Sports broadcast contract receipts are not domestic production gross receipts

Plain-English summary

A sports organization granted a television network rights to produce and broadcast games and asked whether its contract receipts qualified for the former domestic production activities deduction under IRC § 199. The network controlled the editorial choices, cameras, equipment, production staff, commentary, graphics, audio, replays, and commercials. Chief Counsel concluded that the network produced the broadcasts on its own behalf under rights granted by the contract, rather than producing them for the sports organization. The organization's contract receipts therefore were not domestic production gross receipts from a qualified film. Because the network was the producer, there was no need to decide which party bore the benefits and burdens of ownership during production.

Ruling snapshot

• Question: Did the network produce the game broadcasts for the taxpayer under a production contract, requiring a benefits-and-burdens ownership analysis?
• Outcome: Advice given, the network produced on its own behalf and the taxpayer's receipts were non-DPGR
• Key authorities: Treas. Reg. §§ 1.199-3(f)(1) and 1.199-3(k)(8)

Full text (IRS public release)

       Office of Chief Counsel
       Internal Revenue Service
       Memorandum
       Number: 201630015
       Release Date: 7/22/2016
       CC:PSI:B5:DSelig                                      Third Party Communication: None
       POSTF-109368-15                                       Date of Communication: Not Applicable

UILC: 199.00-00, 199.03-00, 199.03-09

date: April 13, 2016

 to:   Thomas J. Kane
       Division Counsel
       (Large Business & International)

       Barbara B. Franklin
       Deputy Division Counsel (Operations)
       (Large Business & International)

from: Nicole R. Cimino
Senior Technician Reviewer, Branch 5
(Passthroughs & Special Industries)

subject: Section 199 Chief Counsel Request on the Qualified Film Issue

       This Chief Counsel Advice responds to your request for clarification of CCA 201545018.
       In particular, you asked that we clarify whether League contracted with Network to
       produce a qualified film for Taxpayer for purposes of § 199. This advice may not be
       used or cited as precedent.

       LEGEND

       Taxpayer                            =        ---------------------------------------
                                                    -----------------------

       League                              =        ----------------------------------

       Network                             =        --------------------------------

       Contract                            =        ------------------------------------------------------------------------
       --------------------------------------------------------------------------------------------------------------------
                                                    ---------------------------------------------

POSTF-109368-15 2

Game Broadcasts = ---------------------------------------------------
---------------------------------------------

b = -----

c = ---

ISSUE

Whether Network performed its production activities with respect to the Game
Broadcasts pursuant to the Contract so that it is necessary to determine whether
Taxpayer had the benefits and burdens of ownership of the Game Broadcasts during
the period of production for purposes of §§ 1.199-3(f)(1) and 1.199-3(k)(8)?

CONCLUSION

Network produced the Game Broadcasts on its own behalf pursuant to the rights
granted to Network in Contract rather than pursuant to a contract with Taxpayer for
purposes of §§ 1.199-3(f)(1) and 1.199-3(k)(8). For this reason, gross receipts that
Taxpayer derived from the Contract are non-DPGR, and a benefits and burdens of
ownership analysis is not required.

FACTS

The facts considered and the terms used in this Chief Counsel Advice are stated in
CCA 201545018.

ANALYSIS

You requested clarification regarding whether Network produced the Game Broadcasts
for Taxpayer for purposes of §§ 1.199-3(f)(1) and 1.199-3(k)(8), rather than on its own
behalf pursuant to rights granted by Contract. For the reasons explained below, we
conclude that Network produced the Game Broadcast on its own behalf rather than on
behalf of Taxpayer. Therefore, all gross receipts that Taxpayer derived from the
Contract are non-DPGR as the gross receipts cannot be considered derived from a
disposition of qualified film produced by Taxpayer.

Network is a producer of television programming as part of its business, and seeks out
events of the type offered by Taxpayer to make programming for its own stations.
Network entered into the Contract to make the Game Broadcasts for itself. A review of
the facts indicates that Network controlled most aspects of the creative production of the
Game Broadcasts. First, 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. For example, Network had largely unfettered discretion to
decide which of several camera feeds it would broadcast at any point during the game,

POSTF-109368-15 3

when and where to zoom in on players, umpires, cheerleaders, coaches, etc., when to
show a replay (in slow or real-time motion), which players to focus on, and when to pan
to the live audience or the sidelines. Network also decided whether and when to add
graphics, sound effects and music. Network also provided the commentators who
described events on the field and provided background, statistical information and color
commentary. Network decided when to use various technologies such as the
SkyCam. All of these activities were part of creating a unique Game Broadcast, which
involved a much different experience than simply recording a game broadcast for
Taxpayer. Moreover, all of these activities were largely within the discretion of Network.

Further, Network provided and controlled all equipment essential to the Game
Broadcasts and a game day staff of b employees and freelance contractors. Those
employees were responsible for all aspects of production from setting up and testing the
equipment, to recording the games, producing the game feeds, monitoring the
broadcasts, and tearing down the production equipment. Network’s employees
included a director, who was responsible for calling out the camera shots, a technical
director who controlled the cameras, and a producer, who decided on whether and
when to show replays and commercials. Network’s producer was in charge of the
particular broadcast.

Network also brought in support staff, graphics staff, and audio staff. About c Network
employees worked inside the broadcasting trucks. The remaining staff worked at the
stadiums. Network’s graphics team prepared thousands of graphics to be shown at
specific times throughout a broadcast. Based on these facts, Network, not Taxpayer, is
the producer of the Game Broadcasts on its own behalf and not pursuant to a contract
for purposes of §§ 1.199-3(f)(1) and 1.199-3(k)(8). Accordingly, all gross receipts that
Taxpayer derived from the Contract are non-DPGR as the gross receipts cannot be
considered derived from a disposition of qualified film produced by Taxpayer.

However, if the IRS were to determine that Network produced the Game Broadcasts
pursuant to a contract for purposes of §§ 1.199-3(f)(1) and 1.199-3(k)(8) then a benefits
and burdens of ownership analysis would be required.

CASE DEVELOPMENT, HAZARDS AND OTHER CONSIDERATIONS

This writing may contain privileged information. Any unauthorized disclosure of this
writing may undermine our ability to protect the privileged information. If disclosure is
determined to be necessary, please contact this office for our views.

Please call David Selig at 202-317-4137 if you have any further questions.