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Tax Developments for Film Companies

By Schuyler M. Moore

For the last several years, the largest source of “soft money” for film financing has been U.S. state tax credits, but within the past year the Internal Revenue Service issued a Chief Counsel Advice that threatened the viability of this vital source of financing by holding that the receipt of the proceeds from the sale of state tax credits is immediately taxable. IRS Chief Counsel Advice 201147024 (2011) (http://1.usa.gov/OjyqGy).

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.

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