Internal Revenue Code Section 199

Recently enacted Internal Revenue Code Section 199, which provides a tax break for the part of an entity's income related goods producing activities is one of the most complex, ill conceived sections of the tax code ever created. Here's how RIA, one of the professional tax publishers, opens up its description of the section in a marketing newsletter directed at tax professionals:

The Code Sec. 199 domestic production activities deduction was enacted to help offset the repeal of the extraterritorial income exclusion, "reduce the tax burden on domestic manufacturers, and make investments in domestic manufacturing facilities more attractive." (Committee Reports to the American Jobs Creation Act of 2004 (P.L. 108-357, 10/22/2004)). It certainly will yield tax breaks for the many businesses, large and small, that "manufacture, produce, extract or grow" a host of tangible products entirely or in significant part within the U.S. It also will be a boon for domestic film-makers, those in the construction business in the U.S., and engineering and architectural firms providing services for U.S. construction products. . . . The Code Sec. 199 deduction, which is effective for tax years beginning after 2004, poses a formidable challenge for tax professionals and their clients. It creates a new vocabulary of detailed and difficult tax concepts, rules, conditions, exceptions, exceptions to the exceptions, de minimis rules, and safe harbors. It also requires many businesses to put new accounting systems in place to distinguish between qualifying and nonqualifying activities and the deductions relating to each. What is more, the rules governing the Code Sec. 199 deduction are still a work in progress. Early in 2005, IRS's initial interpretation of the sparse statutory language and Committee Reports' description was issued in Notice 2005-14, a 100-page document that generated a flood of questions, suggestions, and criticisms. In late-Oct., 2005, IRS followed up with 136 pages of proposed reliance regs and an 88-page preamble that significantly altered some of the rules in Notice 2005-14 and expanded and elaborated on other rules. . . . In an effort to make it easier to understand the Code Sec. 199 rules, [RIA's] Tax Planning & Practice Guide avoids the use of confusing acronyms carried in IRS's official guidance, and adopts a simplified approach to the complex terminology of Code Sec. 199.

This, of course, comes from an administration and Republican controlled Congress that purports to want to simplify the tax code. It sounds like their strategy is to make the Code so impossibly complex that there will be support for reform. Call me naiive, but I don't think that trying to make the system better by making it worse is the best strategy.