Category: Deductions & Credits Copyright 1998, The Tax Resource Group. All rights reserved. Telephone 800-578-3498. Internet: www.taxresourcegroup.com Background In 1994, 1995, and 1996, the taxpayer purchased various FCC licenses giving him the right to construct some type of communications tower or device for a period of one year. As I understand it, the licenses became invalid after that one year period. Your concern is how to write off the cost of the licenses. Like you, I was unable to find anything directly on point; however, I did locate some fairly similar items, or at least arguably so. In brief, I feel there is good support for taking an ordinary loss under Section 165 for the cost of these licenses in the year they actually expire. Regarding your concerns about the character of any loss related to the licenses, I agree that the licenses are capital assets; however, I feel that makes no difference to the result. The taxpayer should still be entitled to an ordinary loss. Section 165 Loss Reg. §1.165-1(b) provides as follows. To be allowable as a deduction under section 165(a), a loss must be evidenced by closed and completed transactions, fixed by identifiable events, and, except as otherwise provided in section 165(h) and §1.165-11, relating to disaster losses, actually sustained during the taxable year. Only a bona fide loss is allowable. Substance and not mere form shall govern in determining a deductible loss. Clearly there has been an economic loss here: the taxpayer paid money for the right to build something. That right was valuable. Under the contractual terms conferring the right, various time limits were imposed. As I understand it, the time limits expired, and the rights the taxpayer once enjoyed were completely extinguished. Clearly, the licenses are now worthless and became so when the taxpayer's exploitation rights expired. The issue under Section 165 is whether there is an identifiable event. It seems to me that expiration of a right by its own terms is an identifiable event of the highest magnitude. The loss of value is tied to a discrete event, the cessation of the taxpayer's rights under the license. That event, the cessation, occurs at a precise, readily identifiable moment in time. It seems to me that while this event may be far less dramatic, it is no less identifiable than an explosion or fire or other casualty. It seems clear to me that the rule requiring an identifiable event is simply aimed at denying loss treatment in cases of gradual decline in value. As I said, I found nothing directly on point, but there are similar items. There are several cases holding that the expiration of various kinds of mineral leases gives rise to an identifiable event sufficient to warrant a loss deduction. See Forrester, 23 BTA 942; Stoll, 5 TCM 731, Boggs Oil Corp., 19 BTA 940; Canisteo Mining Co., 76 F. 2d 378, 35-1 USTC ¶9180 (CA-8); I feel that the rights in question with the mineral leases are very similar to the rights in question here. With a mineral lease, one obtains the right to exploit the mineral in a particular location for a set period of time. When that time period expires, the lease has no further value. Here the taxpayer acquired the right to profit from the communications traffic available over a given geographic area by building a communications tower or other device in that area. Here too there is the right to exploit something in a given area for a given period of time. When the time period expires the right is no longer of value, and the expiration itself is the identifiable event needed for loss treatment. In addition, there is a line of cases holding that the cost of various kinds of liquor licenses, where they were found to have identifiable value separate from the business with which they were associated, became a deductible loss with the onset of Prohibition. The taxpayers had a valuable right that became worthless as of the effective date of the Volstead Act. Although the date in question was externally imposed in that case (by a new law), I think the liquor license cases are very similar in nature to the FCC licenses we are dealing with here. See, for example, Zakon v. Comr., 7 BTA 687 and Elston Co. v. U.S., 21 F. Supp. 267 (Ct. Cl. 1937). Capital Loss Issue There may be a capital asset here, but there is clearly no sale or exchange. There is only one party involved, the taxpayer. With respect to the expiration, nothing changed hands between this taxpayer and any third party.
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