In PLR 201702034, the IRS held that a taxpayer’s sale of UHF TV broadcast rights to the FCC pursuant to the Middle Class Tax Relief and Job Creation Act of 2012 (also known as the Spectrum Act) constituted a sale under threat of condemnation of its FCC licenses and related property for purposes of § 1033 of the Internal Revenue Code.

What is the Spectrum Act?

The Spectrum Act calls for the FCC to reclaim and repurpose spectrum in the 600 MHz band currently used by television broadcasters to help meet this country’s increased need for mobile broadband. Pursuant to this mandate from Congress, the FCC announced that it would undertake two processes to reclaim spectrum currently used for television broadcasting: (i) an “Incentive Auction” and (ii) a “Repacking”.

Incentive Auction and 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. Through the Incentive Auction and Repacking, the FCC will assemble a near nation-wide contiguous band of spectrum for reallocation to mobile broadband.

How Does The Spectrum Act Affect Broadcasters?

The Spectrum Act provides broadcasters with three relinquishment options for participating in the Incentive Auction. Alternatively, broadcasters can also forgo participation in the Incentive Auction altogether and remain on the air. However, that would mean accepting, as part of Repacking, 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).

The Case

The taxpayer had significant reason to believe that its broadcast rights would be subject to Repacking given that the taxpayer was in a premium location and its signal spectrum was particularly well suited for the FCC’s purposes.

In light of the foregoing, the taxpayer felt compelled to sell its rights pursuant to the Incentive Auction. The fact that the taxpayer was “voluntarily” selling its spectrum to the FCC raised the issue as to whether the sale qualified for tax deferral treatment under §1033.

There are many situations where a government or a governmental agency needs privately owned assets and is forced to exercise its eminent domain authority to take the property. In order to soften the harm, § 1033 of the Internal Revenue Code provides that no gain is recognized where property is involuntarily converted “into property similar or related in service or use” to the converted property (“Similar or Related Property”) or is sold under threat of condemnation and timely reinvested in Similar or Related Property. If the owner timely reinvests all of the proceeds from the taking into Similar or Related Property, the owner will be able to defer any gain it realizes as a result of the taking.

For purposes of § 1033, an involuntary conversion is an “involuntary destruction, theft, seizure, requisition or condemnation, or disposition under threat or imminence of requisition or condemnation.” Many times the actual taking has not occurred but the threat that a taking will occur has been made and the parties will negotiate the compensation that will be paid to the owner. Accordingly, the determination that a transaction has occurred under “threat or imminence” is closely scrutinized.

In this case, the IRS ruled that the sale by the taxpayer of all of its spectrum-based broadcast rights to the FCC under the FCC’s announced Incentive Auction program constituted a sale under threat of condemnation, thus enabling the taxpayer to defer its realized gain under § 1033 by timely reinvesting in Similar or Related Property.