Post-Auction M&A Needn’t Be Too Taxing

What do a broadcast license and a steer have in common? While this may sound like the beginning of a bad joke, the answer is serious indeed. In either case, capital gains resulting from a sale may be deferred through a properly structured like-kind exchange (LKE).

Despite the recent spectrum auction’s results coming in far below original estimates, station owners did sell spectrum and will be facing capital gains taxes on the proceeds. Other stations will be subject to involuntary repacking. Preston Padden, principal of Boulder Thinking LLC, who advocated for the interests of TV stations during the spectrum auction, recently delivered a post- mortem on the process.

Among his findings was the conclusion that the Congress put TV broadcasters at a disadvantage by complying with the wireless community’s demand for 600 MHz spectrum, much more than it ultimately needed to purchase. “Almost 1,000 TV stations will be moved involuntarily,” Padden said. In addition, “the auction failed to clear out many low-value TV stations that now remain on the air, complicating the channel repacking process.”

Padden went on to point out that 92% of TV stations that exited the auction without a channel are planning to channel share (133 of 145) and these “nomadic licenses” also need to be transferable.

One example of this situation is Spanish-language station KBEH TV in Los Angeles, which agreed to sell its spectrum for $146.6 million. As reported by TVNewsCheck, the station’s owner, Hero Licenseco LLC, had originally asked the FCC for permission to sell KBEH’s TV license with must-carry rights to Meruelo Television, owner of KWHY Los Angeles, for $10 million.

The station has since pulled its application. However, it also joined a new group called Broadcasters for Free Market License Transactions that is looking to remove uncertainty over the FCC’s position concerning stations that participated in the incentive auction and now wish to reallocate their licenses.

Anticipating licensees would seek to engage in these types of sales, John Sanders, a principal with Bond & Pecaro, an economic and financial consulting firm based in Washington, wrote an item for the May/June issue of MFM’s The Financial Manager magazine. In it he looked at some of the tax considerations that can influence how these post-auction transactions are structured.

Sanders identified three related reasons that he feels will encourage new transitions in the near future. First, he sees pent-up demand related to the “quiet period” during which stations were unable to share data and the “FCC’s related moratorium on approving broadcast station transfers.”

Second is the potential for deferring capital gains on the auction proceeds.

Third is a recent IRS private-letter ruling (PLR) that raises the prospect of additional tax relief.   

Like-Kind Exchanges

The Internal Revenue Code, Section 1031, governing LKEs, dates to the early 1920s. It was originally intended to encourage agricultural reinvestment. Capital gains on a steer properly reinvested in additional livestock would allow the farmer to defer payment of capital gains tax. More recently the law has been applied to FCC broadcast licenses.

As Sanders explains: “A company that totally relinquished an FCC license for $25 million and enjoyed a $15 million gain could defer tax on the $15 million as long as the proceeds are reinvested in a similar license. To comply with the strict requirements of Section 1031, an entity called a qualified intermediary (QI) is often used so that the seller never actually holds cash. It can be an attorney, a CPA or another party as long as the person is independent from the properties being exchanged.”

It is important to note that these exchanges can become complicated with any number of potential valuation and legal pitfalls. For example, categories must be matched properly; real estate and a broadcast license are not like-kind. In addition, “goodwill is never a like-kind asset.”

Timing is also key. When a property is sold (and the proceeds received by the QI), the seller has 45 days to identify the reinvestment property and 180 days to acquire it.

Private-Letter Prospects

Sanders cites a PLR for a taxpayer who argued that the relinquishment of spectrum in the auction could be defined as “a sale under threat of involuntary conversion.” While PLRs do not serve as precedent, Sanders believes the taxpayer’s logic may open the way for a more favorable tax opportunity for some broadcasters.

Echoing Preston Padden’s comments, the broadcaster successfully argued that in the post-auction spectrum repacking process the station will be forcibly relocated to a different and possibly inferior channel position. “In other words, although the auction was described as ‘voluntary,’ it was not really all that voluntary for some broadcasters including those, for example, with channel positions that were likely to be repacked.” The ruling means that the transaction qualified for Section 1033 treatment, rather than the like-kind provisions in Section 1031.

As Sanders goes on to explain, Section 1033 “was intended to soften the blow when a taxpayer involuntarily relinquishes property due to eminent domain, condemnation or other cases when the owner is essentially forced to relinquish property rights. Under Section 1033, the taxpayer has two years, rather than 180 days, to reinvest. No QI is required, so the proceeds are available immediately. Additionally, in contrast to the Byzantine LKE categories, the taxpayer can reinvest in similar or related property, which is a more flexible definition.”

Of course, as Sanders concludes his article, “any determination in this regard will depend upon specific facts and circumstances.” Stations or groups thinking to pursue either Section 1033 or Section 1031 tax deferrals are well advised to check with legal counsel before moving forward.

In addition to tax concerns, stations are also looking for guidance on their actual repacking costs and just how much can be expected by way of reimbursement. Lerman Senter attorney Paul A. Cicelski has some helpful information on that topic which I will include in my next column.

Future posts will also include insights from industry leaders and experts who participated in last month’s Media Finance Focus 2017, the 57^th annual conference of MFM and BCCA, the media Industry’s credit association. Numbering among them was Perry Sook, chairman, president and CEO of Nexstar Media Group, who told attendees the industry’s adoption of the new ATSC 3.0 advanced video standard promises to yield revenue growth opportunities that will be equal to or greater than the contributions resulting from retransmission consent.

In the meantime, please share the concerns keeping you awake at night. We’ll do our best to uncover the silver linings that can bring you reassurance that broadcasting’s best days still lie ahead.

Mary M. Collins is president and CEO of the Media Financial Management Association and its BCCA subsidiary, the media industry’s credit association. She can be reached at[email protected] and via the association’s LinkedIn, Twitter, or Facebook sites.