[Congressional Record Volume 148, Number 25 (Friday, March 8, 2002)]
[Senate]
[Page S1702]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                         INCOME FORECAST METHOD

  Mr. DASCHLE. Mr. President, I would like to engage in a brief 
colloquy with the distinguished chairman and ranking member of the 
Finance Committee, Senator Baucus and Senator Grassley, regarding a tax 
issue that I had hoped to clarify as part of this legislation, which 
will have serious economic ramifications for several important 
industries.
  Recently, some uncertainty has arisen regarding the proper tax 
treatment of residuals and participations under the income forecast 
method of depreciation. I would ask the distinguished chairman and 
ranking member if they could clarify this issue.
  Mr. BAUCUS. In 1993, the United States Court of Appeals for the Ninth 
Circuit held in Transamerica Corporation v U.S. that, for purposes of 
the income forecast depreciation method, the anticipated cost of 
participations and residuals should be included in a property's cost 
basis at the beginning of the property's depreciable life.
  As the Ninth Circuit determined in Transamerica, inclusion of 
participations and residuals in a property's initial cost basis is 
necessary to properly match the income and expenses associated with the 
property and to clearly reflect income. Yet, it is my understanding 
that the IRS is not currently permitting such treatment. To eliminate 
the current uncertainty, Senator Grassley and I have encouraged 
Treasury to consider regulations clarifying that participations and 
residuals may be included in a property's initial cost basis for 
purposes of the income forecast method of depreciation.
  Mr. GRASSLEY. I agree with Senator Baucus. Excluding participations 
and residuals from a property's initial depreciable cost basis under 
the income forecast method results in a mismatching of income from the 
property and the expenses incurred in producing the property. The Ninth 
Circuit reached this conclusion in Transamerica. Moreover, I would note 
that including participations and residuals in the initial depreciable 
cost basis is consistent with industry standards in computing income 
for financial accounting purposes. We should remove this uncertainty to 
avoid needless disputes and to ensure the accurate reflection of 
taxpayers' income.
  Mr. DASCHLE. I want to thank both of my distinguished colleagues for 
this important clarification. I understand that Treasury is considering 
this issue currently as part of its 2001 Priority Guidance Plan. For 
the record, I would note that Senators Baucus and Grassley previously 
sent a letter to Treasury Secretary O'Neill asking him to consider 
regulations that eliminate the current uncertainty by clarifying that 
participations and residuals may be included in a property's initial 
cost basis for purposes of the income forecast method of depreciation. 
I agree with my colleagues and urge Treasury to issue such regulations.
  Mr. BREAUX. Mr. President, I completely agree with the previous 
colloquy of my distinguished colleagues on the income forecast method 
of depreciation. The motion picture industry presently is facing a 
legal cloud that has serious economic implications for the industry. 
The cloud concerns the tax treatment of residual and participation 
payments under the income forecast method of accounting, the 
predominant method of accounting for the industry.
  In 1993, the Ninth Circuit held in Transamerica Corporation v U.S. 
that participations and residuals are included in the initial cost 
basis of a property for purposes of the income forecast method. Yet, 
despite this clear result, I understand that the Internal Revenue 
Service is beginning to challenge that treatment. Simply put, this is 
wrong--as a matter of law, as a matter of policy, and as a matter of 
fairness.
  The Transamerica decision continues to remain the proper result under 
present law. As the Transamerica Court found, the inclusion of 
participations and residuals in the film's costs is necessary in order 
to match income and expenses property and to clearly reflect income.
  I believe we must quickly lift this cloud of uncertainty from one of 
our most critical industries. I am in agreement with my colleagues that 
Treasury should issue regulations which eliminate the current 
uncertainty this year as part of its 2001 Priority Guidance Plan.

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