Film producer receives more time for income-forecast basis elections

Plain-English summary

A partnership producing motion pictures used the income forecast depreciation method for films placed in service during the year. It intended to elect under section 167(g)(7) to include expected participation and residual payments in each film's adjusted basis. The return was prepared consistently with that election, but the filing firm accidentally omitted the election statement from the electronically filed return and discovered the error two days later. The IRS granted 60 days to file an amended return making a separate election for each affected film.

Ruling snapshot

• Question: May the film producer make late elections to include expected participations and residuals in the basis of income-forecast property?
• Outcome: Approved, with separate property elections on an amended return due within 60 days.
• Key authorities: IRC § 167(g)(7); Notice 2006-47; Treas. Reg. §§ 301.9100-1 and 301.9100-3.

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201516025 Third Party Communication: None
Release Date: 4/17/2015 Date of Communication: Not Applicable
Index Number: 9100.00-00
Person To Contact:
-------------------------- ------------------------, ID No. ----------------
------------------------------------ Telephone Number:
--------------------------------------------- --------------------
--------------------------------- Refer Reply To:
CC:ITA:B07
PLR-126125-14
Date:
December 11, 2014

Re: --------------------------------------------------------------
Request for Extension of Time to File Election

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

A: --------------------------------------------

B: --------------------------------------------

C: -------------------------------------------------------------------

Date: --------------------

Firm: -------------------------

Individual: ---------------------

Dear --------------:

  This letter responds to a letter dated July 2, 2014, submitted by Taxpayer

requesting an extension of time under § 301.9100-3 of the Procedure and
Administration Regulations to make an election under section 167(g)(7) of the Internal
Revenue Code.
PLR-126125-14 2

FACTS

  Taxpayer represents that the facts are as follows:

   Taxpayer is a limited liability company treated as a partnership for federal income

tax purposes. The outstanding member interests in Taxpayer are owned by A and B.
A, an entity disregarded for federal income tax purposes, and B, a corporation, are
wholly owned by C. A is the tax matters partner for Taxpayer. Taxpayer uses an
overall accrual method of accounting for federal income tax purposes.

   Taxpayer, along with related entities, is an entertainment company that

produces, among other things, motion picture films. In its taxable year ended Date,
Taxpayer placed in service motion picture films for which it expects to pay participations
and residuals before the end of the tenth taxable year ending following its taxable year
ended Date. Taxpayer’s federal tax return for the taxable year ended Date was
prepared on a basis consistent with an election being made under section 167(g)(7) to
include expected participations and residuals in the adjusted bases of the films placed
in service in that taxable year for which the income forecast method is used.

    Firm was engaged to prepare and electronically file Taxpayer’s federal tax return

for the taxable year ended Date. Individual, a senior tax manager employed by C,
emailed a prepared section 167(g)(7) election statement on behalf of Taxpayer, to Firm
before the extended due date of Taxpayer’s federal tax return for the taxable year
ended Date, and requested that this election statement be included with Taxpayer’s
return.

    Taxpayer’s federal tax return for the taxable year ended Date was filed

electronically by Firm on its extended due date. Firm inadvertently failed to include the
section 167(g)(7) election statement with Taxpayer’s federal tax return. Firm noticed
this error two days after Taxpayer’s return for the taxable year ended Date was filed,
and shortly thereafter informed Taxpayer of the inadvertent omission. Taxpayer
requested Firm to prepare this request for relief under § 301.9100-3.

  As of the date of this letter, the period of limitations on assessment under section

6501(a) has not expired for Taxpayer for the taxable year in which the elections should
have been filed, or for any taxable year that would have been affected by the elections
had the elections been filed in a timely manner.

RULING REQUESTED

    Taxpayer requests, for the taxable year ended Date, an extension of time

pursuant to § 301.9100-3 of the Procedure and Administration Regulations to make the
election under section 167(g)(7) for certain films placed in service by Taxpayer during
its taxable year ended Date.
PLR-126125-14 3

LAW AND ANALYSIS

    Section 167(g)(7)(A) provides that for purposes of determining the depreciation

deduction allowable with respect to income forecast property, the taxpayer may include
participations and residuals with respect to the property in the adjusted basis of the
property for the taxable year in which the property is placed in service, but only to the
extent that the participations and residuals relate to income estimated to be earned in
connection with the property before the close of the 10th taxable year following the
taxable year in which the property was placed in service.

  Section 167(g)(7)(B) defines participations and residuals, for purposes of section

167(g)(7), as costs the amount of which by contract varies with the amount of income
earned in connection with the income forecast property.

   Section 167(g)(7)(D)(i) provides that notwithstanding section 167(g)(7)(A), the

taxpayer may exclude participations and residuals from the adjusted basis of income
forecast property and deduct the participations and residuals in the taxable year that
they are paid.

    Notice 2006-47, 2006-1 C.B. 892, provides that the election to either include

participations and residuals expected to be paid before the end of the tenth taxable year
following the taxable year in which the property is placed in service in the adjusted basis
of property for which the income forecast method of depreciation is used, or exclude
participations and residuals from the adjusted basis of property for which the income
forecast method of depreciation is used and deduct them in the taxable year in which
the amounts are paid, must be made by the due date (including extensions) for the
taxable year the income forecast property is placed in service. For each item of income
forecast property placed in service in a taxable year, the taxpayer must attach a
statement to the return for that year providing the name (or other unique identifying
designation) of the property, stating how the taxpayer will treat participations and
residuals, and providing the date the property was placed in service.

   Under § 301.9100-1, the Commissioner has discretion to grant a reasonable

extension of time under the rules set forth in §§ 301.9100-2 and 301.9100-3 to make a
regulatory election.

   Sections 301.9100-1 through 301.9100-3 provide the standards the

Commissioner will use to determine whether to grant an extension of time to make an
election. Section 301.9100-2 provides automatic extensions of time for making certain
elections. Section 301.9100-3 provides extensions of time for making elections that do
not meet the requirements of § 301.9100-2.

  Section 301.9100-3(a) provides that requests for relief under § 301.9100-3 will be

granted when the taxpayer provides evidence to establish to the satisfaction of the
PLR-126125-14 4

Commissioner that the taxpayer acted reasonably and in good faith, and that granting
relief will not prejudice the interests of the government.

CONCLUSIONS

    Based solely on the facts and the representations submitted, we conclude that

the requirements of §§ 301.9100-1 and 301.9100-3 have been met. Accordingly,
Taxpayer is granted 60 calendar days from the date of this letter to make the election to
include participations and residuals in adjusted basis for films placed in service during
its taxable year ended Date for which the income forecast method of depreciation is
used under section 167(g)(7). This election must be made separately for each affected
property by Taxpayer filing an amended federal tax return for such taxable year, with a
statement that Taxpayer is electing to include in adjusted basis in the year the income
forecast property is placed in service all participations and residuals expected to be paid
before the end of the tenth taxable year following the taxable year in which the property
for which the income forecast method of depreciation is placed in service in its taxable
year ended Date.

   Except as expressly provided herein, no opinion is expressed or implied

concerning the tax consequences of the facts described above under any other
provisions of the Code.

  This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of

the Code provides that it may not be used or cited as precedent.

     In accordance with the power of attorney on file with this office, a copy of this

letter is being sent to your authorized representative.

                                    Sincerely,



                                    KARLA M. MEOLA
                                    Assistant to the Branch Chief, Branch 7
                                    Office of the Associate Chief Counsel
                                    (Income Tax & Accounting)

Enclosures:
Copy of this letter
Copy for section 6110 purposes

cc: