LIQUOR LAW REVISION PROGRAM
Proprietors of distilled spirits
plants, bonded wine cellars, and
At the annual meeting of the National Conference of State
Liquor Administrators in Louisville, Kentucky, on June 10, 1963,
I discussed some of the key elements of a series of proposed
revisions of law as developed by our Liquor Law Revision
Committee. At that time industry cooperation was solicited
and suggestions were invited with respect to the Committee plan
to further simplify and modernize our system of liquor tax
administration. Copies of the Louisville remarks were made
available to members of industry, industry associations and
In view of the controversy which arose over any prospective
change in the wine gallon-proof gallon taxing provisions of
Section 5001(a)(1), I.R.C., the Committee has now developed a
modified proposal which retains many of the advantages of its
"all-in-bond" recommendation, but which would avoid any-change
as to the status quo of taxing imported distilled spirits.
The Committee proposals are attached for your study.
Your comments are invited so that we may further evaluate the
operating aspects of these proposals, and have the benefit of
industry reaction by the end of the year. Comments should be
addressed to the Director, Alcohol and Tobacco Tax Division
(CP:AT:PBF), Washington, D. C. 20224.
Dwight E. Avis
Director, Alcohol and Tobacco Tax Division
Internal Revenue Service
Alcohol and Tobacco Tax Division
Washington, D.C. 20224
September 27, 1963
TO: Mr. Avis
FROM: Liquor Law Revision Committee
SUBJECT: Proposals for Changes in Liquor Tax Administration
Some of the more significant features of a series of proposals by the
Liquor Law Revision Committee to further simplify and modernize our
system of liquor tax administration were made known by you to the
industry last June in Louisville. The first proposal was the
all-in-bond concept in which all operations now performed on bottling
premises would be performed prior to determination of tax on bonded
premises with the tax to be determined and collected on the proof
gallon of the bottled product at the time of withdrawal of the cased
goods. This proposal contemplated a change in the taxing effect of
Section 5001(a)(1), I.R.C.
The second proposal was to eliminate the tax differential effects
incident to the use of wine and alcoholic flavors subject to drawback
when blended with distilled spirits, which would achieve a single uniform
tax on all products sold as distilled spirits. The third and last pro-
posal made known at Louisville was the elimination of the rectification
Many other proposals beneficial to Government and industry were contained
in the Committee's original plan. However, only the above three enumerated
proposals, which formed the core of the suggestions, were made known at
that time in order to solicit industry reaction, and to provide industry
with an opportunity to reconcile its differences so a legislative package
could be developed which would be reasonably equitable and generally
Adverse industry reaction to these proposals was primarily directed to
the first proposal. In recognition of this reaction, the Liquor Law
Revision Committee has now developed an outline of a new proposal which
would avoid any change in the provisions of Section 5001(a)(1), I.R.C.,
and thereby maintain the status quo on taxing imports. In order to
retain as much as possible of the original all-in-bond plan, the first
step in developing the new proposal was to reduce to a minimum the
operations which would need to be conducted out of bond. It was
found that the bonded premises could be extended to include most of
the processing activities presently conducted on bottling premises.
A brief outline of the proposal follows:
Bonded Premises Operations
All distillation and redistillation, including redistillation now
conducted on bottling premises, would be performed on bonded
premises. Redistillation of spirits would be considered new
production, including the production of gin or vodka by
redistillation of neutral spirits. The manufacture of vodka
by other approved processes subsequent to production gauge of
neutral spirits would be treated as "processing in storage" and
thus would not need to be produced in a closed system. There
would be no production of gin or vodka on bottling premises.
No change is contemplated in the 20-year bonding period. Spirits
in storage could be processed prior to removal from bond as described
in Paragraph 3. Processing in storage means (1) the final complete
preparation, including bottling and casing or packaging, of distilled
spirits products which are bottled in bond or bottled for export and
which could remain in bonded storage, (2) the manufacture of vodka
by processes other than redistillation, and (3) the preparatory
steps in the manufacture of distilled spirits products which are
to be tax determined and removed promptly to bottling premises for
Except for spirits to be bottled under Section 5233, I.R.C.,
(bottling in bond), restrictions under the Code as to the mingling
of spirits for further bulk storage would be eliminated. Any such
liberalization would necessitate the revision of FAA regulations
in order to realize the full benefits of the Code revisions.
Mingling in bonded storage would differ from processing in bonded
storage in that (1) spirits after mingling would be retained for
further bonded storage in bulk containers, and (2) blenders, wines,
etc., could not be added during the mingling. Spirits which differ
in age and which are mingled for further storage would assume the
age of the youngest for purposes of the 20-year bonding limitation.
Imported spirits of any proof could be entered into internal revenue
bond in bulk containers (five wine gallons or more) and the force
out date would start to run from day of deposit for spirits of less
than 190 proof. The importer would be required to pay duty at time
of withdrawal from customs; customs would not collect the internal
revenue tax on such spirits entered into internal revenue bond.
3. Processing in Storage
Products would be blended or manufactured to the extent possible in
bond. All alcoholic ingredients (including drawback flavors and
wines) would be combined in bond prior to tax determination.
Nonalcoholic ingredients (juices, oils, color, sugar, etc.)
could be added, at the discretion of the proprietor, either
on bonded premises during processing or on bottling premises
after tax determination. However, to avoid taxpayment on a
wine gallon basis, products would need to be 100 proof or
higher at time of tax determination. For some proprietors
processing in bond would require changes from present
processing procedures or the development of new processing
The following products processed in storage would be eligible
for transfer in bond: (1) spirits to be returned to production
for redistillation, (2) vodka produced by charcoal or carbon
treatment in processing, (3) bottled-in-bond spirits, and
(4) products intended for export. All other products processed
in storage would be required to be tax determined and withdrawn
to the processor's contiguous bottling premises.
Wine required for use in distilled spirits products would be
transferred in bond from wineries or customs to distilled
spirits plants. Alcoholic blenders or flavors (drawback
alcohol) would also be deposited in bond and the proprietor
would be authorized to file claim for credit to be taken on
future tax returns as to the difference between the tax paid
on the blenders and the amount claimed for drawback. (The
processing of wine products would be authorized only in
bonded wineries or bonded wine cellars. Alternation of
bottling equipment between distilled spirits plant and
winery premises would be authorized.)
The present requirements for bottling in bond under the
provisions of Section 5233, I.R.C., would be retained.
Spirits bottled on bonded premises for export but not
bottled under Section 5233, I.R.C., could not be labeled
in any manner which might indicate that they were bottled
Any spirits withdrawn on tax determination on or after the
effective date of the change-over could be returned to bonded
premises for reprocessing, redistillation, denaturation, or
destruction with internal revenue tax refund or credit allowed
on such returned spirits; such spirits merely requiring relabeling
and restamping would be returned to the bottling premises.
Bottling Premises Operations
All bottling house proprietors would be required to maintain bonded
storage facilities (including tax determination facilities) sufficient
for their needs.
After addition of nonalcoholic ingredients (if any), reduction,
and completion of bottling, the losses incurred and completions
achieved would be determined and balanced against the related
tax-determination gauge. Losses as established would be entered
on taxpayment records and paid on the return for the period in
which incurred; any gains in bottling would be deducted from the
losses for taxpayment purposes. Transfer of cases to another
bottling premises prior to taxpayment would not be permitted.
All cases would be taxpaid on the return for the period in
which they were removed from the bottling premises, and within
six months of tax determination of the spirits.
The record of completions would establish losses (tax determination
less completions) by tax-determined lots, and gains would also be a
matter of record. Net losses for a claim period would be allowable
for credit or refund under Section 5008(c), I.R.C. Future experience
probably would indicate the necessity for revising, by regulations,
the schedule of allowances.
3. Case Accounts
The proprietor would be required to make and record promptly an
accurate count of completions, associating the cases by date,
serial number, and/or other identifying marks, with the bottling
record and tax-determination record. A complete and strict
accounting for all completions would be required, with no losses
Taxpayment Based on Removals from Bottling House
Accounting for case goods would be on the basis of lots, established
by the bottling records related to the appropriate tax-determination
records. Removals of case goods from the bottling house would be
recorded promptly and a record so maintained as to reflect currently
at all times the stock of case goods remaining in each lot.
2. Case Goods in Bottling House
Case goods retained after bottling would be so floored as to permit
removal, and taking of inventories, by lots. Tax-determined goods on
which the tax had been paid would be removed from the bottling house
or segregated from goods on which the tax had not yet been paid.
3. Tax Returns
Tax returns, with payment, would be filed semi-monthly to cover --
(a) All losses sustained in the bottling house prior to
completion of bottling,
(b) All case goods removed from the bottling house,
(c) All case goods tax determined six months previously
and still on hand, and
(d) All shortages found in tax-determined case goods, during the return period. The tax would be paid on the proof gallons
4. Retention of Spirits
Any goods remaining in the bottling house six months after tax
determination would be included in the return for the return period
in which the final day of the six months' period fell.
The above proposal would -
1. Provide for payment of tax on the removal of the case goods from
the bottling premises where bottled subject to a six-months' limitation.
2. Make uniform the tax rate on alcoholic content of products by
a. Repeal of the rectification tax, and
b. Elimination of the tax advantages through use of wines and
3. Provide for more flexibility and freedom of action by proprietors in
the preparation of their products and in the conduct of operations.
4. Simplify overall tax administration.
5. Permit orderly scheduling of bottling operations.
6. Simplify taxpayment of bulk imports with the Internal Revenue
Service the only agency involved.
7. Simplify bottling loss considerations.
8. Permit exportation, without payment of tax, of products, including
blended whiskies, cordials, etc., without establishing separate customs
manufacturing bonded warehousing facilities to conduct such operations.