Tax Law’s Effect : Some Enophiles Prefer Green to Reds, Whites
Some American wine lovers are looking at their reds and their whites these days and wondering whether to turn them into green.
They must decide soon whether to liquidate their not-so-liquid assets. For on New Year’s Day, revelers who have gone to bed in the rosy glow of champagne toasts will awaken to the sobering reality that the maximum tax rate on appreciated property is no longer 20 percent, but 28 percent.
Many wines have indeed been appreciating assets, so the tax benefits of selling before year-end can be substantial.
Butterfield & Butterfield, a San Francisco fine arts and wine auctioneer, reports that fully one-third of the collectors who have consigned their private stocks for sale before the end of the year are doing so for tax purposes. A few wines going on the block have appreciated more than 500 percent during the past 25 years. The California collector who offered three bottles of Chateau Petrus 1961, a red Bordeaux that originally sold for about $20, realized a net capital gain of about $575 a bottle.
John Hart, owner of the Chicago Wine Co., cited high wine prices and the “advantages of getting a check dated this year” as factors prompting both individuals and estate trustees to put up their stocks for auction.
Spectacular Gains
Capital gains have been spectacular this year, although the flooding of the rare wine market has stopped or begun to slow the escalation in prices, according to Rene Rondeau, vice president of Draper & Esquin of San Francisco.
Wine sellers say the market for expensive wines is limited by most people’s reluctance to drink them. “The truth is that even rich people say they don’t have enough friends they like well enough to open a $100 bottle of wine for,” said John Hogan of John Walker & Co., a San Francisco retailer. Rather than sell, however, these well-heeled customers trade the high-priced vintages in for larger quantities of newer, cheaper wine, Hogan added.
But taxes are a factor in these deals too, since such swaps also trigger capital-gains taxes, according to the Internal Revenue Service.
Unlike Europe, where wine is freely bought and sold, “archaic” state alcoholic beverage commission regulations and unfavorable tax laws actually serve to make wine an “extremely illiquid investment, very hard to trade,” according to Roman Weil, an accounting professor at the University of Chicago Graduate School of Business.
Despite such problems as tax reform and illiquidity, some Americans are likely to think of wine as an investment, albeit a speculative one.
David Milligan, executive vice president of Seagram’s Chateau & Estate Wine Co. in New York, estimates that a third to a half of its expensive wines are sold about two years before they reach the customer. Wine futures--with payment either up front or not until delivery--reached a frenzy in 1983 when the sun smiled on the U.S. dollar and the Bordeaux vineyards simultaneously.
Futures Sales Popular
Futures on domestic wine have become popular only during the past year when California wineries were short of cash. MacArthur Liquors in Washington has held several California futures sales.
Thirty or 40 Americans are among those who have put up a minimum of $10,000 with John Armit Wine Investments Ltd. in London. The organization buys and stores Bordeaux. Within four to six years, when the wine is sufficiently aged--or when the price has risen sufficiently--customers can either take delivery or have the company sell the wine at auction. Since its founding in 1981, the average annual appreciation has ranged between 20 and 40 percent, according to director Susie De Paolis.
Taking a cue from Europeans, George Schofield, a wine-industry consultant in St. Helena, Calif., has registered what is believed to be the first wine-aging program in this country. In 1985 he raised $190,000 from 21 investors to purchase 1,800 cases of eight different 1981 California Cabernet Sauvignon premium wines. This year the program expanded to 2,000 cases of 1982 Cabernet. Each unit costs $11,000, which works out to $11.45 a bottle.
Schofield estimates that the wines he has laid down for his investors will appreciate at an average annual rate of 20 percent. Six years later, when the wine has aged for a decade, customers will have the option of taking delivery, selling the wine at market prices or accepting a guaranteed redemption price from Schofield.
Skepticism abounds.
“Theoretically wine does appreciate, but it has never been tested as a commercial investment,” said Seagram’s Milligan.
“There is no reason to expect wine prices to behave differently from other commodities,” said the University of Chicago’s Weil. “There’s always some rich guy here who figures that, if they can do it with corn, they can do it with wine. But then they find out it’s too much trouble.”
“For recent vintages, it’s sometimes cheaper to buy at retail in New York than at auction in London,” observed Orley Ashenfelter, economics professor at Princeton University and publisher of a wine newsletter. In his opinion, the California market is too thin to support wine-futures trading. About 95 percent of all California wine is drunk within five years of bottling.
Less Speculation
Yet these economic risks don’t deter the amateur wine investor who prefers to remember that 1982 Bordeaux prices more than doubled in a year and to forget the crash of 1974. Chick Cudlip, a Washington investor in Schofield’s program, is enthusiastic about aging California wines. If they appreciate steadily, he plans to sell half his inventory and take delivery of the other half, for a total cost of less than $10 a bottle.
“The California market is less speculative today; Bordeaux prices are out of control,” he said.
There’s one thing about treating wine as a commodity: Even if the investment doesn’t pan out, you can have a lot more fun taking delivery than with soybeans or pork bellies.
