TTB Change of Control Rules for TTB Alcohol Permits and the Potential Serious Consequences
Those in the alcohol production and distribution business already know that merely receiving Federal TTB alcohol permits and then operating a business can be a daunting task for even the most experienced in the industry. The alcohol industry is governed by a myriad of complex federal laws and regulations under the jurisdiction of the Alcohol and Tobacco Tax and Trade Bureau (TTB). For example, the Federal Alcohol Administration Act at 27 U.S.C. § 203 requires that importers and wholesalers of nearly all alcoholic beverage products, as well as producers of wine and distilled spirits, first obtain a basic permit from TTB before beginning operations. Cider makers of products with 7% or more alcohol by volume also fall within the parameters of the FAA Act permit requirements. Similarly, the Internal Revenue Code mandates that all breweries, before operating, must submit and receive approval of a brewer’s notice from TTB. See 26 U.S.C. § 5401(a).
However, matters can become even more challenging when the existing brewery, winery, cider maker or distillery business experiences changes in its business structure. The same can be said of alcohol importers and wholesalers. In this regard, depending upon the extent of the changes, Federal law may mandate the submission of a new TTB basic permit application or a new brewer’s notice because of the changes to the business structure. Consequently, if your business is contemplating a change to its business structure, here is some information that might help protect your interests, make the transition easier, as well as shed some light on this confusing area of the law involving TTB changes of control and changes of proprietorship. Most importantly, as can be seen below, this information may help your company avoid disastrous consequences.
According to the Federal law, TTB alcohol permits and brewers notices are generally not transferable. Consequently, if a new proprietor takes over the alcohol business operations, the new proprietor will generally first be required to qualify with TTB before operations begin. Furthermore, the Federal Alcohol Administration Act provides that if the actual or legal control of the permittee, such as a corporation, is acquired then the basic permit shall terminate at the expiration of 30 days unless a new permit is applied for within that 30 day period. With corporations, a change of control usually occurs with a change in the ownership of the majority of the stock of the company. Other business entities such as LLCs may be similarly impacted by TTB’s change of control rules. Such rules can place unsuspecting business owners in situations where their TTB permit has terminated without them even being aware of it! Unfortunately, I have been involved in many situations in the past where exactly that has happened.
Sometimes such changes of control can happen even in the most passive of ways and the consequences can be disastrous. For example, in a recent Federal Court decision in Gulf Coast Maritime Supply, Inc. v. Alcohol and Tobacco Tax and Trade Bureau, Case # 1:16-cv-01461 (Dist. Court, D.C. Cir. 7/15/16), the Judge indicated that the TTB alcohol permittee was an S-Corporation, owned jointly by a husband and wife, which possessed TTB alcohol permits for forty-three years. However, in 2013 the husband died and his shares of stock were transferred to the wife and the stock transfer was not reported to TTB. In 2016, TTB visited the premises and according to the Judge, the “TTB informed Gulf Coast that because of the change in stock allocation in August 2013, TTB determined that [Gulf Coast]’s permits had terminated automatically by operation of law in 2013, and continued operation would be . . . potentially subject to civil or criminal penalties.” To make matters drastically worse for the company, which also possessed a TTB tobacco permit, the decision indicated that TTB also informed the industry member that the change of control resulted in the company being liable for nearly $8 million dollars in excise tobacco tax that it apparently otherwise would not have been subjected to due to how the change of control affected its TTB regulated tobacco operations. Although Gulf Coast moved for a preliminary injunction to halt the termination of its TTB permits, the judge dismissed the case and the matter is on appeal at the time of this writing.
As can be seen from the above, a failure to timely comply with TTB’s change of control and change in ownership/proprietorship requirements can result in severe consequences. In past cases, the consequences have been automatic termination of the TTB permits, ceased operations, and even significant tax consequences. In other words, the worst-case scenario. In light of the above, it would appear business entities need to be very vigilant when it comes to identifying and reporting to TTB future potential changes with respect to their business entity.