Triangle Publications, Inc. v. Commissioner ( 1970 )

Triangle Publications, Inc., Petitioner v. Commissioner of Internal Revenue, Respondent

Triangle Publications, Inc. v. Commissioner

Docket No. 4169-67

United States Tax Court

54 T.C. 138; 1970 U.S. Tax Ct. LEXIS 221;

February 5, 1970, Filed

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Decision will be entered under Rule 50.

1. Petitioner's subsidiary acquired from an unrelated party a franchise which petitioner had granted to that unrelated party. Prior to the expiration of the franchise as extended by an agreement with the subsidiary made prior to the acquisition of the franchise by the subsidiary petitioner liquidated the subsidiary and took over its assets and liabilities. Held, petitioner is entitled to deduct amortization for the unexpired portion of the franchise it acquired upon the liquidation of its subsidiary.

2. A payment in excess of the asset value of the corporation made by petitioner for the stock of one of its corporate franchisees in order to obtain the assets of that franchisee is allocable in part to the unexpired franchise of the franchisee which portion is amortizable over the remaining life of the franchise and the remainder is allocable to obtaining free use of subscription lists and an orderly transition of distribution which portion is deductible under sec. 173, I.R.C. 1954.

3. Petitioner is entitled to use the reasonable estimated useful life of certain assets in computing investment credit even though it has used the guideline lives prescribed by Rev. Proc. 62-21 in computing depreciation on these and other similar assets.

Jules I. Whitman and Peter J. Picotte II, for the petitioner.

Albert J. O'Connor, for the respondent.

Scott, Judge.

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SCOTT

Respondent determined deficiencies in petitioner's income tax for the calendar years 1960, 1961, and 1962, in the respective amounts of $ 65,083, $ 293,066, and $ 76,352.

Respondent has conceded on brief one of the issues raised by the pleadings, leaving for our decision the following:

(1) Whether petitioner is entitled to amortize the cost of a TV Guide franchise which its wholly owned subsidiary had acquired by purchase from an unrelated party after agreement by petitioner to an extension thereof which franchise as extended had approximately a year and 8 months remaining when petitioner liquidated its subsidiary and took over its assets and liabilities;

(2) Whether petitioner is entitled to deduct as a business expense all or any part of the amount paid for the stock of its franchisee to the extent such amount exceeds the asset value of the franchisee.

(3) Whether petitioner's election to compute depreciation on its technical equipment under the guidelines established by Rev. Proc. 62-21, 2 C.B. 418">1962-2 C.B. 418, requires it to use the useful life provided for in that revenue procedure for the purpose of computing the investment credit with respect to the portion of the technical equipment acquired in the year 1962.

FINDINGS OF FACT

Some of the facts have been stipulated and are found accordingly.

Petitioner, a corporation organized and existing under the laws of the State of Pennsylvania, maintained its principal place of business at 400 N. Broad Street, Philadelphia, Pa., at the time of the filing of its petition in this case and at all other times pertinent to the issues herein. Petitioner (hereinafter sometimes referred to as Triangle) filed its Federal corporate income tax returns for the calendar years 1960, 1961, and 1962 with the district director of internal revenue at Philadelphia, Pa., using an accrual method of accounting. Triangle during the period relevant to this case was engaged in business as a publisher of the Philadelphia Inquirer, a daily newspaper, TV Guide, ¹ a weekly magazine which is published in regional editions, and in other business activities including operating a number of television stations.

Each issue of TV Guide is prepared and printed in a national and a local section. These two sections are combined before distribution and sale. The national section is composed of a national feature section made up by the national editorial department of TV Guide approximately 4 weeks before distribution date. The regional section is made up of local and network programing and a mixture of local and national advertising and is composed and printed shortly before the date of the release of the magazine to the newsstands. Network programing is that programing supplied by the national network staff and comprises approximately 70 percent of the programing listed in the various editions of TV Guide. Local programing constitutes the remaining 30 percent of such programs listed. The national editorial department of TV Guide provides the information with respect to network programs and the information with respect to 90 percent of the local programing consisting of syndicated shows and movies which is contained in the regional section of TV Guide. The only program information provided by the staff preparing the regional section is with respect to the few programs originated by the local station. Of the advertising included in the local section, the major portion is sold by the national office of TV Guide and consists of national advertising which is run in the regional editions. Only a minor portion of the advertising sold is local in nature running in only the local edition. The national office of TV Guide has control over the physical format used in all parts of the magazine as well as all matters of quality, grade and style of print, and appearance.

TV Guide is now the leading weekly publication in terms of circulation. In 1961 with a circulation of approximately 7.4 million it ranked fourth in national circulation.

On February 20, 1953, Triangle entered into a franchise agreement with Televiews News Co., Inc. ² (hereinafter sometimes referred to as Tele Views), whereby Tele Views agreed to purchase from Triangle a national weekly magazine (TV Guide) containing national television news, program listings, and advertising, to insert therein local advertising and listings and then distribute the final product within a specified area. Triangle maintained control over the size, quality, editorial, and other standards to be used in the publication. Tele Views was required to maintain circulation equal to the national average in comparable areas. The agreement was for a period of 5 years with automatic renewal for successive 5-year periods unless written notice of termination was given by either party to the other at least 6 months before the end of any period. This franchise agreement was amended by several letter agreements (which are irrelevant to the issue at hand) and by an amendatory agreement dated September 1, 1954, whereby the area of the franchise was extended substantially. The amendatory agreement of September 1, 1954, was for a 1-year period with automatic renewals each year thereafter unless either party gave 30 days' notice of termination to the other. The territorial extension was terminated on January 31, 1956.

On May 29, 1956, S.R.B.T.V. Publishing Co., Inc. (hereinafter sometimes referred to as S.R.B.T.V.), which was at that time and continued to be until its liquidation on October 1, 1959, a wholly owned subsidiary of petitioner's, entered into an agreement with Tele Views for the purchase by S.R.B.T.V. of Tele Views' franchise with respect to TV Guide. The purchase price was $ 500,000 with $ 50,000 payable upon the execution of the agreement, $ 150,000 due on July 1, 1956, and $ 25,000 due the first day of June, September, December, and March of each year between March 1, 1958, and December 1, 1960. S.R.B.T.V. purchased no other assets of Tele Views. S.R.B.T.V. maintained offices in Philadelphia at the same address as petitioner. Tele Views was not related to Triangle by stockownership or otherwise.

By an exchange of letters dated May 17, 1956, and May 18, 1956, petitioner and S.R.B.T.V. agreed to an extension of the terms of the franchise which S.R.B.T.V. was proposing to acquire from Tele Views for a period of 5 years from the date of the acquisition of the franchise by S.R.B.T.V. and further agreed that upon expiration of that 5-year term the franchise would terminate unconditionally without right of renewals or extensions. This agreement between S.R.B.T.V. and the petitioner was reached at least 11 days prior to the closing of the sale between S.R.B.T.V. and Tele Views. On May 29, 1956, the area covered by the franchise held by Tele Views included Iowa, Nebraska, and part of Illinois.

S.R.B.T.V. on its Federal income tax returns for the years 1956, 1957, 1958, and January 1 to October 11, 1959, claimed deductions for amortization of the $ 500,000 purchase price of the franchise it acquired from Tele Views on the basis of a 5-year period. These amortization deductions by S.R.B.T.V. were not questioned for Federal income tax purposes upon examination of S.R.B.T.V.'s income tax returns by respondent's agents. Petitioner on its Federal income tax returns for 1959, 1960, and 1961 claimed amortization deductions with respect to the amount S.R.B.T.V. had paid for the franchise on the same basis which had been used by S.R.B.T.V. The amortization deduction claimed by petitioner for the 2-month period in 1959 was not disallowed by respondent.

During the period January 1, 1959, to October 1, 1959, S.R.B.T.V. had the following income and expense record for each of its franchise areas and allocation of amortization of franchise, cost for the franchise acquired from Tele Views:

			Allocation of
Franchise area	Income	Expense	amortization of
			franchise price
Lake Ontario edition	$ 1,241,791.16	$ 734,556.76
Southern Ohio edition	724,933.28	506,308.41
Iowa edition	187,389.44	160,027.25	$ 34,015.40
Nebraska edition	200,706.75	161,827.19	21,323.05
Illinois edition	183,704.04	161,277.98	29,276.93

For the year ending December 31, 1958, S.R.B.T.V. had the following income, expense, and amortization of franchise cost allocation:

			Allocation of
Franchise area	Income	Expense	franchise cost
			amortization
Lake Ontario edition	$ 1,420,962.46	$ 912,145.56
Southern Ohio edition	593,402.05	476,591.98
New England edition	369,749.20	213,633.17
Connecticut Valley edition	148,782.32	96,723.62
Iowa edition	241,966.86	230,296.46	$ 40,200.02
Nebraska edition	230,980.85	204,867.92	25,199.97
Illinois edition	236,046.28	220,493.08	34,600.01

For the year ending December 31, 1957, S.R.B.T.V. had the following income and expenses and allocation of amortization of franchise cost:

			Allocation of
			amortization of
Franchise area	Income	Expense	franchise cost
Lake Ontario edition	$ 1,519,161.91	$ 992,072.54
New England edition	1,500,373.87	1,072,522.04
Connecticut Valley edition	132,269.48	96,318.56
Iowa edition	256,097.81	265,060.25	$ 40,200.92
Nebraska edition	190,754.69	201,582.20	25,199.97
Illinois edition	217,486.21	245,254.30	34,600.01

For the year ending December 31, 1956, S.R.B.T.V. had the following income and expenses and allocation of amortization of franchise cost:

			Allocation of
			amortization of
Franchise area	Income	Expense	franchise cost
Lake Ontario edition	$ 1,278,140.75	$ 926,442.79
Iowa-Nebraska edition (30 issues)	274,933.05	401,241.89	$ 57,967.05
New England edition	1,156,675.83	964,731.46

For the year ending December 31, 1955, S.R.B.T.V. had the following expenses and income for its two editions:

Franchise area 3	Income	Expense
Lake Ontario edition	$ 825,747.04	$ 569,508.34
New England edition	791,470.36	703,029.72

In 1953 after it had commenced publication of TV Guide petitioner acquired the business of TV Digest, another television programing magazine from Television News, Inc. (hereinafter referred to as T.N.I.), and entered into an agreement with that company dated June 22, 1953, under which petitioner granted to T.N.I. a franchise providing that T.N.I. would supply the local insert for the national TV Guide magazine and circulate and sell the combined magazine in a designated area. T.N.I. was not related to petitioner by stockownership or otherwise. The agreement of June 22, 1953, between petitioner and T.N.I. was superseded by an agreement dated November 10, 1956. This agreement provided that the franchise was not assignable without the consent of Triangle. Each agreement provided for noncompetition by T.N.I. with petitioner only so long as the franchise agreement was in effect. The June 22 agreement was for a 5-year period automatically renewable for successive 5-year periods unless one party gave written notice of termination to the other at least 6 months before the end of any such period. The November 1956 agreement was for a period of 5 years and could be extended by mutual consent but did not have an automatic renewal clause. The November agreement provided, however, that both parties should be deemed to have consented to the renewal thereof unless one party gave written notice to the other of its intention to terminate the agreement at least 6 months prior to the expiration date of the agreement. Other provisions of the agreement of June 22, 1953, and the agreement of November 10, 1956, insofar as here pertinent were essentially the same. Both agreements covered Pittsburgh and its surrounding areas, including some counties in West Virginia and Ohio and excluding some counties in eastern Pennsylvania. On May 29, 1961, within the period set by the franchise agreement petitioner notified T.N.I. that it did not intend to renew the franchise agreement dated November 10, 1956. The franchise was to terminate on December 31, 1961. However, the letter of notification indicated that a new franchise agreement would be discussed between the parties.

At the time the letter was posted by Triangle, a management decision was being considered by Triangle to discontinue franchising TV Guide in favor of retaining full publication and distribution by its own employees. After receipt of petitioner's letter by T.N.I. negotiations took place between the parties and petitioner prepared and submitted a proposed agreement to T.N.I. granting a franchise to that company for a 3-year period which period could be extended by mutual consent. This proposed agreement was never executed by T.N.I. or petitioner.

On October 13, 1961, petitioner entered into an agreement with the shareholders of T.N.I. for the purchase of their T.N.I. stock. This agreement with the shareholders of T.N.I. contains a provision that the shareholders of T.N.I. would not compete directly or indirectly with petitioner for a period of 3 years. The agreement for the purchase by petitioner of the T.N.I. stock provided for payment by petitioner to the shareholders of $ 500,000 plus the excess of the current assets over the current liabilities of T.N.I. and the fair market value of T.N.I.'s investment portfolio as reflected on its balance sheet of October 12, 1961. The total purchase price so computed was $ 929,540.53.

While the three shareholders of T.N.I. owned substantially equal amounts of stock, William Adler, one of the shareholders, had throughout the period when T.N.I. held the TV Guide franchise for the Pittsburgh area been the keyman in representing TV Guide in the area. Adler had concluded all agreements relating to television promotion of the magazine which was one of the principal sources for gaining circulation for TV Guide. He had also been the principal contact for the promotion of TV Guide through local television personalities in exchange for cover stories. He handled the acquisition of favorable retail and wholesale distribution outlets, as well as the sale of advertising in the local area. Adler was also very important in acquiring local program information for the area stations.

Circulation in the Pittsburgh area amounted to 230,000, of which 65,000 were subscribers whose records were completely controlled by T.N.I. The advertising rates of TV Guide guaranteed to advertisers a national circulation of 7,250,000. The officers of petitioner were of the opinion that any substantial disruption of the circulation of TV Guide in the Pittsburgh area would have adverse consequences on TV Guide's advertising revenues.

T.N.I. had distributed TV Digest, a program-listing publication, prior to Triangle's purchase thereof, and therefore Adler had the knowledge, expertise, and personal contacts to be an effective competitor to TV Guide in the Pittsburgh area. One of the other shareholders of T.N.I. wrote newspaper articles respecting TV programs and this activity was specifically exempt from the covenant not to compete. The third shareholder of T.N.I. had not been active in the business of the corporation. Because of the nature of the negotiations between Triangle and T.N.I. relating to a new franchise, petitioner's officers were willing to reflect in the purchase price of the T.N.I. stock an amount they considered to be the value of a 3-year franchise such as had been offered by Triangle to T.N.I. subsequent to the letter of May 29, even though no such franchise was ever formally granted to T.N.I. by petitioner.

In addition to the contract between petitioner and the shareholders of T.N.I. relating to the purchase by petitioner of the T.N.I. stock petitioner and William F. Adler entered into a contract for Adler to render consulting services to petitioner. This contract contained a noncompetition clause. The term of the consultation employment of William F. Adler and the noncompetition clause was 5 years. Under the agreement Adler was to be paid $ 50,000 a year for the 5-year period.

In negotiating the purchase agreement between Triangle and T.N.I. no sums were specifically allocated to such items as customer lists, goodwill, noncompetition clauses, and similar intangibles. The sales price was figured on the discounted annual profit anticipated from a 3-year franchise plus the asset value of T.N.I. The suggestion for the stock acquisition came from the shareholders of T.N.I. and it was of no concern to petitioner whether its payment would be to the T.N.I. stockholders for their stock or an outright payment to T.N.I. to terminate the franchise agreement.

T.N.I. was liquidated and its property distributed to petitioner on October 13, 1961. On liquidation of T.N.I. petitioner allocated the $ 929,540.53 purchase price of the T.N.I. stock as follows: $ 418,838 to the value of investments less the cost of their disposition, $ 10,702.53 to the excess of current assets over current liabilities, and the remaining $ 500,000 between cost of the franchise and fixed assets. The amount of $ 10,687.85 was allocated to fixed assets and the remaining $ 489,312.15 to cost of the franchise. Based on the earnings of T.N.I. from its TV Guide franchise the remaining period of the franchise which expired December 31, 1961, had a value of $ 55,000.

During the taxable year 1962 petitioner purchased certain radio and television technical equipment at a cost of $ 304,428.24. ⁴ Petitioner elected for the year 1962 for the purposes of computing depreciation to group these and certain other assets, including the radio and television technical equipment acquired by it in prior years, into guideline classes and to treat each such class as a composite account under Rev. Proc. 62-21, 2 C.B. 418">1962-2 C.B. 418. The radio and television technical equipment acquired by petitioner in 1962 and in prior years was classified in group 4, class 8 (machinery and equipment -- radio and television), as set forth in Rev. Proc. 62-21 on petitioner's income tax return. A class life of 6 years was assigned to group 4, class 8, in accordance with the useful life set forth in Rev. Proc. 62-21, for the sum-of-the-years digits method. In computing the investment credit on the $ 304,428.24 of radio and television technical equipment purchased in 1962 petitioner assigned a useful life of 8 or more years to this equipment and therefore claimed the 7-percent credit with respect to the total cost of the equipment.

On its Federal income tax return for the taxable year 1953 petitioner claimed depreciation of radio and television technical equipment based on a useful life of 6 years. In the examination of petitioner's return for that year respondent's agent determined the useful life of the radio and television technical equipment for the purposes of computing depreciation to be 10 years. Petitioner accepted this adjustment and in the following years claimed depreciation of radio and television technical equipment based on a useful life of 10 years. Petitioner's claimed deduction for depreciation based on a useful life of 10 years for radio and television equipment was not changed during examinations of petitioner's returns for the years 1957 through 1961 by respondent's agents.

In 1952 petitioner owned only station WFIL but in 1956 and thereafter petitioner acquired other stations although WFIL remained its major outlet. The normal useful life of the radio and television technical equipment acquired by petitioner in 1962 is at least 8 to 10 years absent some then unforeseeable radical change in the industry which would make such equipment obsolete.

When petitioner moved station WFIL to new facilities in 1962 or 1963 the old studio at 46th and Market Streets was donated to station WHYY, an educational television station completely in operating condition. At that time there was no obsolescence in the old equipment although some of it was at the time 10 years old. This equipment was still operating and useful to the educational studio and was still the type used in the operation of WFIL.

Respondent in his notice of deficiency disallowed petitioner's claimed deduction for amortization of the "S.R.B.T.V. franchise" for each of the years 1960 and 1961 and disallowed petitioner's claimed deduction of $ 489,312 for 1961 which on petitioner's return was designated as "amortization of Television News franchise." For the year 1962 respondent recomputed petitioner's investment credit for the technical radio and television equipment it acquired that year by using for that equipment the 6-year useful life provided for in Rev. Proc. 62-21, 2 C.B. 418">1962-2 C.B. 418.

ULTIMATE FINDINGS OF FACT

(1) Triangle is the publisher of TV Guide.

(2) The useful life of the franchise between Triangle and S.R.B.T.V. was 5 years from the date of S.R.B.T.V.'s acquisition of the Tele View franchise under the agreement of May 29, 1956.

(3) The only franchise between Triangle and T.N.I. terminated on December 31, 1961. No other franchise existed between Triangle and T.N.I. at the time petitioner purchased the stock of T.N.I.

(4) Of the amount paid by petitioner for the T.N.I. stock $ 489,312.15 was for the T.N.I. franchise terminating on December 31, 1961, covenants not to compete by the shareholders of T.N.I., and the right to customer lists to enable an orderly transition of the business. The amount of $ 55,000 is the value of the franchise terminating December 31, 1961.

(5) The useful life of the radio and television technical equipment purchased by Triangle in 1962 was 10 years.

OPINION

The first issue presented for decision is whether petitioner is entitled to deduct as amortization or otherwise the amount of its subsidiary's cost of purchase from an unrelated party of a TV Guide franchise from petitioner which the subsidiary had not recovered through amortization deductions at the time petitioner liquidated its subsidiary and took over its subsidiary's assets and liabilities. Petitioner contends it is entitled to amortize the unrecovered cost of the franchise to its subsidiary as the cost of an intangible asset with a limited life used in its trade or business under section 1.167(a)-3, Income Tax Regs.⁵Under section 167 and the regulations promulgated pursuant thereto, a contract which has a limited life and is utilized in the business of a taxpayer may be amortized ratably over its useful life. See David Hoffman, 48 T.C. 176">48 T.C. 176 (1967). A franchise may be a contract with a limited useful life. Pasadena City Lines, Inc., 23 T.C. 34">23 T.C. 34, 38 (1954).

Petitioner's position is that the franchise acquired by its subsidiary had a useful life of 5 years to the subsidiary and that when it acquired the assets and liabilities of its subsidiary one of the assets it acquired was the remaining year and 8 months of the franchise.

Although respondent's position is not completely clear he apparently first contends that when petitioner's subsidiary acquired the franchise from the unrelated party in May of 1956 the life of the franchise was indefinite and therefore the asset petitioner acquired in the liquidation was a franchise with an indefinite useful life. In the alternative respondent contends that if the franchise did not have an indefinite useful life it had a useful life of only 3 years. Respondent makes a second contention that since the franchise was from petitioner to the subsidiary, even if it had a useful life of 5 years to petitioner's subsidiary, it ceased to exist when petitioner acquired the assets of its subsidiary as petitioner could not have an asset of a franchise from itself.

Respondent argues that the franchise contract which petitioner's subsidiary S.R.B.T.V. acquired from Tele Views had an indefinite life and that the exchange of letters between petitioner and S.R.B.T.V. limiting the life of the contract unconditionally to 5 years was not an arms'-length transaction. The contract between petitioner and Tele Views did provide for automatic extensions provided no notice of the intention of either party to terminate was given as specified in the contract. However, prior to the acquisition of the franchise by S.R.B.T.V., the life of the franchise had been unconditionally limited to 5 years unless we agree with respondent that the agreement between petitioner and S.R.B.T.V. should be considered of no validity for the purpose of this case. Where a contract is renewable as a matter of course it generally will be considered to have an indefinite life and therefore not to be an asset subject to amortization under section 167. It is therefore necessary for us to determine whether the agreement between petitioner and S.R.B.T.V. was a bona fide agreement limiting the life of the franchise unconditionally to 5 years. On the basis of the evidence in this case we consider the agreement between petitioner and S.R.B.T.V. to be bona fide.

The letter agreement between petitioner and S.R.B.T.V. to extend the term of the franchise for a single 5-year period was entered into before S.R.B.T.V. acquired the franchise from Tele Views. The limitation of the franchise to a definite life was in line with action being taken by petitioner in dealing with unrelated parties. S.R.B.T.V. was not liquidated until more than 3 years after it had acquired the franchise. On the basis of all the evidence of record we conclude that the franchise with respect to TV Guide which S.R.B.T.V. acquired from Tele Views as modified by the letter agreement between petitioner and S.R.B.T.V. had a definite life of 5 years from the date it was acquired by S.R.B.T.V. and we have so found. Our holding in this respect also disposes of respondent's contention that the life of the franchise which S.R.B.T.V. acquired in May 1956 was only 3 years.

Having concluded that the franchise which S.R.B.T.V. acquired from Tele Views had a determinable useful life of 5 years from the date of its acquisition by S.R.B.T.V. we must determine whether this franchise was an asset with a remaining determinable useful life of approximately a year and 8 months when petitioner acquired all of the assets of S.R.B.T.V. upon liquidation of that corporation. Respondent argues that since the franchise owned by S.R.B.T.V. was granted by petitioner, when petitioner acquired the assets of S.R.B.T.V. the franchise ceased to exist.

The effect of the merger of two interests upon the life of an intangible asset has been considered by us in other situations. We have held that where two interests are merged through purchase, the unrecovered cost of the intangible asset is recovered by the purchaser through amortization. See William N. Fry, Jr., 31 T.C. 522">31 T.C. 522 (1958), affirmed per curiam 283 F. 2d 869 (C.A. 6, 1960), involving merger of a life estate with remainder interests in a trust which cites and relies on Bell v. Harrison, 212 F. 2d 253 (C.A. 7, 1954), involving merger of life estate and remainder interests and Peter P. Risko, 26 T.C. 485">26 T.C. 485 (1956), involving purchase by one partner of another partner's limited as to time interest. See also Trustee Corporation, 42 T.C. 482">42 T.C. 482, 488 (1964), involving payment by a lessor to a lessee for cancellation of a lease. In our view the franchise of limited duration owned by petitioner's wholly owned subsidiary when acquired by petitioner falls within the ambit of these cases. On the basis of these cases we sustain petitioner's claimed deduction for amortization of the franchise acquired upon liquidation of S.R.B.T.V. over its remaining useful life to S.R.B.T.V.

The second issue concerns the deductibility by petitioner of the amount paid to acquire the stock of one of its franchisees to the extent the payment exceeded the asset value of the franchisee. Petitioner had served notice of termination of the franchise but while still engaged in negotiations relating to a renewal of the franchise agreement purchased the stock of the franchisee. Immediately after acquiring this stock, petitioner liquidated the franchisee and disposed of the assets of that corporation. The evidence is clear that petitioner acquired the stock of its franchisee solely for the purpose of terminating the franchise without having difficulties arise with respect to its subscription distribution and having the stockholders of the franchisee compete with it or otherwise interfere with the maintenance of the level of distribution of TV Guide then existing in the area. The franchise that existed at the time petitioner liquidated the franchisee after acquiring its stock had only 2 1/2 months to run. The value of the remaining term of this franchise was $ 55,000 and in accordance with our holding on the first issue this amount is properly amortizable over the period ending December 31, 1961, when that franchise expired.

The facts here show that no franchise extending beyond December 31, 1961, existed at the time petitioner purchased the stock of T.N.I. The abortive negotiations between the parties relating to the granting of a 3-year franchise did not result in a contract between the parties. It is also clear that petitioner purchased the stock of T.N.I. only for the purpose of acquiring the assets of T.N.I. and with intent to liquidate the corporation promptly. Although petitioner on its books allocated the total payment in excess of T.N.I.'s asset value to the acquisition of the T.N.I. franchise on the facts here present we hold that to the extent this amount exceeded the $ 55,000 value of the existing franchise it was paid to insure for petitioner unhampered use of the customer lists held by T.N.I. in order to insure an orderly transition in distribution at the time of the termination of the franchise including freedom from competition or unfavorable interference by the T.N.I. stockholders. There was no allocation of the purchase price between the agreement not to compete and the other tangible assets purchased. Where a composite price is paid for a covenant not to compete and other intanglible assets no allocation of a part of the purchase price is made to the covenant if such covenant has no significance beyond insuring the effective transfer of the other intangibles. See Levine v. Commissioner, 324 F. 2d 298, 300 (C.A. 3, 1963), affirming a Memorandum Opinion of this Court. On the basis of the evidence in this case we find that the unhampered use of the customer lists and of the distribution of TV Guide in the Pittsburgh area was the significant asset petitioner was purchasing. The covenant not to compete contained in the purchase contract was merely further assurance of such orderly transition. There was a separate agreement with Adler which involved consulting services and a covenant not to compete for a 5-year period. This covenant of Adler's was undoubtedly very significant to petitioner. However, this separate agreement carried its own consideration and no part of the sales price of the stock is allocable to this agreement. In our view the portion of the excess of the cost to petitioner of the stock over the purchased company's asset value which we have allocated to the acquisition of the customer lists in order to insure an orderly transition of distribution is an amount paid for a capital asset with no reasonably ascertainable useful life and is not deductible by petitioner unless, as it contends, this expenditure comes within the provisions of section 173. ⁶Section 173 specifically allows deduction of expenditures made to establish, maintain, or increase the circulation of a newspaper, magazine, or other periodical other than those for the purchase of depreciable property or the acquisition of circulation through the purchase of any part of the business of another publisher. It is clear from the reference in section 173 to section 263 that any expenditure made to increase or maintain circulation other than those specifically excepted are deductible even though they would otherwise be considered capital expenditures. Therefore, expenditures made for the purchase of customer lists, although normally nondepreciable capital expenditures where made to establish, maintain, or increase circulation of a periodical are deductible. However, expenditures made to acquire circulation through the purchase of any part of the business of another publisher are not deductible under section 173. From the evidence here it appears that petitioner's expenditure was to maintain its circulation and not to "acquire" circulation. The circulation involved in the transaction was of petitioner's magazine TV Guide. However, we need not decide whether this fact would cause the expenditure to be deductible in all events, since in our view T.N.I. was not "another publisher" within the meaning of section 173.

Section 173 was enacted into law as section 23(bb) of the Internal Revenue Code of 1939 by the Revenue Act of 1950. The purpose of the section was to remove the distinction made by prior case law between expenditures to maintain circulation and expenditures to establish or increase circulation. See S. Rept. No. 2375, 81st Cong., 2d Sess., 2 C.B. 529">1950-2 C.B. 529; H. Rept. No. 3124, 81st Cong., 2d Sess., 2 C.B. 583">1950-2 C.B. 583. The original bill provided that a deduction would not be allowed for any part of expenditures for the acquisition of circulation "through the purchase of newspapers, magazines, or other periodicals." See S. Rept. No. 2375, 81st Cong., 2d Sess. 2 C.B. 539">1950-2 C.B. 539. This language was changed in the 1954 Code to the present wording by an amendment in the Senate. However, Congress intended to carry over the substance of section 23(bb) of the 1939 Code into section 173, I.R.C. 1954. S. Rept. No. 1622, to accompany H.R. 8300 (Pub. L. No. 591), 83d Cong., 2d Sess., p. 13 (1954).

We have found no legislative history of section 173 which clarifies the term "publisher," nor have we found any cases determining who shall be deemed to be a publisher within the meaning of section 173. We will, therefore, consider whether T.N.I. should be classed as a "publisher" under section 173 by reference to the nature of its activities.

T.N.I. performed several functions as franchisee of petitioner. It arranged for local distribution of TV Guide through subscription mailing, and retail sales at newsstands and other appropriate points of distribution, such as supermarkets. It arranged to have the center section of the magazine printed, combining the information received from petitioner with a small amount of content (about 10 percent) which it acquired and which dealt solely with local programing and advertising, using a format prescribed by the national office of petitioner. It then combined the center section with material printed and forwarded by petitioner to form one magazine which was placed in distribution in the manner above set forth. T.N.I. had no participation in format, content (except in a minor sense), or editorial decisions with respect to TV Guide. In short, T.N.I. took no part in the fundamental aspects of the creation of the product sold. Although T.N.I. did contract for the actual printing of a portion of the final product, it could not vary the product in any substantial manner, for petitioner retained all power of decision over the format, content, and editorial statement of the magazine. In fulfilling its functions T.N.I. more closely resembles a distributor than it does a creator. Petitioner, not T.N.I., drew together the diverse elements of authorship, financing, editing, advertising, reporting, printing, and distribution which are required in the creation of a magazine. Although the line is not distinct because of T.N.I.'s efforts in sale of local advertising and reporting of local listings, we find on the basis of all evidence of record that T.N.I. is not a publisher within the meaning of section 173. Therefore, the expenditures made by petitioner except to the extent allocable to the remaining 2 months of the T.N.I. franchise are deductible under section 173 since these expenditures were not made in the acquisition of any part of the business of another publisher.

The last question presented is whether petitioner's use of guideline lives under Rev. Proc. 62-21 for the purpose of computing depreciation prohibits it from utilizing with respect to the same assets a different useful life under section 48(c)(2) in computing its investment credit.

Section 46 provides that the amount of credit allowed by section 38 shall be equal to 7 percent of the qualified investment, which is defined as the aggregate of the applicable percentages of cost of new section 38 property. To determine the applicable percentage, section 46(c)(2)⁷ sets forth a table utilizing the term "useful life" without definition. Section 1.46-3(e), Income Tax Regs., ⁸ provides that estimated useful lives "may be determined at the taxpayer's option under either subparagraph 2 or 3 of this paragraph." That consistency between the useful life of an asset for depreciation and for investment credit is not uniformly required by respondent's regulation is shown by the provision of section 1.46-3(c) that a taxpayer may assign to each asset falling within a guideline class the class life of the taxpayer for the guideline class for each year as determined under Rev. Proc. 62-21, 2 C.B. 418">1962-2 C.B. 418, without the requirement that the taxpayer utilize the guideline method for the purposes of computing depreciation. If such consistency were required a taxpayer would be permitted to use class life for investment credit computation only if he had used it in computing depreciation.

Respondent argues that the word "may" found in section 1.46-3(e), should be read as "must" thereby requiring a taxpayer who has used useful life based on the guideline life set forth in Rev. Proc. 62-21 to use the same life for the purpose of computing his investment credit even though that estimated useful life is not accurate for the taxpayer's particular situation. Respondent's interpretation would result in a taxpayer who purchased assets with a useful life in excess of that provided by the guidelines for that class of asset never receiving a portion of the investment credit to which he would be entitled on the basis of the actual useful life of the asset. If a taxpayer either by use of the guidelines or otherwise computes a larger investment credit than that to which he is entitled by utilizing an erroneously long estimated useful life, such excess is subject to recapture upon retirement of the asset.

A taxpayer ultimately recovers his entire investment in an asset through depreciation even though he may recover his investment over a period less than the useful life of the asset if he uses an erroneously short useful life.

Considering these factors as well as the normal meaning of the word "may" we conclude that petitioner is entitled to compute its investment credit for the year 1962 on the basis of the actually demonstrated useful life of the assets it acquired in that year.

Whether a taxpayer should be entitled to use, in computing depreciation, the shorter useful life of an asset prescribed by the guidelines in Rev. Proc. 62-21 when he has demonstrated an actually longer useful life in computing his investment credit is not an issue before us in this case.

In the instant case the evidence shows that the reasonable estimated useful life of the technical equipment which petitioner acquired in 1962 is in excess of 8 years. We interpret respondent's regulations to permit petitioner to use either the guideline class life set forth in Rev. Proc. 62-21 or to use the reasonable estimated useful life of the asset. Since the estimated useful life claimed by petitioner is reasonable, we sustain petitioner's computation of its investment credit.

Decision will be entered under Rule 50.

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Footnotes

• 1. TV Guide is a trademark registered under both Federal and applicable State law in petitioner's name.↩

• 2. Also referred to in the record as Tele Views, Inc., and Tele Views News, Inc.↩

• 3. S.R.B.T.V. had no Iowa-Nebraska editions for this year since it did not acquire that franchise until 1956.↩

• 4. The cost of this equipment was shown on petitioner's return as $ 304,878 but the parties now agree the proper cost is $ 304,428.24.↩

• 5. Sec. 1.167(a)-3, Income Tax Regs. Intangibles.

  If an intangible asset is known from experience or other factors to be of use in the business or in the production of income for only a limited period, the length of which can be estimated with reasonable accuracy, such an intangible asset may be the subject of a depreciation allowance. Examples are patents and copyrights. An intangible asset, the useful life of which is not limited, is not subject to the allowance for depreciation. No allowance will be permitted merely because, in the unsupported opinion of the taxpayer, the intangible asset has a limited useful life. * * *↩

• 6. SEC. 173. CIRCULATION EXPENDITURES.

  Notwithstanding section 263↩, all expenditures (other than expenditures for the purchase of land or depreciable property or for the acquisition of circulation through the purchase of any part of the business of another publisher of a newspaper, magazine, or other periodical) to establish, maintain, or increase the circulation of a newspaper, magazine, or other periodical shall be allowed as a deduction; except that the deduction shall not be allowed with respect to the portion of such expenditures as, under regulations prescribed by the Secretary or his delegate, is chargeable to capital account if the taxpayer elects, in accordance with such regulations, to treat such portion as so chargeable. Such election, if made, must be for the total amount of such portion of the expenditures which is so chargeable to capital account, and shall be binding for all subsequent taxable years unless, upon application by the taxpayer, the Secretary or his delegate permits a revocation of such election subject to such conditions as he deems necessary.

• 7. SEC. 46(c). Qualified Investment. --

  (2) Applicable percentage. -- For purposes of paragraph (1), the applicable percentage for any property shall be determined under the following table:

  	The applicable
  If the useful life is --	percentage is --
  4 years or more but less than 6 years	33 1/3
  6 years or more but less than 8 years	66 2/3
  8 years or more	100

  For purposes of this paragraph, the useful life of any property shall be determined as of the time such property is placed in service by the taxpayer.↩

• 8. Income Tax Regs., sec. 1.46-3(e)Estimated useful life. -- (1) In general. With respect to assets placed in service by the taxpayer during any taxable year, for the purpose of computing qualified investment the estimated useful lives assigned to all assets which fall within a particular guideline class (within the meaning of Revenue Procedure 62-21) may be determined at the taxpayer's option, under either subparagraph (2) or (3) of this paragraph. Thus, the taxpayer may assign estimated useful lives to all the assets falling in one guideline class in accordance with subparagraph (2) of this paragraph, and may assign estimated useful lives to all the assets falling within another guideline class in accordance with subparagraph (3) of this paragraph. See subparagraphs (4) and (5) of this paragraph for determination of estimated useful lives of assets not subject to subparagraph (2) or (3) of this paragraph.

  (2) Class life system. The taxpayer may assign to each asset falling within a guideline class, which is placed in service during the taxable year, the class life of the taxpayer for the guideline class for such year as determined under section 4, Part II of Revenue Procedure 62-21. * * *

  (3) Individual useful life system↩. (1) The taxpayer may assign an individual estimated useful life to each asset falling within a guideline class which is placed in service during the taxable year. * * *