Sports team’s broadcasting-related revenue not qualified domestic production gross receipts

Sport team revenue not part of domestic production gross receiptsIn a recent Chief Counsel Advice memorandum (CCA 201545018), the IRS contemplated whether a professional sports team’s share of gross receipts from a contract with a television broadcaster qualifies as domestic production gross receipts (DPGR). The IRS focused on determining which party had the benefits and burdens of ownership of the broadcasts, which can be considered qualified film under Section 199(c)(6). The conclusion was that the professional sports team’s share of gross receipts did not qualify as DPGR.

The taxpayer, a professional sports team that’s a member of league with other sports teams as members, sold rights to broadcast games to a television network. The network was then required to produce a specified number of game broadcasts per week. The contract identified minimum production requirements, including specifics regarding camera setups, video and audio formatting, overall presentation including audio commentary, and graphics. The league employed its own broadcasting group to oversee the creation of and compliance with these standards.

The CCA acknowledged that while the taxpayer’s primary activity of playing the game is the primary subject of the game broadcasts, the “playing of games is not television programming any more than a newsworthy event, and that the broadcasts contain more content than just the game.” Thus, the taxpayer was not the producer of the broadcast for purposes of Treas. Reg. Secs. 1.99-3(k)(6) or (k)(7). The taxpayer then needed to show that the broadcasts were produced pursuant to a contract with the taxpayer and that it had the benefits of burdens of ownership. Although the contract could be interpreted as saying that the network produced the broadcasts on its own behalf, the CCA’s discussion moved past this and applied the nine factors used in a similar analysis in ADVO Inc. v. Commissioner, 141 T.C. 298 (2013). Some of the factors were given more emphasis.

Factors such as the party that controlled the property or process and the contributions of the team and the league — such as providing film standards, monitoring of all games, providing certain statistics to the network, providing some input in the announcers’ dialogue, and determining the game start times —  were enumerated and seen as minor compared with the network’s activities. The network’s activities, ranging from setup of video equipment to the editing of the film, were presented in contrast, to support the conclusion that the network controlled the broadcasts from a creative and personnel perspective.

The CCA also analyzed who bore the risk of loss or damage to property during production and who received profits from the operation and sale of the property. The network was responsible for all costs and was able to profit further if it found efficiencies in the production process, and this factor wass found to be in its favor.

The CCA ultimately determined that the taxpayer’s share of gross receipts didn’t qualify as DPGR.  The facts presented carefully describe a particular national broadcasting business model, and different leagues and teams may exert different levels of control and involvement in their broadcast activities. The specific facts and circumstances should be carefully analyzed to determine if revenue would qualify as DPGR.

Additionally, proposed regulations under Section 199 (REG-136459-09) remove the benefits and burdens of ownership rule, and provide that if a qualifying activity is performed under a contract, the party that performs the activity is the taxpayer for purposes of Section 199(c)(4)(A)(i). If the proposed regulations become final, taxpayers should revisit this issue, because the CCA’s analysis will likely be obsolete.

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