LB&I directive: Defining non-eligible activities under section 199

Defining non-eligible activities under section 199

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)

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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:

  • Cutting blank keys to a customer’s specification
  • Mixing base paint and a paint coloring agent
  • Applying garnishments to cake that is not baked where sold
  • Applying gas to agricultural products to slow or expedite fruit ripening
  • Storing agricultural products in a controlled environment to extend shelf life
  • Maintaining plants and seedlings

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.

KPMG observation

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.

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