I 

114TH CONGRESS 

2D SESSION H. R. 4770 

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. 

IN THE HOUSE OF REPRESENTATIVES 

MARCH 16, 2016 

Mr. TIBERI (for himself, Mr. NEAL, Mr. STIVERS, and Mrs. BEATTY) introduced the following bill; which was referred to the Committee on Ways 

and Means 

A BILL 

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. 

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled, 


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1 SECTION 1. APPLICATION OF DEDUCTION FOR INCOME AT2 TRIBUTABLE TO DOMESTIC PRODUCTION AC3 TIVITIES TO CERTAIN CONTRACT MANUFAC4 TURING OR PRODUCTION ARRANGEMENTS. 

5 (a) IN GENERAL.—Section 199(d) of the Internal 

6 Revenue Code of 1986 is amended— 

7 (1) by inserting ‘‘the same qualified production 

8 activities income derived from’’ before ‘‘any activity’’ 

9 in paragraph (10), 

10 (2) by redesignating paragraph (10) (as amend11 ed by paragraph (1)) as paragraph (11), and 

12 (3) by inserting after paragraph (9) the fol13 lowing new paragraph: 

14 ‘‘(10) CONTRACT MANUFACTURING OR PRODUC15 TION ARRANGEMENTS.— 

16 ‘‘(A) IN GENERAL.—Except as provided in 

17 subparagraph (B), in the case of a contract 

18 manufacturing or production arrangement 

19 under which any person makes a substantial 

20 contribution through the activities of its em21 ployees within the United States to the manu22 facture, production, growth, or extraction of 

23 qualifying production property, taking into ac24 count the factors set forth in subparagraph 

25 (D)— 


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1 ‘‘(i) such person shall be treated as 

2 engaging in the manufacturing, produc3 tion, growth, or extraction of such quali4 fying production property, and 

5 ‘‘(ii) the domestic production gross re6 ceipts of such person shall include the 

7 gross receipts of such person received 

8 under such arrangement for such activities. 

9 ‘‘(B) TREATMENT OF CERTAIN WRITTEN

10 AGREEMENTS.—In the case of a contract manu11 facturing or production arrangement, if all par12 ties to such arrangement agree in writing that 

13 only one such person shall be eligible for the de14 duction under this section, such person shall be 

15 treated as performing the activities described in 

16 subclauses (I) and (II) of subsection 

17 (c)(4)(A)(i) under such arrangement and no 

18 other person shall be treated for purposes of 

19 this section as performing such activities. 

20 ‘‘(C) CONTRACT MANUFACTURING OR PRO21 DUCTION ARRANGEMENT.—For purposes of this 

22 paragraph, the term ‘contract manufacturing or 

23 production arrangement’ means any arrange24 ment under which— 


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1 ‘‘(i) a person contracts with one or 

2 more unrelated persons for the manufac3 ture, production, growth or extraction of 

4 an item of qualifying production property 

5 or a qualified film, and 

6 ‘‘(ii) in the case of qualifying produc7 tion property, such item of qualifying pro8 duction property is manufactured, pro9 duced, grown or extracted in whole or sig10 nificant part within the United States pur11 suant to subsection (c)(4)(A)(i)(I). 

12 ‘‘(D) FACTORS FOR DETERMINING SUB13 STANTIAL CONTRIBUTION.—The Secretary shall 

14 prescribe regulations setting forth activities to 

15 be taken into account in determining whether a 

16 person makes a substantial contribution 

17 through the activities of its employees within 

18 the United States to the manufacture, produc19 tion, growth or extraction of qualifying produc20 tion property for purposes of subparagraph (A). 

21 Such factors shall include— 

22 ‘‘(i) oversight and direction of the ac23 tivities or process pursuant to which the 

24 property is manufactured, produced, grown 

25 or extracted; 


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1 ‘‘(ii) physical transformation of per2 sonal property, or assembly or conversion 

3 of component parts into qualifying produc4 tion property, that does not by itself con5 stitute manufacturing, production, growth 

6 or extraction pursuant to subsection 

7 (c)(4)(A)(i)(I); 

8 ‘‘(iii) material selection, vendor selec9 tion, or ownership and control of the raw 

10 materials, work-in-process or finished 

11 goods; 

12 ‘‘(iv) management of risk of loss, cost 

13 reduction or efficiency initiatives associated 

14 with the manufacturing process, demand 

15 planning, production scheduling, hedging 

16 raw material costs and other manufac17 turing costs or capacities; 

18 ‘‘(v) control of manufacturing related 

19 logistics; 

20 ‘‘(vi) sample testing, establishment of 

21 quality control standards and other quality 

22 control activities; 

23 ‘‘(vii) developing, or directing the use 

24 or development of, product design and de25 sign specifications, as well as trade secrets, 


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1 technology, and other intellectual property 

2 for the purpose of manufacturing, pro3 ducing, growing or extracting the quali4 fying production property; and 

5 ‘‘(viii) such other activities as shall be 

6 determined by the Secretary. 

7 ‘‘(E) SAFE HARBOR FOR DETERMINING

8 SUBSTANTIAL CONTRIBUTION.— 

9 ‘‘(i) IN GENERAL.—A person which 

10 has economic risk of loss with respect to 

11 greater than 50 percent of the direct mate12 rial costs necessary to the manufacture, 

13 production, growth, or extraction of the 

14 qualifying production in whole or in signifi15 cant part within the United States shall be 

16 deemed for purposes of subparagraph (A) 

17 to make a substantial contribution through 

18 the activities of its employees within the 

19 United States to the manufacture, produc20 tion, growth, or extraction of such quali21 fying production property. 

22 ‘‘(ii) ECONOMIC RISK OF LOSS.—For 

23 purposes of this subparagraph, a person 

24 has economic risk of loss if such person 

25 bears the ultimate economic responsibility 


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1 for the direct material cost. The following 

2 factors shall not affect the determination 

3 of economic risk of loss: 

4 ‘‘(I) Contractual requirements to 

5 insure the direct materials. 

6 ‘‘(II) Contractual liability for 

7 breach of performance. 

8 ‘‘(iii) DIRECT MATERIAL COST.—For 

9 purposes of this subparagraph, the term 

10 ‘direct material cost’ includes the cost of 

11 materials that become an integral part of 

12 qualifying production property and mate13 rials that are consumed in the ordinary 

14 course of production and that can be iden15 tified or associated with particular units or 

16 groups of units of property produced.’’. 

17 (b) EFFECTIVE DATE.— 

18 (1) IN GENERAL.—The amendments made by 

19 this section shall apply to taxable years beginning 

20 after the date of the enactment of this Act. 

21 (2) ELECTION FOR RETROACTIVE APPLICA22 TION.—If all of the persons entering into a written 

23 agreement described in section 199(d)(10)(B) of the 

24 Internal Revenue Code of 1986 (as amended by this 

25 Act) elect to have this paragraph apply to taxable 


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1 years beginning on or before the date of the enact2 ment of this Act and can demonstrate, by providing 

3 copies of timely filed tax returns (including amended 

4 returns) or otherwise, that only one person claimed 

5 the deduction under section 199 of such Code in 

6 such taxable years with respect to the property de7 scribed in the agreement, then the amendments 

8 made by this section shall apply to such taxable 

9 years of such persons. 

10 (c) NO INFERENCE.—The amendments made by this 

11 section are intended as safe harbors and shall not be con12 strued as adversely affecting the eligibility for a deduction 

13 under section 199 of the Internal Revenue Code of 1986 

14 of any person who contracts with another person to manu15 facture, produce, grow or extract property described in 

16 subsection (c)(5) or (c)(6) of such section. 

Æ 


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