IRS Sideshow: A Few Interesting Tax Rules

Stan Rose, Managing Director, Tax Practice
May 2013

No, the purpose of this article is not to focus on the ongoing IRS debacle related to scrutiny of conservative tax-exempt status applications.  That is much too low-hanging fruit to be of any challenge.  This article instead is a light-hearted look at some odd taxes and tax breaks that have caught this author’s eye – something fitting for an April Fools’ Day article, if tax accountants like me were not otherwise occupied at that time.  Arguably, these rules make some sense, when one considers that tax laws often are created to raise revenue for very specific programs, or to accomplish certain social goals.  But still . . . it seems like somebody had way too much time on his or her hands to come up with some of these things.  Here goes . . .

  • Highway use tires are subject to a tax based on load capacity.  The tax is 4.725 cents for each 10 pounds of capacity exceeding 3,500.  However, tires also “designed for steering” are subject to tax of double that amount, or 9.4 cents.  (Observation:  Just getting on the road will cost you, but if you care to in any way influence where you go . . . by steering . . . well, that’ll cost you more.)
  • There is a credit (tax reduction) provided for certain alternative fuel mixtures that causes rates to decrease for mixes with higher alcohol content (proof).  There also is a tax on wine, but in this case the rates increase as proof increases.  The tax structure apparently looks more favorably on alcohol intended for combustion than alcohol intended for consumption.  (It is well-known that ethanol is ruining our weed-wackers, but apparently running them on merlot is cost-prohibitive, so we’ll just stick with the devil we know.)
  • Section 4161 of the Internal Revenue Code imposes a special tax on arrows.  An exception to the tax is provided for wooden arrows.  An exception to the exception is provided (yes, Congress often employs an impressive array of double negatives) that reverts the status to taxable if the wooden arrow is laminated or “enhanced” (whatever that means).  There also is a tax on bows, but only for those requiring 30 pounds or more of draw strength.  (Observation:  Unless you or your sporting goods retailer carved the bow and arrow yourself from a willow branch and assembled it with a shoestring, you likely will owe this tax.) In all seriousness, this clearly was intended to impose the tax on “real” bows and arrows, but not on toys.  But you will never read something that simple in the Internal Revenue Code because that is not how Congress communicates with us.  It instead writes many paragraphs designed to narrow the language such that it can be interpreted in only one way – apparently trying to eliminate the possibility its intentions can be circumvented.  That can backfire, though, as I suspect it did with the next one.
  • The so-called “Black Liquor Credit” was created to allow a tax credit for parties creating or using alternative fuel.  Rather than pinning the qualification on intentions (which of course would be difficult to do), an elaborate set of rules regarding the chemistry of the substance was provided.  Some large paper companies realized that some biomass byproduct they already were burning for fuel would meet the chemical criteria if a very small amount (around one part per thousand) of diesel fuel were added to the byproduct before burning.  It seemed too good to be true, but the IRS Chief Counsel’s office (in Memorandum 200941011) agreed the proposed mix qualified, although complaining that “the diesel fuel is added only to support the alternative fuel mixture credit: otherwise, there is no practical reason to add the diesel fuel.”  The resulting benefit is a so-called “refundable” credit, meaning it can exceed the taxes it is designed to refund, resulting in net payments from the government.  This specific type of credit was short-lived, but it is estimated as much as $6 billion was paid out first – all well within the letter of the law, but much of it completely frustrating the spirit of the law.  (This strikes me as the textbook definition of a loophole.  I suspect at some point Congress realized its social engineering efforts might have been well served by hiring a college engineering major to take a quick look at the chemistry language in the rules before finalizing them.)
  • In IRS Publication 529, the IRS points out that “you cannot deduct the cost of a wristwatch, even if there is a job requirement that you know the correct time to properly perform your duties.”  (Somebody somewhere tried that, didn’t they?)
  • Fishing tackle boxes are subject to a tax of 3%.  Other fishing gear is subject to a tax of 10%.  But you are off the hook if you have the funds to buy some really nice equipment, as the tax on rods cannot exceed $10. Until altered in 1965, this tax also applied to snow toboggans, but only if the length exceeded 60 inches.
  • 2012 Form 1040EZ comes with 46 pages of instructions.  46!  And could they find room in there to tuck a copy of the one-page form itself?  No, even though many of the pages are nearly blank.  One of the more helpful instructions, however, notes “This booklet does not contain tax forms.”  (Thanks, guys; you’ve been a big help.  I guess I’ll just draw my own on one of these blank pages.)
  • In Revenue Ruling 62-210, the IRS ruled that the cost of buying a clarinet and lessons were deductible if recommended by a dentist.  (Yes, sir . . . and I deducted the cost of that new Harley because it helps dry my hair.)
  • Number of pages in the 1913 U.S. tax law: Estimated at 27. Number of pages in 2013 Internal Revenue Code:  A somewhat more robust 5,621.  (This does not count Treasury Regulations, Rulings, Procedures, and case law.) Source: CCH

In all seriousness, the sheer volume of the laws is staggering, and some of the laws are “interesting.”  Some of the laws were created merely to allow reductions in other categories of tax, or simply raise more revenue.  Other taxes are narrow and unique, but they were designed to fund related programs.  Many rules, though, are designed to influence our behavior, as Congress understands money is a powerful motivator.  For instance, it has encouraged home ownership by allowing deductions for mortgage interest and real estate tax.  It has encouraged charitable contributions by allowing deductions to those charities.  For these reasons, I find it hard to believe a true flat tax will ever be employed in this country, even though it could remove many of these seemingly goofy rules.  While it may be good on some levels, a flat tax would remove or weaken Congressional “encouragement” over some of our actions, and relegate the tax laws to merely raising revenue.  Proponents of flat taxes either do not recognize or approve of the government using the tax laws to accomplish social goals in addition to raising revenue.  I am not advocating either approach, but will merely point out that as long as the laws are used for both purposes, we can expect to see some unusual tax laws on the books, and it is our prerogative to laugh (or cry) at them.  I hope you have enjoyed reading a few of them.

If you have any questions, please contact Stan Rose.

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