DISH Network Corporation Tax Law Violation by Kerrisdale Capital – this is the latest – we first broke the news as reported earlier – see below for the latest – Dish shares are currently up 3.50 percent in early trading
DISH Network Corporation is a satellite-TV provider with a market capitalization of more than $20 billion. Over the past several years, DISH and its affiliates have invested approximately $14 billion in wireless spectrum licenses. These licenses have never been used to provide cellular service or generate material revenue, yet DISH is now benefiting from what we estimate to be almost $1 billion of annual tax deductions by amortizing the licenses’ cost. Indeed, as a result of these deductions, DISH – a company with 14 million paying TV subscribers and more than $2 billion in annual operating income – appears to have paid zero dollars of federal income tax in 2015.
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We believe DISH’s actions violate the Internal Revenue Code, which requires that an “amortizable section 197 intangible” be “held in connection with the conduct of a trade or business.”2 DISH is not conducting a trade or business using its cellular licenses; to the contrary, even its latest annual report merely claims that it is “preparing for the commercialization” of its licenses,3 while the Federal Communications Commission has recently held that “DISH has no terrestrial operations on its…spectrum and has not announced its technology plans for the spectrum, other than to say that it has no current plan to build out facilities using its spectrum.”4 In highly analogous circumstances, in which a business claimed large deductions by amortizing the cost of spectrum licenses that it had not yet deployed in any on-air networks, the IRS found that the deductions were improper, a decision subsequently upheld by both the Tax Court5 and the Court of Appeals for the Sixth Circuit.6 Until such time as DISH actually conducts a trade or business using its cellular spectrum, it has no legitimate grounds for benefiting from amortization, and the IRS should not allow it.
DISH has purchased terrestrial spectrum licenses in a variety of FCC-designated frequency bands. Below we summarize DISH’s portfolio, drawing on its public financial disclosures.
DISH’s 700MHz, AWS-4, and H Block licenses are held by LLCs that are wholly owned, direct subsidiaries of DISH Wireless Holding L.L.C., which is, in turn, a wholly owned, direct subsidiary of DISH Network Corporation. Two additional subsidiaries of DISH Wireless Holding L.L.C. own purportedly noncontrolling 85% economic interests in the parent companies of Northstar Wireless, LLC, and SNR Wireless LicenseCo, LLC, which hold AWS-3 licenses. In addition, DISH, via subsidiaries, has lent $8.9 billion to Northstar and SNR.
Despite its terrestrial spectrum holdings, DISH is not in the terrestrial wireless business. All it has done with its licenses is hold them, presumably in anticipation of re-selling or otherwise monetizing them. DISH’s most up-to-date public commentary about its spectrum investments makes it clear that there is no business underway today:
As we consider our options for the commercialization of our wireless spectrum, we may incur significant additional expenses and may have to make significant investments related to, among other things, research and development, wireless testing and wireless network infrastructure, as well as the acquisition of additional wireless spectrum.8
In keeping with the pre-commercial nature of its spectrum investments, DISH reported zero dollars of revenue in its wireless segment for the first quarter of 2016.9
Prior to late 2015, DISH apparently amortized “some of [its] spectrum for tax purposes” but acknowledged the clear legal limits on this practice (“we have to be in the business to do it”):10
Nonetheless, by the next quarterly call, DISH had suddenly determined that it could already amortize its licenses despite still not “being in the business”:11
DISH’s 2015 10-K confirmed the impact of this shift:
Cash paid for income taxes during 2015 was reduced by, among other things, our noncontrolling investments in the Northstar Entities and the SNR Entities, which hold the Northstar Licenses and the SNR Licenses, respectively, as well as our H Block Licenses acquired in 2014. These licenses are amortized over a fifteen-year life for income tax purposes.
While we don’t know for certain which portions of DISH’s portfolio it began to amortize, or when, a $14,223 million aggregate cost basis amortized over 15 years would supply $948 million of deductions per year, saving $332 million of annual federal income taxes at the 35% statutory rate. Equity analysts covering DISH attribute billions of dollars of value to these deductions, as the excerpt below, taken from an April 22, 2016, document, demonstrates:
See full PDF below.