Pop Quiz:  what do Iraq, Kuwait, Lebanon, Libya, Qatar, Saudi Arabia, Syria, the UAE, and Yemen have in common?

Exemplary human rights record?  Demonstrated historic dedication to religious tolerance? Main streets named after George W. Bush?

Nope.  But if you answered “routinely named by the US Government as countries which require participation in, or cooperation with, an international boycott,” you win.  So, what exactly does this mean?

Well, in 1976, Congress sought to deter participation in non-U.S.-sanctioned boycotts by the imposition of the tax penalties codified at Code Section 999.

Generally speaking, the section features two parts:  the risk of losing certain income tax benefits from boycott participation and (surprise!) a reporting requirement.

Taxpayers who actually participate in a boycott risk losing certain foreign tax credit and DISC benefits, increasing their Subpart F income, and may be fined.

But what about that reporting requirement?  That rule is surprisingly broad.  If a taxpayer has operations in or related to a boycotting country and that country is on the above-mentioned list, those operations must be reported.  And by “operations,” Treasury really means “any meaningful commercial contact.”  Also, a taxpayer must report any operations in a non-listed country when the taxpayer “has reason to know” that participation in or cooperation with an international boycott is a condition of such activities.  Needless to say, this “has reason to know” qualifier greatly expands the world of potentially reportable transactions well beyond the Middle Eastern countries listed above.  Failure to report could subject a taxpayer to a fine of $25,000 plus a year in jail.

Iraq’s re-emergence on the list is notable, given that it had been removed as recently as August, 2010.  Other notable “alumni” include Bahrain and Oman.

While not as onerous as an FBAR report, or as frightening as the looming FATCA requirements, the Section 999 reporting requirement should not be ignored.  The generality with which it may be applied makes it a dangerous IRS weapon, even if rarely wielded.

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