[Congressional Record Volume 147, Number 43 (Wednesday, March 28, 2001)]
[Extensions of Remarks]
[Pages E478-E479]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]


           LEGISLATION CLARIFYING THE INCOME FORECAST METHOD

                                 ______
                                 

                            HON. MARK FOLEY

                               of florida

                    in the house of representatives

                       Wednesday, March 28, 2001

  Mr. FOLEY. Mr. Speaker, Congressman Becerra and I introduced 
legislation today to clarify the income forecast method.
  As Chairman of the House Entertainment Industry Task Force, I have 
understood that changes made in the Small Business Job Protection Act 
of 1996 that modified depreciation under the income forecast method 
have had unintended consequences for the movie industry. Our 
legislation corrects those consequences.
  The ``income forecast'' method is a method for calculating 
depreciation under section 167 for certain property, including films. 
Under the income forecast method, the depreciation deduction for a 
taxable year for a property is determined by multiplying the cost of 
the property by a fraction, the numerator of which is the income 
generated by the property during the year and the denominator of which 
is the total forecasted or estimated income to be derived by the 
property during its useful life. The total forecasted income to be 
derived from a property is based on conditions known to exist at the 
end of a period for which depreciation is claimed and these could be 
revised upward or downward at the end of a subsequent taxable year 
based on additional information that becomes available since the last 
estimate. In the case of films, income to be taken into account means 
income from the film less the expense of distributing the film, 
including estimated income from foreign distribution or other 
exploitation of the film including future television exhibition.
  The Small Business Job Protection Act addressed the income forecast 
method in order to make the formula a more appropriate method for 
matching the capitalized costs of certain

[[Page E479]]

property with the income produced by such property. While the new law 
modified the method by including all estimated income generated by the 
property, however, it made no changes to the treatment of 
participations.
  Projected participations--such as percentages of the gross receipts 
due an actor--have been included as part of the total cost of a film 
ever since studios have been forced to forecast the total revenues of a 
film under the income forecast method. But the Internal Revenue Service 
(IRS) has indicated that it will disallow participations as part of a 
film. Participations were not an issue addressed by modification to the 
income forecast method. Studios have negotiated their complex 
transactions based on the clear and well-established principle that the 
cost of a film includes participations.
  The legislation that we have introduced today will ensure that 
participations are a part of the total cost of a film. First, the 
legislation would guarantee that income-contingent costs are includible 
in basis, thereby accepting the conclusion of Transameric Corp. v. U.S. 
The legislation provides that the depreciation allowance, as so 
determined, will apply notwithstanding section 404 or section 419. 
There would be ``no inference'' clause with regard to films placed in 
service after the effective date to the 1996 amendments to section 167 
(that is, films placed in service after September 13, 1995).
  Second, the look-back regime is tightened in two ways: (i) a third 
recomputation year is added; and (ii) the 10 percent de-minimis rule is 
applied on an annual basis not on a cumulative basis in the 
recomputation year. Thus, if the taxpayer initially estimates that the 
film's ultimate income will be $1,000X and the estimated ultimate 
income in year two is increased or decreased by more than 10 percent, 
then the look-back computation is required for that last year. The 10 
percent threshold then applies to the new estimated ultimate income.
  This legislation was the result of consultations with the staff of 
the Committee on Ways and Means and the Joint Committee on Taxation. An 
analysis was done of the legislation for films in the following three 
situations: (1) where the film takes off late; (2) where the film falls 
short of expectations; and (3) where the film exceeds expectations. For 
each scenario, calculations were done using escalating income-
contingent costs, and provided calculations on both an annual basis and 
a cumulative basis of accounting for adjustments to forecasted 
revenues. The conclusion confirmed that the legislative changes would 
not create distortion under the income forecast method.
  We look forward to working with the Committee on Ways and Means to 
find the appropriate legislative vehicle to address this technical 
correction that will reiterate Congressional intent on changes made to 
the income forecast method in the Small Business Job Protection Act.

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