Direct mail operator fails to qualify for “Domestic Production Activity Deduction.” One of the sillier parts of the tax law is the 9% deduction for nothing given to “producers” of manufactured, constructed, raised or mined property. If all you do is manufacture, you get 9% off the top of your taxable income under Section 199.
In a modern interconnected economy, distinguishing between “manufacturing” and other activities is silly. The law is made more silly because it has special interest provisions allowing some architects and engineers to take the deduction. Sure you need them for a construction project, but just try getting a building up without lawyers and accountants, too.
The law’s unwise distinction between “production” activities and other activities encourages taxpayers to try to qualify, and forces the courts to try to draw distinctions. That happened yesterday when the Tax Court looked at a direct mail operator’s Section 199 deduction. From the Tax Court opinion:
During 2005, 2006, and 2007, ADVO distributed direct mail advertising in the United States. Direct mail advertisers such as ADVO distribute advertising material through the U.S. Postal Service (USPS) to residential recipients, who are the targeted potential customers for the products and services sold by ADVO’s clients, the advertisers. The advertising material can be either “solo direct mail” or “cooperative direct mail”. For solo direct mail, the printed advertising material of a single advertiser is delivered in a stand-alone envelope or as a postcard to a residential recipient. For cooperative direct mail, also known as a shared mail package, the printed advertising material for several different advertisers is consolidated into a single delivery mechanism (such as an envelope or sleeve) and delivered as a single unit to residential recipients.
The court had to go through an elaborate analysis of whether ADVO was a “manufacturer.” Judge Wherry concluded:
After careful review of all of the aforementioned factors in the light of the specific facts and circumstances of this case, we find that ADVO did not have the benefits and burdens of ownership while the advertising material was printed.
This implies ADVO was a “contract manufacturer,” and that its customers might have qualified. It also implies that if ADVO had structured its paperwork differently, it might have won. If this deduction is repealed in return for lower rates for everyone, we’ll all win.
Cite: ADVO, Inc. and Subsidiaries, 141 T.C. No. 9
Related: TREASURY ISSUES ‘PRODUCTION DEDUCTION’ PROPOSED REGULATIONS and LINK TO SECTION 199 POWERPOINT SLIDES
Iowa announces business property credit applications open. From a Department of Revenue Press Release:
Applications for credit against 2013 property tax assessments must be received by the county or city assessor by January 15, 2014. The actual amount of credit each property unit will receive depends in part upon the total value of all property units and the average consolidated rates in each unit. The credit calculation is designed to spend ninety-eight percent of the amount appropriated by the Legislature to the Business Property Tax Credit Fund. For the first year of the credit $50 million was appropriated to the Fund. The Legislative Services Agency has estimated that the maximum first year credit amount will be approximately $523.
It applies to “certain commercial, industrial, and railroad properties. More information here.
Careful fiscal stewardship. A judge awarded $7 million in attorney fees for the legal team that forced Des Moines to refund $40 million in illegally-collected taxes. The city fought the refund to the supreme court, so they incurred hefty legal fees on top of those they are paying for the plaintiffs. Well done, Des Moines! It could have been worse, as the attorneys requested twice the amount — and some attorneys in the story linked above think they may get it on appeal.
It will be interesting to see whether this is an issue in next month’s city elections.
Andrew Lundeen, Income Taxes Account for the Largest Share of Federal Revenue (Tax Policy Blog):
Paul Neiffer, 180 Months Means 180 Months!:
In Estate of Helen Trombetta vs. Commissioner, the Tax Court essentially ruled creating a grantor trust with retained interests having a term of 180 months, you better make sure you live for at least 181 months if you want to save on estate taxes.
Hang in there, in other words.
Jason Dinesen, Insolvency and Canceled Debt: Make Sure You Can Prove It! You really have to be tapped out to exclude debt-cancellation income from taxes.
TaxProf, The IRS Scandal, Day 169
Christopher Bergin, Loving You Is Easy (Is It?) (Tax Analysts Blog). He unwisely thinks IRS regulation of tax preparers will do more good than harm.
Oh, boy. New Comprehensive Tax Reform Plan from Citizens for Tax Justice (Tax Justice Blog)
Jana Luttenegger, Estate Planning Awareness Week, Oct 20-26 (Davis Brown Tax Law Blog)
Kay Bell, Obamacare to blame for the 2014 tax filing season delay?
Jack Townsend, Switzerland as Club Fed for Swiss Enablers of U.S. Tax Crimes Given the alternatives, confinement to Switzerland isn’t the worst thing that could happen.
Quotable. David Henderson:
By preventing insurance companies from pricing for pre-existing conditions, Obama has almost destroyed the market for individual insurance. He has taken one of the few parts of the health care that worked pretty well–the market for individual insurance–and badly wounded it. Unless this part of ObamaCare is repealed, we will still have a mess on our hands.
Sadly, that magical thinking provision will be the hardest to undo.
Catch your Friday Buzz from Robert D. Flach!
TaxGrrrl, Vatican Suspends ‘Bishop Of Bling’ Over $40 Million Home Renovation. How? “In Germany, churches are largely funded by taxes – there is no direct prohibition between mixing Church and State as there is in the United States.”
News from the Profession: McGladrey Tax Associate Opts for Pedantry in His Farewell Email (Going Concern)
My brain made me do it. Former football star says brain injury spurred tax evasion. WFTV.com reports:
That former football star, Freddie Mitchell, hoped an Orlando federal judge would show him mercy Tuesday.
Mitchell, a retired Philadelphia Eagles wide receiver, was convicted in an elaborate tax fraud scheme in which he cheated the government out of millions of dollars.
AccountingWeb.com reports that Mr. Mitchell pleaded guilty to help recruit an NBA player for whom a co-conspirator claimed false refunds, which Mr. Mitchell claimed a share. He allegedly claimed over $2 million in other false refunds through an LLC.
So the brain was damaged enough to commit crime, but not so much that it kept him from a drawn-out plan to defraud people and to use an LLC to do it. It’s funny how nobody ever blames brain injuries for, say, giving their life savings to charity.