UNEXPLAINED SHORTAGES OF BOTTLED WINE
Proprietors of Bonded Wine Cellars
and Others Concerned:
This circular is issued to inform you of our position
concerning tax liability on unexplained shortages of bottled
We have from time to time issued statements and estab-
lished guidelines setting forth what actions might be taken
under certain conditions where shortages of wine (as distin-
guished from losses) are reported after the wine has been
bottled. However, it has not always been possible to avoid
misinterpretations or to achieve a uniform application of such
guidelines. We recognize that where the accuracy of a system
is dependent on machines and people some errors occur, even
when a proprietor exercises the utmost caution and control.
It is expected, however, that each proprietor will devise and
maintain an effective recordkeeping system and an effective
system of security controls designed to prevent unauthorized
and unrecorded removals.
The regulations in 27 CFR 240.912 provide that each
proprietor who bottles wine or receives bottled wine, in bond,
shall keep ATF Form 2621, Record of Bottled Wine, showing the
quantity of wine bottled, the quantity of bottled wine received
in bond, and the quantity of bottled wine removed each day.
ATF Form 2621 provides for the showing thereon of breakage,
inventory overage, inventory shortage, etc., of bottled wine.
The regulations in 27 CFR 240.900 provide that a summary of
all operations of the bonded wine cellar shall be reported on
ATF Form 702 (5120.17), Monthly Report of Wine Cellar Operations.
This form has been revised to require that all proprietors who
report losses of bottled wine (including inventory shortages) in
Part I, Section B of ATF Form 702 (5120.17) must fully explain
the losses in Part X, "Remarks," or explain the losses in a
separate signed statement attached to the report.
Under these regulations, winemakers are required to keep
detailed records of their operations and to give complete
summaries thereof in their periodic reports. Our objective with
respect to the verification of the recordkeeping system of tax-pro-
ducing plants is to verify the removal of taxable products and to
assure collection of the exact amount of tax due on such removals;
no more and no less. Achievement of this objective includes checking
the records of production, losses, inventory, removals, etc., to
determine whether the proprietor maintains adequate record controls
over each phase of his operation to assure proper accounting. We
recognize that even though a proprietor has a seemingly adequate con-
trol system, overages and shortages may occur. Where shortages are
found by inspectors or are reported in proprietors' reports, pro-
prietors will be given an opportunity to explain how the shortages
occurred, and a uniform yet a fair approach will be employed in
making a determination as to whether the tax on such shortages will
be assessed. In making such determination, the adequacy of the
proprietor's recordkeeping procedures and of his security systems
becomes a prime factor, since any such shortage is a persuasive
indication that taxable removals may have occurred without payment
of tax and that an assessment to collect the tax may be justified.
Under this policy, when a shortage of bottled wine is reported
by a winemaker, or is disclosed by an examination of records or by
other means, such winemaker shall be held liable for the tax involved.
The winemaker will, however, be given every reasonable opportunity
to explain and account for any particular shortage. Only after a
complete evaluation of all facts and conditions relative to such
shortages (including any offsetting gains in prior or subsequent
accounting periods), and only after an evaluation of the proprietor's
recordkeeping and security control systems, will an assessment be
made or the proprietor be requested to include an appropriate adjust-
ment in his next tax return. Proprietors are reminded, however, that
repetitive instances of apparent shortages occurring as a result of
inaccurate or inadequate records may result in action to impose or to
compromise the penalties provided by law and regulations for failure
to keep proper records.
The policy set forth above shall be effective January 1, 1977.
Beginning with the month of January 1977, operations shall be re-
ported on revised ATF Form 702 (5120.17) (8-76).
Inquiries regarding this circular should refer to its number and
be addressed to the appropriate regional director, Bureau of Alcohol,
Tobacco and Firearms.
Rex D. Davis