FCC Clarifies Auction Tax Situation, Favorable to Channel Sharing
The FCC will pay out reverse auction proceeds in a way that will allow channel sharing stations to get a favorable tax status from the IRS, the Wireless Bureau said in a public notice clarifying the commission's position Wednesday. The commission will follow the winning bidders' instructions in paying out the money, which allows the funds to be sent to qualified intermediaries or trusts instead of the bidders themselves. That's one of the requirements for channel sharing stations to claim that the auction money paid to channel sharing hosts represents a “like-kind exchange” and thus is eligible for deferred taxes.“The flexibility to instruct that payments be disbursed to a third party will facilitate channel sharing and thereby promote voluntary broadcaster participation in the reverse auction,” said the PN. The FCC said it received many inquiries about the policy (see 1511130041).
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Like-kind exchanges are commonly used in real estate, and allow the seller of a property to buy another piece of property with the proceeds, and defer tax payment on the second property's purchase price, said Georgetown Law professor Brian Galle,who specializes in tax law. If reverse auction payouts weren't done in a way that facilitated claiming them as a like-kind exchange, channel sharing hosts would see their payments vastly reduced, making sharing a less attractive option, said Covington Burling broadcast attorney Mace Rosenstein, who lobbied the FCC on the matter. Since the money a host received would have been taxed as income to both the channel sharing station and the host station, broadcasters saw it as double taxation, Rosenstein said. Wednesday's PN is “a really useful clarification,” he said.
Though having proceeds go to a third party is a requirement for claiming a like-kind exchange, it isn't a certainty the IRS will accept that channel sharing deals qualify, broadcast attorneys and tax law experts told us. The IRS rarely issues sweeping guidance about tax policy for one-time events like the incentive auction, unless an IRS rulemaking proceeding is involved, Galle said. Though the IRS does issue private letter rulings on potential tax issues, it's not believed that any broadcaster has sought one for the incentive auction, several broadcast attorneys told us. The IRS declined to comment for this story, but it did send a letter referencing like-kind exchanges to Incentive Auction Task Force Vice Chair Howard Symons last year. “A broadcaster who relinquishes spectrum usage rights in return for cash that is used to obtain channel sharing rights may qualify” for deferred taxes under a like-kind exchange, said the IRS in that letter, which is seen by broadcasters as an indication that the IRS is favorable to the idea. The FCC wouldn't have raised the matter with the IRS if the agency believed the tax agency wouldn't allow the claims, Rosenstein said.
Channel sharing deals out of the reverse auction are an unusual tax situation, because the exchanged good is somewhat intangible, broadcast attorneys and legal professors specializing in tax law said. A licensee that shares another's spectrum after the auction is still able to broadcast,though it has sold off its spectrum, they said. But there's precedent for the IRS allowing like-kind exchanges with similarly intangible goods, said Brooklyn Law School professor Bradley Borden, who specializes in tax law and like-kind exchanges. The IRS has allowed peanut farmers selling their crop quotas to the U.S. government to claim the transactions as like-kind exchanges, and broadcasters exchanging radio and TV licenses, Borden said.
Though the PN issued Wednesday does allow auction winners to designate where their payments go, they're allowed to have the money go only to one party, not several. That's intended to keep broadcasters in channel sharing arrangements from asking the FCC to split up their winnings for them, an FCC official said. But the PN does say the funds could be deposited in a jointly held account to facilitate such arrangements.