CCA Affects Deduction for Domestic Production Activities

On March 29, the IRS published a Chief Counsel Advice memorandum (“CCA”) concluding that the Deduction for Domestic Production Activities under Section 199 may not be taken by a book publisher that uses contract manufacturers to mass produce books.

The publisher provides a contract manufacturer with the electronic version of a book and its list of print specifications.  The contract manufacturer uses the electronic version of the book to create printing plates, which are used to print mass copies of the book.  The contract manufacturer uses their employees, machinery, and plant to print and assemble books according to the agreed-upon specifications.  The contract manufacturer then ships the books directly to the publisher or the publisher’s customers.

The CCA stated that the publisher’s “activities related to producing an electronic version of a book” are intangible in nature, and do not result in the production of Qualified Personal Property (QPP).  The CCA specifically cited Example 5 of Treas. Reg. § 1.199-3(e)(5), noting that the taxpayer in that example performed “material analysis and selections, subcontractor inspections and qualifications, testing of component parts, assisting customers in their review and approval of the QPP, routine production inspections, product documentation, diagnosis and correction of system failure, and packaging for shipment to customers.”  In this example, the activities qualify because the taxpayer is performing them.  If the taxpayer did not perform those activities, as is the case in the CCA, they would not qualify.  However, the contract manufacturer’s activities would qualify.

While CCAs may “not be used or cited as precedent,”  they are issued to assist IRS personnel in administering their programs by providing opinions on certain matters.

The CCA is available here.


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