KFOX, Inc. v. United States, 151-71.
| Decision Date | 19 February 1975 |
| Docket Number | No. 151-71.,151-71. |
| Parties | KFOX, INC. v. The UNITED STATES. |
| Court | U.S. Claims Court |
M. Carr Ferguson, Jr., New York City, attorney of record for plaintiff. Charles T. Mederrick and Wachtell, Lipton, Rosen & Katz, New York City, of counsel.
Laurence J. Whalen, Washington, D. C., with whom was Asst. Atty. Gen., Scott P. Crampton, for defendant. Gilbert E. Andrews, Jr., Washington, D. C., of counsel.
Before COWEN, Chief Judge, and SKELTON and BENNETT, Judges.
OPINION
This case is a suit for a refund of income tax paid pursuant to a finding of tax deficiency by the Internal Revenue Service plus appropriate interest thereon. The period of time involved includes the fiscal year ending November 30, 1963, the taxable period December 1, 1963, through December 31, 1963, and the calendar years 1964, 1965, and 1966. The primary issue in the case deals with the proper allocation of the purchase price of an operating radio station among specific acquired assets.
The plaintiff, KFOX, Inc., formerly Illinois-California Broadcasting Company, Inc., was incorporated under Illinois laws for the purpose of acquiring and operating a Long Beach, California, radio station, KFOX and KFOX-FM (hereinafter referred to as the Old KFOX). Throughout most of its early years and before it was acquired by the plaintiff, Old KFOX operated under a general market format with a limited orientation towards black audiences. During this period the station recorded substantial losses of revenue aggregating over $200,000. In 1957 the original KFOX management tried unsuccessfully to interest the Sonderling Broadcasting Corporation into purchasing the station; Sonderling Broadcasting whose shareholders incorporated the plaintiff was headed by Egmont Sonderling, principal officer of the plaintiff in this suit. When Sonderling expressed disinterest, KFOX and KFOX-FM were subsequently sold in December 1957 to the Bing Crosby enterprises. In early 1959 KFOX was again up for sale as the Crosby group attempted to convince James Blackburn and Company, a national brokerage concern dealing with the communications media, to list the station for sale at $900,000. Blackburn refused because it deemed the selling price to be excessive in view of KFOX's meager annual revenues of $250,000 and yearly operation at a deficit.
At about this time, KXLA, a Pasadena, California, radio station, was undergoing a change in management as well as format. KXLA was long the pioneer of Country and Western (hereinafter "C & W") programming in the Los Angeles area, operating profitably with a small but intensely loyal audience. The radio station's commercial success was due in large part to the popularity of its air personalities, three of whom included Carl (Deacon) Moore, Tom Brennan, and Charlie Williams. When these disc jockeys at KXLA became aware of the impending change of format to "rock and roll" music they began to look for an alternative radio station that could use their particular talents. Frank Simon, Sales Manager for KXLA, approached KFOX and attempted to interest it into switching over to a C & W programming format and taking on all three of KXLA's air personalities in addition to himself. Because a radio station's audience is more loyal to the particular disc jockey personality and station programming than to the station's call letters, Simon argued that a complete takeover of the three C & W radio entertainers would result in a total transplant to KFOX of KXLA's audience as well as the sponsors that the disc jockeys were personally able to attract. Due to KFOX's poor financial situation, the Crosby interests were receptive to the plan, hiring Moore, Williams, and Brennan, but, as a result of negotiation difficulties, not Simon.
The new disc jockeys and their C & W format proved to be a commercial success as KFOX's profitability steadily rose until the operating revenues had increased from $250,000 in 1959 to almost $500,000 in 1961. The Crosby interests, still wishing to sell KFOX for approximately $900,000, continued to remain in touch with Blackburn and Company as well as the plaintiff through Sonderling. Following receipt of an offer passed through Blackburn, Sonderling began to seriously consider the purchase of the station. Although at first Sonderling sought to acquire KFOX's stock and utilize the station's accumulated net operating losses for its tax advantage, this proved to be impossible and so Sonderling began to negotiate for a straight purchase of KFOX assets. A price of $1,000,000 was tentatively agreed to by both parties for such assets. As a result of adjustments made to account for certain liabilities and revenues assumed by the plaintiff, although not calculated until his actual control and ownership began, the ultimate cash purchase price was eventually set at $878,666.
As a condition to final agreement, Sonderling had two stipulations. First, he requested of the Old KFOX management that the station manager, Murillo Schofield, and the four Country and Western air personalities (the three KXLA C & W announcers plus Biff Collie who was hired later) then comprising the heart of KFOX's format be required to sign individual personal service contracts, containing, among other matters, a covenant not to compete. Sonderling apparently felt that these five individuals played a critical part in KFOX's turnabout from running a deficit before 1961 to a profitable operation at the time of the sale. Second, he demanded a renegotiation of the lease of the AM transmitter site. Under the old lease which had 16 years to run, the station was charged a monthly rent of $250 for the first three years and $300 for the remaining life of the lease plus the excess of one percent of KFOX's operating revenues over those fixed amounts.
Sonderling's two demands were met by the Old KFOX management. On August 30, 1961, the four Country and Western performers not previously under contract were signed to two year service contracts, renewable once at the option of the station and subject to an anticompetition clause forbidding the talent from working within 100 miles of Long Beach. Schofield was similarly signed to a contract with KFOX. In addition to the contracts, the Old KFOX negotiated the transmitter site lease replacing the percentage of revenue provision of the original rental agreement with a flat $350 rental. The new lease contained one provision not included in the old one, a clause permitting the lessor to relocate the transmitter at his own expense to any acceptable site within a one mile radius.
Having met the stipulations, a firm sales contract was signed between the Old KFOX and plaintiff on September 21, 1961, contingent only on FCC approval of the transfer of KFOX's broadcasting license to the new owners. Due to the need for FCC approval, the plaintiff did not begin to assume control and operation of the KFOX stations until December 1, 1961.
Shortly after December 1961, Colin Selph, sales representative of Blackburn was asked by plaintiff to allocate the final purchase price of $878,666 among the various assets obtained from the Old KFOX stations. In a letter of January 11, 1962, Selph set forth the following suggested allocation:
Country and Western music
artists contracts ........................... $250,000.00
Station Manager's Contract .................... 150,000.00
Contracts with advertisers .................... 26,500.00
Net current assets ............................ 25,000.00
Office supplies ............................... 2,500.00
Furniture fixtures and lease hold improvements
— Studio and Transmitter sites 43,500.00
Radio Towers, Radio Transmitters
and associated equipment at transmitter
site ........................................ 70,000.00
Studio Equipment—AM and FM .............. 41,200.00
FM Towers and related equipment at
Studio site ................................. 40,000.00
Tools, tubes and other technical replacement
parts and material .......................... 4,000.00
Record library ................................ 30,000.00
Commercial continuity files ................... 6,500.00
Promotion material ............................ 3,500.00
Automobiles ................................... 4,700.00
Transmitter site lease ........................ 50,000.00
Studio and Office lease ....................... 35,500.00
Good will and licenses ........................ 95,766.96
___________
$878,666.96
===========
The allocation of the purchase price as estimated by Selph of Blackburn and Company was adopted by plaintiff in its tax returns in question here as the tax basis for purposes of computing income tax deductions for depreciation of its tangible assets and amortization of its intangibles. On audit by the Internal Revenue Service certain portions of the basis values employed by the plaintiff for amortization and depreciation were deemed inappropriate and disallowed. Those assets whose values were questioned and adjusted are as follows:
Tax Tax Basis
Basis Per As Adjusted
Asset Return by IRS
Station Manager's Contract ... $150,000 $40,909
Performers' Contracts ........ 250,000 68,182
Transmitter Site Lease ....... 50,000 2,540
Studio and Office Lease ...... 35,500 6,000
AM Towers and Transmitter .... 70,000 15,050
FM Towers and Equipment ...... 40,000 8,600
Record Library ............... 30,000 15,000
Goodwill and FCC License ..... 95,766 564,985
As may be noted from the table, the IRS increased the amount of the purchase price allocated to goodwill and the FCC license by the same amount that it reduced the various tangible and intangible assets....
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