Rev. Rul. 86-71

1986-1 C.B. 102, 1986-20 I.R.B. 5.

DEDUCTIONS; FEE FOR PREPARATION OF F.C.C. LICENSE APPLICATION

Published: May 19, 1986

Section 212.-Expenses for Production of Income, 26 CFR 1.212-1: Nontrade or nonbusiness expenses

(Also Section 165, 263, 461; 1.165-1, 1.263(a)-1, 1.461-1.)

  Deductions; fee for preparation of F.C.C. license application. An amount paid for the preparation of an F.C.C. application for a license to operate a radio system is a capital expenditure and not deductible as an expense under section

212 of the Code. If the application is denied, the fee paid may be deductible at some future date as a loss under section 165.

ISSUE

  If a taxpayer pays a person to prepare an application for a Common Carrier Radio Station Construction Permit and License from the Federal communications Commission (F.C.C.), is the payment deductible as an expense under section 212 of the Internal Revenue Code in the circumstances described below?

FACTS

  In November 1984, taxpayer A, an individual not otherwise involved in the telecommunications industry, signed a contract with X, a corporation engaged in the business of providing engineering, economic, and financial planning in the telecommunications industry. Under the agreement, X prepared and filed a Common Carrier Radio Station Application on behalf of A in December 1984. The application is guaranteed to satisfy the filing requirements of the F.C.C., although no assurance is provided that the application will be granted. The application is for participation in the F.C.C.'s random selection program to award licenses to operate cellular radio systems. If granted, the license covers a period greater than one year. The F.C.C. procedures did not permit an award of a license in 1984 for the geographic area that A's application covers, and A's application was not, in fact, acted upon in 1984.

  X charged a fee of 30x dollars for its services. A paid the fee in cash in November 1984.

LAW AND ANALYSIS

  Section 212 of the Code provides that an individual shall be allowed a deduction for all ordinary and necessary expenses paid or incurred for the production or collection of income, and for the management, conservation, or maintenance of property held for the production of income. Under section 211, these deductions are limited by exceptions provided by sections 261 through

280G. One of these exceptions, contained in section 263 and sections 1.263(a)-1 and 1.263(a)-2 of the Income Tax Regulations, provides that no deduction is allowed under section 212 for a capital expenditure.

  The costs of obtaining a license to operate a cellular radio- telephone system with a useful life greater than one year are costs of obtaining a capital asset and are not currently deductible as ordinary and necessary expenses for the production of income. See Dustin v. Commissioner, 53 T.C. 491

(1969), aff'd, 467 F.2d 47 (9th Cir. 1972); KWTX Broadcasting Co,. Inc. v. Commissioner, 31 T.C. 952, aff'd per curiam, 272 F.2d 406 (5th Cir. 1959); Radio Station WBIR, Inc. v. Commissioner, 31 T.C. 803 (1959). See also Rev. Rul. 56-520, 1956-2 C.B. 170.

  In the present situation, the fee paid by A is to file an application to acquire an operating license, with a useful life greater than one year, that A may obtain at some indefinite future date. Accordingly, the expense is related to the cost of acquiring a capital asset, and pursuant to section 263 of the Code and sections 1.263(a)-1, 1.263(a)-2 and 1.212-1(n) of the regulations, A is not entitled to deduct the fee paid to X under section 212. See Central Texas Savings & Loan Association v. United States, 731 F.2d 1181 (5th Cir.

1984).

  If, however, A is unsuccessful in obtaining the license, a deduction for the application fee may be allowable as a loss under section 165(a) of the Code. A will not be allowed to deduct the loss until the tax year in which final action is taken to deny the application. Section 1.165-1(b) of the regulations; Rev. Rul. 71-191, 1971-1 C.B. 77, clarified by Rev. Rul. 79-346, 1979-2 C.B. 84; Rev. Rul. 83-137, 1983-2 C.B. 41; Rev. Rul. 56-520, 1956-2 C.B. 170.

HOLDING

  The fee paid by A to X in 1984 is a capital expenditure within the scope of section 263, and thus is not deductible as an expense under section 212 of the Code.

Rev. Rul. 86-71, 1986-1 C.B. 102, 1986-20 I.R.B. 5.