United States: Court Allows Producer Of Unit-Dose Pharmaceutical Products Section 199 Deduction

In Precision Dose, Inc. v. U.S., No. 3:12-cv-50180 (N.D. Ill. 2015), a U.S. district court ruled that a taxpayer selling "unit doses" of medications was entitled to claim the Domestic Production Activities Deduction (DPAD) under Section 199. The taxpayer's activities in question were analogous to those examined in United States v. Dean, 945 F. Supp. 2d 1110 (C.D. Cal. 2013), and therefore were part of a complex production process resulting in a distinct final product.

The taxpayer sells unit doses of medications; a unit dose is a drug in a nonreusable container intended for administration as a single dose to a patient. The taxpayer undertakes producing these unit doses, which includes numerous activities such as testing unit dose suitability and marketability, preparing specifications and documentation for material to be used, developing cups and syringes, setting up and conducting fill operations, conducting in-process testing, and performing batch record reviews to confirm no anomalies occurred during production.

The taxpayer claimed the Section 199 DPAD on its 2007 and 2008 tax returns. The deduction, if allowed, would result in refunds to the taxpayer of $72,522 plus interest for 2007 and $74,146 plus interest for 2008.

The court determined that the activities described were analogous to those found in Dean. In Dean, the taxpayer purchased various items and then assembled the items as gift baskets using a complex production process; the items purchased were transformed into a distinct final product. The government argued Dean was wrongly decided, and the taxpayer engaged only in repackaging, which is expressly excepted from the definition of manufactured, produced, grown or extracted under Treas. Reg. Sec. 1.199-3(e)(2) .

The court in Precision Dose disagreed with the government, and agreed with the result in Dean that the gift basket was a unique product itself with its own form and function, and not simply repackaged components. The court reasoned that while producing unit doses similarly involves packaging or repackaging, the taxpayer engaged in other production activities, which render the Treas. Reg. Sec. 1.199-3(e)(2) exception inapplicable. Accordingly, the court determined the taxpayer was entitled to the Section 199 deduction.

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