[Congressional Record Volume 150, Number 130 (Monday, October 11, 2004)]
[Extensions of Remarks]
[Pages E1872-E1873]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




            LETTER REGARDING CONFERENCE REPORT TO H.R. 4520

                                 ______
                                 

                         HON. WILLIAM M. THOMAS

                             of california

                    in the house of representatives

                       Thursday, October 7, 2004

  Mr. THOMAS. Mr. Speaker, I would like to insert in the Record, the 
following letter concerning the Conference Report to H.R. 4520, the 
``American Jobs Creation Act of 2004.''

                                       Department of the Treasury,


                                     Internal Revenue Service,

                                  Washington, DC, October 7, 2004.
     Mr. George K. Yin,
     Chief of Staff, Joint Committee on Taxation,
     Washington, DC.
       Dear Mr. Yin: Enclosed are the combined comments of the 
     Internal Revenue Service and the Treasury Department on the 
     new deduction relating to income attributable to domestic 
     production activities contained in the Conference Committee 
     Report on the ``American Jobs Creation Act'', that you 
     identified for complexity analysis in your letter of October 
     6, 2004.
       Our comments are based on the description of the provision 
     provided in your letter, and the statutory language and 
     description of this provision in the Chairman's Mark for the 
     Conference Committee on H.R. 4520, dated October 4, 2004, as 
     posted on the House Ways and Means Committee web site. Due to 
     the short turnaround time, our comments are provisional and 
     subject to change upon a more complete and in-depth analysis 
     of the provision.
       Overall, the conference report provides new tools that will 
     assist the IRS in administering the tax laws. However, thus 
     far in the appropriations process, I would note that Congress 
     has not taken favorable action with regard to the request for 
     incremental enforcement resources for the IRS in the 
     President's FY 05 budget request. As noted in the attached 
     analysis, IRS will face additional challenges and resource 
     requirements in administering the proposed domestic 
     production activities credit.
           Sincerely,
                                                  Mark W. Everson,
                                                     Commissioner.
       Enclosure.

Complexity Analysis of Provision From H.R. 4520, American Jobs Creation 
                              Act of 2004


   Deduction Relating to Income Attributable to Domestic Production 
                               Activities

                               Provision

       The provision provides a deduction from taxable income (or, 
     in the case of an individual, adjusted gross income) that is 
     equal to a portion of the taxpayer's qualified production 
     activities income. For taxable years beginning after 2009, 
     the deduction is equal to nine percent of the lesser of (i) 
     the qualified production activities income of the taxpayer 
     for the taxable year, or (ii) taxable income (determined 
     without regard to this section) for the taxable year. For 
     taxable years beginning in 2005 and 2006, the deduction is 
     three percent of income and, for taxable years beginning in 
     2007, 2008 and 2009, the deduction is six percent of income. 
     However, the deduction for a taxable year is limited to 50 
     percent of the W-2 wages paid by the taxpayer during the 
     calendar year that ends in such taxable year.
       For purposes of determining the deduction, qualified 
     production activities income is equal to domestic production 
     gross receipts, reduced by the sum of (a) cost of goods sold 
     allocable to such receipts, (b) other deductions, expenses, 
     or losses, directly allocable to such receipts, and (c) a 
     ratable portion of deductions, expenses, and losses not 
     directly allocable to such receipts or another class of 
     income.
       The provision is effective for taxable years beginning 
     after 2004.

                       IRS and Treasury comments

               Administration, Compliance and Controversy

       The new deduction for domestic production activities will 
     require the promulgation of extensive, detailed new guidance, 
     particularly in the form of regulations. We anticipate that 
     guidance will be required to address:
       1. Which activities constitute production activities;
       2. The statutory exceptions to the definition of production 
     activity;
       3. The allocation of revenues between production and non-
     production activities;
       4. The allocation of deductions between production and non-
     production activities;
       5. The application of the provision when related and 
     unrelated taxpayers perform parts of the production activity; 
     and
       6. Numerous other issues.
       We expect that such guidance will be difficult to craft. By 
     distinguishing ``production'' from other activities, the 
     provision places considerable tension on defining terms and 
     designing anti-abuse rules.
       Many businesses, particularly small businesses, will find 
     it difficult to understand and comply with these complex new 
     rules, which will affect not only the computation of a 
     taxpayer's regular tax liability but also its alternative 
     minimum tax liability. It will be difficult, if not 
     impossible, for the IRS to craft simplified provisions 
     tailored to small businesses or other taxpayers.
       Taxpayers will be required to devote substantial additional 
     resources to meeting their tax responsibilities, including 
     not only employees and outside tax advisers, but also 
     recordkeeping and systems modification resources. The 
     resulting costs will reduce significantly the benefits of the 
     proposal. Some small businesses may find that the additional 
     costs outweigh the benefits, particularly during the initial 
     phase-in period.
       It will be necessary to devote significant audit resources 
     to administering the new deduction. This will be due not only 
     to the novelty of the rule but also to the benefits that are 
     provided to ``production activities'' over other aspects of a 
     taxpayer's business. Taxpayers naturally will classify 
     everything possible as production activities. Audits, 
     particularly those involving integrated businesses, will have 
     to focus on classification and the allocation of income and 
     costs. Significant additional IRS resources will be needed to 
     administer the provision to avoid diverting resources from 
     other compliance issues (such as tax shelters).
       Finally, for all of the reasons discussed above, we 
     anticipate a significant increase in controversies between 
     taxpayers and the IRS. This will increase the number of IRS 
     appeals cases and litigated tax cases.

                       Tax Forms and Publications

       The computation of the deduction relating to income 
     attributable to domestic production activities would be 
     figured on a new form for 2005 of at least 10 lines. The 
     instructions for the new form would likely be at least 3 
     pages.
       Two additional lines would have to be added to each 2005 
     form or schedule on which the deduction from the new form 
     could be claimed. The deduction would be claimed on the 
     following forms and schedules, among others.
       1. Schedule C (Form 1040) (sole proprietors);

[[Page E1873]]

       2. Schedule F (Form 1040) (farm businesses);
       3. Form 1041 (estates and trusts);
       4. Form 1065 (partnerships);
       5. Form 1065-B (electing large partnerships);
       6. Form 1120 (corporations);
       7. Form 1120-A (short tax return for corporations);
       8. Form 1120S (S corporations); and
       9. Other Form 1120 series returns.
       2005 Forms 4626, 6251, and Schedule I of Form 1041 would 
     have to be revised to add a new line to reflect the 
     difference between the regular tax deduction and alternative 
     minimum tax deduction.
       The instructions for all affected forms and schedules 
     listed above would have to be revised to reflect the new 
     deduction.
       The tax forms and publications for 2007 and 2010 would have 
     to be updated to reflect the increasing percentage of 
     qualified production activities income taken into account 
     beginning in those years.
       Programming changes would be required to reflect the new 10 
     line form, the two additional lines on the above forms and 
     schedules, and the changing percentages. Currently, the IRS 
     tax computation programs are updated annually to incorporate 
     mandated inflation adjustments. Any programming changes 
     necessitated by the provision would be included during that 
     process.
       The following 2005 publications, among others, would have 
     to be revised to cover the new deduction, adding 3 to 6 pages 
     to each.
       1. Publication 225 (farmers);
       2. Publication 334 (small business tax guide);
       3. Publication 541 (corporations);
       4. Publication 542 (partnerships); and
       5. Publication 535 (business expenses).
       Training materials and the Internal Revenue Manual would 
     have to be revised to reflect the new deduction.

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