501(c)(6): This Should Prove Interesting....

Most people are familiar with Section 501(c) of the tax law, which lists a number of kinds of organizations that are exempt from income tax.  Most recognized charities are exempt under Section 501(c)(3), and of course social welfare organizations - the subject of the IRS "scandal" involving conservative political groups - are exempt under Section 501(c)(4).  Less well known is the exemption under Section 501(c)(6), which covers:

(6) Business leagues, chambers of commerce, real-estate boards, boards of trade, or professional football leagues (whether or not administering a pension fund for football players), not organized for profit and no part of the net earnings of which inures to the benefit of any private shareholder or individual.

This is the provision which results in the National Football League being exempt from federal income tax.  However, it's reach is far beyond the NFL.

Yesterday, Jason Chaffetz and Elijah Cummings, the chairman and ranking member of the House Oversight Committee, sent out letters to a number of sports organizations regarding their 501(c)(6) exemptions, including the National Football League, the National Hockey Leagem the US Tennis Association, the Women Tennis Association (WTA) Tour, the Association of Tennis Professionals (ATP) Tour, the National Lacrosse League, the PGA, the PGA Tour, the LPGA and the Professional Rodeo Cowboy's Association.  They specifically asked for "an analysis of what your organization's 2014 tax liability would be, if your organization were not exempt under 501(c)(6)."

I can't wait to see their answers.

A link to the letter to the NFL is here.

BTW, the NBA, Major League Baseball and Major League Soccer are not tax exempt organizations.

For more on the 501(c)(6) exemption, see this.

Sounds Like Retailers Have Taken Some Creative Tax Positions

The IRS came out with a directive last week on the Section 199 deduction.  Here's a link.  Section 199 provides a special deduction for ""Qualified Domestic Production Activities" equal to 9% of "Qualified Production Activities Income."  If your business is the "manufacture, production, growth or extraction" of tangible personal property (which includes computer software and sound recordings), you are eligible for this deduction.  Income from producing films, electricity, natural gas or potable water and from construction activities also qualifies for the deduction.

The purpose of the deduction is quite simple: to provide a lower effective tax rate on income from producing goods as distinct from income from services.  I won't go into a explication of the sordid history of this provision, except to say that its rationale was to reverse the migration of manufacturing activities from the United States to foreign countries.

Interestingly, architects and engineers who provide services with respect to the construction of property also get the deduction.  I guess the lawyers who draw up the construction contracts didn't have the heft to get the same benefit.  Of course, workers don't get the benefit, even though they are actually the ones doing the "producing."

Anyway, the IRS apparently saw a need to issue a notice to its auditors regarding what constitutes "production" for purposes of this rule.  The notice is a list of activities that are not production.  Apparently, some people were being quite creative:

(1) cutting blank keys to a customer’s specification;

(2) mixing base paint and a paint coloring agent;

(3) applying garnishments to cake that is not baked where sold;

(4) applying gas to agricultural products to slow or expedite fruit ripening;

(5) storing agricultural products in a controlled environment to extend shelf life; and

(6) maintaining plants and seedlings. 

Yes, some hardware store (can you guess which?) was taking the position that duplicating a key and adding color to a base paint was "production."  Little did I know that Congress wanted to encourage these kinds of activities by giving them a reduced tax rate!

Sometimes I hate the fact that I'm a tax lawyer, because so many of us are coming up with this sort of shit.

Tax Reform?

You know I'm starting to think this might happen.  The following update from Bloomberg BNA just crossed my desk:

"Members of the Senate Finance Committee's working group on overhauling international taxes say they are “making good progress,” though tax experts at a March 17 committee hearing on the issue said that much work still needs to be done.

Speaking at the hearing, Sens. Charles E. Schumer(D-N.Y.) and Rob Portman (R-Ohio), who co-chair the international-issues working group, sounded positive notes on their efforts to reach a bipartisan agreement.“We’ve reached a good deal of consensus here,” Portman said.

Witnesses ran down a litany of possible changes to international taxes meant to curb base erosion and profit shifting. Pamela Olson, U.S. deputy tax leader and Washington National Tax Services practice leader at PricewaterhouseCoopers LLP, said that the best way to stop BEPS is a lower corporate rate, though tax law should still contain anti-base erosion features."

I love this last quote by the PWC person.  Hey, if we cut the corporate tax rate to zero, there won't be any need for tax avoidance!

I guess I'm gonna have to start posting on this stuff again.