Westinghouse Broad. Co. v. Comm'r of Internal Revenue

• Citation: 36 T.C. 912
• Decision Date: 30 August 1961
• Docket Number: Docket No. 78254.
• Parties: WESTINGHOUSE BROADCASTING COMPANY, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

36 T.C. 912

WESTINGHOUSE BROADCASTING COMPANY, INC., PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 78254.

Tax Court of the United States.

Filed August 30, 1961.

Albert R. Connelly, Esq., and George G. Tyler, Esq., for the petitioner.

John J. O'Toole, Esq., for the respondent.

1. Television network affiliation contract for a term of 2 years, automatically renewable an indefinite number of times unless either party gives written notice of intention not to renew, held to have an indeterminable useful life. Held, further, subsequent termination does not effect status of contract during the taxable years before the Court.

2. Television spot announcement contracts purchased en masse held to have an indeterminable useful life.

TRAIN, Judge:

Respondent determined deficiencies in petitioner's income tax for the years 1953 and 1954 in the amounts of $363,371.93 and $622,410.13, respectively. Petitioner seeks a determination that it made overpayments of its income tax for those years by reason of additional depreciation of its cost of the affiliation contract and spot advertising contracts which petitioner failed to claim in its returns.

The issues presented are:

(1) Whether petitioner is entitled to depreciation deductions with respect to its purchase price of a network affiliation contract for a specific term but subject to automatic renewal for an indefinite number of terms unless either party gave written notice to the contrary and, if so, the amount of such depreciation; and

(2) Whether petitioner is entitled to depreciation deductions with respect to its basis in 183 spot advertising contracts, which contracts had specific termination dates and, if so, the amount of such depreciation.

FINDINGS OF FACT.

The parties have stipulated as to most of the facts and such stipulations are incorporated herein by reference.

Petitioner, formerly known as Westinghouse Radio Stations, Inc., is an Indiana corporation with its financial office in Pittsburgh, Pennsylvania.

Petitioner's income tax returns for the calendar years 1953 and 1954 were prepared on the accrual basis and were filed with the collector or director of internal revenue, Pittsburgh, Pennsylvania.

The period of limitations for the assessment against petitioner of deficiencies in income tax liability for the years 1953 and 1954 was extended to June 30, 1959, by agreements between petitioner and respondent under the provisions of section 276(b) of the Internal Revenue Code of 1939 and section 6501(c)(4) of the Internal Revenue Code of 1954.

The notice of deficiency was mailed to petitioner on December 29, 1958.

On June 1, 1953, petitioner purchased from Philco Corporation (Philco) all the assets of television station WPTZ for $8,534,025.94. The purchase was made pursuant to a letter agreement dated February 19, 1953, in which petitioner agreed to pay Philco $8,500,000, which amount was allocated as follows: $5 million for WPTZ'S affiliation contract with the National Broadcasting Company (NBC); $1,500,000 for goodwill; and $2 million, subject to adjustment, for other assets which included WPTZ's tangible assets and receivables. The fair market value of such tangible assets and receivables was $1,312,975.15.

Among the assets of WPTZ acquired by petitioner on June 1, 1953, was a network affiliation agreement dated November 23, 1949, Between nbc and Philco Television Broadcasting Corporation, which had assigned its rights thereunder to Philco Corporation as of May 14, 1952.

The network affiliation contract set forth the terms of WPTZ'S affiliation with NBC. By the terms of the affiliation contract, NBC agreed to supply to WPTZ a variety of network television programs, sponsored or unsponsored, and to give WPTZ the right of first refusal to broadcast such programs in the Philadelphia area. WPTZ agreed, with certain exceptions, to broadcast sponsored programs of the NBC network during hours designated in the contract as ‘network option time.’ The financial arrangement set forth in the contract called for a division between WPTZ and NBC of gross billings to network advertisers for WPTZ's station time, WPTZ receiving a one-third share and NBC receiving a two-thirds share, except that for the first 24 hours of network programs broadcast by WPTZ each month's billings were to be paid entirely to NBC. Billing rates were specified in the contract and were subject to change by NBC under conditions therein specified.

Commercial television broadcasting in the United States is supported by advertisers who purchase time and other services of television stations in order to place their commercial announcements before the television audience. Television advertisers are offered station time in a variety of forms. An advertiser may purchase time within which to present a program of entertainment and his commercial announcements, or several advertisers may each contract with a station to have ‘participating’ announcements interspersed throughout a program. A single advertiser may purchase an ‘adjacency’ of 8, 20, or 60 seconds for the broadcast of his message in the interval between programs. The size of the audience which can be expected to see such an adjacency is determined by the quality of the entertainment which precedes and follows the announcement.

Advertisers wishing nationwide coverage may purchase the time of network-affiliated stations through the network, or they may purchase the time of either affiliated or nonaffiliated stations by dealing directly with the stations' sales representatives. Advertisers who seek only regional or local advertising, however, do not use networks but buy time directly from local stations.

Purchases of time by advertisers for network programs account for an average of about 25 percent of an affiliated station's revenues. The balance of the revenues of an affiliated station is derived from direct contracts with other users of the station's facilities.

The rates which a television station is able to charge its advertisers, both network and nonnetwork, are determined by the size of its viewing audience. In any given market, audience level depends on the quality of programs which the station offers and the quality of programs of competing stations.

In order for an unaffiliated station to attract the same audience as competing network stations, it must offer programs of the same quality or attractiveness. It was not economically feasible in 1953 for an independent station to produce programs comparable to network programs because the limited size of the independent station's viewing audience, as compared to the size of the combined audiences of the 50 or more affiliated stations customarily broadcasting network programs simultaneously, made the independent station's cost per viewer too high. Furthermore, in 1953, independent stations and their advertisers did not have any alternative to producing programs themselves because the major producers of movie films had not yet released their libraries of films for television broadcasting.

The difference in audience levels between nonaffiliated and affiliated stations due to the quality of their respective programs made it possible for network-affiliated stations to charge higher rates for station time than the independent stations. It enabled the station to sell more program time and adjacencies at higher prices than independent stations. It enabled the station to sell more program time and adjacencies at higher prices than independent stations.

In Philadelphia in the years 1951 and 1952, the net sales of station time by the NBC affiliate, WPTZ, exceeded those of the ABC affiliate, WFIL-TV, by $797,500 and $1,330,619, respectively. But during that 2-year period, the broadcast expenses of the two stations were almost equal.

In 1953 the standard yardstick for measuring the value of a television station was five times annual earnings before taxes. The average annual earnings before taxes of WFIL-TV in 1951-1952 were $705,341. The average annual earnings before taxes of WPTZ during the same period was $1,704,459. Use of the standard yardstick would result in valuing the two stations in 1953 at approximately $3,500,000 and $8,500,000, respectively, the latter sum being approximately the price which petitioner paid for WPTZ.

In 1953, networks desired to own stations in the 10 largest markets in the country. At that time, Philadelphia was the fourth ranking United States city in terms of potential television audience, and the largest market in which NBC did not own its affiliate.

In 1952, the FCC allocated three UHF television broadcasting channels to Philadelphia, in addition the three VHF channels in operation at that time. In 1953 it was not known whether UHF or VHF would be the principal commercial television broadcast band, so that the allocation of UHF channels to Philadelphia posed a constant threat to VHF stations with respect to their network affiliations. A fourth VHF station, WDEL, located in Wilmington, Delaware, was also a threat because it could have been moved to Philadelphia, as was done in 1957. Thus, in 1953, there were seven FCC channel allocations available for stations in the Philadelphia area but only three significant television networks.

Federal Communications Commission regulations in effect during 1953 and 1954 prohibited any contract providing for affiliation for longer than 2 years. ¹

The NBC affiliation contract which petitioner purchased from Philco contained the following provision:

This agreement shall become effective at 3:00 AM, New York City time on the 1st day of January, 1950 and shall remain in effect for a period of two years. It shall then be renewed on the same terms and conditions for a further period of two years, and so on for successive further periods of two years each unless and until either party shall, at least three months prior to the expiration of the then current term, give the other party written notice that it...