Tax Concerns Could Affect Channel Sharing
Broadcaster participation in channel sharing could be affected by how the IRS taxes the procedure. Industry lawyers and broadcaster Entravision said that could depend on a seemingly innocuous administrative decision by the FCC: Will the commission pay out spectrum auction winnings to intermediaries, or require that the funds go directly to licensees? Broadcasters that channel share want the FCC to be capable of paying funds to qualified intermediaries or trusts, attorneys told us, because that could make channel-sharing transactions eligible to be treated as like-kind exchanges, allowing the broadcaster giving up its spectrum to defer gains taxes on the portion of the money paid to its sharing partner. Entravision has participated in “discussions” focused on whether "relinquishment proceeds that a broadcast licensee would receive are eligible to be used in a tax-free manner towards a channel sharing arrangement structured as a like-kind exchange,” said its ex parte filing posted Thursday in docket 12-268.
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Since the amount of taxes paid on auction winnings will affect the take-home amount for participating broadcasters, the way the IRS treats channel sharing agreements could affect the prices broadcasters are willing to accept in the auction, Pillsbury Winthrop broadcast attorney Scott Flick said. If channel-sharing deals aren’t treated as like-kind exchanges, the money involved would be treated as a capital gain, a broadcast attorney told us. “The FCC has a strong incentive to get as many broadcasters to participate as possible,” Flick said.
It’s not clear if the IRS will treat channel sharing deals as like-kind exchanges, several attorneys told us. The IRS raised the possibility in a letter to Incentive Auction Task Force Vice Chairman Howard Symons earlier this year. Allowing auction funds to be paid to qualified intermediaries is a “critical point” in the process, Entravision said. The task force declined to comment.
The auction procedures public notice said the FCC would “follow winning reverse auction bidders' payment instructions as set forth on their respective standardized incentive payment forms to the extent permitted by applicable law.” In other auction PNs, the commission has said it will pay the applicants. FCC officials have concerns about possible fraud if funds are allowed to go to entities that aren’t the licensee, an industry lawyer said. But FCC officials aren't seen as being opposed to facilitating channel sharing deals being treated as like-kind exchanges.