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LB&I directive: Guidance on DPAD claims under now-repealed section 199

Guidance on DPAD claims under now-repealed section 199

The IRS Large Business and International (LB&I) division today publicly released a directive as guidance for LB&I examiners concerning taxpayer claims for an additional domestic production activity deduction (DPAD) under now-repealed section 199.


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The LB&I directive* (LB&I-04-1118-016, dated November 21, 2018):

  • Addresses compliance risk associated with the repeal of the DPAD
  • Provides guidance when a taxpayer files an amended return or claim for refund relating to the DPAD under section 199  
  • Is intended to provide a uniform approach to evaluating the claims and for the “most efficient use of LB&I resources” 

* An LB&I directive is a memorandum from the LB&I Division Commissioner within the Internal Revenue Service (IRS) to IRS directors and field specialists in order to provide notice and field direction on the application of a particular section or concept within the Internal Revenue Code.

Repeal of section 199

Prior to being repealed, section 199 generally provided for a tax deduction equal to 9% of the lesser of (1) the qualified production activities income (QPAI) of the taxpayer for the tax year, or (2) the taxpayer’s taxable income for the tax year. The amount of the deduction allowable for any tax year was limited to 50% of the W-2 wages of the taxpayer for the tax year properly allocable in the determination of QPAI.

The new U.S. tax law (Pub. L. No. 115-97) repealed the DPAD under section 199 for tax years beginning after December 31, 2017. As noted in the LB&I directive, claims for the DPAD for 2018 or later years are not to be made unless one of the following situations applies:

  • The tax year began before January 1, 2018
  • The DPAD results from being a shareholder or partner in an S corporation or partnership with a tax year that began before January 1, 2018
  • The DPAD results from being a beneficiary of an estate or trust with a tax year that began before January 1, 2018
  • The DPAD results from being a patron of an agricultural or horticultural cooperative with a tax year that began before January 1, 2018

LB&I directive

LB&I has established a process to risk assess section 199-related amended returns and claims for refund for tax years prior to the repeal of section 199. Claims for refund filed with the IRS Service Center in Ogden, Utah, or with an examiner will be “risk assessed.” According to the directive, materiality will be considered during the risk review process. 

The LB&I directive provides:

  • An examiner who receives an informal claim for refund, an amended return not filed with the campus, or a Joint Committee on Taxation (JCT) case under section 199 must submit an inquiry to the Corporate Income and Losses (CIL) Practice Network (PN). 
  • A member or members of the risk review team (comprised of CIL PN employees and field examiners) will assist in risk assessing the amended return or claim for refund. 
  • Examiners are to follow existing guidelines (IRM to determine that the claim is valid and meets the requirements under Reg. section 301.6402-2. 
  • In disallowing a claim, examiners are to refer to the procedures in IRM and the LB&I Reference Guide for Claims and to the “written acknowledgment of the facts” process in IRM
  • Examiners are to consider imposing a penalty under section 6676 if appropriate in instances when the claim is denied.

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