Tax Developments for Film Companies

Up until now, film companies have been treating the proceeds of the sale of state tax credits as reducing the cost of the film. While there is no direct authority for this treatment, it seems reasonable by analogy to the treatment of price rebates, which are not treated as taxable income but instead are treated as a retroactive reduction in the cost of the purchased item. See, Rev. Rul. 76-96, 1976-1 CB 23; Rev. Rul. 78-194, 1978-1 CB 24; Rev. Rul. 85-30, 1985-1 CB 20; Rev. Rul. 88-95, 1988-2 CB 28; Freedom Newspapers Inc. v. Comm'r, 36 TCM 1755 (1977). The net result of this treatment has been that if a film costs $15 million before tax credits and the tax credits are sold for $3 million, the film company treats the film as costing $12 million. This $12 million net cost is then amortized using the income forecast method, commencing in the tax year that the film is released to the public.

Under the IRS Chief Counsel Advice approach, the film company in the above example has $3 million of taxable income when it receives the proceeds from the sale of the tax credit and the film is treated as costing $15 million. The worst part for the film company is that it cannot offset the $3 million of taxable income by any portion of the cost of the film until the film is released to the public; even then it has to use income forecast amortization to deduct the film cost over a number of years pro rata with the actual and expected income from the film. Further, it does not appear that the $3 million of income from the sale of the tax credit would be included in calculating income forecast amortization, because it is not attributable to exploitation of the film.