Tuesday, February 26, 2013

Tax Break for Dairy Cows, Minks, and Some Other Livestock

The Internal Revenue Code taxes ordinary income at ~40% and capital gains at ~20%.  A taxpayer's ideal business would be one where all gains are taxed as capital gains, but all losses are ordinary losses that can reduce other ordinary income. 
Livestock (a mink).

Internal Revenue Code section 1231(b)(3) provides this best of both worlds, in that gains from selling certain livestock are capital gains, while losses from selling the livestock are ordinary losses.  The rule applies to any livestock, regardless of age, held by the taxpayer for draft, breeding, dairy, or sporting purposes.  But not poultry.


The Treasury Regulations helpfully clarified that 'livestock' has a broad meaning and "includes cattle, hogs, horses, mules, donkeys, sheep, goats, fur-bearing animals, and other mammals. However, it does not include poultry, chickens, turkeys, pigeons, geese, other birds, fish, frogs, reptiles, etc." 

In the landmark case of Sykes (1972), the Tax Court held that breeder bees are not 'livestock,' because the Treasury Regulations impliedly excluded all lower forms of life. 

Not livestock.
Other business animals used for other business purposes do not qualify under section 1231(b)(3), though there are some other tax benefits in section 1231 that might apply to circus elephants, organ-grinders' monkeys, magicians' rabbits, and pirates' parrots.

The taxpayer must own the cattle and horses for over two years and own the other livestock for over one year.

An incredibly large amount of litigation has occurred over whether particular animals are used for draft, breeding, dairy, or sporting purposes.  For example, the courts have decided that racehorses are acceptable, and cows purchased for breeding who turned out to be sterile are okay, but pigs sold before their first pregnancy do not count.

Saturday, February 23, 2013

Tax Break for Making TV Shows and Movies (But Not Porn)

At the 2012 Democratic National Convention, actress Eva Longoria called for higher taxes the rich: "The Eva Longoria who worked at Wendy's flipping burgers—she needed a tax break. But the Eva Longoria who works on movie sets does not."

Fortunately for the Eva Longoria who works on movie sets, Internal Revenue Code section 181 allows each movie to immediately deduct up to $15 million of production costs.  Even more fortunately for the Eva Longoria who stars in Desperate Housewives, each episode of a TV show counts separately, which means a $15 million deduction is allowed for each episode. 

(For some reason, only the first 44 episodes of a TV show are allowed the immediate deduction.  The Seinfield episode involving the lost wallet would not have qualified.)

Without the special tax break, movie and TV productions would be be required to deduct their costs over a long period of time and possibly 15 years.  The tax break greatly accelerates the movie producers' tax savings, at the government's expense.

One requirement for the tax break is that 75% of the total salaries for the movie or TV episode be paid for work in the United States.  The only other major requirement is that production does not need to keep "records under section 2257 of title 18," a euphemism for porn, which is unfortunate for the Eva Longoria who works on porn sets. 

Thursday, February 21, 2013

Tax Break for Whale Hunting

Internal Revenue Code section 170(n) allows certain whaling captains to deduct up to $10,000 a year for their expenses in whale hunting activities.  The $10,000 deduction is treated as a charitable contribution.   The provision was added by the American Jobs Creation Act of 2004, as one of the many new tax provisions that promote both jobs and charity.

Unlike most other "charitable" contributions, the deduction is allowed even if the expenses are not paid directly to any charity.  The expenses can include food and weapons for the crew, as well as costs incurred in storing and distributing the whale meat. 

The Alaska Eskimo Whaling Commission must give the whaling captain the responsibility of carrying out sanctioned whaling activities, so not everyone should go out and hunt whales all at once.

Section 170(n) is not the only instance where "whaling" appears in the Internal Revenue Code.  Section 6421 provides that gasoline is not subject to excise taxes (around 20 cents per gallon) if it is used for "off-highway business use."  Off-highway business use does not include the use of gasoline in boats, but it does include the use of gasoline by fisheries and whaling businesses.  As a result, whaling ships can save some money when they fill up at the gas station.

The lucrative tax breaks above should be of special interest to those interested in dating whaling captains

Tuesday, February 19, 2013

Tax Break for Taking a Cruise

In 1976, Congress went on an anti-boondoggle rampage and greatly limited tax deductions for attending conventions.  It also banned all tax deductions for going on a cruise.

But in the appropriately-named Surface Transportation Assistance Act of 1982, Congress reinstated a tax deduction for going on certain American cruises for business purposes.  Hawaiian Senator Spark Matsunaga explained that it would "encourage the building of our merchant marine fleet," so that the cruise liners could ferry troops and help defend America against foreign invasion. 

Internal Revenue Code section 274(h)(2) provides that the costs of a cruise are tax-deductible if:
(1) the meetings on the cruise are directly related to the taxpayer's business,
(2) the cruise ship is a vessel registered in the United States,
(3)  all ports of call of the ship are in the United States or its possessions, and
(4) the tax return contains a statement, signed by the cruise meeting organizer, describing what the taxpayer did on each day of the cruise.

The Carnival Triumph, for example, would not qualify because it visited Mexico and because it is registered in the Bahamas.  But thanks to the support of Congress, there is now a cottage industry of Alaskan, Hawaiian, and Puerto Rican cruise seminars for doctors and dentists, who finally obtain the rare opportunity to learn about the latest developments in their field.

Wednesday, February 13, 2013

Tax Break for Clown Animals and Performers Traveling by Air

Internal Revenue Code section 4261 imposes a 7.5% excise tax on the cost of any person traveling by air.  In addition, each travel segment is subject to a tax of $3 to $17.

But Treasury Regulation 49.4261-8(d) provides that the excise taxes do not apply to the air transportation of circus or show performers, laborers, animals, equipment, and so on, as long as they do not receive any separate tickets for regular passenger flights (such as if the circus is traveling as a group).

The circus exemption is not authorized by the statute and appears to be made up by the Treasury Department as one of several examples of air travel where no "persons" are being transported.  For example, Treasury Regulation 49.4261-8(e) provides that the taxes do not apply to the transportation of corpses, but they apply to anyone accompanying the corpse.

While one could reasonably claim that corpses and circus animals are not "persons," circus performers and laborers generally are persons (even if some clowns think they are dead on the inside).  There is no clue why circus performers are so broadly exempt from the air transportation taxes. 

Monday, February 11, 2013

Tax Break for Migrant Farm Workers from Foreign Countries

Not mentioned in Chrysler's God Made a Farmer [youtube] commercial are the various tax breaks and farm subsidies for farmers, one of which is a little known tax break for hiring foreign farm workers.

All employees in the United States have to pay the 6.2% Social Security Tax, for which the employer also chips in another 6.2%, on up to $114,000 of wages, unless a specific exception is available.

Internal Revenue Code section 3121(b)(1) provides that the Social Security Tax does not apply to foreign migrant farm workers.  Specifically, the Social Security Tax does not apply to any "service performed by foreign agricultural workers lawfully admitted to the United States from the Bahamas, Jamaica, and the other British West Indies, or from any other foreign country or possession thereof, on a temporary basis to perform agricultural labor."

In contrast, temporary foreign employees in other industries, such as retail and manufacturing, generally have to pay the Social Security Tax.  American farm workers have to pay the Social Security Tax if they earn more than $150 in wages a year.  This $150 limit has been around since 1956, not adjusted for inflation.

The exemption for foreign migrant farm workers was not very controversial in the 1950s, when many other American farm workers were exempt from the Social Security Tax (at the time, a total of 4% on the first $3,600 of wages).  Cotton ginning, for example, was entirely exempt in 1954.  But with inflation and Social Security's expansion to cover more American agricultural workers, the special tax break for foreign migrant farm workers appears increasingly out of place. 

Thursday, February 7, 2013

Tax Break for Beer and Liquor Used by Foreign Embassies

The Internal Revenue Code imposes significant excise taxes on beer ($17 per barrel of 31 gallons), wine ($1 to $3 per gallon), and distilled spirits ($13.50 per proof gallon of 50% alcohol) made in the United States. 
The taxes also apply to alcohol imported into the United States.

Fortunately for hard-partying United Nations officials, the excise taxes do not apply to any American-made alcohol consumed by foreign governments, public international organizations, and their representatives, for their official and family use. (sections 5053(g), 5066, and 5362(e)).

A public international organization would be an entity like the World Bank, the World Health Organization, or INTERPOL.

This rule was introduced gradually, in 1971 for distilled spirits, in 1980 for wine, and in 1993 for beer, perhaps revealing the alcohol preferences of foreign officials. 
 
The stated rationale for the tax-free rule was that foreign embassies and organizations were able to import beer and other alcohol for use in the United States without having to pay any US excise taxes.  American-made beer and other alcohol, on the other hand, were subject to the US excise taxes and were suffering a competitive disadvantage in the lucrative Foreign Embassies market segment.

Congress recognized a serious problem when it saw one, but it chose not to solve it by taxing embassy-imported beer.  Maybe Congress was concerned that ambassadors would simply smuggle bootleg alcohol inside their diplomatic pouches.

Tuesday, February 5, 2013

Tax Break for Tobacco Manufacturers Giving Cigarettes and Cigars to Their Own Employees

The Internal Revenue Code contains several excise taxes on manufacturers and importers of cigarettes and cigars:
1. 5 cents for each cigarette or small cigar,
2. up to 40 cents for each large cigar,
3. $1.51 per pound of snuff, and so on.

The excise tax adds up to around $10 per carton of 200 cigarettes.

Fortunately for tobacco manufacturers, the excise taxes do not apply to tobacco products that a manufacturer gives to its own employees for use or consumption.  In addition to the ample smoke breaks, this is one of the many perks of working in the tobacco industry.

The exemption was first created in 1924, but only up to 21 cigars or cigarettes per week were tax-free for each employee at the time.  Coincidentally, 1924 was also the year that Congress tried and failed to ban child labor with an amendment to the Constitution

The 21-cigarettes cap was lifted in 1954 in order to modernize the law.

The excise tax exemption does not apply to employees of cigarette importers and cigar importers.

The exemption is oddly specific to the tobacco industry and does not appear anywhere else in the Internal Revenue Code.  A refinery would still have to pay excise taxes on gasoline that the refinery employees siphon off for their own use.


Friday, February 1, 2013

Tax Credit for Hiring Teenagers for the Summer

Internal Revenue Code section 51 provides up to $2,400 in tax credits to employers for hiring certain new employees.  This "work opportunity" tax credit is calculated as 40% of up to $6,000 of the new employee's wages.  The credit expires at the end of 2013, though it has been extended several times in the past.

The credit applies to employees who are members of certain disadvantaged targeted groups, like food stamp recipients, ex-convicts, unemployed or disabled veterans, child welfare recipients, and... low-income 16 and 17 year old summer workers.

Technically the credit applies to a "qualified summer youth employee," who:
1) works for the employer between May 1 and September 15,
2) is either 16- or 17-years-old on the first day of the job,
3) has not worked for the employer before, and
4) is certified by State employment agencies as living in certain low-income communities.

Only $3,000 of the teenager's wages during the summer count toward the 40% credit.  When the credit was first introduced in 1982, it was a much more generous 85% of wages paid to teenage summer employees.

While amusement parks and other retailers could definitely use free money for hiring teenage employees, it is not clear why Congress chose to apply the credit only to summer jobs for 16- and 17-year-olds.  A better government policy may be to encourage permanent jobs for older teenagers, who are more likely to be supporting their own family and actually need a full-time job year-round.