The final and temporary regulations that are the subject of this correction are under section 199 of the Internal Revenue Code.

As published, final and temporary regulations (T.D. 9293) contain errors that may prove to be misleading and are in need of clarification.

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Accordingly, 26 CFR part 1 is corrected by making the following amendments:

Paragraph 1. The authority citation for part 1 is amended by adding entries in numerical order to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

Section 1.199-5T also issued under 26 U.S.C. 199(d). * * *

Section 1.199-7T also issued under 26 U.S.C. 199(d). * * *

Par. 4. Section 1.199-2T(e)(2) is amended by revising the eleventh sentence of Example 2 paragraph (i) and the seventh sentence of Example 5 paragraph (iv) to read as follows:

Example 2. * * *

(i) * * * For Y’s taxable year ending April 30, 2011, the total square footage of Y’s headquarters is 8,000 square feet, of which 2,000 square feet is set aside for domestic production activities. * * *

Example 5. * * *

(iv) * * * The EAG’s tentative section 199 deduction is $360,000 (.09 X (lesser of combined QPAI of $4,000,000 (B’s QPAI of $4,000,000 + S’s QPAI of $0) or combined taxable income of $4,200,000 (B’s taxable income of $4,000,000 + S’s taxable income of $200,000))) subject to the W-2 wage limitation of $50,000 (50% x ($100,000 (B’s W-2 wages) + $0 (S’s W-2 wages))). * * *

Par. 8. Section 1.199-5T is amended by revising sentences eight through ten of paragraph (e)(4)(ii)(A) and revising paragraph (g) to read as follows:

(e) * * *

(4) * * *

(ii) * * *

(A) * * * In this step, in this example, the portion of the trustee commissions not directly attributable to the rental operation ($2,000) is directly attributable to non-trade or business activities. In addition, the state income and personal property taxes are not directly attributable under § 1.652(b)-3(a) to either trade or business or non-trade or business activities, so the portion of those taxes not attributable to either the PRS interests or the rental operation is not a trade or business expense and, thus, is not taken into account in computing QPAI. The portion of the state income and personal property taxes that is treated as an other trade or business expense is $3,000 ($5,000 x $30,000 total trade or business gross receipts/$50,000 total gross receipts). * * *

(g) No attribution of qualified activities. Except as provided in § 1.199-3T(i)(7) regarding qualifying in-kind partnerships and § 1.199-3T(i)(8) regarding EAG partnerships, an owner of a pass-thru entity is not treated as conducting the qualified production activities of the pass-thru entity, and vice versa. This rule applies to all partnerships, including partnerships that have elected out of subchapter K under section 761(a). Accordingly, if a partnership manufactures QPP within the United States, or produces a qualified film or produces utilities in the United States, and distributes or leases, rents, licenses, sells, exchanges, or otherwise disposes of such property to a partner who then, without performing its own qualifying activity, leases, rents, licenses, sells, exchanges, or otherwise disposes of such property, then the partner’s gross receipts from this latter lease, rental, license, sale, exchange, or other disposition are treated as non-DPGR. In addition, if a partner manufactures QPP within the United States, or produces a qualified film or produces utilities in the United States, and contributes or leases, rents, licenses, sells, exchanges, or otherwise disposes of such property to a partnership which then, without performing its own qualifying activity, leases, rents, licenses, sells, exchanges, or otherwise disposes of such property, then the partnership’s gross receipts from this latter disposition are treated as non-DPGR.

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