Final Code Sec. 199 Regulations Support Attribution of Contract Manufacturer's Activities Under Subpart F

From 1964 through 1997, the IRS determined that a proper reading of Section 954(d) and the regulations thereunder requires that the selling controlled foreign corporation (CFC) be considered as engaging in the activities of a contract manufacturer that produces property on its behalf. However, the IRS reversed its position. Rev. Rul. 97-48 states that a CFC can never qualify for the manufacturing exception under such circumstances. The final regulations under Section 199 state that property will satisfy the selling, exchanging, leasing, or licensing requirements if the manufacturing activity of the taxpayer within the US is substantial in nature. In the absence of any legislative guidance, the words " by the taxpayer" do not prohibit a taxpayer from taking into account the activities of a contract manufacturer. The IRS and the Treasury are encouraged to provide subpart F guidance more in line with general federal income tax principles for determining when a CFC that contracts with another party to manufacture its products should be considered the manufacturer of the products it sells.