SECTION 4. APPLICATION

.01 In general . For purposes of § 199, the use of statistical sampling will be considered a reasonable method that is satisfactory to the Secretary to the extent the sampling methodology used meets the requirements of section 4.02 of this revenue procedure and follows the procedures provided in Appendix A (Sampling Plan Standards), Appendix B (Sampling Documentation Standards), and Appendix C (Technical Formulas). For example, pursuant to this revenue procedure, statistical sampling may be used to:

(1) allocate gross receipts between DPGR and non-DPGR under § 1.199–1(d)(1) of the Income Tax Regulations;

(2) determine whether gross receipts qualify as DPGR on an item-by-item basis under § 1.199–3(d)(1);

(3) allocate CGS between DPGR and non-DPGR under § 1.199–4(b)(2)(i); and

(4) allocate deductions that are properly allocable to DPGR or gross income attributable to DPGR under § 1.199–4(c)(1).

.02 When statistical sampling is appro- priate . The appropriateness of using a statistical sample for purposes of § 199 is a facts and circumstances determination. Factors used in determining whether a statistical sample is appropriate include, but are not limited to, the time required to analyze large volumes of data, the cost of analyzing data, the existence of verifiable information relevant to the taxpayer’s § 199 calculation, and the availability of more accurate information. For purposes of § 199, statistical sampling will generally be considered appropriate if the taxpayer can demonstrate a compelling reason for its use.

.03 Examples . Example 1 . X manufactures domestically and sells a variety of mechanical fasteners, including bolts, nuts, and screws. Some of these products are not manufactured by X but instead are purchased from non-related entities. In many cases, products that are purchased by X are the same type of products manufactured by X . In addition, X manufactures the same products in Mexico. Because these products

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designed to improve the precision of the estimate, such as stratification techniques, are acceptable and often preferred.

2. Statistical sampling methodology may not include the use of judgment sampling.

3. Taxpayers may apply the results of a statistical sample only to transactions that both (a) occurred in the taxable year in which the § 199 deduction is recognized and (b) involve items included in the population from which the statistical sample was taken.

4. Any estimated amount must be based on a statistical sample, in which each sampling unit has a known (non-zero) chance of selection, using either a simple random sampling method or stratified random sampling method.

5. A conclusion must be reached as to the treatment of each selected sampling unit. It is never valid to replace a sampling unit that was selected in the random selection process with another sampling unit, merely because documentation is unavailable or difficult to obtain. In evaluating a sampling unit, the decision reached as to the treatment of the sampling unit must be the same as the conclusion which would be reached if that sampling unit was encountered in a 100% analysis. Therefore, a sampling unit with documentation that is unavailable or difficult to obtain must be treated as failing the § 199 requirement(s) being tested.

6. In general, the computation of any estimated amount must be at the least advantageous 95% one-sided confidence limit. The “least advantageous” confidence limit is either the upper or lower limit that results in the least benefit to the taxpayer. However, if the precision of estimated difference divided by the estimated difference does not exceed 10%, the point estimate may be used in place of the least advantageous confidence limit. All strata for which “substantially all” of the population sampling units are sampled will be treated as 100% strata. That is, the overall point estimate and its precision will be estimated by treating all 100% strata appropriately for the sample design used. Also, the calculation of the denominator for the relative precision will exclude all 100% strata. For this revenue procedure, “substantially all” is defined as 80% or more.

determine the DPGR derived from the license of its film collection.

Example 5 . Assume the same facts as in Exam- ple 4 except that Z develops and executes a proper sampling plan as described in Appendix A. In the process, Z discovers that for some of the sampled films it has no historical records and no reliable data can be obtained from other sources that would help determine whether or not each film represents a “qualified film” produced by Z within the meaning of § 199(c)(4)(A)(i)(II) and (c)(6). In accordance with Paragraph 5 of Appendix A, Z must give a value to any film selected as part of its sample. Therefore, if a film is selected for which no historical records and no reliable data can be obtained, Z will be required to treat the selected film as failing the requirements to be a “qualified film” produced by Z for purposes of § 199(c)(4)(A)(i)(II) and (c)(6).

Example 6 . X manufactures and sells a variety of tools. Some tools sold by X are manufactured entirely by X in the United States. Other tools sold by X are purchased for resale from F, an unrelated foreign corporation. X maintains a computerized sales journal which tracks whether a tool sold by X was manufactured by X or F . Assuming the gross receipts derived from the sale of tools manufactured by X qualify as DPGR and gross receipts derived from the sale of tools purchased from F for resale do not qualify as DPGR, the use of statistical sampling by X to compute its DPGR from the sale of tools would not be appropriate because evidence is readily available from another source that can be demonstrated to be a more accurate determination of DPGR.

.04 Limitations . (1) This revenue procedure applies only to § 199.

(2) This revenue procedure does not establish the correctness of a taxpayer’s interpretation of § 199.

(3) This revenue procedure does not preclude the Internal Revenue Service from raising or pursuing any income, employment, or other tax issues identified in the review of a statistical sample.