American Multi-Cinema, Inc.// Glenn Hegar, Comptroller of Public Accounts of the State of Texas And Ken Paxton, Attorney General of the State of Texas v. Glenn Hegar, Comptroller of Public Accounts of the State of Texas And Ken Paxton, Attorney General of the State of Texas// Cross-Appellee, American Multi-Cinema, Inc.

Opinion

ACCEPTED 03-14-00397-CV 3845366 THIRD COURT OF APPEALS AUSTIN, TEXAS 1/21/2015 1:37:38 PM JEFFREY D. KYLE CLERK No. 03-14-00397-CV

FILED IN 3rd COURT OF APPEALS l|n tbe @ourt of Øppestø AUSTIN, TEXAS 1/21/2015 1:37:38 PM for tbe @lSirù VuùitislTßíøtrirt JEFFREY D. KYLE Øuøtin,6'exuÉ Clerk

American Multi-Cinema, Inc., App ellant/Cros s -App el lee,

v

Glenn Hegar, Comptrbller of Public Accounts of the State of Texas, and Ken Paxton, Attorney General of the State of Texas, Appellees/Cross-Appellants.

On Appeal from the 200th Judicial District Court Travis County, Texas

Appellees' Surreply Regarding the Inapplicability of Tex. Tax. Code $ 17f .1012(o) to this Appeal

KEN PAXTON CHARLES K. ELDRED Attorney General of Texas State Bar No. 00793681 Assistant Attorney General CHARLES E. ROY Financial Litigation, Tax, and First Assistant Attorney General Charitable Trusts Division P.O. Box 12548 JAME,S E. DAVIS Austin, Texas 7 87 ll-2548 Deputy Attorney General for Civil Litigation 5t2-47s-1143 512-477-2348 (fax) ROBERT O'KEEFE charles.eldred@texasattonreygeneral. gov Division Chief Financial Litigation, Tax, and Attorneys for Cross-Appel lants Charitable Trusts Division

Oral Argument Requested To rHp HoNoRRer-p TnIRn Counr op AppsRl-s:

AMC seeks a ruling that its movie exhibition costs are costs of goods sold

under Tex. Tax Code $ 171 .l0I2.In district court, AMC had three theories. The

first two theories are discussed in previous briefing and will not be further dis-

cussed in this surreply.

1. AMC sells "personal property that can be seen, weighed, measured,

felt, or touched or that is perceptible to the senses in any other manner." Tex. Tax

Code $ 171.1012(a)(3XAXi).

2. AMC sells "films, sound recordings, videotapes, live and prerecorded

television and radio programs, books, and other similar property embodying words,

ideas, concepts, images, or sound, without regard to the means or methods of dis-

tribution or the medium in which the property is embodied, for which, as costs are

incurred in producing the property, it is intended or is reasonably likely thaT any medium in which the property is embodied will be mass-distributed by the creator

or any one or more third parties in a form that is not substantially altered." Tex.

Tax Code $ 171.1012(a)(3XAXii).

3. AMC's principal business activity is film production, film distribution

or any combination of those activities, so its cost of goods sold for the taxable enti-

ty shall be the costs described in section 171.l0l2in relation to the films and in-

clude depreciation, amortization, and other expenses directly related to the acquisi-

Appellees' Surreply Regarding the Inapplicability of Tex. Tax Code $ I 71 . I 012(o) - Page I American Multi-Cinema, Inc. v. Hegar, et al.; 03-1 4-00397-CV tion, production, or use of the file, including expenses for the right to use the film.

Tex. Tax. Code $ 171.1012(o). CR.7-8 at"lll4 (original petition for Report Year

2008, alleging that AMC produces films for sale); 2.SCR.6-7 aI]¡ll8 (same for Re-

port Year 2009); CR.68-69,79-80,85 (AMC's trial brief); CR.46l (requesting a

finding of fact that "AMC's principal business activity is a combination of film

production and film distribution.")

The district court agreed only with the first theory. The Comptroller ap-

pealed that ruling. AMC's responded by arguing that the district court correctly

ruled in AMC's favor on the first theory and that AMC's second theory was an al-

ternate basis for affirmance. AMC did not argue that the third theory was an alter-

nate basis for aff,rrmance. It specif,rcally did not argue that its principal business ac-

tivity is film production, f,rlm distribution, or any combination of those activities,

which is a prerequisite to using Tex. Tax Code $ 171.1012(o) to calculate its cost

of goods sold. Therefore, AMC's third theory is waived on appeal, and Tex. Tax

Code $ I 71 .1012(o) has no applicability to this appeal

In rejecting AMC's third theory, the district coutl considered evidence from

the Comptroller's expert witness on the role of film produeers, film distributors,

and film exhibitors such as AMC within the movie business. It considered decades

of court opinions recognizing the three parts of the movie business, including the

1948 antitrust case that broke the movie business up into producers, distributors,

Appellees' Surreply Regarding the Inapplicability of Tex. Tax Code S I 71 .1 012(o) - Page 2 American Multi-Cinema, Inc. v. Hegar, et al.; 03-14-00397-CV and exhibitors such as AMC. United States v. Paramount Píctures,334 U.S. 131

( 1948). AMC is not a producer or distributor at all, and its principal business activ-

ity is not film production or distribution. Because AMC did not preserve its third

theory on appeal, the Comptroller has not briefed this extensive testimony and case

1aw.

Yet AMC's Reply Brief states, "AMC is permitted to subtract the costs

listed in the stipulation by Tax Code $ 171.1012(c), (d), and (o)." Appellant's Re-

ply Brief at 16. But for AMC to take advantage of subsection (o), its principal

business activity must be hlm production, film distribution, or a combination of

those activities. The district court rejected that theory, and AMC has not argued

that the district court erred.

The only issue in the Comptroller's cross-appeal is whether, under Tex. Tax

Code $ 171 .1012, AMC acquires or produces "goods" for sale when it exhibits

movies under either AMC's first or second theory. The issue of whether AMC's

principal business activity is film production, film distribution, or a combination of

those activities is not before the court, and so neither is subsection (o)

Respectfully submitted,

KEN PAXTON Attorney General

CHARLES E. ROY First Assistant Attorney General

Appellees' Surreply Regarding the lnapplicability of Tex. Tax Code $ l7l.l0l2(o) - Page 3 American Multi-Cinema, Inc. v. Hegar, et al.; 03-14-00397-CV JAMES E. DAVIS Deputy Attorney General for Civil Litigation

ROBERT O'KEEFE Division Chief Financial Litigation, Tax, and Charitable Trusts Division

CHARLES K. ELDRED Attorney in Charge Financial Litigation, Tax, and Charitable Trusts Division State Bar No. 00793681 P.O. Box 12548 Austin, Texas 7 87 ll -2548 512-475-1743 sI2-477-2348 (fax) charl e s .e I dr ed@texas attorney general. gov

Attorneys for Appellants

Appellees' Surreply Regarding the Inapplicability of Tex. Tax Code $ I 71 .1012(o) - Page 4 American Multi-Cinema, Inc. v. Hegar, et al.; 03-14-00397-CV Certificate of Compliance

In compliance with Texas Rule of Appellate Procedure 9.4(i)(2), this brief

contains 667 words, excluding the portions of the brief exempted by Rule 9.4(iXl).

Charles K. Eldred Assistant Attorney General

CertifÏcate of Service

I certif, that a copy of this Appellees' Surreply Regarding the Inapplicabílity

of Tex. Tax Code S 17 f . 1012 (o) to thís appeal was served by email and eservice to

Doug Sigel, attorney for Appellant and Cross-Appellee, on January 2I, 2015 To

doug. si ge l@ry anlawl lp. com.

Charles K. Eldred Assistant Attomey General

Appellees' Surreply Regarding the Inapplicability of Tex. Tax Code $ 171.1012(o) - Page 5 American Multi-Cinema, Inc. v. Hegar, et al.; 03-14-00397-CV