In Chief Counsel Advice (CCA) 201630015, released on July 22, 2016, the IRS Office of Chief Counsel (IRS) clarified that a professional sports team (Taxpayer) did not contract with a television network (Network) for purposes of Treas. Reg. sections 1.199-3(f)(1) and 1.199-3(k)(8) to produce game broadcasts (potentially qualified film), so no benefits and burdens of ownership analysis of the game broadcasts was required under Section 199. This CCA is a follow up to CCA 201545018, and uses the same facts and terms.

Background

In CCA 201545018, {link to Tax Alert 2015-2144} released on November 6, 2015, the IRS determined that Taxpayer's share of gross receipts from game broadcasts did not qualify as domestic production gross receipts (DPGR) because Taxpayer did not have the benefits and burdens of ownership of the game broadcasts during the period in which the production occurred. In its analysis, the IRS noted that a determination was necessary on whether Taxpayer had in fact entered into a contract with the Network for purposes of Section 199. The IRS indicated that the extent to which Taxpayer had transferred the valuable rights to the game broadcasts to the Network was significant:

"If a taxpayer gives up all of its potential for profit from a property to the producing party before the other produces the property, then it favors concluding that the producing party is not doing the production pursuant to the contract, but on its own behalf. In that case, our Office would conclude that Network's activities were not done pursuant to a contract with Taxpayer within the meaning of Section 1.199-3(f)(1). This is a determination that LB&I must make based on the Contract with Network, and any other relevant contracts of Taxpayer. However, to the extent Taxpayer maintains an interest in the Game Broadcasts at issue, in our view it favors treating Network's activities as done pursuant to the Contract with Taxpayer."

Without deciding whether the Network's activities were done pursuant to a contract with Taxpayer, the IRS found that the Network, and not the Taxpayer, had the benefits and burdens of ownership of the game broadcasts during the period in which the production activity occurred.

Because the IRS did not make a determination that the game broadcasts were produced pursuant to a contract with Taxpayer, Division Counsel for the Large Business and International (LB&I) Division requested clarification from the IRS with respect to whether the Taxpayer had in fact entered into a contract with the Network for purposes of Section 199 to produce the game broadcasts on Taxpayer's behalf.

IRS's Analysis

In determining that the Network entered into the Contract to make the game broadcasts for itself, rather than on behalf of the Taxpayer, the IRS examined which party controlled the aspects of the creative production of the game broadcasts. The IRS stated that the Network had "editorial control over how to film the game, and how to incorporate that film into coherent and complex broadcasts that were consistent with Network standards," and that the Network "provided and controlled all equipment essential to the Game Broadcasts and a game day staff of employees and freelance contractors."

The IRS found that the Network's "activities were part of creating a unique game broadcast, which involved a much different experience than simply recording a game broadcast for the Taxpayer." The IRS further noted "all of these activities were largely within the discretion of the Network." The IRS also pointed out that the Network is in the business of producing programming, based on events like those of the Taxpayer, for its own stations.

As such, the IRS concluded the Network produced the game broadcasts on its own behalf and not pursuant to a contract under Treas. Reg. sections 1.199-3(f)(1) and 1.199-3(k)(8). "Therefore, all gross receipts that the Taxpayer derived from the Contract were non-DPGR, as the gross receipts could not be considered derived from a disposition of qualified film produced by … Taxpayer." The IRS did state, however, that, "if the IRS were to determine that Network produced the Game Broadcasts pursuant to a contract for purposes of Section 1.199-3(f)(1) and 1.199-3(k)(8) then a benefits and burdens of ownership analysis would be required."

Implications

Despite finding against the sports team in this case, this latest CCA leaves open the possibility that a sports team could still claim the Section 199 deduction. Accordingly, sports businesses entering broadcasting agreements should evaluate each party's activities under the agreement to determine whether the property being produced is for their benefit, or the network's. Although it is unclear whether the IRS will evaluate if a contractor produces a product under a contract on its own behalf or a taxpayer's in other circumstances, this CCA could indicate a new area of focus for LBI.

———————————————