In Uncategorized on 10/24/2013 at 17:03

Sec. 199’s largesse to producers, manufacturers, extractors and growers who do their several things in the USA gets a thorough going-over from that formerly-whimsical judge, Judge Wherry (apparently duly chastened by the acerbic remarks of Judge Posner in the Seventh Circuit; see my blogpost “There Goes The Neighborhood”, 9/3/13, for details).

The taxpayer is ADVO Inc. & Subsidiaries, 141 T. C. 9, filed 10/24/13. ADVO is a junk mailer, who solicits businesses for advertising, creates (or takes the businesses’ own) advertising, fiddles with it some, and sends it to contract printers, gets it back, stuffs it in packages, and drops it on the USPS, who in turn drops it on you.

If you want to learn a lot more about computer-generated advertising, web-offset printing,  and how junk mail is packaged and winds up in your trashbarrel (with a side trip to your mailbox) than you ever wanted to know, read Judge Wherry’s guide.

The bottom line, of course, is who gets the Section 199 3% tax break. And that depends upon who owns the thing produced, manufactured, grown or extracted. And that depends upon who has the benefits and burdens that accompany ownership, whatever the papers say.

And that in turn depends upon Treasury guidance, IRS preambles, regulations and Mayo deference vs. Skidmore deference. You remember Mayo deference right now is the top: regulations made pursuant to Congressional statutory authorization directed to the proper twig on the Executive Branch. Skidmore deference (citation omitted, but Judge Wherry has much to say about it) is the lowest. If Mayo deference is the equivalent of “Aye aye, sir” and salute the quarterdeck, then Skidmore is the equivalent of “yeah, ok”, ranking just above “meh”.

So there follows the faceoff between the 263A benefits and burdens test, which IRS discountenances here and Judge Wherry agrees, and the stricter Section 199 test. You remember Section 263A requires capitalization of production costs, and in such production (or manufacturing, extracting or growing) there may be more than one party incurring such costs and bearing the burdens (and getting the benefits) of its role in the process.

But IRS says though there may be many claimants to Section 199 largesse, only one gets the prize. And it’s all facts and circumstances, as Sir Eddie Elgar might say.

At last, after unpacking each phase of the process, from idea on the back of a paper napkin to the “clunk” of junk in your mailbox, ADVO’s contracts with the printers, and noting that one of ADVO’s contract printers testifies he already took a Section 199 deduction (and I’ll bet someone suggested to him strongly that his testimony might help with the audit), Judge Wherry trashes ADVO. And the amici curiæ who plead the Section 263A test are left holding the bag.

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