Channel packages are not qualified films for the domestic production deduction

Plain-English summary

A multichannel video programming distributor claimed former § 199 domestic production activities deductions based on subscription packages containing many television channels. It argued that each package, or the signals used to transmit it, was a new qualified film and that subscriber fees were domestic production gross receipts. The IRS concluded that a package of programs is not a motion picture film, video tape, or live or delayed television program, and that transmitting and distributing content is not film production. Gross receipts from the subscription packages therefore were not DPGR from a qualified film produced by the taxpayer. A portion of the receipts could still qualify if it was properly allocable to an individual film that independently met the qualified-film requirements and was produced by the taxpayer.

Ruling snapshot

• Question: Were multichannel subscription packages qualified films, making the related subscriber fees domestic production gross receipts under former § 199?
• Outcome: advice given
• Key authorities: IRC §§ 168(f)(3) and 199(c)(4), (6); Treas. Reg. § 1.199-3(d), (k)

Full text (IRS public release)

                        INTERNAL REVENUE SERVICE
              NATIONAL OFFICE TECHNICAL ADVICE MEMORANDUM

                                           August 5, 2016


Number:     201646004
Release Date:    11/10/2016
                                                 Third Party Communication: None
                                                 Date of Communication: Not Applicable

Index (UIL) No.:      199.00-00, 199.03-00, 199.03-09
CASE-MIS No.:         TAM-137619-15

Director of Field Operations, Western Compliance Practice Area - Southwest
Paul J. Curtis

      Taxpayer's Name:                           ---------------------------------------------------------------
      Taxpayer's Address:                        ---------------------------------------
                                                 -------------------
                                                 ------------------------------------
      Taxpayer's Identification No.:             -----------------
      Years Involved:                            ---------------
      Date of Conference:                        -----------------------


LEGEND:

Taxpayer:    ------------------------------------------------------

Signals:     -----------------------

ISSUES:

1. For purposes of the domestic production activities deduction under § 199 of the
Internal Revenue Code (Code), whether a package that includes multiple channels of
video programming, or the Signals transmitted by Taxpayer to distribute the package of
video programming (together referred to as a “Subscription Package”) is a qualified film
within the meaning of § 199(c)(6), and § 1.199-3(k)(1) of the Income Tax Regulations.

2. Whether the gross receipts that Taxpayer derived from its Subscription Packages
qualify as domestic production gross receipts (DPGR) under § 199(c)(4)(A)(i)(II) and
§ 1.199-3(k)(3).
TAM-137619-15                              2

CONCLUSIONS:

1. No. A Subscription Package is not a qualified film within the meaning of § 199(c)(6)
or § 1.199-3(k)(1) because it is not property described in § 168(f)(3)(“any motion
picture film or video tape”), or “live or delayed television programming” within the
meaning of § 1.199-3(k)(1).

2. No. The gross receipts that Taxpayer derived from its Subscription Packages were
not from the disposition of a qualified film produced by Taxpayer and are not DPGR
under § 199(c)(4)(A)(i)(II) and § 1.199-3(k). However, the gross receipts that Taxpayer
derived from any individual film included in a Subscription Package that is a qualified
film produced by Taxpayer may qualify as DPGR. Thus, a portion of Taxpayer’s gross
receipts may be DPGR under § 199(c)(4)(A)(i)(II) and § 1.199-3(k), and each qualified
film produced by Taxpayer may be considered an “item” as provided by § 1.199-
3(d)(1)(ii).

FACTS:

Taxpayer is a multichannel video programming distributor (MVPD) regulated by the
Federal Communications Commission (FCC) as a telecommunications service
provider. An MVPD is defined as “a person such as, but not limited to, a cable
operator, a multichannel multipoint distribution service, a direct broadcast satellite
service, or a television receive-only satellite program distributor, who makes available
for purchase, by subscribers or customers, multiple channels of video programming.”
47 U.S.C. § 522(13). As an MVPD, Taxpayer is subject to the rules in the
Communications Act of 1934 (as amended by the Telecommunications Act of 1996).
“Telecommunication services” are defined as “the offering of telecommunications for a
fee, directly to the public, … regardless of the facilities used.” 47 U.S.C. § 153(53).
“Telecommunications” is defined as “the transmission, between or among points
specified by the user, of information of the user’s choosing, without change in the form
or content of the information as sent and received.” 47 U.S.C. § 153(50). The term
“cable channel” or “channel” is defined as “a portion of the electromagnetic frequency
spectrum which is used in a cable system and which is capable of delivering a television
channel (as television channel is defined by the FCC by regulation).” 47 U.S.C.
§ 522(4).

In exchange for various monthly fees, Taxpayer distributed to customers, via the
transmission of Signals, thousands of channels containing television programs,
advertisements, and interstitials. The television content Taxpayer’s customers
received varied depending on their Subscription Package and geographic location.
The reference to the gross receipts that Taxpayer derived from its Subscription
Packages includes all fees attributable to each Subscription Package.
TAM-137619-15                                      3

Some of Taxpayer’s Subscription Packages included access to channels containing
films and television programs with visual depictions of actual sexually explicit conduct
for which records are required to be maintained under 18 U.S.C. § 2257. In addition,
Taxpayer provided to customers access to pay-per-view films and television
programs. Taxpayer also provided to customers the equipment necessary to receive
the Signals transmitted by Taxpayer. The terms and conditions of the contractual
relationship between Taxpayer and customers are set forth in customer agreements,
which are service contracts.

In total, Taxpayer distributed around -------- television channels to customers.
Taxpayer licensed almost all of these television channels from unrelated third parties.
For the tax years at issue, Taxpayer produced television programs for ---- of the
television channels it distributed. However, a significant portion of the content
provided on these ---- channels was also licensed from unrelated third parties. It is
unclear how many Subscription Packages included these ---- channels.

Taxpayer claimed a total of approximately $-------------- in § 199 deductions for the tax
years at issue.

Summary of Taxpayer and LB&I Positions

Taxpayer takes the position that each one of its Subscription Packages is a new film
that is also a qualified film produced by Taxpayer. Thus, the various monthly fees
customers paid to Taxpayer in exchange for access to its Subscription Packages
qualify as DPGR under § 199(c)(4)(A)(i)(II) and § 1.199-3(k). Taxpayer relies on
I.R.S. Technical Advice Memorandum 201049029 (Dec. 10, 2010) (the 2010 TAM) to
support its assertion.1

LB&I disagrees with Taxpayer that a package of television channels is a qualified film.
According to LB&I, as a matter of law, a Subscription Package is not a film, and thus,
is not a qualified film for § 199 purposes. LB&I asserts that the reference to any
motion picture film, video tape, or live or delayed television programming (film) in
§ 199(c)(6) and § 1.199-3(k)(1) is limited to individual films. LB&I further disagrees
that the gross receipts Taxpayer derived from the disposition of its Subscription
Packages are DPGR from a qualified film produced by Taxpayer under
§ 199(c)(4)(A)(i)(II) and § 1.199-3(k).

LB&I asserts that the only gross receipts that are DPGR under § 199(c)(4)(A)(i)(II)
and § 1.199-3(k) are those derived from the individual films that are the components
of a Subscription Package, if such films, on an individual basis, meet the

1
 As a preliminary matter, the 2010 TAM has no precedential value and Taxpayer cannot rely on it directly
or indirectly. See § 6110(b)(1)(A) and (k)(3).
TAM-137619-15                                4

requirements to be a qualified film produced by Taxpayer. Accordingly, the gross
receipts Taxpayer derived from its Subscription Packages are not DPGR because
they are not attributable to the disposition of a qualified film produced by Taxpayer.
Thus, a Subscription Package is not Taxpayer’s “item” under § 1.199-3(d)(1), and
Taxpayer must apply the rules of § 1.199-3(d)(1)(ii) to each individual film included in
its Subscription Packages.

However, LB&I recognizes that Taxpayer may be entitled to include the gross
receipts allocable to each individual film that meets the definition of qualified film, and
that was produced by Taxpayer under § 1.199-3(k)(6) in its § 199 deduction
calculation. That is, LB&I asserts that only films that Taxpayer establishes are,
individually, a qualified film produced by Taxpayer, may be treated as the item under
§ 1.199-3(d)(1)(ii) because the gross receipts from such films are DPGR. Thus, only
the gross receipts Taxpayer derived from those individual qualified films
(components) that were produced by Taxpayer may qualify as DPGR.

LAW:

Under § 199(a), the § 199 deduction is determined by applying a percentage to the
lesser of the taxpayer's qualified production activities income (QPAI) or taxable
income (determined without regard to the § 199 deduction). The applicable
percentage is 3 percent for taxable years beginning in 2005 and 2006, 6 percent for
taxable years beginning in 2007 through 2009, and 9 percent for taxable years
beginning after 2009.

Under § 199(c)(1), QPAI is determined by taking DPGR for the taxable year less cost
of goods sold (CGS) allocable to such DPGR, less other expenses, losses, or
deductions, which are properly allocable to such DPGR.

Section 199(c)(4)(A)(i)(II) provides that DPGR means the gross receipts of the
taxpayer that are derived from any lease, rental, license, sale, exchange, or other
disposition (collectively “disposition”) of any qualified film produced by the taxpayer.

Section 199(c)(6) defines the term “qualified film” as any property described in
§ 168(f)(3) if not less than 50 percent of the total compensation relating to the
production of such property is compensation for services performed in the United
States by actors, production personnel, directors, and producers. Such term does not
include property with respect to which records are required to be maintained under 18
U.S.C. § 2257 (regarding material containing the depiction of sexually explicit
conduct). A qualified film shall include any copyrights, trademarks, or other
intangibles with respect to such film. The methods and means of distributing a
qualified film shall not affect the availability of the deduction.

Section 168(f)(3) property is any motion picture film or video tape.
TAM-137619-15                               5

Under § 1.199-3(d)(1), a taxpayer may use any reasonable method satisfactory to the
Secretary based on all facts and circumstances to determine whether gross receipts
qualify as DPGR on an item-by-item basis (and not, for example, on a division-by-
division, product line-by-product line, or transaction-by-transaction basis).

Section 1.199-3(d)(1)(i) defines the “item” as the property offered by the taxpayer in
the normal course of taxpayer’s business for lease, rental, license, sale, exchange, or
other disposition to customers, if the gross receipts from such property qualify as
DPGR.

Section 1.199-3(d)(1)(ii) provides that, if such property does not qualify under
§ 1.199-3(d)(1)(i), then any component of such property described in § 1.199-
3(d)(1)(i) is treated as the item, provided that the gross receipts that are attributable
to the disposition of the component of such property qualify as DPGR. Each
component that meets the requirements to be treated as the item must be treated as
a separate item and may not be combined with a component that does not meet the
requirements of § 1.199-3(d)(1)(ii).

Section 1.199-3(d)(2)(i) provides that, for purposes of § 1.199-3(d)(1)(i), in no event
may a single item consist of two or more properties unless those properties are
offered for disposition, in the normal course of the taxpayer’s business, as a single
item (regardless of how the properties are packaged).

Section 1.199-3(k)(1) states that the term “qualified film” means any motion picture
film or video tape under § 168(f)(3), or live or delayed television programming (film), if
not less than 50 percent of the total compensation relating to the production of such
film is compensation for services performed in the United States by actors, production
personnel, directors, and producers. For purposes of § 1.199-3(k)(1), the term actors
includes players, newscasters, or any other persons who are compensated for their
performance or appearance in a film. For purposes of § 1.199-3(k)(1), the term
production personnel includes writers, choreographers and composers who are
compensated for providing services during the production of a film, as well as casting
agents, camera operators, set designers, lighting technicians, make-up artists, and
other persons who are compensated for providing services that are directly related to
the production of the film. Except as provided in § 1.199-3(k)(2), the definition of a
qualified film does not include tangible personal property embodying the qualified
film, such as DVDs or videocassettes.

Section 1.199-3(k)(3) provides, in general, that DPGR include the gross receipts from
the disposition of any qualified film produced by such taxpayer.

Section 1.199-3(k)(5) provides that the not-less-than-50-percent-of-the-total-
compensation requirement under § 1.199-3(k)(1) is calculated using a fraction. The
numerator of the fraction is the compensation for services performed in the United
TAM-137619-15                               6

States and the denominator of the fraction is the total compensation for services
regardless of where the production activities are performed.

Section 1.199-3(k)(6) treats a qualified film as produced by the taxpayer for purposes
of § 199(c)(4)(A)(i)(II) if the production activity performed by the taxpayer is
substantial in nature within the meaning of § 1.199-3(g)(2). The special rules of
§ 1.199-3(g)(4) regarding a contract with an unrelated person and aggregation apply
in determining whether the taxpayer’s production activity is substantial in nature.
Sections 1.199-3(g)(2) and (4) are applied by substituting the term qualified film for
qualifying production property (QPP) and disregarding the requirement that the
production activity must be within the United States. The production activity of the
taxpayer must consist of more than the minor or immaterial combination or assembly
of two or more components of a film. For purposes of § 1.199-3(g)(2), the relative
value added by affixing trademarks or trade names as defined in § 1.197-2(b)(10)(i)
will be treated as zero.

Section 1.199-3(k)(7) provides that a film will be treated as a qualified film under
§ 1.199-3(k)(1) and produced by the taxpayer under § 1.199-3(k)(6) (qualified film
produced by the taxpayer) if the taxpayer meets the requirements of § 1.199-3(k)(7)(i)
and (ii). A taxpayer that chooses to use the safe harbor must apply all the provisions
of § 1.199-3(k)(7).

ANALYSIS:

An income tax deduction is a matter of legislative grace and a taxpayer has the burden
of proving that it is entitled to the deduction. ADVO, Inc. v. C.I.R., 141 T.C. 298, 322
(2013). Taxpayer can satisfy its burden by showing that it meets all the requirements to
receive the deduction under § 199, and the amount deductible. To demonstrate that it
meets the requirements of § 199(c)(4)(A)(i)(II), Taxpayer must show that it derived
gross receipts from a qualified film that it produced. In this case, Taxpayer must first
establish that a Subscription Package is a qualified film as defined in § 199(c)(6) and
§ 1.199-3(k)(1). To do this, Taxpayer must show that a Subscription Package: (1) is
property that is a film (“motion picture film or video tape under § 168(f)(3), or live or
delayed television programming”); (2) at least 50 percent of the total compensation
relating to the production of such film is compensation for services performed in the
United States by actors, production personnel, directors, and producers; and (3) it is not
property for which records are required to be maintained under 18 U.S.C. § 2257.

Issue 1: For purposes of the domestic production activities deduction under § 199,
whether a Subscription Package is a qualified film under § 199(c)(6) and § 1.199-
3(k)(1).

      A. A Subscription Package is not a qualified film under § 199(c)(6) because it is
         not property described in § 168(f)(3) or § 1.199-3(k)(1)
TAM-137619-15                                7

Section 199(c)(6) defines the term “qualified film” as any property described in
§ 168(f)(3), provided such property meets the other requirements of § 199(c)(6).
Property described in § 168(f)(3) is “any motion picture film or video tape.” See
BedRoc, Ltd. v. United States, 541 U.S. 176, 183 (2004)(“[The] inquiry begins with the
statutory text, and ends there as well if the text is unambiguous.”). Our Office does not
consider a Subscription Package a “motion picture film or video tape” under even the
most liberal reading of the phrase in § 168(f)(3), and we are unaware of any authority
that indicates otherwise. Instead, we view each of the individual films included in a
Subscription Package as a “motion picture film or video tape” under § 168(f)(3).

The definition of the term “qualified film” under § 1.199-3(k)(1) is also limited to
individual films. In addition to property described in § 168(f)(3), § 1.199-3(k)(1) includes
“live or delayed television programming” within the definition of the term “film” for § 199
purposes. While this added language describes a type of programming, the phrase
must be read in conjunction with the statutory reference to § 168(f)(3). This leads to the
conclusion that the phrase refers to individual television programs that are broadcast
live or on a delayed basis. It is, therefore, inappropriate to interpret the inclusion of the
word “programming” as allowing for a package of live or delayed programs to be
considered an individual film for § 199 purposes. This is also consistent with the
regulatory text. To illustrate, immediately following the phrase “live or delayed television
programming” is a parenthetical with an express reference to the term “film” in the
singular. Thus, while each program is a film that may individually be a qualified film, a
package of multiple programs is not a film, and therefore, not a qualified film.

Interpreting the definition of the term “qualified film” in the singular is also consistent
with Congress’ expressed intent to limit the tax benefits of § 199 to film production
rather than film distribution. The Code and regulations both reference compensation
paid for services performed in the United States by actors, production personnel,
directors, and producers that relate to the production of a film. Rather than producing
programming content, Taxpayer’s activities with respect to a Subscription Package
primarily consist of distributing, through the transmission Signals, the television
channels included in the Subscription Package. The Signals are the medium in which
the films are distributed. Generating and transmitting Signals to distribute a
Subscription Package does not result in the production of any new programming
content. Further, it does not involve the performance of services performed by actors,
production personnel, directors, and producers. The assertion that Taxpayer’s activities
are not those that Congress intended to incentivize is further supported by § 199(c)(6),
which provides, in relevant part, that “[t]he methods and means of distributing a qualified
film shall not affect the availability of the deduction under this section.” Congress
intended to exclude transmission and distribution activities from the production of a
qualified film as they do not affect the availability of the deduction under § 199.
Consequently, expanding the definition of qualified film to include a package of films
could improperly extend the benefits of § 199 to taxpayers engaged film distribution via
the transmission of Signals, rather than film production.
TAM-137619-15                                        8

The legislative history surrounding the provisions relating to film production reinforces
both the statutory and regulatory language cited above. Congress was concerned by
the decreasing number of films being produced domestically. See S. Rep. No. 108-192
at 73 (2003).2 To best effectuate Congress’ express desire to encourage domestic film
production, the qualified film determination must be made on an individual film basis. If
the determination was made on a Subscription Package basis, Taxpayer could
potentially claim the § 199 deduction for films produced outside the United States,
qualified films that it did not produce, and films that are property described under 18
U.S.C. § 2257. The legislative history indicates Congress’ intent to encourage the
production of films domestically. There is nothing, however, to suggest that Congress
intended to incentivize the transmission of Signals and distribution of films within the
United States.3

If any of the terms used to define qualified film are ambiguous, they must be interpreted
in a manner that is consistent with their common meaning. Perrin v. United States, 444
U.S. 37, 42 (1979) (“A fundamental canon of statutory construction is that, unless
otherwise defined, words will be interpreted as taking their ordinary, contemporary,
common meaning.”). Merriam-Webster’s online dictionary defines the term “motion
picture” as “a series of pictures projected on a screen in rapid succession with objects
shown in successive positions slightly changed so as to produce the optical effect of a
continuous picture in which the objects move” and “a representation (as of a story) by
means of motion pictures.” It also defines the term “video tape” as “a movie, TV
program, etc., that is recorded on videotape.” It is our Office’s view that a Subscription
Package does not fall within the common meaning of the term “motion picture film” or
“video tape.” Further, the phrase “live or delayed television programming” in § 1.199-
2
  Specifically, the Senate Report states that, while discussing provisions making depreciation rules more
favorable to the film industry:

        The Committee understands that over the past decade, production of American film
        projects has moved to foreign locations. Specifically, in recent years, a number of foreign
        governments have offered tax and other incentives designed to entice production of U.S.
        motion pictures and television programs to their countries. These governments have
        recognized that the benefits of hosting such productions do not flow only to the film and
        television industry. These productions create broader economic effects, with revenues
        and jobs generated in a variety of other local businesses. Hotels, restaurants, catering
        companies, equipment rental facilities, transportation vendors, and many others benefit
        from these productions.

3
  Congress specifically did not intend to benefit the distribution of television signals. H.R. Rep. No. 108-
755 n. 30 (2004) (Conf. Rep.), 2004 U.S.C.C.A.N. 1341 n. 30 (explaining that distribution activities do not
affect whether taxpayer qualified for benefits); Staff of J. Comm. On Taxation, General Explanation of Tax
Legislation Enacted in the 108th Congress n.294 (Comm. Print 2005), JCS-5-05 (explaining the same).
The proposed regulations under § 199 also clarify that film production activities do not include film
transmission or distribution, including the transmission of a film by electronic signal and the activities
facilitating such transmission (such as formatting that enables the film to be transmitted). Prop. Reg.
§ 1.199-3(k)(6), 80 FR 51978-01, 51989 (Aug. 27, 2015).
TAM-137619-15                                 9

3(k)(1) refers to live television programming or delayed television programming. Both
are types of programs that fall within the definition of the term “film.” However, a
Subscription Package, as a whole, does not fall within the common meaning of either of
those types of programs. Rather, only the individual films that were included in
Taxpayer’s Subscription Packages satisfy the common meaning of film for § 199
purposes. Further, reading the common meaning of these terms to refer to a particular
type of film, in the singular, is consistent with the statutory reference to § 168(f)(3).
Thus, a Subscription Package, and the television channels upon which such films are
simultaneously distributed, does not fall within the common meaning of any terms used
to define qualified film for § 199 purposes.

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 § 199
purposes.

       B. Application of the other elements in the definition of the term “qualified film” in
          § 199(c)(6) and § 1.199-3(k)(1) supports analyzing films on an individual
          basis

Section 199(c)(6) provides, in part, that property is a qualified film if: (1) it is property
described in § 168(f)(3); (2) at least 50 percent of the total compensation relating to the
production of such film is compensation for services performed in the United States by
actors, production personnel, directors, and producers; and (3) it is not property for
which records are required to be maintained under 18 U.S.C. § 2257. Above, our Office
explained why a Subscription Package is not property described in § 168(f)(3) and
§ 1.199-3(k)(1). Consideration of the other qualified film requirements makes clear that
treating a Subscription Package as a qualified film is inconsistent with the statutory and
regulatory scheme of § 199.

Taxpayer argues that a Subscription Package, as a whole, is a qualified film that meets
the 50 percent compensation requirement because most of its activities with respect to
a Subscription Package occur in the United States. At the same time, however,
Taxpayer intends to exclude property described under 18 U.S.C. § 2257 on an
individual, film-by-film, basis so that the inclusion of such property in the Subscription
Package does not disqualify the entire package. Taxpayer’s position results in an
inconsistent application of two statutory requirements found in the definition of qualified
film. The failure to satisfy either element results in the exclusion of property from the
definition of qualified film. Each element of § 199(c)(6) must be applied on an
individual, film-by-film, basis.

Taxpayer also relies on § 1.199-3(d)(1) (the “item” rule) to further support its position
that a Subscription Package is a qualified film, as long as Taxpayer can establish that it
TAM-137619-15                               10

meets the 50 percent compensation requirement on a Subscription Package basis.
However, Taxpayer’s position misconstrues the item rule. The item rule provides that
the term “item” means the property offered by the taxpayer in the normal course of the
taxpayer’s business for disposition to customers, if the gross receipts from such
disposition qualify as DGPR. 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 percent compensation
requirement, or any other requirement of § 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 § 1.199-3(d)(1) because it does not satisfy the
requirements of § 199(c)(6).

Issue 2: Whether the gross receipts Taxpayer derived from the disposition of its
Subscription Packages qualify as DPGR under § 199(c)(4)(A)(i)(II) and § 1.199-3(k)(3).

As explained above, a Subscription Package does not meet the statutory or regulatory
definitions of the term “qualified film” because a Subscription Package is not a film. As
a result, the gross receipts Taxpayer derived from its Subscription Packages were not
derived from the disposition of a qualified film produced by Taxpayer. Thus, the gross
receipts Taxpayer derived from its Subscription Packages are not DPGR under
§ 199(c)(4)(A)(i)(II) and § 1.199-3(k)(3). Further, any gross receipts Taxpayer derived
from non-qualifying services are non-DPGR.

Under § 1.199-3(d)(1)(ii), any component (in this case, any individual film) included in
Taxpayer’s Subscription Packages may be treated as an “item,” provided the gross
receipts from the disposition of the Subscription Packages that are attributable to the
components qualify as DPGR. In this case, Taxpayer licensed nearly all of the
television channels included in its Subscription Packages from unrelated third parties.
These channels included the individual films that are the components of its Subscription
Packages. Because Taxpayer licensed all of these films from unrelated third parties,
Taxpayer cannot be considered to have produced any of these films within the meaning
of § 1.199-3(k)(6). As a result, a significant portion of the gross receipts that Taxpayer
derived from its Subscription Packages are attributable to films that were not produced
by Taxpayer. Here, the facts indicate that Taxpayer only produced programs on ----
channels that were included in its various Subscription Packages. Thus, 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 § 1.199-3(d)(1)(ii).

For the gross receipts from any of these films to qualify as DPGR, Taxpayer must
establish that an individual film meets the requirements of § 199(c)(6) and § 1.199-
TAM-137619-15                                11

3(k)(1) to be a qualified film (outlined above), and that Taxpayer produced the qualified
film within the meaning of § 1.199-3(k)(6). Alternatively, Taxpayer may apply the safe
harbor in § 1.199-3(k)(7) to determine whether a film may be treated as a qualified film
under § 1.199-3(k)(1) and produced by Taxpayer under § 1.199-3(k)(6). In either case,
Taxpayer’s activities relating to the transmission of Signals and distribution of licensed
television channels via Signals are not qualified film production activities for purposes of
§ 1.199-3(k)(6) or § 1.199-3(k)(7) because qualified film production activities are limited
to those activities that result in the creation of property described in § 199(c)(6) and
§ 1.199-3(k)(1).

In conclusion, Taxpayer may be entitled to include as DPGR in its § 199 deduction
calculation, gross receipts from the components of its Subscription Packages that
Taxpayer can establish meet the definition of qualified film, and which were produced by
Taxpayer, assuming all of the other requirements of § 199 are met for each component.

CAVEATS:

A copy of this technical advice memorandum is to be given to the taxpayer. Section
6110(k)(3) of the Code provides that it may not be used or cited as precedent.