Section 199A Pass-Through Deduction Eludes Professional Sports Team Owners

Morgan Lewis

Morgan Lewis

Team owners will generally be unable to take advantage of the 20% pass-through deduction provided by Section 199A with respect to income generated from the operation of professional sports teams, as recently promulgated final regulations by the US Treasury Department and Internal Revenue Service deem such owners to be engaged in the business of providing “sports services.”

In recently promulgated final regulations under Internal Revenue Code Section 199A, the Internal Revenue Service (IRS) and US Department of the Treasury denied access to the new 20% deduction on certain pass-through income for owners of professional sports teams because the owners are deemed to be engaged in the business of providing “sports services” rather than considered investors with capital income.[1] Congress enacted the new deduction as part of the 2017 Tax Cuts and Jobs Act (TCJA) in order to bring the taxation of pass-through income in line with the new 21% tax rate on corporate income. The 20% deduction applies to returns on investment capital, but does not apply to returns on labor. Therefore, the distinction between services and investment income matters a great deal.

While sports “super fans” may shout, “You’re fired!” at the television when disappointed by a player’s performance, those shouts are meaningless because the fans are not the players’ bosses. The employment relationship is not between the fans and the players—it is between the players and the team. The teams earn revenue primarily from licensing their broadcasts and stadium seating rights, and these royalties are returns on capital, not labor.

Moreover, while some owners of professional sports franchises may be former professional athletes, the team owners are not the athletes fans come to watch. How, then, can an owner of a professional sports team be considered to engage in the business of providing sports services?

Despite these and other valid arguments for why team owners should be eligible for the 20% deduction, Treasury and the IRS declined to adopt the recommendation of several commenters that the trade or business of owning a professional sports team does not constitute a specified service trade or business (SSTB) for purposes of Section 199A. Thus, team owners will generally be unable to take advantage of the 20% pass-through deduction provided by Section 199A with respect to income generated from the operation of such professional sports teams.


The TCJA enacted Section 199A, which provides a deduction of up to 20% of “qualified business income” from a domestic business operated as a sole proprietorship or through a partnership, S corporation, trust, or estate. On August 16, 2018, Treasury published a notice of proposed rulemaking containing proposed regulations under Section 199A.[2] Treasury subsequently received numerous comments in response to the proposed regulations. While the proposed regulations addressed several aspects of Section 199A’s construction, they left ambiguous, among other things, the question of whether the trade or business of owning a professional sports team constitutes an SSTB for purposes of Section 199A. Thus, the owners of such teams were “left in the dark” regarding whether they qualified for the 20% deduction granted by Section 199A.

In response to the proposed regulations, certain commenters, including the Major League Baseball (MLB) commissioner, contended that the ownership of a professional sports team does not constitute the performance of an SSTB. In an October 12, 2018, letter to Treasury and the IRS, MLB Commissioner Robert Manfred, Jr., supplemented an earlier letter with additional comments on the Section 199A proposed regulations.[3] In the letter, Manfred sought the revision of an example in the Section 199A proposed regulations that would clarify that neither professional sports clubs nor club owners perform the services described in Section 1202(e)(3)(A) or Section 448(d)(2)(A).[4] By contrast, he argued, sports team owners are not athletes, but are instead business owners who run multifaceted operations with largely nonathletic activities, including, for example, management of stadium operations, ticket sales, marketing, retail, and broadcasting.[5] Thus, in Manfred’s view, the business of a professional sports club is not an SSTB under Section 199A and, thus, the owners of such businesses should be entitled to the deduction generally available for “qualified business income” from a “qualified trade or business” under Section 199A.[6]

Promulgation of Final Regulations

In its summary and explanation of comments regarding the final regulations, Treasury noted the suggestions of certain commenters 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.[7] Treasury further noted the MLB commissioner’s proposed example “to reflect that neither sports clubs nor club owners perform services described in Section 1202(e)(3)(A).”[8]

Treasury, however, declined to adopt these comments. While Treasury conceded that “sports club and team owners are not performing athletic services directly,” in Treasury’s view, that performance “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.”[9] Thus, a professional sports club might, for example, operate its concession services as a distinct trade or business from the operation of its athletic team. In that case, the former trade or business would not constitute an SSTB for purposes of Section 199A. The latter trade or business, however—the professional sports club’s operation of its athletic team—would, in Treasury’s view, constitute an SSTB: the trade or business of performing services in the field of athletics.[10] Income generated from this activity, including income from ticket sales and broadcast rights associated with the activity, is, in Treasury’s view, income from an SSTB. Sports club owners might, by contrast, be able to avail themselves of the Section 199A pass-through deduction to the extent their income was, for example, derived from concession services or the service of broadcasting or video or audio dissemination of athletic events to the public.[11]


The effect of the Section 199A final regulations on professional sports clubs is significant (as evidenced by the level of detail in the MLB commissioner’s October letter). Had Treasury adopted Manfred’s recommendation, the owners of professional sports clubs could have made a compelling argument that they could avail themselves of Section 199A’s 20% deduction on pass-through income generated by their sports teams. For sports clubs generating tens or even hundreds of millions of dollars in annual revenue, the savings provided by the deduction would have been immense. But now that the MLB commissioner and other commenters have “struck out,” they will likely be unable to take advantage of the Section 199A deduction, at least where their income is generated directly from the trade or business of performing services in the field of athletics.


[1] See Final Regulations Concerning the Deduction for Qualified Business Income Under Section 199A, Tax Notes Today 2019-2079, at 86 (Jan. 18, 2019).

[2] See 83 Fed. Reg. 40,884 (Aug. 16, 2018).

[3] See Letter re “Supplemental Comments on Proposed Regulations concerning the deduction for qualified business income under section 199A (REG_107892-18),” from Robert D. Manfred, Jr., to Treasury and the IRS, dated Oct. 12, 2018.

[4] See id. at 2.

[5] See id. at 3.

[6] See id. at 2.

[7] See Tax Notes Doc. 2019-2079, at 86.

[8] Id.

[9] Id.

[10] See id.

[11] See id.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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