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
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.
Combined Opinion