Court Opinion

ID: 4040699
Source: CourtListenerOpinion
Date Created: 2016-09-28 22:36:34.806641+00
Date Added: 2024-06-11T14:04:21.360519
License: Public Domain

ACCEPTED
                                                                            03-14-00397-CV
                                                                                   3783258
                                                                  THIRD COURT OF APPEALS
                                                                             AUSTIN, TEXAS
                                                                       1/15/2015 2:06:00 PM
                                                                          JEFFREY D. KYLE
                                                                                     CLERK
                        No. 03-14-00397-CV
_______________________________________________
                                                            FILED IN
                                                     3rd COURT OF APPEALS
                 In the Court of Appeals                 AUSTIN, TEXAS
              For the Third Judicial District        1/15/2015 2:06:00 PM
                      Austin, Texas                    JEFFREY D. KYLE
                                                             Clerk
_______________________________________________
                   AMERICAN MULTI-CINEMA, INC.

                      Appellant & Cross-Appellee,
                                  v.
    GLENN HEGAR, COMPTROLLER 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 DISTRICT COURT, TRAVIS COUNTY, TEXAS
               TRIAL COURT CAUSE NO. D-1-GN-12-003831
_______________________________________________

             APPELLANT’S REPLY BRIEF
_______________________________________________
Mark W. Eidman                      RYAN LAW FIRM, LLP
Texas Bar No. 06496500              100 Congress Avenue, Suite 950
Mark.Eidman@RyanLawLLP.com          Austin, Texas 78701
                                    512.459.6600 Telephone
Doug Sigel                          512.459.6601 Facsimile
Texas Bar No. 18347650
Doug.Sigel@RyanLawLLP.com           Counsel for Appellant

Olga Goldberg
Texas Bar No. 24083081
Olga.Goldberg@RyanLawLLP.com

January 15, 2014
               5
                                         Table of Contents

Table of Contents .......................................................................................... ii
Table of Authorities ...................................................................................... iv
Appendix ....................................................................................................... v
Reply to Appellees’ Statement of the Case .....................................................1
Reply to Appellees’ Issue Presented ............................................................... 1
Argument ...................................................................................................... 2
   I.     The phase two trial court disregarded conclusive evidence that
          establishes AMC’s sight and sound production process. ................... 2
   II.    This Court should not ignore the plain language of the Tax
          Code and the evidence presented at trial in favor of the
          Comptroller’s “common knowledge” argument. ............................... 7
          A. AMC’s sight and sound production process is not
             “common knowledge.”       The Comptroller’s common
             knowledge argument is not evidence. ........................................ 8
          B.     There is no support in the Tax Code for the Comptroller’s
                 attempt to bifurcate AMC’s production space and
                 consumption space. ................................................................... 11
          C.     Because Tax Code § 171.1012(a)(2) expressly defines
                 “production” to include “improvement,” AMC’s
                 improvements to the film’s sight and sound are part of the
                 film production process. ............................................................13
   III. The Comptroller’s arguments regarding stipulated issues—the
        costs at issue and the Comptroller’s calculations—are wholly
        irrelevant to AMC’s appeal. .............................................................. 15
          A. Comptroller’s argument regarding the costs at issue
             ignores the parties’ stipulation and contradicts Texas law........16
          B.     The Comptroller’s argument regarding its calculations
                 ignores the stipulation and is no substitute for conclusive
                 trial evidence. ............................................................................19

Appellant’s Reply Brief – Page ii
Conclusion and Prayer ................................................................................ 19
Certificate of Compliance ............................................................................ 21
Certificate of Service.................................................................................... 21

Appellant’s Reply Brief – Page iii
                                      Table of Authorities

CASES
American Tobacco Co. v. Grinnel,
  951 S.W.2d 420 (Tex. 1997) .................................................................. 8, 9
Bell Helicopter Textron, Inc. v. Combs,
   No. 03-10-00764-CV, 2011 WL 6938491 (Tex. App.—Austin Dec. 29,
   2011, no pet.) ............................................................................................ 3
Bioderm Skin Care, LLC v. Sok,
   426 S.W.3d 753 (Tex. 2014) ..................................................................... 9
Bonebrake v. Dep’t of Revenue,
  15 Or. Tax 244 (2000) .............................................................................. 8
Buckeye Retirement Co. v. Bank of America, N.A.,
  239 S.W.3d 394 (Tex. App.—Dallas 2007) ............................................. 18
Combs v. Roark Amusement & Vending, L.P.,
  422 S.W.3d 632 (Tex. 2013) ................................................................... 12
First Am. Title Ins. Co. v. Combs,
   258 S.W.3d 627 (Tex. 2008)..................................................................... 3
H.K. Global Trading, Ltd. v. Combs,
  429 S.W.3d 132 (Tex. App.—Austin, pet. denied) ............................. 15, 18
Haddock v. Arnspiger,
  793 S.W.2d 948 (Tex. 1990) ..................................................................... 9
People v. McCabe,
  266 N.Y.S. 363 (N.Y. Sup. Ct. 1933) ......................................................... 8
Tijerina v. Boletto,
   207 S.W.2d 136 (Tex. Civ. App.—Austin 1947, no writ) ......................... 18
TracFone Wireless, Inc. v. Comm’n on State Emergency Commn’cs,
  397 S.W.3d 173 (Tex. 2013) .................................................................2, 12
STATUTES
Tex. Tax Code § 171.1012 (West 2008) ................................................. passim

Appellant’s Reply Brief – Page iv
RULES
Tex. R. Evid. 201............................................................................................ 9
OTHER AUTHORITIES
BLACK’S LAW DICTIONARY (10th ed. 2014) ....................................................... 8
NEW OXFORD AMERICAN DICTIONARY (3rd ed. 2010) .................................... 12
WEBSTER’S THIRD NEW INTERNATIONAL DICTIONARY (2002) ......................... 13

                                               Appendix

7.      Supplemental Stipulation of Facts (Phase Two)

Appellant’s Reply Brief – Page v
                Reply to Appellees’ Statement of the Case

      AMC refers the Court to the Statement of the Case in its Appellants’

Brief. AMC’s disagreement with the Comptroller’s description of the trial

court’s disposition of the case—which appears in both the Appellees’ Brief

and the Cross-Appellants’ Brief—is outlined in AMC’s Response to Cross-

Appellants’ Statement of the Case in AMC’s Cross-Appellee’s Brief.

                    Reply to Appellees’ Issue Presented

      AMC disagrees with the Comptroller’s Issue Presented regarding

phase two of the trial because the Comptroller improperly attempts to

narrow the issue in AMC’s appeal by asking the Court to determine that

AMC’s product is produced “in” specific equipment. (See Appellees’ Brief at

v.). The Tax Code, and not the Comptroller’s assertions, dictate the scope

and nature of the issue presented.

      The Tax Code specifically and broadly defines the term “production”

for purposes of the cost of goods sold (“COGS”) subtraction in Tax Code

§ 171.1012. 1 Under section 171.1012, AMC is permitted to include certain

direct costs of producing the goods it sells to its customers. Because the

parties agree as to the majority of the production costs, the disputed issue--

1“CR” refers to the clerk’s record. “P1, __ RR” refers to the reporter’s record from phase
one. “P1, __ RR” and “P2, __ RR” refer to the reporter’s records from phase one and
phase two, respectively. “Tab” refers to this brief’s appendix. Unless noted otherwise,
“Tax Code” and “section” refer to their respective provisions of the Texas Tax Code in
effect during the period in issue (Report Years 2008 and 2009).

Appellant’s Reply Brief – Page 1
which is the subject of AMC’s appeal of phase two--is the percentage of

movie theatre auditorium space used in the production of AMC’s film

product.

                                      Argument

    I.      The phase two trial court disregarded conclusive
            evidence that establishes AMC’s sight and sound
            production process.

         The phase two trial court’s erroneous conclusion of law no. 3 outlines

the phase two court’s sole basis for its ruling:

         Interpretations given to statutes by state agencies are entitled to
         deference when, as here, a tax [un]arguably applies and the
         court is weighing competing interpretations of the amount
         owed. The Comptroller’s interpretation of the amount owed in
         the present case is reasonable under the plain language of
         Section 171.1012, Tax Code.

(Supp. CR 29.) In a letter to the parties, Judge Naranjo—who presided over

the trial of phase two—made explicit that she ruled for the Comptroller

based only on what she believed to be the Comptroller’s interpretation in a

dispute involving the calculation of tax. 2

2In the letter enclosing its final judgment, the phase two trial court “thought it would be
helpful to the parties to explain the basis of its ruling.” (Supp. CR 33.) “In reaching its
decision the Court relied on TracFone Wireless . . . which states that the interpretations
given to statutes by state agencies are entitled to deference when, as here, ‘a tax
unarguably applies and the court is weighing competing interpretations of the amount
owed.’” (Id.) See TracFone Wireless, Inc. v. Comm’n on State Emergency Commn’cs,
397 S.W.3d 173, 183 (Tex. 2013). The trial court’s asserted support for its ruling is
reflected in erroneous conclusion of law no. 3. (Supp. CR 29.)

Appellant’s Reply Brief – Page 2
       The phase two ruling got it completely wrong. As outlined in the

Appellant’s Brief, there was no dispute over the calculation of tax in the

trial of phase two. 3 (Appellant’s Brief at 25-26.) The parties stipulated to

each side’s competing calculation of AMC’s tax refund in order to

streamline the trial of phase two. (CR 228-33.) Judge Naranjo should have

adopted one party’s stipulated refund amount calculation only if that party

prevailed on the substantive question of law raised by the Tax Code

definition, as applied to AMC’s facts. In other words, Judge Naranjo was

required to determine, under the definition of “production” in Tax Code

§ 171.1012(b), where exactly does AMC’s production process occur?

       The Comptroller’s brief strangely rejects the phase two trial court’s

only justification for her ruling. The Comptroller agrees with AMC that this

Court “need not afford any deference to the agency or the agency’s counsel”

because the Comptroller’s litigation position in this case is categorically not

formal agency policy. (Appellees’ Brief at 10 n.3.) The Comptroller urges—

and AMC agrees—that “[t]he judgment should be upheld if there exists

3 This Court has ruled on cases actually involving calculation disputes, which did not
implicate underlying substantive questions of law. See Bell Helicopter Textron, Inc. v.
Combs, No. 03-10-00764-CV, 2011 WL 6938491, *3-5 (Tex. App.—Austin Dec. 29, 2011,
no pet.) (in a taxpayer challenge to the Comptroller’s methodology for calculating the
interest on its tax refund, this Court deferred to the Comptroller’s calculations); see also
First Am. Title Ins. Co. v. Combs, 258 S.W.3d 627 (Tex. 2008) (deferring to
Comptroller’s formally-promulgated rule requiring new method of calculating
retaliatory tax). Conversely, AMC’s appeal does not challenge the Comptroller’s method
of calculating AMC’s refund; AMC vigorously challenges the Comptroller’s litigation
position interpreting the Tax Code definition of “production” as applied to AMC.

Appellant’s Reply Brief – Page 3
factually sufficient evidence supporting the trial court’s affirmative

findings. In other words, [AMC’s] appeal presents a straightforward

application of [section] 171.1012 to the record before this [C]ourt.” (Id.) In

reality, there is no evidence, much less factually sufficient evidence, in the

record supporting the Comptroller’s position. The only evidence regarding

AMC’s film production process—Huerta’s testimony—directly contradicts

the Comptroller’s unsupported assertions and conclusively establishes

AMC’s position. There is thus no basis in the record on which to affirm the

phase two court’s judgment.

         In phase one of trial, Judge Byrne ruled that AMC is entitled to

include its costs to exhibit films in its COGS subtraction when calculating

its franchise tax. (CR 97; Supp. CR 27.) The court found, based on the

evidence and testimony, that AMC’s product—the film sight and sound

experience—is “tangible personal property” as defined in Tax Code

§ 171.1012(a)(3)(A)(i). (Supp. CR 30.) AMC’s customers purchase a

product that can be seen, heard, and is perceptible to the senses. 4 The

evidence alternatively proved that AMC’s product is a film, which is

“tangible personal property” under section 171.1012(a)(3)(A)(ii).

(Appellant’s Brief at 4-6, 13-22.) This is an independent basis supporting

4   See Tex. Tax Code § 171.1012(a)(3)(A)(i).

Appellant’s Reply Brief – Page 4
Judge Byrne’s ruling and is extensively briefed in the Cross-Appellee’s

Brief. (See Cross-Appellee’s Brief at 13-22.)

         A taxpayer that sells tangible personal property in the ordinary course

of business is entitled to subtract its direct production costs as COGS. 5 Tax

Code § 171.1012(a)(2) specifically and unambiguously defines “production”

as including

         construction, installation, manufacture, development,
         mining, extraction, improvement, creation, raising, or
         growth.

(Emphasis added.) The costs at issue in AMC’s appeal are those related to

the facilities AMC used to produce its product. Only costs related to

facilities used directly in production may be subtracted under section

171.1012. The central question in phase two of trial was thus, where does

AMC produce its film product?

         The answer to this specific question determines the portion of

allowed costs specifically listed in the statute, such as facilities rent, real

estate taxes, building depreciation, utilities, and insurance.6 Therefore, the

parties stipulated to the percentages of AMC’s costs applicable to each

party’s competing theory of the case based upon square footage. This

5   See Tex. Tax Code § 171.1012(a)(1), (c), (d), & (o).
6   Tax Code §§ 171.1012(c)(7), (d)(6), (d)(8) and (o).

Appellant’s Reply Brief – Page 5
appeal involves the disputed issue of the amount of the square footage of

the movie theatre auditorium used to produce AMC’s film product.

      Huerta’s testimony, based on decades of expertise, conclusively

established that the entire movie theatre auditorium is used to produce

AMC’s product. (P2, 1 RR 37-38.) The Comptroller argued—without

support—that only the square footage occupied by the projector, screen and

speakers is used to produce the product. The Comptroller presented no

evidence or testimony. (P2, 1 RR 22.)

      What are the true facts regarding the production process as proven by

the actual evidence, Huerta’s testimony? The auditorium itself is a

production stage that is vital to the production of AMC’s film product—

premium motion picture sight and sound experience. (P2, 1 RR 37-69. 7)

The lighting and sound in this specific experience must be specifically and

meticulously calibrated to each unique auditorium space to manufacture

the quality product that AMC’s customers demand. (P2, 1 RR 52-53.) The

auditorium functions as an acoustic chamber and sound equalization and

screen brightness are frequently adjusted as part of a process that is

carefully designed to improve upon the films AMC receives from its studio

partners. (P2, 1 RR 41, 51-53, 67-68.) If any of the precise visual and

7At trial of phase two, Huerta emphatically referred to AMC’s “premium” product,
underscoring the importance of quality to the sight and sound experience sold to AMC’s
customers. (P2, 1 RR 42.)

Appellant’s Reply Brief – Page 6
acoustic elements in the auditorium is off balance, the result can be

disastrous and AMC will be unable to produce the superior sight and sound

product its customers demand. (P2, 1 RR 51-52, 67-68.)

        Huerta’s testimony conclusively proved that without the state of the

art auditorium production environment, AMC could not produce the sight

and sound experience it sells to its customers. The Comptroller offered no

evidence on this point. There is therefore nothing in the record that

contradicts Huerta’s testimony that production occurs in the entire

auditorium. The Comptroller’s appeals to “common knowledge” facts are

not evidence and wholly disregard both conclusive evidence and the Tax

Code’s definition discussed above. There is no basis for the phase two trial

court’s judgment, and AMC asks the Court to reverse the phase two ruling.

  II.     This Court should not ignore the plain language of the
          Tax Code and the evidence presented at trial in favor of
          the Comptroller’s “common knowledge” argument.

        AMC vigorously disagrees with the Comptroller’s simplistic “common

knowledge” argument. Common knowledge is not a reason to affirm a trial

judge who disregarded the evidence. The Comptroller’s simplistic and

unsupported explanations that mischaracterize AMC’s highly technical

production process are not evidence and in fact plainly disregard both

conclusive evidence in this case and the unambiguous language of the

Appellant’s Reply Brief – Page 7
“production” definition in Tax Code § 171.1012(a)(2).

  A.     AMC’s sight and sound production process is not
         “common knowledge.” The Comptroller’s common
         knowledge argument is not evidence.

       The Comptroller asks this Court to disregard conclusive evidence in

favor of the Comptroller’s unsupported factual assertions about “common

knowledge.” But common knowledge is not evidence. See Bonebrake v.

Dep’t of Revenue, 15 Or. Tax 244, 245 (2000) (ruling Taxpayer’s claim that

building costs are “common knowledge” was not evidence); People v.

McCabe, 266 N.Y.S. 363, 367 (N.Y. Sup. Ct. 1933) (holding that

prosecutor’s “common knowledge” basis for the accusations against a

defendant was not evidence). And the Comptroller’s disregard for the trial

record, which conclusively establishes the facts regarding AMC’s

production process, cannot support affirming the phase two trial court’s

erroneous judgment.

       Black’s Law Dictionary defines “common knowledge” as “[a] fact that

is so widely known that a court may accept it as true without proof.”

BLACK’S LAW DICTIONARY 334 (10th ed. 2014); see also American Tobacco

Co. v. Grinnel, 951 S.W.2d 420, 427 (Tex. 1997) (“common knowledge

encompasses only those things so patently obvious and so well known to

the community generally, that there can be no question or dispute

Appellant’s Reply Brief – Page 8
concerning their existence”) (internal quotations omitted).8 For matters

outside the layperson’s common knowledge, courts require evidence. 9 The

average layperson has no common knowledge of AMC’s sight and sound

production, as established by Huerta’s testimony during trial.

       The Comptroller’s counsel and most lay people have the knowledge of

a moviegoer, a purchaser of a movie theatre’s sight and sound experience.

(See Appellees’ Brief at 12.) Most people know that a movie theatre has

seats, that a film is projected onto a screen, and that there are speakers that

play a soundtrack.

       But a person’s superficial experience of a film’s sight and sound

imparts absolutely no knowledge of the technical, complex method by

which the sight and sound experience is produced. AMC’s film production

8 The Comptroller’s so called “common knowledge” facts are not properly in the trial
record. The Comptroller did not ask the phase two trial court to take judicial notice of
any common knowledge facts, nor did the court do so on its own. Under Tex. R. Evid.
201(b), a court may take judicial notice of an adjudicative fact only if the fact is “one not
subject to reasonable dispute in that it is either (1) generally known within the territorial
jurisdiction of the trial court or (2) capable of accurate and ready determination by
resort to sources whose accuracy cannot reasonably be questioned.” AMC’s technical
film production process is not generally known, and the Comptroller presented no
evidence to support the supposed common knowledge facts.
9 See Bioderm Skin Care, LLC v. Sok, 426 S.W.3d 753, 761 (Tex. 2014) (expert testimony

required regarding use of a medical instrument in a medical procedural because such
use “is not a matter plainly within the common knowledge of laymen”); American
Tobacco, 951 S.W.2d at 430 (“we cannot simply assume that common knowledge of the
general health risks of tobacco use naturally includes common knowledge of tobacco’s
addictive quality”); Haddock v. Arnspiger, 793 S.W.2d 948, 951 (Tex. 1990) (doctrine
of res ipsa loquitur (“the thing speaks for itself”) does not apply “when the use of the
mechanical instrument is not a matter within the common knowledge of laymen”).

Appellant’s Reply Brief – Page 9
process is highly specialized and continually evolves with technology. 10

AMC’s technology, for example, is always improving, from the

implementation of digital and multidimensional audio, to digital

projection, to improvements to screen, amplifier, and projector technology.

(P2, 1 RR 38.) A lay moviegoer has no knowledge of these technologies or

the “dozens and dozens of different technical elements” required to produce

AMC’s sight and sound product. (P2, 1 RR 49-50.)

       The phase one trial court correctly ruled that AMC’s sight and sound

product is tangible personal property that can be seen and is perceptible to

the senses. But a moviegoer who perceives AMC’s film experience

nevertheless has no insight into how AMC produces that product. (Cf.

Appellees’ Brief at 12 (“The audience perceives the movie coming from the

screens and the speakers, not the seats, floors, armrests, or the aisles. To

be sure, the auditorium can affect the quality of the sight and sound. . . . But

that doesn’t have anything to do with where the ‘good’ is ‘produced.’”).)

       The Comptroller’s belief that a person who has experienced a film in a

theatre understands how that film is produced is akin to a belief that a

person who has eaten a gourmet meal knows exactly how that meal was

prepared. Or, similarly, a belief that a person who has pumped gasoline at

10For example, Huerta has a degree in electrical engineering technology and has served
in technical roles dedicated to fixture of facilities, technical systems, digital systems,
new technology, and sight and sounds. (P2, 1 RR 37-38).

Appellant’s Reply Brief – Page 10
a gas station understands the highly technical oil and gasoline production

process. Merely experiencing a product does not give the average lay

consumer insight into the product’s production process or make the process

common knowledge.

        The production process established by Huerta’s testimony is not

within the layperson’s common knowledge. The Comptroller’s vastly

oversimplified opinion of the film sight and sound production process is

not evidence, is not properly in the record, and provides no support for the

phase two trial court’s judgment. AMC asks this Court to reverse the trial

court’s phase two ruling.

   B.     There is no support in the Tax Code for the Comptroller’s
          attempt to bifurcate AMC’s production space and
          consumption space.

        The Comptroller asks this Court to create a false dichotomy wholly

unsupported by the Tax Code: assuming that AMC’s product is produced in

one space, AMC’s customers must then consume that product in a different

space. (Appellees’ Brief at 2.)

        To that end, the Comptroller analogizes to a restaurant, in which food

production and food consumption areas are, in fact, located in two separate

areas. (Id. at 13.) But the restaurant analogy tells the Court nothing about

how AMC’s product is produced. As Huerta explained at trial, a restaurant

Appellant’s Reply Brief – Page 11
customer sitting in a dining room simply orders and consumes the food

that was produced or prepared in the kitchen. (P2, 1 RR 54-55).

Conversely, in a movie theatre auditorium, AMC is “certainly creating [the

product] not just from an ambiance perspective, but . . . from an acoustical

integrity, design and technical perspective,” often at the same time that

AMC’s customers consume11 the product in the same auditorium. (Id.)

      There is nothing in Tax Code § 171.1012 that requires a space to be

used solely for production or consumption of goods for purposes of COGS.

Huerta’s testimony established that AMC’s movie theatre auditoriums are

used for both production and consumption. Texas courts have rejected the

Comptroller’s repeated attempts to impose extra-statutory requirements on

unambiguous statutory provisions. See Combs v. Roark Amusement &

Vending, L.P., 422 S.W.3d 632, 637 (Tex. 2013) ; TracFone Wireless, 397
S.W.3d at 183. AMC asks the Court to reject the Comptroller’s attempts to

expand his taxing authority by improperly narrowing statutorily-granted

exclusions from tax.

11The plain meaning of “consumption” includes “the reception of information or
entertainment, esp. by a mass audience.” NEW OXFORD AMERICAN DICTIONARY 373 (3rd
ed. 2010).

Appellant’s Reply Brief – Page 12
      C.      Because Tax Code § 171.1012(a)(2) expressly defines
              “production” to include “improvement,” AMC’s
              improvements to the film’s sight and sound are part of
              the film production process.

           The Comptroller asks this Court to ignore that Tax Code

§ 171.1012(a)(2) explicitly defines “production” to include “improvement.”

Appellees’ Brief claims incongruously that the “quality of the auditorium,”

as well as the “quality of the sight and sound” are irrelevant to the Court’s

determination of AMC’s production space. (Appellees’ Brief at 12.) The

plain language of the Tax Code mandates the opposite conclusion.

           The ordinary meaning of “improve,” is “to enhance in value or

quality.”12 Thus, production occurs wherever improvement occurs. As

Huerta testified, AMC substantially improves, or enhances the quality of,

the film product in the movie theatre auditorium:

           Certainly, we improved on what we’re originally provided by
           our studio partners because if we did not, if you were to go to
           one of our theatres and that auditorium did not have an
           auditorium specific sound EQ or equalization, the dialogue
           would not be as intelligible, the surround coverage and the
           associate of what we call SPLs or sound pressure level, some of
           them would be too loud; some of them would be too high or hot
           as we call it. You might not have enough low frequency. . . .
           Now, on the visual side, we do it specific to the screen type. . . .
           Everything has to be combined and that combination is what
           really creates the unique auditorium specific entertainment
           experience.

12   WEBSTER’S THIRD NEW INTERNATIONAL DICTIONARY 1138 (2002) (emphasis added).

Appellant’s Reply Brief – Page 13
(P2, 1 RR 47-48.) AMC sells the resulting superior motion picture sight and

sound experience to its customers. Without the improvements performed

in the movie theatre auditorium, sound would be muddled, sight would be

distorted, and theatre fixtures could rattle. (P2, 1 RR 51-52, 68.) AMC

would have no product without improving the quality of the raw material—

the film reel rented from the movie studio—as part of its production

process.

      For the same reason, the Comptroller’s analogies to a movie viewed at

home, on a smart phone, or at a drive-in theatre are unhelpful to the Court

and were rejected by Huerta. (See Appellees’ Brief at 13.) These analogies

tell the Court nothing about AMC’s specific cutting-edge sight and sound

production in a movie theatre. In each scenario, the movie viewer does not

experience the improved film product AMC produces in its movie theatre

auditoriums. Huerta explained that these spaces lack the AMC auditorium

“controlled environment with multi dimensional surround audio” or the

“controlled acoustical environment . . . where you have audio that is

equalized specifically for that space, which basically results in the best

quality of sight and sound.” (P2, 1 RR 39-40, 54.) The production, or

improvement, that occurs in each AMC auditorium, is missing from the

Comptroller’s clumsy analogies.

Appellant’s Reply Brief – Page 14
     III. The Comptroller’s arguments regarding stipulated
          issues—the costs at issue and the Comptroller’s
          calculations—are wholly irrelevant to AMC’s appeal.

       The Appellees’ Brief wrongly brings two un-appealed and undisputed

issues before the court: (1) whether AMC can include the costs listed in Tax

Code § 171.1012(o) in its COGS subtraction; and (2) whether the

Comptroller’s calculation in phase two of the trial—specifically, his estimate

that AMC is entitled to include 1.56% of movie theatre auditorium space in

COGS—is in dispute. (Appellees’ Brief at 5-6, 9.)

       The parties entered into a pretrial stipulation (Tab 7). The parties

agreed to both the types of costs allowed and to both parties’ refund

calculations, with the sole dispute remaining as to which side’s argument

on the allowable costs is correct. (CR 228-33.) The stipulation was

accepted by the phase two trial court. (Supp. CR 28-29.) The Comptroller’s

arguments on matters not in dispute are wholly inapposite to AMC’s appeal

and should be disregarded by the Court. 13

13The Comptroller’s phase two Appellees’ Brief seeks to confuse the issues on appeal by
infusing the Comptroller’s waiver argument from his phase one Cross-Appellants’ Brief.
As outlined in AMC’s Cross-Appellee’s Brief, as the prevailing party in phase one, AMC
was not required to appeal the trial court’s favorable judgment. (Cross-Appellee’s Brief
at 15-17.) Further, the phase one trial court was not required to “set out in detail every
reason or theory” that led it to rule in AMC’s favor. H.K. Global Trading, Ltd. v. Combs,
429 S.W.3d 132, 141 (Tex. App.—Austin, pet. denied) (internal quotations omitted). The
Comptroller’s waiver argument is irrelevant to AMC’s appeal of phase two and
unavailing in the Comptroller’s appeal of phase one.

Appellant’s Reply Brief – Page 15
        Notably, AMC’s desire to streamline the trial by stipulating to the

Comptroller’s refund calculation to be used, if the trial court accepted the

Comptroller’s theory did not relieve the Comptroller from putting on

evidence to support his assertion that AMC’s film production space was

limited to the movie theatre screens, speakers, and projection room. The

parties’ stipulation does not excuse Comptroller’s failure to put on any

evidence on the disputed issue that AMC produces its film sight and sound

experience. Nor is the stipulation a legitimate reason for this Court to rule

in favor of the Comptroller’s position based on assertions about common

knowledge. This Court should decide based on the on-point testimony of

Huerta, which was the only evidence of AMC’s highly complex, technical

production process.

   A.     Comptroller’s argument regarding the costs at issue
          ignores the parties’ stipulation and contradicts Texas
          law.

        AMC is permitted to subtract the costs listed in the stipulation by Tax

Code § 171.1012(c), (d), and (o). The Comptroller agreed that AMC was

entitled to subtract as COGS 100% of some of these costs—such as film

rent. (Id.) The Comptroller agreed that AMC was entitled to subtract a

percentage of other costs, which related to AMC movie theatre facilities.

(Id.) The only disagreement was the correct percentage of facility-related

Appellant’s Reply Brief – Page 16
costs to be determined based on where the production of the movie

occurs.14 There was no dispute at trial—and there is none in AMC’s

appeal—as to the types of costs AMC may subtract as COGS.

       In the Appellees’ Brief, the Comptroller now bizarrely argues that

AMC may not subtract the costs described in Tax Code § 171.1012(o). But it

is wholly unclear which stipulated categories of costs—if any 15—the

Comptroller would seek to remove from COGS. (Appellees’ Brief at 5-6.)

       Section 171.1012(o) permits a taxpayer whose “principal business

activity” is film or television production or broadcasting or the distribution

of tangible personal property including films to subtract the costs permitted

in section 171.1012 generally as COGS. The Comptroller claims that AMC

cannot subtract the costs in subsection (o) because the phase one trial court

made no specific finding of fact on AMC’s “principal business activity.” (Id.

at 6.) 16

       The phase one trial court was not required to make a finding of fact

on AMC’s “principal business activity” because that fact would have no

14 The costs at issue are listed in bold in Joint Exhibit 1. (CR 233.)
15 Appellees’ Brief also notes that “[t]he parties agree on most of the numbers” listed in
Joint Exhibit 1. (Appellees’ Brief at 11.) In fact, the Comptroller’s position in phase two,
and the trial court’s ruling, rest wholly on the parties’ stipulation. (See CR 228-33;
Supp. CR 28-29.)
16 The Comptroller improperly makes his argument in the Appellees’ Brief Statement of

Facts section labeled “Texas Law.” Including argument in the Statement of Facts is
misleading to this Court and inappropriate under Tex. R. App. P. 38.1(g) & 38.2, which
prohibit argument in the Statement of Facts.

Appellant’s Reply Brief – Page 17
effect on the court’s ruling. A trial court is required to make only the

findings of fact that are dispositive of the ultimate, or controlling, issues.

Tijerina v. Boletto, 207 S.W.2d 136, 137 (Tex. Civ. App.—Austin 1947, no

writ) (“It is not proper or necessary for the trial court to make specific

findings on every controverted fact”); Buckeye Retirement Co. v. Bank of

America, N.A., 239 S.W.3d 394, 402 (Tex. App.—Dallas 2007) (an ultimate

or controlling fact issue “is one that is essential to the cause of action” and

“that would have a direct effect on the judgment”). A court is “not required

to set out in detail every reason or theory by which it arrived at its final

conclusions.” H.K. Global Trading, Ltd. v. Combs, 429 S.W.3d 132, 141

(Tex. App.—Austin 2014, pet. denied) (internal quotations omitted).

         The issue in phase one of trial was whether AMC was entitled to elect

to subtract its costs to exhibit films as COGS. (CR 6.) A taxpayer can elect

the COGS subtraction only if it sells “goods,” defined to include “tangible

personal property sold in the ordinary course of business.” 17 The phase one

trial court made all necessary findings—including the fact that AMC sells

tangible personal property as defined by section 171.1012(a)(3)(A)(i)— to

support its conclusion that AMC is entitled to subtract its costs to exhibit

17   Tex. Tax Code § 171.1012(a)(1).

Appellant’s Reply Brief – Page 18
films to its customers. (Supp. CR 30.) There was absolutely no need for

AMC to appeal the phase one court’s correct ruling.

  B.     The Comptroller’s argument regarding its calculations
         ignores the stipulation and is no substitute for conclusive
         trial evidence.

       A footnote in the Appellant’s Brief notes that the Comptroller’s

calculations on AMC’s refund claim, like the entirety of the Comptroller’s

litigation position on phase two of trial, is wholly unsupported by any

evidence in the record. (Appellant’s Brief at 5 n.6.) AMC disagrees with the

Comptroller’s claim that AMC had any burden to prove the Comptroller’s

litigation position. (See Appellees’ Brief at 9.) The Comptroller, not AMC,

argued that production occurs only at the screens and speakers of the movie

theatre auditorium. AMC’s trial evidence—the only evidence in the

record—conclusively proved that the entire auditorium is used in the

production of AMC’s film product. Again, the Comptroller’s arguments

regarding stipulated numbers is bizarre and irrelevant to AMC’s appeal.

                          Conclusion and Prayer

       For the reasons set forth above, AMC respectfully asks this Court to

reverse the district court’s judgment, and to render judgment that,

  1. The entire movie theatre auditorium is used in the production of the

       goods AMC sells to its customers;

Appellant’s Reply Brief – Page 19
  2. As stipulated, costs associated with the square footage of the

     auditorium, projection room, and 75% of concession space can be

     included in AMC’s COGS subtraction (or 67.67% of the total average

     movie theatre square footage); and

  3. AMC is entitled to an additional tax refund amount of $349,947.00

     for a total of $579,656 for Report Year 2008 and an additional

     $321.334.00 for a total of $591,293 for Report Years 2009, in

     addition to assessed penalty and interest and statutory interest.

                                    Respectfully submitted,

                                    Mark W. Eidman
                                    Texas Bar No. 06496500
                                    Mark.Eidman@RyanLawLLP.com
                                    Doug Sigel
                                    Texas Bar No. 18347650
                                    Doug.Sigel@RyanLawLLP.com
                                    Olga Goldberg
                                    Texas Bar No. 24083081
                                    Olga.Goldberg@RyanLawLLP.com
                                    RYAN LAW FIRM, LLP
                                    100 Congress Avenue, Suite 950
                                    Austin, Texas 78701
                                    Telephone: (512) 459-6600
                                    Facsimile: (512) 459-6601

                                    Attorneys for Appellant

Appellant’s Reply Brief – Page 20
                        Certificate of Compliance

      This computer-generated document created in Microsoft Word
complies with the typeface requirements of Tex. R. App. P. 9.4(e) because it
has been prepared in a conventional typeface no smaller than 14-point for
text and 12-point for footnotes. This document also complies with
the word-count limitations of Tex. R. App. P. 9.4(i), if applicable, because it
contains 4667 words, excluding any parts exempted by Tex. R. App. P.
9.4(i)(1). In making this certificate of compliance, I am relying on the word
count provided by the software used to prepare the document.

                                    Doug Sigel

                          Certificate of Service

     I certify that a copy of the foregoing Appellant’s Reply Brief was served
on Appellees, Glenn Hegar and Ken Paxton, through counsel of record,
Charles Eldred, Office of the Attorney General, Financial Litigation, Tax, and
Charitable Trusts Division, 300 West 15th Street, 6th Floor, Austin, Texas,
78701, charles.eldred@texasattorneygeneral.gov, by electronic service
through efile.txcourts.gov on January 15, 2015.

                                    Doug Sigel

Appellant’s Reply Brief – Page 21
         Tab 7
Supplemental Stipulation
  of Facts (Phase Two)
                                                                       2/28/2014 5:42:53 PM
                                                                             Amalia Rodriguez-Mendoza
                                                                                           District Clerk
                                                                                           Travis County
                                                                                        D-1-GN-12-003831

                                 Cause No D-1-GN-12-003831

AMERICAN MULTI-CINEMA, INC.,                  s         IN THE DISTRICT COURT
    Plaintiff,                                s
                                              s
                                              s
                                              s
SUSAN COMBS, COMPTROLLER OF                   s         TRAVIS COUNTY, TEXAS
PUBLIC ACCOUNTS OF THE STATE                  s
OF TEXAS, and GREG ABBOTT,                    s
ATTORNEY GENERAL OF THE STATE                 s
OF TEXAS,                                     s
     Defendants.                              s         2OOTH JUDICIAL DISTRICT

              SUPPLEMENTAL STIPULATION OF FACTS (PHASE TWO)

       The parties stipulate regarding the refund amount, but reserve the right to offer

other evidence not inconsistent with these stipulated facts.

       1.     Judge Byrne ruled ln Phase One that American Multi-Cinema, lnc.

("AMC") may include exhibition costs as Cost of Goods Sold ("COGS") for Report Years

2008 and 2009. Defendants do not agree with this ruling and reserve their appeal

rights, but enter into this stipulation to streamline the determination of the refund amount

based on the ruling.

       2.     The parties stipulate to the admissibility of Joint Exhibit   1. Defendants
agree that the majority of the costs claimed by AMC as COGS qualify as exhibition

costs. These agreed costs include the costs reflected on Joint Exhibit 1 (attached),

with the exception of the percentage of certain rent, real estate taxes, utilities,

depreciation, and insurance expenses ("the disputed costs") to be included. The

disagreed costs are listed on Joint Exhibit 1 in bold. Plaintiffs contend thal67.67% of

the disputed costs should be included. Defendants disagree with this percentage and

contend that only 13.42% of the disputed costs should be included.

Phase Two Stipulation of Facts                                                         Page   1

D-1-GN-'1 2-003831', American Multi-Cinema, lnc. v. Combs
American Multi-Cinema, Inc.
Texas Franchise Tax Taxpayer No. 1-43-0908577-8
Summary

FOR REPORT YEAR:                                  2008       2009       TOTAL

Tax Refund Request -Comptroller's                 $229,709   $269,959    $499,668

Tax Refund Request - AMC's                        $579,656   $591,293   $1,170,949

Plus Penalty, Assessed Interest and Judgment      TBD        TBD        TBD
Interest

                                                                                     Joint Exhibit 1
American Multi-Cinema, Inc.                                                                                              PAGE 1 OF 1
Kansas City, MO
TAX ADJUSTMENT SUMMARY                                                                                          TP#:     14309085778
                               FOR REPORT YEAR:          2008
                                                                             FROM:
                                                                                                     Adjusted            Verification
                                                                         Prior Data Per
               Original Audit Results                                                                Amounts            Results - From:
                                                                        Last Report/Audit/
                                                                                                  per Verification      Col. C or Col. D
                                                                          Refund/FVAR
                        (A)                              (B)                   (C)                     (D)                   (E)

                                                                                                                       AMC's Calculation         Comptroller's Calculation

                                                        REPORT TYPE:         Annual                                         Annual                       Annual
                                                        REPORT YEAR:          2008                                           2008                         2008
REVENUE                                              COL.D & COL.E
ACCOUNTING YEAR ENDING                             FORWARDED FROM           3/29/2007                                      3/29/2007                     3/29/2007
1. GROSS RECEIPTS OR SALES                             Col. C                   2,273,966,201                                  2,273,966,201                 2,273,966,201
2. DIVIDENDS                                           Col. C                               0                                              0                             0
3. INTEREST                                            Col. C                     189,656,324                                    189,656,324                   189,656,324
4. RENTS                                               Col. C                          84,023                                         84,023                        84,023
5. ROYALTIES                                           Col. C                               0                                              0                             0
6. GAINS/LOSSES                                        Col. C                       5,570,498                                      5,570,498                     5,570,498
7. OTHER INCOME                                        Col. C                     245,111,359                                    245,111,359                   245,111,359
8. TOTAL GROSS REVENUE                               SUM #1 - #7                2,714,388,405                                  2,714,388,405                 2,714,388,405
9. DEDUCTIONS FROM GROSS REVENUE                       Exam 2                      72,707,860              2,697,127               2,697,127                     2,697,127
10. TOTAL REVENUE                                      #8 - #9                 $2,641,680,545                                 $2,711,691,278                $2,711,691,278
COST OF GOODS SOLD
11. COST OF GOODS SOLD                                Exam 1                    1,648,143,233          1,505,303,861           1,505,303,861                 1,082,151,986
12. INDIRECT OR ADMIN COSTS                            Col. C                       9,117,635                                      9,117,635                     9,117,635
13. OTHER                                              Col. C                               0                                              0                             0
14. TOTAL COST OF GOODS SOLD                        SUM #11 - #13              $1,657,260,868                                 $1,514,421,496                $1,091,269,621
COMPENSATION
15. WAGES AND CASH COMPENSATION                        Col. C                     251,518,643                                    251,518,643                  251,518,643
16. EMPLOYEE BENEFITS                                  Col. C                      12,009,024                                     12,009,024                   12,009,024
17. OTHER                                              Col. C                               0                                              0                            0
18. TOTAL COMPENSATION                              SUM #15 - #17                $263,527,667                                   $263,527,667                 $263,527,667
MARGIN
19. REVENUE (#10 X 70%)                             #10 X 70%                   1,849,176,382                                  1,898,183,895                 1,898,183,895
20. REVENUE (#10 - COGS)                             #10 - #14                    984,419,677                                  1,197,269,782                 1,620,421,657
21. REVENUE (#10 - COMPENSATION)                     #10 - #18                  2,378,152,878                                  2,448,163,611                 2,448,163,611
22. MARGIN                                        LOWEST 19,20,21                $984,419,677                                 $1,197,269,782                $1,620,421,657
APPORTIONMENT FACTOR
23. GROSS RECEIPTS IN TEXAS                             Col. C                    226,143,616                                    226,143,616                   226,143,616
24 GROSS RECEIPTS EVERYWHERE                            Col. C                  2,735,517,882                                  2,735,517,882                 2,735,517,882
25. APPORTIONMENT FACTOR                               #23 / #24                       0.0827                                         0.0827                        0.0827
TAXABLE MARGIN
26. APPORTIONED MARGIN                                #22 X #25                    81,411,507                                     99,014,211                  134,008,871
27. ALLOWABLE DEDUCTIONS                                Col. C                              0                                              0                            0
28. TAXABLE MARGIN                                    # 26 - # 27                 $81,411,507                                    $99,014,211                 $134,008,871
TAX DUE
29. TAX RATE                                             Col. C                          0.0100                                         0.0100                      0.0100
30. TAX DUE                                            #28 X #29                     814,115.07                                     990,142.11                1,340,088.71
TAX ADJUSTMENTS
31. TAX CREDITS                                         Exam 3                        16,321.54            21,304.95                 21,304.95                   21,304.95
32. TAX DUE BEFORE DISCOUNT                            #30 - #31                     797,793.53                                     968,837.16                1,318,783.76
33. DISCOUNT                                                                               0.00                                           0.00                        0.00
34. TAX DUE                                             #32 - #33                 $797,793.53                                    $968,837.16                 $1,318,783.76
35. LESS TAX PAID                                     Tax Reports                  797,749.67                                   1,548,493.13                  1,548,493.13
36. TAX ADJUSTMENT                                 #34 - REPORTED                      $43.86                                   ($579,655.97)                 ($229,709.37)
37. OTHER REFUNDS ISSUED                             Other Refunds                       0.00                                           0.00                          0.00
38. OTHER FVAR REFUNDS OR ASSESSMENTS                Other FVARs                         0.00                                           0.00                          0.00
39. OTHER BART REFUNDS OR ASSESSMENTS                Other BARTs                         0.00                                           0.00                          0.00
40. OTHER AUDIT ADJUSTMENTS                            Per Audit                         0.00                                           0.00                          0.00
41. NET TAX ADJUSTMENT                            #36-#37-#38-#39-#40                  $43.86                                   ($579,655.97)                 ($229,709.37)

                                                                                                                                                 Joint Exhibit 1
American Multi-Cinema, Inc.                                                                                                 PAGE 1 OF 1
Kansas City, MO                                                         Original Audit                   Preparer/Date:     KJ - 10/07/09
TAX ADJUSTMENT SUMMARY                                                                                            TP#:      14309085778
                              FOR REPORT YEAR:         2009
                                                                            FROM:
                                                                                                        Adjusted            Verification
                                                                         Prior Data Per
             Original Audit Results                                                                     Amounts            Results - From:
                                                                       Last Report/Audit/
                                                                                                     per Verification      Col. C or Col. D
                                                                         Refund/FVAR
                     (A)                                (B)                   (C)                         (D)                   (E)
                                                                                                                          AMC's Calculation         Comptroller's Calculation
                                                        REPORT TYPE:        Annual                                             Annual                       Annual

                                                       REPORT YEAR:          2009                                               2009                         2009

REVENUE                                             COL.D & COL.E
ACCOUNTING YEAR ENDING                            FORWARDED FROM            4/3/2008                                          4/3/2008                      4/3/2008
1. GROSS RECEIPTS OR SALES                            Col. C                    2,282,273,284                                     2,282,273,284                 2,282,273,284
2. DIVIDENDS                                          Col. C                          574,130                                           574,130                       574,130
3. INTEREST                                           Col. C                      188,097,438                                       188,097,438                   188,097,438
4. RENTS                                              Col. C                                0                                                 0                             0
5. ROYALTIES                                          Col. C                          216,626                                           216,626                       216,626
6. GAINS/LOSSES                                       Col. C                      (13,370,666)                                      (13,370,666)                  (13,370,666)
7. OTHER INCOME                                       Col. C                       73,894,886                                        73,894,886                    73,894,886
8. TOTAL GROSS REVENUE                              SUM #1 - #7                 2,531,685,698                                     2,531,685,698                 2,531,685,698
9. DEDUCTIONS FROM GROSS REVENUE                      Col. C                          130,697                                           130,697                       130,697
10. TOTAL REVENUE                                     #8 - #9                  $2,531,555,001                                    $2,531,555,001                $2,531,555,001
COST OF GOODS SOLD
11. COST OF GOODS SOLD                               Exam 1                    1,660,610,572              1,514,869,422           1,514,869,422                1,099,171,074
12. INDIRECT OR ADMIN COSTS                           Col. C                       9,530,393                                          9,530,393                    9,530,393
13. OTHER                                             Col. C                               0                                                  0                            0
14. TOTAL COST OF GOODS SOLD                       SUM #11 - #13              $1,670,140,965                                     $1,524,399,815               $1,108,701,467
COMPENSATION
15. WAGES AND CASH COMPENSATION                       Col. C                     208,369,216                                        208,369,216                  208,369,216
16. EMPLOYEE BENEFITS                                 Col. C                       3,398,514                                          3,398,514                    3,398,514
17. OTHER                                             Col. C                               0                                                  0                            0
18. TOTAL COMPENSATION                             SUM #15 - #17                $211,767,730                                       $211,767,730                 $211,767,730
MARGIN
19. REVENUE (#10 X 70%)                            #10 X 70%                   1,772,088,501                                      1,772,088,501                1,772,088,501
20. REVENUE (#10 - COGS)                            #10 - #14                    861,414,036                                      1,007,155,186                1,422,853,534
21. REVENUE (#10 - COMPENSATION)                    #10 - #18                  2,319,787,271                                      2,319,787,271                2,319,787,271
22. MARGIN                                       LOWEST 19,20,21                $861,414,036                                     $1,007,155,186               $1,422,853,534
APPORTIONMENT FACTOR
23. GROSS RECEIPTS IN TEXAS                            Col. C                    195,814,649                                        195,814,649                   195,814,649
24 GROSS RECEIPTS EVERYWHERE                           Col. C                  2,531,685,697                                      2,531,685,697                 2,531,685,697
25. APPORTIONMENT FACTOR                              #23 / #24                       0.0773                                             0.0773                        0.0773
TAXABLE MARGIN
26. APPORTIONED MARGIN                               #22 X #25                    66,587,305                                         77,853,096                  109,986,578
27. ALLOWABLE DEDUCTIONS                               Col. C                              0                                                  0                            0
28. TAXABLE MARGIN                                   # 26 - # 27                 $66,587,305                                        $77,853,096                 $109,986,578
TAX DUE
29. TAX RATE                                           Col. C                           0.0100                                             0.0100                      0.0100
30. TAX DUE                                          #28 X #29                      665,873.05                                         778,530.96                1,099,865.78
TAX ADJUSTMENTS
31. TAX CREDITS                                        Exam 3                      16,321.54     $            20,911.35               20,911.35                     20,911.35
32. TAX DUE BEFORE DISCOUNT                           #30 - #31                   649,551.51                                         757,619.61                  1,078,954.43
33. DISCOUNT                                                                            0.00                                               0.00                          0.00
34. TAX DUE                                            #32 - #33                 $649,551.51                                        $757,619.61                 $1,078,954.43
35. LESS TAX PAID                                    Tax Reports                  649,507.99                                       1,348,913.06                  1,348,913.06
36. TAX ADJUSTMENT                                #34 - REPORTED                      $43.52                                       ($591,293.45)                 ($269,958.63)
37. OTHER REFUNDS ISSUED                            Other Refunds                       0.00                                               0.00                          0.00
38. OTHER FVAR REFUNDS OR ASSESSMENTS               Other FVARs                         0.00                                               0.00                          0.00
39. OTHER BART REFUNDS OR ASSESSMENTS               Other BARTs                         0.00                                               0.00                          0.00
40. OTHER AUDIT ADJUSTMENTS                           Per Audit                         0.00                                               0.00                          0.00
41. NET TAX ADJUSTMENT                           #36-#37-#38-#39-#40                  $43.52                                       ($591,293.45)                 ($269,958.63)

                                                                                                                                                                  Joint Exhibit 1
AMC ENTERTAINMENT, INC.                                                                                                                AMC ENTERTAINMENT, INC.
TEXAS FRANCHISE TAX AUDIT                                                                                                              TEXAS FRANCHISE TAX AUDIT
COST OF GOODS SOLD SUMMARY                                                                                                             COST OF GOODS SOLD SUMMARY
REPORT YEAR 2008                                                                                                                       REPORT YEAR 2009

ACCOUNT                ACCOUNT DESCRIPTION                      Stipulated Total               AMC             Comptroller            ACCOUNT           ACCOUNT DESCRIPTION       Stipulated Total                       AMC             Comptroller
  60001       FILM RENT ESTIMATES                                   829,788,277               829,788,277        829,788,277            60001        FILM RENT ESTIMATES              840,563,482                       840,563,482        840,563,482
  82001       BASE RENT (excludes HQ)                               400,927,789               271,307,835         53,804,509            82001        BASE RENT (excludes HQ)          409,177,901                       276,890,685         54,911,674
  80401       DEPR EXP - FF & E                                     111,245,459                75,279,802         14,929,141            80401        DEPR EXP - FF & E                105,691,205                        71,521,239         14,183,760
  83004       REAL ESTATE TAX EXPENSE                                 75,664,772               51,202,351         10,154,212            83004        REAL ESTATE TAX EXPENSE            77,863,009                       52,689,898         10,449,216
  63001       UTILITIES                                               72,330,866               48,946,297          9,706,802            63001        UTILITIES                          75,677,010                       51,210,633         10,155,855
  61001       CONCESSIONS MDSE COSTS                                  68,241,492    *          68,241,492         68,241,492            61001        CONCESSIONS MDSE COSTS             71,332,206 *                     71,332,206         71,332,206
  80901       DEPR EXP - L/I                                          62,385,700               42,216,403          8,372,161            80901        DEPR EXP - L/I                     60,094,001                       40,665,610          8,064,615
  62001       HOURLY WAGES                                            37,427,506    *          37,427,506         37,427,506            62001        HOURLY WAGES                       38,152,292 *                     38,152,292         38,152,292
  64501       MAINTENANCE EXPENSE                                     22,828,015               15,447,718          3,063,520            64501        MAINTENANCE EXPENSE                23,018,665                       15,576,730          3,089,105
  60501       NEWSPAPER SUSTAINING                                              -   (1)               -                    -            60501        NEWSPAPER SUSTAINING                        0 (1)                            0                  0
  82002       PERCENTAGE RENT                                          7,412,273                5,015,885            994,727            82002        PERCENTAGE RENT                     7,273,236                        4,921,799            976,068
  81401       DEPR EXP - BLDGS                                         6,346,752                4,294,847            851,734            81401        DEPR EXP - BLDGS                    7,453,921                        5,044,068          1,000,316
  83005       PERSONAL PROP. TAX EXPENSE                               5,508,574                5,508,574          5,508,574            83005        PERSONAL PROP. TAX EXPENSE          4,835,928                        4,835,928          4,835,928
  60101       FILM TAXES                                               5,227,983                5,227,983          5,227,983            60101        FILM TAXES                          5,687,074                        5,687,074          5,687,074
  84006       PROPERTY INSURANCE                                       4,989,523                3,376,410            669,594            84006        PROPERTY INSURANCE                  4,751,824                        3,215,559            637,695
  60002       FILM RENT BUYER ADJST                                    3,801,473                3,801,473          3,801,473            60002        FILM RENT BUYER ADJST              14,033,702                       14,033,702         14,033,702
  60509       OTHER ADVERTISING                                        3,273,708                3,273,708          3,273,708            60509        OTHER ADVERTISING                   1,683,048                        1,683,048          1,683,048
  82003      SPACE RENT SALES TAX                                      3,047,699                2,062,378            409,001            82003       SPACE RENT SALES TAX                 3,132,739                        2,119,925            420,414
  67001      FILM FREIGHT                                              2,414,505                2,414,505          2,414,505            67001       FILM FREIGHT                         2,495,334                        2,495,334          2,495,334
  60503      PRE-ENTERTAINMENT EXPENSE                                 1,828,538                1,828,538          1,828,538            60503        PRE-ENTERTAINMENT EXPENSE          16,314,311                       16,314,311         16,314,311
  81601       DEPR-CAP LEASES BLDG                                     1,461,545                  989,027            196,139            81601        DEPR-CAP LEASES BLDG                1,353,777                          916,101            181,677
  62004       SALARIES 10500 FILM PROGRAMMING                          1,428,179                1,428,179          1,428,179            62004        SALARIES 10500 FILM PROGRAMM        1,508,073                        1,508,073          1,508,073
  62004       SALARIES 95400 FILM PROGRAMMING KC                         866,120                  866,120            866,120            62004        SALARIES 96300 FOOD AND BEVE          725,737                          725,737            725,737
  62004      SALARIES 10910 PROCUREMENT                                  139,137                  139,137            139,137            62004        SALARIES 95400 FILM PROGRAMM          707,862                          707,862            707,862
  62012       OVERTIME PAY                                               703,605    *             703,605            703,605            62012        OVERTIME PAY                          676,625                          676,625            676,625
  60502       COOP AND MULTIPLES ADV                                     612,955                  612,955            612,955            82004       SPACE RENT INSURANCE                   258,363                          174,834             34,672
  62004       SALARIES 96300 FOOD AND BEVERAGE                           451,898                  451,898            451,898            82006       MERCHANT'S ASSOCIATION RENT            233,011                          157,678             31,270

   82004  SPACE RENT INSURANCE                                           240,542                  162,775               32,281          62004 SALARIES 10910 PROCUREMENT                           175,253                  175,253              175,253
   82006  MERCHANT'S ASSOCIATION RENT                                    244,919                  165,737               32,868          64503   MAINTENANCE - LABOR                                 64,621                   43,729                8,672
   60102   FILM RENT - FOUR WALLS                                        178,389                  120,716               23,940          60506   ADVERTISING ACCESSORIES                              5,733                    5,733                5,733
   62014   ACCR HOURLY PAY                                               134,811 *                134,811              134,811          61003   COST OF T-SHIRTS & MDSE.                            (3,224) *                (3,224)              (3,224)
   64503   MAINTENANCE - LABOR                                            84,886                   57,442               11,392          60102   FILM RENT - FOUR WALLS                             (34,544)                 (23,376)              (4,636)
   60506   ADVERTISING ACCESSORIES                                        33,945                   33,945               33,945          60507   PREOPENING ADVERTISING                           1,928,637                1,928,637            1,928,637
   61003   COST OF T-SHIRTS & MDSE.                                        7,249 *                  7,249                7,249          62014   ACCR HOURLY PAY                                   (676,100) *              (676,100)            (676,100)
   61004   SALES TAX ON CONC/MDSE/ADM                                        144                      144                  144          60004   H.O. FILM RENT ADJUSTMENT                       (3,807,559)              (3,807,559)          (3,807,559)
   60003   FILM RENT SETTLMENT ADJST                                    (310,826)                (310,826)            (310,826)         82301   CAP LEASE CONTRA - BLDG                         (9,744,504)              (6,594,106)          (1,307,712)
   60507   PREOPENING ADVERTISING                                       (566,963)                (566,963)            (566,963)        TOTAL DIRECT COGS                                     1,762,602,649           1,514,869,422        1,099,171,074
   60004   H.O. FILM RENT ADJUSTMENT                                  (1,326,230)              (1,326,230)          (1,326,230)                 Indirect COGS                                    9,530,393                9,530,393            9,530,393
   82301   CAP LEASE CONTRA - BLDG                                    (7,961,874)              (5,387,800)          (1,068,483)        TOTAL COGS                                            1,772,133,042           1,524,399,815        1,108,701,467
DIRECT COGS FOR FEDERAL GROUP                                      1,721,113,334            1,474,943,903        1,061,869,617
   60001   LOEKS FILM RENT ESTIMATES                                  17,614,418               17,614,418           17,614,418
   60002   LOEKS FILM RENT BUYER ADJUSTMENT                              280,708                  280,708              280,708                  *   Agreed in Audit.
   60003   LOEKS FILEM RENT SETTLEMENT ADJUSTME                           22,248                   22,248               22,248                (1)   Agreed by AMC to withdraw.
   60004   LOEKS HO FILM RENT ADJUSTMENT                                 (58,772)                 (58,772)             (58,772)                     Note: Amounts in bold adjusted to reflect 67.67% of the total for AMC and 12.86% of the total for the Comptroller's
   67001   LOEKS FILM FREIGHT                                             59,276                   59,276               59,276
           LOEKS-STAR COGS                                            18,386,407               12,442,082            2,364,492
TOTAL DIRECT COGS                                                  1,757,417,618            1,505,303,861        1,082,151,986
           Indirect COGS                                               9,117,635                9,117,635            9,117,635
TOTAL COGS                                                         1,766,535,253            1,514,421,496        1,091,269,621

         *   Agreed in Audit.
       (1)   Agreed by AMC to withdraw.
             Note: Amounts in bold adjusted to reflect 67.67% of the total for AMC and 13.42% of the total for the Comptroller's positions.

                                                                                                                                                                                                                                                    Joint Exhibit 1