FCC spectrum-clearing payments and replacement satellites qualify for Section 1033 nonrecognition

Plain-English summary

A satellite communications company held FCC licenses to use part of the radio
spectrum called the "C-band." The FCC ordered satellite operators to vacate the
lower portion of the C-band so it could be auctioned off for 5G wireless service.
Because the company is being forced off that spectrum, an earlier IRS ruling had
already treated its affected satellites and rights as "involuntarily converted"
under Code § 1033, the rule that lets a taxpayer defer gain when property is
taken and the proceeds are reinvested in similar property. This ruling answered
two follow-up questions. First, a private company that won the spectrum at auction
agreed to pay the operator to clear the band early; the IRS ruled those payments
qualify for § 1033 deferral even though they come from a private party, not the
government. Second, the new satellites and equipment the operator will buy to
provide the same services in different frequencies count as "similar or related in
service or use" replacement property, so the company can defer gain to the extent
it reinvests in them. This matters because it confirms that accelerated relocation
payments and functionally identical replacement equipment both fit within § 1033.

Ruling snapshot

• Question: Do early spectrum-clearing payments from a private auction winner, and new satellites operating in different frequencies, qualify for § 1033 gain deferral?
• Outcome: approved (both rulings granted: payments eligible for nonrecognition; new assets are qualifying replacement property)
• Key authorities: IRC § 1033(a)(2)(A) and (B); Rev. Rul. 64-237; Rev. Rul. 81-180; Maloof v. Commissioner, 65 T.C. 263

Full text (IRS public release)

 Internal Revenue Service                                      Department of the Treasury
                                                               Washington, DC 20224

 Number: 202318004                                             Third Party Communication: None
 Release Date: 5/5/2023                                        Date of Communication: Not Applicable
 Index Number: 1033.00-00, 1033.01-00,
               1033.03-00                                      Person To Contact:
                                                               ---------------------------, ID No. ---------------
 ------------------------------------------                    Telephone Number:
                                                               --------------------
 ----------------                                              Refer Reply To:
 -------------------------------------------------             CC:ITA:B05
 --------------------------                                    PLR-115135-22
 ---------------------------------------------                 Date:
  ------------------------------------                         February 02, 2023



                                                 LEGEND



Taxpayer                  =        -------------------------------------------------------
State A                   =        -------------
$a                        =        ----------------
Tax Years                 =        --------------------
Date 1                    =        ------------------
Year 1                    =        -------
Payments                  =        ---------------------------------------------------------------------------------
                                   -----------
Date 2                    =        -------------------------
Prior Ruling              =        ----------------------
Non C-bands               =        ------------------------------------------------------

Dear --------------:

This letter responds to a request for a private letter ruling dated August 1, 2022,
submitted by Taxpayer's authorized representatives. Taxpayer requests two rulings
relating to the repurposing of certain portions of the electromagnetic spectrum.

                                                     FACTS

Taxpayer is a State A limited partnership classified as a partnership for federal income
tax purposes. Taxpayer uses a calendar year accounting period and an accrual method
of accounting. Taxpayer operates commercial communications satellites directly or
indirectly through entities that are disregarded as separate from Taxpayer for
federal income tax purposes.

Taxpayer, including its disregarded entities, is in the business of providing a wide range
of communication services to customers using its commercial satellites and other
PLR-115135-22                                      2

infrastructure. In connection with its communications services, Taxpayer has rights to
transmit information in certain segments of the electromagnetic spectrum (the
"spectrum") within the United States and other countries. Many of Taxpayer's rights
to transmit information in the United States are granted by the Federal
Communications Commission (the "FCC") under licenses, including licenses to
transmit information to and from certain of its satellites, ground-based facilities, and
other related equipment in the 3.7-4.2 GHz frequency band (the "C-band").
Taxpayer uses the C-band to provide communication services to customers.

Pursuant to its authority under 47 U.S.C. § 309(j) and as required by the Making
Opportunities for Broadband Investment and Limiting Excessive and Needless
Obstacles to Wireless Act (MOBILE NOW Act),1 the FCC is repurposing spectrum in the
C-band—currently used domestically by satellite operators to transmit signals to Earth-
based stations throughout the United States—for other uses including the fifth
generation of wireless technology (5G).

On March 3, 2020, the FCC issued a Report and Order2 (FCC Order) adopting rules to
clear the lower 300 MHz of the C-band; repack existing satellite operators into the upper
200 MHz of the C-band; designate 20 MHz to serve as a guard band; and auction
licenses to use the lower 280 MHz for flexible terrestrial use including 5G wireless
services. The FCC will issue new overlay licenses to wireless broadband service
providers that place winning bids (Overlay Licensees). These overlay licenses will
authorize Overlay Licensees to transmit over the lower 280 MHz within geographic
areas in which the current holders of C-band licenses (Incumbent Licensees) operate.
The FCC Order requires Incumbent Licensees to cease operating on the lower
300 MHz of the C-band by December 5, 2025 (Deadline). Under the FCC Order, as an
"Incumbent Licensee," Taxpayer is required to clear the lower 300 MHz of the C-band
by the Deadline. The FCC order further provides for incentive payments for those
Incumbent Licensees that clear the lower 300 MHz of the C-band before certain
designated dates that fall much earlier than the Deadline.

The Service has issued Prior Ruling to address certain tax consequences to
Taxpayer of the FCC Order. To the extent that any facts set forth in the FACTS
section of Prior Ruling are relevant to the present letter, they are incorporated
herein by reference.

In Prior Ruling, the Service has concluded that, for purposes of section 1033 of the
Internal Revenue Code (Code)3, certain of Taxpayer's assets (Converted Assets)
are being involuntarily converted pursuant to the FCC Order. Taxpayer's Converted
Assets consist of satellites used in Taxpayer's business to receive and transmit

1 MOBILE NOW Act, Pub. L. No. 115-141, Division P, Title VI, § 601 et seq. (2018).
2 FCC 20-22, Report and Order and Order of Proposed Modification, Released Mar. 3, 2020, GN Docket
No. 18-122.
3 Unless specified otherwise, all section references are to the Internal Revenue Code in effect on the

date when this letter ruling is issued.
PLR-115135-22                              3

information in the C-band between ground equipment at various locations on the
earth, associated ground equipment and the rights to use the C-band in which the
satellites and ground equipment operate.

In Year 1, Taxpayer entered into an agreement with a private, non-governmental
entity that had acquired rights to operate in the portion of the C-band that Taxpayer
is clearing in an auction held pursuant to the FCC order (New Overlay Licensee).
Under the agreement, New Overlay Licensee will make Payments to Taxpayer if
Taxpayer clears specified portions of the lower 300 MHz in certain geographic
areas by target dates that fall well in advance of the dates designated in the FCC
order. New Overlay Licensee may be able to commence using the cleared
frequencies earlier if Taxpayer clears them by the target dates.

New Overlays Licensee will make Payments directly to Taxpayer after Taxpayer
meets all agreed-upon requirements to clear relevant frequencies in the subject
geographic locations. Their agreement specifies the geographic areas in which
Taxpayer currently provides services in relevant frequencies of the C-band. The
agreement sets target dates for clearing each area. Taxpayer must perform its
clearing obligations under the agreement only with respect to a particular area by
the target date in order to receive Payments with respect to that area.

The amounts of Payments are subject to adjustment based on several factors,
including the exact date on which Taxpayer clears a designated area, and New
Overlays Licensee's ability to commence its operations in relevant frequencies
within a certain amount of time after Taxpayer has cleared those frequencies in the
area. New Overlay Licensee's obligation to pay Taxpayer any Payments is subject
to certain contingencies, including whether certain other C-band users have cleared
relevant frequencies in the designated areas by specified dates. Subject to these
contingencies, if Taxpayer clears relevant frequencies in a sufficient number of
designated areas by the applicable target dates, it is eligible to receive further
Payments. The maximum amount of Payments that Taxpayer may receive under
the agreement is approximately $a, which Taxpayer would expect to receive in
multiple payments in Tax Years.

Using Payments as well the incentive payments provided under the FCC order,
Taxpayer will acquire new property and upgrade existing equipment and facilities
(Non C-band Assets). Non C-band Assets consist of new satellites that operate in
the Non C-bands (Non C-band satellites), new ground equipment or improvements
made on existing ground equipment that are necessary to operate those satellites
(Non C-band equipment), and capitalized costs that Taxpayer will incur to secure
and maintain rights to use the bands of the spectrum in which Taxpayer's new Non
C-band satellites and Non C-band equipment will operate (Non C-band license
costs).

Although Non C-band satellites operate in the Non C-bands (and not the C-band),
PLR-115135-22                               4

they will perform the same function as Taxpayer's existing C-band satellites once
operational. Like Taxpayer's existing C-band satellites, the new Non C-band
satellites will receive communication signals from equipment on the ground, amplify
those signals, and transmit them to another ground station. Although a given
customer will already have, or will need to acquire, ground equipment that is
specific to a particular frequency (or have such equipment provided to it by
Taxpayer), the nature of the services provided on Non C-band satellites and the
related Non C-band equipment will be the same as those provided on Taxpayer's
existing C-band satellites and the related C-band equipment. Taxpayer does not
separately market services provided in the Non C-bands from those provided in the
C-band. Taxpayer's entire array of satellite communication services can be
provided in the C-band and the Non C-bands. Accordingly, the new Non C-band
satellites and Non C-band equipment will perform the same function as Taxpayer's
existing C-band satellites and related equipment, receiving and transmitting
information in the spectrum.

In addition, the new Non C-band satellites will have the same relationship to
Taxpayer's business as Taxpayer's existing C-band satellites. Consistent with the
strong similarities in physical qualities and operation between the different types of
satellites, there will be no distinction between Taxpayer's personnel who will work
with the new Non C-band satellites and those who work with the existing C-band
satellites. The same engineers will control and operate the new Non C-band
satellites as those that control and operate Taxpayer's existing C-band satellites.
The same management and administrative personnel will oversee and carry out the
activities of Taxpayer with respect to each type of satellites. The same sales
personnel will market the services of each type of satellite using the same
strategies. Because of the close physical similarities and the fact that the satellites
are used to provide the same types of services, the satellites are subject to the
same business risk, regardless of the frequencies in which they operate.

Non C-band license costs consist of costs incurred in connection with acquiring or
maintaining underlying Non C-band spectrum rights. Taxpayer incurs various costs
associated with applying for such licenses and preserving the right to utilize such
licenses. These Non C-band license costs include costs associated with making
filings and various costs that may need to be incurred due to requirements that
Taxpayer use licensed spectrum within a certain time period after receiving the
license or forfeit the license.

Any functional differences between the Non C-band Assets and the Converted
Assets are generally limited to the size (e.g., antennae, batteries), discrete qualities
of certain components (e.g., the frequency of the local oscillator) and, in some
cases, the inclusion of equipment that operates in the frequencies that are neither
the C-band nor the Non C-band. In each case, these functional differences are
required to provide efficient service to customers in the Non C-bands instead of the
C-band.
PLR-115135-22                                 5


Taxpayer thus represents that the Non C-band Assets will have the same function
and use as the Converted Assets. The new Non C-band satellites will be physically
the same as the satellites being converted, other than differences that reflect
technological advances, different manufacturers, and those needed to operate
efficiently in different frequencies of the spectrum. Additionally, the new Non C-
band Assets will have exactly the same relationship to the Taxpayer's business as
the Converted Assets.

Taxpayer requests the following rulings (collectively, the "Requested Rulings"):

(1) Payments that Taxpayer receives from New Overlay Licensee under the
agreement are eligible for nonrecognition of gain under section 1033(a)(2)(A) to the
extent such amounts do not exceed the cost of property purchased by Taxpayer
that is similar or related in service or use to the Converted Assets, during the period
described in section 1033(a)(2)(B); and

(2) The new Non C-band Assets constitute eligible replacement property with
respect to the Converted Assets for purposes of section 1033(a)(2)(A).

                                   LAW AND ANALYSIS

Section 1033(a)(2)(A) generally provides that, if 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 provided in section 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 so
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 only to the
extent that the amount realized upon such conversion (regardless of whether such
amount is received in one or more taxable years) exceeds the cost of such other
property or such stock.

As indicated above, Prior Ruling issued to Taxpayer held, among other things, that
the Converted Assets are being involuntarily converted pursuant to the FCC Order.
This ruling letter is based on that holding in Prior Ruling.

Application of Section 1033 to Payments

Taxpayer is eligible to receive Payments if it clears the lower 300 MHz of the C-
band in certain geographic areas by certain dates well in advance of the dates
designated in the FCC order. Payments are directly related to the FCC's
repurposing of the lower 300 MHz of the C-band and are a direct consequence of
the involuntary conversion of Taxpayer's Converted Assets. We thus conclude that
Payments are eligible for nonrecognition of gain pursuant to section 1033(a)(2)(A)
PLR-115135-22                                6

to the extent such amounts do not exceed the cost of property purchased by
Taxpayer that is similar or related in service or use to the Converted Assets during
the period described in section 1033(a)(2)(B).

The fact that Payments are to be received directly from a third party pursuant to a
private agreement will not affect application of section 1033 to such payments. The
statute and the regulations do not impose restrictions as to the source of the
amounts realized on the involuntary conversion of property.

The Service has consistently held that section 1033 nonrecognition can apply to
cash received from a third party (as opposed to a governmental entity) in
connection with an involuntary conversion of property. See, e.g., Rev. Rul. 81-180,
1981-2 C.B. 161 (cash proceeds the taxpayer received from a private entity in
exchange for land the taxpayer expected to be condemned were received in
connection with an involuntary conversion pursuant to section 1033); see also
PLR 202001016 (Oct. 8, 2019) (concluding that the sale of assets, including FCC
licenses, to a third party in the expectation of being forcibly "repacked" to different
spectrum frequencies if the taxpayer did not participate in an FCC auction of its
rights, qualified as an involuntary conversion under section 1033).

Payments represent amounts received in connection with the involuntary
conversion of the Converted Assets, irrespective of the source of the payments.
Moreover, the fact that Taxpayer must finish clearing the lower 300 MHz of the C-
band in certain areas earlier than required to receive Payments does not change
the application of section 1033 to these payments. Neither the identity of the payor
nor the early timing requirements will cause any Payments received by Taxpayer to
be treated as anything other than amounts received in connection with an
involuntary conversion that are eligible for nonrecognition of gain under
section 1033.

Application of Section 1033 to the Non C-band Assets

Section 1033 provides a means by which a taxpayer whose enjoyment of his property is
interrupted without his consent may arrange to have that interruption ignored for tax
purposes, by returning as closely as possible to his original position. Maloof v.
Commissioner, 65 T.C. 263, 270 (1975). What is required is a reasonable degree of
continuity in the nature of the assets as well as in the general character of the business.
Id. Thus, if the replacement property continues the nature and character of the
taxpayer's investment in, or use of, the converted property, it qualifies as replacement
property for purposes of section 1033 and gain is deferred.

Replacement property will be considered to be similar or related in service or use to the
converted property if the "physical characteristics and end uses of the converted and
replacement properties are closely similar." Rev. Rul. 64-237, 1964 C.B. 319. The Tax
PLR-115135-22                               7

Court in Maloof has explained the similar or related in service or use requirement as
follows:

      [T]he reinvestment must be made in substantially similar business
      property. Stated differently, the statute requires a "reasonably similar
      continuation of the petitioner's prior commitment of capital and not a
      departure from it." While it is not necessary to acquire property which
      duplicates exactly that which was converted, the fortuitous circumstance
      of involuntary conversion does not permit a taxpayer to change the
      character of his investment without tax consequences.

65 T.C. at 269.

Property is "similar or related in service or use to the property so converted"
primarily if there is sufficient "similarity in the relationship of the services or uses
which the original and replacement properties have to the taxpayer-owner." Rev.
Rul. 64-237. This analysis depends on the similarities between the replacement
property and the converted property in terms of the services provided to the
taxpayer, the nature of the business risks connected with the properties, and the
activities that properties demand of the taxpayer. See also Johnson v.
Commissioner, 43 T.C 736 (1965); Loco Realty Co. v. Commissioner, 306 F.2d 207
(8th Cir. 1962); Lian/Record Inc. v. Commissioner, 303 F.2d (2nd Cir. 1962).

If property at issue is used by the taxpayer owner, the analysis relies on the
"functional use test," which examines whether "the physical characteristics and end
uses of the converted and replacement properties were closely similar." See Rev.
Rul. 64-237; see also Rev. Rul. 77-192, 1977-1 CB. 249. This standard does not
require sameness between the converted and replacement property, but only close
similarity. Rev. Rul. 73-225, 1973-1 C.B. 32.

The Converted Assets include spectrum rights, ground-based equipment, and
satellites used to provide satellite communication services in the C-band. Taxpayer
expects to acquire new Non C-band Assets that will be used to provide the same
communications services in the Non C-bands as the Converted Assets did in the C-
band.

The new Non C-band satellites and Non C-band equipment will be physically similar
to, and function in the same way as, the existing C-band satellites and related
ground equipment. Both the Non C-band satellites and Non C-band equipment will
be operated by the same personnel and have their services marketed by the same
personnel in the same way and be subject to the same risks as Taxpayer's existing
C-band satellites and related ground equipment. Taxpayer will incur Non C-band
license costs to acquire and maintain the Non C-band usage rights, just as it did
with respect to the C-band.
PLR-115135-22                              8

The new Non C-band satellites are similar or related in service or use to Taxpayer's
C-band satellites that are being converted, each of which provide the same
communication services, but merely operate in different frequencies. The new Non
C-band satellites perform the same communication services function and are
subject to the same regulatory framework as Taxpayer's existing C-band satellites.
Finally, the new Non C-band satellites and equipment will provide the same
communications services as the C-band satellites and equipment, although the
former will operate in new frequencies, possibly featuring certain technological
advances, and with features necessary to efficiently operate in the new frequencies.

Additionally, Taxpayer uses different portions of the spectrum seamlessly in the
operation of its business. There is no separate "C-band business" or "Non C-band
business." Non C-band License Costs essentially represent costs associated with
replacing rights with respect to the underlying C-band that were, themselves,
converted. That fact supports treating the new Non C-band License Costs as
additional qualified replacement property.

Taxpayer's new Non C-band Assets may reflect some technological advances and
feature differences relative to the Converted Assets that are necessary to operate in
the Non C-bands most efficiently. Nevertheless, the new Non C-band Assets will
provide the same communication services as Taxpayer's existing satellites and
equipment that operate in the C-band. The new Non C-band Assets will share the
same business functions (including marketing and operations) with Taxpayer's
current assets related to the C-band. These differences, while noted, do not make
the Non C-band Assets dissimilar to Taxpayer's existing C-band satellites for
purposes of section 1033.

Accordingly, for purposes of section 1033, Taxpayer's investments in new Non C-
band Assets constitute the purchase of "property similar or related in service or use"
to the Converted Assets. Taxpayer may elect under section 1033 not to recognize
any gain realized with respect to the Converted Assets to the extent Taxpayer's
investment in new Non C-band Assets is within the time period provided by
section 1033(a)(2)(B).

                                      RULINGS

(1) Payments that Taxpayer receives from New Overlay Licensee under the
agreement are eligible for nonrecognition of gain under section 1033(a)(2)(A) to the
extent such amounts do not exceed the cost of property purchased by Taxpayer
that is similar or related in service or use to the Converted Assets, during the period
described in section 1033(a)(2)(B).

(2) The new Non C-band Assets constitute eligible replacement property with
respect to the Converted Assets for purposes of section 1033(a)(2)(A).
PLR-115135-22                                  9

                                         CAVEATS

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 referred to in
this letter.

Except as expressly discussed herein, no opinion is expressed on the basis or effect of
Prior Ruling.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) 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 representatives.

A copy of this letter must be attached to any income tax return to which it is relevant.
Alternatively, taxpayers filing their returns electronically may satisfy this requirement by
attaching a statement to their return that provides the date and control number of the
letter ruling.

The rulings contained in this letter are based upon information and representations
submitted by Taxpayer 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,



                                       Sue-Jean Kim
                                       Senior Technician Reviewer, Branch 5
                                       Office of Chief Counsel
                                       (Income Tax & Accounting)



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