Tele-Commc'ns, Inc. v. Comm'r of Internal Revenue
| Decision Date | 07 November 1990 |
| Docket Number | Docket No. 268-89. |
| Citation | 68 Rad. Reg. 2d (P & F) 540,95 T.C. 495,95 T.C. No. 36 |
| Parties | TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Petitioner purchased cable television systems and amortized the amount attributable to the franchise cost under sec. 1253(d)(2), I.R.C. HELD, a cable television franchise is properly included in the sec. 1253(b)(1) definition of franchise; thus the cost of the cable television franchise properly established by petitioner is amortizable. HELD FURTHER, when a business is conducted pursuant to a de facto monopolistic franchise granted it by a governmental body and it has no bona fide competition, it cannot have any goodwill separate and distinct from the value of its monopolistic franchise. Pasadena City Lines, Inc. v. Commissioner, 23 T.C. 34 (1954), followed. Edward C. Rustigan, Joseph R. Goeke, Jedd S. Palmer, Barry Gassman, Roger J. Jones, and William A. Schmalzl, for the petitioner.
Lawrence C. Letkewicz and Jan E. Lamartine, for the respondent.
The Commissioner determined deficiencies in petitioner's Federal income tax for the taxable year 1978 in the amount of $897,436. In addition to disputing the deficiency, petitioner claims an overpayment of $318,239 for that year.
The issues for decision are whether a cable television franchise is a ‘franchise‘ for purposes of section 1253, 1 or whether the cable television franchises acquired by petitioner have a ‘limited life,‘ thus making such franchises eligible for amortization under section 167. If we decide that petitioner is entitled to amortize the franchises, we must determine what the amount of the cost basis of each franchise eligible for amortization is, and finally, whether petitioner is entitled to include in the cost basis for amortization $2,500 for accounting expenses incurred in connection with the acquisition of the franchises.
Both parties have agreed that another issue, involving a net operating loss carryback from petitioner's 1981 taxable year to its 1978 taxable year, should be severed from the current litigation. The proper calculation of the disputed carryback is dependent upon the calculation of taxable income or loss for petitioner's 1981 taxable year which the parties stipulate is not possible at this time.
Some of the facts in this case have been stipulated by the parties. The stipulation of facts and the exhibits attached thereto are incorporated by this reference.
Tele-Communications, Inc., petitioner, is a Delaware corporation with its principal office in Denver, Colorado, at the time of the filing of its petition.
During the taxable year in issue, petitioner was the third largest cable television operator in the United States, serving over 500,000 subscribers.
A cable television system 2 distributes radio and television signals to consumers, known as ‘subscribers,‘ through cables installed on utility poles or laid underground. For this service, the cable television company operating the system charges the subscriber a fee.
Broadcast signals from distant cities are usually picked up by a cable television system through the use of tall towers and sophisticated antennae and, at times, are brought to the system via microwave relay systems or satellite transmission; in addition, programming on separate channels is sometimes generated by the system itself. Cable television systems typically distribute the radio and television signal to each user through a wire attached to utility poles. The cable company enters into a pole attachment agreement with the utility company that owns the poles.
At each residence, a portion of the combined television signal is extracted by a device called a ‘tap‘ which is analogous to a tap on a water line. The cable from the tap is fed into a subscriber's house and attached to the television set, thereby permitting the subscriber to receive the radio and television signal.
TCI Cablevision, Inc., a Nevada corporation, was a wholly owned subsidiary of petitioner in 1978 and was a member of petitioner's consolidated group. For purposes of this opinion, we will refer to TCI Cablevision, Inc., as petitioner.
Athena Communications Corporation (Athena) is the parent corporation of Athena Cablevision Corporation (Athena Cablevision). Athena was a publicly held corporation which was formed by Gulf & Western in 1971.
In three separate transactions in December 1971 and January 1972, Athena issued its common stock, preferred stock, warrants, and a note to Gulf & Western in exchange for all of the capital stock of Athena Cablevision. In July 1972, petitioner acquired all of the outstanding Athena preferred stock and warrants and 16.8 percent of the common stock. The remaining common stock was distributed to the shareholders of Gulf & Western.
Generally, Athena officers and directors were either officers or directors, or both, of petitioner or one of its subsidiary or affiliated companies. Petitioner and Athena were also parties to a management agreement whereby petitioner's management provided administrative services and assumed managerial responsibility for Athena's cable television systems. This agreement was entered into on October 31, 1973, and was in effect through the end of 1978.
Athena Cablevision, although a wholly owned subsidiary of Athena, had several wholly owned subsidiaries of its own, including North Brevard Cable Television Company, Inc., which owned and operated a cable television system in Titusville, Florida (the Titusville system), and in the contiguous areas of Brevard County (the Brevard County system); 3 International Telemeter Corp., which owned and operated a cable television system in Jefferson City, Missouri (the Jefferson City system); and International Telemeter of Moberly Corp., which owned and operated a cable television system in Moberly, Missouri (the Moberly system).
On January 25, 1978, several subsidiaries of Athena Cablevision sold four cable television systems to petitioner. Only three of the four systems sold to petitioner are involved in the issues presented in this case, specifically, the Titusville, Jefferson City, and the Moberly systems. For reasons not disclosed by the record, petitioner no longer contends it is entitled to amortize the fourth system, located in Columbia, South Carolina. The aggregate consideration petitioner paid to Athena for the four systems was $10,400,000, consisting of $6,700,000 in cash and the cancellation of $3,700,000 of Athena's indebtedness to TCI and its subsidiaries. Petitioner financed the acquisition through various sources. First, petitioner obtained a loan of $8 million from the Bank of New York and the Philadelphia National Bank, with the Bank of New York acting as the principal lender. Second, Cablevision agreed to lend Athena Cablevision $3 million. Finally, Cablevision obtained a noninterest- bearing obligation from Port Arthur Cablevision, Inc., one of petitioner's subsidiaries, for $1,700,000, due on January 1, 1985.
The construction and operation of a cable television franchise system requires the permission, called a ‘'franchise,‘ by the local governmental unit which is typically a municipality. This agreement between the governing body (franchisor) and the cable television system operator (franchisee) is established by enacting an ordinance. Petitioner believed permission was required from the municipalities to operate a cable television system and the operation of a system by petitioner was never contemplated unless a franchise was granted.
On April 21, 1971, the City Council of Jefferson City passed ordinance 8356. This ordinance was in effect during the taxable period in issue and permitted petitioner to establish and operate the cable television system for 10 years, subject to numerous concessions to the franchisor. Among the various conditions in the agreement, the municipality prohibited petitioner from assigning any rights granted by the ordinance without prior approval of the City Council. Also, the franchisor set the maximum which petitioner could charge for basic cable service and set the specific channels which were required to be carried as a part of basic cable service.
Petitioner was required to pay the franchisor 5 percent of its annual gross operating revenues from its service under the franchise, or a minimum of $10,000. In addition, petitioner posted a $50,000 bond to guarantee that cable television service would be properly furnished and maintained in the community.
Further, the franchisor prescribed specific construction standards for petitioner's facilities, as well as the minimum number of television channels, mandatory free FM radio signal service, free service for certain public buildings, and particular programming which petitioner was prohibited from offering to its customers.
On February 6, 1978, the City Council of Moberly enacted ordinance 5587. This ordinance was in effect during the taxable period in issue and permitted petitioner to establish and operate the cable television system for 10 years, subject to numerous concessions to the franchisor. Among the various conditions in the agreement, the municipality prohibited petitioner from assigning any rights granted by the ordinance without prior approval of the City Council. Also, the franchisor set the maximum which petitioner could charge for basic cable service and required free FM radio signal service to subscribers.
Petitioner was required to pay the franchisor 3 percent of its gross annual basic subscriber revenues under the franchise, with a provision for an increase to 5 percent of those revenues. In addition, petitioner was required to maintain a local office with regular business hours where subscribers could visit or telephone with complaints.
Further, the franchisor prescribed specific...
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