To further its effort to align examinations with issues, on January 31, the IRS Large Business and International (LB&I) division announced 13 issue-specific compliance "campaigns," which include Section 199 issues. See Tax Alert 2017-0234 LB&I's stated goal for the compliance campaigns is "to improve return selection, identify issues representing a risk of non-compliance, and make the greatest use of limited resources." The LB&I announcement indicates that more compliance campaigns will be added in the future.

Specifically, the Section 199 campaign involves multi-channel video programing distributors (MVPDs) and television broadcasters that claim the Section 199 deduction for "groups" of channels or programs identified as a qualified film. It also includes MVPDs claiming that they provide online access to computer software for their customers' direct use (incident to taxpayers' transmission activities, including customers' use of the set-top boxes). Kathy Robbins, Director of the Enterprise Activities Practice Area, is the lead LB&I executive with jurisdiction over this campaign.

The campaign announcement comes on the heels of the November 2016 release of two technical advice memoranda (TAMs) concluding that "a video subscription package that includes [1] multiple channels of programming, and [2] the signals transmitted by the service provider distributing the programming" is not a qualified film within the meaning of Section 199. See TAM 201646004 (Tax Alert 2016-1943) and TAM 201647007. This conclusion is consistent with Chief Counsel Advice released in July 2014 (see CCA 201446022 (Tax Alert 2014-2101)) in which the IRS concluded that gross receipts derived by an MVDP from the distribution of subscription packages do not qualify as domestic production gross receipts. It is arguably inconsistent, however, with TAM 201049029 (released December 2010), which observed that "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."

EY observation

The inclusion of Section 199 in the first round of compliance campaigns signals that it is an LB&I focal point, and may result in some much-needed clarification for the media and entertainment industry. Specifically, clarification would be welcomed on when income is derived from the disposition of a qualified film or from providing access to computer software for the MPVD's customers' direct use.

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