Westinghouse Broadcasting Company v. CIR

• Decision Date: 19 October 1962
• Docket Number: No. 13839.,13839.
• Citation: 309 F.2d 279
• Parties: WESTINGHOUSE BROADCASTING COMPANY, Inc., Petitioner, v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Third Circuit

309 F.2d 279 (1962)

WESTINGHOUSE BROADCASTING COMPANY, Inc., Petitioner, v. COMMISSIONER OF INTERNAL REVENUE.

No. 13839.

United States Court of Appeals Third Circuit.

Argued May 17, 1962.

Decided October 19, 1962.

Albert R. Connelly, New York City (Cravath, Swaine & Moore, George G. Tyler, New York City, Leonard E. Kust, Pittsburgh, Pa., George S. Parlin, Jr., New York City, on the brief), for petitioner.

Burt J. Abrams, Washington, D. C. (Louis F. Oberdorfer, Asst. Atty. Gen., Lee A. Jackson, Harry Baum, Attys., Dept. of Justice, Washington, D. C., on the brief), for respondent.

Before KALODNER, HASTIE and SMITH, Circuit Judges.

KALODNER, Circuit Judge.

Is a television network affiliation contract for a two-year term, automatically renewable in the absence of termination notice for successive two-year terms, a depreciable asset?

That is the question presented by this petition for review of the Decision of the Tax Court which answered it in the negative¹ premised on its determination that the contract had "an indeterminate useful life" as of the close of the tax years here involved.

The facts critical to our disposition may be summarized as follows:

On June 1, 1953, Westinghouse Broadcasting Company, Inc. ("taxpayer") purchased from Philco Corporation ("Philco") for $8,534,000 all of the assets of television station WPTZ in Philadelphia, Pennsylvania, including its network affiliation contract with National Broadcasting Company (NBC) which was to expire on January 1, 1954.²

The network affiliation contract was renewable automatically for successive two-year terms unless, at least 90 days prior to the expiration of any two-year term, either party sent the other written notice of its intention not to renew.³

The agreement between Philco and taxpayer allocated $5,000,000 of the $8,500,000 purchase price of WPTZ to the network affiliation contract, $1,500,000 to good will and the balance to tangible assets and receivables.

The network affiliation contract was automatically renewed on January 1, 1954 for a two-year term expiring January 1, 1956. On September 28, 1954 NBC informed taxpayer that it desired to acquire a television station in Philadelphia and sometime prior to November 15, 1954 taxpayer was further advised by NBC that it would not renew the network affiliation contract beyond January 1, 1956.⁴ On October 1, 1955 pursuant to the 90-day notice provision of the affiliation contract NBC gave formal notice to taxpayer of termination of the network affiliation contract on January 1, 1956.

The network affiliation contract had been entered into between NBC and Philco Television Broadcasting Corporation on November 23, 1949 for a two-year term commencing January 1, 1950 and automatically renewed on January 1, 1952 for a further two-year term expiring January 1, 1954. It had been assigned to Philco by Philco Television Broadcasting Corporation on May 14, 1952 during the renewed term.

Federal Communications Commission (FCC) regulations in effect during 1953 and 1954 prohibited any contract providing for network affiliation for a term longer than two years.⁵

The average earnings before taxes of WPTZ for 1951 and 1952 were $1,704,459. The net broadcast income of WPTZ for 1951 and 1952 exceeded the broadcast income of WFIL-TV, the ABC affiliate in Philadelphia, by $748,000 and $1,250,000 respectively, and such excess was attributed by taxpayer's expert, Howard E. Stark, to WPTZ's affiliation with NBC.

Between January 1, 1953, and April 1, 1960, a total of 87 NBC affiliation agreements expired in circumstances other than a station going off the air or the acquisition of the affiliate by the network.

Taxpayer, on its books, and federal income tax returns for 1953 and 1954, depreciated its cost of the $5,000,000 network affiliation contract over a 55-month period ending January 1, 1958, i. e., the 7-month term in existence on June 1, 1953, plus two renewal terms of two years each (January 1, 1954 to January 1, 1956 and January 1, 1956 to January 1, 1958) based on taxpayer's assumption that network affiliation contracts may normally be expected to be renewed for two terms. Subsequently, in the course of the proceedings below, taxpayer contended that the network affiliation contract was depreciable over a 31-month period — the 7-month term ending January 1, 1954 and the 24-month period ending January 1, 1956 when the contract was actually terminated.

Taxpayer here contends that the Tax Court erred in its finding that the network affiliation contract did not have a "determinable useful life" as of the close of 1953 and 1954, the tax years under review. It urges that "as a matter of law, a business contract with a specific term and provision for renewal is definitely limited in duration to that term and such renewal terms as are reasonably certain to occur", and, that "as a matter of fact, there was no reasonable certainty of renewal indefinitely with respect to the affiliation agreement" and that "the maximum period of renewal was to January 1, 1958."

The record, taken as a whole, says taxpayer, "establishes that at the time of acquisition of the affiliation agreement on June 1, 1953, two renewals, i. e. renewals to January 1, 1958, might be reasonably certain, but that a renewal beyond January 1, 1959 was not reasonably certain", and that "Thus the contract, under the reasonable certainty rule, had a maximum useful life of 55 months at the end of 1953 and 1954." In support, taxpayer cites the testimony of its expert, Stark: "If you could not assume two renewals, I don't think I would advise anyone to enter into a contract, but beyond that you can't foresee anything in this business."⁶

The sum of the Commissioner's position is that Section 23(l) of the Internal Revenue Code of 1939 (applicable here to the year 1953) and Section 167(a) of the Internal Revenue Code of 1954 (applicable here to 1954) provide for a depreciation deduction in circumstances where such deduction represents "a reasonable allowance for the exhaustion * * * of property used in the trade or business"; that Treasury Regulations 118 (1939) Code, Sec. 39.23(1)-3 and Treasury Regulations on Income Tax (1954 Code), Section 1.167(a)-3, provide that if an intangible asset is known from experience to be of use in the business or in the production of income for only a limited period, the length of which can be estimated with "reasonable" certainty, such intangible asset may be the subject of a depreciation allowance; that both the...