LB&I directive - Updated section 199 guidance on determining benefits, burdens of ownership under contract manufacturing arrangements 

October 29:  The IRS Large Business and International (LB&I) division today released an LB&I directive for IRS examiners to use in determining whether an “unrelated party” (defined by Reg. section 1.199-3(b)) in a contract manufacturing arrangement may claim the section 199 deduction because it satisfies the benefits and burdens test. LB&I Control No: LB&I- 04-1013-008 (October 29, 2013)

Today’s LB&I directive provides that to claim the section 199 deduction, the taxpayer that is a party to a contract manufacturing arrangement must also satisfy all other requirements of section 199.

The LB&I directive further states that it does not change the special rules in the regulations under section 199 applicable to expanded affiliated groups (EAGs), qualifying in-kind partnerships, EAG partnerships, or government contracts, and that it does not apply to any other provision of the Code, including section 263A.


In 2012, an LB&I directive was issued for examiners to use in determining whether a taxpayer has the benefits and burdens of ownership under a contract manufacturing arrangement for purposes of Reg. section 1.199-3(f)(1).

In July 2013, the IRS issued an LB&I directive that superseded the 2012 directive. Read a description of that directive: TaxNewsFlash-United States: LB&I directive - Revised guidance for ownership analysis in contract manufacturing arrangement for section 199 purposes

Today’s LB&I directive updates the July 2013 directive.

LB&I directive

Today’s LB&I directive provides guidance to LB&I examiners that in deciding whether or not to challenge a taxpayer’s position that the taxpayer has the benefits and burdens of ownership under a contract manufacturing arrangement with a counterparty, the LB&I examiner must request that the taxpayer provide:

  • A statement that explains the basis for the taxpayer’s determination that it had the benefits and burdens of ownership in the year or years under examination
  • A certification statement (using the form attached as an appendix to today’s directive) signed by the taxpayer
  • A certification statement (using the form attached as a second appendix) signed by the counterparty

Time, rules for compliance with statements under LB&I directive

The benefits and burdens statement and certification statements are to be provided to the examiner within 30 days of the date that an information document request (IDR) is issued to the taxpayer with respect to the section 199 deduction.

If, however, the benefits and burdens determination was under examination on July 24, 2013, the taxpayer must provide the benefits and burdens statements and the signed certification statements to the examiner within 60 days of October 29, 2013 (i.e., the date of today’s directive).

If the taxpayer believes more time is needed, an extension of time can be requested. The directive sets forth the requirements for approval of an extension of time.

The benefits and burdens statement and certification statements must be provided for each contract and cannot be changed for the term of the contract. If there is a change as to which party to a multi-year contract has the benefits and burdens of ownership, today’s LB&I directive is no longer applicable, and examiners are directed to apply regular audit procedures for the year of change or any subsequent year(s) to which that contract applies.

Other guidance concerning the statements includes:

  • The taxpayer and the counterparty must complete all sections of the certification statements (i.e., Appendices 1 and 2).
  • The certification statements must be signed under penalty of perjury by individuals who are authorized to execute the taxpayer’s and the counterparty’s federal income tax returns.
  • For a consolidated federal income tax return, the common parent is the sole agent for the group, and an individual authorized to sign the common parent’s federal income tax returns must sign the certification statement for each member of the group.

LB&I examiners are not to challenge ownership

If the taxpayer provides the benefits and burdens statement and certification statement, LB&I examiners are directed not to challenge that the taxpayer has the benefits and burdens of ownership for purposes of section 199 with respect to each qualifying property upon which a qualifying activity is performed under the contract manufacturing arrangement.

However, if the taxpayer does not provide both statements, it is not to be presumed that the taxpayer does not have the benefits and burdens. Instead, LB&I examiners are to apply regular audit procedures to determine which entity (the taxpayer or the counterparty) has the benefits and burdens of ownership for purposes of the section 199.

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