September 17, 2009 IRS Winery Accounting Audits Puts Wine Industry Compliance In Question

Wine industry report has implications for insurance, too 

The IRS is stepping up its investigations to ensure the wine industry’s compliance with its regulations. What this means for both wineries and those who would insure them is described in detail below. David Teed, Managing Director of Live Asset Insurance, lends his expertise to see just how these wine industry developments might play out and how Live Asset Insurance fits into the picture. 

Q:  What was so clearly lacking (enough that the IRS is investigating) in the current winery accounting audits?

A: Wine industry owners use ”bulk wine” and “cased goods” to identify their inventory under the LIFO rules. The IRS is concerned that “the wineries overly broad definition of items failed to determine properly its LIFO index in accordance with Section 472 and case law and thus the LIFO method did not clearly reflect income.”

Q:  Does this current IRS examination of the “last in, first out” method of accounting mean that the nature of wine industry compliance will have to more closely account for wineries’ inventories?

Or, similarly, will wineries have to redefine what they consider inventory?

A: “Under the rules of LIFO you have the right under tax law to use real costs which we track all the time, said Dave Brotemarkle, of Brotemarkle, Davis & Co, LLP in St Helena, California. And the IRS is wondering how many items should be in that cost-for every vintage, for every kind of wine sold. It creates a tremendous burden of record keeping to track all those things in detail. Furthermore if LIFO changes substantially, there could be a HUGE tax bill due to wineries.”

Q:  What does this mean for those who offer insurance to the wine industry? 

Will a more precise method of carrying out winery accounting audits (which the IRS seems to be in favor of) mean that wineries will need to more properly insure their assets?

A: The IRS is looking into using the “Average price index”. According to Tom Davis of Brotemarkle, Davis & Co.who said  ”Another concern is that the IRS is now deciding that the LIFO calculations wineries have been using might be better measured using and average price index, based on the food and beverage industry” Davis says: We feel that is not accurate. The cost of farming and production of higher quality grapes and wines has increased at a faster rate than that. LIFO gives you the absolute right to make a calculation based on real costs and how they have changed, not using a government-provided index.” This IRS ruling does not directly affect the insurance protection required, but could squeeze dollars away from the risk management budget if the associated costs escalate.

Q:  The ultimate goal here is a more accurate method of accounting for winery income.

Assuming the IRS decides to hold wine industry reports to a higher scrutiny, how will that affect a company like Live Asset Insurance? 

A: I think it will help firms like ours that insure the “source of all wine revenue”. Without vines there can be no wine. Just like the cork industry cannot survive if there are no cork trees. We insure the source and for those that are leveraged or would rather transfer the risk of loss at a small cost will continue to search out products like ours. 

Q:   What can Live Asset do for wineries that face a more strict set of accounting practices?

A:  We are very well connected to CPA’s and work closely with CPA’s and Lenders throughout the country involved in the winery world. Being able to connect them to professionals that understand their business is one of our biggest assets. We only provide coverage for plant material so we have no hidden agenda. All we want to do is insure grapevines!

Q:    What is the link between this current IRS examination into wine industry compliance and the winery insurance that Live Asset offers? 

A:  The key to everything is awareness and communication. If the wineries know that we are a resource for those in need of a solution, real or perceived, then we want to be included as part of their “protection team”. We can bring to the table a host of outside professionals from the Banking, Crop Insurance, Accounting and Legal fields. We like to think of risk as a table on which the business owner places his most treasured possessions, and like a table with 4 legs the more secure the 4 legs are the better for the grower. We are the only leg that brings money to the table if a covered loss happens. This makes us one of the most important parts of any growers team, and if we can help by insuring the owners VINES, to keep them in business or put them back in business, then we help everyone else that earns their income from the “production of those VINES”.

More info on winery accounting audits and wine industry compliance, along with insurance options

For more information the IRS winery accounting audits and wine industry compliance, check out this WineBusiness.com article, Wine Industry CPAs Seek Solution to LIFO Challenge by IRS. 

For more information on Live Asset Insurance and the unique options they provide for the wine industry, check out these examples of how vineyard insurance works.