ST. HELENA — The grandest publicity event in the world of wine, the Napa Valley Wine Auction, observed its eighth and most successful resurrection last Saturday night, ending four days of vinous merriment with the stated goal of giving money to charity.
Some $465,000 in wine was sold to 474 bidders and an estimated $375,000 will be turned over to three local hospitals, a record surpassing the $340,000 of last year.
But this event isn't just the auctioning off of expensive wine. It began a week ago today with a series of wine and food events that can destroy a diet in a flash. And it didn't wind down until Sunday evening with a gala 75th birthday party for Robert Mondavi, the man who more than any other helped create the mystique of this valley.
The socializing is intended to woo the rich and unfamous, nouveau wine buyers whom the wineries hope to turn into fanatical collectors.
The success of the Napa Valley auction annually amazes those who have been here since the start, with some cynics wondering what new gimmick will be created to generate interest this year. The amazing thing is that even as the cast of characters changes, bidding rises.
Our Wine Heritage
A reason is wine quality. The Napa Valley is the closest thing this country has to wine heritage; the name itself drips with rich historical tradition and the image of greatness in fermented grape juice. The fact is that the wines made here are probably as good as the collectors think they are, inflated prices notwithstanding.
This auction is, however, not for bargain hunters. Prices paid for unreleased wine usually exceed what the wine would fetch on release. For instance, a case of 1987 Saintsbury Pinot Noir sold for $380, or more than $31 a bottle. A year from now, the wine probably will be released at about $20.
One way this kind of bidding makes a measure of sense is through tax benefits. Since this is a charity auction, buyers can claim a tax deduction on anything they paid for a lot of wine over the donor's stated "fair market value."
Take the Saintsbury Pinot Noir, for example. The winery FOB price of that wine to the trade when released will be about $130, meaning that the person who bought it for $380 can claim a tax deduction of $250 as a charitable contribution to the Napa Valley hospitals. In effect, the government subsidizes the purchase of the wine.
Knowing this, wine collectors with savvy tax attorneys buy some lots of wine at fairly reasonable prices--after taxes are calculated. Especially interesting were one-of-a-kind lots sold to wine merchants, who would turn around and sell them for what they paid, after having taken the tax benefit.
In the past, some sophisticated buyers would take what was then known in the trade as a double dip. They would buy wine at an auction such as this and take a tax deduction for their "contribution" over the fair market value of the wine. Then they would donate a portion of their wine, with its new fair market value, to another charity and wind up having paid nothing or very little out of pocket.
Not an Uncommon Practice
For example, assume a winery put a fair market value on a case of wine at $60 and a buyer paid $2,400 for it (not an uncommon example). Then the buyer could claim a tax deduction on $2,340, arguing that at least one other bidder felt the wine worthy of a price one rung below $2,400.
Then, let's say a year later he donated 10 bottles of this wine to a charity. By then, he can say, the wine has appreciated in value and he is thus giving to the new charity not wine worth $60 a case, but $2,800 a case. (Those doing this typically had to get an independent appraisal of the fair market value.)
Such a scheme used to permit some merchants to pay almost nothing for the wine yet gain a world of free publicity for being such a magnanimous bidder.
However, the tax law that went into effect on Jan. 1, 1987, changed the second half of this tax shelter, according to Dick Poladian of the Los Angeles office of Arthur Andersen & Co., a Big Eight accounting firm.
Poladian said the tax code "still allows a deduction for gifts of appreciated property . . . but the spread is now considered a tax preference item for Alternative Minimum Tax purposes." Poladian called it a "slap you on the back of the hands tax," one that requires that the donor of appreciated goods to charity do two different calculations. The higher tax is paid.
Atlanta wine merchant Frank Stone, one of the savviest of auction bidders and a long-time buyer at the Napa auction, said the new tax law has forced him to make much narrower judgments about what he can and can't buy, based on whether the purchase likely will lead to him having to pay the Alternative Minimum Tax.
Stone said that prospect "takes away any incentive" he might have had for buying certain lots of wine.