SECTION 1. APPLICATION OF DEDUCTION FOR INCOME ATTRIBUTABLE TO DOMESTIC 
              PRODUCTION ACTIVITIES TO CERTAIN CONTRACT MANUFACTURING 
              OR PRODUCTION ARRANGEMENTS.

    (a) In General.--Section 199(d) of the Internal Revenue Code of 
1986 is amended--
            (1) by inserting ``the same qualified production activities 
        income derived from'' before ``any activity'' in paragraph 
        (10),
            (2) by redesignating paragraph (10) (as amended by 
        paragraph (1)) as paragraph (11), and
            (3) by inserting after paragraph (9) the following new 
        paragraph:
            ``(10) Contract manufacturing or production arrangements.--
                    ``(A) In general.--Except as provided in 
                subparagraph (B), in the case of a contract 
                manufacturing or production arrangement under which any 
                person makes a substantial contribution through the 
                activities of its employees within the United States to 
                the manufacture, production, growth, or extraction of 
                qualifying production property, taking into account the 
                factors set forth in subparagraph (D)--
                            ``(i) such person shall be treated as 
                        engaging in the manufacturing, production, 
                        growth, or extraction of such qualifying 
                        production property, and
                            ``(ii) the domestic production gross 
                        receipts of such person shall include the gross 
                        receipts of such person received under such 
                        arrangement for such activities.
                    ``(B) Treatment of certain written agreements.--In 
                the case of a contract manufacturing or production 
                arrangement, if all parties to such arrangement agree 
                in writing that only one such person shall be eligible 
                for the deduction under this section, such person shall 
                be treated as performing the activities described in 
                subclauses (I) and (II) of subsection (c)(4)(A)(i) 
                under such arrangement and no other person shall be 
                treated for purposes of this section as performing such 
                activities.
                    ``(C) Contract manufacturing or production 
                arrangement.--For purposes of this paragraph, the term 
                `contract manufacturing or production arrangement' 
                means any arrangement under which--
                            ``(i) a person contracts with one or more 
                        unrelated persons for the manufacture, 
                        production, growth or extraction of an item of 
                        qualifying production property or a qualified 
                        film, and
                            ``(ii) in the case of qualifying production 
                        property, such item of qualifying production 
                        property is manufactured, produced, grown or 
                        extracted in whole or significant part within 
                        the United States pursuant to subsection 
                        (c)(4)(A)(i)(I).
                    ``(D) Factors for determining substantial 
                contribution.--The Secretary shall prescribe 
                regulations setting forth activities to be taken into 
                account in determining whether a person makes a 
                substantial contribution through the activities of its 
                employees within the United States to the manufacture, 
                production, growth or extraction of qualifying 
                production property for purposes of subparagraph (A). 
                Such factors shall include--
                            ``(i) oversight and direction of the 
                        activities or process pursuant to which the 
                        property is manufactured, produced, grown or 
                        extracted;
                            ``(ii) physical transformation of personal 
                        property, or assembly or conversion of 
                        component parts into qualifying production 
                        property, that does not by itself constitute 
                        manufacturing, production, growth or extraction 
                        pursuant to subsection (c)(4)(A)(i)(I);
                            ``(iii) material selection, vendor 
                        selection, or ownership and control of the raw 
                        materials, work-in-process or finished goods;
                            ``(iv) management of risk of loss, cost 
                        reduction or efficiency initiatives associated 
                        with the manufacturing process, demand 
                        planning, production scheduling, hedging raw 
                        material costs and other manufacturing costs or 
                        capacities;
                            ``(v) control of manufacturing related 
                        logistics;
                            ``(vi) sample testing, establishment of 
                        quality control standards and other quality 
                        control activities;
                            ``(vii) developing, or directing the use or 
                        development of, product design and design 
                        specifications, as well as trade secrets, 
                        technology, and other intellectual property for 
                        the purpose of manufacturing, producing, 
                        growing or extracting the qualifying production 
                        property; and
                            ``(viii) such other activities as shall be 
                        determined by the Secretary.
                    ``(E) Safe harbor for determining substantial 
                contribution.--
                            ``(i) In general.--A person which has 
                        economic risk of loss with respect to greater 
                        than 50 percent of the direct material costs 
                        necessary to the manufacture, production, 
                        growth, or extraction of the qualifying 
                        production in whole or in significant part 
                        within the United States shall be deemed for 
                        purposes of subparagraph (A) to make a 
                        substantial contribution through the activities 
                        of its employees within the United States to 
                        the manufacture, production, growth, or 
                        extraction of such qualifying production 
                        property.
                            ``(ii) Economic risk of loss.--For purposes 
                        of this subparagraph, a person has economic 
                        risk of loss if such person bears the ultimate 
                        economic responsibility for the direct material 
                        cost. The following factors shall not affect 
                        the determination of economic risk of loss:
                                    ``(I) Contractual requirements to 
                                insure the direct materials.
                                    ``(II) Contractual liability for 
                                breach of performance.
                            ``(iii) Direct material cost.--For purposes 
                        of this subparagraph, the term `direct material 
                        cost' includes the cost of materials that 
                        become an integral part of qualifying 
                        production property and materials that are 
                        consumed in the ordinary course of production 
                        and that can be identified or associated with 
                        particular units or groups of units of property 
                        produced.''.
    (b) Effective Date.--
            (1) In general.--The amendments made by this section shall 
        apply to taxable years beginning after the date of the 
        enactment of this Act.
            (2) Election for retroactive application.--If all of the 
        persons entering into a written agreement described in section 
        199(d)(10)(B) of the Internal Revenue Code of 1986 (as amended 
        by this Act) elect to have this paragraph apply to taxable 
        years beginning on or before the date of the enactment of this 
        Act and can demonstrate, by providing copies of timely filed 
        tax returns (including amended returns) or otherwise, that only 
        one person claimed the deduction under section 199 of such Code 
        in such taxable years with respect to the property described in 
        the agreement, then the amendments made by this section shall 
        apply to such taxable years of such persons.
    (c) No Inference.--The amendments made by this section are intended 
as safe harbors and shall not be construed as adversely affecting the 
eligibility for a deduction under section 199 of the Internal Revenue 
Code of 1986 of any person who contracts with another person to 
manufacture, produce, grow or extract property described in subsection 
(c)(5) or (c)(6) of such section.
This bill amends the Internal Revenue Code to specify rules for applying the deduction for income from domestic production activities to contract manufacturing or production arrangements.  In a contract manufacturing or production arrangement, a person contracts with one or more unrelated persons for the manufacture, production, growth, or extraction of an item of qualifying production property (tangible personal property, computer software, and sound recordings) or film. The qualifying production property must be manufactured, produced, grown, or extracted in whole or significant part within the United States. In an arrangement in which any person makes a substantial contribution through the activities of its employees within the United States to the manufacture, production, growth, or extraction of qualifying production property: (1) the person shall be treated as engaging in the activity, and (2) the domestic production gross receipts of the person shall include the gross receipts received under the arrangement for the activities. The Internal Revenue Service must prescribe regulations that include specified factors for determining a substantial contribution.  A person with an economic risk of loss of more than 50% of the direct material costs necessary to the manufacture, production, growth, or extraction of the qualifying production is deemed to make a substantial contribution.  The parties to an arrangement may agree in writing to: (1) make only one person eligible for the deduction, or (2) apply the rules retroactively to tax years in which only one person claimed the deduction.
To amend the Internal Revenue Code of 1986 to provide appropriate rules for the application of the deduction for income attributable to domestic production activities with respect to certain contract manufacturing or production arrangements.