The IRS Large Business and International Division (LB&I) has issued an Industry Director Directive (the Directive) to LB&I examiners for use in determining whether a taxpayer has the benefits and burdens of ownership (B&B) under a contract manufacturing arrangement for purposes of Reg. sec. 1.199-3(f)(1). The Directive is intended to simplify and streamline what has been one of the most difficult and controversial section 199 determinations for taxpayers and the IRS.
The Directive sets forth a three-step process that focuses solely on nine factors for making the B&B determination. However, it appears likely that at least some of the nine factors will generate disagreement and issues of interpretation. As a result, many situations will continue to require an analysis of the regulations' “all the facts and circumstances” test.