Income-Forecast Method Modifications for Film Industry

Under the income-forecast method (Sec. 167(g)), a propertys depreciation deduction for a tax year is determined by multiplying the propertys adjusted basis by a fraction, the numerator of which is the income generated by the property during the year and the denominator of which is the total forecasted or estimated income expected to be generated prior to the close of the 10th tax year after the year the property was placed in service. Any costs not recovered by the end of the 10th year may be taken into account as depreciation in such year; for a full discussion, see Schell, Proposed Regs. Shed Light on Income Forecast Method, TTA, August 2004.

Sec. 167(g) proposed regulations, issued in 2003, provided that contingent payments may not be included in the propertys basis until the year paid or incurred in accordance with the taxpayers accounting method. This position was contrary to that advocated by the industry, which suggested that, based on the holding in Transamerica Corp., 999 F2d 1362 (9th Cir. 1993), the proposed regulations should provide that contingent amounts are properly included in basis beginning in the year the property is placed in service.

New Law

Under AJCA Section 242, income from the property, for purposes of computing depreciation under the income-forecast method, is gross income. Participations and residuals are includible in basis beginning the year the property is placed in service, but only if the participations and residuals relate to income to be derived from the property before the end of the 10th year following the year the property is placed in service. In addition, the AJCA clarifies that distribution costs are not taken into account in determining the propertys current and total forecasted income. Finally, the provision clarifies that, for property eligible for the income-forecast method, the holding in Associated Patentees, Inc., 4 TC 979 (1945) (in which the court held that the taxpayer was entitled to deduct certain royalty payments as paid) continues to constitute a valid method.

Effective Date

The provision is effective for property placed in service after Oct. 22, 2004, but the conferees encourage Treasury and the IRS to expeditiously resolve open cases, taking into account the AJCAs provisions.

Implications

In most cases, computing depreciation under Associated Patentees will likely be more favorable (deduction accelerated) than including contingent amounts in basis and recovering them under the normal income-forecast method. Additionally, the application of Associated Patentees is not limited to film, but applies to all property recoverable under the income forecast method, such as patents and copyrights.

From Jane Rohrs, Washington, DC