Shortages of Inventoried Packaged Beer
To: Brewers and Others Concerned
The Alcohol and Tobacco Tax and Trade Bureau (TTB) issues this industry circular to reiterate our policy regarding Federal excise tax liability relating to reported beer shortages and to provide clarifying guidance on how to report beer shortages.
The proper reporting of shortages and the determination of tax liability regarding inventoried packaged beer shortages have been matters of concern since at least 1964. Recent tax audits have revealed that the reporting of shortages and the brewer’s understanding of the tax liability associated with shortages remains problematic.
Our predecessor agencies, the Office of the Commissioner of the Internal Revenue and the Bureau of Alcohol, Tobacco and Firearms, issued earlier statements on this subject in Industry Circulars 1964–6, 1974–4, and 1976–21. This industry circular supersedes these industry circulars.
We outline in this circular our position on a brewer’s responsibility for reporting and attempting to explain shortages under the records and reports provisions of subpart U, part 25, title 27, Code of Federal Regulations (CFR). We also outline when an explanation of a shortage may result in liability for tax and imposition of penalties.
Under 26 U.S.C. 5051, a tax is imposed on all beer brewed or produced and removed for consumption or sale within the United States. The term “removed for consumption or sale” is defined in 26 U.S.C. 5052(c) as the sale and transfer of possession of beer for consumption at the brewery or any removal of beer from the brewery. In addition, 26 U.S.C. 5054 provides that the tax imposed on beer produced in the United States by a qualified brewery shall be determined at the time the beer is removed for consumption or sale.
Under the TTB regulations at 27 CFR 25.291, a brewer is required to maintain records, summaries, and reports that clearly and accurately reflect by quantity the production and disposition of beer. Section 25.291(c)(2)(ii) requires that a brewer’s records contain all data necessary to enable TTB “to verify removals of beer and cereal beverages, to verify claims, and to ascertain if there has been compliance with law and regulations.”
Additionally, 27 CFR 25.294(b)(3) requires that a brewer show shortages in the record of inventory. Finally, 27 CFR 25.297 requires that a brewer prepare and submit a completed Brewer’s Report of Operations, Form 5130.9. The instructions accompanying Form 5130.9 state that the brewer must report any shortage in Part 1, specifically on line 31. The brewer also must provide an explanation for the shortage in Part 5—Remarks, or in a separate statement signed by the brewer under penalty of perjury.
Under 27 CFR 25.291 and 25.297, written explanations regarding shortages are required as part of the records that contain all data necessary to accurately and clearly reflect by quantity the production and disposition of beer. Further, the brewer’s explanation regarding a shortage must establish that the beer in question was not removed for consumption or sale and, thus, no tax liability exists with respect to the product.
In explaining that the beer was not so removed, a brewer must provide a plausible explanation as to the disposition of the product. In addition, to the extent that any defects in the controls regarding processing, security, and/or record keeping led to the shortage, brewers are expected to demonstrate that they are making a good faith effort to identify and actively address such defects. For example, we would view a statement from a brewer regarding a shortage such as the following to be plausible: “We believe the source of the inventory shortage is overstated production resulting from a potentially faulty case counter. We will monitor the situation throughout the next reporting period and take appropriate corrective action.” Conversely, a description of a shortage as “normal” or “routine” or a result of “normal operating procedures” is not a sufficient explanation to be relieved of the liability for the tax.
If the brewer decides that the shortage is insignificant to the brewer or that the expense of investigating a shortage is not justified, and if the shortage remains unexplained, the product is considered removed for consumption or sale and the brewer is liable for the tax.
When a brewer reports a shortage of packaged beer, or it is disclosed by an examination of records or by other means, the brewer will be given every reasonable opportunity to account for the shortage. TTB will make a complete evaluation of all facts and conditions relative to such shortages (including any offsetting gains in prior or subsequent accounting periods). After the evaluation, which may include a review of the brewer’s record keeping and security control systems, TTB will determine whether to make an assessment of the tax or request the brewer to include an appropriate adjustment in the next tax return. The assessment and collection of the tax may be made at any time within the applicable statute of limitations under 26 U.S.C. 6501.
We remind brewers that repeated instances of shortages, including a failure to take corrective action to avoid repetition of shortages, resulting from inaccurate or inadequate records or internal controls, may result in the imposition of penalties under 26 U.S.C. 5672 for failure to keep proper records.
This industry circular is effective immediately.
John J. Manfreda
Alcohol and Tobacco Tax and Trade Bureau