TTB Publishes Notice of Rulemaking for Inwood Valley AVA
On December 5, 2011, the TTB published a Notice of Proposed Rulemaking (Notice No. 125) regarding the establishment of the Inwood Valley Viticultural Area in Shasta, California. If established, the new AVA would consist of a 28,000 acre area, the vast majority of which is currently not dedicated to, or known for, vineyards. The TTB invites comments on the proposed rulemaking, with any comments due on or before February 3, 2012. A full version of the Notice and the documents relating to the underlying Petition can be found here.
IRS Publishes New Audit Technique Guide for Wineries and Vineyards
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 cslewis@stoel.com
Nikki Dobay at nedobay@stoel.com
Jake Storms at jwstorms@stoel.com
This post was created in conjunction with Nikki Dobay.
California State Water Board Moves on Frost Protection Program
The State Water Resources Control Board (“Board”) held a workshop last week on a proposed regulation designed to assess and mitigate water use from the Russian River by growers in Mendocino and Sonoma Counties during frost season. Though no formal action took place, the Board received numerous comments on the proposed regulation.
The regulation would add Section 862 to the California Code of Regulations establishing that any water diversion from the subject area from March 15 to May 15 not in accordance with a Board-approved Water Demand Management Program (“WDMP”) would be deemed unreasonable. This includes the pumping of hydraulically connected groundwater, but excludes diversions upstream of the Warm Springs and Coyote Dams.
In addition, the new regulation would require the WDMP to include:
· An inventory of the frost diversion systems within the area subject to the WDMP
· A stream stage monitoring program
· Annual assessment of potential risks to salmonids from frost diversions
· Identification and implementation of any corrective actions deemed necessary to protect salmonids
· Annual reporting of the WDMP
The workshop was heavily attended by stakeholders from both government and industry and included a presentation of the projected cost of the proposed regulation. The draft economic report, available here, states that the average cost for those diverters in Mendocino County not requiring corrective actions would be $105.86 per acre in initial capital outlay and $28.50 per acre in annual costs; for Sonoma County, those numbers would be $59.98 and $18.74, respectively. For a 40-acre vineyard in Mendocino, this puts the total cost at $4,234 for initial capital outlay and $1,140 in annual costs; for Sonoma County, these numbers would be $2,399 and $749, respectively.
A common theme from the Board and the audience was that several important terms in the proposed regulation had yet to be satisfactorily defined. Chairman Hoppin, himself a farmer, repeatedly stated his hope that both sides would strive for a balance between protecting species and the water needs of farmers.
Several commentators expressed a need for the Board to address the permitting of offstream storage (i.e., storage ponds) as a tool to help address Russian River overdraft. Chairman Hoppin assured the audience that steps needed to be taken in this arena and that it was on the Board’s radar.
Formal rulemaking and the program’s environmental report are expected in mid-May, with final regulations in place by March 2012.
Napa County Farm Bureau Holds Water Forum
On March 9th, the Napa County Farm Bureau held its first water forum in five or six years in St. Helena, California. Kicked off by Bureau President Jim Lincoln, the event was well attended, with over 100 concerned stakeholders listening to the most recent updates in California water issues.
Phillip Miller, the Deputy Director of Napa County Public Works, discussed a recent study by Napa County designed to compile countywide data, establish a framework for reporting, and provide recommendations related to any future groundwater permitting and monitoring program.
Of most interest was the presentation by Paula Whealen, a principal at the engineering firm of Wagner & Bonsignore. Ms. Whealen gave a general overview of new requirements for surface water users from the California State Water Resources Control Board (“SWRCB”), including:
· All reports of licensees and progress reports by permittees and pre-1914 water right diverters are now due annually by July 1;
· Reports must provide the monthly amount taken from the source;
· They must state the monthly amount beneficially used; and
· They must be filed electronically as of this year.
o Filings will require high-speed internet access
Because all new reports must be filed electronically, the prior “fudge factor” regarding timelines for reporting will no longer exist. The SWRCB will be able to tell on July 2 who hasn’t filed the necessary reports. Failure to file all necessary reports constitutes non-compliance with the underlying water license/permit and can lead to fines and/or other administrative actions. It was also stated that, given the increase in the number of enforcement officers (25) and the establishment of a water rights enforcement office in Santa Rosa, California, there will be a significant increase in site inspections in the North Coast region.
A bit of sage advice given at the Forum is for all vineyard and winery owners operating under a license/permit to take it out, read it, and understand it. If you don’t understand your water rights permit, find someone who does, and most importantly, make sure you are in compliance. In addition, even for those sources that are not required to be reported (i.e., reclaimed water), it behooves vineyards and wineries to keep records of all water that is used on the property.
Sonoma Sets Fees, Program Schedule for Frost Protection Program
The Sonoma County Board of Supervisors has adopted the final measures for moving ahead with the County’s Frost Protection Program (the “Program”). This final act was merely a carry-over from the February 8 meeting where the Board adopted the fee structure for the Program and extended the time frame for implementation of the Program until 2012.
Under the new Section 11B of the County Code, the Program will be used to gather information on vineyard and orchard water usage in the Russian River Watershed. As previously blogged, creation of the program started after complaints were made by the U.S. Fish and Wildlife Service that frost protection measures that use water from the Russian River Watershed were causing the death of certain protected salmonid species. The federal agency threatened to take action under the Endangered Species Act if the County did nothing. The County moved to create the Program ahead of State action, which is expected to occur in the next 12-18 months.
Implementation of the Program was originally planned for the 2011 frost season. However, County staff informed the Board at the February 8 meeting that two hurdles had sprung up that would delay actual implementation until the frost season of 2012. The first was a seemingly 11th-hour move by certain vineyard stakeholders to not back the program due to concerns of the public nature of the information gathered. The second was the negotiations over the issue of indemnification between the County and the non-profit organization created to assist in the implementation and that would oversee the gages in the long-term.
While a delay in implementation to the 2012 frost season was acceptable to the U.S. Fish and Wildlife Service, it was stated that any further delay would require action on the part of the agency. One Board member suggested that, due to the delay, the Board consider scrapping the Program and creating a fully voluntary concept. This idea was not acceptable to the U.S. Fish and Wildlife Service and was quickly discarded.
Vineyards and orchards within the Program’s umbrella must register with the County Agricultural Commission annually between January 1 and March 1. This year’s registration must occur by June 1. The fee set for the Program is $64.00 per site. This fee will be assessed annually with the required registration. The County estimates there are some 360 sites within the Program’s boundaries.
The Program will have to conform to any future State action regarding the Russian River Watershed. However, the Board was confident that the Program would meet with acceptance at the State level.
SONOMA COUNTY VOTES ON FROST PROTECTION PLAN FOR VINEYARDS
On Tuesday, the Sonoma County Board of Supervisors unanimously passed an ordinance creating a plan designed to protect both vineyard frost protection measures and endangered species in the Russian River. After nearly a year of negotiations, the Board added Section 11B to the County Code, creating a registration program for grapegrowers and plan to assess water use practices for frost protection by utilizing over 100 gauges placed throughout the watershed. Information on usage will be presented to the Board on a yearly basis and will be used to potentially mitigate effects of diversions on a real-time basis.
The move to create a program started when Federal officials informed the California State Water Resources Control Board (State Board) that overuse of water from the Russian River and its tributary, Felta Creek, for frost protection was negatively impacting endangered Coho and Chinook salmon and steelhead smelt. Officials from the National Oceanic and Atmospheric Administration stated that continued overuse and endangerment could result in a ‘take’ under Section 9(a)(1) of the Federal Endangered Species Act, subjecting those responsible to fines and penalties.
The adopted program will be supervised by Sonoma County and includes a scientific review panel. The ordinance provides that the gauges will be overseen by an entity comprised of members of the grapegrowing community. The State Board had rejected an earlier proposal by grapegrowers to voluntarily adopt preventative measures, demanding there be some method to “…kick out bad actors.” On October 27, 2010, the State Board published a Notice of Preparation of an Environmental Impact Report (EIR) and Public Scoping Meeting for their own proposed regulations applicable to the grapegrowers diverting from the Russian River watershed. The State’s plan would cover water diverted for frost protection from the Russian River in Sonoma and Mendocino Counties and hydraulically connected groundwater.
Section 11B creates a mandatory registration program for all Sonoma county grapegrowers. Growers will be required to register with the County Agricultural Commissioner starting in mid-January, 2011 and running through March 1, 2011. Failure to comply could subject violators to fines ranging from $500-$1,000. The Board of Supervisors will vote on a fee schedule for the program in January.
