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Sports Team Owners Strike-Out with Pass-Through Deduction

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This article originally appeared in Law360 and is reprinted with permission.

Much of the fanfare around last year’s federal tax reform was around the special 20% deduction applicable to income from flow-through entities like partnerships, S corporations and LLCs under IRC § 199A. But the new law generated more questions than answers, requiring the IRS to issue new regulations to help taxpayers and practitioners sort through all the details. Just recently, the IRS issued final regulations, and they came with some bad news for owners of your favorite sports team. Specifically, the new regulations confirm that sports team ownership falls within the definition of “athletics” and, therefore, is a disqualified activity, meaning team owners generally will be unable to qualify for the 20% deduction with respect to income generated from the team. In this post, we’ll explain what all the fuss is about.


Code section 199A was enacted as part of H.R. 1, commonly known as the Tax Cuts and Jobs Act. This provision generally allows owners of pass-through entities a deduction of up to 20% against qualifying income. For taxpayers in the highest bracket (37%), this deduction provides an effective tax rate of 29.6% for such qualifying income. With professional sports teams generating millions of dollars each year—and with so many of these entities set up as pass-through companies—you easily can see the tremendous tax savings this provision would provide owners.

 Application to Teams and Owners?

Code section 199A sounds great, right? Who wouldn’t love a 20% cut in their tax rate?! But it comes with a catch – not all types of businesses qualify. For taxpayers with taxable income above certain thresholds, the deduction is not allowed for a list of specified service trades or businesses (“SSTBs”), which includes “athletics.” In August of 2018, the U.S. Treasury and IRS released proposed regulations under Code section 199A, which defined athletics to include services performed “by individuals who participate in athletic competition such as athletes, coaches, and team managers” but to not include “the provision of services that do not require skills unique to athletic competition.” On first glance, this language did not seem to cover owners of professional sports teams; however, the proposed regulations contained an example concluding that a partnership that owns and operates a professional sports team is engaged in the SSTB of athletics.

The U.S. Treasury and the IRS received comments to the proposed regulations, including from the Major League Baseball commissioner. These comments generally contended that the definition of a trade or business involving the performance of services in the field of athletics should not include the trade or business of owning a professional sports team because the owners of teams do not perform services in the field of athletics. Instead, team owners operate numerous non-athletic activities, such as ticket sales, managing a stadium, licensing, creating digital content, and producing an entertainment product. As a result, the commentators requested that the U.S. Treasury and the IRS revise the example in the proposed regulations to provide that neither professional sports teams nor team owners perform services in the field of athletics.

The U.S. Treasury and the IRS declined to adopt the above comments. While Treasury, in the summary and explanation of comments regarding the final regulations, acknowledged that “sports club and team owners are not performing athletic services directly,” Treasury believes “that is not a requirement of section 199A, which looks to whether there is income attributable to a trade or business involving the performance of services in a specified activity, not who performed the services.” Treasury did, however, acknowledge that professional sports teams may operate a separate trade or business, distinct from the performance of services in the fields of athletics, such as operating its concession services as a separate trade or business which would not be a SSTB of performing services in the field of athletics. In any event, Treasury believes the operation of the sports team itself would be an SSTB in the field of athletics, meaning income derived from tickets sales and broadcast rights associated with it would not qualify for the 199A deduction.

So while team owners threw the challenge flag on the proposed regulations’ conclusion, the U.S. Treasury and the IRS refused to overturn the call in the final regulations. Obviously, this is a costly result for sports team owners who generally will not be able to take advantage of the Code section 199A deduction with respect to income generated from the operation of their teams.

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