Cellular towers and installed cable systems are like-kind property

Plain-English summary

A communications provider proposed exchanging cellular tower sites for installed fiber-optic and copper cable distribution systems. The tower structures, equipment huts, fencing, and related components were permanently attached to land, while the replacement cables, poles, conduits, pads, and hardware were also permanently installed or intended to remain for their useful lives. The IRS explained that state-law property labels do not alone determine whether assets are like kind under section 1031. It found the properties alike in nature because both transmit or support telecommunications signals over distance and are permanently affixed to land. The ruling treated the properties as like kind, but only for the listed installed assets held through fee ownership or qualifying long-term land-use rights of at least 30 years including exercisable renewals.

Ruling snapshot

• Question: Were cellular tower sites like kind to permanently installed cable distribution systems for a section 1031 exchange?
• Outcome: approved for the specified real-property interests and installed assets
• Key authorities: IRC § 1031; Treas. Reg. § 1.1031(a)-1(b); Fleming v. Commissioner; Morgan v. Commissioner

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201706009 Third Party Communication: None
Release Date: 2/10/2017 Date of Communication: Not Applicable
Index Number: 1031.00-00, 1031.02-00
Person To Contact:
-------------------- ---------------------------, ID No. ---------------
------------------------------------ -----------------
---------------------------------------------- Telephone Number:
---------------------------------- ----------------------
Refer Reply To:
CC:ITA:B04
PLR-116701-16
Date:
November 14, 2016

Taxpayer = ------------------------------------------------------------------

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

This is in response to Taxpayer’s request for a private letter ruling dated May 20, 2016,
under § 1031 of the Internal Revenue Code. Specifically, the request concerns whether
cellular towers that Taxpayer uses in its business and will relinquish are of like-kind
under § 1031 to cable telecommunication signal distribution property Taxpayer intends
to receive in exchange for the cellular towers.

FACTS

Taxpayer is a communications services provider that offers communications
infrastructure to its customers. Taxpayer currently owns fee simple or long-term
leasehold interests in multiple wireless communication tower sites across the nation.
Each tower site consists of fencing around the tower site, an antenna support structure
for mounting antennas that are affixed to the land by a concrete foundation and
attachment hardware (such as bolts and lashings), a nearby equipment hut with HVAC
systems installed in the hut, and the land underlying the site itself (“Towers”). All of
Taxpayer’s Towers are permanently affixed to the land or would be extensively
damaged if removed.

Taxpayer is contemplating exchanging its Towers for fiber-optic and copper cables
installed either above or below ground and various other associated properties,
including telephone poles for carrying the cables, underground conduits, concrete pads,
attachment hardware, pedestals, guy wires, and anchors (“Cable Distribution Systems”).
The Cable Distribution Systems are permanently affixed to the land or are intended
never to be removed until the end of their respective useful lives.
PLR-116701-16 2

LAW AND ANALYSIS

Section 1031 requires nonrecognition of gain or loss in an exchange of properties held
for productive use in a trade or business or for investment if such properties are
exchanged solely for like-kind properties held for productive use in a trade or business
or for investment.

Section 1.1031(a)-1(b) of the Income Tax Regulations provides that the words “like
kind” have reference to the nature or character of the property and not to its grade or
quality. Under § 1031, one kind or class of property may not be exchanged for property
of a different kind or class.

Several cases indicate that state law classifications of property are not the sole
determiner of whether two sets of property are of like kind for § 1031 purposes. In
Fleming v. Commissioner, 24 T.C. 818, 823-24 (1955), aff’d sub nom. Commissioner v.
P.G. Lake, Inc., 356 U.S. 260 (1958), rev’g 241 F.2d 78 (5th Cir. 1957), the court found
that carved-out oil payments and a fee interest in real estate were not like-kind
properties although the oil payment rights were an interest in real estate under
applicable state law. In Clemente Inc. v. Commissioner, T.C. Memo. 1985-367, and
Oregon Lumber Co. v. Commissioner, 20 T.C. 192 (1953), acq. 1953-2 C.B. 5, the
courts considered more than state law classifications of property when determining
whether properties were of like kind.

In addition, in Morgan v. Commissioner, 309 U.S. 78, 80-81 (1940), which concerned
whether a state law classification of a power of appointment determined its character for
federal tax purposes, the Supreme Court stated,

  State law creates legal interests and rights. The federal revenue acts
  designate what interests or rights, so created, shall be taxed ... If it is
  found in a given case that an interest or right created by local law was the
  object to be taxed, the federal law must prevail no matter what name is
  given the interest or right by state law.

Therefore, consistent with Fleming, Clemente, Inc., Oregon Lumber, and Morgan, state
law property classifications are not the sole basis for determining whether the Towers
and the Cable Distribution Systems are like kind property for § 1031 purposes.

In this case, the Towers and the Cable Distribution Systems transmit or support the
transmission of telecommunication signals across distances. Neither the Towers nor
the Cable Distribution Systems are used for other activities. In addition, the Towers and
the Cable Distribution Systems are, or are intended to be, permanently affixed to land.
Under these facts, Taxpayer’s Towers and the Cable Distribution Systems are like kind
property for purposes of § 1031.
PLR-116701-16 3

CONCLUSION

Taxpayer’s real property improved with Towers (including fencing around the tower site,
an antenna support structure for mounting antennas that are affixed to the land by a
concrete foundation and attachment hardware (such as bolts and lashings), nearby
equipment huts with HVAC systems installed in the huts and all other structural
components of Towers and the huts that are fully installed) is of like-kind within the
meaning of § 1031(a)(1) and § 1.1031(a)-1(b) to the real property improved with Cable
Distribution Systems (copper or fiber optic cables, telephone poles, underground
conduits, concrete pads, attachment hardware, pedestals, guy wires, and anchors that
are fully installed). This ruling applies only to Towers and the Cable Distribution
Systems being transferred and received by Taxpayer as relinquished or replacement
property, respectively, in the exchange that are affixed or embedded in real property
held in fee simple or similar interest or under a long-term lease, easement, right of way
or similar long-term right of use arrangement, in each case having a duration of thirty
years or more including optional renewal periods exercisable by the tenant or right of
use holder.

Except as provided in the preceding paragraph, no opinion is expressed or implied
concerning the tax consequences of any aspect of any transaction or item discussed or
referenced in this letter under any provision of the Internal Revenue Code including
§ 1031. For example, this ruling pertains only to the Towers and the Cable Distribution
Systems and does not pertain to any other properties exchanged by Taxpayer.

This ruling is directed only to Taxpayer. Section 6110(k)(3) of the Code provides that it
may not be used or cited as precedent. Taxpayer must attach to any income tax return
to which it is relevant a copy of this letter or, if it files its returns electronically, must
include a statement providing the date and control number of this 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 executed
by an appropriate party. While this office has not verified any of the material submitted
in support of the requested ruling, it is subject to verification on examination.
PLR-116701-16 4

In accordance with the Power of Attorney on file with this office, we are sending a copy
of this letter to Taxpayer’s authorized representative.

                                     Sincerely,



                                     Michael J. Montemurro
                                     Chief, Branch 4
                                     Office of Associate Chief Counsel
                                     (Income Tax & Accounting)