transaction based on the doctrine of substance over form in a manner that would eliminate the tax benefits.
Effective for films placed in service after October 22, 2004, taxpayers may elect, on a film-by-film basis, to irrevocably adopt one of two approaches for the deduction of participations and residuals for the film. Participations and residuals are amounts that “by contract vary with the amount of income earned in connection with” the film (i.e., payables based on gross receipts, or box office bonuses). The taxpayer may elect to increase the adjusted tax basis of the film by the amount of participations and residuals that the taxpayer ultimately may owe based on an estimate of the income from the film during the first ten years after the film is placed in service. Alternatively, the taxpayer may elect to deduct the participations and residuals when paid.