Clearwire 2010 Annual Report Download - page 48

would cause Clearwire to be allocated under Section 704(c) more than $10 million of built-in gains during any
36-month period. For this purpose, Clearwire Communications will have a bona fide non-tax business need with
respect to the sale of Old Clearwire assets, if (1) the taxable sale of the Old Clearwire assets will serve a bona fide
business need of Clearwire Communications’ wireless broadband business and (2) neither the taxable sale nor the
reinvestment or other use of the proceeds is significantly motivated by the desire to obtain increased income tax
benefits for the members or to impose income tax costs on Clearwire. Accordingly, Clearwire may recognize built-
in gain on the sale of Old Clearwire assets (1) in an amount up to $10 million, in any 36-month period, and (2) in
greater amounts, if the standard of bona fide non-tax business need is satisfied. If Clearwire Communications sells
Old Clearwire assets with unamortized built-in gain, then Clearwire is likely to be allocated a share of the taxable
income of Clearwire Communications that exceeds its proportionate economic interest in Clearwire Communi-
cations, and may incur a material liability for taxes. However, subject to the existing and possible future limitations
on the use of Clearwire’s NOLs under Section 382 and Section 384 of the Code, Clearwire’s NOLs are generally
expected to be available to offset, to the extent of these NOLs, items of income and gain allocated to Clearwire by
Clearwire Communications. See the section titled “Risk Factors — The ability of Clearwire to use its net operating
losses to offset its income and gain is subject to limitation. If use of its NOLs is limited, there is an increased
likelihood that Clearwire Communications will be required to make a tax distribution to Clearwire”. Clearwire
Communications is required to make distributions to Clearwire in amounts necessary to pay all taxes reasonably
determined by Clearwire to be payable with respect to its distributive share of the taxable income of Clearwire
Communications, after taking into account the NOL deductions and other tax benefits reasonably expected to be
available to Clearwire. See the sections titled “Risk Factors — Mandatory tax distributions may deprive Clearwire
Communications of funds that are required in its business” and “Certain Relationships and Related Transactions,
and Director Independence”.
Sprint and the Investors may shift to Clearwire the tax burden of additional built-in gain through a
holding company exchange.
Under the Operating Agreement, Sprint or an Investor may affect an exchange of Clearwire Communications
Class B Common Units and Class B Common Stock for Class A Common Stock by transferring to Clearwire a
holding company that owns the Clearwire Communications Class B Common Units and Class B Common Stock in
a transaction intended to be tax-free for United States federal income tax purposes (which the Operating Agreement
refers to as a holding company exchange). In particular, if Clearwire, as the managing member of Clearwire
Communications, has approved a taxable sale by Clearwire Communications of former Sprint assets that are
intangible property and that would cause Sprint to be allocated under Section 704(c) of the Code more than
$10 million of built-in gain during any 36-month period, then, during a specified 15-business-day period, Clearwire
Communications will be precluded from entering into any binding contract for the taxable sale of the former Sprint
assets, and Sprint will have the right to transfer Clearwire Communications Class B Common Units and Class B
Common Stock to one or more holding companies, and to transfer those holding companies to Clearwire in holding
company exchanges. In any holding company exchange, Clearwire will succeed to all of the built-in gain and other
tax characteristics associated with the transferred Clearwire Communications Class B Common Units, including
(1) in the case of a transfer by Sprint, any remaining portion of the built-in gain existing at the formation of
Clearwire Communications and associated with the transferred Clearwire Communications Class B Common
Units, and any Section 704(c) consequences associated with that built-in gain, and (2) in the case of any transfer, any
built-in gain arising after the formation of Clearwire Communications and associated with the transferred Clearwire
Communications Class B Common Units. Section 384 of the Code may limit the ability of Clearwire to use its
NOLs arising before the holding company exchange to offset any built-in gain of Sprint or an Investor to which
Clearwire succeeds in such an exchange. Accordingly, Clearwire may incur a material liability for taxes as a result
of a holding company exchange, even if it has substantial NOLs. Clearwire Communications is required to make
distributions to Clearwire in amounts necessary to pay all taxes reasonably determined by Clearwire to be payable
with respect to its distributive share of the taxable income of Clearwire Communications, after taking into account
the NOL deductions and other tax benefits reasonably expected to be available to Clearwire. See the sections titled
“Risk Factors — Mandatory tax distributions may deprive Clearwire Communications of funds that are required in
its business”.
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