DPAD Allowed For the Creation of Unit Doses of Drugs.

The plaintiff was in the business of selling “unit doses” of drugs in non-reusable container intended for single-dose administration to patients.  The plaintiff bought the drugs it identifies as suitable for unit doses in bulk and then engages in operating procedures for the processes and equipment to be used in converting the drugs purchased in bulk into unit doses.  The IRS denied a domestic production activities deduction (DPAD) under I.R.C. Sec. 199 on the basis that the plaintiff’s activities constituted “packaging, repackaging, labeling and minor assembly” under Treas. Reg. Sec. 1.199-3(e)(2).  The plaintiff claimed that its activities were comparable to the taxpayer’s activities in United States v. Dean, 945 F. Supp. 2d 1110 (C.D. Cal. 2013) where the taxpayer assembled gift baskets and was allowed a DPAD.  The court agreed with the taxpayer in this case and allowed the DPAD on the basis that the activities involved were analogous to those in Dean.  The court believed that activities beyond mere packaging and repackaging were involved, including market research to identify which drugs to buy, testing of drugs, studies involving the mixing of drugs, testing of plastics, and other related activities.  As such, the plaintiff was engaged in a production process and was entitled to a DPAD on its qualified production income.  While the case was decided after the IRS proposed new DPAD regulations containing an example noting the disagreement of the IRS with the result of Dean, the court’s opinion did not involve any analysis or application of those regulations.  Precision Dose, Inc. v. United States, No. 12 C 50180, 2015 U.S. Dist. LEXIS 128115 (N.D. Ill. Sept. 24, 2015).