The Internal Revenue Code Book Could Be Used as a Paperweight in a Tornado

September 19, 2011

The United States Internal Revenue Code (IRC) is complex.  This is immediately obvious once you open it and realize that, depending on your edition, it's about 10,000 to 11,000 pages long.  What's more is that these pages are phone-book thin. 

Reading these pages is even more disheartening.  It is a harder read than James Joyce's Ulysses and Finnegans Wake combined—and just about as thick.

If you aren't familiar with the writings of Joyce or don't have a copy of the IRC sitting on your desk, don't sweat it.  Just visit Cornell University's Legal Information Institute's website and go to the U.S. code section.  After five clicks, you can reach section 582, Bad Debts, Losses, and Gains With Respect to Securities Held by Financial Institutions, copied below:

(a) Securities

Notwithstanding sections 165 (g)(1) and 166 (e), subsections (a) and (b) of section 166 (relating to allowance of deduction for bad debts) shall apply in the case of a bank to a debt which is evidenced by a security as defined in section 165 (g)(2)(C).

(b) Worthless stock in affiliated bank

For purposes of section 165 (g)(1), where the taxpayer is a bank and owns directly at least 80 percent of each class of stock of another bank, stock in such other bank shall not be treated as a capital asset.

(c) Bond, etc., losses and gains of financial institutions

(1) General rule

For purposes of this subtitle, in the case of a financial institution referred to in paragraph (2), the sale or exchange of a bond, debenture, note, or certificate or other evidence of indebtedness shall not be considered a sale or exchange of a capital asset. For purposes of the preceding sentence, any regular or residual interest in a REMIC shall be treated as an evidence of indebtedness.

(2) Financial institutions to which paragraph (1) applies

(A) In general

For purposes of paragraph (1), the financial institutions referred to in this paragraph are-

(i) any bank (and any corporation which would be a bank except for the fact it is a foreign corporation),

(ii) any financial institution referred to in section 591,

(iii) any small business investment company operating under the Small Business Investment Act of 1958, and

(iv) any business development corporation.

(B) Business development corporation

For purposes of subparagraph (A), the term "business development corporation" means a corporation which was created by or pursuant to an act of a State legislature for purposes of promoting, maintaining, and assisting the economy and industry within such State on a regional or statewide basis by making loans to be used in trades and businesses which would generally not be made by banks within such region or State in the ordinary course of their business (except on the basis of a partial participation), and which is operated primarily for such purposes.

(C) Limitations on foreign banks

In the case of a foreign corporation referred to in subparagraph (A)(i), paragraph (1) shall only apply to gains and losses which are effectively connected with the conduct of a banking business in the United States.

Take special notice that the section not only references sections prior to 582, but one after it (591)!  If one really wanted to understand section 582, they would have to read sections 582, 165(g)(1), 166(a), 166(b), 166(e), 165(g)(2)(C), and 591.  This amounts to 731 words one must read before trying to comprehend their meaning.  To understand the IRC in its entirety would require replicating this process for thousands of sections.

Why bring this up?  First, the IRC book is frequently used as a prop to prove a point about complexity.  It's useful to make this complexity relatable and informative, taking it out of the realm of hyperbole.  Second, it's a good example of why public discourse leading to fundamental tax reform is crucial.  Let's create a structure of taxation that will yield a book that can't withstand a tornado.

Follow David Logan on Twitter @Loganomix

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