[Federal Register Volume 76, Number 190 (Friday, September 30, 2011)]
[Rules and Regulations]
[Pages 60721-60729]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-24930]
=======================================================================
-----------------------------------------------------------------------
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
[TD 9551]
RIN 1545-BF94
Deduction for Qualified Film and Television Production Costs
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations and removal of temporary regulations.
-----------------------------------------------------------------------
SUMMARY: This document contains final regulations relating to
deductions for the costs of producing qualified film and television
productions. These final regulations reflect changes to the law made by
the American Jobs Creation Act of 2004 and the Gulf Opportunity Zone
Act of 2005, and affect persons that produce film and television
productions within the United States.
DATES: Effective Date: These regulations are effective on September 29,
2011.
Applicability Dates: For dates of applicability, see Sec. 1.181-6.
FOR FURTHER INFORMATION CONTACT: Bernard P. Harvey, (202) 622-4930 (not
a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained in these final regulations
has been reviewed and approved by the Office of Management and Budget
in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C.
3507(d)) under control number 1545-2059. The collection of information
in these final regulations is in Sec. Sec. 1.181-1, 1.181-2, and
1.181-3. This information is required to enable the IRS to verify that
a taxpayer is entitled to the deduction.
An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless it displays a valid
control number.
Books and records relating to a collection of information must be
[[Page 60722]]
retained as long as their contents might become material in the
administration of any internal revenue law. Generally, tax returns and
tax return information are confidential, as required by 26 U.S.C. 6103.
Background
This document contains amendments to 26 CFR part 1 to provide
regulations under section 181 of the Internal Revenue Code of 1986
(Code). Section 181 permits the deduction of certain production costs
by the producer of a qualified film or television production.
Section 181 was added to the Code by section 244 of the American
Jobs Creation Act of 2004, Public Law 108-357 (118 Stat. 1418) (October
22, 2004), and was modified by section 403(e) of the Gulf Opportunity
Zone Act of 2005, Public Law 109-135 (119 Stat. 2577) (December 21,
2005).
On February 9, 2007, the IRS and the Treasury Department published
in the Federal Register (TD 9312, 72 FR 6155) temporary regulations
relating to deductions for the costs of producing film and television
productions under section 181. On the same date, the IRS published a
notice of proposed rulemaking related to this topic in the Federal
Register (REG-115403-05, 72 FR 6190). No public hearing was requested
or held. Several written comments were received. All comments are
available at http://www.regulations.gov or upon request. After
consideration of all the comments received, the proposed regulations
are adopted as amended by this Treasury decision, and the corresponding
temporary regulations are removed. The revisions to the proposed
regulations are discussed in this preamble. Unless otherwise
specifically stated, references to the temporary regulations are to TD
9312.
Section 502 of the Tax Extenders and Alternative Minimum Tax Relief
Act of 2008, Public Law 110-343 (122 Stat. 3765) (October 3, 2008)
further modified section 181 for film and television productions
commencing after December 31, 2007, and extended section 181 to film
and television productions commencing before January 1, 2010. Section
181 was extended again to film and television productions commencing
before January 1, 2012, by section 744 of the Tax Relief, Unemployment
Insurance Reauthorization, and Job Creation Act of 2010, Public Law
111-312 (December 17, 2010). The IRS and the Treasury Department intend
to publish in the Federal Register proposed and temporary regulations
pertaining to film and television productions commencing after December
31, 2007.
Explanation and Summary of Comments
General Overview
Congress enacted section 181 to promote film and television
production in the United States. For a qualified film or television
production commenced before January 1, 2008 (a ``pre-amendment
production''), section 181 permits an owner to elect to deduct
production costs paid or incurred by that owner in the taxable year the
costs are paid or incurred, in lieu of capitalizing the costs and
recovering them through depreciation allowances, if the aggregate
production costs do not exceed $15 million ($20 million if a
significant amount of the aggregate production costs are paid or
incurred in certain designated areas) for each qualifying production
(the ``aggregate production costs limit''). A film or television
production (a ``production'') is a qualified film or television
production if 75 percent of the total compensation for the production
is compensation for services performed in the United States by actors,
directors, producers, and other production personnel.
The final regulations use the term ``pre-amendment production'' to
distinguish productions that are subject to the maximum aggregate
production costs limit in section 181 as added by the American Jobs
Creation Act of 2004 and modified by the Gulf Opportunity Zone Act of
2005 from productions that are subject to the maximum production costs
deduction limit in the Tax Extenders and Alternative Minimum Tax Relief
Act of 2008. Several provisions of the final regulations are specific
to pre-amendment productions and are designated accordingly.
Deduction for Qualified Film and Television Production Costs
In response to a comment, the final regulations use the term
``aggregate production costs'' as the total production costs paid or
incurred by any person without regard to whether that person deducted
(or was an owner entitled to deduct) those costs under section 181. As
suggested by the same comment, the final regulations clarify that costs
paid on behalf of an owner (for example, participations and residuals
paid by a distributor) are included in aggregate production costs,
notwithstanding that such costs are not deductible production costs for
the owner. Thus, the amount of an owner's deductible costs under
section 181 may be less than the aggregate production costs. Further,
costs are not deductible under section 181 for a pre-amendment
production with aggregate production costs in excess of the aggregate
production costs limit of $15 million (or, if applicable, $20 million),
even if the owner's production costs are less than the aggregate
production costs limit.
In response to a comment, the final regulations clarify that, for
purposes of the aggregate production costs limit, participations and
residuals are calculated based on amounts actually paid or incurred
rather than upon the amount the owner would include in basis under
section 167(g)(7)(A) based on the estimated income from the production.
This clarification is consistent with the limitation that the owner may
claim as a deduction only participations and residuals actually paid or
incurred.
Several commentators suggested that requiring owners to include
participations and residuals in aggregate production costs in
determining whether the aggregate production costs limit is exceeded
creates uncertainty concerning whether the election is available for
the production (and whether recapture may ultimately apply), and that
this uncertainty will discourage persons interested in the benefits of
section 181 from investing in potential qualified productions. This
issue is addressed prospectively by section 502 of the Tax Extenders
and Alternative Minimum Tax Relief Act of 2008, which replaces the
aggregate production costs limit with a deduction limit for productions
commencing on or after January 1, 2008. However, absent a specific
statutory directive to the contrary, all costs required to be
capitalized to cost basis under section 263A, including participations
and residuals, must be included in the aggregate production costs of
pre-amendment productions for purposes of determining if the aggregate
production costs limit is exceeded.
In response to a comment, the final regulations provide that,
solely for purposes of determining if the higher aggregate production
costs limit for productions in certain areas is available for a
production, all compensation costs for actors, directors, producers,
and other production personnel, are allocated entirely to first-unit
principal photography rather than allocating a portion of these costs
to rehearsal and other preproduction activities.
The deduction under section 181 is subject to the passive loss
limitations imposed by section 469 and the at-risk rules imposed by
section 465. An owner
[[Page 60723]]
may claim the section 181 deduction against ordinary income under the
rules of section 469 only if that owner materially participates in the
production process; otherwise, the deduction is available only against
passive income. Furthermore, an owner may only claim the section 181
deduction to the extent that the owner is at-risk within the meaning of
section 465. Several commentators suggested that the final regulations
exempt the deduction under section 181 from the passive loss and at-
risk limitations, or that the final regulations otherwise determine
that these limitations do not apply for section 181. Because there is
no specific statutory direction specifying that these limitations do
not apply, the section 181 deduction continues to be subject to the
passive loss and at-risk limitations.
Election
To ensure that multiple persons do not claim aggregate deductions
in excess of the deduction limit, the final regulations retain language
from the temporary regulations recognizing that some productions are
produced by multiple persons that have not entered into a partnership
agreement and do not file as a partnership. However, the IRS is not
bound by the reporting position of these persons; whether the
activities of these persons rise to the level of a partnership will be
determined in accordance with Sec. 301.7701-3 of this chapter.
Commentators asked whether there is a time limit between when a
production is set for production and the time expected for commencement
of principal photography and whether a minimum budget for production
costs is required. Neither section 181 nor the final regulations impose
such a time limit or minimum budget requirement.
Qualified Film or Television Production (Definitions)
Generally, a motion picture film or video tape (including digital
video) for which the production costs are subject to capitalization
under section 263A, or would be subject to capitalization if section
263A applied to the owner of the production, is a production for
purposes of section 181. Thus, in response to a comment, the final
regulations provide that a motion picture film or video tape (including
digital video) acquired after ``initial release or broadcast'' is not a
production. The final regulations define ``initial release or
broadcast'' as the first commercial exhibition or broadcast to an
audience. The object of this provision is to maximize the availability
of the election under section 181 to advance the goal of the statute
(to promote film and television production in the United States) while
preventing the use of section 181 in cases that do not advance the goal
of the statute, such as the purchase of an existing film library. Under
the final regulation, the term ``initial release or broadcast'' does
not include certain limited exhibitions primarily for purposes of
publicity, marketing to potential purchasers or distributors,
determining the need for further production activity, or raising funds
for the completion of production. This exception is added to permit
producers to exhibit productions at film festivals to interested buyers
without compromising the ability of those buyers to use section 181, as
well as to permit producers to test audience reaction to the production
in order to determine if further production activities are needed. A
person acquiring a completed motion picture film or video tape
(including digital video) prior to its initial release or broadcast is
considered an owner for purposes of section 181 and may treat the
acquired asset as a production, even if the acquiring person does not
pay or incur costs that are subject to section 263A.
A commentator asked whether video games or computer games are
productions for purposes of section 181. They are not because they are
not motion picture films or video tapes. However, to the extent that a
game producer produces or acquires (prior to initial release or
broadcast) a motion picture film or video tape (including digital
video) the production costs of which are subject to capitalization
under section 263A (or that would be subject to capitalization if
section 263A applied to the owner of the production) for inclusion in a
game (for example, as a cinematic within the game), then the cost of
producing that motion picture film or video tape may be eligible for
section 181.
The IRS and the Treasury Department rejected a suggestion that,
rather than allocating the cost of production services to the place
where the principal photography occurs for purposes of determining
whether the production is a qualified production, the final regulations
should instead require that the majority of principal photography occur
in the United States. The statute defines the term ``qualified film or
television production'' with reference to ``qualified compensation,''
defined as the amount of compensation for services paid to certain
persons. The final regulations use the same definition, and require the
owner to allocate compensation for services to those persons to the
place where principal photography occurs in determining the amount of
qualified compensation for the production. This approach is consistent
with the statute and simplifies the calculation for the owner and
prevents uncertainty that would otherwise arise from allocations to
rehearsal and other preproduction activities.
Special Rules
The final regulations clarify that an owner must recapture the
entire amount of any section 181 deduction when the owner sells a
production prior to the initial release or broadcast in order to
preserve the buyer's ability to deduct the acquisition cost of the
production under section 181.
Effective/Applicability Date
These final regulations apply to qualified film and television
productions for which principal photography or, for an animated
production, in-between animation, commenced on or after September 29,
2011. The owner of a qualified film or television production for which
principal photography or, for an animated production, in-between
animation, commenced on or after October 22, 2004, and before February
9, 2007, or on or after January 1, 2009, and before September 29, 2011,
may apply the proposed regulations published on February 9, 2007, or,
in the alternative, may apply these final regulations.
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) and (d) of the Administrative Procedure
Act (5 U.S.C. chapter 5) does not apply to these regulations. It is
hereby certified that this regulation will not have a significant
economic impact on a substantial number of small entities. The final
regulations impose a collection of information on small entities in
order to demonstrate eligibility for tax benefits under the statute,
and this collection of information will require recordkeeping. This
collection of information is discussed elsewhere in this preamble.
However, the recordkeeping required by this collection of information
does not differ significantly from the recordkeeping that a taxpayer
must perform in order to determine whether the taxpayer is eligible to
claim a deduction under the statute. Consequently, the economic impact
on
[[Page 60724]]
small entities resulting from the recordkeeping required under this
regulation is de minimis. Accordingly, a regulatory flexibility
analysis is not required. Pursuant to section 7805(f) of the Internal
Revenue Code, the notice of proposed rulemaking preceding these final
regulations 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 Bernard P. Harvey,
Office of Associate Chief Counsel (Income Tax and Accounting). However,
other personnel from the IRS and the Treasury Department participated
in their development.
List of Subjects
26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
26 CFR Part 602
Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR parts 1 and 602 are 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 1.181-0 is added to read as follows:
Sec. 1.181-0 Table of contents.
This section lists the table of contents for Sec. Sec. 1.181-1
through 1.181-6.
Sec. 1.181-1 Deduction for qualified film and television production
costs.
(a) Deduction.
(1) In general.
(2) Owner.
(3) Production costs.
(4) Aggregate production costs.
(5) Pre-amendment production.
(6) [Reserved].
(7) Initial release or broadcast.
(8) Special rule.
(b) Limit on amount of aggregate production costs and amount of
deduction.
(1) In general.
(i) Pre-amendment production.
(ii) [Reserved].
(iii) Special rules.
(2) Higher limit for productions in certain areas.
(i) In general.
(ii) Significantly paid or incurred for live action productions.
(iii) Significantly paid or incurred for animated productions.
(iv) Significantly paid or incurred for productions incorporating
both live action and animation.
(v) Establishing qualification.
(vi) Allocation.
(c) Effect on depreciation or amortization of a qualified film or
television production.
(1) Pre-amendment production.
(2) [Reserved].
Sec. 1.181-2 Election to deduct production costs.
(a) Election.
(1) In general.
(2) Exception.
(b) Time of making election.
(1) In general.
(2) Special rule.
(3) Six-month extension.
(c) Manner of making election.
(1) In general.
(2) Information required.
(i) Initial election.
(ii) Subsequent taxable years.
(3) Deductions by more than one person.
(d) Revocation of election.
(1) In general.
(2) Consent granted.
Sec. 1.181-3 Qualified film or television production.
(a) In general.
(b) Production.
(1) In general.
(2) Special rules for television productions.
(3) Exception for certain sexually explicit productions.
(c) Compensation.
(d) Qualified compensation.
(e) Special rule for acquired productions.
(f) Other definitions.
(1) Actors.
(2) Production personnel.
(3) United States.
Sec. 1.181-4 Special rules.
(a) Recapture.
(1) Applicability.
(i) In general.
(ii) Special rule.
(2) Principal photography not commencing prior to the date of
expiration of section 181.
(3) Amount of recapture.
(b) Recapture under section 1245.
Sec. 1.181-5 Examples.
Sec. 1.181-6 Effective/applicability date.
(a) In general.
(b) Application of proposed regulations to pre-effective date
productions.
(c) Application of Sec. Sec. 1.181-1 through 1.181-5 to certain
pre-effective date productions.
Sec. 1.181-0T [Removed]
0
Par. 3. Section 1.181-0T is removed.
0
Par. 4. Section 1.181-1 is added to read as follows:
Sec. 1.181-1 Deduction for qualified film and television production
costs.
(a) Deduction--(1) In general. (i) An owner (as defined in
paragraph (a)(2) of this section) of any film or television production
(production, as defined in Sec. 1.181-3(b)) that the owner reasonably
expects will be, upon completion, a qualified film or television
production (as defined in Sec. 1.181-3(a)) may elect to treat
production costs paid or incurred by that owner (subject to the limits
imposed under paragraph (b) of this section) as an expense that is
deductible for the taxable year in which the costs are paid (for an
owner who uses the cash receipts and disbursements method of
accounting) or incurred (for an owner who uses an accrual method of
accounting). The deduction under section 181 is subject to recapture if
the owner's expectations are later determined to be inaccurate.
(ii) This section provides rules for determining the owner of a
production, the production costs (as defined in paragraph (a)(3) of
this section), and the maximum amount of aggregate production costs (as
defined in paragraph (a)(4) of this section) that may be paid or
incurred for a pre-amendment production (as defined in paragraph (a)(5)
of this section) for which the owner makes an election under section
181. Section 1.181-2 provides rules for making the election under
section 181. Section 1.181-3 provides definitions and rules concerning
qualified film and television productions. Section 1.181-4 provides
special rules, including rules for recapture of the deduction. Section
1.181-5 provides examples of the application of Sec. Sec. 1.181-1
through 1.181-4, while Sec. 1.181-6 provides the effective date of
Sec. Sec. 1.181-1 through 1.181-5.
(2) Owner. (i) For purposes of this section and Sec. Sec. 1.181-2
through 1.181-6, an owner of a production is any person that is
required under section 263A to capitalize the costs of producing the
production into the cost basis of the production, or that would be
required to do so if section 263A applied to that person.
(ii) Further, a person that acquires a finished or partially-
finished production is treated as an owner of that production for
purposes of this section and
[[Page 60725]]
Sec. Sec. 1.181-2 through 1.181-6, but only if the production is
acquired prior to its initial release or broadcast (as defined in
paragraph (a)(7) of this section). Moreover, a person that acquires
only a limited license or right to exploit a production, or receives an
interest or profit participation in a production, as compensation for
services, is not an owner of the production for purposes of this
section and Sec. Sec. 1.181-2 through 1.181-6.
(3) Production costs. (i) For purposes of this section and
Sec. Sec. 1.181-2 through 1.181-6, the term production costs means all
costs that are paid or incurred by an owner in producing a production
that are required, absent the provisions of section 181, to be
capitalized under section 263A, or that would be required to be
capitalized if section 263A applied to the owner, and, if applicable,
all costs that are paid or incurred by an owner in acquiring a
production prior to its initial release or broadcast. Production costs
include, but are not limited to, participations and residuals paid or
incurred, compensation paid or incurred for services, compensation paid
or incurred for property rights, non-compensation costs, and costs paid
or incurred in connection with obtaining financing for the production
(for example, premiums paid or incurred to obtain a completion bond for
the production).
(ii) Production costs do not include costs paid or incurred to
distribute or exploit a production (including advertising and print
costs).
(iii) Production costs do not include the costs to prepare a new
release or new broadcast of an existing production after the initial
release or broadcast of the production (for example, the preparation of
a DVD release of a theatrically-released film, or the preparation of an
edited version of a theatrically-released film for television
broadcast). Costs paid or incurred to prepare a new release or a new
broadcast of a production after its initial release or broadcast,
therefore, are not taken into account for purposes of paragraph (b)(1)
of this section, and may not be deducted under this paragraph (a).
(iv) If a pre-amendment production is acquired from any person
prior to its initial release or broadcast, the acquiring person must
use as its initial aggregate costs the greater of--
(A) The cost of acquisition; or
(B) The seller's aggregate production costs.
(v) Production costs do not include costs that the owner has
deducted or begun to amortize prior to the taxable year the owner makes
an election under Sec. 1.181-2 for the production (for example, costs
described in Sec. 1.181-2(a)(2)). These costs, however, are included
in aggregate production costs to the extent they would have been
treated as production costs by the owner notwithstanding this paragraph
(a)(3)(v).
(4) Aggregate production costs. The term aggregate production costs
means all production costs described in paragraph (a)(3) of this
section paid or incurred by any person, whether paid or incurred
directly by an owner or indirectly on behalf of an owner.
(5) Pre-amendment production. The term pre-amendment production
means a qualified film or television production commencing after
October 22, 2004, and before January 1, 2008.
(6) [Reserved].
(7) Initial release or broadcast. Solely for purposes of this
section and Sec. Sec. 1.181-2 through 1.181-6, the term initial
release or broadcast means the first commercial exhibition or broadcast
of a production to an audience. However, the term ``initial release or
broadcast'' does not include limited exhibition prior to commercial
exhibition to general audiences if the limited exhibition is primarily
for purposes of publicity, marketing to potential purchasers or
distributors, determining the need for further production activity, or
raising funds for the completion of production. For example, the term
initial release or broadcast does not include exhibition to a test
audience to determine the need for further production activity, or
exhibition at a film festival for promotional purposes, if the
exhibition precedes commercial exhibition to general audiences.
(8) Special rule. The provisions of this paragraph (a) apply
notwithstanding the treatment of participations and residuals permitted
under the income forecast method in section 167(g)(7)(D).
(b) Limit on amount of aggregate production costs and amount of
deduction--(1) In general--(i) Pre-amendment production. Except as
provided under paragraph (b)(2) of this section, no deduction is
allowed under section 181 for any pre-amendment production, the
aggregate production costs of which exceed $15,000,000. See also
paragraph (a)(3)(iv) of this section. For a pre-amendment production
for which the aggregate production costs do not exceed $15,000,000 (or,
if applicable under paragraph (b)(2) of this section, $20,000,000), an
owner may deduct under section 181 all of the production costs paid or
incurred by that owner.
(ii) [Reserved].
(iii) Special rules. The owner's deduction under section 181 is
limited to the owner's acquisition costs of the production plus any
further production costs paid or incurred by the owner. The deduction
under section 181 is not available for any portion of the acquisition
costs, and any subsequent production costs, of a production with an
initial release or broadcast that is prior to the date of acquisition.
(2) Higher limit for productions in certain areas--(i) In general.
This section is applied by substituting $20,000,000 for $15,000,000 in
paragraph (b)(1) of this section for any production the aggregate
production costs of which are significantly paid or incurred in an area
eligible for designation as--
(A) A low income community under section 45D; or
(B) A distressed county or isolated area of distress by the Delta
Regional Authority established under 7 U.S.C. section 2009aa-1.
(ii) Significantly paid or incurred for live action productions.
The aggregate production costs of a live action production are
significantly paid or incurred within one or more areas specified in
paragraph (b)(2)(i) of this section if--
(A) At least 20 percent of the aggregate production costs paid or
incurred in connection with first-unit principal photography for the
production are paid or incurred in connection with first-unit principal
photography that takes place in such areas; or
(B) At least 50 percent of the total number of days of first-unit
principal photography for the production consists of days during which
first-unit principal photography takes place in such areas.
(iii) Significantly paid or incurred for animated productions. For
purposes of an animated production, the aggregate production costs of
the production are significantly paid or incurred within one or more
areas specified in paragraph (b)(2)(i) of this section if--
(A) At least 20 percent of the aggregate production costs paid or
incurred in connection with keyframe animation, in-between animation,
animation photography, and the recording of voice acting performances
for the production are paid or incurred in connection with such
activities that take place in such areas; or
(B) At least 50 percent of the total number of days of keyframe
animation, in-between animation, animation photography, and the
recording of voice acting performances for the production consists of
days during which such activities take place in such areas.
(iv) Significantly paid or incurred for productions incorporating
both live
[[Page 60726]]
action and animation. For purposes of a production incorporating both
live action and animation, the aggregate production costs of the
production are significantly paid or incurred within one or more areas
specified in paragraph (b)(2)(i) of this section if--
(A) At least 20 percent of the aggregate production costs paid or
incurred in connection with first-unit principal photography, keyframe
animation, in-between animation, animation photography, and the
recording of voice acting performances for the production are paid or
incurred in connection with such activities that take place in such
areas; or
(B) At least 50 percent of the total number of days of first-unit
principal photography, keyframe animation, in-between animation,
animation photography, and the recording of voice acting performances
for the production consists of days during which such activities take
place in such areas.
(v) Establishing qualification. An owner intending to utilize the
higher aggregate production costs limit under this paragraph (b)(2)
must establish qualification under this paragraph (b)(2).
(vi) Allocation. Solely for purposes of determining whether a
production qualifies for the higher aggregate production costs limit
provided under this paragraph (b)(2), compensation (as defined in Sec.
1.181-3(c)) to actors (as defined in Sec. 1.181-3(f)(1)), directors,
producers, and other production personnel (as defined in Sec. 1.181-
3(f)(2)) is allocated entirely to first-unit principal photography.
(c) Effect on depreciation or amortization of a qualified film or
television production--(1) Pre-amendment production. Except as provided
in Sec. Sec. 1.181-1(a)(3)(v) and 1.181-2(a)(2), an owner that elects
to deduct production costs under section 181 for a pre-amendment
production may not deduct production costs for that production under
any provision of the Internal Revenue Code other than section 181
unless the recapture requirements of Sec. 1.181-4(a) apply to the
production.
(2) [Reserved].
Sec. 1.181-1T [Removed]
0
Par. 5. Section 1.181-1T is removed.
0
Par. 6. Section 1.181-2 is added to read as follows:
Sec. 1.181-2 Election to deduct production costs.
(a) Election--(1) In general. Except as provided in paragraph
(a)(2) of this section, an owner may make an election under section 181
to deduct production costs of a production only if that owner has not
deducted in a previous taxable year any production costs for that
production under any provision of the Internal Revenue Code (Code)
other than section 181.
(2) Exception. An owner may make an election under section 181
despite prior deductions under any other provision of the Code for
amortization of the costs of acquiring or developing screenplays,
scripts, story outlines, motion picture production rights to books and
plays, and other similar properties for purposes of potential future
development or production of a production, if such costs were paid or
incurred before the first taxable year for which an election may be
made under Sec. 1.181-2(b) and are included in aggregate production
costs.
(b) Time of making election--(1) In general. The election to deduct
production costs for a production under section 181 must be made by the
due date (including any extension) for filing the owner's Federal
income tax return for the first taxable year in which:
(i) Any aggregate production costs have been paid or incurred;
(ii) The owner reasonably expects (based on all of the facts and
circumstances) that the production will be set for production and will,
upon completion, be a qualified film or television production; and
(iii) For any pre-amendment production, the owner reasonably
expects (based on all of the facts and circumstances) that the
aggregate production costs paid or incurred for the pre-amendment
production will, at no time, exceed the applicable aggregate production
costs limit set forth under Sec. 1.181-1(b)(1)(i) or (b)(2).
(2) Special rule. If paragraph (b)(1) of this section is not
satisfied until a taxable year subsequent to the taxable year in which
any aggregate production costs were first paid or incurred, the owner
must make the election for the taxable year in which paragraph (b)(1)
of this section is first satisfied, and any production costs paid or
incurred prior to the taxable year in which the owner makes the
election and not deducted in a prior taxable year are treated as
production costs (except costs described in Sec. 1.181-2(a)(2)) that
are deductible under Sec. 1.181-1(a)(1)(i) for the taxable year
paragraph (b)(1) of this section is first satisfied and the election is
made.
(3) Six-month extension. See Sec. 301.9100-2 for a six-month
extension of time to make the election in certain circumstances.
(c) Manner of making election--(1) In general. An owner must make
the election under section 181 separately for each production. For a
production owned by an entity, the election must be made by the entity.
For example, if the production is owned by a partnership or S
corporation, the partnership or S corporation must make the election.
(2) Information required--(i) Initial election. For each production
to which the election applies, the owner must attach a statement to the
owner's Federal income tax return for the taxable year of the election
stating that the owner is making an election under section 181 and
providing--
(A) The name (or other unique identifying designation) of the
production;
(B) The date aggregate production costs were first paid or incurred
for the production;
(C) The amount of aggregate production costs paid or incurred for
the production during the taxable year (including costs described in
Sec. Sec. 1.181-1(a)(3)(v) and 1.181-2(b)(2));
(D) The amount of qualified compensation (as defined in Sec.
1.181-3(d)) paid or incurred for the production during the taxable year
(including costs described in Sec. 1.181-2(b)(2));
(E) The amount of compensation (as defined in Sec. 1.181-3(c))
paid or incurred for the production during the taxable year (including
costs described in Sec. 1.181-2(b)(2));
(F) If the owner expects that the aggregate production costs of the
production will be significantly paid or incurred in (or, if
applicable, if a significant portion of the total number of days of
first-unit principal photography will occur in) one or more of the
areas specified in Sec. 1.181-1(b)(2)(i), the identity of the area or
areas, the amount of aggregate production costs paid or incurred (or
the number of days of first-unit principal photography engaged in) for
the applicable activities described in Sec. 1.181-1(b)(2)(ii),
(b)(2)(iii), or (b)(2)(iv), as applicable, that took place within such
areas (including costs described in Sec. Sec. 1.181-1(a)(3)(v) and
1.181-2(b)(2)), and the aggregate production costs paid or incurred (or
the total number of days of first-unit principal photography engaged
in) for such activities (whether or not they took place in such areas),
for the taxable year (including costs described in Sec. Sec. 1.181-
1(a)(3)(v) and 1.181-2(b)(2));
(G) A declaration that the owner reasonably expects (based on all
of the facts and circumstances at the time the election is made) both
that the production will be set for production (or has been set for
production) and will be a qualified film or television production; and
[[Page 60727]]
(H) For any pre-amendment production, a declaration that the owner
reasonably expects (based on all of the facts and circumstances at the
time the election is made) that the aggregate production costs paid or
incurred for the pre-amendment production will not, at any time, exceed
the applicable aggregate production costs limit set forth under Sec.
1.181-1(b)(1)(i) or (b)(2).
(ii) Subsequent taxable years. If the owner pays or incurs
additional production costs in any taxable year subsequent to the
taxable year for which production costs are first deducted under
section 181, the owner must attach a statement to its Federal income
tax return for that subsequent taxable year providing--
(A) The name (or other unique identifying designation) of the
production that was used in the initial election, and any revised name
(or unique identifying designation) subsequently used for the
production;
(B) The date the aggregate production costs were first paid or
incurred for the production;
(C) The amount of aggregate production costs paid or incurred for
the production during the current taxable year;
(D) The amount of qualified compensation paid or incurred for the
production during the current taxable year;
(E) The amount of compensation paid or incurred for the production
during the current taxable year, and the aggregate amount of
compensation paid or incurred for the production in all prior taxable
years;
(F) If the owner expects that the aggregate production costs of the
production will be significantly paid or incurred in (or, if
applicable, if a significant portion of the total number of days of
first-unit principal photography will occur in) one or more of the
areas specified in Sec. 1.181-1(b)(2)(i), the identity of the area or
areas, the amount of aggregate production costs paid or incurred (or
the number of days of first-unit principal photography engaged in) for
the applicable activities described in Sec. 1.181-1(b)(2)(ii),
(b)(2)(iii), or (b)(2)(iv), as applicable, that took place within such
areas, and the aggregate production costs paid or incurred (or the
number of days of first-unit principal photography engaged in) for such
activities (whether or not they took place in such areas), for the
current taxable year;
(G) A declaration that the owner continues to reasonably expect
(based on all of the facts and circumstances at the end of the current
taxable year) both that the production will be set for production (or
has been set for production) and will be a qualified film or television
production; and
(H) For any pre-amendment production, a declaration that the owner
continues to reasonably expect (based on all of the facts and
circumstances at the end of the current taxable year) that the
aggregate production costs paid or incurred for the pre-amendment
production will not, at any time, exceed the applicable aggregate
production costs limit set forth under Sec. 1.181-1(b)(1)(i) or
(b)(2).
(3) Deductions by more than one person. If more than one person
will claim deductions under section 181 with respect to the production
for the taxable year, each person claiming the deduction (but not the
members of an entity who are issued a Schedule K-1 by the entity with
respect to their interest in the production) must provide a list of the
names and taxpayer identification numbers of all such persons, the
dollar amount that each such person will deduct under section 181, and
the information required by paragraph (c)(2) of this section for all
such persons. Notwithstanding the preceding sentence, whether or not
multiple persons form a partnership with respect to the production will
be determined in accordance with Sec. 301.7701-3 of this chapter.
(d) Revocation of election--(1) In general. An owner may revoke an
election made under this section only with the consent of the
Commissioner. Except as provided in paragraph (d)(2) of this section,
an owner seeking consent to revoke an election made under this section
must submit a letter ruling request, other than a Form 3115,
``Application for Change in Accounting Method,'' under the appropriate
revenue procedure. See, for example, Rev. Proc. 2011-1, 2011-1 CB 1
(updated annually) (see Sec. 601.601(d)(2)(ii)(b) of this chapter).
(2) Consent granted. The Commissioner grants consent to an owner to
revoke an election under this section for a particular production if
the owner--
(i) Complies with the recapture provisions of Sec. 1.181-4(a)(3)
on a timely filed (including any extension) original Federal income tax
return for the taxable year of the revocation; and
(ii) Attaches a statement to that Federal income tax return that
includes the name of the production that was in the owner's original
election statement, and any revised name (or other unique identifying
designation) of the production, and a statement that the owner revokes
the election under section 181 for that production, pursuant to Sec.
1.181-2(d)(2).
Sec. 1.181-2T [Removed]
0
Par. 7. Section 1.181-2T is removed.
0
Par. 8. Section 1.181-3 is added to read as follows:
Sec. 1.181-3 Qualified film or television production.
(a) In general. The term qualified film or television production
means any production (as defined in paragraph (b) of this section) for
which not less than 75 percent of the aggregate amount of compensation
(as defined in paragraph (c) of this section) paid or incurred for the
production is qualified compensation (as defined in paragraph (d) of
this section).
(b) Production--(1) In general. Except as provided in paragraph
(b)(3) of this section, for purposes of this section and Sec. Sec.
1.181-1, 1.181-2, 1.181-4, 1.181-5, and 1.181-6, the term production
means any motion picture film or video tape (including digital video)
production the production costs of which are subject to capitalization
under section 263A, or that would be subject to capitalization if
section 263A applied to the owner of the production. If, prior to its
initial release or broadcast, a person acquires a completed motion
picture film or video tape (including digital video) that the seller
was entitled to treat as a production under this paragraph (b)(1), then
the new owner may treat the acquired asset as a production within the
meaning of this paragraph (b)(1).
(2) Special rules for television productions. Each episode of a
television series is a separate production to which the rules, limits,
and election requirements of this section and Sec. Sec. 1.181-1,
1.181-2, 1.181-4, 1.181-5, and 1.181-6 apply. An owner may elect to
deduct production costs under section 181 only for the first 44
episodes of a television series (including pilot episodes). A
television series may include more than one season of programming.
(3) Exception for certain sexually explicit productions. A
production does not include property for which records are required to
be maintained under 18 U.S.C. 2257.
(c) Compensation. The term compensation means, for purposes of this
section and Sec. 1.181-2(c)(2), all amounts paid or incurred either
directly by the owner or indirectly on the owner's behalf for services
performed by actors (as defined in paragraph (f)(1) of this section),
directors, producers, and other production personnel (as defined in
paragraph (f)(2) of this section) for the production. Examples of
indirect
[[Page 60728]]
payments paid or incurred on the owner's behalf are payments by a
partner on behalf of an owner that is a partnership, payments by a
shareholder on behalf of an owner that is a corporation, and payments
by a contract producer on behalf of the owner. Payments for services
are all elements of compensation as provided for in Sec. Sec. 1.263A-
1(e)(2)(i)(B) and (e)(3)(ii)(D). Compensation is not limited to wages
reported on Form W-2, ``Wage and Tax Statement,'' and includes
compensation paid or incurred to independent contractors. However,
solely for purposes of paragraph (a) of this section, the term
``compensation'' does not include participations and residuals (as
defined in section 167(g)(7)(B)). See Sec. 1.181-1(a)(3) for
additional rules concerning participations and residuals.
(d) Qualified compensation. The term qualified compensation means,
for purposes of this section and Sec. 1.181-2(c)(2), all compensation
(as defined in paragraph (c) of this section) paid or incurred for
services performed in the United States (as defined in paragraph (f)(3)
of this section) by actors, directors, producers, and other production
personnel for the production. A service is performed in the United
States for purposes of this paragraph (d) if the principal photography
to which the compensated service relates occurs within the United
States and the person performing the service is physically present in
the United States. For purposes of an animated film or animated
television production, the location where production activities such as
keyframe animation, in-between animation, animation photography, and
the recording of voice acting performances are performed is considered
in lieu of the location of principal photography. For purposes of a
production incorporating both live action and animation, the location
where production activities such as keyframe animation, in-between
animation, animation photography, and the recording of voice acting
performances for the production is considered in addition to the
location of principal photography.
(e) Special rule for acquired productions. A person who acquires a
production from a prior owner must take into account all compensation
paid or incurred by or on behalf of the seller and any previous owners
in determining if the production is a qualified film or television
production as defined in paragraph (a) of this section. Any owner that
elects to deduct as production costs the costs of acquiring a
production and any subsequent production costs must obtain from the
seller detailed records concerning the compensation paid or incurred
for the production and, for a pre-amendment production, concerning
aggregate production costs, in order to demonstrate the eligibility of
the production under section 181.
(f) Other definitions. The following definitions apply for purposes
of this section and Sec. Sec. 1.181-1, 1.181-2, 1.181-4, 1.181-5, and
1.181-6:
(1) Actors. The term actors means players, newscasters, or any
other persons who are compensated for their performance or appearance
in a production.
(2) Production personnel. The term production personnel means
persons who are compensated for providing services directly related to
the production, such as writers, choreographers, composers, casting
agents, camera operators, set designers, lighting technicians, and
make-up artists.
(3) United States. The term United States means the 50 states, the
District of Columbia, the territorial waters of the continental United
States, the airspace or space over the continental United States and
its territorial waters, and the seabed and subsoil of those submarine
areas that are adjacent to the territorial waters of the continental
United States and over which the United States has exclusive rights, in
accordance with international law, for the exploration and exploitation
of natural resources. The term ``United States'' does not include
possessions and territories of the United States (or the airspace or
space over these areas).
Sec. 1.181-3T [Removed]
0
Par. 9. Section 1.181-3T is removed.
0
Par. 10. Section 1.181-4 is added to read as follows:
Sec. 1.181-4 Special rules.
(a) Recapture--(1) Applicability--(i) In general. The requirements
of this paragraph (a) apply notwithstanding whether an owner has
satisfied the revocation requirements of Sec. 1.181-2(d). An owner
that claimed a deduction under section 181 for a production in any
taxable year in an amount in excess of the amount that would be
allowable as a deduction for that year in the absence of section 181
must recapture the excess amount as provided for in paragraph (a)(3) of
this section for the production in the first taxable year for which--
(A) For any pre-amendment production, the aggregate production
costs of the production exceed the applicable aggregate production
costs limit under Sec. 1.181-1(b)(1)(i) or (b)(2);
(B) For any pre-amendment production, the owner no longer
reasonably expects (based on all of the facts and circumstances at the
end of the current taxable year) that the aggregate production costs of
the production will not, at any time, exceed the applicable aggregate
production costs limit set forth under Sec. 1.181-1(b)(1)(i) or
(b)(2);
(C) The owner no longer reasonably expects (based on all of the
facts and circumstances at the end of the current taxable year) either
that the production will be set for production or that the production
will be a qualified film or television production; or
(D) The owner revokes the election pursuant to Sec. 1.181-2(d).
(ii) Special rule. An owner that claimed a deduction under section
181 and disposes of the production prior to its initial release or
broadcast must recapture the entire amount specified under paragraph
(a)(3) of this section in the year the owner disposes of the production
before computing gain or loss from the disposition.
(2) Principal photography not commencing prior to the date of
expiration of section 181. If an owner claims a deduction under section
181 for a production for which principal photography does not commence
prior to the date of expiration of section 181, the owner must
recapture deductions as provided for in paragraph (a)(3) of this
section in the owner's taxable year that includes the date of
expiration of section 181.
(3) Amount of recapture. An owner subject to the recapture
requirements under this section must, for the taxable year in which
recapture is required, include in the owner's gross income as ordinary
income and add to the owner's adjusted basis in the property--
(i) For a production that is placed in service in a taxable year
prior to the taxable year for which recapture is required, the
difference between the aggregate amount the owner claimed as a
deduction under section 181 for the production for all such prior
taxable years and the aggregate depreciation deductions that would have
been allowable for the production for such prior taxable years (or that
the owner could have elected to deduct in the taxable year that the
production was placed in service) for the production under the owner's
method of accounting; or
(ii) For a production that has not been placed in service, the
aggregate amount claimed as a deduction under section 181 for the
production for all such prior taxable years.
(b) Recapture under section 1245. For purposes of recapture under
section
[[Page 60729]]
1245, any deduction allowed under section 181 is treated as a deduction
allowable for amortization.
Sec. 1.181-4T [Removed]
0
Par. 11. Section 1.181-4T is removed.
0
Par. 12. Section 1.181-5 is added to read as follows:
Sec. 1.181-5 Examples.
The following examples illustrate the application of Sec. Sec.
1.181-1 through 1.181-4:
Example 1. X, a corporation that uses an accrual method of
accounting and files Federal income tax returns on a calendar-year
basis, is a producer of films. X is the owner (within the meaning of
Sec. 1.181-1(a)(2)) of film ABC. X incurs production costs in year
1, but does not commence principal photography for film ABC until
year 2. In year 1, X reasonably expects, based on all of the facts
and circumstances, that film ABC will be set for production and will
be a qualified film or television production. Provided that X
satisfies all other requirements of Sec. Sec. 1.181-1 through
1.181-4 and Sec. 1.181-6, X may deduct in year 1 the production
costs for film ABC that X incurred in year 1.
Example 2. The facts are the same as in Example 1. In year 2, X
begins, but does not complete, principal photography for film ABC.
Most of the scenes that X films in year 2 are shot outside the
United States and, as of December 31, year 2, less than 75 percent
of the total compensation paid for film ABC is qualified
compensation. Nevertheless, X still reasonably expects, based on all
of the facts and circumstances, that film ABC will be a qualified
film or television production. Provided that X satisfies all other
requirements of Sec. Sec. 1.181-1 through 1.181-4 and Sec. 1.181-
6, X may deduct in year 2 the production costs for film ABC that X
incurred in year 2.
Example 3. The facts are the same as in Example 2. In year 3, X
continues, but does not complete, production of film ABC. Due to
changes in the expected production costs of film ABC, X no longer
expects film ABC to qualify under section 181. X files a statement
with its return for year 3 identifying the film and stating that X
revokes its election under section 181. X includes in income in year
3 the deductions claimed in year 1 and in year 2 as provided for in
Sec. 1.181-4(a)(3). X has successfully revoked its election
pursuant to Sec. 1.181-2(d).
Sec. 1.181-5T [Removed]
0
Par. 13. Section 1.181-5T is removed.
0
Par. 14. Section 1.181-6 is added to read as follows:
Sec. 1.181-6 Effective/applicability date.
(a) In general. Sections 1.181-1 through 1.181-5 apply to
productions, the first day of principal photography for which occurs on
or after September 29, 2011. For an animated production, this paragraph
(a) applies by substituting ``in-between animation'' in place of
``principal photography''. Productions involving both animation and
live-action photography may use either standard.
(b) Application of proposed regulations to pre-effective date
productions. Except as provided in paragraph (c) of this section, an
owner may apply 26 CFR 1.181.1T through 1.181-5T (as contained in 26
CFR part 1 revised April 1, 2008) to productions, the first day of
principal photography (or in-between animation) for which occurs on or
after October 22, 2004, and before February 9, 2007, or on or after
January 1, 2009, and before September 29, 2011, provided that the owner
applies all provisions of the proposed regulations to the productions.
(c) Application of Sec. Sec. 1.181-1 through 1.181-5 to certain
pre-effective date productions. An owner may apply Sec. Sec. 1.181-1
through 1.181-5 to productions, the first day of principal photography
(or in-between animation) for which occurs on or after February 9,
2007, and before September 29, 2011, provided that the owner applies
all provisions of Sec. Sec. 1.181-1 through 1.181-5 to the
productions.
Sec. 1.181-6T [Removed]
0
Par. 15. Section 1.181-6T is removed.
PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT
0
Par. 16. The authority citation for part 602 continues to read as
follows:
Authority: 26 U.S.C. 7805.
0
Par. 17. In Sec. 602.101, paragraph (b) is amended as follows:
1. The following entries to the table are removed:
Sec. 602.101 OMB Control numbers.
* * * * *
(b) * * *
------------------------------------------------------------------------
Current OMB
CFR part or section where identified and described control No.
------------------------------------------------------------------------
* * * * *
1.181-1T and 1.181-2T................................... 1545-2059
* * * * *
------------------------------------------------------------------------
2. The following entries are added in numerical order to table:
Sec. 602.101 OMB Control numbers.
* * * * *
(b) * * *
------------------------------------------------------------------------
Current OMB
CFR part or section where identified and described control No.
------------------------------------------------------------------------
* * * * *
1.181-1................................................. 1545-2059
1.181-2................................................. 1545-2059
1.181-3................................................. 1545-2059
* * * * *
------------------------------------------------------------------------
Steven T. Miller,
Deputy Commissioner for Services and Enforcement.
Approved: September 19, 2011.
Emily S. McMahon,
Acting Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2011-24930 Filed 9-29-11; 8:45 am]
BILLING CODE 4830-01-P