[Federal Register Volume 73, Number 46 (Friday, March 7, 2008)]
[Rules and Regulations]
[Pages 12268-12272]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-4575]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9384]
RIN 1545-BG33


Qualified Films Under Section 199

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations involving the 
deduction for income attributable to domestic production activities 
under section 199. The final regulations revise certain rules and 
examples relating to the definitions of a qualified film produced by 
the taxpayer under section 199(c)(4)(A)(i)(II) and (c)(6) and an 
expanded affiliated group under section 199(d)(4). The final 
regulations affect taxpayers who produce qualified films and taxpayers 
who are members of expanded affiliated groups.

DATES: Effective Date: These regulations are effective March 7, 2008.
    Applicability Date: For dates of applicability, see Sec.  1.199-
8(i)(8) and (9). FOR FURTHER INFORMATION CONTACT: Concerning Sec.  
1.199-3(k), David McDonnell, at (202) 622-3040; concerning Sec.  1.199-
7, Ken Cohen (202) 622-7790 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

    This document amends Sec. Sec.  1.199-3(k) and 1.199-7 of the 
Income Tax Regulations (26 CFR Part 1). Section 1.199-3(k) relates to 
the definition of qualified film produced by the taxpayer under section 
199(c)(4)(A)(i)(II) and (c)(6) of the Internal Revenue Code (Code) and 
Sec.  1.199-7 involves expanded affiliated groups under section 
199(d)(4). Section 199 was added to the Code by section 102 of the 
American Jobs Creation Act of 2004 (Pub. L. 108-357, 118 Stat. 1418), 
and amended by section 403(a) of the Gulf Opportunity Zone Act of 2005 
(Pub. L. 109-135, 119 Stat. 25), section 514 of the Tax Increase 
Prevention and Reconciliation Act of 2005 (Pub. L. 109-222, 120 Stat. 
345), and section 401 of the Tax Relief and Health Care Act of 2006 
(Pub. L. 109-432, 120 Stat. 2922).
    On June 7, 2007, the IRS and Treasury Department published proposed 
regulations under section 199 (72 FR 31478). The proposed regulations 
revise certain rules and examples in TD 9263 (71 FR 31268) relating to 
qualified films produced by the taxpayer under section

[[Page 12269]]

199(c)(4)(A)(i)(II) and (c)(6) and expanded affiliated groups under 
section 199(d)(4). No comments were received responding to the notice 
of proposed rulemaking and no public hearing was requested or held. 
Therefore, the proposed regulations are adopted without change by this 
Treasury decision.

Explanation of Provisions

General Overview

    Section 199(a)(1) allows a deduction equal to 9 percent (3 percent 
in the case of taxable years beginning in 2005 or 2006, and 6 percent 
in the case of taxable years beginning in 2007, 2008, or 2009) of the 
lesser of (A) the qualified production activities income (QPAI) of the 
taxpayer for the taxable year, or (B) taxable income (determined 
without regard to section 199) for the taxable year (or, in the case of 
an individual, adjusted gross income).
    Section 199(c)(1) defines QPAI for any taxable year as an amount 
equal to the excess (if any) of (A) the taxpayer's domestic production 
gross receipts (DPGR) for such taxable year, over (B) the sum of (i) 
the cost of goods sold (CGS) that are allocable to such receipts; and 
(ii) other expenses, losses, or deductions (other than the deduction 
under section 199) that are properly allocable to such receipts.
    Section 199(c)(4)(A)(i) provides that the term DPGR means the 
taxpayer's gross receipts that are derived from any lease, rental, 
license, sale, exchange, or other disposition of (I) qualifying 
production property (QPP) that was manufactured, produced, grown, or 
extracted by the taxpayer in whole or in significant part within the 
United States; (II) any qualified film produced by the taxpayer; or 
(III) electricity, natural gas, or potable water produced by the 
taxpayer in the United States.
    Section 199(c)(6) defines a qualified film to mean any property 
described in section 168(f)(3) if not less than 50 percent of the total 
compensation relating to production of the property is compensation for 
services performed in the United States by actors, production 
personnel, directors, and producers. The term does not include property 
with respect to which records are required to be maintained under 18 
U.S.C. 2257 (generally, films, videotapes, or other matter that depict 
actual sexually explicit conduct and are produced in whole or in part 
with materials that have been mailed or shipped in interstate or 
foreign commerce, or are shipped or transported or are intended for 
shipment or transportation in interstate or foreign commerce).
    Section 199(d)(4)(A) provides that all members of an expanded 
affiliated group (EAG) are treated as a single corporation for purposes 
of section 199. Under section 199(d)(4)(B), an EAG is an affiliated 
group as defined in section 1504(a), determined by substituting ``more 
than 50 percent'' for ``at least 80 percent'' each place it appears and 
without regard to section 1504(b)(2) and (4).

Qualified Film Produced by the Taxpayer

    Under section 199(c)(4)(A)(i)(II), a taxpayer's gross receipts 
qualify as DPGR if the receipts are derived from any lease, rental, 
license, sale, exchange, or other disposition of any qualified film (as 
defined in section 199(c)(6)) produced by the taxpayer. A film must be 
both a ``qualified film'' under section 199(c)(6) and ``produced by the 
taxpayer'' under section 199(c)(4)(A)(i)(II) in order for the gross 
receipts to qualify as DPGR. However, as discussed in the preamble to 
the proposed regulations published on June 7, 2007 (72 FR 31478), the 
``by the taxpayer'' compensation fraction in Sec.  1.199-3(k)(5) in TD 
9263 (71 FR 31268) may have resulted in a film that was produced 
entirely within the United States as not qualifying under section 
199(c)(6) if less than 50 percent of the total compensation relating to 
production was paid ``by the taxpayer.''
    This Treasury decision revises the ``by the taxpayer'' compensation 
fraction in Sec.  1.199-3(k)(5) in TD 9263 (71 FR 31268) for 
determining the not-less-than-50-percent-of-the-total-compensation 
requirement under Sec.  1.199-3(k)(1). Under the revised fraction in 
Sec.  1.199-3(k)(5), the numerator of the revised fraction is the 
compensation for services performed in the United States and the 
denominator is the total compensation for services regardless of where 
the production activities are performed. The revised fraction 
essentially compares (in the numerator) the sum of the compensation for 
services paid by the taxpayer for services performed in the United 
States and the compensation for services paid by others for services 
performed in the United States to (in the denominator) the sum of the 
total compensation for services paid by the taxpayer for services and 
the total compensation for services paid by others for services 
regardless of location.
    Under Sec.  1.199-3(k)(6), a film that is a qualified film under 
Sec.  1.199-3(k)(1) will be treated as ``produced by the taxpayer'' for 
purposes of section 199(c)(4)(A)(i)(II) if the production activity 
performed by the taxpayer is substantial in nature within the meaning 
of Sec.  1.199-3(g)(2). Thus, a qualified film will be treated as 
produced by the taxpayer if the production of the qualified film by the 
taxpayer is substantial in nature taking into account all of the facts 
and circumstances, including the relative value added by, and relative 
cost of, the taxpayer's production activity, the nature of the 
qualified film, and the nature of the production activity that the 
taxpayer performs.
    The revised fraction in Sec.  1.199-3(k)(5) follows the statutory 
language in section 199(c)(6) by referencing all compensation for 
services related to the production as opposed to the more limited ``by 
the taxpayer'' compensation fraction in TD 9263 (71 FR 31268). Because 
taxpayers may have difficulty obtaining information related to the 
compensation paid by others, this Treasury decision provides a safe 
harbor in Sec.  1.199-3(k)(7) that treats a film as a qualified film if 
not less than 50 percent of the total compensation for services paid by 
the taxpayer is compensation for services performed in the United 
States. The safe harbor further provides that a qualified film will be 
treated as produced by the taxpayer if the taxpayer satisfies the safe 
harbor in Sec.  1.199-3(g)(3) with respect to the qualified film, which 
requires that the direct labor and overhead costs incurred by the 
taxpayer to produce the qualified film within the United States account 
for 20 percent or more of the total costs of the film. Thus, a taxpayer 
will be treated as having produced a qualified film if, in connection 
with the qualified film, the direct labor and overhead of the taxpayer 
to produce the qualified film within the United States account for 20 
percent or more of the taxpayer's CGS of the qualified film, or in a 
transaction without CGS (for example, a lease, rental, or license) 
account for 20 percent or more of the taxpayer's ``unadjusted 
depreciable basis'' (as defined in Sec.  1.199-3(g)(3)(ii)) in the 
qualified film.

Expanded Affiliated Groups

    As discussed in the preamble to the proposed regulations published 
on June 7, 2007 (72 FR 31478), Sec.  1.199-7(e), Example 10, in TD 9263 
(71 FR 31268) misapplies Sec.  1.1502-13 of the consolidated return 
regulations. Accordingly, Sec.  1.199-7(e), Example 10, has been 
revised to correctly apply the consolidated return regulations. In 
addition, as also discussed in the preamble to the proposed regulations 
published on June 7, 2007 (72 FR 31478), the section 199 closing of the 
books method under Sec.  1.199-7(f)(1)(ii) in TD 9263 (71 FR 31268) 
could have

[[Page 12270]]

created a larger section 199 deduction than is warranted. Accordingly, 
this Treasury decision removes the section 199 closing of the books 
method and revises the Example in Sec.  1.199-7(g)(3) to apply the pro 
rata allocation method.

Effective/Applicability Dates

    Sections 1.199-3(k) and 1.199-7(e), Example 10, (f)(1), and (g)(3) 
are applicable to taxable years beginning on or after March 7, 2008. A 
taxpayer may apply Sec. Sec.  1.199-3(k) and 1.199-7(e), Example 10, to 
taxable years beginning after December 31, 2004, and before March 7, 
2008. However, for taxable years beginning before June 1, 2006, a 
taxpayer may rely on Sec.  1.199-3(k) only if the taxpayer does not 
apply Notice 2005-14 (2005-1 CB 498) (see Sec.  601.601(d)(2)(ii)(b)) 
or REG-105847-05 (2005-2 CB 987) (see Sec.  601.601(d)(2)(ii)(b)) to 
the taxable year.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866. 
Therefore, a regulatory assessment is not required. It also has been 
determined that section 553(b) of the Administrative Procedure Act (5 
U.S.C. chapter 5) does not apply to this regulation, and because the 
regulation does not impose a collection of information on small 
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not 
apply. Pursuant to section 7805(f) of the Internal Revenue Code, the 
notice of proposed rulemaking preceding this regulation was submitted 
to the Chief Counsel for Advocacy of the Small Business Administration 
for comment on its impact on small business.

Drafting Information

    The principal author of these regulations is David H. McDonnell, 
Office of the Associate Chief Counsel (Passthroughs and Special 
Industries), IRS. However, other personnel from the IRS and Treasury 
Department participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

0
Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read, in 
part, as follows:

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


0
Par. 2. Section 1.199-0 is amended by:
0
1. Revising the entries for Sec.  1.199-3(k)(6) and (7).
0
2. Adding new entries for Sec. Sec.  1.199-3(k)(7)(i) and (ii); (8), 
(9), and (10); and 1.199-8(i)(8) and (9).
0
3. Removing the entries for Sec.  1.199-7(f)(1)(i), (ii), and (iii).
    The additions and revisions read as follows:


Sec.  1.199-0  Table of contents.

* * * * *
Sec.  1.199-3 Domestic production gross receipts.
* * * * *
    (k) * * *
    (6) Produced by the taxpayer.
    (7) Qualified film produced by the taxpayer--safe harbor.
    (i) Safe harbor.
    (ii) Determination of 50 percent.
    (8) Production pursuant to a contract.
    (9) Exception.
    (10) Examples.
* * * * *
Sec.  1.199-8 Other rules.
* * * * *
    (i) * * *
    (8) Qualified film produced by the taxpayer.
    (9) Expanded affiliated groups.
* * * * *


0
Par. 3. Section 1.199-3 is amended by:
0
1. Revising paragraphs (k)(1), (k)(4), and (k)(5).
0
2. Redesignating paragraph (k)(6) as (k)(9).
0
3. Redesignating paragraph (k)(7) as (k)(10).
0
4. Adding new paragraphs (k)(6), (k)(7), and (k)(8).
0
5. Revising Example 6 of newly redesignated paragraph (k)(10)
    The revisions and additions read as follows:


Sec.  1.199-3  Domestic production gross receipts.

* * * * *
    (k) Definition of qualified film--(1) In general. The term 
qualified film means any motion picture film or video tape under 
section 168(f)(3), or live or delayed television programming (film), if 
not less than 50 percent of the total compensation relating to the 
production of such film is compensation for services performed in the 
United States by actors, production personnel, directors, and 
producers. For purposes of this paragraph (k), the term actors includes 
players, newscasters, or any other persons who are compensated for 
their performance or appearance in a film. For purposes of this 
paragraph (k), the term production personnel includes writers, 
choreographers and composers who are compensated for providing services 
during the production of a film, as well as casting agents, camera 
operators, set designers, lighting technicians, make-up artists, and 
other persons who are compensated for providing services that are 
directly related to the production of the film. Except as provided in 
paragraph (k)(2) of this section, the definition of a qualified film 
does not include tangible personal property embodying the qualified 
film, such as DVDs or videocassettes.
* * * * *
    (4) Compensation for services. For purposes of this paragraph (k), 
the term compensation for services means all payments for services 
performed by actors, production personnel, directors, and producers 
relating to the production of the film, including participations and 
residuals. Payments for services include all elements of compensation 
as provided for in Sec.  1.263A-1(e)(2)(i)(B) and (3)(ii)(D). 
Compensation for services is not limited to W-2 wages and includes 
compensation paid to independent contractors. In the case of a taxpayer 
that uses the income forecast method of section 167(g) and capitalizes 
participations and residuals into the adjusted basis of the qualified 
film, the taxpayer must use the same estimate of participations and 
residuals in determining compensation for services. In the case of a 
taxpayer that excludes participations and residuals from the adjusted 
basis of the qualified film under section 167(g)(7)(D)(i), the taxpayer 
must use the amount expected to be paid as participations and residuals 
based on the total forecasted income used in determining income 
forecast depreciation in determining compensation for services.
    (5) Determination of 50 percent. The not-less-than-50-percent-of-
the-total-compensation requirement under paragraph (k)(1) of this 
section is calculated using a fraction. The numerator of the fraction 
is the compensation for services performed in the United States and the 
denominator is the total compensation for services regardless of where 
the production activities are performed. A taxpayer may use any 
reasonable method that is satisfactory to the Secretary based on all of 
the facts and circumstances, including all historic information 
available, to determine the compensation for services performed in the 
United States and the total compensation for services regardless of 
where the production activities are

[[Page 12271]]

performed. Among the factors to be considered in determining whether a 
taxpayer's method of allocating compensation is reasonable is whether 
the taxpayer uses that method consistently from one taxable year to 
another.
    (6) Produced by the taxpayer. A qualified film will be treated as 
produced by the taxpayer for purposes of Sec.  199(c)(4)(A)(i)(II) if 
the production activity performed by the taxpayer is substantial in 
nature within the meaning of paragraph (g)(2) of this section. The 
special rules of paragraph (g)(4) of this section regarding a contract 
with an unrelated person and aggregation apply in determining whether 
the taxpayer's production activity is substantial in nature. Paragraphs 
(g)(2) and (4) of this section are applied by substituting the term 
qualified film for QPP and disregarding the requirement that the 
production activity must be within the United States. The production 
activity of the taxpayer must consist of more than the minor or 
immaterial combination or assembly of two or more components of a film. 
For purposes of paragraph (g)(2) of this section, the relative value 
added by affixing trademarks or trade names as defined in Sec.  1.197-
2(b)(10)(i) will be treated as zero.
    (7) Qualified film produced by the taxpayer--safe harbor. A film 
will be treated as a qualified film under paragraph (k)(1) of this 
section and produced by the taxpayer under paragraph (k)(6) of this 
section (qualified film produced by the taxpayer) if the taxpayer meets 
the requirements of paragraphs (k)(7)(i) and (ii) of this section. A 
taxpayer that chooses to use this safe harbor must apply all the 
provisions of this paragraph (k)(7).
    (i) Safe harbor. A film will be treated as a qualified film 
produced by the taxpayer if not less than 50 percent of the total 
compensation for services paid by the taxpayer is compensation for 
services performed in the United States and the taxpayer satisfies the 
safe harbor in paragraph (g)(3) of this section. The special rules of 
paragraph (g)(4) of this section regarding a contract with an unrelated 
person and aggregation apply in determining whether the taxpayer 
satisfies paragraph (g)(3) of this section. Paragraphs (g)(3) and (4) 
of this section are applied by substituting the term qualified film for 
QPP but not disregarding the requirement that the direct labor and 
overhead of the taxpayer to produce the qualified film must be within 
the United States. Paragraph (g)(3)(ii)(A) of this section includes any 
election under section 181.
    (ii) Determination of 50 percent. The not-less-than-50-percent-of-
the-total-compensation requirement under paragraph (k)(7)(i) of this 
section is calculated using a fraction. The numerator of the fraction 
is the compensation for services paid by the taxpayer for services 
performed in the United States and the denominator is the total 
compensation for services paid by the taxpayer regardless of where the 
production activities are performed. For purposes of this paragraph 
(k)(7)(ii), the term paid by the taxpayer includes amounts that are 
treated as paid by the taxpayer under paragraph (g)(4) of this section. 
A taxpayer may use any reasonable method that is satisfactory to the 
Secretary based on all of the facts and circumstances, including all 
historic information available, to determine the compensation for 
services paid by the taxpayer for services performed in the United 
States and the total compensation for services paid by the taxpayer 
regardless of where the production activities are performed. Among the 
factors to be considered in determining whether a taxpayer's method of 
allocating compensation is reasonable is whether the taxpayer uses that 
method consistently from one taxable year to another.
    (8) Production pursuant to a contract. With the exception of the 
rules applicable to an expanded affiliated group (EAG) under Sec.  
1.199-7 and EAG partnerships under Sec.  1.199-3(i)(8), only one 
taxpayer may claim the deduction under Sec.  1.199-1(a) with respect to 
any activity related to the production of a qualified film performed in 
connection with the same qualified film. If one taxpayer performs a 
production activity pursuant to a contract with another party, then 
only the taxpayer that has the benefits and burdens of ownership of the 
qualified film under Federal income tax principles during the period in 
which the production activity occurs is treated as engaging in the 
production activity.
* * * * *
    (10) * * *
    Example 6. X creates a television program in the United States 
that includes scenes from films licensed by X from unrelated persons 
Y and Z. Assume that Y and Z produced the films licensed by X. The 
not-less-than-50-percent-of-the-total-compensation requirement under 
paragraph (k)(1) of this section is determined by reference to all 
compensation for services paid in the production of the television 
program, including the films licensed by X from Y and Z, and is 
calculated using a fraction as described in paragraph (k)(5) of this 
section. The numerator of the fraction is the compensation for 
services performed in the United States and the denominator is the 
total compensation for services regardless of where the production 
activities are performed. However, for purposes of calculating the 
denominator, in determining the total compensation paid by Y and Z, 
X need only include the total compensation paid by Y and Z to 
actors, production personnel, directors, and producers for the 
production of the scenes used by X in creating its television 
program.
* * * * *

0
Par. 4. Section 1.199-7 is amended by:
0
1. Revising Example 10 of paragraph (e).
0
2. Revising paragraphs (f)(1) and (g)(3).
    The revisions read as follows:


Sec.  1.199-7  Expanded affiliated groups.

* * * * *
    (e) * * *
    Example 10. (i) Facts. Corporation P owns all of the stock of 
Corporations S and B. P, S, and B file a consolidated Federal income 
tax return on a calendar year basis. P, S, and B each uses the 
section 861 method for allocating and apportioning their deductions. 
In 2010, S MPGE QPP in the United States at a cost of $1,000. On 
November 30, 2010, S sells the QPP to B for $2,500. On February 28, 
2011, P sells 60% of the stock of B to X, an unrelated person. On 
June 30, 2011, B sells the QPP to U, another unrelated person, for 
$3,000.
    (ii) Consolidated group's 2010 QPAI. Because S and B are members 
of a consolidated group in 2010, pursuant to Sec.  1.199-7(d)(1) and 
Sec.  1.1502-13, neither S's $1,500 of gain on the sale of QPP to B 
nor S's $2,500 gross receipts from the sale are taken into account 
in 2010. Accordingly, neither S nor B has QPAI in 2010.
    (iii) Consolidated group's 2011 QPAI. B becomes a nonmember of 
the consolidated group at the end of the day on February 28, 2011, 
the date on which P sells 60% of the B stock to X. Under Sec.  
1.199-7(d)(1) and Sec.  1.1502-13(d), S takes the intercompany 
transaction into account immediately before B becomes a nonmember of 
the consolidated group. Pursuant to Sec.  1.1502-13(d)(1)(ii)(A)(1), 
because the QPP is owned by B, a nonmember of the consolidated group 
immediately after S's gain is taken into account, B is treated as 
selling the QPP to a nonmember for $2,500, B's adjusted basis in the 
property, immediately before B becomes a nonmember of the 
consolidated group. Accordingly, immediately before B becomes a 
nonmember of the consolidated group, S takes into account $1,500 of 
QPAI (S's $2,500 DPGR received from B-S's $1,000 cost of MPGE the 
QPP).
    (iv) B's 2011 QPAI. Pursuant to Sec.  1.1502-13(d)(2)(i)(B), the 
attributes of B's corresponding item, that is, its sale of the QPP 
to U, are determined as if the S division (but not the B division) 
were transferred by the P, S, and B consolidated group (treated as a 
single corporation) to an unrelated person. Thus, S's activities in 
MPGE the QPP before the intercompany sale of the QPP to B continue 
to affect the attributes of B's sale of the QPP. As such, B is 
treated as having

[[Page 12272]]

MPGE the QPP. Accordingly, upon its sale of the QPP, B has $500 of 
QPAI (B's $3,000 DPGR received from U minus B's $2,500 cost of MPGE 
the QPP).
* * * * *
    (f) Allocation of income and loss by a corporation that is a member 
of the expanded affiliated group for only a portion of the year--(1) In 
general. A corporation that becomes or ceases to be a member of an EAG 
during its taxable year must allocate its taxable income or loss, QPAI, 
and W-2 wages between the portion of the taxable year that it is a 
member of the EAG and the portion of the taxable year that it is not a 
member of the EAG. This allocation of items is made by using the pro 
rata allocation method described in this paragraph (f)(1). Under the 
pro rata allocation method, an equal portion of a corporation's taxable 
income or loss, QPAI, and W-2 wages for the taxable year is assigned to 
each day of the corporation's taxable year. Those items assigned to 
those days that the corporation was a member of the EAG are then 
aggregated.
* * * * *
    (g) * * *
    (3) Example. The following example illustrates the application of 
paragraphs (f) and (g) of this section:

    Example. (i) Facts. Corporations X and Y, calendar year 
corporations, are members of the same EAG for the entire 2010 
taxable year. Corporation Z, also a calendar year corporation, is a 
member of the EAG of which X and Y are members for the first half of 
2010 and not a member of any EAG for the second half of 2010. During 
the 2010 taxable year, neither X, Y, nor Z joins in the filing of a 
consolidated Federal income tax return. Assume that X, Y, and Z each 
has W-2 wages in excess of the section 199(b) wage limitation for 
all relevant periods. In 2010, X has taxable income of $2,000 and 
QPAI of $600, Y has a taxable loss of $400 and QPAI of ($200), and Z 
has taxable income of $1,400 and QPAI of $2,400.
    (ii) Analysis. Pursuant to the pro rata allocation method, $700 
of Z's 2010 taxable income and $1,200 of Z's 2010 QPAI are allocated 
to the first half of the 2010 taxable year (the period in which Z is 
a member of the EAG) and $700 of Z's 2010 taxable income and $1,200 
of Z's 2010 QPAI are allocated to the second half of the 2010 
taxable year (the period in which Z is not a member of any EAG). 
Accordingly, in 2010, the EAG has taxable income of $2,300 (X's 
$2,000 + Y's ($400) + Z's $700) and QPAI of $1,600 (X's $600 + Y's 
($200) + Z's $1,200). The EAG's section 199 deduction for 2010 is 
therefore $144 (9% of the lesser of the EAG's $2,300 of taxable 
income or $1,600 of QPAI). Pursuant to Sec.  1.199-7(c)(1), this 
$144 deduction is allocated to X, Y, and Z in proportion to their 
respective QPAI. Accordingly, X is allocated $48 of the EAG's 
section 199 deduction, Y is allocated $0 of the EAG's section 199 
deduction, and Z is allocated $96 of the EAG's section 199 
deduction. For the second half of 2010, Z has taxable income of $700 
and QPAI of $1,200. Therefore, for the second half of 2010, Z has a 
section 199 deduction of $63 (9% of the lesser of its $700 taxable 
income or $1,200 QPAI for the second half of 2010). Accordingly, X's 
2010 section 199 deduction is $48, Y's 2010 section 199 deduction is 
$0, and Z's 2010 section 199 deduction is $159, the sum of the $96 
section 199 deduction of the EAG allocated to Z for the first half 
of 2010 and Z's $63 section 199 deduction for the second half of 
2010.

* * * * *

0
Par. 5. Section 1.199-8 is amended by:
0
1. Adding two sentences at the end of paragraph (a).
0
2. Adding new paragraphs (i)(8) and (i)(9).
    The revisions and additions read as follows:


Sec.  1.199-8  Other rules.

    (a) In general. * * * For purposes of Sec. Sec.  1.199-1 through 
1.199-9, use of terms such as payment, paid, incurred, or paid or 
incurred is not intended to provide any specific rule based upon the 
use of one term versus another. In general, the use of the term 
payment, paid, incurred, or paid or incurred is intended to convey the 
appropriate standard under the taxpayer's method of accounting.
* * * * *
    (i) * * *
    (8) Qualified film produced by the taxpayer. Section 1.199-3(k) is 
applicable to taxable years beginning on or after March 7, 2008. A 
taxpayer may apply Sec.  1.199-3(k) to taxable years beginning after 
December 31, 2004, and before March 7, 2008. However, for taxable years 
beginning before June 1, 2006, a taxpayer may rely on Sec.  1.199-3(k) 
only if the taxpayer does not apply Notice 2005-14 (2005-1 CB 498) (see 
Sec.  601.601(d)(2)(ii)(b) of this chapter) or REG-105847-05 (2005-2 CB 
987) (see Sec.  601.601(d)(2)(ii)(b) of this chapter) to the taxable 
year.
    (9) Expanded affiliated groups. Section 1.199-7(e), Example 10, 
(f)(1), and (g)(3) are applicable to taxable years beginning on or 
after March 7, 2008. A taxpayer may apply Sec.  1.199-7(e), Example 10, 
to taxable years beginning after December 31, 2004, and before March 7, 
2008.

 Linda E. Stiff,
Deputy Commissioner for Services and Enforcement.
    Approved: March 3, 2008.
Eric Solomon,
Assistant Secretary of the Treasury (Tax Policy).
 [FR Doc. E8-4575 Filed 3-6-08; 8:45 am]
BILLING CODE 4830-01-P