FCC C-band payments qualify for involuntary conversion relief

Plain-English summary

Two satellite communications taxpayers had to clear part of the C-band spectrum under an FCC order and relocate their services to the remaining band. The FCC arrangement provided reimbursement for relocation costs and additional payments for meeting accelerated deadlines. The IRS ruled that both types of payments were money received from an involuntary conversion of the affected spectrum rights and related assets under Section 1033. The threat of condemnation began when the FCC issued its order on March 3, 2020. Gain can qualify for nonrecognition to the extent the taxpayers timely buy similar or related replacement property, and new multi-band satellites used in the satellite business qualify as replacement property even if they also operate outside the C-band.

Ruling snapshot

• Question: Do FCC payments for clearing C-band spectrum qualify for Section 1033 relief, and do new multi-band satellites qualify as replacement property?
• Outcome: Approved. The payments arise from an involuntary conversion, and the described satellites are eligible replacement property.
• Key authorities: IRC § 1033(a)(2); Treas. Reg. § 1.1033(a)-2(c)(3); Rev. Rul. 63-221; Rev. Rul. 64-237; Rev. Rul. 81-180; Rev. Rul. 82-147

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202125006 Third Party Communication: None
Release Date: 6/25/2021 Date of Communication: Not Applicable
Index Number: 1033.00-00, 1033.01-00,
1033.02-00, 1033.03-00 Person To Contact:
-------------, ID No. -----------------
------------------------------------------ Telephone Number:
--------------------
---------------- Refer Reply To:
-------------------------- CC:ITA:B04
---------------------------------------- PLR-121976-20; PLR-121977-20
------------------------------ Date:
--------------------------- March 29, 2021

----------------

--------------------------

                                                  LEGEND

Taxpayer 1 = ----------------------------------------
Taxpayer 2 = --------------------------
Foreign Entity = -----------------------------------------
State = -------------
$x = --------------
$y = --------------

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

   This letter responds to your request for a private letter ruling dated September

29, 2020, and supplemental information, dated December 4, 2020, regarding the
application of § 1033 of the Internal Revenue Code (“Code”) to your transactions. You
have requested 4 rulings relating to the repurposing of certain portions of the
electromagnetic spectrum and whether such sales constitute sales under a threat of an
involuntary conversion for purposes of § 1033. This letter ruling is being issued
electronically in accordance with Rev. Proc. 2020-29, 2020-21 I.R.B. 859. A paper copy
will not be mailed to the taxpayers.

                                                FACTS

   Taxpayer 1 is a Foreign Entity classified as -- -------corporation for U.S. federal

income tax purposes which ---------------------------------------------, Taxpayer 2, which is a
State limited partnership. Taxpayers are in the business of providing communication
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services in --------------------over the -------------------------(the “C-band”) through
commercial communication satellites and other infrastructure (the “Satellite Business”).
Taxpayers both use the accrual method of accounting and file on a December 31
taxable year-end.

  Taxpayer 2, through entities that are disregarded as separate from Taxpayer 2,

holds almost all of Taxpayers’ tangible and intangible assets related to the Satellite
Business (“Relevant Assets”), including licenses issued by the Federal Communications
Commission (“FCC”) giving Taxpayer 2 the right to transmit over the C-band (“Spectrum
Usage Rights”), satellites, ground-based facilities, and other related equipment.
Taxpayers represent that Taxpayer 1 holds the monetization rights to a subset of the
Spectrum Usage Rights held by Taxpayer 2.

   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 (the “Deadline”). After the Deadline, the
FCC will consider Incumbent Licensees that continue to transmit on the lower 300 MHz
to be operating on an unauthorized basis and such operators may be subject to fines
with a base amount of $10,000 for each prohibited transmission. While Incumbent
Licensees will need to clear the lower 300 MHz, the FCC Order also requires that those
licensees continue to serve their current customers entirely within the upper 200 MHz
without any service interruptions.

 The FCC Order offers affected Incumbent Licensees two potential forms of

compensation. First, to facilitate the relocation of services into the upper 200 MHz,
Incumbent Licensees that relocate by the Deadline are eligible to receive payments as
reimbursement (“Reimbursement Payments”) for certain reasonable costs incurred that

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.
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are reasonably necessary to move operations from the lower 300 MHz to the upper 200
Mhz. Second, to incentivize Incumbent Licensees to clear the lower 300 MHz more
quickly, the FCC Order also authorizes payments (“Acceleration Payments”) to
Incumbent Licensees who meet certain accelerated deadlines. As Incumbent
Licensees, Taxpayers are entitled to a $x payment if they clear ---------------------------by
December 5---------, and a $y payment if they clear ---------------------------by December 5,
---------. Both the Reimbursement and Acceleration Payments will be funded by the
Overlay Licensees as a condition of receiving a new overlay license.

  To manage the collection and disbursement of funds, including the

Reimbursement and Acceleration Payments, the FCC Order calls for the selection of a
neutral, third party to serve as a clearinghouse subject to the FCC’s oversight. The
clearinghouse’s duties include collecting funds from the Overlay Licensees, reviewing
Incumbent Licensees’ claims for reimbursement, apportioning costs, and disbursing the
Reimbursement and Acceleration Payments to the Incumbent Licensees.

  In light of the FCC Order and their particular situation, Taxpayers concluded that

they had no rational economic choice other than to pursue the Reimbursement
Payments and Acceleration Payments. Accordingly, Taxpayers have submitted to the
FCC a proposed plan for transitioning its services out of -----------------------------of the C-
band. This plan includes the acquisition of new equipment and the upgrade of existing
equipment and facilities, the costs for which will be covered through Reimbursement
Payments. In particular, Taxpayer 2 is in the process of designing, building, and
launching new satellites, which are capable of transmitting on the C-band as well as
frequencies outside of the C-band (“New Multi-Band Satellites”) and which will replace
existing multi-band satellites currently in use. Taxpayers represent that these New Multi-
Band Satellites are necessary for and will be used in Taxpayers’ Satellite Business.

                             REQUESTED RULINGS

1. Whether any Reimbursement Payments and the Acceleration Payments received
 by Taxpayers constitute money received in connection with a compulsory or
 involuntary conversion of the Relevant Assets for purposes of § 1033 of the
 Code.

2. Whether the release of the FCC Order on March 3, 2020, constitutes the date of
 the beginning of the threat or imminence of requisition or condemnation of the
 Relevant Assets for purposes of § 1033(a)(2)(B) and Treas Reg. § 1.1033(a)-
 2(c)(3).

3. Whether any Reimbursement Payments or Acceleration Payments received by
 Taxpayers shall be eligible for nonrecognition of gain pursuant to § 1033(a)(2)(A)
 to the extent such amounts do not exceed the cost of property purchased by ------
 ---------- that is similar or related in service or use to the Relevant Assets, or
                                     4

PLR-121976-20

  otherwise used to provide broadcast services using the C-band over North
  America, during the period described in § 1033(a)(2)(B) (as such period may be
  extended pursuant to Treas. Reg. § 1.1033(a)-2(c)(3)).

4. Whether the New Multi-Band Satellites constitute eligible replacement property
 for purposes of § 1033(a)(2)(A).

                             LAW AND ANALYSIS

   Section 1033(a)(2)(A) of the Code 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 § 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 shall 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.

Ruling Number 1: Sale Under Threat of a Compulsory or Involuntary Conversion

  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 United States 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.” 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.”
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PLR-121976-20

   In the present case, the FCC’s repurposing of the lower 300 MHz of the C-band

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 Taxpayers of
the Relevant Assets. Taxpayers’ choice to clear -------------------------prior to the
applicable deadlines in order to be eligible for Reimbursement Payments and
Acceleration Payments is not a meaningful choice because choosing not to do so would
result in Taxpayers nevertheless losing the right to transmit in ------------------------range
and use of related equipment and facilities, while also forfeiting the right to any
Reimbursement or Acceleration Payments.

Ruling Number 2: Date Threat of Condemnation Began

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

  The FCC issued the FCC Order on March 3, 2020, determining that it would

proceed with plans to clear the lower 300 MHz of the C-band. The FCC Order
constituted written notice to the Taxpayers of the FCC’s intent to reassign a portion of
Taxpayers Spectrum Usage Rights, which would result in the involuntary conversion or
taking of the Relevant Assets.

Ruling Number 3: Taxpayers’ Spectrum Rights and Associated Equipment Were
Involuntarily Converted into Money in the Form of the Reimbursement and Acceleration
Payments
6

PLR-121976-20

   Based on the information and representations provided, the Reimbursement and

Acceleration Payments are the only way for Taxpayers to receive compensation for
relinquishing their right to broadcast in --------------------------of the C-band and for the
costs related to relocating services into ----------------------- -of the C-band. Accordingly,
the Reimbursement and Acceleration Payments constitute money received in exchange
for the relinquished Spectrum Usage Rights and the other Relevant Assets.

Ruling Number 4: The New Multiband Satellites Constitute Eligible Replacement
Property for Purposes of § 1033(a)(2)(A)

  Conversion into Property Similar or Related in Service or Use

  With respect to owner-users of converted property, 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 Court 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.

Maloof v. Commissioner, 65 T.C. 263, 269 (1975) (citations omitted).

  Section 1033 is a Relief Provision

   In determining whether a given taxpayer's receipt of replacement property

qualifies under § 1033, courts have long recognized that § 1033 is a relief provision that
should be liberally construed to effect its purpose. See, e.g., Massillon-Cleveland-Akron
Sign Co. v. Commissioner, 15 T.C. 79, 83 (1950) (interpreting former § 112(f), the
precursor to § 1033). 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 at 270, citing Gaynor News Co. v. Commissioner, 22 T.C. 1172 (1954).
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 § 1033 and gain
is deferred.
7

PLR-121976-20

  Taxpayers must replace or modify existing equipment in order to comply with the

FCC’s Order and transition service seamlessly to ------------------------------of the C-band
before the relevant deadlines. As part of their proposed plan, Taxpayer 2 is acquiring
the New Multi-Band Satellites to replace its existing multi-band satellites. Based on
Taxpayers’ representations, the New Multi-Band Satellites will serve the same basic
function in Taxpayers’ Satellite Business as the existing multi-band satellites that are
being replaced: to provide broadcasting services over the C-band in -------------------.
Thus, the New Multi-Band Satellites that provide services over ------------------------------of
the C-band as part of the Satellite Business, regardless of whether they also are used to
provide service outside of the C-band, constitute replacement property for purposes of
§ 1033(a)(2)(A).

                                     RULINGS

1. The Reimbursement Payments and the Acceleration Payments received by
 Taxpayers constitute money received in connection with a compulsory or
 involuntary conversion of the Relevant Assets for purposes of § 1033 of the
 Code.

2. The release of the FCC Order on March 3, 2020, constitutes the date of the
 beginning of the threat or imminence of requisition or condemnation of the
 Relevant Assets for purposes of § 1033(a)(2)(B) and Treas Reg. § 1.1033(a)-
 2(c)(3).

3. Reimbursement Payments or Acceleration Payments received by Taxpayers
 shall be eligible for nonrecognition of gain pursuant to § 1033(a)(2)(A) to the
 extent such amounts do not exceed the cost of property purchased by Taxpayers
 that is similar or related in service or use to the Relevant Assets, or otherwise
 used to provide broadcast services using the C-band over North America, during
 the period described in § 1033(a)(2)(B) (as such period may be extended
 pursuant to Treas. Reg. § 1.1033(a)-2(c)(3)).

4. The New Multi-Band Satellites constitute eligible replacement property for
 purposes of § 1033(a)(2)(A).

                                    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.

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.
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PLR-121976-20

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 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 request for rulings, it is subject to verification on examination.

                                  Sincerely,



                                  Angella L. Warren
                                  Branch Chief, Branch 4
                                  (Income Tax & Accounting)

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