Construction of inherently permanent structures eligible for Section 199

The IRS released a technical advice memorandum (TAM 201638022) concluding that a taxpayer’s construction activities and the resulting gross receipts represented domestic production gross receipts (DPGRs) and that the properties constructed are inherently permanent structures as defined in Treas. Reg. Sec. 1.263A-8(c)(3).

Construction activities can qualify for the domestic production activity deduction (DPAD) under Section 199, but Treas. Reg. Sec. 1.199-3(m)(3) requires the constructed property to be “real property.” The taxpayer addressed by the TAM was in a trade or business considered construction for purposes of the North American Industry Classification System (NAICS) on a regular and ongoing basis. The taxpayer’s activities in the United States involved substantial renovation, construction or erection of a certain type of property. The analysis focused on whether the property in question, which had a heavily redacted description, was “real property” under Treas. Reg. Sec. 1.199-3(m)(3).

Treas. Reg. Sec. 1.199-3(m)(3) provides that “real property” includes “inherently permanent structures (as defined in Treas. Reg. section 1.263A-8(c)(3)) other than machinery (as defined in Treas. Reg. Sec. 1.263A-8(c)(4)) (including items that are structural components of such inherently permanent structures).” The construction of machinery as defined in Treas. Reg. section 1.263A-8(c)(4) isn’t a construction activity eligible for the Section 199 deduction. The IRS determined that the properties constructed by the taxpayer were inherently permanent structures, and therefore the taxpayer may be entitled to the deduction under Section 199, assuming all of the other Section 199 requirements are met. 


Sharon Kay

Partner, Washington National Tax Office
T +1 202 861 4140

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