The US District Court for the Central District of California recently concluded in United States v. Dean, 2013 WL 2255254 (C.D. Cal., May 7, 2013), that the activities of a gift basket company qualified as manufacturing activities eligible for the Section 199 domestic manufacturing deduction. The gift basket company’s activities involved purchasing various items — such as chocolates, cookies, candy, cheeses, crackers, wine, and alcohol — from third parties, and combining these items together in gift baskets or towers.
The court concluded that the company’s activities were not merely the packaging and repackaging of goods, but changed the form and function of the individual items into a new product with a different demand, namely a gift. Taxpayers that engage in this activity or similar activities — for example, by combining two or more purchased raw materials and using those, and perhaps other raw materials, to form a new item -- should consider the potential impact of this case on eligibility for the Section 199 deduction.