-
Jefferson-Pilot Corporation and Subsidiaries, Petitioner v. Commissioner of Internal Revenue, RespondentJefferson-Pilot Corp. v. CommissionerDocket No. 1488-89April 13, 1992, Filed
United States Tax Court *36
Decision will be entered under Rule 155 .P's subsidiary purchased three radio stations for $ 15 million in 1974. P seeks to deduct a portion of the purchase price which it claims is attributable to the FCC broadcast licenses which were transferred pursuant to the sale.
Held: An FCC broadcast license constitutes a "franchise" and the FCC retained a "significant power, right, or continuing interest with respect to the subject matter of the franchise" as those terms are used insec. 1253, I.R.C. A ratable portion of the purchase price attributable to the licenses is therefore deductible undersec. 1253(d)(2), I.R.C. Dean F. Chatlain Peter H. Winslow ,Albert L. Sandlin, Jr. Clinton M. Fried ,Ruwe,Judge .RUWE*435 OPINION
Ruwe,
Judge: Respondent determined deficiencies in petitioner's Federal income tax as follows:
TYE Deficiency Dec. 31, 1969 $ 177,970 Dec. 31, 1970 217,101 Dec. 31, 1971 926,035 Dec. 31, 1972 1,168,892 Dec. 31, 1974 74,096 2,564,094 *436 Pursuant to the agreement of the parties, all issues contained in the statutory notice of deficiency related to the 1969, 1970, 1971, *37 and 1972 tax years have been settled. With respect to the 1974 tax year, petitioner concedes the worthless stock deduction related to Jefferson-Pilot Fire & Casualty Co.'s $ 100,000 investment and Jefferson-Pilot Title Insurance Co.'s $ 51,000 investment in Franklin National Bank preferred stock, as set forth in the statutory notice of deficiency. Petitioner also concedes an adjustment relating to $ 141,966 of amortization relating to customer lists. The only remaining issue with respect to 1974 is whether petitioner is entitled to deduct a ratable portion of the cost of purchasing FCC broadcast licenses for stations WQXI-AM, WQXI-FM, and KIMN-AM under
section 1253 . BackgroundSome of the facts have been stipulated and are so found. The stipulation of facts and attached exhibits are incorporated herein by *38 this reference. Petitioner is a North Carolina corporation with its principal place of business in Greensboro, North Carolina. Petitioner is publicly owned, and its stock is listed on the New York Stock Exchange. Petitioner is a holding company whose subsidiaries provide a variety of insurance, financial, and communications products and services.
Petitioner's broadcasting subsidiary, Jefferson-Pilot Communications Co. (J-P Communications) operates an NBC television network affiliate in Richmond, Virginia, a CBS television network affiliate in Charlotte, North Carolina, and radio stations in Atlanta, Georgia, Charlotte, North Carolina, Denver, Colorado, Miami, Florida, and San Diego, California. J-P Communications also produces and syndicates television sports programming including Atlantic Coast Conference football and basketball, Southeastern Conference basketball, and NASCAR racing events. J-P Communications also supplies computer services to other broadcasting stations, advertising agencies, and station representative firms.
*437 As of the start of 1974, J-P Communications had operated television station WBTV (Charlotte) since 1949, television station WWBT (Richmond) *39 since 1968, radio station WBT-AM (Charlotte) since 1945, and radio station WBT-FM (Charlotte) since 1947. Petitioner and its nonlife insurance subsidiaries (including J-P Communications) filed a consolidated Federal income tax return for 1974.
By 1973, J-P Communications had developed an acquisition strategy under which it sought to purchase radio stations in major metropolitan markets in the southern United States. Pursuant to this strategy, on August 30, 1973, J-P Communications entered into an agreement with Pacific & Southern Co., Inc., to purchase various assets related to radio station WQXI-AM in Atlanta, Georgia, radio station WQXI-FM in Smyrna, Georgia (an Atlanta suburb), and radio station KIMN-AM in Denver, Colorado (hereinafter referred to as the acquired radio stations). *40 & Southern to file for license renewals with the Federal Communications Commission (FCC) if the transaction was not closed by the date that the renewals were due, and the agreement also required that the Commissioner of the FCC consent to the transfer of the licenses as a condition precedent to the closing of the agreement. On September 7, 1973, J-P Communications and Pacific & Southern Co. filed an application with the FCC to assign the broadcast licenses of the acquired radio stations to J-P Communications.
In order to lawfully operate a radio station, the operator must be licensed by the FCC.
47 U.S.C. sec. 301 (1988) . Only the FCC may issue radio broadcasting licenses, and FCC approval is required in order to transfer a broadcast license.47 U.S.C. secs. 303 *41(l)(1) ,310 (1988) . In connection with the *438 application for the assignment of the FCC licenses from Pacific & Southern Co. to J-P Communications, J-P Communications retained Media Statistics, Inc., to conduct various surveys of the general public. Media Statistics, Inc., conducted surveys in the Atlanta and Smyrna, Georgia areas, as well as Denver, and surrounding areas of Colorado.By letter dated January 9, 1974, the FCC granted the application for assignment of the acquired radio stations' licenses to J-P Communications, subject to certain conditions. The FCC imposed a $ 300,000 transfer fee on the assignment of the FCC licenses. Pursuant to the purchase agreement, J-P Communications and Pacific & Southern Co. each paid one-half of the transfer fee. J-P Communications completed the purchase of the assets of WQXI-AM, WQXI-FM, and KIMN-AM on February 28, 1974.
On December 31, 1974, Manufacturers' Appraisal Co., of Philadelphia, Pennsylvania, issued to J-P Communications a 312-page report on the fair market value of the real estate and personal property of the acquired radio stations as of March 1, 1974. On February 26, 1975, Manufacturers' Appraisal Co. issued to *42 J-P Communications its appraisal report on the intangible assets of the acquired radio stations and incorporated the values of the real estate and personal property detailed in the 312-page report. In accordance with the February 26, 1975, appraisal from Manufacturers' Appraisal Co., petitioner allocated the $ 15 million purchase price of the acquired radio stations for financial and tax accounting purposes as follows:
WQXI-AM WQXI-FM KIMN-AM Real estate $ 35,028 $ 7,648 $ 362,821 515,627 264,009 515,016 Customer lists/records 321,215 137,664 298,272 6,118,390 3,059,195 3,365,115 Total 6,990,260 3,468,516 4,541,224 In connection with this litigation, petitioner retained Broadcast Investment Analysis, Inc. (BIA), to prepare a valuation of the intangible assets*43 purchased by J-P Communications *439 in connection with the transfer of WQXI-AM, WQXI-FM, and KIMN-AM. This valuation allocates the $ 15 million purchase price, as reduced by the portion of the price allocated to the tangible assets, among various intangible assets. BIA appraised the WQXI-AM, WQXI-FM, and KIMN-AM FCC licenses at $ 2,090,000, $ 1,440,000, and $ 1,892,000, respectively. Based on these reports, petitioner now contends that the $ 15 million purchase price should be allocated among the various assets purchased as follows:
WQXI-AM WQXI-FM KIMN-AM Real estate $ 35,028 $ 7,648 $ 362,821 Personal property 515,627 264,009 515,016 FCC licenses 2,090,000 1,440,000 1,892,000 Goodwill, trade names, and all other intangibles 4,349,605 1,756,859 1,771,387 Total 6,990,260 3,468,516 4,541,224 Discussion The only remaining issue is whether a ratable portion of the cost of the FCC licenses for WQXI-AM, WQXI-FM, and KIMN-AM is deductible under
section 1253(d)(2)(A) . *45Section 1253(d)(2)(A) provides that if a transfer of a franchise, trademark, or trade name is not treated as a sale or exchange of a capital asset undersection 1253(a) , then*44 any single payment in discharge of a principal sum agreed upon in the transfer agreement shall be deductible ratably by the payor over a period of 10 years or the period of the transfer agreement, whichever is shorter.section 1253(d)(2)(A) , we must determine whether an FCC license is a "franchise", as *440 that word is used insection 1253 , and whether the sale of the licenses should not be treated as a sale of a capital asset undersection 1253(a) . Undersection 1253(a) , a transfer of a franchise shall not be treated as a sale or exchange of a capital asset if the transferor retains any significant power, right, or continuing interest with respect to the subject matter of the franchise.Section 1253(a) refers to the retention of powers, rights, or continuing interest by the "transferor". It could therefore be argued thatsection 1253(a) refers only to the "transferor" from whom the taxpayer purchased the franchise. If such a transferor was itself a mere franchisee who retained no significant power, right, or continuing interest in the subject matter of the franchise, the ultimate transferee would not qualify for the deduction allowed bysection 1253(d)(2)(A) . Respondent, however, has taken the position that the tax treatment accorded to a franchise purchaser should not turn on whether the franchise was purchased from the franchisor or from a prior franchisee and that the requirement insection 1253(a) that the "transferor" retain a significant power, right, or continuing interest is satisfied if the franchisor retains such power, right, or continuing interest.Rev. Rul. 88-24, 1 C.B. 306">1988-1 C.B. 306 . The ruling notes that even if no portion*46 of the purchase price is paid to the franchisor, franchise rights continue to flow from a franchisor who has retained rights in the franchise and, in that sense, the franchisor is a "transferor". Thus, even though the entity from whom J-P Communications purchased the licenses retained no power, right, or interest, petitioner will nevertheless qualify for a deduction undersection 1253(d) if an FCC license is a "franchise" within the meaning ofsection 1253 and the FCC retained a significant power, right, or continuing interest in the subject matter of the franchise.1.
An FCC License Is a "Franchise" Within the Meaning of Section 1253 Section 1253(b)(1) defines "franchise" for purposes ofsection 1253(a) .Section 1253(b)(1) states: "The term 'franchise'includes an agreement which gives one of the parties to the agreement the right to distribute, sell, or provide goods, services, or facilities, within a specified area." (Emphasis *441 added.) "Franchise" is not a general word insection 1253 ; it is the linchpin of the section. Congress did not simply mention "franchises" in passing.Tele-Communications, Inc. v. Commissioner, 95 T.C. 495">95 T.C. 495United States v. American Trucking Associations, Inc., 310 U.S. 534">310 U.S. 534, 543 (1940)section 1253 , broadly to mean "franchises" as that term is commonly understood, including any agreement which gives one party the right to distribute, sell, or provide goods, services, or facilities within a specified area.Sec. 1253(b)(1) ;Tele-Communications, Inc. v. Commissioner, supra at 509*48 Respondent argues that
section 1253 is ambiguous and that we must look to legislative history in order to ascertain its purpose. Respondent further argues that the legislative history indicatessection 1253 was only intended to apply to private or "Dairy Queen"-type franchises. *49 We have recently held thatsection 1253 is not ambiguous, that it includes public franchises, and that such inclusion is not inconsistent with congressional intent.Tele-Communications, Inc. v. Commissioner, supra at 510Tele-Communications, Inc. v. Commissioner, supra at 512*442 Our reading of
section 1253(b)(1) to include more than the "Dairy Queen"-type franchise is buttressed by the fact that Congress specifically excluded professional sports franchises from the ambit ofsection 1253 .Sec. 1253(e) . The exclusion for professional sports franchises indicates*50 that Congress was aware that the definition insection 1253(b)(1) encompassed more than the typical "Dairy Queen"-type franchise. If Congress had wanted to exclude other franchises that fell within the definition contained insection 1253(b)(1) , we believe that it would have so provided. SeeTele-Communications, Inc. v. Commissioner, supra at 510, 512, 514An FCC license is a "franchise" as that term is commonly understood.
a right or privilege conferred by grant from a sovereign or a government and vested in an individual or a group;specif: a right to do business conferred by a government * * * the right granted to an individual or group to market a company's goods or services in a particular territory. * * *
An FCC license satisfies the definition*51 of franchise found in both dictionaries. It is a special privilege which does not belong to citizens generally of common right and which is conferred by the Government on an individual or corporation. *443 Specifically, it represents the right to engage in the broadcasting business.An FCC license also satisfies the specific, nonexclusive, definition of "franchise" set out in
section 1253(b)(1) . An FCC license is an agreement between the Federal Government and the licensee under which the licensee agrees to provide the service of radio broadcasting within a specified area in exchange for the right to broadcast.Respondent argues that there is no "agreement", within the meaning of
section 1253(b)(1) , *52 because there is no consideration or bargained-for exchange. Respondent assumes "agreement" means "contract". However, an "agreement" is a broader term than "contract" and may lack an essential element of a contract. Black's Law Dictionary (6th ed. 1990). If Congress had intended to limitsection 1253 only to contracts, it would have used that narrower term.Clearly, an agreement is struck under which the FCC permits the licensee to broadcast in return for the licensee's promise to provide public service. The licensee seeks and is "
granted the free and exclusive use of a limited and valuable part of the public domain; when heaccepts thatfranchise [CBS, Inc. v. FCC, 453 U.S. 367">453 U.S. 367, 395 (1981)Central Florida Enterprises, Inc. v. FCC, 683 F.2d 503">683 F.2d 503National Broadcasting Co. v. FCC, 516 F.2d 1101">516 F.2d 1101Office of Communication of United Church of Christ v. FCC, 359 F.2d 994">359 F.2d 994mandated to operate in the public interest and hasassumed the obligation of presenting important public questions fairly and without bias."Red Lion Broadcasting Co. v. FCC, 395 U.S. 367">395 U.S. 367Democratic National Committee v. FCC, 460 F.2d 891">460 F.2d 891Although consideration or bargained for exchange may not be required in order to have an agreement, we nevertheless note that these elements are present. For instance, it is *444 beyond dispute that J-P Communications agreed to operate in the public interest in exchange for the FCC's consent to the assignment of the *54 licenses. not upon the Commission or any government entity.
Respondent argues that an FCC license is merely a "unilateral grant of power by the government." However, the Government only agrees to let the licensee use the airways upon the licensee's agreement to comply with the conditions imposed by the FCC. This grant is no more unilateral than the typical commercial*55 franchise agreement. The fact that a prospective licensee cannot negotiate over license terms is irrelevant. Even respondent's expert on commercial franchises acknowledged that the typical commercial franchisee must accept the franchisor's terms without alteration or not accept at all.
section 1253(b)(1) because it is an agreement between the Federal Government and the licensee, under which the licensee agrees to provide the service of radio broadcasting within a specified area in exchange for the grant of the right to broadcast.*56 and that the absence of a trademark from an FCC licensing arrangement indicates that the arrangement is not a franchise arrangement.Section 1253(a) addresses the tax treatment of the "transfer of a franchise, trademark,or trade name". (Emphasis added.) If Congress intended that all franchising arrangements to whichsection 1253 applies must include a trademark or trade name, *445 we think such a restriction would have been explicitly stated in the statute. This is especially true where Congress provided, without any limiting language, that "The term 'franchise'includes an agreement which gives one of the parties to the agreement the right to distribute, sell, or provide goods, services, or facilities, within a specified area."Sec. 1253(b)(1) (emphasis added).Respondent argues that an FCC license is not a public franchise because the licensee obtains no property interest in the license. Even if we were to find this to be the case, petitioner would still be entitled to a deduction under
section 1253(d)(2) because an FCC license satisfies the specific statutory definition of franchise found insection 1253(b)(1) .Tele-Communications, Inc. v. Commissioner, 95 T.C. 495">95 T.C. 495An FCC license "is not a full-fledged, indefeasible property interest. But neither is it a non-protected interest, defeasible at will."
Orange Park Florida T.V., Inc. v. FCC, 811 F.2d 664">811 F.2d 664Reuters Ltd. v. FCC, 781 F.2d 946">781 F.2d 946L.B. Wilson, Inc. v. FCC, 170 F.2d 793">170 F.2d 793WJR, The Goodwill Station v. FCC, 174 F.2d 226">174 F.2d 226L.B. Wilson, Inc. v. FCC, supra at 802Metro Broadcasting, Inc. v. FCC, 497 U.S. 547">497 U.S. 547Red Lion Broadcasting v. FCC, 395 U.S. 367">395 U.S. 367In re Fugazy Exp., Inc., 124 Bankr. 426, 430 (S.D.N.Y. 1991)In re Schnippel, 121 Bankr. 784, 787 (Bankr. S.D. Ohio 1990)In
Radio Station WBIR v. Commissioner, 31 T.C. 803">31 T.C. 803Radio Station WBIR v. Commissioner, supra at 813, 814KWTX Broadcasting Co v. Commissioner, 31 T.C. 952">31 T.C. 952272 F.2d 406">272 F.2d 406 (5th Cir. 1959), we held that moneys paid to a third party to withdraw a competing application before the FCC were a capital expenditure for the acquisition of a television operating permit.KWTX Broadcasting Co. v. Commissioner, supra at 958An FCC license is a public franchise.
CBS, Inc. v. FCC, 453 U.S. 367">453 U.S. 367Central Florida Enterprises, Inc. v. FCC, 683 F.2d 503">683 F.2d 503Office of Communication of United Church of Christ v. FCC, 359 F.2d 994">359 F.2d 99447 U.S.C. secs. 301 ,303 (1988) . That right is essential to function as a broadcaster. J-P Communications could not lawfully engage in the business of broadcasting without the grant, and only the Government could grant this right.We hold that an FCC license is a "franchise" within the meaning of
section 1253 .*447 2.
The FCC Retained a Significant Power, Right, or Continuing Interest in the Subject Matter of the Franchise Having established that an FCC license is a "franchise", we must now determine whether, for purposes of
section 1253(a) , the transfer of an FCC license is not to be "treated" as the sale or exchange of a capital asset. Undersection 1253(a) , if the FCC retained a significant power, right, or continuing interest in the subject matter of the license, the transaction is not treated as the sale of a capital asset.Section 1253(b)(2) states:The term "significant power, right, or continuing interest" includes, but is not limited*62 to, the following rights with respect to the interest transferred:
(A) A right to disapprove any assignment of such interest * * *.
(B) A right to terminate at will.
(C) A right to prescribe the standards of quality of products used or sold, or of services furnished, and of the equipment and facilities used to promote such products or services.
Petitioner need only establish that the FCC retained one of these rights.
Section 310(d) of 47 U.S.C. (1988) states that an FCC license may not be "assigned, or disposed of in any manner * * * except upon application to the Commission and upon finding by the Commission that the public interest, convenience, and necessity will be served thereby." A transfer may only be approved*63 after an affirmative showing that the transfer will serve the public interest.47 U.S.C. sec. 310(d) (1988) ;Committee to Save WEAM v. FCC, 808 F.2d 113">808 F.2d 113FCC v. Pottsville Broadcasting Co., 309 U.S. 134">309 U.S. 134CBS, Inc. v. FCC, 453 U.S. 367">453 U.S. 367FCC v. WNCN Listeners Guild, 450 U.S. 582">450 U.S. 582Red Lion Broadcasting Co. v. FCC, 395 U.S. 367">395 U.S. 367FCC v. WOKO, Inc., 329 U.S. 223">329 U.S. 223FCC v. National Citizens Committee for Broadcasting, 436 U.S. 775">436 U.S. 775Respondent argues the FCC has not retained the right to disapprove assignments because it rarely disapproves proposed assignments, and it exercises its discretion pro forma upon proper application for assignment. This argument assumes the FCC abrogates its responsibility of determining that the public interest is served by the assignment. We are unwilling to make such an assumption. *65 Permit or License.
Committee to Save WEAM v. FCC, 808 F.2d 113">808 F.2d 113Committee to Save WEAM v. FCC, supra at 118Storer Communications, Inc. v. FCC, 763 F.2d 436">763 F.2d 436The FCC also retained the right to prescribe the standards of quality of services furnished and of the equipment used to promote such service as required by
section 1253(b)(2)(C) . The service provided is radio broadcasting. In 1974, the FCC required licensees to satisfy technical specifications which it prescribed to ensure satisfactory signal quality, promote safety, and prevent signal interference.47 C.F.R. secs. 39-99 ,250-333 (1974) . *67 The FCC also required licensees to broadcast a minimum number of hours each day,47 C.F.R. secs. 73.71 ,73.261 (1974) , prohibited broadcasting for consideration without disclosure,47 U.S.C. sec. 317(a)(1) (1988) ;47 C.F.R. secs. 73.119 ,73.289 (1974) ;47 C.F.R. sec. 73.1212 (1975) , and required that candidates for public office receive equal access to broadcast media,47 C.F.R. sec. 73.120 (1974) . Indeed, the FCC, short of abridgement of free speech, free press, and censorship, was free to implement requirements such as equal access to broadcasting for candidates for public office and equal time for countervailing views on public issues in order to properly discharge its duty of promoting the public interest.Red Lion Broadcasting Co. v. FCC, 395 U.S. 367">395 U.S. 36747 C.F.R. sec. 73.120-73.125 (1974) . Thus, the FCC has also retained the right to prescribe standards for the quality of the services provided and the equipment used and it exercises this right. Although these standards may not be as specific as the standards sometimes used in a private franchise agreement, they nevertheless are mandatory, *68 and failure to comply with them could result in revocation of the license.Respondent argues that most stations would have operated within these minimum requirements regardless of the FCC's *450 specifications. Even if this were true,
CBS, Inc. v. FCC, 453 U.S. 367">453 U.S. 367, 378 (1981)47 U.S.C. sec. 312(a)(7) (1988) could result in license revocation). Respondent's position would require a franchisor to exercise its retained rights in such a way as to prove onerous to the franchisee in order for them to qualify as retained rights undersection 1253(b)(2)(C) . We do not readsection 1253(b)(2)(C) to require this. We hold that the FCC has retained an interest in the subject matter of the franchise. Accordingly, undersection 1253(a) , the transfer*69 is not treated as the sale or exchange of a capital asset, and petitioner is therefore entitled to ratably deduct the cost of the licenses pursuant tosection 1253(d)(2)(A) .In order to determine the amount of the deduction under
section 1253(d)(2) , we must value the FCC licenses. Valuation issues present questions of fact that can only be resolved by weighing all the evidence.885 Investment Co. v. Commissioner, 95 T.C. 156">95 T.C. 156Stanley Works v. Commissioner, 87 T.C. 389">87 T.C. 389Messing v. Commissioner, 48 T.C. 502">48 T.C. 502Buffalo Tool & Die Manufacturing Co. v. Commissioner, 74 T.C. 441">74 T.C. 441Petitioner argues that the values for the FCC licenses for stations WQXI-AM, WQXI-FM, and KIMN-AM are $ *70 2,090,000, $ 1,440,000, and $ 1,892,000, respectively. Respondent argues that the licenses have no independent value because, standing alone, they are incapable of producing income. Both parties rely heavily on expert opinion to support their positions on the value of the FCC broadcast licenses. We evaluate such opinions in light of the demonstrated qualifications of the expert and all other evidence of value.
Estate of Newhouse v. Commissioner, 94 T.C. 193">94 T.C. 193Parker v. Commissioner, 86 T.C. 547">86 T.C. 547Johnson v. Commissioner, 85 T.C. 469">85 T.C. 469Estate of Newhouse v. Commissioner, supra at 217Parker v. Commissioner, supra at 561Buffalo Tool & Die Manufacturing Co. v. Commissioner, supra at 452Petitioner relies primarily on the valuation reports prepared by Broadcast Investment Analysts, Inc. (BIA), and the testimony of its vice president, John Intrater. We found Mr. Intrater to be a convincing and believable witness. Mr. Intrater has been involved in the appraisal of over 700 communication properties, and his qualifications as an expert on the value of broadcast properties were unmatched by any of respondent's witnesses.
The BIA reports value the FCC licenses by determining the anticipated cash-flow from operating a hypothetical startup station over 9 years and the anticipated proceeds on the sale of the station in year 9. These amounts were then discounted using a discount factor of 14 percent. Mr. Intrater used a 9-year period because, based on his experience, a typical purchaser held a radio station for 9 years. Mr. Intrater used a hypothetical new station in an effort to exclude goodwill and going concern value from the valuation. This methodology assumes that a new station does not have any goodwill or going concern value.
To determine the amount of cash-flow to discount to present value, Mr. Intrater projected future radio revenues for a hypothetical new station*72 in the Atlanta and Smyrna, Georgia, and Denver, Colorado, markets over a 9-year period beginning in 1974. These projections are based on information which would have been available to a buyer in 1974. Mr. Intrater began his analysis by projecting the anticipated yearly revenues generated by all comparable stations in the Atlanta and Denver markets for each of the 9 years used in the discounted cash-flow analysis. *452 the average market share for stations within the group of comparable stations being examined for purposes of the valuation. Mr. Intrater assumed the hypothetical station would perform at the industry average and command the average market share by its third year of operation. *73 Once Mr. Intrater determined the hypothetical station's anticipated market share, he multiplied the market share percentage against total projected market revenues for the year to arrive at the station's anticipated gross revenues for the year. The gross revenues for each year were decreased to reflect anticipated expenses to arrive at the hypothetical station's projected cash-flow from operations for the years 1974 through 1983. These revenue projections were then discounted by a factor of 14 percent. *74 by J-P Communications, would pay.
Respondent argues that valuations based on a hypothetical business are erroneous, citing
UFE, Inc. v. Commissioner, 92 T.C. 1314">92 T.C. 1314UFE, Inc. is misplaced. InUFE, Inc., the Court rejected an expert's valuation since the expert's assumptions were based on "pure conjecture".UFE, Inc. v. Commissioner, supra at 1328*76 Respondent did not make any attempt to assign a specific value to the licenses other than zero. Indeed, respondent argues that a license has no independent value because, standing alone, it is incapable of producing income. Respondent's position is that an FCC license is incapable of valuation separate and apart from goodwill. The capability of an FCC license to produce income is no more dependent on goodwill and other assets than any other franchise. As with all franchises, the FCC license, standing alone, produces no income. It is only after the license or other franchise rights are combined with other assets that income is generated. Courts have recognized that, even though the mere possession of an FCC license does not guarantee the realization of profit, the license can have substantial value. See
Miami Valley Broadcasting Corp. v. United States, 204 Ct. Cl. 582">204 Ct. Cl. 582Meredith Broadcasting Co. v. United States, 186 Ct. Cl. 1">186 Ct. Cl. 1Roy H. Park Broadcasting, Inc. v. Commissioner, 56 T.C. 784">56 T.C. 784Rev. Rul. 88-24, 1 C.B. 306">1988-1 C.B. 306 , andsection 1.1253-1(d), Proposed Income Tax Regs. ,36 Fed. Reg. 13151 (July 15, 1971).Rev. Rul. 88-24 deals with the transfer of franchise rights incident to the sale of an ongoing business. Presumably, these franchise rights, *78 standing alone, were incapable of producing income. Nevertheless,Rev. Rul. 88-24 ,supra, permitted valuation of the *454 franchise rights and allowed a deduction of a ratable portion of the purchase price attributable to the transfer of the franchise rights. Similarly, inExample 1 ofsection 1.1253-1(d)(2), Proposed Income Tax Regs. ,supra, use of a trade name (which presumably was incapable of producing income standing alone) was transferred incident to the sale of an ongoing business. A separate value was allocated to the right to use the trade name. *79 Respondent relies onForward Communications, Inc. v. United States, 221 Ct. Cl. 582">221 Ct. Cl. 582Forward Communications does not support this position. The issue before the court inForward Communications was whether the taxpayer could depreciate a television broadcast license over a claimed useful life of 3 years. The court held that the license had no determinable useful life and, therefore, was not depreciable under section 167.Forward Communications, Inc. v. United States, supra at 494Forward Communications, Inc. v. United States, supra at 496In view of the determination that the license may not be depreciated or amortized and the failure of the parties here to demonstrate that it is necessary to place a separate value on the license as an aid in ascertaining the value of any other asset, there appears to be no necessity for finding an independent value herein. * * * [*80
Forward Communications, Inc. v. United States, supra at 497Respondent's argument that an FCC license has no value separate and apart from goodwill does not withstand logical *455 analysis. For example, a hypothetical purchaser of a station who wanted to change the format and hire a new staff would probably pay little, if anything, for goodwill. This is because the change in format would attract new listeners, and the old listeners would find a new station whose format was similar to the one they listened to before the purchase. Similarly, many of the station's sponsors would advertise on other stations whose formats target their consumers. Goodwill would be of little value to this purchaser. The same would be true of a station that had not generated any profits in previous years. A prospective purchaser would probably pay very little for the goodwill associated with such a station. In arriving at a purchase price, this purchaser would probably determine the value of the station's tangible assets and then place a value on the right to enter into the business of broadcasting. See
Meredith Broadcasting Co. v. United States, supra at 1228Respondent's remaining attacks on the BIA reports, in the aggregate, provide an insufficient basis for discounting the value reached therein. Respondent adhered to the position that the FCC license had no value separate and apart from goodwill and failed to provide a specific alternative value other than zero. After reviewing all the expert testimony and reports in this case, we adopt the values reflected in the BIA reports.
Finally, respondent argues that the deductibility requirements of
section 1253(d) cannot be met by attributing a portion of the total purchase price to the FCC licenses because in order to be deductible undersection 1253(d) , the payment for the franchise must be made in discharge of a principal sum agreed-upon in the transfer agreement. Respondent argues that petitioner fails to meet this requirement because the agreement between J-P Communications and Pacific & Southern Co. does not specify the sales price of the FCC licenses.The agreement between J-P Communications and Pacific & Southern Co. specifically identified the FCC licenses*82 as assets which were to be transferred pursuant to the agreement. The agreement also required Pacific & Southern Co. to keep the *456 licenses current and required FCC consent to the transfer of the licenses as a condition precedent to the closing of the sale. The agreed upon purchase price was $ 15 million. Clearly, the FCC licenses were assets which both buyer and seller knew were being transferred pursuant to the agreement. Some portion of the $ 15 million in the agreement represents consideration for the transfer of the licenses. Although it is unclear from the contractual terms what specific amount should be allocated to the FCC licenses, some allocation is surely necessary. See
Peterson Machine Tool, Inc. v. Commissioner, 79 T.C. 72">79 T.C. 72section 1253 by allocating part of the total purchase price to the franchise. SeeTele-Communications, Inc. v. Commissioner, 95 T.C. 495">95 T.C. 495Respondent's position is inconsistent*83 with
section 1.1253-1(d), Proposed Income Tax Regs. ,36 Fed. Reg. 13151 (July 15, 1971) andRev. Rul. 88-24, 1 C.B. 306">1988-1 C.B. 306 .Section 1.1253-1(d)(1), Proposed Income Tax Regs. , states that in connection with the sale of a trade or business, the amount deductible undersection 1253 "is to be determined on the basis of the facts and circumstances involved in each case, including any written agreement entered into by the parties".Section 1.1253-1(d)(1), Proposed Income Tax Regs. ,supra, also states that to the extent the purchase price is not attributable to specific tangible assets, the purchase price must be allocated on a reasonable basis among the intangible assets transferred, including any franchise rights. Seesec. 1.1253-1(d)(2) ,Example (1), Proposed Income Tax Regs,supra .Rev. Rul. 88-24, 1 C.B. 306">1988-1 C.B. 306 , involves facts similar to those insection 1.1253-1(d)(2) ,Example (1), Proposed Income Tax Regs.,supra , i.e., the sale of an ongoing business, including franchise rights and other intangibles, for which there is no separately stated principal*84 sum agreed upon for the transfer of the franchise rights.Rev. Rul. 88-24 ,supra, states that the taxpayer is entitled to amortize the portion of the purchase price attributable to the acquisition of the franchise rights. The ruling permits a post hoc allocation of the purchase price in order to determine the amount which may be amortized undersection 1253(d)(2) . Petitioner's post hoc *457 allocation of the $ 15 million purchase price in the instant case is entirely consistent withRev. Rul. 88-24 ,supra .We adopt the values assigned to the FCC licenses in the BIA reports and hold that petitioner is entitled to amortize those amounts pursuant to
section 1253(d)(2) .Decision will be entered under Rule 155 .Footnotes
1. Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the taxable year 1974, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩
2. Although J-P Communications was not originally interested in expanding into the Denver market, Pacific & Southern Co. insisted on including KIMN-AM in the sale of WQXI-AM and WQXI-FM.↩
1. For purposes of this case, the parties agree to the fair market values of the real estate and personal property of the acquired radio stations as reported on petitioner's income tax return for 1974.↩
2. Petitioner made no allocation to the FCC licenses and claimed no deduction under
sec. 1253↩ on its income tax return for 1974.3.
Sec. 1253(d)(2)(A) , provides in pertinent part:SEC. 1253(d) . Treatment of Payments by Transferee. --* * *
(2) Other payments. -- If a transfer of a franchise, trademark, or trade name is not (by reason of the application of subsection (a)) treated as a sale or exchange of a capital asset, any payment not described in paragraph (1) [dealing with payments which are contingent on the productivity, use, or disposition of a franchise] which is made in discharge of a principal sum agreed upon in the transfer agreement shall be allowed as a deduction --
(A) in the case of a single payment made in discharge of such principal sum, ratably over the taxable years in the period beginning with the taxable year in which the payment is made and ending with the ninth succeeding taxable year or ending with the last taxable year beginning in the period of the transfer agreement, whichever period is shorter;↩
4. Petitioner makes no claim that it is entitled to deductibility over a period shorter than 10 years.↩
5. The Deficit Reduction Act of 1984, Pub. L. 98-369, sec. 138(a), 98 Stat. 672, amended sec. 7701 by redesignating subsec. (b) as subsec. (c).↩
6. Respondent refers to these franchises as "Dairy Queen"-type franchises in reference to the line of cases which preceded the enactment of
sec. 1253 and which involved Dairy Queen franchises. SeeUnited States v. Wernentin, 354 F.2d 757">354 F.2d 757Moberg v. Commissioner, 310 F.2d 782">310 F.2d 78235 T.C. 773">35 T.C. 773 (1961);Estate of Gowdey v. Commissioner, 307 F.2d 816">307 F.2d 816T.C. Memo 1961-112">T.C. Memo. 1961-112 ;Moberg v. Commissioner, 305 F.2d 800">305 F.2d 80035 T.C. 773">35 T.C. 773 (1961);Dairy Queen of Oklahoma v. Commissioner, 250 F.2d 503">250 F.2d 50326 T.C. 61">26 T.C. 61 (1956). During the course of this opinion, our reference to "Dairy Queen"-type franchises is used to denote the type of franchise to which respondent contendssec. 1253↩ applies.7. Respondent also argues that the retained powers requirement in
sec. 1253(a) indicates thatsec. 1253 only applies to private franchises because the retention of powers is only consistent with a private franchise arrangement. This argument ignores the statutory structure ofsec. 1253 .Sec. 1253 requires a two-step analysis. First, we must determine if the interest transferred was a "franchise" as defined insec. 1253(b)(1) ; then we determine whether a significant power was retained. Limiting the definition of "franchise" based on inferences from the retained powers requirement begs the question of whether the interest transferred is a "franchise" in the first place.Tele-Communications, Inc. v. Commissioner, 95 T.C. 495">95 T.C. 4958. "Where Congress uses terms that have accumulated settled meaning under either equity or the common law, a court must infer, unless the statute otherwise dictates, that Congress means to incorporate the established meaning of these terms."
NLRB v. Amax Coal Co., 453 U.S. 322">453 U.S. 3229. We note that these courts describe the licensee's relationship with the FCC as a franchise. Although this language is arguably dicta, it nevertheless supports the conclusion that an FCC license is a "franchise" as that term is commonly understood.↩
10. The FCC also imposed a $ 300,000 transfer fee with respect to the licenses transferred to J-P Communications. The FCC refunded this transfer fee to J-P Communications in 1980.↩
11. See also
Tele-Communications, Inc. v. Commissioner, supra↩ at 51112. The parties do not dispute that an FCC broadcast license limits operations to a specified geographic area.↩
13. Respondent cites
FCC v. Sanders Bros. Radio Station, 309 U.S. 470">309 U.S. 470Sanders Bros.↩ when stating that although an FCC license is not a full-fledged property interest, neither is it a nonprotected interest, defeasible at will.14. In
Rev. Rul. 56-520, 2 C.B. 170">1956-2 C.B. 170 , respondent took the position that costs incurred in connection with obtaining FCC permission to use a particular broadcast frequency were a part of the cost basis of an asset of a permanent nature, and that the useful life of the asset (FCC license) is of an indeterminate duration. In support of this conclusion, the ruling invites the reader to compareCoca-Cola Bottling Co. v. Commissioner, 6 B.T.A. 1333">6 B.T.A. 1333Coca-Cola Bottling Co. involves a private commercial franchise. InRev. Rul 64-124, 1964-1 C.B. (Part 1) 105, respondent reiterated the position taken inRev. Rul. 56-520 ,supra↩ .15. A public franchise is a right or privilege granted by a sovereignty to one or more parties to do some act or acts which they could not perform without the grant of the sovereignty.
Bank of Augusta v. Earle, 38 U.S. (13 Pet.) 519, 595 (1839)McPhee & McGinnity Co. v. Union Pac. R. Co., 158 F. 5">158 F. 516. It is generally recognized that the legislature may grant a franchise indirectly through its duly authorized administrative agency, and to this extent, the power to grant a franchise has frequently been delegated. 37 C.J.S., Franchises, sec. 14(c) (1943); see
Public Service Commission of Puerto Rico v. Havemeyer, 296 U.S. 506">296 U.S. 506↩17. We note that
sec. 1253(b)(2)↩ is a nonexclusive list.18. We note that on brief respondent states: "an FCC license is also personal to the licensee because it can only be transferred with permission of the FCC and the FCC
must examine↩ the transferee as if he were the original licensee." (Emphasis added.)19. We do not find that this is true.↩
20. These projected earnings for all comparable stations are based on earnings during the years 1970-73. The analysis assumes a growth rate consistent with the growth rate in the markets during 1970-73 and then factors in an increase to reflect external factors not present during 1970-73 and which were expected to further increase radio earnings.↩
21. This assumption is based on Mr. Intrater's experience that it takes, on average, 3 years to turn a station around. Mr. Intrater attributed a less-than-average market share to the station during the first 2 years of operation.↩
22. Mr. Intrater testified that this figure was twice the rate for T-bills in 1974 and was used to reflect the potential risk of investing in a radio station.↩
23. Mr. Intrater assumed that a subsequent purchaser would pay nine times the station's operating profit at the time of sale. This assumption is based on information provided by radio brokers. The net sale proceeds also reflects various transaction costs.↩
24. Respondent also cites
Forward Communications Corp. v. United States, 221 Ct. Cl. 582">221 Ct. Cl. 582Miami Valley Broadcasting Corp. v. United States, 204 Ct. Cl. 582">204 Ct. Cl. 582Meredith Broadcasting Co. v. United States, 186 Ct. Cl. 1">186 Ct. Cl. 1Forward Communications andMeredith Broadcasting,↩ the court found that it was not even necessary to value the FCC license separate from other intangible assets.25. Ironically, in
Roy H. Park Broadcasting, Inc. v. Commissioner, 56 T.C. 784">56 T.C. 784Meredith Broadcasting Co. v. United States, supra ,↩ respondent argued that the residual value of all intangibles was properly included in the value of the FCC broadcasting license. Respondent's reply brief addresses this apparent inconsistency by noting that FCC licenses were not amortizable under prior case law and, therefore, it was in respondent's interest to argue that a large allocation should be attributed to the FCC licenses.26.
Rev. Rul. 57-377, 2 C.B. 146">1957-2 C.B. 146 , also suggests that respondent's official position is that an FCC license may be valued separate from goodwill. The issue inRev. Rul. 57-377 was whether a purchaser of a television station could depreciate a network affiliation contract and national spot advertising contracts. InRev. Rul. 57-377 , the purchaser allocated the entire purchase price among physical assets, goodwill, local and national advertising contracts, and a network affiliation contract. The ruling states that "One of the assets acquired in the purchase is a television broadcasting license." The revenue ruling criticizes the taxpayer's failure to allocate a portion of the purchase price to the FCC license stating:The foregoing allocation by the corporation reflects no value for the Federal Communications Commission license to broadcast. In this connection, see
Rev. Rul. 56-520 ,C.B. 1956-2, 170 , in which it is held that the expenditures incurred by a taxpayer to obtain permission from Federal Communications Commission to operate a television broadcasting station on a certain channel constitute capital expenditures * * *. [Rev. Rul. 57-377, 1957-2 C.B. at 147 ↩.]
Document Info
Docket Number： Docket No. 1488-89
Citation Numbers： 98 T.C. 435, 70 Rad. Reg. 2d (P & F) 999, 1992 U.S. Tax Ct. LEXIS 36, 98 T.C. No. 32
Judges： Ruwe
Filed Date： 4/13/1992
Precedential Status： Precedential
Modified Date： 10/19/2024