Court Allows Winery To Proceed On Refund Claim Against the U.S. For Excise Taxes Paid By Bonded Warehouse

What entity has the right to pursue a refund for overpayment
when a bonded warehouse overpays taxes on a winery’s inventory?  This question about the Small Producers Tax
Credit on Wine (26 USC
§5041
) is at
the center of a recent case from the Eastern District of Washington.

K Vintners brought
this complaint against the federal government looking to collect a refund for a
$433,238.37 overpayment after the taxes were paid by K Vintners bonded
warehouseman – Tiger Mountain.

The government moved to dismiss on the grounds that because
the taxes were paid by the warehouseman, even though K Vintners had reimbursed
the warehouseman for the payment, K Vintners didn’t have the right to make the
claim to recover the federal excise taxes on wine that Tiger paid on K Vintners
wine.

In this opinion, the Court rejected the argument with some
explanation that is a helpful explanation of the bonded warehouse/winery
relationship.  In denying the U.S.’
request to dismiss, the court found that Tiger Mountain served only as a “bonded
transporter and warehouse for the wine as it travels from producer to retailer
and then to the consumer.”  The court
noted that Tiger Mountain, was a convenient collection point for the IRS in the
stream of commerce, but K Vintners owned the wine and directed its destination
for sale. 

On these facts, the court compared the case to an older cotton tax case where the middle-man
incurred tax assessment on goods owned by the producer – as a convenient
collection point.

The court went so far as to cite to the legislative history
of the statute that allows for refunds – 26 USC §6423, which makes
specific reference to these types of situations:

This subsection [§6423]
also makes provision for cases where the taxpayer is not the owner of the taxed
commodity. For example, in the case of distilled spirits withdrawn from
internal revenue bond, the tax is paid by the warehouseman holding the spirits,
and the warehouseman is therefore the only person entitled to file claim for
refund of such tax. However, in many instances he is not the owner of the
spirits. In such cases the owner is likely to supply the warehouseman with the
amount of the tax to secure the release of the spirits from bond. This
subsection recognizes the equities of the owner under these circumstances even
though he was not the taxpayer. It permits the warehousemen in these cases to
claim the refund or credit where the owner has given his written consent to
allowance of the refund to the claimant warehouseman if the owner bore the
ultimate burden of the tax or has unconditionally repaid the amount claimed by
the person who bore the ultimate burden of the tax.

The agreement (a portion of it was included with the
pleadings and can be found here) between the warehouse and the winery even
specifically mandated reimbursement because it was a contract from a bonded
warehouse and they always mandate reimbursement for taxes paid by the
warehouse.  The specific language in this
agreement states “Bonded customers will be billed for Federal Taxes on taxable
distribution twice monthly.”

It seems pretty clear from the legislative history and the language in §6423 that there shouldn’t have been an issue, but we’ll want to keep
monitoring this case as it may provide some insight as to how the government
understands the credit.