TLJ News from March 21-25, 2014

IRS States that Virtual Currencies are Property for Tax Purposes

3/25. The Internal Revenue Service (IRS) released a document titled "IR-2014-36: IRS Virtual Currency Guidance: Virtual Currency Is Treated as Property for U.S. Federal Tax Purposes; General Rules for Property Transactions Apply". It references a second IRS document [6 pages in PDF] titled "Notice 2014-21", also released on March 25, 2014.

The IRS states that for the purposes of federal tax law, virtual currencies, such as Bitcoin, are treated as property, rather than as currency.

Notice 2014-21 states that "This notice describes how existing general tax principles apply to transactions using virtual currency."

Its key conclusion is that "For federal tax purposes, virtual currency is treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency."

Also, "Under currently applicable law, virtual currency is not treated as currency that could generate foreign currency gain or loss for U.S. federal tax purposes." And, "A taxpayer who receives virtual currency as payment for goods or services must, in computing gross income, include the fair market value of the virtual currency, measured in U.S. dollars, as of the date that the virtual currency was received."

This notice states that the IRS "is aware that ``virtual currency´´ may be used to pay for goods or services, or held for investment. Virtual currency is a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value. In some environments, it operates like ``real´´ currency -- i.e., the coin and paper money of the United States or of any other country that is designated as legal tender, circulates, and is customarily used and accepted as a medium of exchange in the country of issuance -- but it does not have legal tender status in any jurisdiction."

This notice continues that "Virtual currency that has an equivalent value in real currency, or that acts as a substitute for real currency, is referred to as ``convertible´´ virtual currency. Bitcoin is one example of a convertible virtual currency. Bitcoin can be digitally traded between users and can be purchased for, or exchanged into, U.S. dollars, Euros, and other real or virtual currencies."

This IRS notice also addresses determination of the basis and fair market value of virtual currency. It also addresses mining of virtual currencies, and other issues.

The principle author of this notice is the IRS's Keith Aqui.

HCC/SCT Marks Up STELA Reauthorization Bill

3/25. The House Commerce Committee's (HCC) Subcommittee on Communications and Technology (SCT) marked up a yet to be introduced bill to extend expiring provisions of the Communications Act related to the retransmission of signals of television broadcast stations.

This main provision of this draft bill is reauthorization of the Satellite Television Extension and Localism Act (STELA). It provides for a five year extension. However, this bill also addresses the FCC's media ownership rules, retransmission consent, sweeps week, the integration ban, and other issues.

See, discussion draft of the bill, the HCC's draft summary, and TLJ bill summary in story titled "HCC/SCT to Mark Up STELA Reauthorization Bill" in TLJ Daily E-Mail Alert No. 2,635, March 24, 2014.

The full HCC has not yet scheduled a date for it mark up of this bill. The Senate Commerce Committee (SCC) has not yet marked up a bill. Key provisions of the STELA (enacted as S 3333 [LOC | WW] in the 111th Congress) are set to expire at the end of 2014.

See, full story.

House Appropriations Subcommittee Holds Hearing on FCC Budget

3/25. The House Appropriations Committee's (HAC) Subcommittee on Financial Services and General Government held a hearing on the Fiscal Year 2015 budget for the Federal Communications Commission (FCC). FCC Chairman Thomas Wheeler wrote in his prepared testimony that the FCC's FY 2015 budget request is $375,380,313.

He said that the FCC requests "a total of 1,790 FTEs for FY 2015, which includes an additional 10 FTEs for Information Technology (IT) programming and 45 FTEs for USF modernization and oversight".

He also explained that "The FCC's spending levels decreased after FY 2009 from $341 million to $335 million, and hovered just at that mark for two years, finally hitting $339 million during the next three years -- with $17 million of that number going toward sequestration in FY 2013. During FY 2013, the FCC cut its programming to the bone and worked hard to find cost savings, often delaying lifecycle replacements and improvements for facilities and equipment. In FY 2011, the FCC had 1,776 employees. Today, we are down to 1,725, which is a 30-year low in FTEs. The number of FCC contracting personnel also has steadily decreased from a high of 959 in FY 2009 to a current level of 470."

Wheeler also boasted that the FCC's auctions provide vast revenues for the US Treasury.

However, this was not the case during the tenure of former Chairman Julius Genachowski.

FCC Commissioner Ajit Pai wrote in his prepared testimony that "From January 2009 through December 2013, the Commission raised a paltry $72 million in auction revenue, or about two-tenths of one percent of the amount raised in the prior four years. Indeed, when you account for the Commission’s spending on auctions, our auctions program has actually lost money during the last five years. This is bad news not just for the Treasury but also for American consumers, whose demands for additional bandwidth have increased as their use of tablets and smartphones has spiked over this same period of time."

Pai also wrote at length about the forthcoming auction of spectrum (federal spectrum in the 1755–1780 MHz and 2155–2180 MHz bands, and spectrum relinquished by broadcasters) provided for by the 2012 spectrum act.

He wrote that "My greatest worry regarding the incentive auction, at this point, is about participation. In order for the incentive auction to be successful, we will need robust participation by broadcasters and wireless carriers alike. But right now, I am concerned that the Commission will make unwise policy choices that will deter participation in both the reverse and forward auctions. My position on the reverse auction is simple. Prices paid to broadcasters should be determined by the market. The Commission should not set them by administrative fiat. The Commission should not deter broadcaster participation through a complicated ``scoring´´ scheme that tries to prejudge the compensation television station owners should receive."

Pai continued that "Any attempt to restrict payments to broadcasters will prove to be penny-wise and pound-foolish. Indeed, without sufficient broadcaster participation, the entire incentive auction will fail. And on the forward auction, the Commission should not limit carriers' ability to participate, such as by setting a spectrum cap or narrowing the spectrum screen despite the significant competition that exists in the wireless market. The inevitable effect of such a policy would be less spectrum for mobile broadband, less funding for national priorities, a higher budget deficit, and an increased chance of a failed auction."

Pai also addressed the FCC's universal service tax and subsidy programs, including expansion of the e-rate program, the IP transition, wireless infrastructure, network neutrality, regulation of media and media ownership, AM radio revitalization, 911 service and location surveillance, and FCC reform.

More News

3/25. The Federal Communications Commission (FCC) released an Order [42 pages in PDF] that amends its rules to adjust FCC fees. The FCC adopted this order on March 24, and released it on March 25. It is FCC 14-24 in GEN Docket No. 86-285.

Obama Aide Discusses PRC and IP Theft

3/24. Ben Rhodes, a speech writer and foreign policy advisor for President Obama, spoke at a news conference about the People's Republic of China (PRC), cyber intrusions, and intellectual property.

Rhodes said that US President Obama and PRC President Xi discussed cyber security. See, transcript.

Rhodes said that "What President Obama made clear to him is that, again, the United States does not engage in espionage to gain a commercial advantage. We don't share information with our companies."

Rhodes elaborated that "Both the United States and China, understandably, like other countries in the world, engage in intelligence activities on behalf of our national security. But there’s a clear distinction, in our view, between intelligence activities that have a national security purpose versus intelligence activities that have a commercial purpose. And what we’ve tried to stress to the Chinese in our cyber dialogue is that while we understand that different nations are going to have approaches to cybersecurity and intelligence collection, that we need to cooperate in setting clear rules of the road that wall off theft of tradecraft related to commercial entities, theft of intellectual property."

Various news media have published stories in recent days that state that the National Security Agency (NSA) has gained unauthorized access to Huawei servers in the PRC. See for example, story by David Sanger and Nicole Perlroth titled "N.S.A. Breached Chinese Servers Seen as Security Threat".

They wrote in a story published on March 22, 2014 in the New York Times that "The agency pried its way into the servers in Huawei’s sealed headquarters in Shenzhen, China’s industrial heart, according to N.S.A. documents provided by the former contractor Edward J. Snowden. It obtained information about the workings of the giant routers and complex digital switches that Huawei boasts connect a third of the world’s population, and monitored communications of the company’s top executives."

FCC Releases Agenda for March 31 Meeting

3/24. The Federal Communications Commission (FCC) released an agenda for its event on Monday, March 31, 2014 titled "Open Meeting".

The FCC is scheduled to adopt items pertaining to (1) unlicensed use of 5 GHz spectrum, especially for Wi-Fi, (2) commercial use of spectrum for advanced wireless services (AWS), (3) retransmission consent negotiations, network non-duplication, and syndicated exclusivity, and (4) broadcast ownership regulation, broadcast TV sharing agreements, and attribution of joint sales agreements (JSAs).

5 GHz Band. First, the FCC is scheduled to adopt a Report and Order (R&O) that will revise FCC rules regarding unlicensed use 5 GHz spectrum.

The FCC adopted and released a Notice of Proposed Rulemaking (NPRM), as required by Section 6406(a) of the 2012 spectrum act, on February 20, 2013. It is FCC 13-22 in ET Docket No. 13-49.

The goal is deployment of Wi-Fi networks in the 5 GHz band. Currently, most Wi-Fi is in the 2.4 GHz band.

The spectrum act is Title VI of HR 3630 [LOC | WW], the "Middle Class Tax Relief and Job Creation Act of 2012", enacted in the 112th Congress.

AWS-3 Spectrum. Second, the FCC is scheduled to adopt a R&O that contains allocation, licensing, service, and technical rules for the 1695-1710 MHz, 1755-1780 MHz, and 2155-2180 MHz bands, as required by the spectrum act.

The FCC adopted and released its NPRM on July 23, 2013. It is FCC 13-102 in GN Docket No. 13-185.

Rep. Doris Matsui (D-CA) and Rep. Brett Guthrie (R-KY) sent a letter to the FCC regarding this item on March 25. They wrote that "As the FCC finalizes its band plan and rules for an auction of the long-sought AWS-3 spectrum, we write to stress the importance of creating strong incentives for wireless carriers to compete in the auction. We urge the Commission to put forth a band plan that allows for robust competition, maximizing revenue through vigorous auction participation."

Retransmission Consent. Third, the FCC is scheduled to adopt an item that contains an Order related to retransmission consent negotiations, and a Further NPRM regarding whether the FCC should eliminate the network non-duplication and syndicated exclusivity rules. This is MB Docket No. 10-71.

Broadcast Ownership. Fourth, the FCC is scheduled to adopt an item that contains a FNPRM to commence its 2014 quadrennial review of its broadcast ownership rules. This item also contains an NPRM that proposes to define and require the disclosure of a category of sharing agreements between broadcast television stations. This item also contains a R&O that determines that certain television JSAs are attributable.

This meeting is scheduled to take place on Monday, March 31 at 10:30 AM in the FCC's Commission Meeting Room.

More News

3/24. Federal Communications Commission (FCC) Chairman Thomas Wheeler gave a speech in Washington DC in which he discussed the FCC's forthcoming incentive auction involving broadcast licensees' spectrum.

3/24. Federal Communications Commission (FCC) Commissioner Ajit Pai gave a speech in Washington DC in which he discussed 911 calls placed from multi-line telephone systems (MLTS).

More News

3/22. The U.S. China Economic and Security Review Commission (USCESRC) released a revised version of its report titled "Red Cloud Rising: Cloud Computing in the China". The USCESRC released the original version of this report on September 5, 2013. See, story titled "Report Addresses Development of Cloud Computing in the PRC" in TLJ Daily E-Mail Alert No. 2,602, September 17, 2013. The just released version states that "Microsoft brought to the authors’ attention new information about its partnership with Chinese company 21Vianet. The original version of the report inaccurately characterized certain aspects of the Microsoft -- 21Vianet partnership."

EC Adopts Competition Rules for Technology Transfer Agreements

3/21. The European Commission (EC) announced the adoption of new competition rules and guidelines for the assessment of technology transfer agreements, through which a licensor permits a licensee to exploit patents, know how or software for the production of goods and services.

The EC stated in a release that "The revised rules facilitate such sharing of intellectual property, including through patent pools, and provide clearer guidance on licensing agreements that stimulate competition. At the same time they aim to strengthen incentives for research and innovation.

The EC released a new Technology Transfer Block Exemption Regulation (TTBER), which exempts certain licensing agreements from antitrust rules, and Technology Transfer Guidelines, which provide further guidance.

These rules and guidelines go into effect on May 1, 2014.

USCESRC Report Predicts Growing PRC FDI in US ICT Sectors

3/21. The U.S. China Economic and Security Review Commission (USCESRC) released a report titled "China’s Foreign Exchange Reserves and Holdings of U.S. Securities". The author is the USCESRC's Nargiza Salidjanova. This report addresses the People's Republic of China's huge investment in US Treasury Securities, and the growing trend of PRC direct foreign investment (DFI) in the US technology, communications, and services sectors.

It states that "Persistent intervention in the exchange rate markets to keep the RMB undervalued has allowed China to accumulate the world’s largest reserves of foreign exchange, most of which is in U.S. dollars. By yearend 2013, China had over $3.82 trillion in foreign exchange reserves, nearly double the figure five years earlier. A significant proportion of these reserves is invested in U.S. Treasury securities because Treasuries are seen as a safe investment; are denominated in dollars; and constitute the only financial market base vast enough to accommodate China’s surplus liquidity."

This report continues that "Another avenue is foreign direct investment (FDI). In 2001, the Chinese government officially adopted a policy encouraging Chinese companies to invest abroad. This “going out” policy has started to show results, although outward investment still pales in comparison to inward investment. According to the latest available Chinese government statistics, outward investment in 2012 reached $87.8 billion (an increase of 17.6 percent year-on-year), with the total accumulation at that time at $531.94 billion. Chinese companies have made major acquisitions of mining and other natural resource companies in Australia, Canada, and parts of Africa, while Chinese brands like Haier (home appliances), Huawei (telecommunications), and Lenovo (personal computers) are seeking to tap global markets, in part through direct investment abroad."

Hong Kong is the top destination for such FDI, and the US is second. The report adds that "Although Chinese FDI in the United States remains low, there is a clear upward trend, and it is expected to grow substantially. One reason is that Beijing has become increasingly aware of the risk of having most of its foreign exchange reserves invested in low-interest-bearing Treasuries and is looking to diversify its investments. In addition, U.S. leadership in technology and services has made the United States an attractive prospect for Chinese investors seeking to increase their competiveness at home and abroad." (Footnote omitted.)

HCC/SCT to Mark Up STELA Reauthorization Bill

3/21. The House Commerce Committee's (HCC) Subcommittee on Communications and Technology (SCT) scheduled a meeting to mark up a draft of a STELA reauthorization bill on March 24 and 25, 2014. The SCT members will make open statements on Monday at 5:30 PM. The SCT will mark up the draft bill on Tuesday at 10:30 AM.

The HCC released a draft of this yet to be introduced bill. It provides a five year extension of the Satellite Television Extension and Localism Act (STELA). This bill also addresses retransmission consent, the integration ban, and other issues.

See also, the HCC's notice of the meeting, and the HCC's  draft summary.

Also, the Senate Judiciary Committee (SJC) will hold a hearing titled "Reauthorization of the Satellite Television Extension and Localism Act" at 10:00 AM on Wednesday, March 26. See, SJC notice.

STELA Reauthorization. First, this draft bill would extend the exemption from retransmission consent for distant signals where a satellite subscriber is outside the area served by the broadcast signal, and extend the prohibition on exclusive retransmission consent deals and requirement that broadcasters negotiate in good faith with multichannel video programming distributors (MVPD). (See, Section 2 of this draft bill, at pages 1-2.)

The Congress last extended the statutory licenses that permit satellite television service providers to retransmit distant television broadcast station signals in the 111th Congress in 2010. See, S 3333 [LOC | WW], the "Satellite Television Extension and Localism Act of 2010", or "STELA", and story titled "Obama Signs Satellite TV Bill" in TLJ Daily E-Mail Alert No. 2,089, May 28, 2010.

Retransmission Consent. Second, the draft bill would amend the retransmission consent regime, which is codified at 47 U.S.C. § 325.

Section 325 provides that "No cable system or other multichannel video programming distributor shall retransmit the signal of a broadcasting station, or any part thereof, except ... with the express authority of the originating station".

Under Section 325 broadcasters can charge cable companies and other MVPDs for retransmission of their programming. The companies have been negotiating retransmission consent contracts since this section was enacted by the Cable Act of 1992. Withholding of consent by broadcasters, and resulting the blackouts, have become common.

This draft bill would prohibit multiple broadcast stations from negotiating retransmission consent jointly unless the cable or satellite operator agrees to joint negotiations or the stations are directly or indirectly under common de jure control approved by the Federal Communications Commission (FCC).

Specifically, this draft bill would add a new subsection iv to 325(b)(3)(C)) that would require the FCC to write regulations that "shall" "prohibit a television broadcast station from negotiating on a joint basis with another television broadcast station in the same local market ... to grant retransmission consent under this section to a" MVPD "unless -- (I) such stations are considered to be directly or indirectly owned, operated, or controlled by the same entity for purposes of section 73.3555(b) of title 47, Code of Federal Regulations, or any successor regulation; or (II) such" MVPD "agrees to negotiate on such joint basis." (See, Section 3, at pages 2-3.)

Media Ownership Rules. Third, this draft bill would address attribution for the purpose of the FCC's obsolete media ownership rules.

The draft bill would prohibit the FCC from modifying its rules to treat stations under any "shared service agreement, local news service agreement, local marketing agreement, or joint sales agreement ... as resulting in the attribution of a cognizable interest in, or ownership, operation, or control of, a television broadcast station for purposes of the" FCC's local television multiple ownership rule, which is codified at 47 CFR 73.3555(b), until the FCC concludes its 2010 quadrennial review of its media ownership rules. (See, Section 4, at pages 3-4.)

Sweeps Week. Fourth, the draft bill would require the FCC to amend its rules, which are codified at 47 CFR 17 76.1601, within 90 days, to eliminate the sweeps week provision that prohibits cable operators from dropping broadcast signals during the weeks when Nielsen Media Research does its major audience measurements. (See, Section 5, at page 4.)

The HCC's bill summary states that "Since cable providers do not have a corresponding right to demand access to programming during a retransmission dispute, and satellite providers are not subject to the rule, the change will provide regulatory parity and remove the government from this aspect of the negotiation for signal carriage."

Integration Ban. Fifth, the draft bill would eliminate the integration ban. (See, Section 6, at pages 4-5.)

This provision is similar to an untitled bill introduced by Rep. Bob Latta (R-OH) and Rep. Gene Green (D-TX) on September 26, 2013. See, HR 3196 [LOC | WW] and story titled "Reps. Latta and Green Introduce Bill to End FCC's Integration Ban" in TLJ Daily E-Mail Alert No. 2,609, October 7, 2013.

The FCC's integration ban currently prohibits MVPDs from making available to consumers devices that contain both navigation of video content functions and security functions. The draft bill would amend Section 629 of the Communications Act, which is codified at 47 U.S.C. § 549, and which pertains to "Competitive availability of navigation devices".

GAO Study. Sixth, the draft bill would require that the Government Accountability Office (GAO) issue a report on what regulatory changes would be necessary if the Congress were to repeal the statutory compulsory copyright regime that governs broadcast content.

The draft bill would require that the GAO "shall conduct a study that analyzes and evaluates the changes to the carriage requirements currently imposed on" MVPDs under the Communications Act and FCC regulations thereunder, "that would be required or beneficial to consumers, and such other matters as the Comptroller General considers appropriate, if Congress implemented a phase-out of the current statutory licensing requirements set forth under" 17 U.S.C. §§ 111, 119, and 122.

The draft bill adds that "the study shall consider the impact such a phase-out and related changes to carriage requirements would have on consumer prices and access to programming." Also, the GAO would have 18 months to issue its report. (See, Section 7, at pages 6-7.)

Satellite Reporting. Seventh, the draft bill would require each satellite direct broadcast service provider to report the local signals that it provides for each market in which it broadcasts such services and also report on the potential use of its technology for the retransmission of local signals in each mark. (See, Section 8, at pages 7-8.)

People and Appointments

3/21. Mythili Raman, the acting Assistant Attorney General in charge of the Department of Justice's (DOJ) Criminal Division, announced her departure.