Could a 99%-owned partnership receive Virginia film credits at the entity level without putting those credits on its parent's consolidated return?

Plain-English summary

The proposed partnership could receive the Motion Picture Production Tax Credits, but only the film credits could remain at the partnership level. The operating subsidiary produced qualifying commercials and proposed to own 99% of NEWCO, with an LLC owning 1%. NEWCO would be created solely to apply for, receive, and administer credits awarded to the subsidiary.

Under the 2012 guidelines, an entity at least 80% owned by a motion picture production company could itself be treated as a production company when it had to file a Virginia income-tax return and the Virginia Film Office memorandum designated it as the credit recipient. NEWCO met those conditions under the proposed facts.

Ordinarily, NEWCO's income, gains, losses, deductions, and credits would pass through to its owners. The guidelines created a limited exception for the film credit: NEWCO could claim it at entity level if it told the Film Office in writing with its final application that it would not allocate the credit and then followed the certification letter's instructions.

If those steps were completed, the film credits would not flow through the subsidiary onto the parent's Virginia consolidated return. NEWCO's other financial activities still would pass through, and the amounts allocated to the subsidiary would be reported by the parent.

What this means for you

• Ownership alone was not enough; the Virginia filing requirement and Film Office memorandum designation also mattered.
• Entity-level treatment required written notice with the final credit application and compliance with the certification letter.
• The exception covered the Motion Picture Production Tax Credit, not the partnership's other income-tax attributes.
• The ruling applied the 2012 credit guidelines and proposed facts, not current film-credit procedures.

Common questions

Q: Why did the partnership qualify as a production company?
A: It was 99% owned by the producing subsidiary, had to file a Virginia return, and would be designated as recipient in the Film Office memorandum.

Q: Did all partnership activity stay off the parent's return?
A: No. Only properly elected entity-level film credits did; other items passed through.

Q: What notice was required?
A: Written notice to the Virginia Film Office with the final credit application that the partnership would not allocate the credits.

Citations and references

• Va. Code §§ 58.1-390.1, 58.1-439.12:03, and 58.1-442(B)(1).
• Virginia Public Document 12-128 (August 6, 2012).

Subject

Eligibility to Claim Motion Picture Production Tax Credit

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 12-196

Original ruling text

December 3, 2012

Re: Ruling Request: Eligibility to Claim Motion Picture Production Tax Credits

Dear *:

This is in response to your letter, dated October 18, 2012, requesting a ruling addressing whether NEWCO, which is 99% owned by * ("the Subsidiary"), is eligible to receive Motion Picture Production Tax Credits earned by the Subsidiary and whether *** ("the Parent") will have to report the financial activities of NEWCO on its Virginia consolidated income tax return.

FACTS

The Subsidiary is a Virginia-based corporation that is wholly owned by the Parent. The Parent files one consolidated income tax return in Virginia for all of its Virginia-based subsidiaries. The subsidiary intends on establishing NEWCO, a partnership that will be 99% owned by the Subsidiary and 1% owned by * ("LLC"), for the sole purpose of being the designated applicant, recipient and administrator of any Motion Picture Production Tax Credits earned by the Subsidiary. The Subsidiary will enter into a Memorandum of Understanding with the Virginia Film Office designating NEWCO as the recipient of any Motion Picture Production Tax Credits awarded to the Subsidiary as a result of qualifying commercial productions produced by the Subsidiary. NEWCO will file its federal and Virginia income tax returns and submit its application to the Virginia Film Office for any Motion Picture Production Tax Credits awarded to the Subsidiary. NEWCO will claim any Motion Picture Production Tax Credits on its Pass-Through Entity Return of Income and will receive any refund at the entity

level.

The Subsidiary contends that this arrangement will make NEWCO eligible to receive Motion Picture Production Tax Credits and that the Parent will not have to report any of the financial activities of NEWCO on its Virginia consolidated income tax return.

ISSUES

Whether NEWCO will be eligible to receive Motion Picture Production Tax Credits.

2. Whether the Parent will have to report the financial activities of NEWCO on its Virginia consolidated income tax return.

DETERMINATION

Issue 1

Va. Code § 58.1-439.12:03 allows a qualifying "motion picture production company" to claim the Motion Picture Production Tax Credit. In the Updated Guidelines for the Virginia Motion Picture Production Tax Credit (Public Document (P.D.) 12-128 (8/6/2012)), a "motion picture production company" is defined as "any individual, corporation, partnership, electing small business corporation (S corporation), limited liability company, or other form of business association producing a motion picture production." Under the Guidelines, an entity that is at least 80% owned by a "motion picture production company" and which is required to file a Virginia income tax return may be considered a "motion picture production company" if the Memorandum of Understanding between the Virginia Film Office and the motion picture production company designates such entity as the company that will receive the credit. Under the definitions set forth in the Guidelines, the Subsidiary qualifies as a "motion picture production company" because it is a corporation that is producing a motion picture production. NEWCO also qualifies as a "motion picture production company" because it will be 99% owned by the Subsidiary. NEWCO will be required to file a Virginia income tax return as a pass-through entity, and the Subsidiary will enter into a Memorandum of Understanding with the Virginia Film Office designating NEWCO as the company that will receive Motion Picture Production Tax Credits. Therefore, under the proposed arrangement, NEWCO is eligible to receive Motion Picture Production Tax Credits.

Issue 2

Because NEWCO will be a pass-through entity, it will generally be required to allocate its income tax attributes, including tax credits, to its owners, the Subsidiary and LLC. The Parent will then include the Subsidiary and its tax attributes, including any Motion Picture Production Tax Credits allocated to the Subsidiary by NEWCO, in its Virginia consolidated income tax return. However, the Guidelines for the Virginia Motion Picture Production Tax Credit allow a pass-through entity to forgo allocating its Motion Picture Production Tax Credits to the entity's owners and claim the credits at the entity level if it meets certain requirements. In order for NEWCO to claim Motion Picture Production Tax Credits at the entity level without allocating the credits to the Subsidiary and LLC, NEWCO must notify the Virginia Film Office in writing, at the time that it submits its final credit application, that it will not allocate the credits. Upon approval of the final credit application, NEWCO must follow any instructions for claiming Motion Picture Production Tax Credits that are provided within the Virginia Film Office's certification letter. If NEWCO meets these requirements, it will not be required to allocate Motion Picture Production Tax Credits to the Subsidiary and the Motion Picture Production Tax Credits will not be included on the Virginia consolidated income tax return of the Parent.

However, the Parent will be required to include all of the other financial activities of NEWCO on its Virginia consolidated income tax return. Because NEWCO will be a pass­-through entity, under Va. Code 58.1-390.1, its income, gains, losses, deductions and credits must pass through to its owners and be reported on their Virginia income tax returns. The only exception to this rule is Motion Picture Production Tax Credits, which may be claimed directly by NEWCO pursuant to the Guidelines for the Virginia Motion Picture Production Tax Credit. Therefore, to the extent that NEWCO has any income, gains, losses, deductions and other, tax credits, those items will flow through to NEWCO's owners and any amounts allocated to the Subsidiary will be included as income or losses on the Parent's Virginia consolidated income tax return under Va. Code § 58.1-442 B.1.

CONCLUSION

For the foregoing reasons, NEWCO will be eligible to receive Motion Picture Production Tax Credits and, if the requirements set forth in the Guidelines are met, the Parent will not include such credits on its Virginia consolidated income tax return. However, the Parent will have to report other financial activities of NEWCO that are allocated to the Subsidiary on its Virginia consolidated income tax return. The Code of Virginia sections cited are available online at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's website. If you have additional questions, please contact * in the Office of Tax Policy, Policy Development Division, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

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