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Some assembly required: treasury provides first round of guidance on the domestic manufacturers' deduction.

New section 199 of the Internal Revenue Code (2) provides a large segment of American business with a significant tax deduction for domestic production activities. Although aimed principally at manufacturers, the new deduction will benefit a relatively wide range of businesses and may well generate years of controversy regarding the meaning of "production" activities as well as the items of revenue and expense allocable to such activities.

The domestic manufacturers' deduction permits a phased-in deduction of a specified percentage of a business's "qualified production activities income" or its taxable income, whichever is lower. (3) Section 199 is replete with new terms, acronyms, and concepts imported from other parts of the Code. For example, "qualified production activities income" is defined as the excess of the company's "domestic production gross receipts" over the sum of the costs of goods sold and the direct and indirect costs allocable to the production of those receipts. Moreover, the deduction is capped at 50 percent of the "W-2 wages" paid during the year by the company and members of its "expanded affiliated group."

As a threshold matter, taxpayers must determine whether their production activities are domestic or foreign sourced. The legislative history of section 199 directs the Department of the Treasury to prescribe rules for the proper allocation of items of income, deduction, expense, and loss. (4) Congress further directed that when appropriate the sourcing rules should be similar to and consistent with the principles of section 861. Needless to say, developing administrable sourcing rules is more easily said than done and will present the government and taxpayers alike with one of the biggest challenges in reducing section 199 to a workable provision.

On January 19, 2005, the Treasury Department and Internal Revenue Service released the first installment of the eagerly anticipated guidance implementing the new domestic production activities deduction of section 199. Rather than following the high-level question-and-answer format frequently used to satisfy the need for immediate guidance in an emerging area, Notice 2005-14 (5) provides taxpayers with more than one hundred pages of comprehensive guidance providing a fair level of detail on a number of complex issues. Given the scope of the project, the number of offices within Treasury and IRS required to collaborate in the venture, and the thoroughness of the document produced in only 87 days, the Notice is a commendable achievement.

Overview of the Production Deduction

Conceptually, the operation of section 199 is relatively straightforward. A taxpayer may deduct a specified percentage of the lesser of its qualified production activities income (QPAI) or its taxable income. QPAI is the excess of the taxpayer's domestic production gross receipts (DPGR) over allocable expenses. DPGR equals the taxpayer's gross receipts derived from the production in the United States of certain specific types of real and personal property. The taxpayer subtracts from its DPGR the cost of goods sold allocable to those gross receipts (as determined using the principles of section 263A), as well as other deductions allocable to that production activity under the principles of section 861. The net amount is the taxpayer's QPAI, which serves as the basis for the production deduction. The taxpayer's annual production deduction may not exceed one-half of the wages that it reported for that year on Forms W-2. For purposes of section 199, all related entities within an "expanded affiliated group" (EAG) are treated as a single corporation.

Subject to the W-2 wage limitation, taxpayers are entitled to a production deduction equal to three percent of the lesser of QPAI or taxable income in 2005 and 2006. The percentage increases to six percent for 2007, 2008, and 2009, and finally reaches nine percent in 2010.

Calculating Gross Receipts: DPGR

With a few notable exceptions, the Notice follows a generally expansive approach in defining the gross receipts qualifying as DPGR. DPGR includes those gross receipts derived from three broad categories:

* any lease, rental, license, sale, exchange, or other disposition of most forms of personal property, including tangible personal property, software, sound recordings, qualified films, and certain revenues derived from the production of electricity, natural gas, or potable water;

* construction performed in the United States; and

* engineering or architectural services performed in the United States for U.S. construction projects.

1. Gross Receipts from the Production of Personal Property

Much of the Notice's discussion of DPGR focuses on gross receipts derived from the production of qualifying production property (QPP) (tangible personal property, software, and sound recordings), largely because of the many sub-elements that the Treasury was faced with defining in connection with this category. Section 199(c)(4)(A)(i)(I) includes within DPGR the taxpayer's gross receipts derived from any lease, rental, license, sale, exchange, or other disposition of QPP that was manufactured, produced, grown, or extracted by the taxpayer in whole or in significant part within the United States. Section 4.04 of the Notice tackles the many terms embedded within this broad standard.

QPP includes tangible personal property, computer software, and sound recordings. (6) Tangible personal property is defined as tangible property other than land and buildings, and excludes personal property described elsewhere in section 199 or the Notice (such as software, sound recordings, and films). The definition of software is based largely on the definition found in Treas. Reg. [section] 1.1972(c)(4)(iv). (7) Sound recordings are defined by reference to section 168(f)(4), meaning any works that result from the fixation of a series of musical notes or other sounds, regardless of the nature of the material (such as discs, tapes, or other phonorecordings) in which such sounds are embodied. Because tangible personal property, software, and sound recordings are defined to be mutually exclusive, the sale of a musical recording on a CD (for example) includes two distinct types of QPP--tangible personal property (the CD) and the sound recording itself. The Notice requires separate treatment for each element.

Gross receipts only qualify as DPGR if they are derived from the sale, lease, etc., of QPP that was "manufactured, produced, grown, or extracted" (in the vernacular of the Notice, MPGE) by the taxpayer. (8) Expanding on the statutory definition, the Notice defines MPGE to include activities relating to manufacturing, producing, growing, extracting, installing, developing, improving, and creating QPP: making QPP out of either new or used materials by processing, manipulating, refining, or changing the form of an article; or combining or assembling two or more articles. The term also includes cultivating soil, raising livestock, fishing, and mining materials.

The Notice imposes a consistency rule under which taxpayers who take the position that they MPGE QPP for the taxable year also must treat themselves as producing that property for purposes of the uniform capitalization rules of section 263A. (9) This consistency requirement is inapplicable if the taxpayer is not subject to section 263A under the Code, regulations, or published guidance. Because this exception refers to the nature of the taxpayer (possibly referring to taxpayers eligible for the de minimis exception available for producers with indirect costs of $200,000 or less (10)) rather than the nature of the production activity or item produced, some have questioned whether producers of software or of property subject to the long-term contract rules of section 460 (activities not otherwise subject to section 263A (11)), must voluntarily subject those production activities to the uniform capitalization rules in order to include the gross receipts from those activities within DPGR. Senior Treasury officials have stated publicly that this was not the Notice's intention, and that producers of software and of property subject to the long-term contract rules need not apply section 263A to those activities in order to qualify for the production deduction. Presumably the forthcoming proposed regulations will reflect this clarification.

Next, the QPP must have been MPGE "by the taxpayer." (12) The roiling issue here has centered on the treatment of so-called contract manufacturers. The Notice provides that (with the exception of production activities performed by one member of an expanded affiliated group for another member), if one taxpayer performs a qualifying activity under section 199(c)(4)(A)(i) pursuant to a contract with another party, only the taxpayer that has the "benefits and burdens" of ownership of the property under federal income tax principles during the period of the qualifying production activity is treated as having engaged in that activity.

Treasury's focus under this provision is upon contracts calling upon another party to essentially perform a fabrication service on behalf of the owner of the property. In other words, assume that a taxpayer designs an article of clothing, purchases the required fabric and other materials, and provides the design and materials to a third party to cut and stitch the taxpayer's fabric into the desired article of clothing. Under the parties' agreement, the taxpayer retains the risk of loss in the event the materials are damaged or destroyed while in the contractor's possession; the taxpayer has no right to refuse delivery of the completed articles in the event it is dissatisfied with the finished product, because it in fact owns the completed product throughout the fabrication process. The taxpayer has simply hired someone to perform those services that it could have performed in-house but for business reasons chose not to. The taxpayer essentially has hired an independent contractor rather than having its own employees perform the same task.

The Notice provides that this rule is based on the contract manufacturer's not deriving its gross receipts from the sale or other disposition of the QPP. Because the customer owns the product during the period of actual manufacture, the contract manufacturer in the Treasury's view simply has no chattel to sell to the customer. Its gross receipts instead are derived entirely front its own services in assisting its customer in the customer's own production efforts. The customer, not the contract manufacturer, is the only entity that ever owns--and hence that can derive gross receipts from the sale of--the Qpp. (13)

This rule does not affect the application of section 199 to traditional supply chains in which one company's product becomes a component of a downstream manufacturer's own product. As long as each vendor in the production chain retains the benefits and burdens of ownership during its MPGE of its own items of QPP, the gross receipts each derives from the sale of its own products to a downstream customer will be included within its DPGR. The sales price included in a particular company's DPGR becomes a component of its customer's cost of goods sold, and thus serves to exclude that amount from the DPGR of that and any other downstream purchaser of that component. Thus, regardless of the number of times the product is subsequently sold and incorporated into downstream products, its treatment as a cost of goods sold by everyone but its original manufacturer will preclude two taxpayers from deriving a production deduction based on the sale of that component.

Third, the QPP must have been MPGE by the taxpayer "in whole or in significant part" within the United States. Under section 4.04(5) of the Notice, this requirement can be satisfied under either of two standards. (14) The general rule is a subjective standard looking to whether the production activities performed by the taxpayer in the United States are "substantial in nature." This is a facts-and-circumstances inquiry, but the Notice lists as relevant factors the relative value added by and the relative cost of the taxpayer's MPGE activity in the United States, the nature of the property, and the nature of the MPGE activity that the taxpayer performs in the United States. Incorporating a foreign-made component into an item of QPP produced by the taxpayer in the United States generally meets this standard, as does the domestic refining of oil extracted abroad and imported into the United States. On the other hand, labeling, packaging, repackaging, or performing minor assembling operations will not be sufficient to satisfy the "substantial in nature" test. (15)

Design and development activities undertaken in connection with the MPGE of tangible personal property are disregarded for purposes of the "substantial in nature" standard. Design and development activities are considered in applying this standard to the MPGE of software and sound recordings, however, because a significant portion of the "production" of such items (e.g., writing software programming code or editing the master copy of a sound recording) may be viewed as design and development. (16)

A producer also can satisfy the "in significant part" requirement if the "conversion costs" (defined as direct labor and related factory burden) it incurs to MPGE the property in the United States are at least 20 percent of the property's total cost of goods sold. Again, design and development costs and the cost of any intangibles do not qualify as conversion costs with respect to tangible personal property, but are considered in connection with the MPGE of software and sound recordings. The costs of packaging, repackaging, labeling, and minor assembly operations also do not qualify as conversion costs for purposes of the 20percent safe harbor.

These two standards are derived largely from (but are not identical to) the regulations under section 954 of the Code. Although the Notice borrows the concepts of "substantial in nature" and the 20-percent safe harbor from Treas. Reg. [section] 1.954-3(a)(4)(iii), the Notice specifically provides that the "substantial transformation test" of Treas. Reg. [section] 1.954-3(a)(4)(ii) is not relevant to the determination of"substantial in nature" for purposes of section 199. Although not identical, the Notice's use of the section 954 regulations' framework provides a useful benchmark in applying the "substantial in nature" and 20-percent safe harbor rules now applicable for purposes of the section 199 production deduction. The Tax Court's decision in Bausch & Lomb Inc. v. Commissioner (17) provides a useful overview of the application of these standards.

The Notice essentially creates an "all or nothing" rule for purposes of the "in significant part" requirement. Under this rule, even if the taxpayer's production activities involve parts, components, or even finished products manufactured abroad or by unrelated parties, the taxpayer is entitled to include in its own DPGR the entire sales price of QPP as long as the activities that the taxpayer performs on that item independently satisfy either the "substantial in nature" standard or the 20-percent safe harbor. The converse also is true, so that if the taxpayer undertakes activities in the U.S. that satisfy either of these two standards but completes the manufacture of the item at a foreign facility, the gross receipts derived from the sale of the QPP is DPGR, even if the product is not returned to the U.S. for sale.

In applying the "in significant part" requirement, the production activities of another member of the taxpayer's expanded affiliated group should be attributed to the taxpayer since the EAG is treated as a single corporation. (18) Likewise, because the taxpayer is treated as performing the production activities of a contract manufacturer if the taxpayer has the benefits and burdens of ownership during the production period, (19) the production activities of the contract manufacturer also should be attributed to the taxpayer for purposes of the "in significant part" requirement. Thus, as long as the taxpayer's production activities when combined with those of either another member of the taxpayer's EAG or those of a contract manufacturer are either substantial in nature or satisfy the 20-percent safe harbor, the taxpayer will be treated as having MPGE the QPP in significant part regardless of the taxpayer's actual, direct production activities.

DPGR only includes gross receipts "derived from" the lease, rental, license, sale, exchange or other disposition of QPP. Section 4.04(7) of the Notice explains that this includes only gross receipts received "directly" from the sale, lease, etc., of the QPP. Included within this rule are gross receipts from the sale of self-constructed QPP that the taxpayer uses internally before sale; business interruption insurance payments to the extent they substitute for gross receipts that would have been DPGR; and the value of non-cash consideration received by the taxpayer in exchange for QPP that was MPGE by the taxpayer in whole or in significant part in the United States. The gross receipts from the sale of non-cash property that the taxpayer receives in exchange for otherwise qualifying QPP, however, generally would not be includible within DPGR, because those receipts are not derived directly from the taxpayer's own production activities.

A central question left unanswered by the Notice is whether DPGR includes gross receipts derived from the sale of QPP that originally was MPGE by the taxpayer in whole or significant part in the United States but that was sold to an unrelated third party and subsequently reacquired by the taxpayer. If so, DPGR would include any gross receipts derived from the lease, license, rental, sale, exchange, or other disposition of QPP that previously was MPGE by the taxpayer, but that was later reacquired (whether in a taxable or a non-taxable transaction (20)) and then leased or sold again. If the "derived from" standard applies this broadly, taxpayers may be able to sell, reacquire, and resell (or lease) its QPP numerous times, irrespective of intervening breaks in ownership.

Although section 199 plainly does not restrict the taxpayer's ability to engage in multiple, seriatim leases or rentals of QPP if the property has never been sold outside the EAG, arguably the same should not be true where the taxpayer has disposed of the property and subsequently reacquired it from a third party. Instead, the gross receipts received upon the lease, sale, etc., of the taxpayer's QPP in that situation arguably are "derived from" the later purchase of that property rather than from the taxpayer's original manufacture of the goods. Under this view, the group is functioning as and should be accorded the same tax treatment as a reseller of the property, notwithstanding its original manufacture of the item. Treasury Department representatives, however, have acknowledged that this issue was not considered during the Notice's drafting.

The gross receipts "derived from" the lease, sale, etc., of QPP also exclude any portion of the gross receipts attributable to "embedded services." (21) Although the term "embedded service" is not specifically defined, the Notice provides that the portion of the gross receipts that are considered "derived from" the lease, rental, license, sale, exchange, or other disposition of QPP may not exceed the selling price of the property without the service element. Embedded charges for installation, for example, may be susceptible to challenge where the manufacturer routinely is willing to negotiate a lower price in lieu of installation services. Treasury officials have informally suggested informally that the inclusion of the term "installation" within the definition of MPGE should not be read broadly enough to include situations such as this.

The Notice does include within DPGR any gross receipts from embedded services if that amount is less than five percent of the gross receipts received for a particular item of property. This de minimis rule currently applies on an item-by-item basis, but the Treasury Department has been urged to consider an elective "pooling" concept similar to that provided in connection with the de minimis rules available under the new INDOPCO regulations. (22)

The Notice also carves out of the "embedded services" rule (and thus permits to be included within DPGR) the gross receipts attributable to a "qualified warranty." A "qualified warranty" is one that is provided in connection with the sale of QPP if (i) in the normal course of its business, the taxpayer includes the charge for the warranty in the price charged for the lease, sale, etc., of the QPP, and (ii) the warranty is neither separately offered by the taxpayer nor separately bargained for with the customer. For example, gross receipts derived from standard automobile warranties would be included, while those from separately-available extended warranties would not be.

The qualified warranty exception is a sensible one. The Treasury should consider extending this principle to other items that purchasers receive as a non-negotiable, integral component of their purchase, but which if viewed in isolation may not fall within the definition of tangible personal property. Possible examples include (i) embedded software required for QPP to function, but the code for which the QPP's manufacturer may have licensed from a third-party; (ii) roadside service plans provided to all new car buyers; and (iii) "trial subscriptions" to satellite radio or on-board concierge services associated with built-in accessories of a new automobile.

The same principle also should apply to the sale of software, sound recordings, and qualified films. Because these items are not themselves tangible property for purposes of section 199, the Notice requires manufacturers of such items to separately account for the gross receipts from the sale of a qualified film (for example) and the revenue derived from the tangible medium (such as a DVD), if the same EAG did not MPGE both the film and the tangible medium. (23) The same is true for the tangible media used to convey software and sound recordings. (24) The purchaser generally cannot purchase the film without purchasing the DVD, and as in the case of a qualified warranty the gross receipts attributable to the tangible medium is minor and merely ancillary to the principal transaction.

As a matter of administrative grace, the Treasury should expand the well-reasoned principles of the qualified warranty exception more broadly in the context not only of tangible property, but of films, sound recordings, and software as well. Although the gross receipts attributable to such ancillary components (including qualified warranties were they not already excluded) typically would fall within the five-percent de minimis rule generally applicable to non-qualifying gross receipts, (25) taxpayers should not be required to compute and maintain records to support the application of the de minimis rule in such situations at all.

In addition to gross receipts derived from QPP, DPGR also includes gross receipts derived from the lease, rental, license, sale, exchange or other disposition of "qualified films." (26) This category includes any motion picture film, video tape, or live or delayed television programming (other than certain sexually explicit productions) if at least 50 percent of the total compensation relating to the production of the qualified film is for services performed in the United States by actors, production personnel (generally those working directly on the production as opposed to, for example, studio administrators), directors, and producers. Taxpayers are permitted to use any reasonable method in allocating compensation for this purpose. Although the allocation method used should not constitute a method of accounting (such that the taxpayer would not require IRS consent to modify it), (27) consistent use is one factor in determining whether the method is reasonable.

The Notice's attribution of production activities to each member of an expanded affiliated group presents a wide range of issues in the context of media conglomerates. For example, a single EAG may produce a qualified film; collect payments from unrelated theater chains for exhibition of the film; (28) collect subscription fees attributable in whole or part to the exhibition of the film on a cable network or pay-per-view outlet belonging to the group; sell or rent copies of the film through a related video rental (or retail) store; and collect advertising revenue in connection with the exhibition of the film on a broadcast outlet belonging to the group. The potential issues arising in connection with media conglomerates are far ranging and deserving of a separate discussion.

The third category of DPGR derived from the sale, lease, etc., of personal property relates to production revenue earned by certain utilities. DPGR includes gross receipts derived from any lease, rental, license, sale, exchange, or other disposition of electricity, natural gas, or potable water produced by the taxpayer in the United States. DPGR does not, however, include gross receipts derived from the transmission or distribution of these items. (29)

The Treasury determined that the statute's reference to the production of "potable water" refers only to water utilities rather than, for example, manufacturers of bottled water. The Notice instead treats bottled water as tangible personal property, meaning that gross receipts derived from the distribution as well as the production of that product remain includible in DPGR. The Notice does not address the result under section 199 if a water utility bottles water for sale to wholesale or retail customers in additional to conveying it through pipelines to commercial and residential customers. Arguably, the utility should bifurcate its gross receipts accordingly. Treasury may well take the position that the manner of packaging is not determinative for purposes of section 199, though that position would beg the question why the Notice distinguishes water utilities from producers of bottled water. In any event, commercial resellers of bottled water produced by the utility generally would not qualify for the production deduction where they merely label, re-label, or package the water produced by the utility.

Some regulated electric utilities may have difficulty allocating their gross receipts and associated expenses between their generation and their transmission and distribution (T&D) activities. Many integrated electric companies generate, transmit, and distribute electricity to their customers for a single price per kilowatt-hour. State regulators determine these rates through the ratemaking process, which results in a "bundled" price for the generated electricity itself and for the transmission and distribution of that electricity. With no objective means of unbundling their gross receipts and expenses attributable to that earned from generation (DPGR) and that from T&D (non-DPGR), these utilities generally will need an alternative mechanism for determining their QPAI. Currently, the Notice provides no such alternatives, but Treasury officials have suggested publicly that they remain open to considering how to address such industry-specific issues.

DPGR also includes gross receipts derived from the lease, rental, license, sale, exchange, or other disposition of natural gas. For this purpose, natural gas is defined consistently with section 613A(e)(2) and includes only natural gas extracted from a natural deposit (as opposed to, for example, methane extracted from a landfill). Production activities include all activities involved in extracting natural gas from the ground and processing the gas into pipeline quality gas. As with other utilities, DPGR does not include gross receipts attributable to the transmission of pipeline quality gas from a natural gas field (or from a natural gas processing plant) to a local distribution company's citygate (or to another customer). The Notice does not define "pipeline quality gas." Other forms of petroleum products should remain subject to the general rules available for the MPGE of QPP (hence able to include distribution revenue within DPGR, for example).

2. Production of Real Property

The second major category of gross receipts included within DPGR is that derived from construction performed in the United States. (30) In general, "construction" refers only to the construction or erection of inherently permanent structures, of inherently permanent land improvements, and of infrastructure, by a taxpayer that is in a trade or business that is considered construction for purposes of the North American Industrial Classification System (the NAICS codes). Potentially applicable NAICS codes include Code 236 (construction of buildings), Code 2371 (utility system construction), and Code 2372 (land subdivision).

This NAICS-based limitation suggests that taxpayers not otherwise engaged in a separate construction-related trade or business cannot include in their DPGR gross receipts derived from occasional construction projects, even where those gross receipts arise in connection with the taxpayer's overall, non-construction trade or business. For example, assume an EAG includes a clothing manufacturer, a large retail chain, and a relatively small "separate trade or business" (whether a separate corporation or otherwise) engaged in developing and constructing the manufacturing, distribution, and retail facilities used in producing and selling the group's QPR Having no actual construction equipment or employees of its own, the property development trade or business develops and constructs the facilities by engaging architects, engineers, and general contractors, maintaining overall project management responsibility and oversight. If its property development division meets the NAICS code requirement the group may include in its DPGR the gross receipts eventually received upon its sale or exchange of the building (which may not occur until the group has used the facility in its own business for many years).

On the other hand, if the EAG is not engaged in the regular construction of real property and does not have a separate trade or business engaged in a construction trade within the scope of the NAICS codes, the IRS may argue that the gross receipts derived from the eventual sale of the property are not includible in DPGR. Because of the difficulty sometimes encountered in determining whether a taxpayer's activities rise to the level of a separate trade or business, (31) and because the IRS is not the government's principal arbiter of the scope of various NAICS codes, this may prove a difficult limitation to administer. Further, it is not clear from the statute or conference report that Congress intended to apply section 199 so restrictively in the construction context. Because of the ease in satisfying this NAICS code requirement through the use of a separate subsidiary or division, the rule essentially operates as a trap for the unwary or poorly advised and should be reconsidered.

Qualifying construction activities include the substantial improvement of real property. The Notice suggests that standards similar to those used in determining whether an expenditure is for a capital improvement or instead is for a routine repair (including the plan of rehabilitation doctrine) will be considered in determining whether an activity is a "substantial improvement." (32) This obviously creates a tension between a customer seeking to classify an activity as a deductible repair for purposes of section 162 and a construction contractor seeking to classify the same activity as a substantial improvement to that property for purposes of section 199.

In contrast to gross receipts derived from personal property, section 199 does not define qualifying gross receipts from construction activities in terms of the "lease, rental, license, sale, exchange or other disposition of' the constructed property. Based on this difference in language, the Notice includes within DPGR derived from the construction of real property only proceeds from the sale, exchange, or other disposition of real property constructed by the taxpayer in the United States (regardless of whether the property is sold immediately after construction is completed). (33)

There is no readily apparent support in either the statute or legislative history for including in DPGR gross receipts from the sale or exchange of real property while excluding gross receipts from leases or rentals of that same property. To the extent the Treasury is concerned about the statute's specific reference to gross receipts from the "lease, rental, license, sale, exchange or other disposition" of personal property with no such reference with respect to real property, the same negative inference either should (or should not) apply to sales and to leases equally. To the extent that gross receipts from leases and rentals are seen as derived from a transaction separate from the physical construction of the real property, (34) the same could be said of the conveyance of title. To be consistent, the Notice should permit gross receipts derived from leases and rentals of real property to be included in DPGR along with sales receipts or, alternatively, should limit the application of this provision to those taxpayers being compensated for physically constructing real property.

Nonetheless, the Notice specifically excludes from DPGR gross receipts derived from renting or leasing real property. For example, where a taxpayer constructs an apartment building to be held for rental purposes, it may not include in its DPGR the lease or rental payments received from tenants. The taxpayer may, however, include in its DPGR the sales proceeds received upon its ultimate disposition of that building, even if the sale occurs many years after the completion of construction. Thus, the taxpayer could construct the building, derive both rental income and depreciation and other tax deductions for a period of time, and then sell the building and include the gross receipts derived from the sale of the building in calculating a production deduction under section 199 for the year of sale. Although the same is true with respect to personal property, the manufacturer of the personal property also is entitled to include the lease or rental payments in its DPGR during its period of ownership prior to the eventual sale.

This difference in language also renders irrelevant the benefits and burdens of ownership during the construction period. Both the owner (assuming it meets the NAICS code requirement) and the contractor are entitled to include in DPGR the gross receipts derived from their respective qualifying production activities. Thus, a construction company engaged in construction activities in connection with real property owned by another taxpayer may include in its DPGR the gross receipts received from the property owner for those construction services. The owner of the property also will be entitled to include in its DPGR the sales price of the property constructed for it by the general and subcontractors. This rule is in sharp contrast to the "contract manufacturing" rule applicable in the context of personal property. The difference stems from the requirement that in the context of personal property, the DPGR must result directly from the taxpayer's sale, lease, etc., of its production, whereas the statute imposes no such sale or lease limitation in the context of real property.

Finally, DPGR derived from construction activities does not include "gross receipts attributable to the sale or other disposition of land." (35) As currently drafted, this rule is somewhat ambiguous. Read literally, this provision would exclude from the QPAI calculation all gross receipts--and presumably costs and expenses (including basis)--derived from the sale of land itself. In other words, receipts and costs attributable to land (as opposed to buildings, for example) arguably are simply factored out of the section 199 computation altogether in all circumstances. For example, assume a taxpayer purchased a parcel of undeveloped real property in a downtown area in 1960 for $10x. The land remains undeveloped until 2005, when the taxpayer constructs an office tower and sells it for $1000x. At the time of the sale, the land would have sold for $100x had it remained undeveloped. In this scenario, the Notice arguably would permit the taxpayer to include only $900x in DPGR and to disregard the $10x basis in the land in determining the allocable cost of the building.

Alternatively, the provision arguably could be read to exclude from DPGR only the appreciation having no connection to the taxpayer's construction activities (in the above example, $90x) while still including as DPGR any appreciation in the land value that can be shown to have resulted from the taxpayer's construction or improvements on or around the parcel. For example, in the above example, although the appraised value of the land absent any construction would have been $100x, the land's value after construction of the office building, landscaping, and other amenities and neighborhood improvements stimulated by the new construction might be shown to be $120x. Arguably, the additional $20x increase in the land's value is "derived from" the construction of the building and should be included in DPGR. It is unclear from the Notice how the taxpayer should account for the $10x basis in the land in that situation.

While more complex, the second approach is more consistent with public statements that have been made by Treasury officials. Treasury has explained that the government was concerned about a situation in which a taxpayer makes minimal improvements to a highly appreciated parcel of undeveloped land in an effort to convert the appreciated value of undeveloped property into DPGR. The second approach also is more consistent with the Notice's inclusion of inherently permanent land improvements within the definition of "construction performed in the United States." (36) This rule demonstrates that receipts from the sale of land are not per se excluded from the scope of section 199.

Under the third major category of potentially qualifying gross receipts, DPGR includes gross receipts derived from engineering or architectural services performed in the United States for construction projects in the United States. DPGR generally includes gross receipts from these services even if the underlying real property is never constructed. (37)

Allocation of Expenses

After calculating DPGR, the taxpayer next must allocate to its production activities three types of production costs: (i) the cost of goods sold (COGS) directly allocable to DPGR; (ii) the amount of deductions directly allocable to DPGR; and (iii) a ratable portion of other deductions not directly allocable to DPGR or to another class of income.

The allocation of COGS should be relatively straight-forward for most taxpayers eligible for the production deduction. For purposes of section 199, COGS allocable to DPGR includes the costs that would have been included in ending inventory under the principles of sections 263A, 471, and 472 if the goods sold during the taxable year were on hand at the end of the taxable year. (38) These rules should be familiar to nearly all taxpayers seeking to take advantage of section 199.

For taxpayers having gross annual receipts of more than $25 million, the allocation of production costs other than COGS is governed by the principles of the regulations under section 861. (39) Under the "section 861 method," a taxpayer must allocate and apportion its deductions using the allocation and apportionment rules provided by the section 861 regulations, subject to certain modifications. Section 199 is an "operative section" for purposes of Treas. Reg. [section] 1.861-8(f), meaning the taxpayer must apply the rules of the section 861 regulations to allocate and apportion deductions to gross income attributable to DPGR. The Notice largely just refers the taxpayer to the section 861 regulations, with little further explanation.

The use of section 861 to allocate and apportion certain deductions between the taxpayer's qualifying and nonqualifying activities is largely consistent with the legislative history's suggestion (in a footnote) that the Treasury Department apply the principles of section 861 "where appropriate." The Notice's current across-the-board requirement that all large companies use this single allocation method for such expenses (apparently finding its use appropriate in all cases) has led to some debate. The proponents of using section 861 (largely practitioners who specialize in the international tax area) point to a well-developed body of law applying these principles and the ready availability of software programs supposedly allowing taxpayers to simply "press a button" to make the required allocations. Treasury also appears to subscribe to this view, noting that the Notice otherwise would have had to include an entirely new allocation system unfamiliar to all taxpayers. Proponents of providing alternative methodologies suggest that even though many taxpayers may be familiar with the section 861 principles, many others are not, and that alternative methodologies (particularly universally available simplified methods) should be further explored.

The Notice does provide simplified allocation rules as an alternative to the section 861 method, but only for relatively small taxpayers. Taxpayers having average annual gross receipts of $25 million or less may apportion their deductions (but not COGS) ratably between DPGR and non-DPGR based on relative gross receipts. (40) Thus, the amount of deductions apportioned to DPGR is equal to the proportion of the deductions that the amount of DPGR bears to total gross receipts. Taxpayers having average annual gross receipts of $5 million or less and those eligible to use the cash method by reason of Rev. Proc. 2002-28, 2002-1 C.B. 815 may allocate both COGS and their deductions using this gross receipts ratio. (41)

In public statements, government officials have justified this $25-million limitation based on internal statistics showing that 99.1 percent of all corporations would qualify for one of these simplified methods. That 99.1 percent of taxpayers were provided with simplified rules does not explain why the remaining 0.9 percent were not. In contrast, the section 263A regulations provide simplified methods that are available to even the largest producers, recognizing that the need to maximize administrability and minimize compliance costs is as important for the largest taxpayers as it is for the smallest. As the government has stated repeatedly, however, the Notice is just Phase I, and given the extreme time pressures faced by the government in developing the Notice, it is understandable that this first effort does not incorporate all of the nuances and details that the proposed or at least the final section 199 regulations presumably will contain. Optimally, the next layer of detail will contain elective, simplified allocation rules available to all taxpayers.

DPGR Minus Allocable Expenses: QPAI

Although section 199 presents a maze of calculations, subcalculations, and assorted allocations and apportionments, the ultimate goal is to determine the taxpayer's QPAI. Because the production deduction is a stated percentage of QPAI (or, if less, taxable income), this is one situation in which the taxpayer actually seeks to maximize domestic income for federal tax purposes. Section 199(c)(1) defines QPAI for any taxable year as an amount equal to the excess (if any) of the taxpayer's DPGR, over (i) the cost of goods sold allocable to those receipts, (ii) other deductions, expenses, or losses directly allocable to such receipts, and (iii) a ratable portion of other deductions, expenses, and losses that are not directly allocable to such receipts or another class of income. In other words, QPAI equals the taxpayer's DPGR minus the COGS allocable to those gross receipts minus all other deductions that can be directly or indirectly allocated to that production activity.

Before issuance of the Notice, one question regarding this calculation centered on Whether the taxpayer determined its QPAI using "two buckets" or instead using a "silo" approach. Under the two-bucket approach, all production gross receipts from all sources are added together, all production expenses from all sources are added together, and the two resulting sums are netted to derive the taxpayer's QPAI. The net effect is to reduce the deduction available from profitable production activities by the losses resulting from unprofitable production activities.

The "silo" approach would create multiple buckets, based either on product lines, divisions, separate trades or businesses, or some other demarcation. This is a simplified version of the transaction-by-transaction (TxT) approach used for purposes of the foreign sales company (FSC) regime. For example, assume a conglomerate owns a profitable automaker, a break-even movie studio, and an experimental fuel cell maker that is generating significant losses but holds tremendous promise in future years. Each would be considered a separate "silo" for purposes of section 199 and would calculate its own QPAI independently. The group would be entitled to a section 199 production deduction based on the automaker's QPAI and on the movie studio's QPAI in profitable years. The group would have no QPAI (and hence no section 199 deduction) but would suffer no detriment from its willingness to incur operating losses in attempting to develop a new technology.

The Notice answers this question in favor of a two-bucket approach. Section 4.03(1) provides that QPAI is determined on an "item-by-item basis (and not, for example, on a division-by-division, product line-by-product line, or transaction-by-transaction basis)." The taxpayer's QPAI is the sum of the QPAI derived "from each item," which may be either positive or negative. (42) The Notice posits as an example a taxpayer that manufactures a shirt and a hat in the United States, with the QPAI derived from the manufacture of the shirt being $3 and the QPAI derived from the hat being ($1). The taxpayer's QPAI under the Notice's item-by-item approach is $2. The result under a silo approach would have been $3, because the operating losses from manufacturing the hat would not have detrimentally affected the taxpayer's profitable shirt business for purposes of section 199. The bottom-line effect of including both profitable and unprofitable production activities irrespective of their relationship (apart from falling within the same EAG) is the two-bucket approach, with the reference to an "item-by-item" calculation being something of a misnomer.

Treasury has explained that the item-by-item approach was selected to prevent taxpayers from being able to cherry-pick only their profitable production activities in computing the production deduction. Under this view, the taxpayer's deduction is based on its overall success as a "producer" rather than its success in producing discrete items. If that is the congressional intent underlying section 199, the two-bucket approach is not unreasonable. Given the highly diversified nature of many American corporations, however, with some business segments or product lines having nothing in common but a distant CEO, a strong case can be made for using the silo approach as a mechanism for rewarding successful ventures without effectively penalizing them for common ownership with an unprofitable one. A senior congressional staff member has noted publicly that, in his view, the tax deduction provided under section 199 generally will not be enough to effect a business's decision to enter, expand, relocate, or terminate a particular line of business. Nonetheless, if section 199 was intended to benefit American manufacturing, maximizing that benefit through the silo approach would be as defensible as the two-bucket approach adopted by the Notice.

Special Rules for Affiliated Groups and Passthrough Entities

For purposes of section 199, all members of an expanded affiliated group are treated as a single corporation. (43) An EAG is an affiliated group as defined in section 1504(a), determined by substituting "50 percent" for "80 percent" each place it appears, and by including insurance companies subject to tax under section 801 as well as corporations with respect to which an election under section 936 is in effect for the taxable year. (44) The activities of each member of an EAG are attributed to all other members. Thus, the activities of individual members of an EAG may be aggregated in determining whether the group MPGE QPP in whole or significant part in the U.S. If so, the group may treat as DPGR the gross receipts from the lease, sale, etc., of such QPP even if the product ultimately is sold by a member of the EAG otherwise engaged exclusively in retail operations.

The EAG computes its section 199 deduction at the group level by aggregating each member's separate taxable income or loss, QPAI (whether positive or negative), and W-2 wages. The resulting section 199 deduction is then allocated among members of the group in proportion to each member's QPAI (if any), regardless of whether the EAG member has taxable income or loss for the year and regardless of whether the EAG member has W-2 wages. As a result, a member of the group that is engaged in production activities, but whose qualifying activities are conducted largely through some combination of independent contractors and contract manufacturers (and thus has little or no W-2 wages) may still benefit from section 199. That member's separate DPGR and allocable expenses will be used to compute its separate QPAI. That QPAI will be included in the EAG's aggregate calculation of the group's section 199 deduction. Assuming the group itself has sufficient W-2 wages from all sources to support its aggregate section 199 deduction, the member will be allocated its share of that aggregate deduction based on the ratio of its QPAI to the group's QPAI. The member will be entitled to deduct its share of the EAG's section 199 deduction even though the member individually has insufficient W-2 wages and thus would not be able to benefit from section 199 had it been operating outside of an EAG.

The Notice clarifies the application of section 199 to pass-through entities such as partnerships and Subchapter S corporations. (45) Some practitioners had read section 199 to require the calculation of the production deduction at the entity level followed by an allocation of that entity-level deduction among the partners (as is the case under the Notice in the case of an EAG). Government officials have acknowledged informally that this would have been a reasonable interpretation of the statute and was considered, but that Treasury and the IRS ultimately were unable to reconcile this approach with many of the mechanical requirements of subchapter K and of section 199 itself. As a result, the Notice instead requires calculating the section 199 deduction at the partner level.

Each partner is allocated (in accordance with sections 702 and 704) its share of partnership items allocated or attributable to the partnership's qualifying production activities. Each partner also receives an allocation of the partnership's W-2 wages. The partner then calculates QPAI using only these partnership items to ensure that its partnership QPAI allocation is greater than zero. If not, the partner is barred from using its allocable share of the partnership's W-2 wages in calculating its production deduction attributable to the partner's other production activities. The partner's QPAI derived from the partnership's production activities (presumably whether positive or negative) is then added to the partner's QPAI derived directly from its other production activities, with the sum being the partner's total QPAI for purposes of section 199. The Notice provides similar rules applicable to Subchapter S corporations.

Although not entirely clear from the Notice, presumably the partnership's production activities will be attributed to the individual partners. This approach would ensure that limited partners receive the same tax benefit as general or operating partners, and would ensure that all partners benefit equally from the partnership's production activities, regardless of the nature of their own, respective trades or businesses. For example, if a furniture maker, a chemical company, and a number of individual investors having no production activities of their own form a limited partnership for the manufacture of furniture polish (with the chemical company as the only general partner), all partners should be treated as engaged in the active trade or business of MPGE furniture polish for purposes of section 199. Because the Notice explicitly attributes production activities to all related parties only in the context of an EAG, however, this conclusion is not firmly supported by the Notice and needs to be clarified in the forthcoming regulations.

Public Comments and Next Steps

The public comment period provided by Notice 2005-14 ended on March 31, 2005. The Treasury Department received a large number of comments covering a wide range of issues arising under section 199 and the Notice.

The most frequently discussed issue relating to the calculation of DPGR appears to have been the treatment of contract manufacturers, with several commentators expressing concern regarding the restrictive "benefits and burdens" standard adopted by Treasury. (46) The treatment of QPP provided to consumers through emerging technologies, such as software available on a remote server (47) and books available in an electronic format, (48) also elicited a number of comments, as did the definition of "embedded services." (49) Two commentators recommended that DPGR not include any gross receipts attributable to transactions arising after the EAG's first sale of the QPP to a third party, such as receipts from a lease, rental, or sale following the group's reacquisition of QPP previously manufactured and sold by the EAG. (50)

A number of commentators raised questions and concerns regarding the manner in which the Notice applies section 199 to domestic construction activities (51) as well as the limitations Treasury has placed on engineering and architectural services. (52)

The mandatory use of the section 861 method by all taxpayers with more than $25 million in average annual gross receipts also was the subject of considerable discussion, with a number of commentators emphasizing the need for alternative methods. (53) Others expressed concern regarding the allocation of interest expense under the section 861 method by an EAG that includes a finance company not engaged in production activities. (54)

With regard to the treatment of passthrough entities, Treasury received a request that the in-kind distribution rules currently applicable only to oil and gas partnerships be made available to all in-kind partnerships, (55) a request for clarification regarding the application of the W-2 wage limitation in the context of partnerships, (56) as well as comprehensive comments regarding the application of section 199 to farmers' cooperatives. (57)

The government hopes to issue proposed regulations under section 199 sometime during Summer 2005, with final regulations to be issued by April 21, 2006 (i.e., within 18 months of the October 2004 enactment of section 199, in order to meet the requirements of section 7805(b)(2) for the regulations to apply retroactively). (58) In the meantime, taxpayers may rely on the guidance provided by Notice 2005-14. Treasury officials have commented publicly that any disadvantageous changes to the Notice will apply prospectively only. Taxpayer-favorable changes, on the other hand, can be expected to be available retroactively, on an elective basis.

(1) The author gratefully acknowledges the assistance of Alexander Zakupowsky, Jr., J. Michael Cornett, Rocco Femia, and Dwight Mersereau of Miller & Chevalier Chartered, and of Beth Benko of Ernst & Young LLP in the preparation of this article.

(2) Section 199 was added by section 102 of the American Jobs Creation Act (H.R. 4520), which was signed by President Bush on October 22, 2004.

(3) Section 199 permits a three-percent deduction of qualified production income in 2005 and 2006, six percent in 2007 through 2009, and nine percent in 2010 and thereafter. The nine-percent rate will effectively reduce the maximum corporate tax rate from 35 percent to 32 percent.

(4) References to the legislative history of section 199 are to the Conference Report on the American Jobs Creation Act of 2004, H.R. Rep. No. 108-755, 108 th Cong., 2d Sess. (Oct. 7, 2004).

(5) 2005-7 I.R.B. 498.

(6) See generally section 4.04(8) of the Notice.

(7) See also Treas. Reg. [section] 1.861-18.

(8) See generally section 4.04(3) of the Notice.

(9) Section 4.04(3)(b) of the Notice.

(10) Treas. Reg. [subsection] 1.263A-l(b)(12) and 1.263A-2(b)(3)(iv).

(11) Treas. Reg. [section] 1.263A-1(b)(2) (long-term contracts); Rev. Proc. 2000-50, 2000-2 C.B. 601 (software).

(12) Section 4.04(4) of the Notice.

(13) See section 3.04(4) of the Notice.

(14) See also section 3.04(5) of the Notice.

(15) See sections 3.04(5)(d) and 4.04(5)(b) of the Notice.

(16) Id.

(17) Bausch & Lomb Inc. v. Commissioner, T.C. Memo 1996-57.

(18) See section 4.09(2)(b) of the Notice.

(19) Sections 3.04(4) and 4.04(4) of the Notice.

(20) See section 4.12(b) of the Notice regarding application of section 199 in the context of like-kind exchanges.

(21) Sections 3.04(7)(b) and 4.04(7)(b) of the Notice.

(22) Treas. Reg. [section] 1.263(a)-4(h).

(23) Section 4.04(9) of the Notice.

(24) Section 4.04(8)(c) and (d) of the Notice (software and sound recordings, respectively). See generally section 3.04(8)(b) of the Notice.

(25) Section 4.03(2) of the Notice.

(26) See generally section 4.04(9) of the Notice.

(27) The same conclusion should be true for the various other allocations required by the Notice, including the allocation of gross receipts between DPGR and non-DPGR and the allocations required by the "section 861 method" discussed in the text that follows. Where the allocations do not involve the timing of an item of income or expense, the allocation method chosen would not be a method of accounting for purposes of section 446(e) and could be changed without IRS consent.

(28) Section 3.04(9)(a) of the Notice states, "In no event will ticket sales for viewing qualified films constitute DPGR." Presumably this statement applies only to ticket sales by exhibitors that do not belong to the EAG that MPGE the qualified film. This statement should have no effect on the EAG's ability to include in its DPGR amounts received from such exhibitors that are based on ticket sales (i.e., exhibition fees stated as a percentage of box office receipts). This conclusion is consistent with that section's statement that if a taxpayer produces a qualified film and licenses it to unrelated commercial theaters, the taxpayer's gross receipts from the license of the qualified film (the right to publicly display the film) are included in the taxpayer's DPGR, even though the gross receipts attributable to the lease of the tangible medium to which the qualified film is affixed are not. Using box office receipts to calculate this license fee should have no effect on its inclusion in DPGR.

(29) See generally section 4.04(10) of the Notice.

(30) See generally section 4.04(11) of the Notice.

(31) See generally Treas. Reg. [section] 1.446-1(d).

(32) Sections 3.04(11)(d) and 4.04(11)(d) of the Notice.

(33) Section 4.04(11)(e) of the Notice.

(34) See section 3.04(11)(e)(i) of the Notice.

(35) Section 4.04(11)(e) of the Notice.

(36) Section 4.04(11)(a) of the Notice.

(37) See generally section 4.04(12) of the Notice.

(38) Section 4.05(2) of the Notice.

(39) Section 4.05(3)(c) of the Notice.

(40) Section 4.05(3)(d) of the Notice.

(41) Section 4.05(4) of the Notice.

(42) Not surprisingly, Treasury officials have informally suggested that taxpayers need not literally undertake separate QPAI calculations for each individual item.

(43) Section 4.09(1) of the Notice.

(44) This standard likely will be changed through a technical correction to section 199 to read "more than 50 percent."

(45) See generally section 4.06 of the Notice.

(46) "Aerospace Industry Group Concerned About Guidance on New Manufacturing Deduction Provision," 2005 TNT 49-33 (March 15, 2005) (comments of Aerospace Industries Association); "Group Seeks Changes in Production Activities Deduction Guidance," 2005 TNT 62-25 (March 25, 2005) (comments of Electronic Industries Alliance); "Grocers Concerned With Treatment of Contract Manufacturing," 2005 TNT 67-12 (March 29, 2005) (comments of Grocery Manufacturers of America); "Attorney Comments on Guidance on Domestic Production Deduction," 2005 TNT 72-26 (March 31, 2005) (comments of White & Case LLP).

(47) "Online Software Company Seeks Benefits Under New Domes tic Production Activities Deduction," 2005 TNT 60-32 (March 22, 2005) (comments of Salesforce.com); "IT Group Seeks Change in Domestic Production Activities Deduction Rules," 2005 TNT 63-45 (March 31, 2005) (comments of Information Technology Association of America); "Attorneys Address Treatment of Software Under Domestic Production Activities Provision," 2005 TNT 72-24 (March 31, 2005) (comments of Software Coalition) ("Software Coalition Comments"); "Software Groups Object to Narrow Construction of Manufacturing Deduction," 2005 TNT 77-31 (March 31, 20051 (comments of Software & Information Industry Association and TechNet).

(48) "Publishers Urge that Manufacturing Deduction Apply to Electronic Books," 2005 TNT 72-19 (March 22, 2005) (comments of Association of American Publishers).

(49) "Automobile Group Comments on Domestic Production Activities Deduction," 2005 TNT 72-22 (March 31, 2005) (comments of Association of International Automobile Manufacturers) ("AIAM Comments"); "Tax Advisers Comment on Domestic Production Activities Deduction," 2005 TNT 72-23 (March 31, 2005) (comments of Alvarez & Marsal Tax Advisory Services LLC); Software Coalition comments, supra at note 47.

(50) AIAM Comments, supra note 49; "Attorney Seeks Clarity in Manufacturing Deduction Guidance," 2005 TNT 67-13 (March 31, 2005) (comments of Alston & Bird LLP).

(51) "E&Y Offers Manufacturing Comments on Behalf of Homebuilders, Land Developers," 2005 TNT 31-13 (Feb. 15, 2005); "Company Seeks Assurance that Rental Income Qualifies for Deduction," 2005 TNT 72-20 (March 24, 2005) (comments of United Rentals, Inc.): "AICPA Suggests Clarifications to Domestic Production Activities Guidance," 2005 TNT 72-27 (March 31, 2005) (comments of American Institute of Certified Public Accountants) ("AICPA Comments").

(52) "Attorney Comments on Manufacturing Deduction Guidance," 2005 TNT 46-16 (comments of former IRS Commissioner Donald Alexander); "Group Seeks Change in Domestic Production Activities Guidance," 2005 TNT 72-21 (Marcia 29, 2005) (comments of Design Professionals Coalition); "PwC Makes Recommendations for Domestic Production Deduction Guidance," 2005 TNT 72-28 (March 31, 2005) (comments of PricewaterhouseCoopers LLP on behalf of oilfield equipment and services companies) ("PwC Comments"); "Architects Take Issue With Definition of 'Construction Project'," 2005 TNT 72-14 (April 15, 2005) (comments of American Institute of Architects).

(53) "Electric Industry Group Comments on Domestic Production Incentive," 2005 TNT 49-34 (March 15, 2005) (comments of the Edison Electric Institute); "Grant Thornton Comments on Domestic Production Activities Deduction," 2005 TNT 70-28 (April 1, 2005); AIAM Comments, supra note 49; AICPA Comments, supra note 51; PwC Comments, supra note 52.

(54) AIAM Comments, supra note 49; "Attorney Seeks Clarification of Guidance on Domestic Production Activities Deduction," 2005 TNT 65-14 (April 6, 2005) (comments of Hogan & Hartson LLP).

(55) "Attorneys Seek Clarification of Issues Under Manufacturing Deduction Guidance," 2005 TNT 67-14 (March 31, 2005) (comments of Miller & Chevalier Chartered).

(56) AICPA Comments, supra note 51.

(57) "Farmer Co-Ops Seek Clarity in Guidance on Domestic Production Deduction," 2005 TNT 72-25 (March 29, 2005) (comments of National Council of Farmers Cooperatives).

(58) "Domestic Production Guidance Expected This Summer, Treasury Official Says," 2005 TNT 64-5 (April 5, 2005) (remarks of George Manousos at TEI 2005 Midyear Conference).

JAMES L. ATKINSON is Counsel with Miller & Chevalier Chartered in Washington, D.C. Before joining the firm, Mr. Atkinson worked at the Internal Revenue Service, where he was both an Assistant to the Commissioner and, most recently, Associate Chief Counsel (Income Tax and Accounting). A graduate of the University of South Carolina and the University of Illinois College of Law, he is an adjunct professor of law at Georgetown University Law Center, where he teaches Federal Tax Accounting.
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