PLR 1132016: Sports programming business is not predominantly an intangible property business

Plain-English summary

The IRS ruled that a corporation producing and transmitting sports programming was not conducting a trade or business consisting predominantly of developing or holding intangibles for sale or license. The corporation acquired or created intangible rights, including sports broadcast licenses and its own programming, but its primary income came from advertising. The IRS noted that advertising represented at least 80 percent of gross revenue in the prior year and was projected to represent at least 80 percent in the current year, while projected license fees were less than 9 percent of projected gross revenue. The ruling addressed the intangible-property limitation used in determining whether the business could be a qualified business for the new markets tax credit, but expressed no opinion on whether the other requirements for that credit were satisfied.

Ruling snapshot

• Question: Did the taxpayer's sports programming business consist predominantly of developing or holding intangibles for sale or license under section 1397C(d)(4)?
• Outcome: approved
• Key authorities: IRC §§ 45D and 1397C

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201132016 Third Party Communication: None
Release Date: 8/12/2011 Date of Communication: Not Applicable
Index Number: 1397C.00-00 Person To Contact:
---------------------, ID No. -----------------
Telephone Number:
------------------------------------- ---------------------
------------------------- Refer Reply To:
------------------- CC:ITA:B07
--------------------------------- PLR-147079-10
Date:
May 17, 2011

Re: Request for Private Letter Ruling Regarding § 1397C(d)

Taxpayer = ---------------------------------------------------
State 1 = -------------
State 2 = ------------
Location = ------------------------
Year 1 = -------
Year 2 = -------
Year 3 = -------
B = -------
C = ---------------
D = ---------
E = ------------------------------
F = ------------------------------
G = --------------------------
H = ---
I = ---
J = ------------
K = ----

Dear ------------------:

   This letter is in response to your letter dated November 8, 2010, and subsequent

correspondence, submitted on behalf of Taxpayer, requesting a letter ruling under §
1397C(d)(4) of the Internal Revenue Code.
PLR-147079-10 2

                                    FACTS

  Taxpayer represents that the facts are as follows:

 Taxpayer is a C-corporation incorporated under the laws of State 1, and is

headquartered in Location.

   Taxpayer produces and transmits sports programming in State 2. Taxpayer

primarily provides live transmissions of B, C, and D sports, and E games on television
and the internet.

    In Year 1, Taxpayer was founded and began providing live transmissions of State

2 C sports on the internet. Beginning in Year 2, Taxpayer began providing sports
programming on digital channels of several local television stations for broadcast to
television viewers in State 2. Taxpayer pays each television station a fee for access
and use of a 24-hour, 7-day a week digital channel. Taxpayer has not acquired any
licensing rights or ownership in these television stations.

   Taxpayer does not have any affiliation agreements with any cable operator to

provide programming. The local television stations on which Taxpayer has purchased
access and use of a digital channel have contracts with cable operators to retransmit
the local television station’s programming to the cable operators for distribution to
subscribers, including Taxpayer’s programming. Taxpayer is not a party to these
contracts, and does not share in any revenue the television stations receive from the
cable operators, including subscriber fees.

  Taxpayer also uploads its programming to satellite. As a result, a cable operator

may pull down Taxpayer’s programming from the satellite. Taxpayer does not receive
any payment from the satellite or cable operators.

   Most of the sports programming produced by Taxpayer is live sports events for

which Taxpayer obtains the rights to broadcast. Taxpayer also has acquired from the F
the rights to broadcast certain of its G games.

   Taxpayer currently has one primary source of income and it is advertising

revenue. Taxpayer’s advertising revenue is derived primarily from sales of local spot
advertising and infomercial advertising. Taxpayer generally retains this advertising
revenue. However, in some cases where Taxpayer does not pay a fee for the right to
broadcast a sports event, the advertising revenue from that event is split between
Taxpayer and the party of the event. For the Year 3 taxable year, Taxpayer earned
approximately H percent of its gross revenue from advertising. For the current taxable
year, Taxpayer projects that it will earn approximately I percent of its gross revenue
from advertising.
PLR-147079-10 3

   Taxpayer currently does not receive any income, including subscriber fees, from

the local television stations, cable operators, or satellite operators for Taxpayer’s
programming. Although Taxpayer projects receiving $J in license fees during its current
taxable year, which is approximately K percent of its projected gross revenue for the
current taxable year, there is not currently any licenses in place or contracts in place for
license fees. For prior taxable years, Taxpayer did not receive any income, including
subscriber fees, from the local television stations, cable operators, or satellite operators
for Taxpayer’s programming.

                             RULING REQUESTED

   Taxpayer requests that the Service issue the following ruling:

   The trade or business currently conducted by Taxpayer does not constitute a

trade or business consisting predominantly of the development or holding of intangibles
for sale or license pursuant to § 1397C(d)(4) for purposes of determining whether
Taxpayer’s trade or business is a qualified business under § 45D(d)(3).

                             LAW AND ANALYSIS

    Section 45D provides the rules for the new markets tax credit. For purposes of §

45D(d), the term “qualified business” is defined in § 45D(d)(3) as having the meaning
given to such term by § 1397C(d); except that (A) in lieu of applying § 1397C(d)(2)(B),
the rental of others of real property located in any low-income community is treated as a
qualified business if there are substantial improvements located on such property, and
(B) § 1397C(d)(3) does not apply.

   Section 1397C(d)(1) provides that except as otherwise provided in § 1397C(d),

the term "qualified business" means any trade or business.

   Section 1397C(d)(4) provides that the term "qualified business" shall not include

any trade or business consisting predominantly of the development or holding of
intangibles for sale or license.

    Taxpayer's trade or business is the production and transmission of sports

programming, which extensively involves the use of intangibles. Taxpayer acquires or
creates intangibles (e.g., licenses from third parties for the rights to broadcast their
sports events and from its own self-created programming). In the cases where
Taxpayer does not pay a fee for the right to broadcast the sports event but Taxpayer
splits the advertising revenue from that event with the party of the event, we view the
portion of the advertising revenue provided by Taxpayer to the party to be in the nature
of a license fee paid by Taxpayer for its right to broadcast the event.
PLR-147079-10 4

    Currently, Taxpayer receives advertising revenue related to its sports

programming or to infomercials. For the Year 3 taxable year, Taxpayer’s advertising
revenue was at least 80 percent of its gross revenue. For the current taxable year,
Taxpayer estimates that its advertising revenue also will be at least 80 percent of its
projected gross revenue. Taxpayer currently does not receive any subscriber fees or
other revenue from the local television stations, cable operators, or satellite operators
for Taxpayer’s programming. While the local television stations on which Taxpayer has
purchased access and use of a digital channel may sell or otherwise exploit Taxpayer’s
programming to cable operators, without Taxpayer’s permission, Taxpayer is not a party
to these contracts or arrangements between the local television stations and cable
operators. Although Taxpayer projects that it will receive license fees during the current
taxable year, the projected amount of $J is less than 9 percent of Taxpayer’s projected
gross revenue for the current taxable year. Accordingly, Taxpayer has demonstrated
that its trade or business does not consist predominantly of developing or holding
intangibles for sale or license.

                              CONCLUSION

   Based solely on the facts and representations submitted and the relevant law

and analysis as set forth above, we conclude that Taxpayer’s trade or business of
producing and transmitting sports programming, as currently conducted by Taxpayer,
does not constitute a trade or business consisting predominantly of the development or
holding of intangibles for sale or license pursuant to § 1397C(d)(4).

   Except as set forth above, we express no opinion concerning the Federal income

tax consequences of the facts described above under any other provisions of the Code.
Specifically, no opinion is expressed or implied on whether the requirements of the new
markets tax credit under § 45D are satisfied, whether Taxpayer is a qualified active low-
income community business under § 45D(d)(2), or whether Taxpayer satisfies §
1397C(d)(2) (as modified by § 45D(d)(3)) or § 1397C(d)(5).

  In accordance with the power of attorney, we are sending a copy of this letter to

Taxpayer’s authorized representative. We are also sending a copy of this letter to the
appropriate operating division director.
PLR-147079-10 5

  This letter ruling is directed only to the taxpayer requesting it. Section 6110(k)(3)

provides that it may not be used or cited as precedent.

                                             Sincerely,

                                             KATHLEEN REED


                                             KATHLEEN REED
                                             Chief, Branch 7
                                             Office of Associate Chief Counsel
                                             (Income Tax and Accounting)

Enclosures (2):
copy of this letter
copy for section 6110 purposes