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AGC Responds to IRS Section 199 Comment Period

December 3, 2015

Last week, AGC submitted a comment letter in response the IRS Notice Of Proposed Rulemaking issued in August on proposed amendments to regulations involving the domestic production activities deduction under Section 199 of the Internal Revenue Code. Specifically, the comments addressed the definition of “substantial renovation” in Prop. Treas. Reg. §1.199-3(m)(5), which indicates that activities constitute substantial renovation where they would be a capitalizable improvement under Section 263(a).

Section 199 was added to the Code by the American Jobs Creation Act of 2004. For construction activities, gross receipts derived from construction of real property performed in the United States by the taxpayer in the ordinary course of business are domestic production gross receipts. The final regulations issued by the IRS in May 2006 provide that activities constituting construction include activities performed by a general contractor, including management and oversight of the construction process such as approvals, periodic inspection of progress of the construction project, and required job modifications.

Over the years, proposed and temporary regulations originally have intended to address a number of legislative changes to Section 199. However, the IRS determined that it also needed to address a variety of other issues that have arisen over the years at IRS exam, Appeals, and in the courts. The topics and associated comments will be discussed at a public hearing scheduled for Dec. 16 at 10:00 AM.

The preamble to the newly proposed regulations states that some taxpayers have interpreted the 2006 regulations to mean that a taxpayer that only approves or authorizes payments is engaged in activities typically performed by a general contractor. To clarify the definition of construction, the proposed regulations would add that a taxpayer whose engagement in the activity is primarily limited to approving or authorizing invoices or payments is not considered engaged in a construction activity as a general contractor or in any other capacity.

AGC notes in the letter that the proposed definition of substantial renovation would lead to significant controversies between taxpayers and the IRS since it does not correspond with the broad rules for determining construction activities; and would not be administrable, since it would require construction firms to step into the shoes of property owners and determine whether costs are capitalizable under Section 263(a) where the E&C taxpayers lack the information to make such determinations. Therefore, AGC proposed that Treasury and the IRS retain the current definition, which has generated little controversy, or alternatively, modify the proposed definition of substantial renovation as described above.

For more information, please contact Brian Lenihan at lenihanb@agc.org or (202) 547-4733.

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