SECTION 2. BACKGROUND

.01 Cable television companies provide broadcast and video programming to subscribers. In recent years, many companies have upgraded their systems to provide new cable services such as digital television, internet access through a cable modem, and telephony. Upgraded systems use fiber optic cable because optic fibers have immense capacity and are reliable, and transmissions over them are not susceptible to interference by outside signals. The fiber optic strands of glass (optic fibers) within fiber optic cables carry analog or digital signals in the form of light waves. In comparison, coaxial cable carries radio frequency signals. Bandwidth is the range of radio frequencies or light spectrum available for use by cable television distribution systems for transmission.

.02 The design of cable television distribution systems varies considerably throughout the country. Programming normally originates from an antenna, satellite, microwave, film, or videotape and is fed into the headend. The headend is electronic equipment that receives programming signals and combines, amplifies, and converts the programming signals for transmission throughout the system. The distribution plant conveys the programming signals from the headend to subscribers. The distribution plant generally consists of optic transmission and receiver devices, fiber optic cable (used as trunk lines), fiber optic transfer nodes

(“nodes” containing optical receivers and reverse optical transmitters), coaxial cable (used as feeder or distribution cables), amplifiers, taps, and coaxial drop cables to the subscribers' properties.

.03 A fiber optic cable usually contains several bundles of optic fibers. Many cable television distribution systems dedicate one bundle from the headend to each node. The nodes are the point of interface between the fiber optic cable and the feeder or distribution cables, which carry the signals to, and past, subscribers' properties. Fiber optic cable and node function together as an integrated unit. Nodes, however, are not usually interconnected or dependent on one another; each node operates independently of other nodes.

.04 Subscribers generally cannot receive two-way communication services until the node serving them is connected to the equipment necessary for the services. In order to provide two-way communication services, usually two optic fibers are connected between the headend and the node, even though the bundle of fibers dedicated to the node may contain more than two fibers. Typically, one optic fiber is used for transmitting data downstream from the headend to subscribers and another optic fiber is used for transmitting data upstream from subscribers.

.05 Section 167(a) provides that there shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion, and wear and tear of property used in a trade or business or held for the production of income.

.06 The depreciation deduction provided by § 167(a) for tangible property placed in service after 1986 generally is determined under § 168. Section 168 prescribes two methods of accounting for computing depreciation: the general depreciation system in § 168(a); and the alternative depreciation system (ADS) in § 168(g). Under either depreciation system, the depreciation deduction is computed by using a prescribed depreciation method, recovery period, and convention.

.07 Rev. Proc. 87–56, 1987–2 C.B. 674, as clarified and modified by Rev. Proc. 88–22, 1988–1 C.B. 785, sets forth the class lives of property that are necessary to compute depreciation under § 168. Rev. Proc. 87–56 prescribes asset class 48.41, “CATV [Cable Television]-Headend,” which includes assets

August 11, 2003 304 2003-32 I.R.B.

of property described in section 4.01 of this revenue procedure. If the unit of property is primarily used for providing one-way communication services, the unit of property is assigned to asset class 48.42, “CATV-Subscriber Connection and Distribution Systems,” and classified as 7-year property under § 168(e)(1) with an applicable recovery period of 7 years under § 168(c) and a recovery period of 10 years under § 168(g). However, if the unit of property is primarily used for providing two-way communications services, § 168(e)(3)(E)(ii) classifies the unit of property as 15-year property with an applicable recovery period of 15 years under § 168(c) and a recovery period of 24 years under § 168(g). For purposes of this revenue procedure, a cable television company may determine primary use based on either: the node within the unit of property described in section 4.01 of this revenue procedure; or the applicable cable television distribution system for each headend, provided the cable television company maintains its books and records based on each headend.

(1) Reasonable manner . A reasonable manner includes, but is not limited to, determining primary use by gross receipts or by subscriber count for each service within the applicable cable television distribution system. However, for purposes of this safe harbor method, determining primary use by bandwidth is not considered reasonable.

(2) Change in primary use . If the primary use of the unit of property described in section 4.01 of this revenue procedure changes from providing either one-way communication services to two-way communication services, or two-way communication services to one-way communication services, § 168(i)(5) applies beginning in the year of the change in use.

.03 Placed in service . The unit of property described in section 4.01 of this revenue procedure is considered placed in service for depreciation purposes when placed in a condition or state of readiness and availability for its specifically assigned function. The specifically assigned function of a cable television company's distribution system is to provide services to subscribers. Thus, when a node is connected to the equipment necessary for providing one-way or two-way communication services to subscribers or potential subscribers, the property is considered

such as towers, antennas, preamplifiers, converters, modulation equipment, and program non-duplication systems. This asset class has a class life of 11 years, which means that the property in this asset class is classified as 7-year property under § 168(e)(1) with an applicable recovery period of 7 years under § 168(c) and a recovery period of 11 years under § 168(g).

.08 Rev. Proc. 87–56 prescribes Asset Class 48.42, “CATV-Subscriber Connection and Distribution Systems,” which includes assets such as trunk and feeder cable, connecting hardware, amplifiers, power equipment, passive devices, directional taps, pedestals, pressure taps, drop cables, matching transformers, multiple set connector equipment, and converters. This asset class has a class life of 10 years, which means that the property in this asset class is classified as 7-year property under § 168(e)(1) with an applicable recovery period of 7 years under § 168(c) and a recovery period of 10 years under § 168(g). Rev. Proc. 87–56 excludes from CATV asset classes 48.41 and 48.42 assets used to provide subscribers with two-way communication services.

.09 Rev. Proc. 87–56 assigns a class life of 24 years to property described in asset classes 48.31 to 48.45 that is comparable to property described in asset class 48.14, “Telephone Distribution Plant,” and used for two-way exchange of voice and data communication which is the equivalent of telephone communication. Comparable equipment does not include cable television equipment used primarily for one-way communication. See also § 168(e)(3)(E)(ii) and § 168(g)(3)(B), under which any telephone distribution plant and comparable equipment used for two-way exchange of voice and data communications is 15-year property with an applicable recovery period of 15 years under § 168(c) and a recovery period of 24 years under § 168(g). .10 Under § 1.167(a)–11(b)(4)(iii)( b ) of the Income Tax Regulations, property is included in the asset guideline class for the activity in which the property is primarily used. Property is classified according to primary use even though the activity in which such property is primarily used is insubstantial in relation to all the taxpayer's activities.

.11 Property is first placed in service in the taxable year in which the property is

placed in a condition or state of readiness and availability for a specifically assigned function, whether in a trade or business, in the production of income, in a tax-exempt activity, or in a personal activity. See § 1.46–3(d)(1)(ii).