In Industry Director Directive on Domestic Production Deduction #3 (3/4/2009) (the “IDD”), the IRS addressed the treatment of post-2004 compensation deductions (e.g., pension expense and medical-related costs) that relate to services rendered prior to 2005. The IDD held that the treatment of such deductions requires an analysis under the “section 861 method”. In lieu of detailed support regarding the lack of a factual relationship between a deduction and domestic production gross receipts (“DPGR”), the IDD allowed taxpayers to treat such deductions as not properly allocable to DPGR, subject to a 10% haircut. The haircut relates to the — sometimes real, sometimes theoretical – possibility that some of the services rendered prior to 2005 may relate to the production of (post-2004) DPGR. The scope of the IDD was limited to expenses not subject to §263A. Read More