The IRS recently published an LB&I directive clarifying its position on the activities that meet the definition of “manufactured, produced, grown, or extracted” (MPGE) under Treas. Reg. § 1.199-3(e) for the § 199 Domestic Production Deduction. The directive, published as a memorandum to LB&I employees, is not an official pronouncement of law and cannot be relied on as such, but provides clarity on positions the Service will likely take when reviewing § 199 deductions.

Section 199 provides a deduction for certain income attributable to domestic production activities for property that was manufactured, produced, grown or extracted in whole or a significant part in the United States. Among the other requirements outlined in IRC § 199 and Treas. Reg. §1.199, a taxpayer’s activities must meet the definition of MPGE. Treas. Reg. § 1.199-3(e) states that MPGE “includes manufacturing, producing, growing, extracting, installing, developing, improving and creating QPP.” Additionally, it includes “storage, handling, or other processing activities (other than transportation activities) within the United States . . . .”

The directive states that the following activities performed at the retail level will not be considered MPGE:
1. Cutting blank keys to a customer’s specification;
2. Mixing base paint and a paint coloring agent;
3. Applying garnishments to cake that is not baked where sold;
4. Applying gas to agricultural products to slow or expedite fruit ripening;
5. Storing agricultural products in a controlled environment to extend shelf life; and
6. Maintaining plans and seedlings.

The list provided in the directive is not intended to be an exhaustive list and is intended to be expanded as more information is provided to the Corporate Income & Losses Issue Practice Group. While the list is not an official pronouncement of law, it helps taxpayers better under the position of LB&I.

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