In technical advice memorandum (TAM 201646004), the IRS has determined that, for purposes of the domestic production activities deduction under Section 199, a video subscription package that includes multiple channels of programming, and the signals transmitted by the service provider distributing the programming, do not constitute a qualified film within the meaning of Section 199. Thus, gross receipts received by the provider from its subscription packages were not domestic production gross receipts (DPGR) for purposes of Section 199. This TAM is specifically directed to the facts of the taxpayer involved and is not binding authoritative guidance, although it is indicative of the IRS's interpretive view, which could apply to others.

Background

Under Section 199(c)(4)(A)(i)(II), DPGR includes gross receipts derived from a qualified film produced by the taxpayer. A taxpayer determines whether gross receipts qualify as DPGR on an item-by-item basis. See Reg. Section 1.199-3(d)(1). Reg. Section 1.199-3(d)(1)(i) defines "item" as property offered by the taxpayer in the normal course of the taxpayer's business for lease, rental, license, sale, exchange or other disposition to customers, if the gross receipts from the property qualify as DPGR. Reg. Section 1.199-3(d)(2)(i) allows a single item to consist of two or more properties if those properties are offered for disposition in the normal course of taxpayer's business as a single item.

In TAM 201049029, the IRS analyzed whether a taxpayer's licensing of a group of programs (a Programming Package), composed of programs both produced by the taxpayer and programs licensed by the taxpayer from third parties, would be considered a single item, or if each individual program would be considered an item, for purposes of determining the taxpayer's DPGR from licensing. The IRS stated:

"Our Office believes it is consistent to test a Programming Package offered by Taxpayer to customers in the normal course of business as a single qualified film for purposes of [Section] 199(c)(6), because other property that consists of multiple properties is tested as a single property for purposes of [Section] 199. This is true regardless of the fact that a Programming Package, the property offered in this case, includes multiple films of which some are Taxpayer-produced films and some are third-party produced films."

The taxpayer's operations included television cable networks, television broadcast networks, and owned and operated television stations, and it was not a multichannel video programming distributor (MVPD) (i.e., a cable operator, a multichannel multipoint distribution service, a direct broadcast satellite service or a television receive-only satellite program distributor).

In Chief Counsel Advice (CCA 201446022), the IRS considered whether an MVPD, a distributor of multiple channels of video programming (a Subscription Package), was the producer of the Subscription Packages. The CCA noted the taxpayer had not provided information showing that any of the Subscription Packages satisfied the qualified film compensation requirement. Even if the taxpayer were able to show that any of the Subscription Packages were qualified films, the IRS found that the taxpayer's activities with respect to the Subscription Packages were not substantial in nature, under either a facts-and-circumstances analysis or under the safe harbor provided in Reg. Section 1.199-3(k)(7). The CCA stated that almost all of the channels that the taxpayer distributed were produced by third parties (television and cable networks).

As to whether the taxpayer could be considered the producer of all of the film in a Subscription Package, the IRS stated, after considering the taxpayer's business and the nature of the product:

"While it is allowable for Taxpayer to determine whether it produced enough of the film to be considered the producer of all of the film in a Subscription Package, it is incorrect to say Taxpayer is producing a new film. Taxpayer's disposition of the films as a package (which is its method of distribution), and its activities enabling that distribution, do not affect whether Taxpayer is a film producer. Taxpayer argues that distributing a number of films together as a package can make a taxpayer the producer of the films within that package. Our Office does not agree with that argument. Our Office views Taxpayer's business and activities as the distribution of groups of films, rather than film production."

Facts

The taxpayer is an MVPD regulated by the FCC as a telecommunications service provider. The taxpayer distributes Subscription Packages to customers, via the transmission of signals. The service includes thousands of channels containing television programs and advertisements. Nearly all channels are licensed from unrelated third parties.

Analysis

IRS evaluated two issues: (1) whether the Subscription Package is property described in Section 168(f)(3), and therefore within the definition of "qualified film"; and (2) whether the Subscription Package could be considered the "item" for purposes of Section 199.

As to the first issue, IRS stated that it does not consider a Subscription Package to be within the definition of "any motion picture film or video tape." In this regard, the IRS agreed with the examination team that " … as a matter of law, a Subscription Package is not a film, and thus, is not a qualified film for [Section] 199 purposes."

On the second issue, IRS stated that the term "live or delayed programming," within the definition of the term "film," refers to individual television programs, so the term "qualified film" is limited to individual films. "[Section] 199 and the regulations thereunder, as well as the legislative history, require a qualified film to be an individual film, and not a package including multiple films like the Subscription Package. Consequently, Taxpayer cannot circumvent the statutorily prescribed mandate that only one individual film may be a qualified film for [Section] 199," the IRS concludes. Regarding the taxpayer's argument that the Subscription Package was the "item," since it was the product offered by the taxpayer in the normal course of its business, the IRS stated:

"Taxpayer argues that the rule implies that a Subscription Package can be a film, and even a qualified film, because Taxpayer disposed of the Subscription Package in the normal course of its business and the Subscription Package included films. The item rule provides only the basis for determining whether gross receipts are DPGR. It does not modify the statutory or regulatory definitions of qualified film. Thus, whether Taxpayer satisfies the 50% compensation requirement or any other requirement of [Section] 199 on a Subscription Package basis is immaterial because a Subscription Package is not a film. Consequently, a Subscription Package may not be the item under [Reg. Section] 1.199-3(d)(1) because it does not satisfy the requirements of [Section] 199(c)(6)."

IRS concluded that "it is appropriate to evaluate the individual films included in a Subscription Package to determine whether any one film is a qualified film produced by Taxpayer, and a potential item under [Reg. Section] 1.199-3(d)(1)(ii)." According to the IRS, to the extent the taxpayer could satisfy all of the requirements under Section 199 for an individual film, it would be entitled to a Section 199 deduction for that individual film.

Implications

The taxpayer in TAM 201646004, like the taxpayer in CCA 201446022, sought to qualify its gross receipts as DPGR on the basis of its entire Subscription Package, for which it produced little of the content, under the facts provided. As in CCA 201446002, the IRS rejected the argument made by the taxpayer (in reliance on TAM 201049029) that each of its subscription packages is a new film that is also a qualified film produced by the taxpayer. In TAM 201049029, in contrast to TAM 201646004, the taxpayer's operations included television cable networks, television broadcast networks, and owned and operated television stations and the taxpayer was not a MVPD.

Although IRS has concluded that DPGR related to MVPD's Subscription Packages must be evaluated on an individual film basis, not on the basis of the item offered by the taxpayer in the normal course of business, it is unclear whether IRS will apply the same approach to programming packages offered by television cable networks, television broadcast networks, and owned and operated television stations. If the approach taken in TAM 201646004 applies to such television network and station taxpayers, that approach would directly conflict with TAM 201049029, which supports the position that a network or station programming package (i.e., the 24-hour feed) may be considered the "item" for purposes of Section 199.

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