United States District Court, E.D. Washington
K VINTNERS, a Washington Corporation, and TIGER MOUNTAIN TRANSPORT, LTD., Plaintiffs,
UNITED STATES OF AMERICA, Defendant
For K Vintners a Washington Corporation, Plaintiff: Frederick Brian Rivera, Michael T Reynvaan, LEAD ATTORNEYS, Perkins Coie - SEA, Seattle, WA.
For Tiger Mountain Transport LTD doing business as Tiger Mountain Services, Plaintiff: Eugene W Wong, LEAD ATTORNEY, Lasher Holzapfel Sperry & Ebberson, Seattle, WA.
For United States of America, Defendant: W Carl Hankla, LEAD ATTORNEY, Lee Perla, U S Department of Justice - DC, Washington, DC.
ORDER ON CROSS-MOTIONS FOR SUMMARY JUDGMENT
THOMAS O. RICE, United States District Judge.
BEFORE THE COURT are the parties' cross-motions for summary judgment. ECF Nos. 42, 48. This matter was heard with oral argument on January 7, 2015. Fredrick B. Rivera appeared on behalf of Plaintiff K Vintners. W. Carl Hankla appeared on behalf of the United States. The Court has reviewed the briefing and the record and files herein and heard from counsel, and is fully informed.
This case concerns Plaintiffs' claim that the Treasury Department's Alcohol and Tobacco Tax and Trade Bureau (" TTB" ) wrongfully assessed and collected wine excise taxes. The parties have filed cross-motions for summary judgment. For the reasons discussed below, the Court finds the United States is entitled to summary judgment.
DOMESTIC SMALL PRODUCER CREDIT
The Internal Revenue Code imposes an excise tax upon all wine produced in the
United States. 26 U.S.C. § 5041. The tax must be paid when the wine is removed from a bonded premises for consumption or sale. 26 U.S.C. § § 5043(a)(1), 5362(a). Wine may be transferred in bond from one bonded premises to another without incurring payment of the excise tax. 26 U.S.C. § § 5043(a)(1)(A), 5362(b). In such a case, the transferee is liable for payment of the tax once the wine is removed from the bonded premises for sale or distribution. 26 U.S.C. § 5043(a)(1)(A).
In 1990, the tax rate on still wines and artificially carbonated wines was increased by $0.90 per gallon. Omnibus Budget Reconciliation Act, Pub. L. No. 101-508, § 11201, 104 Stat. 1388-415 (1990). At the same time, Congress enacted a tax credit for small domestic wine producers (the credit at issue in this case), effectively reducing the tax to its previous level:
[I]n the case of a person who produces not more than 250,000 wine gallons of wine during the calendar year, there shall be allowed as a credit against any tax imposed by this title . . . of 90 cents per wine gallon on the 1st 100,000 wine gallons of wine (other than [champagne or sparkling wine]) which are removed during such year for consumption or sale and which have been produced at qualified facilities in the United States.
Id. (codified at 26 U.S.C. § 5041(c)(1)). The Secretary of Treasury was empowered to prescribe regulations to carry out the purposes of the small producer credit and to prevent the credit from benefiting any person other than small producers. Pub L. 101-508, § 11201, 104 Stat. 1388-416 (1990) (codified at 26 U.S.C. § 5041(c)(7)).
By its plain wording, the credit established in 26 U.S.C. § 5041(c)(1) was only available to small producers who " removed . . . [wine] for consumption or sale. . . ." As the TTB explained the historical progression of the statute in a 2007 final rule-making statement,
The provisions of [26 U.S.C. § 5041(c)(1)] separated the activities of production and removal in such a way that eligibility for the credit was based on removal of wine by an eligible small producer and was not conditioned on the producer actually producing the wine removed. Thus, a proprietor who produced less than 250,000 gallons of wine a year could take the small domestic producer wine tax credit on wine purchased and received in bond as long as the wine was within the first 100,000 gallons of wine removed from the small producer's bonded premises during the calendar year.
Under the [Omnibus Budget Reconciliation Act of 1990], small wine producers were eligible to take the small producer wine tax credit only on wine removed for consumption or sale by that producer. If the producer transferred wine in bond to another bonded wine premises (for example, a bonded wine cellar used as a warehouse) for storage pending subsequent removal by the warehouse, then the producer could not claim a credit on that wine, since the producer had not removed the wine for consumption or sale. If the warehouse did not produce wine at all, or produced more than 250,000 gallons of wine, then the warehouse was not eligible for the small producer wine tax credit. Even if the warehouse produced wine and was eligible for credit in its own right, its eligibility was limited to the first 100,000 gallons removed during the year. In order to receive the credit, some small wineries began to taxpay their wines at the time of removal and store the wines in a taxpaid status rather than transfer them in bond.
Small Domestic Producer Wine Tax Credit--Implementation of Public Law 104-188,
Section 1702, Amendments Related to the Revenue Reconciliation Act of 1990, 72 Fed.Reg. 65452-01 (Nov. 21, 2007).
This oversight in the statute was addressed in 1996 with the retroactive addition of subsection (c)(6), allowing the credit to be claimed by a transferee in bond:
(6) Credit for transferee in bond. --If--
(A) wine produced by any person would be eligible for any credit under paragraph (1) if removed by such person during the calendar year,
(B) wine produced by such person is removed during such calendar year by any other person (hereafter in this paragraph referred to as the " transferee" ) to whom such wine was transferred in bond and who is liable for the tax imposed by this section with respect to such wine, and
(C) such producer holds title to such wine at the time of its removal and provides to the transferee such information as is necessary to properly determine the transferee's credit under this paragraph,
then, the transferee (and not the producer) shall be allowed the credit under paragraph (1) which would be allowed to the producer if the wine removed by the transferee had been removed by the producer on that date.
26 U.S.C. § 5041(c)(6); see also Pub. L. 104-188, § 1702, 110 Stat. 1868-69 (1996). It is the interplay between these two provisions concerning the tax credit--§ 5041(c)(1) and (c)(6)--that is central to the motions before the Court.
Plaintiff K Vintners is a small winery holding a federal permit to produce and sell wine at its bonded premises in Walla Walla, Washington. ECF Nos. 43 ¶ 1 (Defendant's Statement of Material Facts); 49 ¶ 1 (Plaintiffs' Statement of Material Facts); 56 at 2 (Plaintiffs' Counterstatement of Material Fact). At the Walla Walla facility, K Vintners produced 190 gallons of wine in 2005, 360 gallons in 2006, 375 gallons in 2007, and 180 gallons in 2008, the years at issue in this case. ECF Nos. 43 ¶ 1; 49 ¶ 5; 56 at 2. Due to limited capacity at its Walla Walla facilities, K Vintners contracted with two larger wineries--Hogue Cellars in Prosser, Washington, and Wahluke Slope Vineyards in Mattawa, Washington--to increase K Vintners' supply of wine. ECF Nos. 43 ¶ ¶ 2-4; 49 ¶ 6. These wineries fermented, blended, and bottled wine that K Vintners sold under K Vintners' trade names. ECF Nos. 43 ¶ ¶ 2, 10; 49 ¶ ¶ 6, 9; 56 at 3. The wines produced at these facilities are those at issue in this case (the " Hogue/Wahluke wines" ).
K Vintners oversaw the production of the Hogue/Wahluke wines, including blending the wines, providing bottling components and labels, and providing some of the grapes and base juice or wine for blending. ECF Nos. 43 ¶ 11; 44-2 at 10 (Clinton Depo. at 37 ln 14-16); 49 ¶ 6; 56 at 3; 56 at 3, 6. K Vintners held title to the Hogue/Wahluke wines upon purchasing those wines from the larger bonded wineries. ECF No. 43 ¶ 5; 56 at 2-3, 4 (" . . . K Vintners held title to and had ownership of its wine produced at Hogue and Wahluke's bonded wine premises entirely from the point of purchase through shipment . . . ." ). None of the fermenting, blending, or bottling of the Hogue/Wahluke wines occurred at K Vintners' bonded winery in Walla Walla. ECF Nos. 43 ¶ 3; 49 ¶ 6; 56 at 3.
Plaintiff K Vintners contracted with Plaintiff Tiger Mountain to have the Hogue/Wahluke
wines shipped directly to Tiger Mountain's bonded cellar, located in Kent, Washington, to be stored in bond prior to sale and distribution. ECF Nos. 43 ¶ ¶ 15, 16; 49 ¶ 8; 56 at 6-7. The contractual relationship between Plaintiffs obliged K Vintners to reimburse Tiger Mountain for any excise tax paid on the Hogue/Wahluke wines at the time they were removed from bond for distribution. ECF Nos. 43 ¶ ¶ 16, 17; 49 ¶ 9, 11; 56 at 7. The Plaintiffs also agreed that K Vintners would transfer its small domestic producer tax credit to Tiger Mountain to reduce Tiger Mountain's excise tax liability. ECF Nos. 43 ¶ 18; 49 ¶ 9; 56 at 7. Tiger Mountain applied the tax credit when paying the excise taxes due on the Hogue/Wahluke wines. ECF No. 49 ¶ 12.
In 2006, the TTB audited Tiger Mountain's 2004 and 2005 tax filings, and reviewed K Vintners' filings as part of the audit. ECF Nos. 49 ¶ 13. In February and March 2006, Sharon Clinton, K Vintners' business manager, and TTB Specialist Audrey Addison exchanged a series of e-mails. ECF Nos. 43 ¶ 19; 49 ¶ 14; 56 at 7. The e-mails indicated that Ms. Clinton was confused about the application of the tax credit, and on February 6, 2006, Ms. Clinton inquired whether TTB Specialist Addison could " review our situation and give us your calculation as to who owes who what?" ECF Nos. 44-3 at 25; 54-1 at 7. TTB Specialist Addison responded on February 7, 2006, that for K Vintners to be eligible for the credit it
1-Must have produced (NOT BLENDED) wine in the calendar year
2-Must have produced (NOT BLENDED) less than 250,000 gallons
3-Must have produced (NOT BLENDED) less than 150,000 to [be] eligible for full $.90 credit
4-Production between 150,000 to 250,000 gallons, the sliding scale is used BASED ON THE PRODUCTION OF THE CURRENT CALENDAR YEAR to determine credit amount
5-Credit is only taken up to the first 100,000 gallons REMOVED. After that, full rate is paid.
6-Eligibilty for the Small Producers Tax Credit is refigured each year, based on production ...