When did direct, indirect, or affiliated pre-release exploitation rights make a later transfer of a motion-picture copyright nontaxable?

Plain-English summary

California explained when a post-release transfer to someone holding exploitation rights directly, indirectly, or by affiliation remained outside the definition of sale under section 6010.6(a)(2)(B).

Exploitation rights meant rights to exploit the motion picture itself, not cast names and likenesses or music-soundtrack rights.

A person held rights indirectly when it controlled an entity that held them. An entity held rights by affiliation when controlled by the rights holder. Without clear contrary evidence, a majority ownership interest established control.

Applying those principles, the opinion reached nontaxable results in seven examples involving parents, production and distribution subsidiaries, partnerships, general partners, retained non-theatrical rights, common control, and pre-release distribution licenses. The answers were not unconditional: counsel assumed majority ownership or another controlling interest in examples 2 through 7 and a pre-exhibition partnership license in examples 6 and 7.

Counsel also corrected the requester's labels in substance. In example 2, the production subsidiary held rights by affiliation with the copyright-owning parent, not indirectly. In example 4, the controlling parent indirectly held the partnership's retained rights, rather than holding them by affiliation.

Source and live-annotation limits

The official PDF quotes the seven examples from a January 25, 1989 request but does not include that request. It supplies no association or member, motion picture, cast or soundtrack right, copyright, exploitation or distribution license, pre-existing agreement, corporate ownership record, partnership agreement, control evidence, transfer instrument, consideration, tax return, assessment, refund, or later outcome. Every application is an example, and examples 2 through 7 depend on stated assumptions.

The live annotation preserves the statutory exclusion, indirect and affiliation definitions, majority-controlled parent/subsidiary example, and controlling-partner example. It omits the preliminary limit excluding cast, likeness, and soundtrack rights, majority-control evidentiary caveat, five other examples, corrected characterization of examples 2 and 4, pre-release license assumptions, missing records, and no-outcome limit. It dates the entry July 18, 1989 even though the official PDF's correction note says every July 18 continuation header should be July 19.

What this means for you

Motion-picture groups and tax professionals

Map copyright and exploitation rights before release, then document majority ownership, partnership control, common control, licensing dates, and every post-release transfer.

Common questions

Q: What did “indirectly” mean?

A: A controlling owner could indirectly hold rights owned by the controlled entity.

Q: What did “by affiliation” mean?

A: A controlled entity could hold rights through its affiliation with the controlling rights holder.

Q: What generally established control?

A: Majority ownership, absent clear evidence to the contrary.

Q: Did exploitation rights include cast likenesses or soundtrack rights?

A: Counsel preliminarily said no; the rights concerned exploitation of the motion picture itself.

Q: Were all seven examples approved without conditions?

A: No. Six depended on control assumptions, and the last two also assumed the partnership obtained its distribution license before general-audience exhibition or broadcast.

Q: Why does the page use July 19 instead of the live annotation's July 18?

A: The source's first-page date is July 19, and its 2005 correction note expressly changes the continuation headers from July 18 to July 19.

Citations and references

• California Revenue and Taxation Code § 6010.6(a)(2)(B)
• January 25, 1989 request — described and quoted but not included
• Agreements, copyrights, rights, licenses, ownership and control records, partnerships, transfers, tax records, and outcomes — described or assumed but not documented
• July 18, 2005 source note correcting the continuation-page dates to July 19, 1989

Verbatim support

From the official tax-counsel letter:

Preliminarily, I believe that exploitation rights pertain to the right to exploit the motion picture itself rather than the right to use the names and likenesses of the cast, recording or releasing of a music sound track, etc.

Generally, in the absence of clear evidence to the contrary, we believe that a person holds a controlling interest in an entity when the person holds a majority ownership interest.

We reach the conclusion based on the parent’s directly holding the copyright and transferring it to the subsidiary which would hold the exploitation rights by affiliation.

In the original letter, the date in the header on pages 2 through 5 is incorrect and should actually be July 19, 1989, not July 18, 1989.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 375.1097
• Original supporting opinion: 375.1097 PDF

Original ruling text

375.1097

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION
1020 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 445-6450

July 19, 1989

Mr. F--- M--Manager State Tax
M--- P--- A--of ---, Inc.
XXXX --- --- --- ----- ---, -- XXXXX

Dear Mr. M---:
As you know, your January 25, 1989 letter to Mr. Glenn Bystrom regarding the interpretation of Revenue and Taxation Code section 6010.6, subdivision (a)(2), has been referred to me for reply. You wish to clarify when tax does not apply to the transfer of a qualified motion picture to a person under the following circumstance provided at section 6010.6, subdivision (a)(2)(B): “The transfer is made to any person or persons holding, either directly or indirectly, or by affiliation, any exploitation rights obtained prior to the date that the qualified motion picture is exhibited or broadcast to its general audience.” Preliminarily, I believe that exploitation rights pertain to the right to exploit the motion picture itself rather than the right to use the names and likenesses of the cast, recording or releasing of a music sound track, etc. Before turning to the specific examples you provided, our interpretation of the terms “indirect” and “by affiliation” is as follows. We believe that, when a person holds a controlling interest in an entity which holds exploitation rights, the person “indirectly” holds exploitation rights. For example, a postrelease transfer to one of the partners of a partnership which holds exploitation rights is nontaxable provided such partner holds the controlling interest in the partnership. We would view the partner as holding the exploitation rights indirectly. Generally, in the absence of clear evidence to the contrary, we believe that a person holds a controlling interest in an entity when the person holds a majority ownership interest. On the other hand, a transfer to a person who holds exploitation rights “by affiliation” would occur when the transfer is to an entity which is controlled by the person who holds the exploitation rights. For example, if a person who holds exploitation

Mr. F--- M---

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July 18, 1989
375.1097

rights holds a controlling interest in a partnership, a postrelease transfer to the partnership would be nontaxable. The partnership would hold the exploitation rights by affiliation. We will turn now to the examples you provided and follow with our response. “EXAMPLE 1

A parent company controls a production subsidiary and retains ownership of the copyright for all films that are produced. The parent also controls other subsidiaries which distribute the films in various markets. Upon completion of a film, exploitation rights are licensed to the distribution subsidiaries by virtue of a pre-existing agreement. Since the distribution subsidiary held the exploitation rights directly, a transfer of the film copyright to the distribution subsidiary after exhibition or broadcast would be non-taxable.”

We agree with your conclusion.
EXAMPLE 2

Same facts as Example 1 except that after theatrical exhibition, the film copyright is transferred to the production subsidiary. The subsidiary did not have exploitation rights directly prior to exhibition or broadcast. However, since this subsidiary is controlled by an entity that also controls an entity with distribution rights, the production subsidiary would be deemed to hold exploitation rights indirectly and therefore the transfer would be nontaxable.”

We assume that the subsidiary is truly a subsidiary of the parent; that is, the parent is the majority stockholder of the subsidiary. In such case, we agree that the transfer is nontaxable. We reach the conclusion based on the parent’s directly holding the copyright and transferring it to the subsidiary which would hold the exploitation rights by affiliation. “EXAMPLE 3

The parent company is a general partner in a partnership which produces several films. The film copyrights are owned by the partnership. The films are licensed for theatrical exhibition to a distribution subsidiary controlled by the parent. Upon dissolution of the partnership, completion of theatrical distribution or for any other reason, the film copyrights are transferred to the parent. The parent would be deemed to hold exploitation rights indirectly because of its control over the distribution subsidiary. Accordingly, the tranfer to the parent would be nontaxable.”

Assuming that the parent holds the controlling interest in either the distribution subsidiary or the partnership, we agree with your conclusion. The parent would indirectly hold the films distribution rights or the copyrights.

Mr. F--- M---

“EXAMPLE 4

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July 18, 1989
375.1097

The parent company is a general partner in a partnership which produces several films. The film copyrights are owned by the partnership. The films are licensed for theatrical exhibition to an entity not associated with any of the partners. The partnership retained other, non-theatrical, exploitation rights. The parent through its role in the partnership exercised control over the partnership activities and thus would be deemed to hold exploitation rights by affiliation. As a result, the transfer of a film copyright to the parent would be nontaxable.”

Assuming that the parent holds the controlling interest of the partnership, we agree that the transaction is nontaxable. The parent indirectly owns the exploitation rights retained by the partnership. “EXAMPLE 5

Same facts as Example 4 except the film is transferred to a subsidiary controlled by the parent. The transfer would be nontaxable since the subsidiary is deemed to hold exploitation rights as a result of being controlled by the parent which held exploitation rights by affiliation with the partnership.”

Assuming that the parent held the controlling interest in both the partnership and the subsidiary, we agree that the transaction is nontaxable. The subsidiary is affiliated with the partnership since each is under the common control of the parent corporation/general partner. “EXAMPLE 6

A partnership is licensed to distribute a film made by an independent production company. Upon completion of the initial distribution, the film copyright is transferred by the independent production company to one of the general partners. The transfer would be nontaxable since the general partner held exploitation rights by affiliation with the partnership.”

We assume that the partnership obtained its distribution license prior to the date the film is exhibited or broadcast to its general audience. In such case, we agree that the transaction is nontaxable if the general partner holds the controlling interest in the partnership. The general partner would indirectly hold the exploitation rights of the partnership. “EXAMPLE 7

Same facts as example 6 except the film is transferred to a subsidiary controlled by a general partner. The subsidiary did not hold exploitation rights directly. As a result of the subsidiary’s affiliation with the general partner, the transfer would be nontaxable.”

Mr. F--- M---

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July 18, 1989
375.1097

Assuming again that the general partner controls both the partnership and the subsidiary, we agree that the transaction would be nontaxable for the same reason as expressed in response to example 5. We hope this has answered your questions; however, if you need further information, feel free to write again. Very truly yours,

Ronald L. Dick
Tax Counsel

RLD:sr
cc:

Mr. Robert Nunes
Mr. Glenn A. Bystrom
Mr. Jeff McGuire
Mr. Gary J. Jugum
Mr. Donald J. Hennessy

In the original letter, the date in the header on
pages 2 through 5 is incorrect and should
actually be July 19, 1989, not July 18, 1989.
DR (7-18-05)