The Internal Revenue Service (IRS) has ruled the Federal Communication Commission (FCC) television and radio licenses with spectrum rights containing bandwidth differences are like-kind, or eligible for a 1031 exchange, because they were not different in nature and character, but merely grade and quality, per Private Letter Ruling 200532008. Television (TV) stations are assigned licenses with different frequency bandwidths. These licenses are being auctioned by the FCC along with other actions to free up more spectrum for broadband users by incentivizing license holders for certain TV stations to sell their rights in a FCC auction. When sold, the sole underlying property is the assigned frequency of the electromagnetic spectrum known as a FCC TV license. In Technical Assistance Memorandum 200035005 and Private Letter Rulings 8321127 and 8340041, the IRS allowed the exchange of a TV license for a radio license.
1031 Exchange
A Internal Revenue Code Section 1031 tax deferred exchange states that “no gain or loss shall be recognized on the exchange of property held for productive use in trade or business, or for investment, if such property is exchanged solely for property of like kind which is to be held for productive use in trade or business or for investment.” The recognized gain as determined by recapture depreciation and federal and state capital gain tax is deferred indefinitely or until the replacement property is sold. Property can be either real, tangible or intangible personal property. Held implies a season of time the property is used in a business or for investment. The IRS suggests that two years is sufficient. Exchanged means the replacement property acquired of equal or greater value than the relinquished net sales price or a tax is imposed on the difference.
A 1031 exchange can defer upwards of forty percent of the relinquished sales price. The like kind exchange represents interest free working capital to be used to acquire replacement property. The reason for the deferred tax is the taxpayer’s economic position does not change between the sale and the subsequent purchase. The taxpayer has not received cash or reduction of indebtedness and if so, then the equity or mortgage boot or benefit received triggers a tax.
Television and Radio
TV and radio licenses are considered intangible personal property whose gain upon sale can be deferred when another like kind TV and radio license is acquired. The IRS provided Coordinated Issue Papers for radio and TV station exchanges also referred to as “station swaps,” issued May 27, 2005, and revised April 12, 2007. The papers provide guidance to IRS field examiners to establish consistent application of tax laws. Included in the papers is that: (i) network affiliation agreements and any claimed ability to affiliate should be valued separately from the FCC licenses under I.R.C. § 1031, (ii) goodwill should be valued separately from the FCC license, and (iii) accuracy related penalties should be developed when the taxpayer values the FCC licenses using the residual method rather than the direct method.
The IRS has forwarded a letter to the FCC outlining general information on the tax consequences of TV station auction in relation to the Spectrum Act, including a variety of potentially 1031 eligible scenarios when a broadcaster moves from one channel to another or sells rights to one channel and enters into an arrangement to share a channel with another broadcaster.
The first step in a potential 1031 exchange is to discuss the tax consequences with your CPA. Once known and the intent is to replace the relinquished property, then it is time to engage a Qualified Intermediary to accommodate the 1031 exchange. To learn what questions veteran taxpayers ask when vetting a Qualified Intermediary, click the button below for the complimentary file download.
