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.

Bill: 114-hr-4770
Sponsor: full_name: Rep. Tiberi, Patrick J. [R-OH-12]
Introduced: 2016-03-16
Policy area: Taxation
Subjects: Administrative law and regulatory procedures

Computers and information technology

Contracts and agency

Department of the Treasury

Income tax deductions

Manufacturing

Sound recording

Television and film
Latest action: action_date: 2016-03-16
text: Referred to the House Committee on Ways and Means.

Summaries:
action_date: 2016-03-16
action_desc: Introduced in House
text: <p>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. </p> <p>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.</p> <p>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.</p> <p>The Internal Revenue Service must prescribe regulations that include specified factors for determining a substantial contribution. </p> <p>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. </p> <p>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.</p>

tv_txt: I 114th CONGRESS 2d Session H. R. 4770 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. 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.