Section 181-Deduction for Film and Television Production Costs, 6155-6165 [E7-2154]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 72, Number 27 (Friday, February 9, 2007)]
[Rules and Regulations]
[Pages 6155-6165]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E7-2154]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 602

[TD 9312]
RIN 1545-BF95


Section 181--Deduction for Film and Television Production Costs

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Temporary regulation.

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SUMMARY: This document contains temporary regulations relating to 
deductions for the cost of producing film and television productions 
under section 181. These temporary regulations reflect changes to the 
law made by the American Jobs Creation Act of 2004 and the Gulf 
Opportunity Zone Act of 2005, and affect taxpayers that produce films 
and television productions within the United States. The text of these 
temporary regulations also serves as the text of the proposed 
regulations set forth in the notice of proposed rulemaking on this 
subject in the Proposed Rules section in this issue of the Federal 
Register.

DATES: Effective Date: These regulations are effective February 9, 
2007.
    Applicability Dates: For dates of applicability, see Sec.  1.181-
6T.

FOR FURTHER INFORMATION CONTACT: Bernard P. Harvey, (202) 622-3110 (not 
a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    These temporary regulations are being issued without prior notice 
and public procedure pursuant to the Administrative Procedure Act (5 
U.S.C. 553). For this reason, the collections of information contained 
in these regulations have been reviewed and, pending receipt and 
evaluation of public comments, approved by the Office of Management and 
Budget under control number 1545-2059. Responses to these collections 
of information are required to obtain a tax benefit.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless the collection of 
information displays a valid OMB control number.
    For further information concerning this collection of information, 
and where to submit comments on the collection of information and the 
accuracy of the estimated burden, and suggestions for reducing this 
burden, please refer to the preamble of the cross-referencing notice of 
proposed rulemaking published in the Proposed Rules section in this 
issue of the Federal Register.
    Books or records relating to a collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.

Background

    This document contains amendments to 26 CFR part 1 to provide 
regulations under section 181 of the Internal Revenue Code of 1986 
(Code). Section 181 was added to the Code by section 244 of the 
American Jobs Creation Act of 2004, Public Law 108-357 (118 Stat. 1418) 
(Oct. 22, 2004), and was modified by section 403(e) of the Gulf 
Opportunity Zone Act of 2005, Public Law 109-135 (119 Stat. 2577) (Dec. 
21, 2005).

Explanation of Provisions

    For several years, independent filmmakers and television producers 
have moved production activities from the United States to other 
countries. Frequently, this has been motivated by credits and other 
incentives offered by foreign governments to attract the economic 
benefits gained by hosting these productions. Congress enacted section 
181 to make domestic production more attractive to these taxpayers.
    Section 181 permits the owner of a qualified film or television 
production to elect to deduct production costs in the year the costs 
are paid or incurred in lieu of capitalizing the costs and recovering 
them through depreciation allowances if the aggregate costs do not 
exceed $15 million for each qualifying production ($20 million if a 
significant amount of the production costs are incurred in certain 
designated areas) (the ``production cost limit''). A film or television 
production is a qualified film or television production if 75 percent 
of the total compensation of the production is compensation for 
services performed in the United States by actors, directors, 
producers, and other relevant production personnel (the ``75 percent 
test'').

[[Page 6156]]

Allowance of Deduction

    The deduction under section 181 is allowed for the cost of 
producing qualified film and television productions for which principal 
photography begins after October 22, 2004, and before January 1, 2009. 
Production costs incurred before or after this period may be deducted 
so long as principal photography commences during the period.
    Section 181 refers to ``the taxpayer'' who makes the election and 
takes the deduction. The temporary regulations provide that only the 
owner of the film or television production may elect to deduct 
production costs under section 181. Under the regulations, the owner of 
the production is deemed to be the person or persons otherwise required 
to capitalize production costs into the basis of the film or television 
production under section 263A (or the person or persons that would be 
required to capitalize production costs if subject to section 263A).
    The production costs that must be taken into account (for both the 
amount of the deduction and for the production cost limit) are the 
amounts that, absent section 181, are required to be capitalized under 
section 263A (or the amounts that would be required to be capitalized 
if the taxpayer was subject to section 263A). Although a film's budget 
might be evidence that the production costs will not exceed the 
production cost limit, the budget is not the same as production costs 
for purposes of section 181. All production costs eligible to be 
deducted under section 181 are subject to the production cost limit. 
Under the temporary regulations, distribution costs are specifically 
excluded from the definition of production costs under section 181, 
consistent with the exclusion of distribution costs under section 263A.
    Section 181 does not require the production to be placed in service 
in order for the producer to begin deducting production costs, and 
there is no requirement that the production ever be placed in service 
or completed. However, the temporary regulations require that, at the 
time the election is made and in any year that a deduction is claimed, 
a taxpayer must have a reasonable basis for believing that the 
production will be set for production (as defined in American Institute 
of Certified Public Accountants Statement of Position 00-2), will be a 
qualified film or television production upon completion, and will not 
exceed the production cost limit. For example, a taxpayer that has 
developed a shooting script, has a well-documented budget, and has 
obtained financing on the basis of these facts is in a good position to 
determine whether it has a reasonable basis to claim the deduction.
    The temporary regulations treat the cost of acquiring a production 
as a production cost. This rule is premised upon the understanding that 
under section 1245, the seller would recapture upon the sale of the 
production any section 181 deduction that the seller had claimed. In 
the case of a sale between related parties, the purchaser must treat 
the greater of the acquisition cost or the seller's production cost as 
the purchaser's production cost for purposes of the production cost 
limit, notwithstanding that the purchaser's deduction under section 181 
is based on the purchaser's actual acquisition cost.
    In the film industry, once a prospective producer has determined 
the estimated budget for a production, it usually must obtain financing 
from a bank or other lender to cover at least part of the production 
cost. The producer may incur up-front costs in obtaining such 
financing. The producer's pre-sale agreements with distributors may be 
used as collateral for this financing. Generally, the financier will be 
repaid directly by these distributors upon delivery of the finished 
production. In addition, the financier will usually require that the 
producer obtain a completion guarantee (often referred to as a 
completion bond) as a condition of the loan. The completion guarantee 
is a guarantee that, if the production costs exceed the budgeted costs 
or the loan proceeds are mishandled, the film will still be completed 
and/or the financier will be made whole. A completion guarantee can be 
satisfied in a number of ways. For example, the guarantor may loan 
funds to the producer to finish the production, may finish the 
production itself (although this is rare), or may reimburse the 
financier for the amount loaned to the producer (plus interest and 
other charges). Generally, the producer must pay an up-front amount in 
order to obtain a completion guarantee.
    The temporary regulations provide that the costs of obtaining 
financing, including premium costs for completion guarantees, are 
production costs that are subject to the production cost limit and are 
deductible under section 181. In addition, if the completion guarantor 
loans additional funds to the producer and the funds are expended by 
the producer to complete the production, or if the completion guarantor 
incurs additional production costs on its own behalf, the additional 
funds are production costs under section 181.
    Participations and residuals (P&R) are defined in section 
167(g)(7)(B), as costs with respect to an item of property described in 
section 167(g)(6), the amount of which by contract varies with the 
amount of income earned in connection with the property. In the context 
of film and television production, participations are payments to 
actors, directors, and other talent based on a contractually-defined 
measure of future income from the production. Residuals are payments 
made pursuant to collective-bargaining agreements, such as those of the 
directors' and actors' guilds, based upon non-theatrical sales, under 
terms that differ between video, free television, and pay television 
sales. Participations are generally paid by the producer but may be 
assumed by a third-party distributor. On the other hand, residuals are 
generally paid by a distributor out of its gross receipts from the 
production. Industry accounting generally treats participation payments 
made by distributors as a reduction in the producer's profit rather 
than a production cost, and generally treats residual payments made by 
distributors as a distribution cost.
    Various comments were received with respect to the treatment of P&R 
under section 181. Some comments suggested that taxpayers be permitted 
to elect to deduct participation payments (rather than capitalizing 
those payments into the basis of the production) under the income 
forecast method rather than section 181. Other comments suggested that 
Congress, by specifically excluding P&R costs paid or incurred by the 
taxpayer from the definition of ``qualified compensation'' in section 
181(d)(3), intended these costs to be excluded from the production cost 
limit in section 181(a)(2). Comments received also suggested that P&R 
costs should be excluded for purposes of determining whether the 
production cost limit is exceeded, but nonetheless should be deductible 
production costs under section 181.
    In addition, various comments expressed concerns about productions 
being subsequently disqualified if P&R costs are included in 
determining if the production cost limit is exceeded. For example, a 
taxpayer forecasts its production costs (including a reasonable amount 
of P&R costs based upon projected income from the production) and based 
upon this forecast the taxpayer determines it has a reasonable basis 
for making an election under section 181. However, if an unexpectedly 
large amount of P&R is later paid as a result of production earnings 
being much greater than was

[[Page 6157]]

initially expected, with the result that the total production cost 
exceeds the production cost limit, the production would become 
disqualified from treatment under section 181.
    The temporary regulations provide that P&R costs are considered 
production costs for purposes of the production cost limit. The IRS and 
Treasury Department recognize that P&R costs are costs that are 
generally subject to capitalization under section 263A (see Sec.  
1.263A-1(e)(2) and Sec.  1.263A-1(e)(3)). Nonetheless, an explicit 
reference to P&R costs is provided in the temporary regulations in 
order to avoid any uncertainty with respect to these costs.
    The IRS and Treasury Department believe that the statute requires 
P&R costs to be included in the production cost limit. For example, the 
statute specifically provides that participations and residuals are 
excluded from the definition of compensation for purposes of 
determining whether the production was a qualified film or television 
production, as defined in section 181(d)(1). This explicit exclusion is 
not found in the production cost limit of section 181(a)(2) or 
elsewhere in section 181.
    In addition, the IRS and Treasury Department are concerned that if 
P&R costs were excluded from the definition of production costs under 
section 181, section 181(b) could cause them to be nondeductible under 
any provision of the Internal Revenue Code. Specifically, section 
181(b) states that no depreciation or amortization deduction other than 
the deduction provided under section 181 is allowed for the basis of a 
qualified film or television production for which an election has been 
made. Therefore, if P&R costs were excluded from the definition of 
production costs under section 181, a taxpayer wishing to expense P&R 
costs under the holding of Associated Patentees, 4 T.C. 979 (1945), may 
be barred from doing so under section 181(b), as the holding in that 
case is explicit that a deduction under Associated Patentees is a 
depreciation deduction of basis.
    Additionally, the IRS and Treasury Department are concerned that a 
blanket exclusion of participations from the definition of production 
costs would allow taxpayers to manipulate the total production cost 
(and avoid the production cost limit) by structuring compensation as 
participation payments. Commentators argued that this potential abuse 
could be mitigated with an anti-abuse rule that treats only those 
participations that are disguised non-contingent or guaranteed 
payments, where the talent incurs minimal risk of non-payment (for 
example, participations with a payment priority over distribution cost 
repayment and/or production financing cost repayment) as production 
costs subject to the production cost limit, but does not treat other 
participation costs as production costs.
    The IRS and Treasury Department considered excluding from the 
amount to be taken into consideration as production costs any residuals 
(payments to actors' or directors' guilds based on gross income from 
exploitation in secondary markets) that are paid by the distributor or 
other third party, under the theory that these payments are costs of 
exploiting the finished production. However, the same argument could be 
advanced for participations contingent on income, notwithstanding that 
most participations are taken in lieu of compensation for services 
(normally a production cost). In addition, a payment of residuals by a 
third party is still made on the producer's behalf, and the producer 
remains the party with ultimate liability for the payment. Thus, the 
temporary regulations provide that P&R costs are production costs that 
are deductible under section 181 and are included in the production 
cost limit.
    Section 181(a)(2)(B) provides a higher production cost limit for a 
qualified film or television production ``the aggregate cost of which 
is significantly incurred'' in a designated area. Designated areas 
include areas eligible for designation as low-income communities or 
certain distressed counties and isolated areas. However, neither the 
statute nor its legislative history provides a definition for 
``significantly incurred,'' nor do they explain how the standard should 
be applied. However, Congress' stated intent in enacting section 181 
was to encourage economic activity in these designated areas. 
Accordingly, the temporary regulations provide two different tests for 
establishing when production costs have been significantly incurred in 
a designated area. One test is based upon production costs while the 
other is based upon days of production. Under the first of these tests, 
the temporary regulations establish a 20 percent threshold for the 
``significantly incurred'' standard (similar to the rules of Sec.  
1.199-3(g)(3)). This test compares production costs incurred in first-
unit principal photography that takes place in a designated area to all 
production costs incurred for first-unit principal photography. First-
unit principal photography typically films the primary actors, whereas 
second-unit principal photography typically films shots that establish 
location or context (exteriors of buildings, crowds, cars passing). 
Production costs of principal photography include, for example, 
compensation to actors, directors and other production personnel, 
location costs, camera rental and insurance, and catering. This 20 
percent test is based upon production costs incurred in first-unit 
principal photography and ignores all other production costs such as 
preproduction, editing, and postproduction costs for purposes of the 
``significantly incurred'' requirement. These other production costs 
often greatly exceed principal photography costs, and must be incurred 
where adequate production facilities exist (and it is likely that few 
such facilities are available in the designated areas). The IRS and 
Treasury Department believe that if all production costs were taken 
into consideration in determining whether the 20 percent 
``significantly incurred'' threshold had been met, very few films would 
qualify for the higher production cost limit, even if a substantial 
amount of principal photography occurred in a designated area. However, 
we request comments regarding whether the exclusion of preproduction, 
editing, and postproduction costs will unfairly impact taxpayers.
    Comments were received requesting that consideration be given to 
developing a ``significantly incurred'' test based upon the number of 
days of principal photography. The temporary regulations adopt this 
suggestion and provide, as an alternative to the 20 percent cost-based 
test, a ``significantly incurred'' test based upon the total number of 
days of principal photography. Under this test, if at least 50 percent 
of the total days of principal photography take place in a designated 
area, the production will be deemed to have satisfied the 
``significantly incurred'' requirement of section 181(a)(2)(B). This 50 
percent test may provide a simpler computation than the 20 percent 
cost-based test and avoids issues such as the allocation of salaries to 
specific days of principal photography.
    A taxpayer intending to utilize the $20 million production cost 
limit under section 181(a)(2)(B) must maintain records adequate to 
demonstrate that it has a reasonable basis under the ``significantly 
incurred'' standard to support reliance on the higher dollar 
limitation.

Election

    The Conference report underlying section 181 provides that, until 
the

[[Page 6158]]

Secretary publishes specific guidance, taxpayers may make a valid 
election under section 181 by claiming the deduction on the taxpayer's 
return for the year that production costs are first incurred. H. R. 
Conf. Rep. 108-755. The IRS published the section 181 election 
requirements in Notice 2006-47 (2006-20 IRB 892, May 15, 2006). See 
Sec.  601.601(d)(2)(ii)(b). The Notice also includes transition rules 
for taxpayers that incurred costs during the period prior to October 
22, 2004 (the enactment of section 181) for productions that qualify 
under section 181 (that is, productions for which principal photography 
began on or after October 22, 2004). The temporary regulations provide 
the same election requirements and transition rules, along with a 
requirement that the taxpayer have a reasonable basis for claiming the 
deduction.
    Many films are owned by a passthrough entity with more than one 
owner. The temporary regulations provide that if the production is 
owned by a partnership, the election is made at the partnership level.
    Section 181(c)(2) provides that an election under section 181 may 
not be revoked without the consent of the Secretary. However, the 
election is effectively revoked if the production costs exceed the 
production cost limit or if the production fails to be a qualified film 
or television production. In recognition of the concerns expressed by 
commentators over the inclusion of P&R costs in the definition of 
production costs under section 181, and the fact that the requirements 
of section 181 may ultimately not be met notwithstanding a prior 
reasonable basis for believing otherwise, the temporary regulations 
permit taxpayers to revoke a section 181 election by filing a statement 
with the return for the taxable year in which the revocation is 
effective identifying the production for which the election is revoked. 
The return for that taxable year must also report compliance with the 
recapture provisions discussed in ``Special Rules'' in this preamble.

Qualified Film or Television Production (Definitions)

    Both the Senate report and the Conference report underlying section 
181 state that ``the provision defines a qualified film or television 
production as any production of a motion picture (whether released 
theatrically or directly to video cassette or any other format); 
miniseries; scripted, dramatic television episode; or movie of the 
week'' that satisfies the 75 percent test. The definition provided in 
the Senate report and the Conference report arguably would exclude 
productions that do not fall within these delineated categories, such 
as reality programming, documentaries, sports programs, news programs, 
variety shows, game shows, live performances, interview and talk shows, 
commercials and ``infomercials,'' religious/inspirational programming, 
educational programming, exercise shows, training videos, and others. 
Comments were received noting that it appeared from the legislative 
history that Congress intended for the provision to apply only to a 
motion picture, miniseries, scripted dramatic television episode, or 
movie of the week. Notwithstanding the legislative history, section 
181(d)(2) itself defines a production as ``property described in 
section 168(f)(3).'' Section 168(f)(3) property is ``any film or video 
tape.'' Accordingly, the temporary regulations adopt the broader 
statutory definition provided in section 168(f)(3) and specifically 
define a production under section 181 to include any film or video tape 
production the production cost of which is subject to capitalization 
under section 263A.
    Once a film or television production is released or broadcast, the 
taxpayer may face additional costs to prepare the production for 
foreign distribution, rebroadcast (for example, editing a theatrical 
film for television), or release to the home video market. Consistent 
with the approach taken under the income forecast method (see section 
167(g)(5)(A)(ii)), these costs are not treated as production costs of 
the film or television production for purposes of the production cost 
limit under section 181(a)(2), and no deduction may be taken under 
section 181 for such costs.
    Section 181(d)(1) compares qualified compensation to total 
compensation in applying the 75 percent test. Although qualified 
compensation is defined by section 181(d)(3)(A) as compensation for 
services performed in the United States by actors, directors, 
producers, and other relevant production personnel, the 75 percent test 
compares this amount to the ``total compensation of the production.'' 
In order to be consistent with the definition provided for in section 
181(d)(3)(A), the temporary regulations define ``total compensation of 
the production'' as the total amount of compensation paid for services 
performed anywhere by actors, directors, producers, and other relevant 
production personnel in the production of the film or television 
production. In addition, the temporary regulations specifically provide 
that the terms compensation and qualified compensation include 
compensation paid to persons who are not directly employed by the 
producer.
    The term qualified compensation is defined as compensation for 
services by various participants performed ``in the United States.'' 
The definition of ``United States'' in section 7701(a)(9) includes the 
50 states and the District of Columbia. Although the goal of section 
181 is to encourage economic activity within the United States as 
defined in section 7701(a)(9), the use of a standard based upon 
principal photography requires the use of a slightly broader definition 
that takes into account that the physical act of principal photography 
may take place on land, at sea, or in the air. Consequently, the 
temporary regulations provide that a service is performed in the United 
States for purposes of the 75 percent test if the principal photography 
to which the service relates occurs within the fifty states, the 
District of Columbia, the territorial waters of the continental United 
States, or the airspace or space above the continental United States 
and its territorial waters.
    There are some services related to a production that may physically 
take place at a variety of places outside the control and knowledge of 
the producer (for example, training, rehearsal, and pre- and post-
production). However, the producer has direct or indirect control and 
knowledge of the shooting location of principal photography with which 
these other services are associated. Therefore, the IRS and Treasury 
Department believe that as a general rule the 75 percent test should be 
based upon the locations where principal photography occurs.
    In this regard, the temporary regulations provide a special rule 
for animated productions. Although these productions may have a 
``principal photography'' analogue, the production process is 
completely different and the majority of the work of the ``talent'' is 
performed independent of the actual frame photography. Computer-
generated animation is not photographed at all. Hand-drawn animated 
films involve the creation of a storyboard (sketches of the story 
action) by the principal artists. Once the storyboards are approved, 
individual frames showing important moments in the action called 
``keyframes'' are created by the principal artists, after which the 
frames in between these frames (the ``in-betweens'') are produced by 
assistant animators. These in-betweens are frequently outsourced 
overseas. Background art is created separately. The animation frames 
are transferred to plastic cels with a copier or, in some cases, are 
hand painted on the cels (or

[[Page 6159]]

both). The cels are then photographed against the background art. Voice 
acting, music, and Foley (sound effects) are recorded independently. 
All of these elements are then combined into the finished film.
    The production process for computer animation is similar, except 
that the principal artists work directly with computer programmers to 
create keyframe images in the animation software. In-between work is 
less likely to be outsourced, as the computer can generate most in-
between frames from the keyframes themselves. Background art can be 
created within the computer program or scanned in from physical 
artwork. Post-production is generally done completely in the digital 
realm, and the final product is output to disc.
    The temporary regulations apply the 75 percent test to animated 
productions based upon the production locations for (at least) the 
keyframe animation, the in-between animation, the animation 
photography, and the recording of the voice acting performances instead 
of the location where principal photography takes place. A separate 
rule is provided for productions that combine animation and live 
action, taking into account the production locations for the animation 
functions in addition to the location of principal photography.

Special Rules

    The version of the legislation that became section 181 (as 
originally passed by the Senate) provided a deduction for production 
costs up to $15 million, and allowed production costs in excess of $15 
million to be depreciated using the straight-line method over a 36-
month period. Jumpstart Our Business Strength (JOBS) Act, S. 1637, 
108th Cong. Sec.  321 (2003). The depreciation provision was removed in 
conference, with the result that the deduction does not apply to 
qualified film or television productions with an aggregate production 
cost in excess of $15 million ($20 million if a significant amount of 
the production costs are incurred in designated areas.) Section 181 is 
silent as to what should happen when a production appears to meet the 
requirements of section 181 in the year the election is first made, but 
fails to meet those requirements thereafter (for example, when the 
production cost exceeds $15 million, or when the production no longer 
meets the 75 percent test).
    The temporary regulations provide a recapture provision that 
requires the recapture of any production costs previously deducted 
under section 181 in the year the election is voluntarily revoked or 
the production fails to meet the requirements of section 181. For 
property already placed in service, the taxpayer must include in income 
the difference between the aggregate amount claimed under section 181 
and the depreciation that would have been otherwise allowable with 
respect to the production in the same years. For a production not yet 
placed in service, the taxpayer must include in income the aggregate 
amount claimed under section 181. The structure of the recapture 
provision is intended in part to alleviate concerns that including P&R 
in the definition of production costs under section 181 would cause 
taxpayers to completely forgo the benefits of section 181. Under the 
temporary regulations, a taxpayer with a reasonable belief that it is 
producing a qualified film or television production, and that the 
production cost will not exceed the production cost limit, will be 
permitted to elect to currently deduct production costs under section 
181 with the understanding that a recapture may be required in a later 
year if circumstances or expectations change. A taxpayer that is 
required to recapture previously deducted production costs under 
section 181 will nonetheless be permitted to deduct otherwise allowable 
depreciation expenses in future years.
    Prior to the technical correction enacted in the Gulf Opportunity 
Zone Act of 2005, a taxpayer could potentially incur production costs, 
deduct the production costs under section 181 against ordinary income, 
then sell the film after holding it for one year and report the 
proceeds (including the gain attributable to the basis reduction from 
the section 181 deduction) as a long-term capital gain, effectively 
converting ordinary income to capital gain. This potential ``tax 
flip,'' existed because, as originally enacted, the statute did not 
specify that the deduction under section 181 is a deduction for 
depreciation or amortization, or state that it is subject to recapture 
under section 1245. The technical correction specifically treats a 
deduction under section 181 as a deduction for depreciation or 
amortization that is subject to recapture under section 1245, and the 
temporary regulations follow this rule.

Effective Date

    The temporary regulations apply to qualified film and television 
productions with respect to which principal photography or, in the case 
of an animated production, in-between animation, commenced on or after 
February 9, 2007 and before January 1, 2009.

Effect on Other Documents

    The following publications are modified as of February 9, 2007:
    Notice 2006-47 (2006-20 IRB 892) is modified by removing section 
B.2. in the INTERIM PROVISIONS of Notice 2006-20.
    Rev. Proc. 2002-9 (2002-1 CB 327) is modified and amplified to 
include the automatic changes in methods of accounting in Sec.  1.181-
2T(d)(2) and (e)(1) in the Appendix of Rev. Proc. 2002-9.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866. 
Therefore, a regulatory assessment is not required. It also has been 
determined that section 553(b) and (d) of the Administrative Procedure 
Act (5 U.S.C. chapter 5) does not apply to these regulations. For 
applicability of the Regulatory Flexibility Act (5 U.S.C. chapter 6), 
please refer to the Special Analyses section of the preamble to the 
cross-reference notice of proposed rulemaking published in the Proposed 
Rules section in this issue of the Federal Register. Pursuant to 
section 7805(f) of the Code, these regulations have been submitted to 
the Chief Counsel for Advocacy of the Small Business Administration for 
comment on its impact on small business.

Drafting Information

    The principal author of these regulations is Bernard P. Harvey, 
Office of Associate Chief Counsel (Passthroughs and Special 
Industries). However, other personnel from the IRS and Treasury 
Department participated in their development.

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 602

    Reporting and recordkeeping requirements.

Amendments to the Regulations

0
Accordingly, 26 CFR parts 1 and 602 are amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read, in 
part, as follows:

    Authority: 26 U.S.C. 7805 * * *


0
Par. 2. Sections 1.181-0T through 1.181-6T are added to read as 
follows:

[[Page 6160]]

Sec.  1.181-0T  Table of contents (temporary).

    This section lists the table of contents for Sec. Sec.  1.181-1T 
through 1.181-6T.


Sec.  1.181-1T  Deduction for qualified film and television production 
costs (temporary).

    (a) Deduction.
    (1) In general.
    (2) Owner.
    (3) Production costs.
    (b) Limit on amount of production costs and amount of deduction.
    (1) In general.
    (2) Higher limit for productions in certain areas.
    (i) In general.
    (ii) Significantly incurred.
    (iii) Animated film and television productions.
    (iv) Productions incorporating both live action and animation.
    (v) Records required.
    (c) No other depreciation or amortization deduction allowed.


Sec.  1.181-2T  Election (temporary).

    (a) Time and manner of making election.
    (b) Election by entity.
    (c) Information required.
    (1) Initial election.
    (2) Subsequent taxable years.
    (3) Deductions by more than one owner.
    (d) Revocation of election.
    (1) In general.
    (2) Consent granted.
    (e) Transition rules.
    (1) Costs first paid or incurred prior to October 23, 2004.
    (2) Returns filed after June 14, 2006, and before March 12, 2007.
    (3) Information required.


Sec.  1.181-3T  Qualified film or television production (temporary).

    (a) In general.
    (b) Production.
    (1) In general.
    (2) Special rules for television productions.
    (3) Exception for certain sexually explicit productions.
    (c) Compensation.
    (d) Qualified compensation.
    (e) Special rule for acquired productions.
    (f) Other definitions.
    (1) Actors.
    (2) Production personnel.
    (3) United States.


Sec.  1.181-4T  Special rules (temporary).

    (a) Recapture.
    (1) Applicability.
    (2) Principal photography not commencing prior to January 1, 2009.
    (3) Amount of recapture.
    (b) Recapture under section 1245.


Sec.  1.181-5T  Examples (temporary).


Sec.  1.181-6T  Effective date (temporary).

    (a) In general.
    (b) Application of regulation project REG-115403-05 to pre-
effective date productions.
    (c) Special rules for returns filed for prior taxable years.


Sec.  1.181-1T  Deduction for qualified film and television production 
costs (temporary).

    (a) Deduction--(1) In general. The owner (as defined in paragraph 
(a)(2) of this section) of any film or television production (as 
defined in Sec.  1.181-3T(b)) that the owner reasonably expects will 
be, upon completion, a qualified film or television production (as 
defined in Sec.  1.181-3T(a)) for which the production costs (as 
defined in paragraph (a)(3) of this section) will not be in excess of 
the production cost limit of paragraph (b) of this section may elect to 
treat all production costs incurred by the owner as an expense that is 
deductible in the taxable year in which the costs are paid (in the case 
of a taxpayer who uses the cash method of accounting) or incurred (in 
the case of a taxpayer who uses the accrual method of accounting). This 
deduction is subject to recapture if the owner's expectations prove to 
be inaccurate. This section provides rules for determining who is the 
owner of a production, what is a production cost, and the maximum 
production cost that may be incurred for a production for which an 
election is made under section 181 of the Internal Revenue Code (Code). 
Section 1.181-2T provides rules for making the election under section 
181. Section 1.181-3T provides definitions and rules concerning 
qualified film and television productions. Section 1.181-4T provides 
special rules, including rules for recapture of the deduction. Section 
1.181-5T provides examples of the application of Sec. Sec.  1.181-1T 
through 1.181-4T, while Sec.  1.181-6T provides the effective date of 
Sec. Sec.  1.181-1T through 1.181-5T.
    (2) Owner. For purposes of this section and Sec. Sec.  1.181-2T 
through 1.181-6T, the owner of a production is any taxpayer that is 
required under section 263A to capitalize costs paid or incurred in 
producing the production into the cost basis of the production, or that 
would be required to do so if section 263A applied to that taxpayer. A 
taxpayer that obtains only a limited license or right to exploit a 
production, or receives an interest or profit participation in a 
production as compensation for services, generally is not an owner of 
the production for purposes of this section and Sec. Sec.  1.181-2T 
through 1.181-6T.
    (3) Production costs. (i) The term production costs means all costs 
paid or incurred by the owner in producing or acquiring a production 
that are required, absent the provisions of section 181, to be 
capitalized under section 263A, or that would be required to be 
capitalized if section 263A applied to the owner. These production 
costs specifically include, but are not limited to, participations and 
residuals, compensation paid for services, compensation paid for 
property rights, non-compensation costs, and costs paid or incurred in 
connection with obtaining financing for the production (for example, 
premiums paid or incurred to obtain a completion bond for the 
production).
    (ii) Production costs do not include costs paid or incurred to 
distribute or exploit a production (including advertising and print 
costs).
    (iii) Production costs do not include the costs to prepare a new 
release or new broadcast of an existing film or video after the initial 
release or initial broadcast of the film or video (for instance, the 
preparation of a DVD release of a theatrically-released film, or the 
preparation of an edited version of a theatrically-released film for 
television broadcast). Costs paid or incurred to prepare a new release 
or a new broadcast of a film or video that has previously been released 
or broadcast, therefore, are not taken into account for purposes of 
paragraph (b) of this section, and may not be deducted under this 
paragraph (a).
    (iv) If a production (or any right or interest in a production) is 
acquired from any person bearing a relationship to the taxpayer 
described in section 267(b) or section 707(b)(1), and the costs paid or 
incurred to acquire the production are less than the seller's 
production cost, the purchaser must treat the seller's production cost 
as a production cost of the acquired production for purposes of 
determining whether the aggregate production cost paid or incurred with 
respect to the production exceeds the applicable production cost limit 
imposed under paragraphs (b)(1) and (b)(2) of this section. 
Notwithstanding this paragraph (a)(3)(iv), the taxpayer's deduction 
under section 181 is limited to the taxpayer's acquisition cost of the 
production plus any further production costs incurred by the taxpayer.
    (v) The provisions of this paragraph (a) apply notwithstanding the 
provisions of section 167(g)(7)(D).
    (b) Limit on amount of production cost and amount of deduction--(1) 
In

[[Page 6161]]

general. Except as provided under paragraph (b)(2) of this section, the 
deduction permitted under section 181 does not apply in the case of any 
production, the production cost of which exceeds $15,000,000.
    (2) Higher limit for productions in certain areas--(i) In general. 
This section is applied by substituting $20,000,000 for $15,000,000 in 
the case of any production the aggregate production cost of which is 
significantly incurred in an area eligible for designation as--
    (A) A low income community under section 45D; or
    (B) A distressed county or isolated area of distress by the Delta 
Regional Authority established under 7 U.S.C section 2009aa-1.
    (ii) Significantly incurred. The aggregate production cost of a 
production is significantly incurred within one or more areas specified 
in paragraph (b)(2)(i) of this section if--
    (A) At least 20 percent of the total production cost incurred in 
connection with first-unit principal photography for the production is 
incurred in connection with first-unit principal photography that takes 
place in such areas; or
    (B) At least 50 percent of the total number of days of first-unit 
principal photography for the production consists of days during which 
first-unit principal photography takes place in such areas.
    (iii) Animated film and television productions. For purposes of an 
animated film or television production, the aggregate production cost 
of the production is significantly incurred within one or more areas 
specified in paragraph (b)(2)(i) of this section if--
    (A) At least 20 percent of the total production cost incurred in 
connection with keyframe animation, in-between animation, animation 
photography, and the recording of voice acting performances for the 
production is incurred in connection with such activities that take 
place in such areas; or
    (B) At least 50 percent of the total number of days of keyframe 
animation, in-between animation, animation photography, and the 
recording of voice acting performances for the production consists of 
days during which such activities take place in such areas.
    (iv) Productions incorporating both live action and animation. For 
purposes of a production incorporating both live action and animation, 
the aggregate production cost of the production is significantly 
incurred within one or more areas specified in paragraph (b)(2)(i) of 
this section if--
    (A) At least 20 percent of the total production cost incurred in 
connection with first-unit principal photography, keyframe animation, 
in-between animation, animation photography, and the recording of voice 
acting performances for the production is incurred in connection with 
such activities that take place in such areas; or
    (B) At least 50 percent of the total number of days of first unit 
principal photography, keyframe animation, in-between animation, 
animation photography, and the recording of voice acting performances 
for the production consists of days during which such activities take 
place in such areas.
    (v) Records required. A taxpayer intending to utilize the higher 
production cost limit under paragraph (b)(2)(i) of this section must 
maintain records adequate to demonstrate qualification under this 
paragraph (b)(2).
    (c) No other depreciation or amortization deduction allowed. (1) 
Except as provided in paragraph (c)(2) of this section, an owner that 
elects to deduct production costs under section 181 with respect to a 
production may not deduct production costs for that production under 
any provision of the Code other than section 181 unless Sec.  1.181-
4T(a) applies to the production. In addition, except as provided in 
paragraph (c)(2) of this section, an owner that has, in a previous 
taxable year, deducted any production cost of a production under a 
provision of the Code other than section 181 is ineligible to make an 
election with respect to that production under section 181.
    (2) An owner may make an election under section 181 despite prior 
deductions claimed for amortization of the cost of acquiring or 
developing screenplays, scripts, story outlines, motion picture 
production rights to books and plays, and other similar properties for 
purposes of potential future development or production of a production 
under any provision of the Code if such costs were incurred before the 
first taxable year in which an election could be made under Sec.  
1.181-2T(a). However, the production cost of the production does not 
include costs that a taxpayer has begun to amortize prior to the time 
that the production is set for production (for further guidance, see 
Rev. Proc. 2004-36 (2004-1 CB 1063) and Sec.  601.601(d)(2)(ii)(b) of 
this chapter).


Sec.  1.181-2T  Election (temporary).

    (a) Time and manner of making election. (1) Except as provided in 
paragraph (e) of this section, a taxpayer electing to deduct the 
production cost of a production under section 181 must do so in the 
time and manner described in this paragraph (a). Except as provided in 
paragraphs (a)(2) and (e) of this section, the election must be made by 
the due date (including extensions) for filing the taxpayer's Federal 
income tax return for the first taxable year in which production costs 
(as defined in Sec.  1.181-1T(a)(3)) have been paid or incurred. See 
Sec.  301.9100-2 of this chapter for a six-month extension of this 
period in certain circumstances. The election under section 181 is made 
separately for each production produced by the owner.
    (2) An owner may not make an election under paragraph (a)(1) of 
this section until the first taxable year in which the owner reasonably 
expects (based on all of the facts and circumstances) that--
    (i) The production will be set for production and will, upon 
completion, be a qualified film or television production; and
    (ii) The aggregate production cost paid or incurred with respect to 
the production will, at no time, exceed the applicable production cost 
limit set forth under Sec.  1.181-1T(b) of the regulations.
    (3) If the election under this paragraph (a) is made in a taxable 
year subsequent to the taxable year in which production costs were 
first paid or incurred because paragraph (a)(2) of this section was not 
satisfied until such subsequent taxable year, the election must be made 
in the first such taxable year, and any production costs incurred prior 
to the taxable year in which the taxpayer makes the election are 
treated as production costs (except as provided in Sec.  1.181-
1T(c)(2)) that are deductible under Sec.  1.181-1T(a) in the taxable 
year paragraph (a)(2) of this section is first satisfied and the 
election is made.
    (b) Election by entity. In the case of a production owned by an 
entity, the election is made by the entity. For example, the election 
is made for each member of a consolidated group by the common parent of 
the group, for each partner by the partnership, or for each shareholder 
by the S corporation. The election must be made by the due date 
(including extensions) for filing the return for the later of the 
taxable year of the entity in which production costs are first paid or 
incurred or the first taxable year in which Sec.  1.181-2T(a)(2) is 
satisfied.
    (c) Information required--(1) Initial election. For each production 
to which the election applies, the taxpayer must attach a statement to 
the return stating

[[Page 6162]]

that the taxpayer is making an election under section 181 and 
providing--
    (i) The name (or other unique identifying designation) of the 
production;
    (ii) The date production costs were first paid or incurred with 
respect to the production;
    (iii) The amount of production costs (as defined in Sec.  1.181-
1T(a)(3)) paid or incurred with respect to the production during the 
taxable year (including costs described in Sec.  1.181-2T(a)(3));
    (iv) The aggregate amount of qualified compensation (as defined in 
Sec.  1.181-3T(d)) paid or incurred with respect to the production 
during the taxable year (including costs described in Sec.  1.181-
2T(a)(3));
    (v) The aggregate amount of compensation (as defined in Sec.  
1.181-3T(c)) paid or incurred with respect to the production during the 
taxable year (including costs described in Sec.  1.181-2T(a)(3));
    (vi) If the owner expects that the total production cost of the 
production will be significantly paid or incurred in (or, if 
applicable, if a significant portion of the total number of days of 
principal photography will occur in) one or more of the areas specified 
in Sec.  1.181-1T(b)(2)(i), the identity of the area or areas, the 
amount of production costs paid or incurred (or the number of days of 
principal photography engaged in) for the applicable activities 
described in Sec.  1.181-1T(b)(2)(ii), (iii), or (iv), as applicable, 
that take place within such areas (including costs described in Sec.  
1.181-2T(a)(3)), and the total production cost paid or incurred (or the 
total number of days of principal photography engaged in) for such 
activities (whether or not they take place in such areas), for the 
taxable year (including costs described in Sec.  1.181-2T(a)(3)); and
    (vii) A declaration that the owner reasonably expects (based on all 
of the facts and circumstances at the time the election was filed) both 
that the production will be set for production (or has been set for 
production) and will be a qualified film or television production, and 
that the aggregate production cost of the production paid or incurred 
will not, at any time, exceed the applicable dollar amount set forth 
under Sec.  1.181-1T(b).
    (2) Subsequent taxable years. If the owner pays or incurs 
additional production costs in any taxable year subsequent to the 
taxable year in which production costs are first deducted under section 
181, the owner must attach a statement to its Federal income tax return 
for that subsequent taxable year providing--
    (i) The name (or other unique identifying designation) of the 
production;
    (ii) The date the production costs were first paid or incurred;
    (iii) The amount of production costs paid or incurred by the owner 
with respect to the production during the taxable year;
    (iv) The amount of qualified compensation paid or incurred with 
respect to the production during the taxable year;
    (v) The aggregate amount of compensation paid or incurred with 
respect to the production during the taxable year, and the aggregate 
amount of compensation paid or incurred with respect to the production 
in all prior taxable years;
    (vi) If the owner expects that the total production cost of the 
production will be significantly paid or incurred in (or, if 
applicable, if a significant portion of the total number of days of 
principal photography will occur in) one or more of the areas specified 
in Sec.  1.181-1T(b)(2)(i), the identity of the area or areas, the 
amount of production costs paid or incurred (or the number of days of 
principal photography engaged in) for the applicable activities 
described in Sec.  1.181-1T(b)(2)(ii), (iii), or (iv), as applicable, 
that take place within such areas, and the total production cost paid 
or incurred (or the number of days of principal photography engaged in) 
for such activities (whether or not they take place in such areas), for 
the taxable year; and
    (vii) A declaration that the owner continues to reasonably expect 
(based on all of the facts and circumstances at the time the election 
was filed) both that the production will be set for production (or has 
been set for production) and will be a qualified film or television 
production, and that the aggregate production cost of the production 
paid or incurred will not, at any time, exceed the applicable dollar 
amount set forth under Sec.  1.181-1T(b).
    (3) Deductions by more than one owner. If more than one taxpayer 
will claim deductions under section 181 with respect to the production 
for the taxable year, each owner (but not the members of an entity who 
are issued a Schedule K-1 by the entity with respect to their interest 
in the production) must provide a list of the names and taxpayer 
identification numbers of all such taxpayers, the dollar amount that 
each such taxpayer is entitled to deduct under section 181, and the 
information required by paragraphs (c)(1)(iii) through (vi) and 
(c)(2)(iii) through (vi) of this section for all owners.
    (d) Revocation of election--(1) In general. An election made under 
this section may not be revoked without the consent of the Secretary.
    (2) Consent granted. The Secretary's consent to revoke an election 
under this section with respect to a particular production will be 
granted if the owner--
    (i) Files a Federal income tax return in which the owner complies 
with the recapture provisions of Sec.  1.181-4T(a) to recapture the 
amount described in Sec.  1.181-4T(a)(3); and
    (ii) Attaches a statement to the owner's return clearly indicating 
the name (or other unique identifying designation) of the production, 
and stating that the election under section 181 with respect to that 
production is being revoked pursuant to Sec.  1.181-2T(d)(2).
    (e) Transition rules--(1) Costs first paid or incurred prior to 
October 23, 2004. If a taxpayer begins principal photography of a 
production after October 22, 2004, but first paid or incurred 
production costs before October 23, 2004, the taxpayer is entitled to 
make an election under this section with respect to those costs. If, 
before June 15, 2006, the taxpayer filed its Federal tax return for the 
taxable year in which production costs were first paid or incurred, and 
if the taxpayer wants to make a section 181 election for that taxable 
year, the taxpayer may make the election either by--
    (i) Filing an amended Federal tax return for the taxable year in 
which production costs were first paid or incurred, and for all 
subsequent affected taxable year(s), on or before November 15, 2006, 
provided that all of these years are open under the period of 
limitations for assessment under section 6501(a); or
    (ii) Filing a Form 3115, ``Application For Change in Accounting 
Method,'' for the first or second taxable year ending on or after 
December 31, 2005, in accordance with the administrative procedures 
issued under Sec.  1.446-1(e)(3)(ii) for obtaining the Commissioner's 
automatic consent to a change in accounting method (for further 
guidance, for example, see Rev. Proc. 2002-9, 2002-1 CB 327, and Sec.  
601.601(d)(2)(ii)(b) of this chapter). This change in method of 
accounting results in a section 481 adjustment. Further, any 
limitations on obtaining the automatic consent of the Commissioner do 
not apply to a taxpayer seeking to change its method of accounting 
under this paragraph (e)(1). Moreover, the taxpayer must include on 
line 1a of the Form 3115 the designated automatic accounting method 
change number ``100''.

[[Page 6163]]

    (2) Returns filed after June 14, 2006, and before March 12, 2007. 
If, after June 14, 2006, and before March 12, 2007, the owner of a film 
or television production filed its original Federal income tax return 
for a taxable year ending after October 22, 2004, without making an 
election under section 181 for production costs first paid or incurred 
after October 22, 2004, and if the taxpayer wants to make an election 
under section 181 for production costs first paid or incurred during 
that taxable year, the taxpayer must make the election within the time 
provided by paragraph (a) of this section and in the manner provided in 
paragraph (c)(1) of this section, except that the election statement 
attached to the return must include the information required in 
paragraphs (c)(1)(i) through (vi) of this section.
    (3) Information required. If, in accordance with paragraph (e)(1) 
of this section, the taxpayer is making an election for a prior taxable 
year by filing amended Federal tax return(s), the statement and 
information required by paragraphs (c)(1) and (c)(2) of this section 
must be attached to each amended return. If, in accordance with 
paragraph (e)(1) of this section, the taxpayer is making a section 181 
election for a prior taxable year by filing a Form 3115 for the first 
or second taxable year ending on or after December 31, 2005, the 
statement and information required by paragraphs (c)(1) and (c)(2) of 
this section must be attached to the Form 3115. For purposes of the 
preceding sentence, the amount of the cost or compensation paid or 
incurred for the production must only include the amount paid or 
incurred in taxable years prior to the year of change (for further 
guidance on year of change, see section 5.02 of Rev. Proc. 2002-9 and 
Sec.  601.601(d)(2)(ii)(b) of this chapter).


Sec.  1.181-3T  Qualified film or television production (temporary).

    (a) In general. The term qualified film or television production 
means any production (as defined in paragraph (b) of this section) if 
not less than 75 percent of the total amount of compensation (as 
defined in paragraph (c) of this section) paid with respect to the 
production is qualified compensation (as defined in paragraph (d) of 
this section).
    (b) Production--(1) In general. Except as provided in paragraph 
(b)(3) of this section, for purposes of this section and Sec. Sec.  
1.181-1T, 1.181-2T, 1.181-4T, 1.181-5T, and 1.181-6T, a film or 
television production (or production) means any film or video 
(including digital video) production the production cost of which is 
subject to capitalization under section 263A, or that would be would be 
subject to capitalization if section 263A applied to the owner of the 
production.
    (2) Special rules for television productions. Each episode of a 
television series is a separate production to which the rules, 
limitations, and election requirements of this section and Sec. Sec.  
1.181-1T, 1.181-2T, 1.181-4T, 1.181-5T, and 1.181-6T apply. A taxpayer 
may elect to deduct production costs under section 181 only for the 
first 44 episodes of a television series (including pilot episodes). A 
television series may include more than one season of programming.
    (3) Exception for certain sexually explicit productions. A 
production does not include property with respect to which records are 
required to be maintained under 18 U.S.C. 2257. Section 2257 of Title 
18 requires maintenance of certain records with respect to any book, 
magazine, periodical, film, videotape, or other matter that--
    (i) Contains one or more visual depictions made after November 1, 
1990, of active sexually explicit conduct; and
    (ii) is produced in whole or in part with materials that have been 
mailed or shipped in interstate or foreign commerce, or is shipped or 
transported or is intended for shipment or transportation in interstate 
or foreign commerce.
    (c) Compensation. The term compensation means, for purposes of this 
section and Sec.  1.181-2T(c), all payments made by the owner (whether 
paid directly by the owner or paid indirectly on the owner's behalf) 
for services performed by actors (as defined in paragraph (f)(1) of 
this section), directors, producers, and other relevant production 
personnel (as defined in paragraph (f)(2) of this section) with respect 
to the production. Indirect payments on the owner's behalf include, for 
example, payments by a partner on behalf of an owner that is a 
partnership, payments by a shareholder on behalf of an owner that is a 
corporation, and payments by a contract producer on behalf of an owner. 
Payments for services include all elements of compensation as provided 
for in Sec.  1.263A-1(e)(2)(i)(B) and (3)(ii)(D). Compensation is not 
limited to wages reported on Form W-2, ``Wage and Tax Statement,'' and 
includes compensation paid to independent contractors. However, solely 
for purposes of paragraph (a) of this section, the term 
``compensation'' does not include participations and residuals (as 
defined in section 167(g)(7)(B)). See Sec.  1.181-1T(a)(3) for 
additional rules concerning participations and residuals.
    (d) Qualified compensation. The term qualified compensation means, 
for purposes of this section and Sec.  1.181-2T(c), all payments made 
by the owner (whether paid directly by the owner or paid indirectly on 
the owner's behalf) paid for services performed in the United States 
(as defined in paragraph (f)(3) of this section) by actors, directors, 
producers, and other relevant production personnel with respect to the 
production. A service is performed in the United States for purposes of 
this paragraph (d) if the principal photography to which the 
compensated service relates occurs within the United States and the 
person performing the service is physically present in the United 
States. For purposes of an animated film or animated television 
production, the location where production activities such as keyframe 
animation, in-between animation, animation photography, and the 
recording of voice acting performances are performed is considered in 
lieu of the location of principal photography. For purposes of a 
production incorporating both live action and animation, the location 
where production activities such as keyframe animation, in-between 
animation, animation photography, and the recording of voice acting 
performances for the production is considered in addition to the 
location of principal photography.
    (e) Special rule for acquired productions. A taxpayer who acquires 
an unfinished production from a prior owner must take into account all 
compensation paid by or on behalf of the seller and any previous owners 
in determining if the production is a qualified film or television 
production as defined in paragraph (a) of this section. Any owner 
seeking to deduct as a production cost either the cost of acquiring a 
production or any subsequent production costs should obtain from the 
seller detailed records concerning the compensation paid with respect 
to the production in order to demonstrate the eligibility of the 
production under section 181.
    (f) Other definitions. The following definitions apply for purposes 
of this section and Sec. Sec.  1.181-1T, 1.181-2T, 1.181-4T, 1.181-5T, 
and 1.181-6T:
    (1) Actors. The term actors includes players, newscasters, or any 
other persons who are compensated for their performance or appearance 
in a production.

[[Page 6164]]

    (2) Production personnel. The term production personnel includes, 
for example, writers, choreographers, and composers providing services 
during production, casting agents, camera operators, set designers, 
lighting technicians, make-up artists, and others who are compensated 
for providing services directly related to producing the production.
    (3) United States. The term United States includes the 50 states, 
the District of Columbia, the territorial waters of the continental 
United States, the airspace or space over the continental United States 
and its territorial waters, and the seabed and subsoil of those 
submarine areas that are adjacent to the territorial waters of the 
continental United States and over which the United States has 
exclusive rights, in accordance with international law, with respect to 
the exploration and exploitation of natural resources. The term United 
States does not include possessions and territories of the United 
States (or the airspace or space over these areas).


Sec.  1.181-4T  Special rules (temporary).

    (a) Recapture--(1) Applicabili