DISTILLED SPIRITS TAX INCREASE AND
RESULTING FLOOR STOCKS TAX
Proprietors of Distilled Spirits Plants, Importers,
Wholesalers, Retailers, and Others Concerned:
Purpose. This Industry Circular is issued to advise
proprietors of an increase in the distilled spirits tax rate,
effective October 1, 1985, and of a resulting onetime floor
stocks tax. In addition, this circular will describe the
procedures for establishing the inventory of distilled spirits
to determine the total liability of the floor stocks tax.
Background. The Deficit Reduction Act of 1984 (Public Law
98369), enacted on July 18, 1984, increased the rate of tax on
distilled spirits from $10.50 to $12.50 per proof gallon,
effective October 1, 1985. All distilled spirits removed from
bonded premises on or after the effective date will be subject
to the increased tax rate. As a transition to the" new tax
rate, this Act imposes a onetime floor stocks tax equal to the
difference between the old and new tax rates ($2.00 per proof
gallon) on all taxpaid distilled spirits held for sale on
October 1, 1985.
Terms Defined. Certain terms used in this circular may
need defining to alleviate any confusion. The following
definitions should assist concerned proprietors:
Wine gallon. A standard U.S. volumetric gallon.
Proof. The alcohol content of a liquid, stated as twice
the percent of alcohol by volume. For example, whiskey with an
alcohol content of 40 percent is 80 proof.
Proof gallon. A standard U.S. gallon at 100 proof, or its
alcoholic equivalent. For example, 1 gallon of 200 proof
spirits would equal 2 proof gallons; 10 gallons of 80 proof
spirits would equal 8 proof gallons.
Dealer. Unless otherwise specified, this term includes
importers, wholesalers, and retailers of distilled spirits.
Also included are taxpaid storage rooms operated by proprietors
of distilled spirits plants.
Small or mediumsized dealer. Any dealer whose aggregate
gross sales receipts for all products (not just distilled
spirits products) for the most recent taxable year ending
before October 1, 1985, do not exceed $500,000.
Controlled group. Any group of incorporated or
nonincorporated dealers that have common ownership interests
(including States or political subdivisions of States).
Generally, a proprietor is considered to be part of a
controlled group if at least 50 percent of the company is
either owned by, or in common with, another company (or
companies).
Open stock. All stock that is not in full cases. Includes
both opened and unopened bottles of various sizes, proofs, and
brands, whether in storerooms, on the shelf, or behind a bar.
Floor Stocks Tax Liability. The distilled spirits floor
stocks tax is imposed on all federally taxpaid or
taxdetermined distilled spirits that are held for sale on the
first moment of October 1, 1985. Dealers of distilled spirits
who have 500 wine gallons or less on hand on October 1, 1985,
are exempt from the floor stocks tax, although they must file a
tax return. All dealers who have more than 500 wine gallons on
hand are allowed as a credit against the floor stocks tax an
amount equal to $800 or the amount of tax liability, whichever
is smaller. Controlled groups must apply the 500 wine gallon
exemption and the $800 credit to the group as a whole.
Proprietors are liable for the floor stocks tax irrespective of
the location where their distilled spirits are held. Taxpaid
distilled spirits held for sale on Federal property (military
installations, Indian reservations, etc.) are not excluded from
the tax.
General Inventory Provisions. Liability for the floor
stocks tax must be established either by a physical inventory
or a record (book) inventory supported by the appropriate
source records. The inventory will be the basis for
establishing the quantity of distilled spirits held subject to
the floor stocks tax as of the first moment of October 1, 1985.
Proprietors who prefer not to take a physical inventory on
October 1, may take it anytime between September 23, and
October 6, 1985. (Or, if the business is closed before
September 23, and will remain closed through October 1, the
inventory may be taken on the last business day before
closing.) If the physical inventory is not taken between the
end of the last business day of September, and the beginning of
the first business day of October, it must be reconciled to
October 1, 1985. This reconciliation must be supported by
records of all receipts and dispositions between October 1, and
the date of the inventory.
A record inventory must indicate the exact onhand quantity
of distilled spirits in stock on October 1, and be supported by
source records that indicate receipts and dispositions of
distilled spirits. The records of receipt and disposition
(such as invoices) must include (1) the name and address of the
consignor and consignee, (2) date of receipt and disposition,
(3) brand name, (4) kind of spirits, and (5) quantity of
spirits involved (in wine gallons or liters, and proof).
The physical inventory will be recorded in writing as it is
being taken, and retained at the place of business to which the
inventory pertains for a period of at least 3 years after the
filing date of the floor stocks tax return. Similarly,
proprietors using a record inventory must retain that record
for a period of 3 years after the filing date of the floor
stocks tax return. The record of inventory must identify all
products by brand name, proof, and size of container. The
record must be made available at each proprietor's place of
business for inspection by ATF officers. Taxpaid distilled
spirits in transit as of October 1, 1985, will be included in
the inventory of the person who owns the spirits as of that
date.
Unmerchantable distilled spirits are not subject to the
floor stocks tax. In this context, unmerchantable refers to
spirits which are being returned back up the merchandising
chain because of some defect. Distilled spirits which are
being returned because of poor market demand or to reduce
inventory are not considered unmerchantable. Although the
floor stocks tax is not imposed on unmerchantable distilled
spirits, all persons holding distilled spirits for sale must
physically segregate any unmerchantable products and include
them in a separate section of their inventory record. The
unmerchantable merchandise should not be included when
determining whether the dealer holds over 500 wine gallons,
need not be converted to proof gallons, and should not be shown
on the floor stocks tax return. If for any reason the
distilled spirits are not subsequently returned or destroyed,
floor stocks tax must be paid on them and the taxpayer must
file an amended floor stocks return. Failure to comply with
these provisions can result in the assessment of interest and
penalties.
Inventory Conversion Procedures. To determine the amount
of distilled spirits on hand, the inventory in liters must be
first converted into wine gallons. This can be done entirely
by mathematical computation using the appropriate conversion
factor discussed below, or by using Chart I at the back of this
Circular. (Chart I shows the amount of wine gallons in each
bottle or case of distilled spirits bottled in the standard
metric sizes.) Persons with more than 500 wine gallons of
distilled spirits on hand (or members of a controlled group
that has a total of more than 500 wine gallons on hand) are
liable for the floor stocks tax and must convert the wine
gallon inventory into proof gallons.
However, persons who have determined using their own
methods that they are liable for floor stocks tax may elect to
convert directly from liters and proof to proof gallons. For
example, a wholesaler may have several thousand cases of
distilled spirits on hand. Since approximately 210 cases of
750 ml bottles would equal 500 wine gallons, the wholesaler can
readily determine that his spirits will not be exempt from the
tax. By using a conversion chart the intermediate step of
converting to wine gallons can be eliminated.
Chart II gives factors for the conversion of standard
metric sizes at the most common proofs directly to proof
gallons per case; Chart III shows the factors for individual
bottles. These charts are also placed at the back of this
circular. Taxpayers may compute their own factors or use
factors supplied by industry associations or trade journals for
items bottled at proofs not shown on the attached charts.
However, they are reminded that the taxpayer is responsible for
the accuracy of the information shown on the tax return.
To convert the inventory to wine gallons mathematically
without using a conversion chart, the quantity in liters should
be multiplied by the standard conversion factor of 0.264172.
(However, if the proprietor is a retailer who qualifies for the
special inventory procedures discussed in the next section, a
shortened factor may be used for some computations.) For each
conversion by brand and size, the total wine gallons should be
rounded to the nearest hundredth (for example, 75.369712 would
be rounded to 75.37). There are two basic methods that can be
used to convert liters to wine gallons; both will result in the
same answer.
If the conversion from liters to wine gallons is made
before multiplying the total number of cases or bottles to be
converted, then the result should first be rounded to the
nearest sixth decimal place. Then multiply that figure by the
total number of units to determine the wine gallon amount.
This final answer should be rounded off to the nearest second
decimal place (that is, to the nearest hundredth of a wine
gallon). For example, if you had seven 1.75 Liter bottles on
hand, you could convert a single bottle to its wine gallon
equivalent using the factor, carry out the answer to the sixth
decimal place, multiply by seven, and round that answer off to
the nearest second decimal place to get the final wine gallon
figure.
Alternatively, the conversion from liters can be made after
computing the total number of liters in the cases or bottles.
This answer can be rounded directly to the nearest second
decimal place. Using the figures from the example above, the
12.25 Liters in those bottles (1.75 x 7) can be multiplied by
the factor and the answer rounded to two decimal places. Both
methods result in the same answer of 3.24 wine gallons.
To determine the proof gallon amount, multiply the number
of wine gallons times the proof of the product, divide by 100,
and round the answer off to the nearest first decimal place
(that is, to the nearest tenth of a proof gallon). If the
seven bottles discussed above were 80 proof, their proof gallon
content would be 2.6 (3.24 x 80 divided by 100 = 2.592, rounded
to 2.6 proof gallons). Remember, the wine gallon quantity must
be rounded to the nearest second decimal place (to the nearest
hundredth of a proof gallon), and the proof gallon quantity
must be rounded to the nearest first decimal place (to the
nearest tenth of a proof gallon).
There is one other method that may be used to inventory
full cases of distilled spirits only. Many cases will have the
wine gallon content marked on the side of the case; some cases
will have the proof gallon content also marked. Whenever these
markings are found, proprietors may use them in lieu of any
other conversion method.
The following examples illustrate the various conversion
procedures:
Special Inventory Procedures. Retailers of distilled
spirits must use the above inventory procedures for computing
the quantity of full cases on hand. However, retailers may use
the following special procedures for taking a physical
inventory of open stock (products in less than full cases):
1. The record of inventory may list the total number of
bottles by size and proof only.
2. Fractional label proofs may be rounded to the nearest
whole proof (for example, 86.8 proof would be rounded to 87
proof).
3. A shortened conversion factor of 0.26 may be used for
converting quantities in liters to wine gallons.
4. The quantity of spirits in all open bottles of the same
proof, regardless of size, may be totalled and shown as one
entry (for example, "Miscellaneous bottles, ______ proof = ______
Liters).
Retailers who choose to round fractional proofs and use the
shortened conversion factor must use both of these special
procedures consistently throughout their open stock inventories.
The following example illustrates the use of these special
inventory procedures:
Convert 25 750 milliliter bottles of 86.8 proof spirits to
wine gallons, and then to proof gallons.
25 bottles X .75 liters = 18.75 liters
18.75 liters X 0.26 = 4.875 wine gallons, rounded to 4.88
4.88 wine gallons X .87 proof = 4.2456 proof gallons
After rounding, the total would be 4.2 proof gallons.
Computing Tax Liability. The total tax liability, before
taking any credit, is determined by multiplying the total proof
gallons in inventory times $2.00. For example, 870.2 proof
gallons X $2.00 = $1740.40. The $800 credit is then subtracted
from the computed tax to determine the total tax due.
Remember, the credit may not exceed to computed tax; therefore,
if the computed tax is $570.40, a credit of $570.40 would be
taken on the tax return, and the tax due would be $0. Also,
members of controlled groups are reminded that the controlled
group is entitled to a single credit, which may be apportioned
among the members in any manner satisfactory to them.
Paying Floor Stocks Tax. All persons holding distilled
spirits for sale on October 1, 1985, must file a tax return.
Persons with 500 wine gallons or less in inventory, and those
who have no tax liability as a result of the credit are not
exempt from filing a tax return.
The floor stocks tax return (IRS Form 11) will be
distributed to proprietors by September 15, 1985. Additional
forms may be obtained from IRS and ATF offices.
The floor stocks tax return must be filed with the
appropriate Internal Revenue Service Center, with full payment,
on or before April 1, 1986. However, small and mediumsized
dealers may elect to pay the tax in three equal installments
due on or before April 1, July 1, and October 1, 1986. To
qualify for installment payments, controlled groups must apply
the $500,000 gross sales receipts criteria to the group as a
whole. The Internal Revenue Service will bill these dealers
for the installment payments due on or before July 1, and
October 1, 1986. These dealers will be responsible for filing
the tax return with the first payment on or before April 1,
1986.
CHART I  CONVERSION OF LITERS TO WINE GALLONS
CHART II  PROOF GALLONS PER CASE
To use this chart: total the number of cases (by brand) of each size and
proof, multiply by the factor in the appropriate column, and round the result
to the nearest first decimal place (i.e., to the nearest tenth of a proof
gallon).
CHART III  PROOF GALLONS PER BOTTLE
To use this chart: total the number of bottles (opened cases) of each size and
proof, multiply by the factor in the appropriate column, and round the result to
the nearest first decimal place (i.e., to the nearest tenth of a proof gallon).
Inquiries. Please direct any inquiries concerning the
floor stocks tax to the appropriate floor stocks tax
coordinator in the nearest ATF regional office, listed below:
Midwest Region 

Bureau of Alcohol, Tobaccoand Firearms
230 S. Dearborn St.15th Floor
Chicago, IL 60604
(312) 8865149 
Bureau of Alcohol, Tobacco and Firearms
500 Main Street, Rm. 6510A
Federal Office Bldg.
Cincinnati, OH 45202
(513) 6843334 
North Atlantic Region 

Bureau of Alcohol, Tobaccoand Firearms
6th Floor
6 World Trade Center
New York, NY 10048
(212) 2643994 
Bureau of Alcohol, Tobacco and Firearms
Fed. Bldg./U.S. P.O.
Sixth Floor
Ninth & Market Streets
Philadelphia, PA 19107
(215) 5973984 
Southwest Region 
Southeast Region 
Bureau of Alcohol, Tobacco and Firearms
1114 Commerce Street Room 701
Dallas, TX 75242
(214) 7672257

Bureau of Alcohol, Tobacco and Firearms
3835 Northeast Exwy.
Room 200
Atlanta, GA 30340
(404) 4552645 
Western Region 

Bureau of Alcohol, Tobacco and Firearms
525 Market Street
34th Floor
San Francisco, CA 94105
(415) 9749620 

Director 