated and identified
Our field officers have encountered difficulty in locating movable tanks assigned to alternating proprietors and discovered instances where the host proprietor, as the designated recordkeeper of the tenant proprietor, neglects to record removals of wine on behalf of the tenant proprietor, resulting in underpayment of taxes. These and other difficulties arise from the lack of separation of physical and recordkeeping operations between the host and tenant proprietors.
While we understand the desire for national consistency in handling applications for alternating proprietors, we have a responsibility to judge each application on its individual merits, including the physical layout of the wine premises to be shared, the compliance and business history of the various applicants, and the likelihood that the alternation will take place without administrative difficulty or jeopardy to the revenue.
Previously, the ATF Area Supervisor was the deciding official on the suitability of premises under alternation agreements. Now, in TTB, the sole official delegated to approve alternating proprietor applications is the Chief, National Revenue Center (NRC). The Chief, NRC, will use the general guidelines below and apply them uniformly in evaluating applications for alternating proprietorships. These guidelines will be used collectively (and not separately) to determine whether an applicant qualifies as an alternating proprietor:
- We may require a copy of the contract between the host and tenant proprietors, a business plan, or other information in support of an application for an alternating proprietorship. We will consider the tenant proprietor's business history (is the tenant proprietor a grower, a winemaker or a wholesaler?), plans for development of future winery assets, and level of commitment to the business as evidenced by investment in vineyards or other permanent assets. Marketing investment will not be considered for alternating proprietor qualification.
- The tenant proprietor must qualify as a bona fide bonded wine premises. The primary contract between the tenant and the host proprietors should be for rental of space and equipment, and not for gallons of wine produced. If the tenant proprietor is having wine custom made, for example, with no supervision or control over the operation, we will not approve the application.
- The contract between a tenant proprietor and a host proprietor may include the services of the host proprietor's cellar employees. The tenant proprietor must direct and be fully responsible for those things that are usual and customary to the production, bottling and storage of wine (as applicable) and the managing of the business. If a prospective tenant proprietor contracts to hire the host proprietor's winemaker, the application will be subject to additional scrutiny. We will look to factors of authority and control to make a determination that the tenant proprietor will run a bona fide and independent bonded wine premises operation regardless of the sharing of equipment.
- The agreement between the host proprietor and the prospective tenant proprietor must allow the tenant proprietor to have reasonable access to the premises and to the wine.
- The shared premises must be set up in such a way that the bonded areas of the host and tenant proprietors are clearly defined by partitions, signs, or other means while the alternating proprietors are active, and provide sufficient protection of the revenue. The Chief, NRC may require the host and tenant proprietors to do more to identify or separate the areas before approving the application.
We have reexamined our previous position that there must be a part of the premises that stays under the control of each alternating proprietor at all times. In the past, we held that a core premises had to exist for each alternating proprietor, even if the alternator anticipated no winery operations for a period of several months and had no wine to account for. This holding was based on the idea that, since the bond remained active, it should attach to a physical location. That physical location, or core premises, would form the basis of any future extension of premises covered by the bond. Our new position is that, if an alternating proprietor obtains approval of an alternate method or procedure to maintain records at a separate and permanent business office address (other than the host proprietor's premises) where TTB may contact the proprietor and review records during business hours, and transfers or removes all wine on the alternated portion of the premises, the entire bonded premises may revert to the host proprietor.
Wineries currently qualified with other arrangements will not be asked to change their arrangements unless we encounter difficulties resulting from those arrangements. The Chief, NRC, may require more identification or separation of alternating areas in any approved operation on a finding that the approved premises do not provide the required separation and protection. Existing alternating proprietorships will also be subject to the same level of scrutiny as newly approved arrangements, specifically relating to tax payments and accountability.
Existing alternating proprietors who change locations in the next year may elect to maintain their qualification under the old criteria (including the requirement for permanent premises). They may exercise this option by filing a written statement with their application for a change in location. The statement should include the date of original qualification (prior to the date of this industry circular). Any application for a change in location that does not include such a statement will be evaluated under the new criteria, and all applications filed more than one year after the date of this circular will also be evaluated under the new criteria. New applications and requalifications due to changes in ownership or control will be evaluated under the new criteria.
In addition to the qualification and tax issues discussed above, we wish to remind proprietors that alternating proprietorships are conducted under an approved alternation plan that describes the area to be used by each proprietor when that proprietor is active. The host proprietor must not change the portion of the premises assigned to the tenant proprietor on an approved alternation plan without notice to the tenant proprietor and the Chief, NRC. We also wish to remind alternating proprietors of the potential label effects of certain practices common in alternating proprietor arrangements: for example, if wine is transferred in bond to another proprietor, even if the wine remains in the same physical location, the producer would not be able to make an "estate bottled" claim on the label.
In the future, we may undertake rulemaking on alternating proprietors. If we do, any final rule on the subject will supersede this Industry Circular, with appropriate transition rules.
TTB recognizes that alternating proprietor arrangements may be undertaken for many reasons. For instance, a tenant proprietor may qualify as a bonded wine premises proprietor to obtain privileges under State law that are not available to wholesalers. As a result, a qualified alternating proprietor may or may not be a producer eligible for the small domestic producers' wine tax credit. This credit was intended to encourage small new businesses to enter the wine industry. We plan to continue to review alternating proprietor arrangements to ensure that proprietors who take the credit are entitled to it and that the facility where the wine is made is used by small and independent producers. We may instruct proprietors to adjust their taxes if we find the credit was taken in error.
QUESTIONS: If you have questions concerning this circular, contact the Chief, Regulations and Procedures Division, Alcohol and Tobacco Tax and Trade Bureau, 650 Massachusetts Avenue, NW, Washington, DC 20226.
Arthur J. Libertucci