Is An IRU Really An IRU?

Everyone talks about indefeasible rights of use, or IRUs, as if they are unique or special. Reams of FCC and state regulatory orders have been written on them as have fiber agreements, both large and small. Those statements, however, usually take IRUs for granted. In other words, they assume  that everyone knows what they are and go from there. There was a time when IRUs (along with MIUs or minimum investment units) only applied to wet cable; in particular, trans-oceanic fiber. The purpose was to allow carriers who could not afford to build or participate in the build of a cable to purchase dark fiber in the cable but without any ownership interest.

There was also a time when the term of the IRU was the depreciable life of the cable or 20 years. Over time, IRUs made their way on land and not only applied to dry cable but, eventually, lit capacity and had terms anywhere from 15 to 25 years. Then, of course, there was the infamous “how do I book the purchase and sale of an IRU?” For instance, can I account for it as an asset and depreciate it? If so, can I book it in year one or must I spread the revenues over the life of the IRU? Is it property under the Tax Code or the Communications Act or a service? Even Congress and the SEC got in the act back at the turn of the century and every once in a while there is a Revenue Ruling by the IRS that never seems to get to the core of the issue.

The truth, however, is much more simple than it has been made out to be. The answer:  an IRU is a lease, of which there are two types, an operating lease or a capital lease. Whether it is an operating lease or a capital lease depends on the terms of the IRU and the indicia laid out by the Financial Accounting Standards Board’s Statement of Financial Accounting Standards No. 13, entitled Accounting for Leases. (Although dated 2002, the reader may find this explanation to be both of interest and helpful.)  IRUs also have an additional characteristic: the right of quiet enjoyment. In other words, the purchaser of the IRU is permitted to use it without any interference by anyone other than for required maintenance.

So far so good for accounting purposes; not yet so clear for how it is treated for taxes. Specifically, is it a service or property? Much writing has been done on the tax treatment of IRUs but little has been resolved. Only in one instance am I aware was it found to be something akin to property and that instance was a bankruptcy case where the judge needed to determine if an IRU agreement gave the grantee an ownership interest in the IRU. The judge arrived at his decision by parsing the language of the IRU agreement and noting that the operations and maintenance of the fiber was a service that was the subject of a separate agreement.

An IRU is not, therefore, really an IRU and unfortunately a lot of folklore has risen around the term such that it has strayed from its original intent. But cutting to the core, an IRU is a lease, usually a capital lease, with the unfettered right to enjoy it.