Richmond Television Corporation v. United States

• Decision Date: 16 April 1965
• Docket Number: No. 9531.,9531.
• Parties: RICHMOND TELEVISION CORPORATION, Appellee, v. UNITED STATES of America, Appellant.
• Court: U.S. Court of Appeals — Fourth Circuit

345 F.2d 901 (1965)

RICHMOND TELEVISION CORPORATION, Appellee, v. UNITED STATES of America, Appellant.

No. 9531.

United States Court of Appeals Fourth Circuit.

Argued November 6, 1964.

Decided April 16, 1965.

Rehearing Denied May 25, 1965.

Fred R. Becker, Department of Justice, Washington, D. C. (Louis F. Oberdorfer, Asst. Atty. Gen., Lee A. Jackson and David O. Walter, Attys., Department of Justice, C. Vernon Spratley, Jr., U. S. Atty. and Samuel W. Phillips, Asst. U. S. Atty., on brief), for appellant.

Robert T. Barton, Jr., and Horace D. McCowan, Jr., Richmond, Va. (Christian, Barton, Parker, Epps and Brent, Richmond, Va., on brief), for appellee.

Before SOBELOFF, Chief Judge, and BRYAN and J. SPENCER BELL, Circuit Judges.

SOBELOFF, Chief Judge:

The taxpayer, Richmond Television Corporation, owns and operates a television station which broadcasts over Channel 12 in Richmond, Virginia. In February, 1963, it brought suit in the United States District Court for the Eastern District of Virginia, seeking a refund of $21,378.27 in income taxes which it paid after the Commissioner of Internal Revenue disallowed $35,129.19 of the deductions claimed on its tax returns for 1956 and 1957.¹ Its theory is that the amounts in question are deductible as "ordinary and necessary expenses of commencing Plaintiff's business and/or of managing, conserving and maintaining property held for production of income." It claims in the alternative that, if the total amounts are not deductible as expense items, it is entitled to "amortize them over the life of the construction permit plus the life of its first regular license from the Federal Communications Commission (FCC)."

The Judge submitted the case to the jury on special interrogatories which asked whether these were ordinary and necessary business expenses and, if so, in what amount. The jury was also asked whether the television broadcasting license has a useful life of limited or indefinite duration and, if the former, of what duration. The jury found its verdict for the taxpayer, answering that the entire $53,129.19 was an ordinary and necessary business expense and that the license had a useful life of three years. The United States moved for judgment n. o. v. and, in the alternative, for a new trial. Both motions were denied.

The Government has appealed, urging that the taxpayer is entitled to no deduction for the amount in question or any part of it. It contends first that these were capital expenditures as a matter of law, and that the District Court erred in submitting to the jury the issue of whether these were ordinary and necessary business expenses. The second contention of the Government is that there is no evidence to support the jury's finding that these were capital assets having a definite duration.

I

The taxpayer was organized in 1952, and among its stated corporate purposes was the operation of a television station. On December 22, 1952, it submitted an application to the FCC for a construction permit to operate Channel 12. There were at the time two other applicants competing for the license, Larus Brothers & Company (Larus), the owner and operator of radio station WRVA in Richmond, and Richmond Newspapers, Inc.

Larus had submitted its application for the Channel 12 license as early as 1948. In anticipation of success, it designated Samuel S. Carey, a member of its radio station staff to conduct a training program so that if it obtained the license it would have immediately available a trained staff capable of operating a television broadcasting station enabling it to produce income at an early stage.

The training program, organized in the 1948-1949 period, attained full scope during 1951 and 1952. Approximately fifty persons were under training by Carey, twenty-six of them full-time employees of WRVA, Larus' radio station. Twenty were part-time students in local area schools who received no compensation from WRVA. Some members of this group, however, later went to work for the taxpayer. During the training program, Larus purchased equipment and films and set up the beginnings of a television broadcasting studio.

On November 23, 1953, Larus and Richmond Television entered into an agreement described as a merger,² which embodied the following provisions: Larus would dismiss its pending application for a television construction permit, leaving the taxpayer's application unopposed except by Richmond Newspapers, Inc., not deemed a serious contender. Larus subscribed to 4500 shares of Richmond Television's common stock, which was sixty percent of its maximum authorized voting stock, at $100 per share or the total price of $450,000, and it promised to subscribe at a later date to $450,000 worth of capital notes of Richmond Television. The parties agreed that representation on Richmond Television's Board of Directors would be proportional to their stock ownership, thereby assuring Larus of control.

Pursuant to the November, 1953, agreement, Richmond Television also paid Larus $25,799.19 as reimbursement for costs previously incurred in the training program. This amount is described on the tax return as payment for "Retention personnel — per agreement," and is part of the $53,129.19 which Richmond Television claims it is entitled to deduct as an ordinary and necessary business expense. Following the agreement, Larus continued the training program for the benefit and convenience of Richmond Television. Larus' trainees remained on its payroll, and under the terms of the "Personnel Retention Agreement," Richmond Television reimbursed Larus for the additional $27,330 expense it incurred thereafter in the training of personnel. This arrangement continued until Richmond Television began broadcasting.

The FCC granted the construction permit on November 30, 1955, and in 1956 it issued a three-year license to the taxpayer which then commenced broadcasting.

Although Richmond Television had no receipts from television broadcasting prior to 1956, it undertook, in its original returns for 1952 through 1956, to claim deductions in the aggregate sum of $114,708 for the cost of the training program as well as the cost of obtaining an operating license from the FCC. In 1956, however, after the Internal Revenue Service issued Revenue Ruling 56-520, holding that certain costs incurred in obtaining a television broadcasting license from the FCC were not deductible from gross income, the taxpayer voluntarily capitalized $58,165.79 of the sum previously deducted for its expenses in obtaining the license from the FCC. The remaining $56,552.01 it continued to treat as deductible. Of that amount, the Internal Revenue Service later allowed $3,422.82, and disallowed $53,129.19, the cost of the training program, both before and after the November, 1953, agreement. These are the items here in dispute.

II

For reasons to be stated, we hold that the taxpayer is not entitled to the claimed refund.

Section 162(a) of the Internal Revenue Code of 1954, 26 U.S.C.A. § 162(a) (1955), provides:

"There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business * * *."

To qualify under this section, expenses must be (a) incurred in carrying on a trade or business, (b) ordinary and necessary, and (c) paid or incurred within the taxable year.³ The Government concedes that the expenses in question were ordinary and necessary, and it does not suggest that the expenses were incurred in taxable years other than those claimed. It is the Government's position, however, that as a matter of law the sums expended by the taxpayer in training prospective employees in the techniques of television broadcasting in years prior to receipt of its FCC broadcasting license are not ordinary business expenses but capital expenditures. The argument is that the District Court erred in failing to rule as a matter of law that the taxpayer was not "carrying on any trade or business" during the taxable years, and hence is not entitled to a deduction under section 162(a).

The taxpayer maintains that these were "ordinary and necessary start-up expenses," and asserts that no case or ruling has ever denied a deduction for such expenses. The taxpayer, however, fails to deal with the point that to qualify for the deduction the expenses must have been incurred in "carrying on * * * a trade or business."

The precise question is the deductibility of "pre-opening" expenses incurred between the decision to establish a business and the actual beginning of business operations.⁴ During the three-year period under consideration, Richmond Television had indeed been incorporated for the purpose of conducting a television station but it had not yet obtained a license or begun broadcasting. The issue therefore is at what point of time did its business begin, and whether at this doubtful, prefatory stage it was carrying on a business. While decisions are to be found holding that particular taxpayers were or were not engaged in a trade or business, there is little discussion of the question of when, in point of time, a trade or business actually begins. This is usually a factual issue, but the resolution of the issue must have an evidentiary basis. It is therefore helpful to turn to several cases presenting analogous circumstances. While these did not formally articulate a general rule, the manner in which the facts in those cases were treated may furnish a guide.

In Frank B. Polachek v. Commissioner of Internal Revenue, 22 T.C. 858 (1954), the taxpayer during the latter part of 1947 devoted his time to planning a new business investment advisory service. The business was never formally organized, but the taxpayer spent $544 for advertising, travelling expenses, secretarial help, printing, mailing, etc. In 1948, the taxpayer abandoned the project. The Tax Court found as a fact that

"the expenses incurred in planning and organizing of peti

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