The IRS recently issued a new Audit Technique Guide (“ATG”, available here) applicable to winery and vineyard operations. As with previous IRS guidance, the new ATG is meant to be used by IRS examiners; however the IRS anticipates the industry will rely upon the publication as a guide. It should be noted, the ATG should not be cited as the IRS's technical position.
Many of the issues in the new publication have been previously covered in prior IRS guidance. In this ATG, however, the IRS appears to streamline many of its positions. For example, the UNICAP rules, to which wineries are subject, have evolved since the 1995 guidance. While previously cited as only temporary, these rules have since been finalized, and additional UNICAP rules have been added.
While the streamlining in the new guidance is mainly procedural, the ATG does reflect some significant developments. One such change is the IRS's acknowledgement that vineyards may qualify for Section 179 deductions. Currently, Section 179 allows a $500,000 deduction to taxpayers who place over $2 million of property in service by the end of 2011. For 2012, Section 179 reduces those numbers to a $125,000 deduction for placing over $500,000 of property in service during that year. The deduction will be further reduced to $25,000 for tax years beyond 2012. The ATG states that, based on changes to the definition of property subject to the Section 179 deduction, "[c]ertain practitioners are taking the position that this new definition includes vineyards and are taking [the Section] 179 deduction."
In addition, the ATG addresses and essentially blesses an income deferral method rejected in a 1996 case. The ATG describes the case as involving an accounting structure in which a farmer, using cash method accounting and operating a vineyard as a division of a winery, would sell grapes to the winery without receiving payment until the wine was sold, up to two or three years later. As a result of using cash method accounting, the vineyard would defer income until such time as the wine was sold. The ATG states that in 1997, the IRS published treasury regulations allowing this accounting practice.
To learn more about the issues discussed above as well as other developments addressed in the ATG, please contact:
Carl Lewis at firstname.lastname@example.org
Nikki Dobay at email@example.com
Jake Storms at firstname.lastname@example.org
This post was created in conjunction with Nikki Dobay.
Hong Kong has been making a concerted effort to promote the wine industry within its borders. The Hong Kong Commerce and Economic Development Bureau (CEDB) began signing Memoranda of Understanding (MOUs) with wine producing regions in August of 2008 when it signed an MOU with France. This followed Hong Kong’s abolition of the wine tax, which opened up the market considerably to foreign producers. The MOUs piggy-backed on the 0% wine tax by addressing additional wine industry concerns, including fraud, storage and handling, education, promotion of wine tourism, and investment and cooperation in industry trade events. Since signing with France, the CEDB has signed similar MOUs with Bordeaux, Spain, Australia, Italy, Hungary and New Zealand, and has renewed its official support for its wine industry initiative.
In February of 2010, the CEDB took another step forward when it signed a cooperation agreement with China regarding wine entering the mainland through Hong Kong. This agreement puts in place a voluntary registration system that seeks to streamline the process of importing wine from Hong Kong, and in the process sets Hong Kong up as a gateway for foreign wine entering China, which as we all know is an important and growing market.
The CEDB’s activity has finally reached the U.S. – in May of this year it signed an MOU with the U.S. and a joint MOU with Washington and Oregon. Not only does this continue efforts that regional organizations have been making to promote Northwest wine in Asia, but it is yet another acknowledgment of how important this region is becoming in the global wine economy.