News & Events


A directive has been issued by the Large Business & International Division (LB&I) simplifying the approach in determining who bears the benefits and burdens of ownership in a contract manufacturing arrangement to claim a deduction under section 199 (DPAD).

The taxpayer that has the benefits and burdens of ownership of the property in a contract manufacturing arrangement is entitled to the DPAD deduction. Examiners were previously instructed in a prior directive to evaluate as many as nine factors in a three-part test to determine who had the benefits and burdens of ownership.

According to the recent guidance from LB&I, examiners should not challenge a taxpayer claiming DPAD as long as the taxpayer provides three statements: 

  1. Basis for determining that it had the benefits and burdens of ownership
  2. Certification signed by the taxpayer
  3. Certification signed by the other party to the contract manufacturing arrangement

Determining who bears the benefits and burdens of ownership is factually intensive and the recent guidance is an effort to reduce some of the controversy faced by taxpayers. The issued directive is effectively permitting the contracting corporation and the contractor to agree as to which of them will take the deduction granted the allocation is properly certified.

For more information or questions on this topic, please contact your local UHY LLP professional.