The question of which taxpayer may claim a deduction under §199 when it can be argued that one contracted with the other to perform a “qualified activity” can become complicated. In Chief Counsel Advice 201630015 the question arose about whether a professional sports league might be eligible to claim the deduction for a “qualified film” for game broadcasts conducted by a network under its contract.

The IRS has promulgated regulations to assure that only taxpayer may claim the deduction §199 when production is conducted under a contract. Reg. §1.199-3(f)(1) reads:

(1) In general. With the exception of the rules applicable to an expanded affiliated group (EAG) under § 1.199-7, qualifying in-kind partnerships under paragraph (i)(7) of this section and § 1.199-9(i), EAG partnerships under paragraph (i)(8) of this section and § 1.199-9(j), and government contracts under paragraph (f)(2) of this section, only one taxpayer may claim the deduction under § 1.199-1(a) with respect to any qualifying activity under paragraphs (e)(1), (k)(1), and (l)(1) of this section performed in connection with the same QPP, or the production of a qualified film or utilities. If one taxpayer performs a qualifying activity under paragraph (e)(1), (k)(1), or (l)(1) of this section pursuant to a contract with another party, then only the taxpayer that has the benefits and burdens of ownership of the QPP, qualified film, or utilities under Federal income tax principles during the period in which the qualifying activity occurs is treated as engaging in the qualifying activity.

In the case of a film production, more details on this matter can be found at Reg. §1.199-3(k)(8) which reads:

(8) Production pursuant to a contract. With the exception of the rules applicable to an expanded affiliated group (EAG) under § 1.199-7 and EAG partnerships under § 1.199-3(i)(8), only one taxpayer may claim the deduction under § 1.199-1(a) with respect to any activity related to the production of a qualified film performed in connection with the same qualified film. If one taxpayer performs a production activity pursuant to a contract with another party, then only the taxpayer that has the benefits and burdens of ownership of the qualified film under Federal income tax principles during the period in which the production activity occurs is treated as engaging in the production activity.

But before getting into the question of which party had the “benefits and burdens of ownership” of the film a more fundamental question needs to be answered—did the network actually produce the film for the sports league under a contract.

The memorandum indicates that this depends on an analysis of the facts of the case—and, in this case the memorandum concludes that the network was actually undertaking the production on its own, not doing a portion of the production under contract to the league.

The memorandum notes that the network is in business to produce and obtain content to fill time slots for its broadcasts.

The memorandum continues:

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.

The memorandum notes that the network controlled what cameras were to be used, when various types of instant replay (full speed or slow motion) would be used, when and whether to add music, sounds and graphics to the broadcast, provided commentators, used various technologies (such as the SkyCam), provided virtually all equipment for the broadcast and all supporting staff.

The memorandum concludes:

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.