United States

Taxpayer's print ad expenses do not result in DPGR

IRS advice memorandum clarifies the advertisement income rules of DPGR


An increase in sales due to advertising does not qualify the costs as domestic production gross receipts (DPGR) under the advertising income rules of Reg. section 1.199-3(i)(5)(ii)(A), according to a Chief Counsel Advice Memorandum 201626024 released June 24, 2016.

The IRS answered the question whether a taxpayer can claim a portion of its gross receipts derived from the sale of its products, which were entirely manufactured, produced, grown or extracted outside of the United States, as DPGR from advertising income. The taxpayer is a clothing manufacturer who sells its products both in the United States and internationally at retail stores, as well as through its website and over the phone (catalog sales). The taxpayer advertises through various mediums of print media, manufactured in the United States through a third party, to which it has the benefits and burdens of ownership. The taxpayer does not sell any of the print media to third parties nor does it sell advertising space to third parties in the print media it distributes.

The taxpayer argued that it should be entitled to a domestic production activities deduction for the print media they manufacture because the advertising expenses are a component of the products they sell. The taxpayer believes that a portion of the revenue generated from products sold in stores and online are attributable to the advertising costs, and, as such, should be included as DPGR under the advertising income rule of Reg. section 1.199-3(i)(5)(ii)(A).

The IRS determined that the taxpayer was misapplying the advertising income rule provided in the regulations. The rule provided under Reg. section 1.199-3(i)(5)(ii)(A) provides that advertising income that is earned by the selling of advertising space in a medium is eligible as DPGR, not that income earned from effective advertising would be DPGR. In the taxpayer’s situation, no one is purchasing advertising space from them in the printed medium, thus, the amounts the taxpayer pays for the ads are non-DPGR.


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