Clearwire 2010 Annual Report Download - page 46

points. An exchange by an Investor of Class B Common Units of Clearwire Communications and Class B Common
Stock for Class A Common Stock, or the exchange by a holder of the 8.25% exchangeable notes due 2040, which we
refer to as the Exchangeable Notes, of such notes for shares of Class A Common Stock of Clearwire, may cause or
contribute to an ownership change of Clearwire. Clearwire has no control over the timing of any such exchange. If
Clearwire undergoes an ownership change, then the amount of the pre-ownership change NOLs of Clearwire that
may be used to offset income of Clearwire arising in each taxable year after the ownership change generally will be
limited to the product of the fair market value of the stock of Clearwire at the time of the ownership change and a
specified rate based on long-term tax-exempt bond yields.
Separately, under Section 384 of the Code, Clearwire may not be permitted to offset built-in gain in assets
acquired by it in certain tax-free transactions, if the gain is recognized within five years of the acquisition of the
built-in gain assets, with NOLs arising before the acquisition of the built-in gain assets. Section 384 may apply to
built-in gain to which Clearwire succeeds in the case of a holding company exchange by an Investor.
Tax loans that Clearwire Communications may be required to make to Sprint in connection with the sale
of certain former Sprint built-in gain assets may deprive Clearwire Communications of funds that are
required to operate its business.
Under the Operating Agreement, if Clearwire Communications or any of its subsidiaries enters into a
transaction that results in the recognition of any portion of the built-in gain with respect to a former Sprint asset
(other than in connection with the dissolution of Clearwire Communications or the disposition of certain specified
Sprint assets), Clearwire Communications will be required, upon delivery by Sprint of a timely request therefor, to
make a tax loan to Sprint on the terms set forth in the Operating Agreement. The principal amount of any tax loan to
Sprint will be the amount by which the built-in gain recognized by Sprint on the sale of former Sprint assets exceeds
any tax losses allocated by Clearwire Communications to Sprint in the taxable year in which the sale of such built in
gain assets occurs, multiplied by then-highest marginal federal and state income tax rates applicable to corporations
resident in the state in which Sprint’s principal corporate offices are located (taking into account the deductibility of
state taxes for federal income tax purposes). Interest on any tax loan will be payable by Sprint to Clearwire
Communications semiannually at a floating rate equal to the higher of (a) the interest rate for Clearwire
Communications’ unsecured floating rate indebtedness and (b) the interest rate for Sprint’s unsecured floating
rate indebtedness plus 200 basis points. Principal on any tax loan to Sprint is payable in equal annual installments
from the tax loan date to the later of (x) the 15th anniversary of the Closing or (y) the first anniversary of the tax loan
date. Any tax loan that Clearwire Communications is required to make to Sprint may deprive Clearwire
Communications of funds that are required in its business.
The tax allocation methods adopted by Clearwire Communications are likely to result in disproportionate
allocations of taxable income.
Clearwire and Sprint have contributed to Clearwire Communications assets that have a material amount of
built-in gain for income tax purposes — meaning that the fair market value ascribed to those assets at the time of
contribution, as reflected in the initial capital account balances and percentage interests in Clearwire Commu-
nications received by Clearwire and Sprint, is greater than the current basis of those assets for tax purposes. For this
purpose, the fair market value ascribed to those assets at the time of contribution was calculated based upon a value
of $17 per Clearwire Communications Non-Voting Unit plus liabilities assumed by Clearwire Communications at
the time of contribution. We refer to contributed assets that have a fair market value that exceeds the tax basis of
those assets on the date of contribution as built-in gain assets. Under Section 704(c) of the Code, items of income,
gain, loss or deduction of Clearwire Communications must be allocated among its members for tax purposes in a
manner that takes account of the difference between the tax basis and the fair market value of the built-in gain assets.
The built-in gain assets of Clearwire Communications with the largest amounts of built-in gain are spectrum and
other intangible assets.
Clearwire Communications maintains a capital account for each member, which reflects the fair market value
of the property contributed by that member to Clearwire Communications and the amount of which generally
corresponds to the member’s percentage interest in Clearwire Communications. For capital account purposes,
Clearwire Communications amortizes the value of the contributed built-in gain assets, generally on a straight-line
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