IRS clarifies definition of 'construction of real property' for purposes of sec. 199.

• Author: Karnis, Daniel

In a technical advice memorandum (TAM 201638022), the IRS National Office of the Chief Counsel determined a taxpayer's substantial renovation, construction, and erection of certain property qualified as the construction of real property under Sec. 199 such that the gross receipts derived from those activities qualified as domestic production gross receipts (DPGR). In reaching its decision, the Chief Counsel determined that the property was "inherently permanent structures" (as defined in Regs. Sec. 1.263A-8(c)(3)) under Regs. Sec. 1.199-3(m)(3).

Facts

The taxpayer, a U.S. construction contractor, engaged in a trade or business that is considered construction for purposes of the North American Industry Classification System on a regular and ongoing basis and derived gross receipts from the renovation of major components and substantial structural parts of property used in facilities already in existence or being constructed.

The taxpayer claimed that the substantial renovation, construction, or erection of the property constituted the construction of real property under Sec. 199. The Large Business & International (LB&I) examination team, with the assistance of local counsel from LB&I Division Counsel, argued that the taxpayer's activities performed in constructing the property did not qualify as the construction of real property under Sec. 199, asserting the property was tangible personal property.

The taxpayer and LB&I requested technical advice from the Chief Counsel's Office on the qualification under Sec. 199 of gross receipts that the taxpayer derived from the projects related to the substantial renovation, construction, or erection of the items in the United States.

Law

Sec. 199(c)(4)(A)(ii) provides that, in the case of a taxpayer engaged in the active conduct of a construction trade or business, DPGR include gross receipts derived from construction of real property performed in the United States by the taxpayer in the ordinary course of that trade or business. Regs. Sec. 1.199-3(m)(1)(i) defines "construction" as activities and services relating to the construction or erection of real property in the United States. Regs. Sec. 1.199-3(m)(2)(i) describes activities constituting construction as those performed in connection with a project to erect or substantially renovate real property.

Regs. Sec. 1.199-3(m)(3) provides that "real property" includes "inherently permanent structures (as defined in [Regs. Sec.] 1.263A-8(c)(3)) other...