Income-forecast method modifications for film industry.

• Author: Rohrs, Jane

Under the income-forecast method (See. 167(g)), a property's depreciation deduction for a tax year is determined by multiplying the property's 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, p. 510.

Sec. 167(g) proposed regulations, issued in 2003, provided that contingent payments may not be included in the property's basis until the year paid or incurred in accordance with the taxpayer's 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...