In PLR 201706009, the IRS has ruled that a taxpayer's exchange of cellular tower properties for certain cable telecommunications properties will qualify for like-kind treatment under Section 1031. Accordingly, no gain or loss will be recognized by the taxpayer on the exchange.

Facts

Taxpayer is a communications services provider that currently owns fee simple or long-term leasehold interests in multiple wireless communication tower sites (Towers) located across the country. Taxpayer uses the Towers in its business. Each Tower consists of antennas and an antenna-support structure that is affixed to a concrete foundation, as well as the underlying land, surrounding fencing and an accompanying equipment hut. For each Tower, the infrastructure is either permanently affixed to the land or would be extensively damaged if removed.

Taxpayer plans to exchange its Towers for certain "Cable Distribution Systems," which include fiber-optic and copper cables installed above or below ground, and associated properties, such as telephone poles, underground conduits, concrete pads and related hardware. The Cable Distribution Systems are either permanently affixed to the land or are not intended to be removed before the end of their useful lives.

Law and analysis

Section 1031(a)(1) generally provides that no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if the property is exchanged solely for property of like kind that is to be held either for productive use in a trade or business or for investment. Treas. Reg. Section 1.1031(a)-1(b) states that the words "like kind" refer to the nature or character of the property and not to its grade or quality, and that one kind or class of property may not be exchanged for property of a different kind or class.

In addition to the relevant statute and regulations, the IRS also highlighted case law from several court decisions in its ruling. Although the IRS did not address the state law treatment of the Towers or Cable Distribution Systems, the highlighted case law established that state law property classifications are not the sole basis for determining whether two sets of property are of like kind under Section 1031.

The IRS ruled that the Towers and Cable Distribution Systems are like-kind property for purposes of Section 1031. The IRS noted that both the Towers and Cable Distribution Systems transmit or support the transmission of telecommunications signals across distances and that neither are used for any other activities. The IRS additionally noted that both the Towers and Cable Distribution Systems are (or are intended to be) permanently affixed to land. Finally, it should be noted that the ruling states that the conclusion applies only to the Towers and Cable Distribution Systems that are affixed or embedded in real property that is held in fee simple or similar interest or under a long-term lease, easement, right of way or similar long-term right of use arrangement (in each case having a duration of 30 years or more including optional renewal periods exercisable by the tenant or right of use holder).

Implications

In CCA 201238027, the IRS concluded that state law property classifications are not determinative of whether property is of like kind, but, instead, the IRS should consider all facts and circumstances, including state law and federal tax law classifications as appropriate.

Perhaps going beyond its approach in CCA 201238027, the IRS in PLR 201706009 did not even discuss the state law characterization of the relinquished and replacement properties, but instead relied solely on federal income tax law in concluding that the relinquished and replacement properties are of like kind for Section 1031 purposes.

Although neither CCA 201238027 nor PLR 201706009 is a published ruling and, thus, they cannot be cited or used as precedent under Section 6110(k)(3), they do represent the current position of the IRS on the issue. Depending on the facts and timing of a transaction, taxpayers may wish to obtain their own private rulings on the issue.

Another issue not addressed in PLR 201706009 is recapture under Section 1245. Tangible property used as an integral part of providing communications services (e.g., distribution assets) is Section 1245 property under Section 1245(a)(3)(B). If the relinquished property in an exchange includes Section 1245 property but the replacement property does not, then any inherent Section 1245 recapture in the relinquished property is triggered, even if the exchange would otherwise qualify as tax-free under Section 1031. Thus, taxpayers should be aware that Section 1245 will override Section 1031 unless the replacement property includes adequate Section 1245 property.

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