ATF Ruling 74-3
The Bureau of Alcohol, Tobacco and Firearms recognizes the need to clarify its position in regard to alternatives provided under law and regulations when considering losses by casualty or theft, subsequent to the rejection of a claim for allowance of those losses, with specific attention to the question of whether the quantity of wine covered by the claim may be carried forward on winery records and thus fall within the shortages disclosed by inventory on June 30 and December 31, and thereby appearing as fiscal year losses inherent in normal wine storage operations.
In cases where wine is lost or destroyed, by theft or otherwise, 26 U.S.C. 5370(b) provides that the Secretary may require, by regulations, the person liable for the tax to file a claim for relief from the tax and submit proof as to the cause of the loss. Those regulations, as found generally in 26 CFR Part 240--Subpart NN, and specifically under 26 CFR 240.786, provide for the action to be taken by the winery proprietor when any unusual loss, other than a loss in transit, has occurred. Losses in transit are treated separately but similarly under 26 CFR 240.785. The actions to be taken in the event of an unusual loss include notification to the Regional Director or the nearest designated ATF officer that a loss has occurred, preparation of a claim on Form 702 for the month in which the loss occurred. Entry of the loss on Form 702 reduces the book record of wine on hand and, therefore, regardless of the ultimate disposition of the claim, removes the quantity of wine reported as lost from consideration as an operational loss disclosed by semiannual inventory under the provisions of 26 CFR 240.783.
The disposition of a claim submitted for allowance of loss is largely dependent upon those provisions of 26 CFR 240.780 and 240.782 which require the winery proprietor to establish to the satisfaction of the regional director that, in the case of theft, no connivance, collusion, fraud or negligence was a factor in the theft, or if the loss was the result of occurrences other than theft, that loss was in fact sustained. Failure to satisfactorily establish the above conditions must necessarily result in the denial of the claim and the subsequent assessment of tax on the wine reported as lost.
It is therefore held that losses by fire, by casualty or by any other extraordinary or unusual occurrence, including losses by theft, must be reported immediately to the regional director or the nearest designated ATF officer. Such losses shall be entered on report Form 702 for the month in which the loss occurred and a claim Form 2635 for allowance of the loss will be prepared and submitted with that report form. It is further held that the allowance of the loss, or the assessment of the tax on the wine reported as lost, will rest on the acceptance or rejection of the claim. In either case, inclusion of loss on report Form 702 removes the wine shown as a loss on that form further consideration as a portion of the fiscal year losses or shortages disclosed by semi-annual inventory.
26 CFR 240.780, 240.782, 240.783, 240.786, 240.787 and 240.788.