What to do with inventory when Distillery closes

[ralphie513]

What happens to inventory on hand if you cease distillery operations?  Can you just pay the tax due and keep it?

[Silk City Distillers]

No simple answer because this crosses both state and federal jurisdiction, so the laws of the state you are in are going to apply as well.  Even if you are the business owner, keep in mind that you are selling the inventory from the business entity, to yourself, if even for a penny (fun legal history on monetary consideration - https://en.wikipedia.org/wiki/Peppercorn_(legal) ).

Federal, in that you can't sell bulk spirits (barrels, tanks) to a non-DSP.  So you as a private individual can not buy bulk spirits from the distillery going out of business.  It would need to be bottled for a non-DSP to "buy".  Once withdrawn, you'd pay taxes as normal.

State, in that are there any state laws that would prohibit the distillery from selling a large volume of bottled spirits to a private individual.  For example, in our state, there is a relatively small daily limit.  So, while I could technically sell the entire inventory to myself, it would need to be in daily transactions over the course of months.  Once sold, you'd pay state excise taxes as normal.  If you were in a control state where you were not permitted to sell directly to the public, then you don't have much of a choice to keep the spirits once the license is gone.

Why, more commonly, it either gets destroyed (yes, destroyed) or transferred-in-bond to another distillery.  Previously, this would have meant dumping bottles back into bulk, however the law has recently changed to allow bottles to be transferred in bond as well.

Also keep in mind that if you have creditors who are going to get stiffed, if you sell the inventory to yourself at a discount, you are likely committing fraud.  You wouldn't, and you aren't, I know, but it's worth mentioning just to cover bases for someone who might find this thread in the future.

@dhdunbar likely has a much better answer than I do.

[dhdunbar]

Silk City says it well.  Section 19.147 describes what you must do when you go out of business.  One of the things you have to do is provide a written statement affirming that you have  lawfully disposed of all spirits, denatured spirits, articles, wines, liquor bottles, and other pertinent items.  Transfer in bond to another DSP for beverage use is a lawful disposition.  That can be either in bulk, or as Silk City points out, in bottles, but remember you must have an approved application from the receiving DSP before you can do that (19.403).

The restrictions on bulk sales are in 27 CFR 1.80.  Note that they allow sales not only to DSP's, but to anyone qualified to receive spirits in bulk, but that is not generally feasible.  Other than exotic sales to persons who operate customs manufacturing bonded warehouses,  the other uses are all for industrial alcohol.  Most DSP's are not qualified to produce or handle industrial alcohol.  It requires an operating permit under the Internal Revenue Code (See section 19.92 and following), and if you have no bond, you had to declare that you would not be conducting such operations.  If you do conduct them, you would have to buy a bond.  Finally, since you designated the spirits as beverage alcohol at the time of the production gauge (even if you did not know you did this, you did so by default under the provisions of certain sections of the regulation I will not bore you with here)  so would have to make application to redesignate them (19.487) before removing them to, say, someone who makes rum cake, which would trigger the operating permit and bonding requirements and ...  So, even if you could declare the alcohol to be industrial rather than nonindustrial (the law's word for what we call "beverage'), you''d have more hurdles than you probably want.  

Note, if you do destroy the alcohol, recognize that, while, under 19.459, TTB does not access taxes on spirits voluntarily destroyed in the manner described in that section, you must follow the rules in 19.459, , which require that you gauge the spirits.  Further, gauges of spirits destroyed are required by 19.283 and that requires that you prepare a gauge record (19.618) and record of destruction (19.617).   

Because you may be destroying a significant quantity of spirits, and will be attesting to their lawful disposition, make sure you dot the "i's" and cross the "t's" to protect against having to file a claim (19.462) and the possibility of denial, however remote that may be.