Entertainment tax; staying up to date on new rulings, regs of the entertainment industry.

• Author: Miller, Mitchell R.
• Position: ENTERTAINMENTISSUES

Over the past several years, new revenue rulings, proposed regulations and other types of published guidance, such as Internal Revenue Code Sections and Final Treasury Regulations, have clarified a number of major issues in the entertainment tax area.

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Congress also recently passed legislation to encourage film and television production in the United States (among them, the American Jobs Creation Act of 2004).

Here's an update on developments for CPAs who practice in the entertainment area, whether in public practice or industry.

ADVANCE PAYMENTS

The treatment of advance payments was the most significant unresolved entertainment tax issue. The IRS and the courts have historically taken the position that all advance payments are income recognized upon receipt, unless specifically otherwise provided for by statute or regulation.

Advance payments are commonly used in the motion picture and television industry in the course of TV and film production. A studio may pay a production company one-third of the price for a film upon the commencement of principal photography. Inevitably some of these payments are received in a year prior to completion of the picture.

Notwithstanding many court cases requiring immediate taxation of advance payments generally, in the film and television industry they were rarely, if ever, reported as income upon receipt because, among other reasons, they are deferred under GAAP by SOP 00-2 (continuing the former treatment under FASB 53).

Deferral of advance payments for services is permitted under Rev. Proc. 71-21, and for goods or building, installing, constructing or manufacturing under IRC Reg. Sec. 1.451-5. However, rulings and regulations do not provide certain treatment of motion picture producers, since it has never been made clear that motion picture or television production falls into one or the other of these categories.

To resolve these uncertainties, the IRS promulgated Rev. Proc. 2004-34, which covers (among other things) goods, services, mixed goods and services; licensing of intellectual property; and sale, lease or license of computer software, including motion picture and television production.

"Applicable financial statements," that is, financial statements submitted to persons outside the company, such as audited financial statements accompanied by the report of an independent CPA, are helpful in qualifying for the deferral method provided by Rev. Proc. 2004-34. However, taxpayers...