Gulf Television Corp. v. Comm'r of Internal Revenue

• Decision Date: 25 September 1969
• Docket Number: Docket No. 3348-66.
• Parties: GULF TELEVISION CORPORATION, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

17 Rad. Reg. 2d (P & F) 2031

52 T.C. 1038

GULF TELEVISION CORPORATION, PETITIONER

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 3348-66.

Tax Court of the United States.

Filed September 25, 1969.

Whitman Knapp, Donald Shapiro, Michael O. Finkelstein, and Paul R. Herman, for the petitioner.

George H. Jelly, for the respondent.

In 1956 petitioner purchased a television station for $4,800,000 of which $2,700,000 was allocated by petitioner to the purchase price of a network affiliation contract which the station had with CBS. This contract like all network affiliation contracts was for 2 years (the maximum period permitted by the FCC) but was automatically renewable for successive 2-year terms unless either party gave 6 months' written notice of intention not to renew. At the time it was acquired by petitioner at an allocated cost of $2,700,000, 19 months of a 2-year term had yet to run. The contract was still in force at the time of the trial herein. On its books petitioner amortized its allocated cost of this contract initially on the basis of an assumed useful life of 19 months. Six months prior to the expiration of the 2-year term beginning Mar. 1, 1956, when the contract was automatically renewed for another 2-year term ending Mar. 30, 1960, the amortization was computed on an assumed life of the contract of 30 months (24 months plus 6 months). This was the method used by petitioner in computing the amortization deductions taken in its returns for the taxable years. These deductions were disallowed by respondent on the ground that the contract ‘does not have a useful life which can be determined with reasonable accuracy as required by section 167 of the Internal Revenue Code of 1954.’ In the original petition filed herein petitioner alleged that the useful life of the contract was 20 years and that the amortization deductions should be computed accordingly. At the trial herein and consistent with the allegation of its amended petition filed at that time petitioner now contends that the amortization deductions should be computed on the assumption that in each taxable year the contract will not be renewed for more than six 2-year terms after the expiration of the current period. Held, on the proof presented herein petitioner has failed to show that the network affiliation contract was of use in petitioner's business ‘for only a limited period, the length of which can be estimated with reasonable accuracy’ or that the useful life of such contract is other than ‘indefinite’ or ‘indeterminate’ and therefore has failed to prove that respondent erred in his determination of deficiency and that the method of computing the amortization of this contract which petitioner now advocates is appropriate to the facts of this case.

Respondent determined the following deficiencies in petitioner's income tax:

+------------------------------------+
                ¦Taxable year ended—  ¦Deficiency  ¦
                +-----------------------+------------¦
                ¦                       ¦            ¦
                +-----------------------+------------¦
                ¦Aug. 31, 1957          ¦$338,523.82 ¦
                +-----------------------+------------¦
                ¦Aug. 31, 1958          ¦365,084.33  ¦
                +-----------------------+------------¦
                ¦Aug. 31, 1959          ¦399,137.47  ¦
                +-----------------------+------------¦
                ¦Dec. 31, 1959          ¦152,614.43  ¦
                +------------------------------------+
                

Other issues having been disposed of by agreement of the parties, the remaining issue presented for decision is whether the useful life of the network affiliation contract between Columbia Broadcasting System and television station KHOU-TV (formerly KGUL-TV), an intangible asset which was acquired by the petitioner on August 31, 1956, can be estimated with reasonable accuracy, thus making the cost of the network affiliation interest subject to the allowance for depreciation under section 167 of the Internal Revenue Code of 1954.¹

FINDINGS OF FACT

Some of the facts and exhibits have been stipulated and are incorporated herein by this reference.

Petitioner is a corporation organized under the laws of the State of Delaware on February 6, 1956. Its principal office is at 1945 Allen Parkway, Houston, Tex.

The Federal income tax returns of petitioner for the taxable years ended August 31, 1957, August 31, 1958, and August 31, 1959, and for the taxable period September 1, 1959, to December 31, 1959, were duly filed with the district director of Internal Revenue, Austin, Tex. Petitioner's books of account were maintained, and its Federal income tax returns prepared, on the basis of an accrual method of accounting. Petitioner used a fiscal year ended August 31, except for the period ending December 31, 1959. Thereafter petitioner was a member of an affiliated group filing a consolidated return.

The petitioner was first organized as the Lone Star Television Corp. In the period May 8 through August 23, 1956, the Long Star Television Corp. acquired all of the outstanding stock and some notes of Gulf Television Co. On August 20, 1956, the purchase of the stock of Gulf Television Co. by the petitioner was approved by the Federal Communications Commission (hereinafter called FCC).

Gulf Television Co. owned and operated television station KGUL-TV whose city of license was Galveston, Tex. at the time petitioner acquired its stock and notes. The call letters KGUL-TV were changed to KHOU-TV on June 1, 1959. KHOU-TV rather than KGUL-TV will be used to refer to the television station acquired and thereafter owned by petitioner throughout the Findings of Fact and Opinion in this case.

On August 29, 1956, Gulf Television Co. adopted a plan of complete liquidation. On August 31, 1956, Gulf Television Co. liquidated pursuant to the plan and, as of that date all of its assets were transferred to petitioner and petitioner assumed all of its liabilities in the amount of $368,571. This liquidation qualified under section 334(b)(2) of the 1954 Code. Petitioner acquired in this manner, all the assets and assumed all the liabilities of KHOU-TV. Petitioner Lone Star Television Corp. then changed its name to Gulf Television Corp.

Petitioner acquired the stock and notes of Gulf Television Co. for a total consideration (including acquisition expenses and assumption of Gulf Television Co.‘s liabilities) of $4,828,107. On its income tax returns for the years 1957-59 petitioner allocated the cost of the assets acquired from Gulf Television Co. as follows:

+--------------------------------------+
                ¦CBS affiliation contract¦$2,740,000.00¦
                +------------------------+-------------¦
                ¦Goodwill                ¦795,416.55   ¦
                +------------------------+-------------¦
                ¦Tangible assets         ¦1,292,690.56 ¦
                +------------------------+-------------¦
                ¦                        ¦4,828,107.11 ¦
                +--------------------------------------+
                

Petitioner's allocation of $1,292,690.56 to tangible assets was not disturbed on audit by respondent.

Among the assets acquired by petitioner from Gulf Television Co. was a television network affiliation contract with the Columbia Broadcasting System (hereinafter referred to as CBS) with respect to station KHOU-TV. The CBS affiliation contract of KHOU-TV was an agreement dated March 30, 1956, which had an initial term expiring on March 30, 1958, but which was automatically renewable for additional 2-year terms in a manner to be described below. Pursuant to the provisions of the affiliation contract, CBS consented in writing to its transfer to petitioner and petitioner assumed the obligations of the contract.

The pertinent provisions of the network affiliation contract between CBS and KHOU-TV in effect at the time of petitioner's acquisition may be summarized as follows:

1. The contract recited that the parties ‘recognize that the regular audience of Station will be increased, to their mutual benefit, if CBS Television provides Station with television programs not otherwise locally available.’

2. CBS agreed to offer KHOU-TV for broadcasting by that station (a) CBS network sustaining (i.e., nonsponsored) programs, and (b) CBS network sponsored programs (i.e., programs sold by CBS Television for sponsorship by its own client-advertisers).

3. The station has a right of ‘first refusal’ of each network-sponsored or sustaining program good against any television station licensed to operate in the same community.

4. Subject to specified limitations, the station agreed to accept and broadcast all network-sponsored programs offered to it for broadcast during released on May 31, 1963, the FCC amended this rule to prohibit network option time, effective September 10, 1963.)

5. CBS agreed to pay the station for broadcasting sponsored programs 30 percent of the gross rates charges to sponsors by CBS for the broadcasting time of the station, less certain deductions specified in the affiliation contract.

6. CBS also agreed to furnish sustaining programs delivered to the station by coaxial cable or microwave relay facilities without charge, but where such programs were delivered in the form of TV recordings, the station agreed to pay CBS's charges for the recordings.

7. The affiliation contract further provided that ‘unless either party shall send notice to the other at least six months prior to the expiration of the then current two-year period that the party sending such notice does not wish to have the term extended beyond such original period, the term of this Agreement shall be automatically extended upon the expiration of the original term and each subsequent extension thereof for an additional period of two years; and provided further, that this Agreement may be terminated effective at any time by either party sending notice to the other at least twelve months prior to the effective date of termination specified therein.’

Between September 1, 1956, and September 3, 1963, the network affiliation contract between CBS and KHOU-TV was amended on six different occasions. The amendments related to station acceptance of programs from...