Winemakers have been arguing for many years that there's special value in wines made from grapes grown in Napa Valley, Russian River Valley and other prized winegrowing regions to justify bottle prices.
Wineries could reap a big harvest of tangible income tax savings by amortizing that intangible value of place under Section 197 of the Internal Revenue Code, according to Greg Scott, a prominent wine industry accountant and partner with PricewaterhouseCoopers LLP in San Francisco.
"I have contended since the mid '90s that this worked," Mr. Scott said, noting that the IRS hasn't provided public or private clarification since then. "It is great to finally get affirmation."
Last week, the IRS issued a chief counsel memorandum that the "right" to use such an American Viticultural Area name when selling grapes grown there is an amortizable intangible that can be allocated to a vineyard purchase price.
"For Section 197 purposes, the right to use an AVA designation is a license, permit or other right granted by a government unit and is not an interest in land," the memo said.
In 1993, Congress approved Section 197, which includes a 15-year amortization of goodwill and other "intangibles" such as trade names.
For example, $300 million worth of North Coast vineyards purchased 10 years ago would result in a $200,000 adjustment on the 2010 tax return, based on 15-year amortization of $20,000 a year, or 20 percent of the land value. For an individual, that could be an $84,000 cash saving, he noted.
The accounting community has argued that AVAs are trade names and, thus, are Section 197 intangible assets, rather than excluded interests in land such as easements, riparian and mineral rights and zoning variances.
Appraisals and valuations often don't pull out the value of the winegrowing region from the land value, according to Mr. Scott. The residual approach commonly is used for identifying depreciable assets such as vines, trellises and buildings, assigning the rest of the value to land.
So a vineyard owner that purchased the property after Aug. 10, 1993, and didn't segregate AVA value from the land value can apply for an automatic change in method of accounting to be able to deduct all the accumulated amortization.
The IRS memo noted that valuing an appellation can be "factually difficult" because of the shared use of the trade name by vineyard owners in the same AVA. Thus, recognizing such an intangible would be allowed "only if there was a factual showing of some clear premium, such as a recognized and marketable trade name to a taxpayer's vineyard," the memo said.
Mr. Scott has been establishing AVA value via the foregone-royalty approach, which is commonly used for valuing trade names. Comparables for the premium in pricing that comes from a wine made from grapes grown in one appellation versus another is gleaned from a public source such as a royalty price book.
Often, careful digging for trade name value in land value will unearth previously unidentified depreciable assets such as ponds or drainage ditches that can be included into the deduction, according to Mr. Scott.