Buckley v. Commissioner

Citation68 T.C.M. 754
Decision Date26 September 1994
Docket NumberDocket No. 24934-91.
PartiesCharlton H. Buckley and Susan S. Buckley v. Commissioner.
CourtUnited States Tax Court

CHIECHI, Judge:

Respondent determined the following deficiencies in, additions to, and increased interest on petitioners' Federal income tax:

                Increased
                                                                       Additions to Tax                    Interest
                                                      ----------------------------------------------       ---------
                                                       Section          Section       Section    Section    Section
                Year                   Deficiency   6653(a)(1)(A)1 6653(a)(1)(B)    6653(a)    6659(a)    6621(c)
                1987 ...............   $185,155        $9,258              *            --      $ 55,545       **
                1988 ...............    608,648          --                --        $30,432     182,594       **
                * 50 percent of the interest due on the portion of the underpayment attributable to negligence. Respondent determined
                that the entire underpayment was attributable to negligence
                ** Interest at 120 percent of the underpayment rate provided by sec. 6621 on the portion of the deficiency constituting
                a substantial underpayment attributable to tax-motivated transactions. Respondent determined that the entire
                underpayment was attributable to tax-motivated transactions
                

As an alternative to her determination with respect to the additions to tax imposed by section 6659(a), respondent determined that petitioners are liable for the addition to tax imposed by section 6661(a) for a substantial understatement of income tax for each of the years at issue.

The issues remaining for decision are:2

1. Are petitioners entitled to amortize the amounts allocated by Henry Broadcasting Company (Henry), an S corporation wholly owned by petitioner Charlton H. Buckley (Mr. Buckley), to radio broadcast formats (formats) that were among the assets of certain radio stations (stations) it acquired? We hold that they are to the extent stated herein.

2. Are petitioners entitled to amortize the amount allocated by Henry to a studio lease (studio lease) that was among the assets of certain stations it acquired? We hold that they are to the extent stated herein.

3. Are petitioners entitled to amortize the amounts allocated by Henry to transmitter leases that were among the assets of certain stations it acquired? We hold that they are to the extent stated herein.

4. Are petitioners entitled to amortize the amounts allocated by Henry to two covenants not to compete that it entered into with the sellers of certain stations it acquired? We hold that they are to the extent stated herein.

5. Are petitioners liable for the additions to tax for negligence for each of the years at issue? We hold that they are to the extent stated herein.

6. Are petitioners liable for the addition to tax for a valuation overstatement for each of the years at issue? We hold that they are to the extent stated herein.

7. To the extent that respondent's determination with respect to the addition to tax for a valuation overstatement for each year at issue is not sustained, are petitioners liable for the addition to tax for a substantial understatement of income tax for each such year? We hold that they are not.

8. Are petitioners liable for interest at the increased rate provided by section 6621(c) for each of the years at issue? We hold that they are to the extent stated herein.

Findings of Fact

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

At the time their petition was filed, petitioners resided in Atherton, California.

Mr. Buckley is the sole shareholder and president of Henry, an S corporation.

Pursuant to an asset purchase agreement dated July 22, 1986, on October 1, 1986, Henry purchased from Grace Broadcasting Co. (Grace) for $3 million substantially all of the assets of radio stations KDON-AM and KDON-FM (sometimes collectively referred to herein as KDON) that were licensed to the city of Salinas, California. As part of the purchase of KDON, Henry and Grace entered into a covenant not to compete (Grace covenant) that stated that Grace agreed, in exchange for $2 million, not to compete for three years with Henry in providing commercial radio broadcasting at any location within a 50-mile radius of Salinas. Prior to the purchase of KDON, a media broker furnished Henry with projections of operating profits for both DON-AM and KDON-FM for 1986, 1987, and 1988 which estimated that the total such profits for those years would be $1,465,000. At the time Henry purchased KDON-FM, it was broadcasting a contemporary hit, or top 40, music format.3

Pursuant to an asset purchase agreement dated September 30, 1986, on December 22, 1986, Henry purchased from KFAB Broadcasting Co. for $21,800,000 substantially all of the assets of radio stations KFAB-AM (KFAB) and KGOR-FM (KGOR) that were licensed to the city of Omaha, Nebraska. At the time of those purchases, CAB was broadcasting a full service AM format, and KGOR was broadcasting a contemporary hit, or top 40, music format.4

Among the assets acquired by Henry when it purchased substantially all of the assets of KFAB and KGOR was a lease for space used as the studios for those stations (studio lease). The lease term had begun on April 1, 1979, and was to end on March 31, 1989. The monthly rent payable under the studio lease was $1,800. At the option of the lessee, the studio lease was renewable at a monthly rent of $2,100 for two consecutive five-year terms from April 1, 1989 to April 1, 1994, and from April 1, 1994 to April 1, 1999.

As part of the negotiations between Henry and the owner of KGOR, on December 22, 1986, Henry entered into a 10-year lease with Lee Enterprises, Inc. (Lee) to rent for $100 per month space for the KGOR transmitter and antenna (KGOR transmitter lease) at a site owned by Lee. Under that lease, Henry was permitted to broadcast KGOR's signal from an antenna situated on Lee's television tower in Omaha, Nebraska. The KGOR transmitter lease could be extended, at the lessee's option, for a second 10-year term at a monthly rent of $200.

Pursuant to an asset purchase agreement dated July 13, 1987 (original agreement), that was modified on November 10, 1987 (modified agreement), on December 1, 1987, Henry purchased from McClatchy Newspapers, Inc. (McClatchy) for $5,243,450 substantially all of the assets of radio stations KMJ-AM (KMJ) and KNAX-FM (KNAX) that were licensed to the city of Fresno, California. At the time of those purchases, KMJ was broadcasting a news/talk format, and KNAX was broadcasting a country music format.

As part of those purchases, on December 1, 1987, Henry and McClatchy entered into a covenant not to compete (McClatchy covenant) that stated that McClatchy agreed not to become associated for three years in any manner with any radio broadcast station located within 50 miles of Fresno. The original agreement provided that the consideration for the McClatchy covenant was $2 million. The modified agreement recited that the consideration for that covenant was $1,906,550.

McClatchy was a media conglomerate that owned newspapers, including a daily newspaper in Fresno, and radio and television stations. At the time Henry purchased most of the assets of KMJ and KNAX, McClatchy informed Mr. Buckley that it was terminating its involvement in the communications business except with respect to newspapers. Under regulations of the Federal Communications Commission (FCC),5 McClatchy could not, after the sale of KMJ and KNAX, obtain a license for a broadcast station in Fresno because it published a daily newspaper in that city. McClatchy's sale of those stations terminated a cross-ownership arrangement that had been allowed by the FCC under certain so-called grandfathering rules that it had promulgated.

In 1988, at about the time it acquired KFYE-FM, discussed below, Henry sold KNAX in order to buy a station in Fresno with a stronger signal than that of KNAX, which was poor. As part of that sale, Henry entered into a covenant not to compete (Henry covenant) with the buyer of KNAX that stated that Henry agreed, in exchange for $1 million, not to broadcast country music in the Fresno market for three years.

Pursuant to an asset purchase agreement dated April 28, 1988, on September 30, 1988, Henry purchased from Professional Broadcasting, Inc. for $4,350,000 substantially all of the assets of radio station KFYE-FM (KFYE) that was licensed to the city of Fresno, California. Among the assets acquired was a transmitter lease (KFYE transmitter lease) under which Henry was allowed to transmit KFYE's signal from a television broadcast tower. The lease term had begun on November 8, 1979, and that lease was modified on March 15, 1985. At the time Henry purchased KFYE, it was losing money and the adult contemporary broadcast format that it was broadcasting was unsuccessful.

Petitioners' returns for the years at issue were prepared by the accounting firm of Johnson, Levie & Lehrman (Johnson, Levie). Henry's returns for the years at issue were prepared by the accounting firm of Miller, Kaplan, Arase & Co. (Miller, Kaplan). Miller, Kaplan, which has extensive experience in the radio broadcast industry, also provided a variety of other services to Henry, including auditing its books and allocating the prices paid for the stations purchased by Henry to various assets acquired and determining the useful lives of those assets.

Specifically, shortly after Henry purchased the stations in question, Mr. Buckley and Henry's employees provided Miller, Kaplan with information concerning the assets of those stations, including the prices paid and the purchase agreements. Miller, Kaplan allocated the purchase...

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