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Proposed Regulations Under Section 199 Provide Guidance for Certain Taxpayers Who Produce Films or Who Are Members of an Expanded Affiliated Group
The Treasury Department and IRS today released for publication in the Federal Register
proposed regulations (REG-1038342-07) that would amend existing regulations concerning the deduction for income attributable to domestic production activities under section 199. Today’s proposed regulations, if finalized, would affect taxpayers who produce qualified films and taxpayers who are members of an expanded affiliated group.
For a computer-scanned version of the proposed regulations:
REG-103842-07
Background
After final regulations under section 199 were published on June 1, 2006, Treasury and the IRS became aware that the definition of a qualified film produced by a taxpayer as outlined in the final regulations may not be consistent with the statutory language of section 199.
Under the final regulations, a film must be both (1) a “qualified film” and (2) “produced by the taxpayer” for the gross receipts to qualify as domestic production gross receipts (DPGR) under section 199. Under the test provided in the final regulations, a film produced entirely in the United States could fail to qualify for the section 199 deduction if less than 50% of the total compensation relating to the film’s production was paid “by the taxpayer.”
Also, under the final regulations, an example addressed a situation when a member of a consolidated group sells qualifying production property (QPP) to another member of the group; and before the QPP is sold to an unrelated party, the purchasing corporation is disaffiliated from the consolidated group. The example provided that neither the selling corporation nor the purchasing corporation has DPGR.
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Proposed Regulations: Qualified Films
According to the preamble, the proposed regulations more closely follow the statutory language under section 199(c)(6) by revising the fraction in the final regulations for determining the not-less-than-50%-of-the-total-compensation requirement. In the proposed regulations:
- The numerator of the revised fraction is the compensation paid by the taxpayer or others for services performed in the United States.
- The denominator is the total compensation for services regardless of where the production activities are performed.
The proposed regulations also clarify that 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.
Expanded Affiliated Groups
Concerning Example 10 of Reg. section 1.199-7(e), Treasury and the IRS determined that it does not properly apply Reg. section 1.1502-13 of the consolidated return regulations and that both the selling and purchasing corporations have DPGR under the facts described in the example. Therefore, existing Example 10 is removed and replaced with a new example that is intended to provide a proper application of the consolidated return regulations.
Effective Date; Due Date for Comments
The proposed regulations generally are to be effective for tax years beginning on or after the date the final regulations are published in the
Federal Register. However, until then, taxpayers can rely on the proposed regulations for tax years beginning after December 31, 2004. However, for tax years beginning before June 1, 2006, a taxpayer can rely on the film production provisions under the proposed regulations, provided the taxpayer does not apply Notice 2005-14 to the tax year.
A public hearing on the proposed regulations has been scheduled for October 2, 2007, and comments or requests to speak at the hearing must be received by September 5, 2007.
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REG-103842-07 will appear in the Federal Register on Thursday, June 7, 2007.
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