FCC spectrum-license exchange occurred under threat of condemnation

Plain-English summary

Members of a communications group held radio licenses in the 39 GHz spectrum
band when the Federal Communications Commission reorganized the band for uses
including 5G services. Licensees could accept modified licenses or surrender
all existing rights for an incentive payment and eligibility to bid for new
licenses. The group chose surrender and asked whether the exchange occurred
under threat or imminence of condemnation for IRC § 1033. The IRS found that
the choice was not meaningful because declining the auction would still have
forced the licensees into the FCC's reconfiguration and modified licenses.
Accordingly, the surrender for payment and auction access qualified as a
disposition under threat or imminence of condemnation. The IRS did not rule
whether any replacement property would be similar or related in service or
use.

Ruling snapshot

• Question: Did the FCC-directed surrender of 39 GHz licenses occur under
  threat or imminence of condemnation for § 1033?
• Outcome: Approved
• Key authorities: IRC § 1033(a); Rev. Rul. 63-221; Rev. Rul. 81-180;
  Rev. Rul. 82-147

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202042003 Third Party Communication: None
Release Date: 10/16/2020 Date of Communication: Not Applicable
Index Number: 1033.00-00, 1033.01-00,
1033.02-00 Person To Contact:
----------------------, ID No. ------------
----------------------------- Telephone Number:
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--------------------------------------- Refer Reply To:
---------------------- CC:ITA: B05
--------------------------------------- PLR-100491-20
-------------------------------- Date:
July 23, 2020

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Legend

Taxpayer = -----------------------------------------------------------------
Subsidiary 1 = -----------------------------------------------
Subsidiary 2 = --------------------------------------
Licensee 1 = --------------------------------------
Licensee 2 = ------------------------
X = --------------
Y = --------------
Date A = ------------------
Date B = ----------------
Date C = ------------
Date D = ------------
Year 1 = -------
Year 2 = -------
Order 1 = -----------------------------------------------------------------------------
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Order 2 = -----------------------------------------------------------------------------

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Order 3 = ----------------------------------------------------------------------------

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Dear --------------:
PLR-100491-20 2

This responds to your request for a private letter ruling, dated Date A, Year 2, regarding
the application of § 1033 of the Internal Revenue Code (Code) to your transactions.
You have requested a ruling that the decision by wholly owned direct and indirect
subsidiaries of Taxpayer to relinquish radio broadcast licenses in exchange for a
payment and the ability to bid for new licenses in an auction pursuant to an order of the
Federal Communications Commission (FCC) was made under threat or imminence of
condemnation within the meaning of § 1033(a).

FACTS

Taxpayer is the parent of an affiliated group of corporations that file a consolidated
federal income tax return. Taxpayer, through its corporate and other subsidiaries,
provides wireline and wireless communications services to consumers. On Date B,
Year 1, Taxpayer acquired all of the stock of Subsidiary 1, resulting in: (i) Subsidiary 1
becoming a wholly owned direct subsidiary of Taxpayer and a member of the affiliated
group; (ii) Subsidiary 2, a wholly owned subsidiary of Subsidiary 1, becoming a wholly
owned indirect corporate subsidiary of Taxpayer and member of the affiliated group;
and (iii) the assets of Licensee 1, a single-member limited liability company wholly
owned by Subsidiary 2 and disregarded for federal tax purposes, continuing to be
treated as the assets of Subsidiary 2.

Licensee 2 is a general partnership of which X% of the general partnership interests are
owned by Taxpayer through wholly owned direct and indirect subsidiaries that are
disregarded for federal tax purposes, and of which the remaining Y% general
partnership interests are owned by wholly owned indirect corporate subsidiaries of
Taxpayer that are members of the affiliated group. Licensee 1 and Licensee 2 own
radio broadcast licenses which are the subject of your request. Taxpayer, Subsidiary 1,
Subsidiary 2 and Licensee 2 each has the calendar year as it annual accounting period
and each is on the accrual method of accounting for financial accounting and federal
income tax purposes.1

Taxpayer’s United States businesses operate under authority of radio broadcast
licenses issued by the FCC, which authorize the holders to broadcast and receive radio
waves within a specified range of frequencies on the electromagnetic spectrum and
within a defined geographic area. The radio broadcast licenses held by Licensee 1 and
Licensee 2 authorize them to operate in the 39 GHz band. Licensee 1 holds a greater
portion of the total aggregate value of the 39 GHz licenses owned by both Licensee 1
and Licensee 2. The value of each 39 GHz license exceeds its adjusted tax basis.

1 For purposes of convenience, “Taxpayers” refers to the collective group of the Taxpayer and the
affiliated business entities, Subsidiary 1, Subsidiary 2, Licensee 1, and Licensee 2, making this ruling
request.
PLR-100491-20 3

Pursuant to the Middle-Class Tax Relief and Job Creation Act of 2012 (Spectrum Act),2
on Date D, Year 1 the FCC began reorganizing and reconfiguring the 39 GHz band for
the deployment of broadband services, including 5G services.3 The FCC intended to
facilitate the reconfiguration of existing 39 GHz spectrum holdings into contiguous
swathes of spectrum that would be conducive to wireless broadband deployment,
including 5G services. To that end, the FCC initiated an incentive auction, “Auction
103,” because a number of existing 39 GHz licenses did not conform to the FCC’s plan
to organize the 39 GHz band into licenses that each cover 100 megahertz (MHz) of
spectrum in defined geographic areas, known as partial economic areas (PEA).

The FCC took the following steps: (i) the 39 GHz band plan was modified to 14
channels of 100 MHz each; (ii) holders of 39 GHz licenses were offered a
reconfiguration of existing spectrum usage rights that conformed closely to the new
band plan and service areas; (iii) license holders were afforded the option to select an
alternative reconfiguration that was intended to better align the reconfiguration with
license holders’ operations; and (iv) license holders were informed they would be given
the choice to accept modifications to their licenses, as proposed by the FCC or an
acceptable alternative, or to participate in an auction to relinquish their existing
spectrum usage rights in exchange for a share of auction proceeds.

Auction 103 includes a reverse auction component that allows spectrum usage license
holders to relinquish their existing 39 GHz band licenses and a forward auction in which
participating incumbent licensees and new applicants bid on licenses for all 39 GHz
band spectrum, except for licenses for any spectrum retained to provide modified
licenses to non-participating licensees. A licensee is required to relinquish all of its
existing licenses as a prerequisite to participating in the incentive auction.

The FCC clarified that all existing licenses are subject to modification irrespective of
whether an incumbent licensee participates in the incentive auction.4 Under the FCC’s
procedures, a 39 GHz licensee, or group of licensees if they are affiliated, must
designate an Initial Commitment Representative to select among one of the following
initial commitments:

 Option 1: Accept modified licenses based on the Commission’s proposed
 reconfiguration of the ---- 39 GHz licenses;

 Option 2: Accept modified licenses based on an acceptable alternative
 reconfiguration; or

2 Pub. L. No. 112-96, §§ 6402-03, 126 Stat. 224 (2012).
3 Order 1.

4 Order 2, Order 3.
PLR-100491-20 4

Option 3: Relinquish all spectrum usage rights pursuant to ---- 39 GHz licenses in
exchange for an incentive payment by having the licenses cancelled, thereby
being eligible to bid for new licenses in the auction.

Further, any licensee that fails to make a selection by the established deadline will be
deemed to have selected Option 1. Under the FCC’s established procedures, an “Initial
Commitment Representative” is one of three individuals named by an incumbent
licensee or, in the case of a commonly controlled group that includes more than one
incumbent licensee, a person named on behalf of the group to act on the group’s behalf
regarding auction matters. For purposes of designating an Initial Commitment
Representative and participation in the auction, all commonly controlled entities are
treated as a single entity by the FCC. Licensee 1 and Licensee 2 are commonly
controlled under the FCC’s standards and the procedures governing Auction 103. As a
result, they are treated as a single entity respecting their decision about whether to
participate in the auction of 39 GHz licenses.

The FCC reported that all incumbent license holders of 39 GHz licenses, including
Licensee 1 and Licensee 2, elected Option 3, deciding to have their licenses cancelled
in exchange for an incentive payment and thereby becoming eligible to bid for new
licenses in Auction 103.

REQUESTED RULING

You have requested a ruling that Taxpayers elected Option 3 under threat or imminence
of condemnation of the 39 GHz licenses within the meaning of § 1033(a) of the Code.

LAW AND ANALYSIS

Section 1033(a)(2)(A) of the Code provides that if the property (as a result of its
destruction in whole or in part, theft, seizure, or requisition or condemnation or threat or
imminence thereof) is compulsorily or involuntarily converted into money and the
taxpayer, within the period specified in § 1033(a)(2)(B) and for the purpose of replacing
such property, purchases other property similar or related in service or use to the
property converted, or purchases stock in the acquisition of control of a corporation
owning such other property, at the election of the taxpayer the gain must be recognized
to the extent that the amount realized on the conversion (regardless of whether such
amount is received in one or more taxable years) exceeds the cost of such other
property or such stock.

One of the circumstances in which a § 1033 requisition or condemnation occurs is when
a taxpayer’s property is subjected to a compensable government taking for public use
under the Fifth Amendment of the U.S. Constitution. American Natural Gas Co. v.
United States, 279 F.2d 220 (Ct. Cl. 1960); Behr-Manning Corp. v. United States, 196
F.Supp. 129 (D.C. Mass. 1961); Rev. Rul. 69-654, 1969-2 C.B. 162; Rev, Rul. 58-11,
1958-1 C.B. 273. The Fifth Amendment provides, in part, that no “private property be
PLR-100491-20 5

taken for public use without just compensation.” The meaning of condemnation or
requisition for purposes of § 1033 is not, however, strictly limited to takings within the
meaning of the Fifth Amendment.

In Rev. Rul. 82-147, 1982-1 C.B. 190, a federal law prohibited the use of motorboats
with motors of greater than 25 horsepower on designated lakes in wilderness areas. It
also provided that, if the horsepower restriction made the operation of a resort
uneconomical, the owner of the resort could require the government to purchase its
resort at its fair market value (determined without regard to the horsepower restrictions).
The horsepower restriction made the operation of the taxpayer’s resort uneconomical
and the taxpayer sold its fishing lodge to the Federal Government. In holding that the
government’s purchase of the resort constituted a condemnation within the meaning of
§ 1033, the Service did not refer to a Fifth Amendment taking, but instead emphasized
that the horsepower restriction “in addition to the provision authorizing purchase of a
resort at its fair market value without regard to the restriction, effectively constitutes a
taking of property upon payment of fair compensation.”

In the present case, the FCC’s reorganizing and reconfiguring process is functionally
equivalent to a direct physical taking of private property for public use without the
consent of the property owner because it effectively deprives Taxpayers of their assets.
Taxpayers’ choice to elect Option 3 and relinquish the radio broadcast licenses in
exchange for an incentive payment and participation in Auction 103 was not a
meaningful choice. Choosing to forego participation in Auction 103 would have
subjected the Taxpayers to the reorganizing process and forced them to accept
modified licenses.

Rev. Rul. 63-221, 1963-2 C.B. 332, provides that for purposes of § 1033, threat or
imminence of condemnation is generally considered to exist if a property owner is
informed, either orally or in writing, by a representative of a governmental body that the
government entity has decided to acquire his property and the property owner has
reasonable grounds to believe, from the information conveyed to him by such
representative, that the necessary steps to condemn the property will be instituted if a
voluntary sale is not arranged.

In Rev. Rul. 81-180, 1981-2 C.B. 161, a taxpayer learned through newspaper reports
that a city intended to acquire its property by condemnation for public use if a sale could
not be negotiated. City officials confirmed the accuracy of the reports. The taxpayer
sold its property to a third party thereafter, but before the city actually condemned the
property. The Service concluded that the sale was made under the “threat or
imminence of condemnation” because the property was sold after the taxpayer was
given reasonable grounds to believe that its property would be taken.

These authorities indicate that a voluntary sale qualifies as an involuntary conversion
under § 1033 if the threat or imminence of condemnation is present at the time of sale.
The threat need not be a certainty. A threat exists if the taxpayer may reasonably
PLR-100491-20 6

believe from representations of the government and surrounding circumstances that a
forced sale is likely to take place.

The FCC has provided Taxpayers with notice, through the Spectrum Act and its
published reports and orders, of its intent to acquire the radio broadcast licenses that
Taxpayers possessed. Under these unique circumstances, it is reasonable for
Taxpayers to believe that if they did not relinquish their radio broadcast licenses for an
incentive payment and participate in Auction 103, then the FCC would take Taxpayers’
radio broadcast licenses and force Taxpayers to accept modified radio broadcast
licenses.

Accordingly, Taxpayers’ election of Option 3 to exchange their radio broadcast licenses
for an incentive payment and participation in Auction 103 constitutes a disposition under
the threat or imminence of condemnation for purposes of § 1033 of the Code.

CONCLUSION

We therefore conclude that Taxpayers elected Option 3 under the threat or imminence
of condemnation within the meaning of § 1033.

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter. In particular, no opinion is expressed or implied concerning whether any
particular property acquired by Taxpayers, or any party related to Taxpayers,
constitutes property that is similar or related in service or use within the meaning of
§ 1033(a)(2) to the Spectrum Rights relinquished, which are discussed in this private
letter ruling.

This ruling is directed only to the Taxpayers requesting it. Section 6110(k)(3) of the
Code provides that it may not be used or cited as precedent.

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representative.
PLR-100491-20 7

The rulings contained in this letter are based upon information and representations
submitted by the Taxpayers and accompanied by a penalty of perjury statement
executed by an appropriate party. While this office has not verified any of the material
submitted in support of the request for rulings, it is subject to verification on
examination.

                                  Sincerely,



                                  Christina M. Glendening
                                  Senior Counsel
                                  Office of Associate Chief Counsel
                                  (Income Tax & Accounting)

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