Publication Date - July 2006

NOTE: This guide is current through the publication date. Since changes may have occurred after the publication date that would affect the accuracy of this document, no guarantees are made concerning the technical accuracy after the publication date.

Chapter Five / Table of Contents / Chapter Seven
Tax Code, Regulations and Official Guidance Search

Chapter Six - Raisin Grapes

• Overview of Industry
• Growing Production Cycle for a Mature Vineyard
• Development of a New Vineyard
• Mature Productive Operating Vineyard
• Method of Accounting
• Rancher or Farmer
• Gross Income
• Expenses and Depreciation
• Related Party Transactions
• Exhibit A: Cites for Code, Regulations, Revenue Rulings and Court Cases

Gross Income

Raisin Receipts
Wide fluctuations in reported receipts seen in the Spread Analysis may be explained by factors that may or may not be in the grower’s control. The grower may be buying and selling ranches, he may be pulling out vines to plant new ones, or he may have lost a portion of his crop receipts to rain, etc.. The agent should be concerned about grower controllable decisions that concern income tax reporting. The agent must identify the packer and the business arrangement between the grower and the packer. Most growers only deliver product to one packer.

Audit Techniques:

1. In the Initial Document Request (IDR) specifically ask for all grower-packer contracts and for the “Grower Payment Reports” for the year under examination. Consider a “frontload approach.” Have the documents mailed to you prior to the first audit meeting. These documents are discussed later in this subsection.
2. A pre-audit indicator that the grower is deferring raisin receipts is a packer listed on Schedule B, Form 1040. Rather than an outright loan by grower to the packer, this interest is being earned on crop proceeds being left with the packer. The terms vary from packer to packer, but a standard arrangement is that the packer will pay prime rate, simple interest, no compounding, and interest beginning ten days after final delivery. The interest terms are set by the packer and are not part of any written agreement.
3. If delivery and payment are based on a verbal understanding with nothing in writing, it appears that the RBA Master Agreement is controlling if the farmer is an RBA grower. Thus, regardless of when the grower received payment from the packer, the amount based on the preliminary free tonnage percentage would be constructively received in the harvest year. This is when the price is fixed and determinable, and the grower has the unrestricted right to this amount. The amount based on the final free tonnage percentage is not established until the year following the harvest year. Therefore, that portion is not constructively received until the year following the harvest year.
4. If the delivery and payment are based on an individual written agreement, inspect the agreement. If it was executed after delivery, it appears the grower would have no bargaining power for payment terms because he has already performed. If the contract is executed prior to the first delivery to the packer and includes specific payment arrangements that state that grower cannot receive money prior to a certain date, and that date is in the following year, this appears to be a valid, bona fide deferred contract for tax purposes.
   Whereas, a deferred payment contract, with the specific language “I will advise you when I want payment.” probably is not a valid, deferred contract for tax purposes because the grower controls when he receives his payment and can readily ask for it anytime, including in the harvest year . It is not quite settled whether under a valid, bona fide deferred contract situation the grower can defer the receipts into years following the year following the harvest year. Constructive receipt and deferred payment contracts are covered under IRC § 451.
5. Inspect all “Grower Payment Reports,” also known as “Settlement Statements,” issued by the packer. They include extensive information regarding deliveries, weights, bonuses earned, reductions for advances, assessments, shaking, hauling, etc. Potential issues are whether the grower is properly treating all advances as taxable in the year received, and whether the grower is both reporting a net proceeds amount for tax purposes and also duplicating the expense elsewhere on the Schedule F. Bank records should be analyzed for any unexplained deposits.

Patronage Dividends
These are not dividends in the ordinary sense (i.e. reportable on Schedule F, not Schedule B). They are received by the grower from the Cooperative. They are distributions of funds from the Cooperative to the member. They are always taxable in the year received and the Cooperative is required to issue Forms 1099-PATR. The Cooperative does not allow the growers to enter into any deferred payment contracts for patronage dividends.

RAC Payments
These are progress payments made by the RAC from individual reserve pools by crop year and grape variety. They are always taxable in the year received. The RAC does issue Forms 1099. The RAC does not allow the growers to enter into any deferred payment contracts for these RAC payments.

Audit Techniques

1. Inspect RAC check stubs for running totals for each reserve pool.
2. If the above is not available, consider contacting the local USDA field office to confirm the amounts paid to the grower.