A winery may return, to a DSP, wine spirits that it obtained, from a DSP, for use in wine production. The DSP may receive them for any lawful use.
To understand who, what, where, and how, forget analysis and guesses from operating report forms. To understand the rules, you must look to the regulations. TTB employees who give answers without consulting the regulations can lead you astray.
In this case, working through the regulations is not an easy chore. Let’s do it anyway, because it is chock full of learning points:
When the distillery ships the spirits to the winery, the spirits remain in bond. “In bond” is defined to include “spirits withdrawn without payment of tax under 26 U.S.C. 5214, and with respect to which relief from liability has not occurred under 26 U.S.C. 5005(e)(2) [§19.1].” Shipping spirits to a winery for the winery to use in wine production is a withdrawal under §5214.
Take note of the term “withdraw without payment of tax.” For accounting purposes, a withdrawal without payment of tax is not a “transfer in bond.” The rules distinguish between the two. The withdrawal to a winery is treated as a withdrawal without payment of tax tax for use in wine production [§19.418(a)(6)]. You should report the transaction as a “withdrawal without payment of tax for use in wine production” on the account from which you withdrew them. The forms have a line for this. Do not report it as a transfer in bond.
To be clear, the sprits are “in bond,” but the transfer is not a “transfer in bond,” it is a “withdrawal without payment of tax.”
There is no natural law at work here; these are arbitrary rules, but they are important because they make for consistent recording and allow TTB to make different rules for returns and relief from the tax liability. For accounting purposes, they are no more arbitrary than the distinctions accountants make between, say, long-term and short-term liabilities. For rules, they are no more arbitrary than the different speed limits one sees for cars and trucks. To handle the accounting correctly, and to follow the rules, you must know what the terms mean and how to classify the transactions.
With definition out of the way, Section 19.454(i) applies to returns of spirits from a winery to a DSP. It provides, “Wine spirits withdrawn without payment of tax for use in wine production can be returned to any DSP [note, not just the DSP from which they were withdrawn] for any lawful purpose, subject to two conditions.
· The DSP proprietor must obtain approval as provided in §19.403. That is the section that requires an application to TTB to receive a transfer in bond. Here TTB allows the return of spirits withdrawn without payment of tax to piggyback on the transfer in bond application, even though the transfer is not treated as a transfer in bond for accounting purposes.
· The winery must follow the wine regulation. Section 24.226 provides, in pertinent part, “If spirits are to be transferred to a distilled spirits plant or to bonded wine premises, the proprietor shall use the transfer record and procedures prescribed by §19.405.” That section describes the transfer document for transfers in bond. Again, although it is not a transfer in bond, TTB piggybacks, presumably as a matter of convenience, on the transfer in bond provisions.
Mixing the documentation for returns of spirits withdrawn for use in wine production with the documentation required for transfers in bond can lead to confusion. But be clear. Neither the shipment to the winery nor the return from the winery are treated as transfers in bond. With that in mind, here are the rules:
The shipping winery prepares the transfer record required by §19.405. Yes, this is a transfer in bond record. The receiving DSP must follow the rules in §19.407. These are lengthy and I will not repeat them here. Receipt involves, among other things, gauging the spirits received, entering certain information to the transfer record, reporting unusual loses, and, of course, making entries to the appropriate DSP record.
The regulations make specific provision returning the spirits to the production account and the processing account. They do not make specific provision for returning them to the storage account, but I see no harm in doing so, since they may be returned for any lawful purpose, which would include storage.
Section Sec. 19.315(a)(3) provides the rules for redistillation in the production account. It provides, “A proprietor may receive and redistill spirits have been withdrawn without payment of tax and returned to bond under subpart T of this part (Subpart T is an error, it should be subpart Q). Note, that if, for any reason, you want to redistill the spirits, you must first have an approved formula. That requirement is well hidden in the §19.77(b), which requires statements of production procedure, and is easily overlooked. It provides, “If the applicant intends to redistill spirits in the production account, the applicant must submit and receive approval for such redistillation on form TTB F 5110.38, Formula for Distilled Spirits under the Federal Alcohol Administration Act.)
Sec. 19.342 (c) provides that a DSP may “receive spirits into the processing account that are returned to bond under the provisions of 26 U.S.C. 5215.
The rules for receiving spirits into the storage account do not include any provision that specifically states that you can receive, in the storage account, spirits withdrawn without payment of tax. Here, I must break my “read the regulations rule.” I think the omission is a glitch, to use a nontechnical word.
Line 4 of the monthly report of storage operations captures returns of bulk spirits into the storage account. In a roll-over form that explains the entries to be made in on each line, TTB gives an example. You would use line 4, they say, to record the return of bulk spirits that were shipped to, but refused by, the consignee. Since you may return, to your DSP, for any lawful purpose, spirits withdrawn, without payment of tax, to a winery, for use in wine production, returning such spirits for storage is appropriate. That is a long string of prepositional phrases for which I apologize. Line 4 is a convenient place to record the transfer. That is short and to the point, even if I cannot find a direct reference to this in the regulations.