FCC spectrum sale qualifies as threatened involuntary conversion

Plain-English summary

A television station planned to relinquish its spectrum-based broadcast rights and related assets through the FCC's incentive auction, then reinvest the proceeds in similar or related property. If it did not participate, the station was almost certain to be involuntarily repacked to a different and potentially inferior channel without compensation beyond limited moving-cost reimbursement. The IRS concluded that this government-created alternative was functionally equivalent to a taking and gave the station reasonable grounds to believe forced relocation was forthcoming. The station's sale under the “go off air” option therefore qualified as a disposition under threat or imminence of condemnation for section 1033 purposes. The ruling did not address the separate options of moving to VHF or entering a channel-sharing arrangement.

Ruling snapshot

• Question: Does selling broadcast spectrum rights through the FCC incentive auction under the “go off air” option occur under threat of involuntary conversion for section 1033?
• Outcome: approved
• Key authorities: IRC § 1033; Rev. Rul. 82-147; Rev. Rul. 63-221; Rev. Rul. 81-180

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201702034 Third Party Communication: None
Release Date: 1/13/2017 Date of Communication: Not Applicable

Index Number: 1033.01-00, 1033.02-00, Person To Contact:
1033.03-00 ---------------------, ID No. -----------
Telephone Number:
----------------------------------- ----------------------
--------------------------------------------------- Refer Reply To:
----------------------------------- CC:ITA:B04
---------------------------------------- PLR-126060-15
----------------------------------- Date:
February 01, 2016

LEGEND

Taxpayer = -----------------------------------------
State = --------------
Date 1 = ------------------
Date 2 = --------------------------

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

This responds to your request for a private letter ruling, dated July 30, 2015, regarding
the application of §1033 of the Internal Revenue Code to your transaction. Specifically,
you request a ruling that the sale or other disposition of the spectrum-based content
distribution rights currently associated with the Taxpayer’s broadcast services pursuant
to the actions of the Federal Communications Commission (FCC) constitutes a sale
under a threat of an involuntary conversion of its FCC licenses and related property for
purposes of § 1033 of the Internal Revenue Code.

FACTS

Taxpayer owns and operates a full-power television station in the State market that
operates in the “upper 600 MHz band”. Taxpayer’s UHF TV station operates pursuant
to licenses and permits issued by the FCC, which authorize the station to deliver video,
audio, data, and other content over specific broadcast frequencies.
PLR-126060-15 2

Pursuant to applicable provisions of the Middle Class Tax Relief and Job Creation Act of
2012 (Spectrum Act),1 the FCC is implementing a mandate by Congress to repurpose
spectrum in the 600 MHz band currently used by television broadcasters to help meet
the nation’s accelerating needs for mobile broadband and other new bandwidth-
intensive technologies. The Spectrum Act calls for the FCC to undertake two related,
but independent, processes to reclaim spectrum currently used for television
broadcasting: (i) an “Incentive Auction” and (ii) a “Repacking”. The Incentive Auction is
intended to motivate existing television broadcasters to relinquish some or all of their
spectrum usage rights to accommodate the requirements of the wireless carriers within
the repurposed spectrum. Repacking is an involuntary reassignment of remaining
broadcast television stations to a narrower segment of spectrum lower in the band. This
Repacking will allow the FCC to assemble a near nation-wide contiguous band of
spectrum in the upper 600 MHZ band for reallocation to mobile broadband.

The Spectrum Act provides broadcasters with three relinquishment options for
participating in the Incentive Auction. First, broadcasters can relinquish their spectrum-
based content distribution rights in their entirety and cease broadcasting (Go Off- Air).
Second, broadcasters currently operating on frequencies in the UHF band can
voluntarily agree to relocate to frequencies in the VHF band2 (Move to VHF). Third,
broadcasters can relinquish their rights to deliver content over a television broadcast
channel and, instead, agree to share a single channel with another broadcaster
(Sharing Arrangement).

Alternatively, broadcasters can also forgo participation in the Incentive Auction
altogether and remain on the air. However, that would mean accepting, as part of the
Repacking process, the potential to be reassigned to a different, possibly inferior, less
valuable, UHF channel without compensation (other than reimbursement from a limited
fund for the cost of moving to the new channel).

On Date 1, the FCC released a Report and Order3 adopting rules to implement the
Spectrum Act, including the broadcast television spectrum Incentive Auction and
Repacking. Under the rules, the Incentive Auction will consist of a “reverse” auction and
a “forward” auction. The reverse auction will determine the price at which a broadcast
station would be willing to relinquish some or all of its spectrum-based content
distribution rights. The forward auction will set the price that the wireless carriers will
pay for the new licenses for repurposed spectrum. After the auction is completed,
broadcasters whose bids were accepted in the auction will receive their payments from
the forward auction proceeds. The FCC will also use proceeds from the forward auction

1
Middle Class Tax Relief and Job Creation Act of 2012, Pub. L. No. 112-96 §6403.
2
It is widely accepted within the industry that VHF spectrum is grossly inferior to UHF spectrum for
distribution of video, audio, data and other content in digital form.
3
Expanding the Economic and Innovation Opportunities of Spectrum Through Incentive Auctions, Report
and Order, 29 FCC Rcd.
PLR-126060-15 3

to reimburse certain spectrum relocation costs of broadcasters who do not elect to sell.
Any remaining proceeds will be deposited with the federal treasury.

As stated, broadcasters who choose to forego the Incentive Auction and instead remain
on the air are subject to mandatory relocation to different operating frequencies at the
direction of the FCC. Non-participating stations that currently operate in that portion of
the upper 600 MHz band that will be repurposed for mobile broadband licenses will
almost certainly be forced to change to a new channel in a lower portion of the existing
UHF band. Non-participating stations that do not currently operate in the purposed
band may still be required to operate on new channels, as necessary, to accommodate
other stations being moved to other frequencies.

If Taxpayer does not participate in the Incentive Auction, it is almost certain that
Taxpayer would be Repacked into a different, lower channel. Taxpayer is one of only a
limited number of broadcast television stations that the FCC will force to relocate to
another channel under virtually any scenario. Taxpayer’s TV station is located in the
premium location of State, one of the nation’s largest television and wireless markets.
In addition, its assigned station on the spectrum (in the upper 600 MHZ band) is optimal
for use in mobile broadband and the new bandwidth technologies. These
circumstances make Taxpayer’s station strategically important to the FCC’s spectrum
reclamation project -- virtually ensuring that the FCC would compel Taxpayer to relocate
to a new channel in the Repacking process if Taxpayer fails to participate in the
Incentive Auction.

The FCC is obligated to use “all reasonable efforts” to replicate a station’s coverage
area and population served. However, the FCC is not required to account for all of the
real and substantial technical, commercial and economic differences between the
current value of Taxpayer’s UHF spectrum and the future value of residual lower band
UHF spectrum.

In light of the Spectrum Act, and the FCC’s activities implementing Congress’ directive,
Taxpayer plans to sell the spectrum-based content distribution rights currently
associated with its broadcasting services as part of the Incentive Auction and reinvest
such proceeds in property that is similar or related in service or use.

On Date 2, Taxpayer filed its application with the FCC electing to participate in the
Incentive Auction. Taxpayer’s application notified the FCC that it is retaining all three
relinquishment options: (i) Go Off-Air, (ii) Move to VHF and (iii) enter into a Sharing
Arrangement. However, this private letter ruling deals only with the first option, to Go
Off-Air, to the exclusion of options (ii) and (iii). This private letter ruling only addresses
the transaction as currently proposed.

REQUESTED RULING
PLR-126060-15 4

The sale or other disposition of the spectrum-based content distribution rights and
related assets currently associated with Taxpayer’s broadcast services constitutes a
sale under a threat of an involuntary conversion for purposes of § 1033.

LAW AND ANALYSIS

Section 1033(a)(2) of the Code provides, in part, 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 if the
taxpayer during the period specified in § 1033(a)(2)(B), for the purpose of replacing the
property so converted, purchases other property similar or related in service or use to
the property so converted, then, at the election of the taxpayer, the gain shall be
recognized only to the extent that the amount realized upon such conversion exceeds
the cost of such property.

Repacking under Section 1033

One of the circumstances in which a § 1033 requisition or condemnation occurs is
where a taxpayer's property is subjected to a compensable governmental 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. 69-254, 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 taken for public use without just compensation.” However, the meaning of
condemnation or requisition for purposes of § 1033 of the Code is not 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 motor boats
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 Repacking process is functionally equivalent to a direct
physical taking of private property for a public use without the consent of the property
owner because it effectively deprives the Taxpayer of its assets. Taxpayer’s choice to
participate in the Incentive Auction is not a meaningful choice. Choosing to forgo the
PLR-126060-15 5

Incentive Auction would mean subjecting itself to the Repacking process. Due to
Taxpayer’s unique circumstances, if Taxpayer does not participate in the Incentive
Auction, it is virtually assured of being Repacked into a different, lower band channel
without compensation other than reimbursement from a limited fund for the cost of
moving to the new channel.

Sale under Threat of Repacking

In Rev. Rul. 63-221, 1963-2 C.B. 332, the Service stated that for purposes of § 1033,
threat or imminence of condemnation is generally considered to exist where 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, the Service considered a situation where 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.
However, the threat need not be a certainty. A threat exists if the taxpayer may
reasonably believe from representations of the government and surrounding
circumstances that a forced sale is likely to take place.

In the present situation, the FCC’s decision to impose on Taxpayer mandatory
modification of its broadcast facilities if it decides not to participate in the Incentive
Auction (including forced relocation to a different operating frequency, and the potential
to incur service losses, unreimbursed out-of-pocket costs, and reduced value for its
remaining assets), creates the reasonable grounds to believe that condemnation is
forthcoming. The involuntary conversion is the FCC’s threat of Repacking Taxpayer’s
station to a different frequency and the consequent loss of economic utility of its related
property.

The FCC has provided Taxpayer with notice, through the Spectrum Act and the Report
and Order, of its intent to acquire the type of spectrum-based distribution rights that
Taxpayer possesses. Under its unique circumstances, Taxpayer reasonably believes
that if it does not participate in the Incentive Auction, the FCC will take Taxpayer’s
PLR-126060-15 6

spectrum, resell it to wireless carriers, and then force Taxpayer to relocate its station to
an inferior frequency.

Accordingly, under the relinquishment option to Go Off Air, Taxpayer’s sale of spectrum-
based content distribution rights and related assets currently associated with its
broadcast services to the FCC constitutes a disposition under the threat or imminence
of condemnation for purpose of § 1033 of the Code.

CONCLUSIONS

Under the relinquishment option to Go Off Air, the sale or other disposition of the
spectrum-based content distribution rights and related assets currently associated with
Taxpayer’s broadcast services to the FCC constitutes a sale under a threat of an
involuntary conversion for purposes of § 1033.

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 referenced in
this letter. Thus, as noted above, we do not express any opinion about the tax
consequences under § 1033 or any other provision of the Code if Taxpayer proceeds
with relinquishment option (ii) Move to VHF or relinquishment option (iii) enter into a
Sharing Arrangement. The Service does not issue letter rulings on alternative plans of
proposed transactions or on hypothetical situations. See section 6.12 of Rev. Proc.
2016-1, 2016-1 I.R.B. 1, 21.

This ruling is directed only to the taxpayer 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
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 ruling contained in this letter is based upon information and representations
submitted by the Taxpayer and accompanied by a penalty of perjury statement
PLR-126060-15 7

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,



                                  J. Peter Baumgarten
                                  Assistant to the Branch Chief, Branch 4
                                  Office of Chief Counsel
                                  (Income Tax & Accounting)