United States

Television subscription package is not a qualified film for DPAD

IRS determines distributor’s subscriptions are not qualified films


On Nov. 10 and Nov. 18, the IRS released two technical advice memoranda (TAM 201646004 and TAM 201647007, respectively) addressing issues related to the domestic production activities deduction (DPAD) of qualified films. The memoranda addressed whether multichannel video programming distributors' subscription packages could be considered qualified films under section 199 and if the gross receipts from those sales could be considered domestic production gross receipts (DPGR) for purposes of the deduction.

The DPAD is determined by applying an applicable percentage to the lesser of a taxpayer’s qualified production activities income (QPAI) or taxable income. QPAI is determined by taking the DPGR and subtracting the allocable cost of goods sold and other expenses. DPGR consists of the gross receipts received from the sale, lease, license, or other disposition of the taxpayer’s qualified films. A qualified film is a motion picture film under section 168(f)(3), or live or delayed television programming, if not less than 50 percent of the total compensation of the film is compensation for services performed in the United States by actors, production personnel, directors and producers.

In order to determine if the taxpayers derived gross receipts from a qualified film that they produced, the memoranda first looked to see if the subscription packages could be considered a film and then if at least 50 percent of the total compensation from the film was compensation for services performed in the United States by actors, production personnel, directors and producers. The memoranda determined that the subscription packages were not a qualified films for purposes of the DPAD because they were not property described under section 168(f)(3) or section 1.199-3(k)(1). Under this definition the IRS determined that a qualified film must be a motion picture film or video tape. Further, the IRS determined that a qualified film must be an individual film, not a package of multiple programs. Although, each individual film may still satisfy the requirements of a qualified film.

Next the IRS examined whether gross receipts from dispositions of the subscription packages should qualify as DPAD. However, without the subscription package satisfying the qualifying film definition, the gross receipts from their sale would not be considered DPGR. The IRS determined that any individual film in the subscription package may, however, be treated as an item for purposes of DPAD but only if the taxpayer produced them.

The memoranda represents a distinction by the IRS from their previous guidance in TAM 201049029, where IRS determined that receipts from licensing television programming packages could be tested for qualification in the aggregate and thus, qualify as DPGR. However, the previous TAM addresses cable and broadcast networks that produce and distribute content as a package, unlike the current TAMs that address a programming distributors that sells subscriptions.

Although these technical advice memorands are fact specific and may not be relied on as precedent, taxpayers in the film production, network television and cable television business may find that the IRS will rule similarly in situations with similar facts. It is best to consult your tax advisor if you have questions as to how this guidance may apply to you.


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