The IRS Large Business and International (LB&I) division today posted a directive as guidance for use by LB&I examiners concerning how to define activities that meet the definition of “manufactured, produced, grown, or extracted” (MPGE) under Reg. section 1.199-3(e) for purposes of claiming the domestic production deduction under section 199. LB&I-04-0315-001 (posted March 18, 2015, and dated March 16, 2015)
The LB&I directive focuses on the meaning of the MPGE requirement of section 199, noting that taxpayers may claim the section 199 deduction if the MPGE standard and all other requirements of section 199 and the regulations are satisfied.
Accordingly, the LB&I directive provides that taxpayers may not claim section 199 deductions when their activities fall outside the definition of MPGE in Reg. section 1.199-3(e). The LB&I directive provides a list of examples of activities that are generally not MPGE. These include the following activities performed at a retail level:
The LB&I directive further provides that other similar activities may be non-MPGE activities, depending on the specific facts and circumstances of the taxpayer’s activities, processes through which the activities are performed, and the taxpayer’s industry.
The directive provides that LB&I examiners are encouraged to contact the Corporate Income & Losses Issue Practice Group (CIL IPG) if, in the cases assigned to them, a taxpayer claims deductions under section 199 for activities that are different from but similar to those described above. This will enable LB&I to expand the list of non-MPGE activities as appropriate.
As tax professionals have noted, this directive suggests that LB&I examiners reviewing section 199 deductions are being advised to disallow section 199 claims when the taxpayer engages in only de minimis production in its overall trade or business.
© 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.