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Sunday, December 24, 2017

THE INTERNAL REVENUE CODE JUMPS THE SHARK WITH THE TAX CUTS AND JOBS ACT OF 2017

Meaning of “jump the shark” - “It's reached its peak, it'll never be the same again, and from now on it's all downhill.” [Source] Or if you prefer another popular culture reference, the Code has entered the Twilight Zone.

Case in point, new Code Section 199A which provides a 20% deduction for qualified business income earned through pass-thru entities. This one new Code Section:

a. is over 22 pages long (using the pages from the bill report and print;

b. employs approximately 20 defined terms;

c. includes 26 cross-references within Section 199A;

d. includes 25 cross-references to other Code provisions;

e. includes numerous “lesser than” or “greater than” computations, some of which are nested within each other;

f. includes computations that require subtraction, addition, and multiplication;

g. includes exemption amounts, and then includes complex formulas to phase-out out those amounts at higher levels; and

h. imports an international tax concept (effectively connected income) into a provision applicable to all domestic pass-through entities.

Forgive me if some of these counts are off a bit - I was getting nauseous going through the provision so could only go through it once in counting.

I’m sure our Congressmen and women understand the gist of the deduction, but I sincerely doubt that most of them have read the language of this provision. I further doubt whether ANY of them can fully comprehend the operation of the statute from the text of the statute alone.

There are plenty of complex provisions in the Internal Revenue Code, but this one statute is really up there. Yes, I can figure it out, but I have been practicing tax law for over 35 years, and it took me quite a while to parse out and comprehend this statute. This is serious business when a law is written as to be incomprehensible to 99%+ of the population. Some aspects of this are:

1. The Rule of Law is degraded, if not obliterated. How can one be subject to the Rule of Law when the law itself is incomprehensible to most everyone?

2. How can a taxpayer be penalized for violating this law when it is incomprehensible? Is there de facto reasonable cause relief for violation?

3. Similarly, how is a typical federal District Court judge going to understand this statute in a tax dispute with the IRS?

4. How much wasted time, effort, and cost will be expended at the taxpayer and professional advisor/accountant level in regard to complying with and planning in regard to this provision?

I pity the poor programmers at Turbotax and other tax preparation software companies that will have to convert this into computer code.

If you think I am exaggerating, you can download the statutory language here and read it for yourself.

Was there really no way to provide this deduction in a much simpler, shorter, and straight-forward manner? While there are some provisions of the new law that aim to simplify the Code, at least for smaller taxpayers and businesses, provisions like this swamp that simplification effort and continue the beastly size and complexity of the Internal Revenue Code.



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