Rev. Rul. 56-393

The Internal Revenue Service has been requested to give further consideration to possible disposition of distilled spirits approaching the age of eight years; specifically, whether such spirits may be removed from the warehouse for redistillation and, if so, whether Form 1577, Destruction of Distilled Spirits, should be prepared to cover such operation.

Section 5011(b) of the Internal Revenue Code of 1954 provides that the distiller, warehouseman, or other person responsible for the tax, with respect to any distilled spirits in bond, may voluntarily destroy such spirits, but only if the destruction is under such supervision, and under such regulations, as the Secretary of the Treasury or his delegate may prescribe. Section 5194 of the Code provides that distilled spirits of any proof may be transferred in any approved container from a distillery or an internal revenue bonded warehouse to any distillery for redistillation.

Revenue Ruling 54-290, C.B. 1954-2, 469, and Revenue Ruling 55-739, C.B. 1955-2, 696, held that where an application for voluntary destruction of distilled spirits in an internal revenue bonded warehouse is timely filed before the expiration of the eight-year storage period, but the necessary steps to effect the destruction thereof cannot be completed within such period, the spirits may continue to remain in the warehouse temporarily pending final action on the application. They also deal with other relevant matters concerning the taxation of such spirits, including losses sustained after the expiration of the storage period.

Pursuant to section 5194 of the Code, distilled spirits may be withdrawn from an internal revenue bonded warehouse for transfer to a distillery for redistillation. Redistillation does not constitute destruction of the spirits, but merely changes their condition or character. Destruction of spirits must be accomplished by running the spirits into the sewer or by other suitable means of completely destroying the spirits as required by law. Accordingly, the use of Form 1577, Destruction of Distilled Spirits, to cover the redistillation of spirits is improper.

In cases where the spirits are approaching the age of eight years, the warehouseman may follow either of three procedures with respect to their disposition, namely:

(1) If he desires to have the spirits redistilled, he will present to the storekeeper-gauger to cover the transfer the application on Form 236, Transfer of Distilled Spirits in Bond, that was filed with him by the receiving distiller; or

(2) If he desires to destroy the spirits, he will present an application on Form 1577 to the Assistant Regional Commissioner, Alcohol and Tobacco Tax, through the storekeeper-gauger; or

(3) If he is undecided whether the spirits will be redistilled or destroyed, he will present two applications, one on Form 236 as described in (1) above for the transfer of the spirits for redistillation, and the other on Form 1577 as described in (2) above for destruction of the spirits.

These documents will be filed and disposed of in the manner prescribed by the applicable provisions of the Regulations relating to the Production of Distilled Spirits, the Production of Brandy, and the Warehousing of Distilled Spirits. It is necessary that the application be filed prior to the expiration of the eight-year storage period of the spirits. Applications timely filed will enable the warehouseman to hold the spirits temporarily, if necessary, in order to complete the removal for redistillation or the destruction of the spirits. If applications are timely filed, as indicated, for destruction or redistillation of the spirits, partial disposition may be made under either method, or the spirits may be completely disposed of under one method.

Prompt action must be taken by the warehouseman to effect the destruction of transfer for redistillation of the spirits pursuant to Form 1577 or Form 236, as the case may be. If circumstances are such that the proprietor may not be able to complete the removal of the spirits for redistillation or the destruction thereof before the end of the eight-year period, he will notify the Assistant Regional Commissioner, Alcohol and Tobacco Tax, of the reasons for failure to so remove or destroy the spirits and will state his planned schedule for disposition thereof. If any of the spirits remain on hand in the warehouse at the end of the eight-year period, they will be gauged for the purpose of determination of tax and subsequent assessment, if required, in the manner provided by the Regulations relating to the Warehousing of Distilled Spirits. This, however, will not preclude the destruction or redistillation of the spirits if the warehouseman acts in good faith, and promptly, in the matter of transferring the spirits for redistillation or in destroying them.

Failure to effect within a reasonable time the destruction or redistillation of spirits covered by a timely filed application will result in assessment of tax on the spirits and the consequent loss of the privilege of voluntary destruction or redistillation.

Revenue Ruling 54-290, supra , and Revenue Ruling 55-739, supra , are hereby amplified.