Company Urges IRS to Retain Ownership Rule in Manufacturing Regs

I am writing on behalf of Meredith Corporation regarding the Department of Treasury (Treasury) and Internal Revenue Services' (IRS) proposed rulemaking under Section 199 of the Internal Revenue Code (IRC). As you know, Congress enacted Section 199, the Domestic Production Activities Deduction, as part of the American Jobs Creation Act in 2004 in order to support U.S. manufacturers and producers and the nation's economy. The Section 199 deduction incentivizes American businesses to produce goods in the United States as opposed to moving such activities abroad where production costs may be lower. Since enactment, Section 199 has encouraged American businesses to maintain production activities in the United States.

Where a taxpayer develops a product and utilizes contract manufacturers to produce the product, the agency's proposed rulemaking would replace the "benefits and burdens of ownership" test with an arbitrary award of the Section 199 deduction to the contract manufacturer. The concept of "benefits and burdens of ownership" is a long-standing standard that the IRS has relied on for analyzing the facts and circumstances where determining ownership is important to identify the taxpayer eligible to claim depreciation deductions and tax credits, and for evaluating issues of substance vs. form. Replacing the "benefits and burdens of ownership" analysis with the unilateral award of the Section 199 deduction to the contract manufacturer completely disregards the important factors the IRS has relied on to ensure proper enforcement of Section 199 since enactment in 2004 and upsets existing contractual relationships that were influenced by the benefits and burdens rule.

The Explanation of Provisions section (Item 7. Definition of "by the taxpayer") of the proposed regulations states "This rule, which applies solely for purposes of section 199, reflects the conclusion that the party actually producing the property should be treated as engaging in the qualifying activity for purposes of section 199, and is therefore consistent with the statute's goal of incentivizing domestic manufacturers and producers". This "conclusion" ignores whether it is the contract manufacturer or instead the contracting party (who develops the product) that determines where the product is to be produced. By eliminating the benefits and burdens considerations from the eligibility determination and arbitrarily awarding the Section 199 deduction to the contract manufacturer, the result will in many instances subvert the intent of the statute and impose unintended consequences on the U.S. manufacturing sector. These unintended consequences include eliminating the incentive for product developers to use contract manufacturers located in the United States. Furthermore, because the Section 199 deduction requires a taxpayer to derive its gross receipts from a qualifying disposition of qualifying property, the proposed rulemaking -- treating the party performing the contract manufacturing activity as the party that performs the qualifying activity irrespective of benefits and burdens or ownership -- could eliminate either party's ability to claim the deduction.

Meredith has participated in and fully supports the more detailed comments to the proposed regulations prepared by the MPA -- the Association of Magazine Media -- that will be separately submitted by the November 25^th comment deadline. Meredith Corporation urges Treasury and the IRS not to abandon the "benefits and burdens of ownership" rule and replace it with a unilateral assignment of deductibility to contract manufacturers. The Treasury and IRS can better achieve their goal to provide administrative clarity while ensuring appropriate application of the law by working with stakeholders, and refocusing its efforts on strengthening, as opposed to eliminating the established "benefits and burdens of ownership" rules.

We appreciate the opportunity to comment on the proposed rulemaking and look forward to working with the Treasury and IRS to strengthen the application of Section 199, the Domestic Production Activities Deduction.