Deseret Management Corporation v. United States

In the United States Court of Federal Claims

No. 09-273T

(Filed under seal: July 31, 2013)

Reissued: August 22, 20131

_________

DESERET MANAGEMENT *

CORPORATION, * Tax refund claim; Trial; Exchange of radio

* stations; Like-kind exchange – section 1031

* of the Code; Goodwill – qualitative and

Plaintiff,

* quantitative aspects; Significant goodwill not

* transferred in exchange of radio stations;

v. Class lives of depreciable property – sections

*

* 167 and 168 of the Code; Air conditioning

THE UNITED STATES, equipment reclassified; Other assets received

*

proper class lives; Refund process

Defendant. *

established.

*

_________

OPINION

__________

Eric C. Olson, Kirton & McConkie, Salt Lake City, UT, for plaintiff.

Benjamin C. King, Jr., Tax Division, United States Department of Justice, Washington,

D.C., with whom was Assistant Attorney General Kathryn M. Keneally, for defendant.

ALLEGRA, Judge:

This tax refund case is before the court following trial in Washington, D.C. There are

two distinct issues presented in this case. The first involves the tax treatment of a swap of radio

stations that occurred in 2000. More specifically, at issue is whether the agreed upon value of

radio station KZLA-FM (KZLA), the Los Angeles station that plaintiff swapped in that

transaction, included any component for goodwill. Plaintiff claims that the station, which was

the only country station in Los Angeles at the time, possessed no appreciable goodwill;

defendant contends otherwise. If plaintiff is correct, no additional taxes were owed on the swap,

1

An unredacted version of this opinion was issued under seal on July 31, 2013. The

parties were given an opportunity to propose redactions, but no such proposals were made.

Nevertheless, the court has incorporated some minor changes into this opinion.

which otherwise qualified as a like-kind exchange under section 1031 of the Internal Revenue

Code.2 If defendant is right, the portion of the value of KZLA allocated to goodwill is taxable as

capital gain. The second issue herein involves whether assets that were placed in service

between 1988 and 2000 are properly classified as non-residential buildings (or structural

components thereof) or, instead, property used in radio broadcasting. Resolution of this issue

affects the class lives of this property, thereby impacting the calculation of depreciation

allowances under section 168 of the Code.

Based on its review of the record, and for the reasons that follow, the court finds that:

(i) for purposes of the like-kind exchange provisions of section 1031 of the Code, plaintiff did

not transfer appreciable goodwill as part of the KZLA exchange; and (ii) with the exception of

certain air conditioning equipment, plaintiff has failed to demonstrate that the assets in question

were improperly treated as non-residential buildings (or structural components thereof) for

purposes of their depreciation under section 168 of the Code. Procedures for the issuance of an

appropriate judgment are established.

I. FINDINGS OF FACT

Based upon the record, including the stipulation of facts, the court finds as follows:

Plaintiff, Deseret Management Corporation (Deseret or plaintiff), is a Utah corporation

and a holding company for various subsidiaries. The latter include Bonneville International

Corporation (BIC), which owns and operates radio stations in large markets throughout the

United States. From 1998 to 2000 (the relevant time period), Bruce Reese was the president and

Chief Executive Officer (CEO) of BIC. In tandem with a sister company, Bonneville Holding

Company (BHC), BIC was in the business of owning and operating radio stations. Often, in

purchasing a radio station, BHC would acquire and hold the station’s Federal Communications

Commission (FCC) license,3 while BIC would acquire and hold the remainder of the station’s

assets. In these situations, BIC operated the radio station and paid royalties to BHC for use of

the license.

2

All references herein are to the Internal Revenue of 1986 (26 U.S.C.), as amended and

in force during the years in question.

3

Since 1934, the FCC has managed the electromagnetic spectrum that each radio station

uses. In any geographic area, there are a finite number of frequencies on which a radio station

can broadcast without signal interference. See Metro Broadcasting, Inc. v. FCC, 497 U.S. 547,

566-67 (1990); Red Lion Broadcasting v. FCC, 395 U.S. 367, 375-77 (1969). The lawful

operation of such a station in the United States requires an FCC license, which assigns a defined

coverage area, call letters, a transmitting power, a transmitting location, a band and class of

service (AM or FM and Class A FM or Class B FM) and, for FM stations, an antenna height.

An FM station’s signal coverage is, in part, a function of the location and elevation of the

station’s transmitting antenna (referred to as its “height above average terrain” or HAAT) and its

transmitting power (referred to as its “effective radiated power” or ERP).

-2-

A. KZLA – Goodwill

On April 3, 1998, BIC and BHC exchanged certain assets of radio station KBIG-FM

with Chancellor Media Corporation for those of KZLA. Both stations broadcast in the Los

Angeles, California radio market (the LA Market). Consistent with the pattern described above,

BHC acquired KZLA’s license, while BIC acquired all of the station’s other assets. After

acquiring KZLA, BIC kept the country format. From 1998 to 2000, David Ervin was the general

manager of KZLA, and Richard Meacham its President. In 1998 and 1999, KZLA’s revenue

was $17.25 million and $16.57 million, respectively. In 2000, revenue was approximately $16.4

million.4

KZLA was the only FM station that used a country music format in the LA Market

between 1998 and 2000. Because this case turns upon a determination of what, if any,

“goodwill” KZLA possessed in 2000, it is necessary to review some basic facts about the radio

business and the LA Market.

During the time in question, Los Angeles was the second largest radio market in the

country, and it was growing rapidly. Population in the LA Market grew from 13.2 million in

1998 to 13.6 million in 2000. Gross revenues for radio stations expanded from between $648.4

million and $658.2 million in 1998, to between $851 million and $914 million in 2000. By

2000, there were seventy stations in the market: seventeen Class A FM signals, twenty-two

Class B FM signals, and thirty-one AM signals. FM signals tend to have greater clarity and

coverage than AM signals. Within FM stations, Class A signals serve smaller areas or

communities and have smaller coverage than Class B signals, which tend to cover larger

metropolitan areas. One financial analyst reported that in 2000, only twenty-one of the LA

stations were “viable FMs,” that is, FM stations with ratings sufficiently “significant” to be

considered “serious competitors.”

In Los Angeles, the mountainous terrain adversely impacts the broadcast coverage of FM

signals. This topography gives certain radio stations in the LA Market a few advantages over

their competitors. The first of these, for some of these stations, is antenna location: the antenna

farm located on Mt. Wilson offers the most elevated place in the LA Market from which to

broadcast a radio signal. In 2000, of the approximately forty FM stations that were licensed to

broadcast in the LA Market, only fourteen were licensed to transmit from this peak in the San

Gabriel Mountains, including KZLA. A second advantage is enjoyed by stations that are exempt

from FCC restrictions (dating to 1963) which limit the power stations can use to broadcast

signals from elevated antenna locations such as Mt. Wilson. Seventeen Los Angeles FM stations

were “grandfathered in” under those regulations because they were using power exceeding the

4

Actual revenue data for all of 2000 is unavailable, but through October 31 of that year,

revenue was $11.2 million. Duncan’s Radio Market Guide, a source of information about the

commercial radio industry that reports station revenues, estimated the year’s total revenue to be

$16.4 million. Duncan’s estimates for 1998 and 1999 were within $650,000 and $370,000 of

KZLA’s actual revenue figures, respectively, lending some credence to the 2000 estimate.

-3-

restrictions when they were promulgated in 1963. KZLA, a Class B FM station broadcasting at a

frequency of 93.9, was one of those 17 “superpower” stations. Its signal covered approximately

6,400 square kilometers, capable of reaching a population of more than 12.7 million listeners.

Like much of the country, the LA Market was dramatically impacted by the passage of

the Telecommunications Act of 1996 (the Telecommunications Act). Prior to 1996, the FCC

limited the number of stations that could be owned by a single entity in both a given market, as

well as nationwide: a single entity could not own more than three AM stations and three FM

stations in a large market such as Los Angeles, nor could it own more than thirty AM stations

and thirty FM stations nationally. The Telecommunications Act relaxed these limits. After

1996, in a large market, like Los Angeles, a single entity could own up to eight commercial radio

stations, so long as no more than five of them were either AM or FM. National ownership

limitations were eliminated entirely. These changes prompted major consolidations within the

radio industry – for instance, in March 1996, the two largest radio groups, Clear Channel and

Jacor held 113 stations between them; by March 2001, they owned more than 1,200 stations.

The Telecommunications Act also prompted owners to sell stations in one market and acquire

them in another, seeking to consolidate their holdings.5 Consolidations like these occurred in the

LA Market. Some of the transactions took the form of so-called “stick” transfers, in which the

only thing the buyer desired was the FCC license (and associated dial position), the transmitter,

and the tower/antenna – what one witness referred to as a “ticket to play in that market.” In

1995, the three largest radio station owners in the area (CBS, Cox, and Infinity) owned nine FM

and AM radio stations; by 2000, the then three largest owners (Clear Channel, Infinity, and

Hispanic) controlled 22 stations.

During this same time, Spanish-language broadcasting blossomed as a driving economic

force in the LA Market, with broadcasters in this genre showing an intense demand for LA

stations with strong FM signals. This demographics-inspired sea change, combined with the

Telecommunications Act’s relaxation on ownership limits, created a demand for FCC licenses

and radio stations that outpaced supply. Not surprisingly, prices for radio stations increased

astronomically during this period.

5

One of plaintiff’s witnesses, Mary Beth Garber, who was once President of the

Southern California Broadcasters Association, testified that after the passage of the

Telecommunications Act:

A number of groups realized that they could use scale, the scale of mass, to

become more efficient and also to become more effective, that they could

translate a lot of their expertise into shares in markets other than where they were

and expand their footprint in the markets where they were.

At that point we basically developed players and non-players. And people looked

at where they were in a marketplace and determined whether it was worth it for

them to stay there and try to acquire more stations or if it made more sense for

them to sell what they owned to someone else and get out of dodge and basically

go someplace else and consolidate their hold in that market.

-4-

A radio station is in the business of selling time to advertisers that are attempting to reach

the station’s listeners. Advertisers are interested in the size and demographics of a radio station’s

audience. Because listeners are drawn by the “format” of a radio station, a station may target

specific demographics for their listener base by playing the music or other content it believes

will appeal to those individuals. The station then looks to sell time to advertisers interested in

reaching listeners within those demographics. The majority of radio advertising time is sold to

advertising agencies, which buy on behalf of companies.

Several metrics are used to gauge the success of a radio station. One of these is market

share. Arbitron is a nationally-recognized radio audience research firm. At the end of 2000, it

had designated 278 different local geographic areas, or “Metros,” in an attempt to reflect the

audiences reached by local radio stations. One of these Metros was the LA Market, consisting of

Los Angeles and Orange Counties, California. During the relevant time period, Arbitron

reported the percentage of all radio listening in each Metro area. It did so by sampling the total

persons twelve or older listening to the radio Monday through Sunday, 6:00 am to midnight. A

station’s percentage of all radio listening is referred to as its “audience share.” Sometimes this

share is adjusted to compare a station’s audience to all commercial radio audiences in the market

– the “adjusted share.”

Duncan’s Radio Market Guide reported that revenue for stations in the LA Market rose

from $648.4 million in 1998 to $914 million in 2000. As reported in various Duncan

publications, between 1985 and 2001, retail sales in the LA Market grew at a compound annual

rate of 5.2 percent; between 1994 and 2000, radio station revenue in the LA Market grew at a

compound annual rate of 12.2 percent. By comparison, from 1998 to 2000, KZLA’s revenue

stayed relatively flat, at approximately $16 million per year. According to Duncan, KZLA’s

adjusted audience share in 1998 was 2.6, which was the twentieth best share out of the thirty-five

stations covered in the Duncan report for Los Angeles. In 1999, the share dropped to 2.4 (20th of

39), and in 2000, it went back up to 2.6 (17th of 39). Another indicator of station success is

revenue share, which is calculated by dividing a station’s revenue by the total gross radio

revenue in the market. KZLA’s revenue share was 2.6 in 1998, 2.1 in 1999, and 1.8 in 2000.6

Finally, a radio station’s “power ratio” is obtained by dividing its revenue share by its

adjusted audience share. The higher the power ratio, the better a station is performing –

suggesting either a superior performance in marketing the station to advertisers or an unusually

desirable demographic. A power ratio of 1.0 indicates that the station is attracting the same share

of advertiser spending as its share of the market audience. In some situations, the power ratio

exceeds 1.0 by enough to make the station a “must buy” or “top tier”– a station so desirable that

6

The report of Mr. Bond, one of plaintiff’s experts, does not list rankings for revenue

shares in the LA Market, but does set forth rankings for raw revenue. In this ranking, KZLA was

reportedly 18th of 34 in 1998, 22nd of 35 in 1999, and 22nd of 40 in 2000. The numbers of

stations in the revenue rankings do not align exactly with the numbers of stations in the audience

share rankings. There is no explanation for this minor discrepancy.

-5-

an advertising agency would be doing its clients a disservice if it did not purchase advertising.7

Conversely, a ratio below 1.0 indicates either that the station is doing a less than adequate job in

marketing itself or has a less desirable audience. In 1998, KZLA had a power ratio of 1.0. In

1999, KZLA’s power ratio fell to 0.88, and in 2000, it dropped further, to 0.69. Accordingly, as

noted in various testimony, at a time where revenue in the LA Market was growing, KZLA’s

power ratio was shrinking.

In late 1999, Mr. Ervin (KZLA’s general manager) hired Coleman Research (Coleman)

to study KZLA’s performance. Coleman does research and marketing for various media

companies, primarily radio stations. Pursuant to that contract, Chris Ackerman, a vice president

of Coleman, performed a “perceptual study” of KZLA in December 1999, designed to determine

audience perception of the station, “brand image position,” and how to improve audience share.8

Data for the study was developed through a survey instrument that a third party used to conduct

telephone interviews with a representative, random set of listeners – approximately 500 people

were surveyed.9 In January 2000, Coleman presented the results of its study and a set of

recommendations to Mr. Ervin and BIC. Its report found that KZLA listenership was “under-

developed,” that KZLA suffered from weak formatting, that the station lacked brand depth

beyond music,10 and that the on air personalities were “not particularly compelling.”11 In this

7

On this point, Ms. Garber used the example of a Honda passenger van. She suggested

that advertisers seeking to sell such vans would target women 25-54 years of age, who tend to

have children to transport. Regarding this example, she noted that “[i]f you’re after women 25-

54 years of age there are several radio stations in the market that have a significant enough share

of those women that you must buy them or you’d really better be in a position where you can

explain to your client why you didn’t.” Ms. Garber indicated that in such an instance, the

advertising agency would issue a request for proposals, indicating that it is going to buy a certain

number of rating points against women 25 to 54 at a specified price per rating point. Responses

to the request from radio stations would indicate how the desired demographic would be served.

8

Mr. Ackerman had considerable experience in the radio business – he had worked for

14 years in the business before joining Coleman and had been a vice president at Coleman since

1992.

9

Among the areas covered by the survey were: which radio stations can you list off the

top of your head; which radio station do you listen to the most; total time spent listening to radio;

which country music station is preferred; and preferences among country music fans in terms of

whether they preferred classic or contemporary.

10

As defined by Mr. Ackerman at trial, “brand depth” “refers to the nonmusic brand

elements that successful stations typically have,” and includes things like “morning show,

personalities, games and contests, concerts, parties, events, community involvement.” The

Coleman report found that even the station’s loyal users did not perceive that the station had such

elements to stimulate them to use the station more frequently.

-6-

regard, the report indicated that “[w]hile the overall appetite for the Country format in Los

Angeles is somewhat lower than Coleman Research typically observes nationally, it still has the

potential to fuel a Top 5 25-54 rank position for KZLA, provided it can develop strong, dominant

ownership of the Country format image position.” Consistent with this view, the report found

that KZLA’s existing audience was “relatively loyal and committed to the station,” as reflected

by strong figures indicating that the station was the “absolute favorite” among country listeners.

The report concluded that there was an unrealized potential for the country format – specifically

that “there are Country share points being left on the table” – and that there was potential for

KZLA to “grow another full share point above its current ratings range.” The report concluded

with eleven recommendations designed to realize KZLA’s full potential, particularly focusing on

aggressive external marketing.12

In early 2000, Mr. Reese negotiated a deal with Emmis Communications (Emmis) in

which Emmis would acquire KZLA’s assets. Emmis is an Indianapolis-based company that

owns and operates radio and magazine entities throughout the country. In 2000, it owned

approximately twenty radio stations, including KPWR-FM, a Class B FM station in Los Angeles.

It also owned or had the right to acquire four stations in the St. Louis radio market – WRTH-

AM, WIL-FM, WVRV-FM, and WKKX-FM (the St. Louis Stations). Jeff Smulyan was the

president and CEO of Emmis; Doyle Rose was the president of Emmis Radio, a division of

Emmis. Reese and Smulyan agreed to exchange the assets of the St. Louis Stations for the assets

of KZLA. These assets included the respective FCC licenses for each of the radio stations.

On April 19, 2000, Mr. Reese briefed BHC regarding the progress of negotiations with

Emmis. In a letter, he explained that BHC and BIC would give up KZLA, which, according to

Mr. Reese, had increased in fair market value from the time it was acquired – from $155 million

to between $225 and $250 million. The letter listed the principal hard assets of KZLA as the

office building ($2.5 million), owned antenna and towers, and a leased transmitter site. The

letter further noted that KZLA’s cash flow was approximately $6.5 million in 1999 and $6.6

million in 2000. In exchange, BIC and BHC would acquire three or four St. Louis stations;

depending on the stations provided, and their cash flows, there would also be an exchange of

cash between the companies. “At the one extreme,” Mr. Reese explained, “Emmis might end up

giving [BIC and BHC] three stations plus $25-$35 million in cash. At the other end, [BIC and

BHC] could get four stations and pay up to $25 million in cash.” Mr. Reese asked BHC to

11

Most of these findings were supported by statistics. For example, one finding was that

only 18 percent of 25-54 year-olds associated the country format with KZLA. The report stated

that “[t]ypically, well-positioned Country stations achieve 25%-35% market images.” Further,

the report found that only 50 percent “of those expressing a Core Interest in the Country format

associate KZLA with the Country format image,” noting, by comparison, that “[n]ormally,

successful Country stations achieve 70%-80% format fit among Country format fans.”

12

These recommendations ranged from marketing points designed to strengthen the

station’s format and music image position; to ways to leverage KZLA’s position better with the

country music industry; to revamping KZLA’s roster of on-air personalities.

-7-

authorize BIC management to proceed with negotiations, and recommended that tax advisors

from both BIC and BHC review the structure of the proposed transactions.

On April 28, Mr. Reese wrote Messrs. Smulyan and Rose at Emmis outlining a proposal

for exchanging the assets of KZLA for the assets of the St. Louis Stations. In this letter, Mr.

Reese assessed that “the value of KZLA is well north of $200 million. . . . In fact, I suspect it

might go for as much as $240-$250 million on the open market. This presumption is based on

unsolicited but relevant inquiries since November, from both general market and Hispanic

operators.” However, because St. Louis was an “attractive opportunity,” he concluded that

“something less than an auction price is the right place for us to value KZLA.” At trial, Mr.

Smulyan testified that, during the negotiations, he did not believe that KZLA was worth as much

as Mr. Reese thought and that Emmis viewed the transaction as acquiring a “stick” for an entry

price.

On June 21, 2000, BIC, BHC, and Emmis executed a letter of intent setting forth the

terms under which the exchange would occur.13 On October 6, 2000, they executed an Asset

Exchange Agreement (the Agreement), in which they agreed to exchange the assets of KZLA for

those of the St. Louis Stations. In the Agreement, the signatories agreed that the exchange value

of the assets on both sides was $185 million. A section in the Agreement described the assets

exchanged and discussed the “allocation of asset values.” In this section, the companies agreed

that “the fair market value of the [assets] shall be determined and allocated on the basis of an

appraisal (the Appraisal) prepared by [BIA Consulting, Inc.].” The parties agreed to file any

income tax schedules or forms required by the Internal Revenue Service (IRS, or the Service) in

conformity with the Appraisal. The parties to this litigation have further stipulated that as of

October 6, 2000, the value of all tangible assets of KZLA was $3,384,637, and that the value of

all intangible assets of KZLA, apart from the FCC License and any goodwill, was $4,858,317.

As the Agreement envisioned, BIA performed an appraisal of the assets of KZLA as of

October 6, 2000. That appraisal was completed and delivered after the transaction closed. BIA

concluded therein that KZLA had a “Going Concern Value” of $156,000 and that its FCC license

was worth $176,757,046. As used in the BIA report, going concern value included the value of

KZLA’s preexisting systems and procedures for finances, administration, technology, and sales,

and “allows for the continued successful operation of the station.” BIA valued KZLA’s going

concern as the “cost that would be required to replicate the systems and procedures in place and

in use at the station.” It calculated the value of the FCC license using the residual fair market

value method – it subtracted the value of all other assets (tangible and intangible) from the

exchange value (the $185 million), and assigned the difference (the residual) to the FCC license.

BIA assigned no value to goodwill because: (i) as a matter of case law, “[i]t is well-established

that broadcast stations do not possess any goodwill;” (ii) broadcast stations in general “do not

13

The transaction was to close at a later date pending FCC approval of the deal and the

resolution of litigation Emmis had with Sinclair Communications, Inc. On July 31, 2000, BIC

and Emmis entered into Time Brokerage Agreements that allowed Emmis to begin operations in

Los Angeles before the deal closed.

-8-

enjoy any goodwill in the sense of either listener or advertiser loyalty;” and (iii) KZLA, in

particular, “does not possess any other traditional manifestations of goodwill.”14

Following the transfer, Emmis continued to maintain KZLA’s country format (and did so

until sometime in 2006).15 While it retained the program director and most of the sales staff,

Emmis terminated all but one of the on-air personalities at the station. It modified the music mix

in the country format, shifting from more traditional to contemporary country music. And it

added various brand depth elements. Emmis also had access to the Coleman report and began, in

consultation with Coleman, to implement some of the recommendations in that report.

For each of the tax years 2000 through 2002, Deseret timely filed a consolidated federal

income tax return on behalf of itself and its subsidiaries, including BIC. In 2000, Deseret

reported the above-described exchange as a “like-kind” exchange and recognized gains owing to

the exchange. It based its report of gains on the BIA appraisal, and therefore assigned no value

to goodwill. Following an audit, on February 28, 2005, the IRS proposed an adjustment in

Deseret’s 2000 tax year with respect to the reporting of gain from the exchange. The IRS

determined that KZLA possessed goodwill with a value of $73,311,046 on the date of the

exchange. On May 6, 2005, the IRS issued to Deseret a thirty-day letter (IRS Form 950) with

respect to tax years 2000 through 2002, which asserted a deficiency regarding 2000 and

14

In his testimony at trial, the individual who performed this allocation, Geoffrey Price,

agreed that “no part of [his] analysis . . . was designed to ascertain the value of goodwill because

[he] operated under the assumption that because [he was] dealing with a radio station that there

was no such thing.” In assigning values to intangible assets, Mr. Price also did not assign a value

to KZLA’s assembled workforce or to any name recognition associated with the station’s call

letters.

15

In describing the rationale for this decision, Mr. Smulyan testified:

I think it was based on three things, one it was based on the research that

we had done, Coleman, and I’m sure we did independent research of Coleman. I

know that we always tore apart the market . . . . So we looked at the demographic

and psychographic trends. I think we based it on the fact that there was an

outpouring of potential support from the country music community who felt that

they needed to provide significant support to the format in Los Angeles.

And I think we looked at it and said we weren’t absolutely certain that

there was an alternative format that was going to be a top-five station. I think if

we had said there is a format that we know will be top five we would have blown

it up, absolutely, positively. And I’m certain that there was nothing in the

Coleman report that told us this was a major radio station. I think they said if you

do the following things you can improve its rank and position.

-9-

incorporated the conclusions previously set forth with respect to the value of the goodwill of

KZLA.

In early 2008, Deseret and the IRS jointly executed an IRS Form 870-AD, on which

Deseret agreed to the assessment and collection of deficiencies for the tax years in question, but

also reserved “the right to timely file a claim for refund or credit or prosecute a timely claim.”

On December 15, 2008, Deseret did just that – it filed with the IRS an Amended U.S.

Corporation Income Tax Return, Form 1120X (Claim for Refund) for the tax year 2000, seeking

refund of what it alleged was an overpayment of $25,572,074, plus interest. On February 19,

2009, the IRS fully disallowed each item claimed in the Claim for Refund. On March 4, 2009,

Deseret executed IRS Form 2297 – Waiver of Statutory Notification of Claim Disallowance and

Form 3363 – Acceptance of Proposed Disallowance of Claim for Refund or Credit – and sent

them, along with a letter, to the IRS. In these documents, Deseret acknowledged the IRS’s

disallowance of their claim, but expressly preserved its right to bring an action for refund of the

disputed tax assessments.

B. Depreciation – Class Lives

The thirty-two assets at issue were placed into service by plaintiff between 1988 and

2000. These assets were originally classified by plaintiff as buildings or structural components

of buildings, depreciable as nonresidential real estate over 39 or 31.5 years. Four of the assets

are buildings which were used by BIC to store equipment and to house its transmitters. The

other assets were air conditioning equipment and duct work; electrical wiring; partitions, walls,

ceilings, windows, and millwork; and other leasehold improvements.

In 2002, BIC retained the accounting firm Deloitte and Touche (Deloitte) to review its

fixed asset records and determine whether BIC was depreciating assets correctly. John Seabrook

was the Deloitte partner primarily responsible for conducting the study. BIC provided Deloitte

with an electronic download of its fixed asset records, which contained information on each of

BIC’s approximately 18,600 fixed assets. Those records described each asset, the date on which

it was placed in service, the asset’s location, its cost, and information regarding the depreciation

of the asset, including original life and accumulated depreciation data. This data came from

Capital Asset Addition Forms, which were completed by the BIC employee who had acquired

the asset, and then submitted to BIC’s corporate office for entry into the Fixed Asset System. In

addition to reviewing this information, Mr. Seabrook viewed some assets and had conversations

with BIC employees about others. At the end of his study, he concluded that BIC had been

claiming less depreciation than was allowable under the Code with respect to 158 specific assets

which had been placed into service between 1988 and 2000.

On or about September 10, 2002, Mr. Seabrook assisted BIC/Deseret in preparing and

submitting an IRS Form 3115 – Application for Change in Accounting Method – to request a

change in the method by which Deseret depreciated these assets, beginning in tax year 2001.

The IRS and plaintiff agreed on the treatment of the wide majority of these assets, but disagreed

as to the proper treatment of thirty-two of the assets described above. At Deloitte’s suggestion,

BIC reclassified them into one of two groups: (i) assets used in radio and television broadcasting

- 10 -

as described in Asset Activity Class 48.2 of Revenue Procedure 87-56, 1987-2 C.B. 674,

depreciable over five years, or (ii) office furniture and fixtures, and equipment included in Asset

Class 0.11, also of Revenue Procedure 87-56, depreciable over seven years.

* * * * *

On April 29, 2009, Deseret filed this refund suit against the United States for recovery of

income tax payments including, inter alia, those paid relating to the KZLA exchange and those

relating to proper class lives of the BIC assets. Discovery was completed in May 2011. Trial in

this case was held between February 23, 2012, and March 1, 2012.16 Closing arguments were

heard November 20, 2012.

II. DISCUSSION

In a refund suit, the assessment made by the IRS is presumed to be correct, placing an

obligation on the taxpayer to come forward with evidence to rebut a presumption of correctness.

United States v. Janis, 428 U.S. 433, 440-41 (1976); Welch v. Helvering, 290 U.S. 111, 115

(1933). Viewed in these terms, the presumption of correctness “is a procedural device which

requires the taxpayer to come forward with enough evidence to support a finding contrary to the

Commissioner’s determination.” Rockwell v. Comm’r of Internal Revenue, 512 F.2d 882, 885

(9th Cir. 1975), cert. denied, 423 U.S. 1015 (1975). In addition, a taxpayer in a refund suit also

has the burden of proof – the ultimate burden of proving not only that it overpaid its taxes, but

also the amount of the overpayment. See Helvering v. Taylor, 293 U.S. 507, 515 (1935); Lewis

v. Reynolds, 284 U.S. 281, 283 (1932); Am. Airlines, Inc. v. United States, 204 F.3d 1103, 1108

(Fed. Cir. 2000).

This case presents two distinct issues. The first involves the proper treatment of the

KZLA exchange under the like-kind exchange provisions of section 1031 of the Code. The

second focuses on the proper classification of certain assets under the depreciation rules provided

by sections 167 and 168 of the Code. The court will consider those claims seriatim.

A. KZLA – Goodwill

Under section 1031 of the Code, a taxpayer may defer recognition of gain or loss from

qualifying exchanges of like-kind property. 26 U.S.C. § 1031(a). A like-kind exchange occurs if

property held for productive use in a trade or business or for investment is exchanged solely for

16

Using a practice employed by the United States Tax Court, see Tax Ct. R. 143(g), at

trial, the court received the experts’ reports in lieu of live expert testimony. This practice was

adopted by the court at the Rule 16 conference, at the outset of discovery, in order to give the

parties fair warning of its use prior to the time their experts generated their reports. Live

examination of the expert witnesses began with cross-examination. The use of this practice

saved considerable trial time. See Samuel R. Gross, “Expert Evidence,” 1991 Wis. L. Rev. 1113,

1215-16 (advocating this approach).

- 11 -

property of like kind that is to be held either for productive use in a trade or business or for

investment. Id.; see also 3 Michael D. Houser, Mertens Law of Federal Income Taxation §

20B:1 (2013) (hereinafter “Mertens”). Such an exchange allows the exchanger to delay

recognizing gain on the exchanged property, as the tax basis of that property carries forward to

the newly-acquired property. 26 U.S.C. § 1031(d); see also Ocmulgee Fields, Inc. v. Comm’r of

Internal Revenue, 613 F.3d 1360, 1364 (11th Cir. 2010); Morton v. United States, 98 Fed. Cl.

596, 603 (2011).17 However, a taxpayer recognizes gain in a like-kind exchange under section

1031 to the extent of the fair market value of any nonqualifying property exchanged. See 26

U.S.C. 1001. In this regard, Treas. Reg. § 1.1031(a)-2(c)(2) provides that “[t]he goodwill or

going concern value of a business is not of a like kind to the goodwill or going concern value of

another business.” See also Beeler v. Comm’r of Internal Revenue, 73 T.C.M. (CCH) 1982,

1987 (1997); Mertens, supra, at § 20B:1.18

“Goodwill” is neither specifically referenced in section 1031 of the Code, nor defined in

any Treasury Regulation thereunder. The term is employed elsewhere in the Code, most notably

section 197, dealing with the amortization of intangible assets.19 The regulations under that

section define “goodwill” as “the value of a trade or business attributable to the expectancy of

continued customer patronage,” which expectancy may be due “to the name or reputation of a

trade or business or any other factor.” See Treas. Reg. § 1.197-2(b)(1). This definition “falls

strictly in line with two centuries of the classic common law understanding of the term

‘goodwill.’” Kelly M. Haggar, “A Catalyst in the Cotton: The Proper Allocation of the

‘Goodwill’ of Closely Held Business and Professional Practices in Dissolution of Marriages,” 65

La. L. Rev. 1191, 1217 (2005). Courts grappling with the concept of goodwill have often done

so in tax cases, with the definitions in that setting having dimensions that are both qualitative

(i.e., focusing on characteristics of goodwill) and quantitative (i.e., focusing on arithmetic

calculations indicating the existence of goodwill). See Eric J. Skytte, “Changing the Rules, but

Not the Goodwill Game: Newark Morning Ledger in the Wake of I.R.C. Section 197,” 21 Wm.

Mitchell L. Rev. 485, 489 (1995).

17

As noted by a prominent commentator, “[t]he statutory nonrecognition of gain or loss

in the case of property held for productive use or investment has remained essentially unchanged

since 1924.” Mertens, supra, at § 20B:2.

18

“Congress afforded nonrecognition treatment to § 1031(a) like-kind exchanges

because it recognized that when a taxpayer merely exchanges one investment property for a

similar investment property, the taxpayer has not cashed in on his investment but continued that

investment, albeit in a different property.” Ocmulgee Fields, 613 F.3d at 1364; see also Starker

v. United States, 602 F.3d 1341, 1342 (9th Cir. 1979).

19

Section 197 entitles taxpayers to claim “an amortization deduction with respect to any

amortizable section 197 intangible.” 26 U.S.C. § 197(a). Section 197(d)(1)(A) defines the term

“section 197 intangible” to include, among other things, “goodwill.” Id. at § 197(d)(1)(A); see

generally, Recovery Grp., Inc. v. Comm’r of Internal Revenue, 652 F.3d 122, 125-26 (1st Cir.

2011).

- 12 -

Qualitatively speaking, goodwill has been defined in the case law as “the expectation of

continued patronage.” Newark Morning Ledger Co. v. United States, 507 U.S. 546, 555-56

(1993) (quoting Boe v. Comm’r of Internal Revenue, 307 F.2d 339, 343 (9th Cir. 1962)).20

Approximately 150 years earlier, Justice Story bundled together many of the indicia of goodwill

in the following oft-quoted definition, to wit, that goodwill is –

the advantage or benefit, which is acquired by an establishment . . . in

consequence of the general public patronage and encouragement which it receives

from constant or habitual customers, on account of its local position, or common

celebrity, or reputation for skill or affluence, or punctuality, or from other

accidental circumstances or necessity, or even from ancient partialities or

prejudices.

Joseph Story, Partnerships § 99 (1841); see also Des Moines Gas Co. v. Des Moines, 238 U.S.

153, 165 (1915) (goodwill is “that element of value which inheres in the fixed and favorable

consideration of customers, arising from an established and well-known and well-conducted

business); Metro. Nat’l Bank of N.Y. v. St. Louis Dispatch Co., 149 U.S. 436, 446 (1893) (relying

on the Story definition). Goodwill thus “provides a useful label with which to identify the total

of all the imponderable qualities that attract customers to the business.” Newark Morning

Ledger, 507 U.S. at 556; see also L.A. Gas & Elec. Corp. v. R.R. Comm’n, 289 U.S. 287, 313

(1933).

Searching for more clarity, courts have also defined goodwill in quantitative terms, with

an eye towards value. Thus, the Supreme Court, relying on the Story definition quoted above,

has described goodwill as the value “beyond the mere value of the capital, stock, funds, or

property employed therein” associated with continued patronage. Newark Morning Ledger, 507

U.S. at 555 (quoting Metro. Nat’l Bank, 149 U.S. at 446); see also Baker v. Comm’r of Internal

Revenue, 338 F.3d 789, 793 (7th Cir. 2003); Globe Life & Accident Ins. Co. v. United States, 54

Fed. Cl. 132, 136 (2002). Accordingly, in setting the value of goodwill as an intangible asset,

goodwill is often described quantitatively as “the excess of cost over the fair value of the

identifiable net assets acquired.” Coast Fed. Bank, FSB v. United States, 323 F.3d 1035, 1039

(Fed. Cir. 2003); see also Jack Daniel Distillery v. United States, 379 F.2d 569, 579 (Ct. Cl.

1967). This residual value approach properly signals the existence of goodwill, of course, only if

both sides of a transaction are balanced; it does not work “when one party to the transaction

achieves a bargain.” R.M. Smith, Inc. v. Comm’r of Internal Revenue, 591 F.2d 248, 252 (3d Cir.

1979), cert. denied, 444 U.S. 829 (1979); see also Jack Daniel Distillery, 379 F.2d at 579.

20

In Newark Morning Ledger, the Supreme Court allowed the taxpayer to take

depreciation deductions for its subscriber base, finding that these “paid subscribers” “constituted

a finite set of subscriptions” and were not “composed of constantly fluctuating components.”

507 U.S. at 567. The latter fact distinguished the subscriber base from so-called “mass assets,”

that is, non-amortizable “customer-based intangibles” that were considered “self-regenerating

assets that may change but never waste.” 507 U.S. at 558; see also Capital Blue Cross v.

Comm’r of Internal Revenue, 431 F.3d 117, 126 (3d Cir. 2005).

- 13 -

Because of this, courts sometimes combine the qualitative and quantitative approaches, seeking

to reinforce one with the other.

So, under these definitions, did KZLA possess goodwill at the time that it was transferred

by plaintiff in exchange for the St. Louis Stations? There is no dispute that the enterprise value

of KZLA in the swap transaction was $185 million. Likewise, the parties agree that, as of the

date of the transaction, the value of KZLA’s tangible assets was $3,384,637, and the value of its

intangible assets (apart from the station’s FCC license and any goodwill) was $4,858,317. But,

what do we do with the residual – the $176,757,046 difference between the $185 million and the

stipulated value of the other assets ($8,242,954)? More specifically, the question is whether any

portion of that difference is attributable to KZLA’s goodwill? Plaintiff claims the answer to that

question is no – arguing that the station possessed no goodwill and that all the value associated

with the residual should be attributed to the station’s FCC license. Not so, defendant retorts,

asserting that the value of the FCC license was much less than what plaintiff claims, and that

what is left, when that reduced license value is subtracted from the residual, is the value of

KZLA’s goodwill. As to that amount, defendant argues, the exclusion under section 1031 is

triggered, producing gain under section 1001(a) of the Code. Determining which of the parties is

right presents several questions of fact that can be resolved only by weighing all the evidence, a

matter to which this court now turns.

1. Qualitative Indicia of Goodwill

There are indications that KZLA may have possessed some degree of goodwill with

respect to its audience and, relatedly, its advertisers. KZLA was the only Class B station with a

country format in a market of nearly 13 million listeners. Listeners in portions of that market

closely followed KZLA – a factor that Emmis considered in retaining KZLA’s country format.

Since the real customers of a radio station are its advertisers, it bears noting that KZLA’s

retention of a set of loyal listeners was reflected in the market share numbers that, in turn, led to

advertising rates and ad placements. For KZLA, of course, those numbers reflected a mixed bag,

with the station seemingly not performing to its potential, as reflected by its declining revenue

share and power ratio during the relevant period. But, the record also hints at the notion that

advertisers selling products that might be appealing to country listeners might have been more

inclined to place ads with the dominant country station in the LA Market. Indeed, the evidence

indicates that companies in the country music industry, as well as media buyers, viewed having a

successful country station in Los Angeles – which at the time of the swap was the number one

market for country record sales – as essential to the success of the format. Moreover, it is

virtually undisputed that KZLA had a seasoned sales staff that had relationships with key

advertising firms and that those relationships provided the station with a slight advantage over its

competition.

In deciding that KZLA may have possessed some goodwill, the court is also mindful of

the findings made by Coleman in its 1999 perceptual study of the station. In that study, Coleman

found, inter alia, that KZLA listenership was “under-developed,” and that the station lacked

“brand depth” beyond music and an appropriate “image profile.” The report indicated that the

country format had the potential to support a top-five station in the important 25-54 age group,

- 14 -

further asserting that if KZLA realized its full potential it could grow a full share point above its

then rating. To aid KZLA in realizing these gains, Coleman made eleven separate

recommendations, e.g., that KZLA “will need aggressive external marketing to raise its top of

mind awareness and strengthen its format and music position,” as well as take a variety of other

steps to improve its “music image marketing” and “music image position.” But, what exactly

was the “brand depth” and “music image” that these extensive recommendations were designed

to enhance – the enhancement of which would allegedly lead KZLA to realize its full potential as

the dominant country station in the huge and burgeoning LA Market? In the court’s view, for tax

purposes, it appears that this “brand depth” and “music image” are reflective of the existence of

some degree of goodwill, albeit perhaps underdeveloped. This depth and image appear to

represent, to paraphrase Justice Story, an “advantage or benefit” beyond the value of KZLA’s

other assets “in consequence of the general public patronage and encouragement which [the

station] receive[d] from constant or habitual customers.” Presumably, the steps recommended by

Coleman were designed to enhance the station’s base of constant or habitual customers, with the

expectation that a resulting increased market share would translate readily into enhanced

advertising revenue.

Both plaintiff, and BIA before it, flatly contend that a radio station can never possess

goodwill because audience loyalty is a matter of format and on-air personalities. That listeners

might flee a station that suddenly changes its format or on-air personalities, however, does not

prove plaintiff’s point – any more than it would be true to say that other types of businesses

cannot have goodwill because they would lose their customers if they fundamentally changed

their business plans. Can it be that nationally-recognized restaurant chains lack goodwill

because their customers might flee if they radically changed their menus; or that sporting goods

stores lack goodwill because they might decide to sell only flowers; or that familiar chains of

coffee purveyors lack goodwill because they would lose their current business if they sold only

soda? One would think not. For a host of strategic business reasons, an acquiring entity may

defenestrate the critical and identifying features that, either individually or collectively, gave the

acquired entity the expectation of continued patronage. That it may choose to do so – perhaps

hoping to gain still more patronage in a reformatted configuration – does not mean that the

business it acquired lacked goodwill. Put another way, whether goodwill exists as part of the

assets acquired in a transaction cannot depend upon whether the buyer concludes that it is in its

best interests to sustain the prior business model – that the prior goodwill must be accounted for

if the prior business model is maintained, but not if that model is modified.

Nor does this court believe that KZLA necessarily lacked goodwill because it was

underperforming. There is undeniably a positive nexus between the existence of goodwill and

the ability to generate profit – but that is to say neither that only profitable firms have goodwill,

nor, especially, that only firms with profits above the norm possess that asset. See C.F. Hovey

Co. v. Comm’r of Internal Revenue, 4 B.T.A. 175, 177-78 (1926). The proclivity of ‘“old

customers . . . to resort to the old place,’” Houston Chronicle Publ’g Co. v. United States, 481

F.2d 1240, 1247 (5th Cir. 1993) (quoting Comm’r of Internal Revenue v. Killian, 314 F.2d 852,

855 (5th Cir. 1963)), may exist even where a firm is unprofitable, or at least not more profitable

than the “norm.” Plaintiff’s attempt to cabin goodwill to those stations earning above-average

profits would leave the concept with no independent content, substantive meaning, or permanent

- 15 -

dimensions. According to plaintiff, goodwill is a fleeting concept, here one instant and gone the

next, depending upon a firm’s current profit status – much like a Harry Potter wizard who

disapparates in bad times and reappears in good.

In contending otherwise, plaintiff relies on several decisions of the Court of Claims. For

example, it asseverates that Meredith Broadcasting established a per se rule that FCC-licensed

broadcasting stations can never possess goodwill. In that case, the taxpayer acquired all the

assets of a radio and a television station. At issue was whether a portion of the purchase price

attributed to intangible assets should be attributed to television network contracts. The Court of

Claims held that these contracts “were intangible assets of significant value” separate from all of

the other intangible assets. Meredith Broad., 405 F.2d at 1224. In so doing, it acknowledged

that “considerable confusion” has arisen in this area because of “the shifting meaning of the term

‘goodwill,’” which, in some instances was used to refer to the aggregate of all the intangibles of

the business, and, in others, “in its narrow sense to refer to the traditional concept of goodwill as

a matter of favorable customer relations.” Id. The court held that the network contracts were

assets separate and distinct from the narrower concept of goodwill. Id. at 1225-26. It was within

this context that the court commented, in regard to television stations:

The station did not, however, have any particular goodwill in the sense of viewer

preference or loyalty to the station. This is because television audiences are

attracted primarily by the programs and not by the particular broadcast station,

call letters, station personnel or management. Nor do television stations

(including KPHO-TV in 1952) have any particular goodwill in the sense of

advertiser preference for the station. Television advertisers basically buy the

attention of an audience on the best terms available or the lowest cost per

thousand, and they place business with a station on the basis of the station’s

ability to reach an audience.

Id. at 1223. Ultimately, the court concluded that the network contracts were not an expectancy

or form of goodwill, but rather were separate, identifiable, and distinct assets.

A fair reading of Meredith Broadcasting does not support the proposition that a licensed

radio station can never have goodwill. Rather, the opinion appears to reflect nothing more than

the court’s view of the factual record as it related to the television broadcasting industry in the

1950s. There is no reason for this court, after its own trial, to attribute those same factual

findings to a radio station broadcasting a half a century later – in the era of the internet, social

networking, and satellite broadcasting. Nor is there any other basis for concluding that unlike

other industries, radio stations universally lack any goodwill, at least as that concept is applicable

herein. See also KFOX, Inc. v. United States, 510 F.2d 1365, 1377 (Ct. Cl. 1975) (dealing with

case in which goodwill had been identified as an asset transferred with a radio station); Roy H.

Park Broad., Inc. v. Comm’r of Internal Revenue, 56 T.C. 784, 813 (1971) (indicating that a

radio station can have goodwill, albeit “little”). Rejection of this per se rule is significant

because BIA, the company that appraised KZLA’s assets following the swap, viewed Meredith

as establishing such a rule in concluding, in its valuation report, that “[i]t is well-established that

broadcast stations do not possess any goodwill.” It was on the basis of this faulty premise that

- 16 -

BIA, after assigning values to KZLA’s tangible and intangible assets, as well as its going

concern value, used the residual basis for allocating the remainder of the purchase price to

KZLA’s FCC license ($176,757,046). Although the consequences of using this approach remain

to be seen, the decisional law plainly suggests that approach was legally erroneous.

Plaintiff likewise claims that the Court of Claims adopted its view of the law in Richard

S. Miller & Sons, Inc. v. United States, 537 F.2d 446, 451 (Ct. Cl. 1976). But, that is untrue. To

be sure, in cataloguing various definitions of goodwill, the court there observed that one of them

“equates goodwill with a rate of return on investment which is above normal returns in the

industry and limits it to the residual intangible asset that generates earnings in excess of a normal

return on all other tangible and intangible assets.” Id. (citing Note, “Amortization of Intangibles:

An Examination of the Tax Treatment of Purchased Goodwill,” 81 Harv. L. Rev. 859, 861

(1967-68)).21 It also observed that “[t]he term ‘goodwill’ has a varying content, depending on its

usage.” Richard S. Miller & Sons, 537 F.2d at 450. The Court of Claims, accordingly, neither

suggested that its “excess return” definition was the controlling one for goodwill for Federal tax

purposes, nor, more generally, that a firm, to have goodwill, must currently have above-average

profits. Indeed, applying traditional notions of goodwill, the court found that a relatively poor-

performing insurance business had goodwill, indicated by a variety of factors, including a

“pattern of growth” and the fact that the acquirer negotiated a covenant not to compete from the

seller. Id. at 453 (noting that the covenant not to compete was “the most significant indication

that goodwill was transferred in the sale”). Notably, the court conducted no comparison between

the insurance company’s profits and the norm in the area – an omission that would make little

sense if plaintiff was right about what that case holds.

Contrary to plaintiff’s claims then, it would seem that questions involving the presence of

goodwill in a given transaction must be resolved on the basis of the facts in a particular case, not

some bright-line rule of law. To be sure, goodwill can be viewed as the “premium” that is paid

over and above what other assets of the business would be worth if bought individually. See

R.M. Smith, Inc. v. Comm’r of Internal Revenue, 69 T.C. 317, 320-22 (1977), aff’d, 591 F.2d 248

(3d Cir.), cert. denied, 444 U.S. 828 (1979); Concord Control, Inc. v. Comm’r of Internal

Revenue, 78 T.C. 742, 745-47 (1982). But, logic and common sense suggests that such a

premium might be realized even where the acquired entity is not currently profitable – perhaps

based upon the expectation that it will become profitable. Yet, plaintiff assumed the contrary in

ascribing the residual of the price paid for KZLA, less the value of identifiable tangible and

intangible assets, entirely to the station’s FCC license. It made no attempt to determine

independently the value of that license so as to allow for the possibility that some premium

21

Law & Economics scholars Judge Posner and Professor Landes have described the

synergies related to sales and patronage, observing that “once the reputation [of a brand] is

created, the [owner of the brand name] will obtain greater profits because repeat purchases and

word-of-mouth references will generate higher sales and because consumers will be willing to

pay higher prices for lower search costs and greater assurance of consistent quality.” William M.

Landes & Richard A. Posner, “Trademark Law: An Economic Perspective,” 30 J.L. & Econ.

265, 270 (1987).

- 17 -

effectively was paid for KZLA beyond the value of its tangible and intangible assets, that is, for

goodwill.

Plaintiff’s reliance, moreover, on accounting conventions to support its per se rule is

similarly misconceived. Accounting principles, which are designed to yield a conservative

statement of current income, cannot be presumed to override the construct of the Internal

Revenue Code. See Thor Power Tool Co. v. Comm’r of Internal Revenue, 439 U.S. 522, 542-43

(1979) (given their different objectives, “any presumptive equivalency between tax and financial

accounting would be unacceptable”). Indeed, beginning in 2004, the Securities and Exchange

Commission began requiring public radio stations to value directly their FCC licenses and assign

the residual value to goodwill – a policy that caused companies, like Emmis, to identify and

value the goodwill associated with their stations. See SEC Staff Announcement, “Use of

Residual Method to Value Assets Other Than Goodwill” (Sept. 29, 2004) (citing Federal

Accounting Board’s Statement 141, paragraph 3).

So where does this leave us? In plaintiff’s telling, the story here is black-and-white:

KZLA possessed no goodwill based on bright-line legal distinctions applicable to all (or virtually

all) broadcasting stations. The truth is more grey. There are a few indications that KZLA may

have possessed some goodwill – albeit far less than some other radio stations, as various market

metrics indicated. In the court’s view, determining whether that goodwill was appreciable – or,

alternatively, de minimis – requires an examination of the quantitative evidence that goodwill

was transferred here. See Jefferson-Pilot Corp. v. Comm’r of Internal Revenue, 98 T.C. 435, 450

(1992), aff’d, 995 F.2d 530 (4th Cir. 1993). That, in turn, requires a determination as to whether

there was some residual “cost over the fair value of the identifiable net assets acquired.” Coast

Fed. Bank, 323 F.3d at 1039; see also Jack Daniel Distillery, 379 F.2d at 579. On this valuation

point, both parties rely heavily on expert opinions. Critically, the court is not bound to accept, in

toto, those opinions, but may alter their findings based on its evaluation of the record. See

Jefferson-Pilot, 98 T.C. at 450-51; see also Miami Valley Broad. Corp. v. United States, 499

F.2d 677, 688-89 (Ct. Cl. 1979). It is to that evaluation that the court now turns.

2. The Value of KZLA’s Goodwill

Hewing to its view that KZLA lacked goodwill, plaintiff never offered a value for

KZLA’s goodwill. Defendant, for its part, employed its own version of a residual method – not

to calculate the value of KZLA’s FCC license, as BIA had done, but rather to assess the value of

the station’s goodwill.

To determine the value of the license, defendant’s expert, Ms. Flynn, employed a direct

valuation method – the income or discounted cash flow (DCF) method – a method that has been

used by public radio stations, appraisers and, ultimately, the courts in valuing stations. See

Jefferson-Pilot, 98 T.C. at 450-55. Under this method, Ms. Flynn attempted to isolate the

income attributable to the FCC license by performing a discounted cash flow analysis of the

station, treating it as a start-up. She prepared projections for the revenue, operating cash flow,

and net free cash flow that KZLA could reasonably be expected to achieve in the market, giving

consideration to past performance, market operating and financial benchmarks, as well as the

- 18 -

performance of other radio stations in the LA Market. The operating cash flow was derived by

subtracting from the revenue flow future operating expenses; the net cash flow was derived by

subtracting from the operating cash flow taxes, depreciation, capital expenditures and additions

to working capital. Discounting the net free cash flow to present value, Ms. Flynn then isolated a

value for KZLA’s license.22 Using this method, Ms. Flynn initially set the value of KZLA’s

license, as of October 6, 2000, at $131.4 million, leaving a residual value of goodwill, as of

October 6, 2000, of $45.4 million – a figure approximately $28 million below that employed by

the IRS in asserting its deficiency against plaintiff.

Over time, Ms. Flynn further adjusted her calculations, each time reducing the value she

ascribed to goodwill.23 At trial, plaintiff produced testimony from several experts questioning

some of the remaining assumptions used by Ms. Flynn in her calculations. In the face of this

testimony, defendant has acknowledged some of the errors identified by plaintiff’s witnesses.

This all obliges the court to examine further several of the critical steps employed by Ms.

Flynn in her DCF calculations. As presented at trial, those calculations incorporated the

following steps/assumptions:

● Market Revenue: Ms. Flynn used estimates by BIA that KZLA would

generate $851 million in revenue in 2000, growing to $1.102 billion by

22

For a case in which a similar DCF method was employed, see Jefferson-Pilot, 98 T.C.

at 452-53; see also Meredith Broad., 405 F.2d at 1228-29.

23

The following chart shows how defendant’s positions have varied regarding the

relative values of KZLA’s license and goodwill:

Date Procedural Posture License Value Goodwill Value

5/9/05 IRS’s Adjustment to Tax Return $103,466,000 $73,311,046

$161,957,046 – $14,800,000 -

8/27/10 Besen Expert Report

$152,707,046 $24,050,000

8/29/11 Flynn Expert Report $131,366,000 $45,391,000

3/9/12 First post-trial submission $140,247,000 $36,510,000

7/20/12 Post-trial brief $156,957,046 $19,800,000

7/28/13 Second post-trial submission $156,999,000 $19,758,000

The Besen Expert Report was drafted by Dr. Stanley Besen, an expert for defendant who did not

testify at trial; the report, however, was received in evidence. Dr. Besen used a regression

analysis in an attempt to calculate the value of KZLA’s goodwill. His conclusion that between 8

to 13 percent of the total value in the exchange was attributable to goodwill was attacked by

plaintiff and largely abandoned by defendant. In its post-trial briefs, defendant attempted to

inject an entirely new argument into this case – that a significant portion of the value of the

exchange related to going concern value. But, the parties previously stipulated that the value of

all intangibles, except for goodwill, was $4,858,317. In the court’s view, that stipulation, as well

as defendant’s failure to raise its going concern argument much earlier in the case, preclude it

from relying on that argument at this late point.

- 19 -

2003 and $1.765 billion by 2009. In reaching this number, Ms. Flynn

projected a gradual growth in the radio station’s average audience share to

3.2 percent by the tenth year of the projection – slightly less than the

average Class B FM station’s audience share in 2000 (3.31 percent). She

likewise projected that KZLA’s power ratio would grow to 1.12 over time.

● Expenses: Ms. Flynn broke the projected station operating expenses into

three categories: programming and engineering; advertising/promotion

and sales; and other (which included general and administrative expenses).

In projecting the growth of expenses, she relied upon historic KZLA

operating data, as well as industry data. The figures she used correlated

well with at least one comparison data set, relating to industry statistics.24

● Capital Expenditures and Working Capital: Ms. Flynn projected

annual capital expenditures of $600,000 and a deduction for working

capital equal to five percent of the change in revenues.

● Taxes: In computing her income flows, Ms. Flynn computed taxes at a

35 percent rate after deducting projected depreciation/amortization from

operating cash flow. In calculating the amortization deductible with

respect to the FCC license, Ms. Flynn assumed that the asset had a forty-

year useful life and a value of $80 million.

● Discount Rate: Ms. Flynn discounted future cash flows by a factor of

11.7 percent that she derived by modifying figures available in Ibbotson’s

Valuation Edition Yearbook for 2001. To derive this discount figure, Ms.

Flynn estimated the cost of equity financing (14.54 percent) and the after-

tax cost of debt financing (7.48 percent). She then allocated those figures,

presuming 60 percent of financings to be equity and 40 percent to be debt,

yielding a weighted average cost of capital (WACC) of 11.7 percent.

● Terminal Value: Ms. Flynn arrived at her terminal values using the

Gordon Growth formula, assuming a 4.5 percent perpetuity growth and a

discount terminal value back ten years using the WACC of 11.7 percent.

● Other Intangible and Tangible Assets: In determining the residual

value of goodwill, Ms. Flynn also deducted the value of the other tangible and

intangible assets of KZLA that were exchanged. Those values came to

approximately $8.243 million.

24

That report was the National Association of Broadcasters’ Radio Financial Report,

published in 1992. Ms. Flynn’s assumed expenses correlate, as a percentage of net revenue, to

the data in this report.

- 20 -

As noted, before trial, Ms. Flynn initially set the value of KZLA’s FCC license at $131.4 million,

leaving $45,391,000 in goodwill. At trial, however, she admitted that she had failed to include in

her calculations all of KZLA’s projected cash flow for 2009 and had incorrectly calculated

working capital. Correcting for these errors, her estimate of KZLA’s license value increased,

correspondingly dropping her estimate of the station’s goodwill to $36,510,000.

At trial, plaintiff’s experts cited alleged errors in Ms. Flynn’s tax computations that she

did not correct before trial. They noted, for example, that she had failed to use the full value of

KZLA’s license in calculating the amortization deduction owed – instead, she used a proxy value

of $80 million. While Ms. Flynn claimed that she could not set the value of the license, for tax

amortization purposes, in the same calculation she was using to establish the value of that

license, in fact, the spreadsheet she employed appeared to permit that functionality – using that

spreadsheet, one could repeat the calculations until the value used for amortization and the final

value derived matched. Apart from this, defendant admits that Ms. Flynn made two additional

errors in her tax calculations: (i) she used a 40-year, rather than the 15-year, statutory period

prescribed by section 197 of the Code, as the useful life of the license, see Treas. Reg. § 1.197-

2(f); and (ii) she started the amortization of the license as of January 1, 2001, rather than as of

October 2000, as section 197 requires. Plaintiff asserts that if one corrects for all three of these

errors, i.e., the value of the license, the useful life, and the starting date, the value of KZLA’s

“stick” license increases to $179,626,000, leaving no portion of the $185 million purchase price

left to be allocated to goodwill.25 In the face of these claims, defendant, in its post-trial briefing,

presented yet another revised value for the license that reflected two of the three modifications

plaintiff proposed to the amortization deduction – that is, defendant still kept the proxy value of

the license at $80 million, but adjusted the useful life and starting point for the amortization.

According to defendant, that brought the value of the FCC license up to $157 million, leaving a

goodwill value of $19.8 million.

Logic suggests that the value of the license employed in determining the amortization

deduction must closely approximate its actual value, lest the projected income stream from the

license be understated, thereby causing the value of the FCC license to be understated.26 Simply

picking a supposed “average” license value (e.g., $80 million), as Ms. Flynn essentially did,

25

$185,000,000 less $179,626,000 leaves $5,374,000. If one then deducts from that last

figure the value of KZLA’s other intangible and tangible assets ($8,243,000), the resulting figure

is negative (-$2,869,000).

26

An understatement of the cash flow would occur if the amortization value of the

license were too low because that would cause the amortization deductions associated with the

license to be understated. The latter understatement of deductions would, in turn, increase the

amount of taxes accounted for in the projections, which would reduce the projected income

stream and, when present-valued, the value of the FCC license.

- 21 -

makes no sense in a DCF calculation.27 In addition, the court agrees with plaintiff that Ms.

Flynn’s discount rate (the WICC) was too high. That rate was calculated by separately deriving

a cost of equity financing and an after-tax cost of debt financing, and then averaging those

percentages in proportion to a market analysis reflecting how radio companies generally financed

their capital (e.g., how much equity versus debt financing the stations used). Changing this

discount factor impacts the value of the license derived: The higher the rate employed, the lower

the present value of the FCC license derived when the station’s future income is discounted –

and the higher the residual value of goodwill. Conversely, the lower the discount rate derived

via this calculation, the higher the present value of the FCC license obtained, and the lower the

residual value of goodwill. Because Ms. Flynn’s discount rate was overstated, it caused her to

derive values for the license that were too low, and ultimately caused her to set a value of

goodwill that was too high.

With this in mind, the following are the specific errors that plaintiff demonstrated existed

in Ms. Flynn’s discount rate calculation: First, she based her risk-free rate on the average yield

of 20-year U.S. Treasury bonds in the year 2000 (6.8 percent), rather than focusing on the yield

of those bonds in October 2000 (6.04 percent). Consistent with the testimony of plaintiff’s

experts, the court believes that the 6.04 percent figure should be employed as the starting point

for determining the cost of equity that would have been incurred by a start-up radio station

looking to obtain equity financing in October 2000. This approach is consistent, inter alia, with

how Ms. Flynn approached the debt component of her discount rate, which began with the prime

rate as of October 2000. Second, while Ms. Flynn’s cash flow projections were somewhat rosy

as compared to KZLA’s historical performance, indications are that the equity risk premium she

used in calculating her cost of equity was too high.28 Several reliable economic sources cited by

27

Ms. Flynn derived her average by identifying what she argued were ten comparable

radio sales from around the country between October 1995 and March 2000. There are several

major problems with this approach. For one thing, Ms. Flynn failed to explain why the license

values she used – which involved station sales in places like Philadelphia, San Francisco,

Chicago, and New York City – were comparable to the value that should be assigned to a license

in Los Angeles. Since all but two of these transactions she used were between 1995 and 1997, it

is obvious that they did not capture the explosion in license values that was occurring in the LA

Market in 2000. Even more disturbing is the fact that Ms. Flynn disregarded a number of sales

(including four transactions in 2000) that occurred in the period immediately following the

KZLA transaction – perhaps not coincidentally, use of these transactions would have produced a

much higher proxy figure for the license.

28

The risk-free rate “is the rate of return an investor can obtain without taking market

risk,” often set at the rate of return on long-term Treasury securities. Ibbotson Assocs., Stocks

Bonds, Bills, & Inflation: Valuation Edition 2003 Yearbook, at 253 (2003) (hereinafter

“Ibbotson”). The equity risk premium is “the additional return an investor expects to

compensate for the additional risk associated with investing in equities as opposed to investing in

a riskless asset.” Id. at 251; see also Spectrum Sciences and Software, Inc. v. United States, 98

Fed. Cl. 8, 26 n.27 (2011); Franconia Assocs. v. United States, 61 Fed. Cl. 718, 764 (2004).

- 22 -

plaintiff establish that this premium should not have been 8.1 percent, but rather no more than 6

percent.29 Finally, defendant agrees that the calculation of her discount factor should have taken

into account a greater projected use of debt (a 58 percent equity/42 percent debt ratio, rather than

the 60/40 split used in her report), thereby lowering the final discount factor further. The

following chart tracks the required changes:

WEIGHTED AVERAGE COST OF CAPITAL CALCULATION

Original Adjusted

Risk-free rate 6.80 % 6.04 %

Equity risk premium 8.10 % 6.00 %

Size premium 0.80 % 0.80 %

Industry risk premium -1.16 % -1.16 %

Cost of equity 14.54 % 11.68 %

Prime rate 9.50 % 9.50 %

Prime adjustment 2.0 % 2.0 %

Cost of debt 11.50 % 11.50 %

After-tax COD 7.48 % 7.48 %

% Equity 60 % 58 %

% Debt 40 % 42 %

Total 100 % 100 %

WACC 11.71 % 9.91 %

As the chart indicates, making all three adjustments to Ms. Flynn’s discount rate calculation

reveals that her discount rate (the weighted average cost of capital or WACC) should have been

9.91 percent, rather than 11.71 percent.

While defendant’s post-trial goodwill figure of $19.758 million reflects the 58 percent

equity/42 percent debt ratio, it does not account for the other changes that must be made to

correct Ms. Flynn’s calculations. Specifically, her post-trial figure must be adjusted further to

reflect: (i) a value of the license for amortization purposes that more closely corresponds to its

actual value; and (ii) the new discount factor (9.91 percent), with an equity component that

reflects a modified risk free rate of 6.04 rather than 6.8 percent and an equity risk premium of 6.0

rather than 8.1 percent. The following chart illustrates the impact of these changes in alternating

scenarios by: (i) modifying (in column C) the amortization value of the FCC license, and (ii)

showing (in column E) how the ultimate value of the license would be affected under four

discount rate scenarios: (a) where the equity rate is the same as in defendant’s calculation;

29

Mr. Jerry Hausman, one of plaintiff’s experts, convincingly testified that there are at

least a half a dozen articles that would indicate that 8.1 percent is “too high.” He pointed to a

paper by Professors Faumin and French, and to an opinion by Jeremy Siegel of the Wharton

School at the University of Pennsylvania.

- 23 -

(b) where the equity rate is adjusted to modify the risk-free rate; (c) where the equity rate is

adjusted to modify the equity risk premium; and (d) where the equity rate is adjusted to modify

the risk-free rate and the equity risk premium.30 Here is that chart:

(A) (B) (C) (D) (E) (F)

Transaction's Less Tangibles & Amortization Equity Rate: Changes to Goodwill Value

License Value

Total Value Intangibles License Value Defendant's Calculations (Remainder)

No Change 156.999 19.758

Modified Risk Free Rate 169.088 7.669

185 8.243 80

Modified Equity Risk Premium 194.934 -18.177

Both Modifications 212.954 -36.197

No Change 167.298 9.459

Modified Risk Free Rate 180.031 -3.274

185 8.243 120

Modified Equity Risk Premium 207.241 -30.484

Both Modifications 226.202 -49.445

No Change 176.757 0.000

Modified Risk Free Rate 190.083 -13.326

185 8.243 156.742

Modified Equity Risk Premium 218.545 -41.788

Both Modifications 238.371 -61.614

No Change 180.170 -3.413

Modified Risk Free Rate 193.710 -16.953

185 8.243 170

Modified Equity Risk Premium 222.624 -45.867

Both Modifications 242.762 -66.005

* Data in millions of dollars

Several key findings flow from this chart. For one thing, it appears that KZLA’s goodwill values

(those listed in column F) fall below zero if the calculation is adjusted to reflect the two equity

rate adjustments discussed above – even if the court continues to use defendant’s extraordinarily

low proxy value of $80 million for the license. If, instead, the amortization value of the license

is increased toward its actual value – as can be seen by comparing the values in column C with

those in column E – it appears that, even using Ms. Flynn’s original discount factor of 11.71

percent, the value of KZLA’s residual goodwill falls below zero at an amortization value for the

license of around $156,742,000.31 This is because even using this still understated value to

30

The court generated these statistics by making simple modifications to the cells in the

spreadsheet provided to the court by defendant.

31

Modifying defendant’s spreadsheet reveals that, contrary to Ms. Flynn’s claims, one

may determine the point at which the amortization value of the FCC license and the calculated

license value equate. The following chart shows those points using various assumptions for the

equity portion of the discount rate:

- 24 -

calculate the amortization deduction leads to a calculated license value in excess of $176.7

million – which leaves nothing for goodwill. In short, the chart demonstrates that if the court

makes virtually any one of the changes that must be made to straighten out her calculations – let

alone all the changes required – Ms. Flynn’s discounted cash flow method yields a value for

KZLA’s goodwill that collapses to zero or below.

So what does this mean? Indisputably, the burden of proof here is on the plaintiff. See

United States v. Janis, 428 U.S. 433, 440-41 (1976); see also Charron v. United States, 200 F.3d

785, 792 (Fed. Cir. 1999). Accordingly, to prevail, defendant need not prove that a positive

value should be assigned to goodwill; rather, plaintiff must prove otherwise. But, that does not

mean that the court must turn a blind eye to the results of defendant’s shrinking attempts to value

the goodwill supposedly present here in deciding whether plaintiff has met its burden of proof.

Per contra. Having embraced the residual value method as the proper method of valuing

goodwill here, defendant cannot avoid the results produced by that method when they turn

negative. As other cases illustrate, the use of discount calculations to value goodwill represents a

double-edged sword, in that the numbers can demonstrate either the presence or the absence of

goodwill. See Jack Daniel Distillery, 379 F.2d at 579; Phila. Steel & Iron Corp. v. Comm’r of

Internal Revenue, 344 F.2d 964 (3d Cir. 1965) (adopting the opinion of 23 T.C.M. (CCH) 558

(1964)); R.M. Smith v. Comm’r of Internal Revenue, 36 T.C.M. (CCH) 97, 112 (1977), aff’d, 591

F.2d 248 (5th Cir. 1979).32 Here, those calculations thoroughly undercut defendant’s position

and, in so doing, substantially aid plaintiff. Put another way – by consistently demonstrating that

Break Even (Amortization Value = License Value)

Equity Rate: Changes to

License Value

Defendant's Calculations

No Change 183.696

Modified Risk Free Rate 202.639

Modified Equity Risk Premium 246.010

Both Modifications 278.795

* Data in millions of dollars

** Values "equal" when rounded to nearest 1,000

This chart perhaps explains why Ms. Flynn could not use the actual license value for

amortization purposes if she hoped to find a positive value for KZLA’s goodwill. That is

because the “break even” values for the license – the point at which the amortization and final

values of the license are the same – all are too high to leave any value for goodwill.

32

The record suggests that no value could be ascribed to goodwill if the court were to

compute the value of that asset by capitalizing projected “excess” earnings, as no proof was

adduced that such “excess” earnings could be projected. See Banc One Corp. v. Comm’r of

Internal Revenue, 84 T.C. 476, 506 (1985), aff’d, 815 F.2d 175 (6th Cir. 1987) (discussing the

relative merits of calculating goodwill via this formula method as opposed to the residual method

(and favoring the latter)).

- 25 -

defendant’s calculations yield values for goodwill that are below zero, plaintiff has shown that,

under any set of reasonable assumptions, any goodwill present in this transaction was, at most,

negligible. That was true either because KZLA did not possess more than a negligible amount of

goodwill or because Emmis did not, for purposes of section 1031, exchange anything of value

for KZLA’s goodwill when it transferred its radio station assets for those held by BHC and BIC.

The latter point bears a few additional words. A preponderance of the evidence suggests

that the parties to the KZLA exchange did not intend to attribute any part of the exchange value

to the station’s goodwill – that Emmis did not provide, and plaintiff did not receive, anything for

that goodwill as a part of the transaction. See Beeler, 73 T.C.M. at 1987. (for purposes of section

1031, transfer did not include business’ goodwill or going concern value). The buyer (Emmis)

determined the amount it was willing to pay BHC and BIC on the basis of the realities of the

marketplace and its apparent analysis of the value residing in the assets or operations of KZLA.

Under the circumstances of this case, KZLA’s license was the heart and backbone of the

station’s value. While the rest of its tangible and intangible assets offered some value to Emmis,

it would appear that Emmis parted with no appreciable value for the station’s goodwill. This

finding, again, is driven by the fact that no reasonable allocation of the exchange value – $185

million – leaves any room for assigning a transferred value to goodwill. It is not simply a matter

of giving effect to the parties’ expressed subjective intentions.

In analogous circumstances, when use of the residual value method left nothing to be

allocated to goodwill, the Tax Court has held that a taxpayer need not allocate a separate value to

assets in the nature of goodwill. See, e.g., Charles Schwab Corp. v. Comm’r of Internal

Revenue, 122 T.C. 191, 214-15 (2004), supp. on other grounds, 123 T.C. 306 (2004); Monaghan

v. Comm’r of Internal Revenue, 40 T.C. 680, 686 (1963); see also R.M. Smith, 36 T.C.M. at 112;

see also Maseeh v. Comm’r of Internal Revenue, 52 T.C. 18, 24 (1969).33 Such was also the

holding in Republic Steel Corp. v. United States, 40 F. Supp. 1017 (Ct. Cl. 1941). In Republic,

the seller and buyer of patents agreed, in their price negotiations, that the value of the stock sale

designed to effectuate the transfer of the patents reflected the value of the patents and certain

other assets on the company’s books; the record reflected that the acquirer had no intention of

purchasing a continuing business and thus “placed no value on [goodwill] in determining

whether or not to pay the price demanded.” Id. at 1023. In such an instance, the Court of Claims

held that no part of the cost of the stock was allocable to goodwill. In so concluding, this court’s

33

The fact that the exchange was a genuine multiple-party transaction involving an

unrelated entity (Emmis) adds some credence to this position. As the Supreme Court put it in a

related context –

where . . . there is a genuine multiple-party transaction with economic substance

which is compelled or encouraged by business or regulatory realities, is imbued

with tax-independent considerations, and is not shaped solely by tax-avoidance

features that have meaningless labels attached, the Government should honor the

allocation of rights and duties effectuated by the parties.

Frank Lyon Co. v. United States, 435 U.S. 561, 583-84 (1978).

- 26 -

predecessor stated: “[i]t may be that the seller’s good will really did have a value, but if the

parties did not think so and, in computing the price to be paid, gave it no value, it must be

eliminated from consideration in computing the amount paid for the other assets.” Id.; see also

Meister v. Comm’r of Internal Revenue, 302 F.2d 54, 57 (2d Cir. 1962).34

Now, of course, there is another possibility – that other errors in Ms. Flynn’s calculations

overstated the value of KZLA’s license and, concomitantly, understated the value of KZLA’s

goodwill. But, neither party has identified those errors with any specificity and the court will not

wade into this thicket on its own. That is particularly so because the notion that the value of the

KZLA’s FCC license was so great as to suggest that no goodwill was accounted for in the

exchange is confirmed by the sale of a radio station that occurred less than a month after the

KZLA transaction. Specifically, at trial, plaintiff showed that on November 3, 2000, radio

station KFSG was sold at auction for $250 million. KFSG was similar to KZLA in several

critical ways – it was, for example, a Los Angeles-based Class B station.35 Yet, KFSG did not

have as good a signal as KZLA – unlike the latter station, KFSG did not have a transmitter

located on Mt. Wilson. KFSG was acquired in a “stick” transaction – where only the license,

tower/antenna and transmitter were acquired – by a broadcaster that intended to and, indeed, did

drop the religious format of the station and replace it with Spanish programming. And, yet, that

broadcaster paid nearly $65 million more than the amount of the value exchanged in the KZLA

34

In Jefferson-Pilot, the Tax Court employed a similar rationale in rejecting the

Commissioner’s argument that an FCC license had no value separate and apart from goodwill.

In this regard, it reasoned:

Respondent’s argument that an FCC license has no value separate and apart from

goodwill does not withstand logical analysis. For example, a hypothetical

purchaser of a station who wanted to change the format and hire a new staff

would probably pay little, if anything, for goodwill. This is because the change in

format would attract new listeners, and the old listeners would find a new station

whose format was similar to the one they listened to before the purchase.

Similarly, many of the station’s sponsors would advertise on other stations whose

formats target their consumers. Goodwill would be of little value to this

purchaser. The same would be true of a station that had not generated any profits

in previous years. A prospective purchaser would probably pay very little for the

goodwill associated with such a station. In arriving at a purchase price, this

purchaser would probably determine the value of the station’s tangible assets and

then place a value on the right to enter into the business of broadcasting.

98 T.C. at 455-56; see also Meredith Broad., 405 F.2d at 1228.

35

“A ‘comparable’ must be substantially similar to the entity or asset that is at issue.”

Caraci v. Comm’r of Internal Revenue, 456 F.3d 444, 459 (5th Cir. 2006); see also Van Zelst v.

Comm’r of Internal Revenue, 100 F.3d 1259, 1263 (7th Cir. 1996); Estate of Palmer v. Comm’r

of Internal Revenue, 839 F.2d 420, 423 (8th Cir. 1988).

- 27 -

transaction, with every indication that all but a small portion of that $250 million was for one

thing, and one thing alone – KFSG’s FCC license. In the court’s view, this transaction confirms

that the values generated by Ms. Flynn’s adjusted calculations – numbers that suggest that the

value of KZLA’s license left no room for allocating any value to goodwill – were correct and

represent the high value that the LA Market placed on the FCC licenses of radio stations with

strong signals. See R.M. Smith, 591 F.2d at 253 (residual value method is appropriate where

supported “by other collateral evidence”).

* * * * *

To recapitulate, the “[e]xistence of ‘good will’ and the value thereof are primarily

questions of fact which ‘must necessarily be considered in the light of [the] facts in each case.’”

Miller v. Comm’r of Internal Revenue, 333 F.2d 400, 404 (8th Cir. 1964); see also Houston

Chronicle, 481 F.2d at 1245; Morton Bldgs. of Neb., Inc. v. Morton Bldgs., Inc., 333 F. Supp.

187, 196 (D. Neb. 1971); Concord Control, Inc. v. Comm’r of Internal Revenue, 78 T.C. 742,

744 (1982); Drybrough v. Comm’r of Internal Revenue, 45 T.C. 424, 435 (1966). Based on the

record as a whole, the court finds that if KZLA possessed any goodwill, its value was negligible

and insignificant. The court also finds that Emmis did not transfer any assets in exchange for

that goodwill, such as it was. While the record, as a whole, tends to support these findings, the

adjusted calculations summarized above prove the sockdolager on this count. Plaintiff thus

prevails on this first issue.

B. Classification of Station Assets for Depreciation Purposes

The court now turns to the dispute concerning the proper class lives that should have

been assigned to certain assets placed into service by plaintiff between 1988 and 2000. Section

167(a) of the Code provides “as a depreciation deduction a reasonable allowance for the

exhaustion, wear and tear . . . . of property used in the trade or business.” 26 U.S.C. § 167(a).

For the property in question, section 168 of the Code sets forth rules for determining the amount

of the depreciation allowed under section 167(a). In pertinent part, section 168(c) provides the

time period over which an asset is depreciated, a function accomplished by placing assets into

particular classes of property. The class lives of depreciable assets can be found in a series of

revenue procedures issued by the IRS. See Treas. Reg. §§ 1.167(a)-11(b)(4)(ii); see also

§ 1.168-3, Proposed Income Tax Regs., 49 Fed. Reg. 5957 (Feb. 16, 1984). The revenue

procedure in effect for the years in question was Rev. Proc. 87-56, 1987-2 C.B. 674. See Iowa

80 Grp., Inc. v. Internal Revenue Serv., 406 F.3d 950, 952 (8th Cir. 2005); Saginaw Bay Pipeline

Co. v. United States, 338 F.3d 600, 605 (6th Cir. 2003). For nonresidential real property, Rev.

Proc. 87-56 generally sets a recovery period of 31.5 years. For non-real (personal) property,

Rev. Proc. 87-56 includes a lengthy table that breaks down that property into asset classes and

assigns recovery periods or class lives to those classes. Rev. Proc. 87-56, § 5.03. As noted by

the Tax Court in a recent case, the table breaks “assets into two broad categories: (1) asset

guideline classes 00.11 through 00.4, consisting of specific depreciable assets used in all

business activities (the asset category), and (2) asset guideline classes 01.1 through 80.0,

consisting of depreciable assets used in specific business activities (the activity category).” Broz

- 28 -

v. Comm’r of Internal Revenue, 137 T.C. 25, 31 (2011); see also Norwest Corp. & Subs. v.

Comm’r of Internal Revenue, 111 T.C. 105, 158 (1988).

In 2002, BIC retained Deloitte to determine whether it was properly depreciating its

assets. As part of this process, Deloitte reviewed the electronic records associated with

approximately 18,600 fixed assets. With a few exceptions, Deloitte did not review the individual

assets or discuss them with BIC employees, but merely reviewed the catalog of information

assembled by BIC. As part of this review, Deloitte determined that BIC was using an

impermissible depreciation method with respect to 158 assets. Deloitte assisted BIC in preparing

and submitting an IRS Form 3115 (Application for Change in Accounting Method), requesting a

change in the method by which BIC depreciated those assets. The Commissioner allowed, in

part, and disallowed, in part, the requested changes.

The disputed assets were originally classified by BIC as nonresidential real property with

either a 39-year or 31.5-year life, depending upon when the asset was placed in service. Deloitte

determined that these assets should be reclassified as various forms of personal property. The

following table (drawn from one of plaintiff’s briefs) summarizes plaintiff’s claims with respect

to these disputed assets:

Asset New Nature of the Asset Location of

Number Class Asset

21934 0.11 Tenant improvements (X‐ray machine equipment) Salt Lake City

21935 0.11 Tenant improvements (X‐ray machine equipment) Salt Lake City

21936 0.11 Tenant improvements (X‐ray machine equipment) Salt Lake City

22384 0.11 Tenant Improvements (partition for sublease space, fire alarm, Chicago

light switches, ductwork)

20456 0.11 Tenant improvements (lights, design, etc.) Salt Lake City

16284 0.11 Tenant improvements (partitions, carpentry, painting, wallpaper, Washington, DC

doors, hardware and carpet)

16285 0.11 Tenant improvements (partitions, doors, carpentry, painting, Washington, DC

wallpaper, hardware and carpet)

19438 0.11 Tenant improvements (partitions, doors, carpentry, painting, Washington, DC

wallpaper, hardware and carpet)

9555 0.11 Tenant improvements (glazing) Salt Lake City

9560 0.11 Tenant improvements (millwork) Salt Lake City

22152 48.2 Tenant improvements (air conditioning unit) Chicago

21073 48.2 Tenant improvements (thermofuser and controls) San Francisco

21074 48.2 Tenant improvements (thermostat ) San Francisco

7323 48.2 Tenant improvements (10‐ton a/c unit to cool transmitter and Chicago

associated support equipment)

7324 48.2 Tenant improvements (duct work, internal air blower and motor Chicago

and filters to cool transmitter and associated support equipment)

7501 48.2 Tenant improvements (7‐ton a/c unit to cool transmitter and Chicago

associated support equipment)

7502 48.2 Tenant improvements (custom air handling system to cool Chicago

transmitter and associated support equipment)

2792 48.2 Tenant improvements (cable wire and electrical work for Salt Lake City

newsroom)

2793 48.2 Tenant improvements (cable wire and electrical work for Salt Lake City

newsroom)

2252 48.2 Tenant improvements (refrigerated air dryer) Salt Lake City

- 29 -

1927 48.2 Tenant improvements (XMTR kitchen vent exhaust) Salt Lake City

1981 48.2 Tenant improvements (construction of videotaping room) Salt Lake City

1982 48.2 Tenant improvements (installation of ceiling over taping room) Salt Lake City

1983 48.2 Tenant improvements (electrical work in dubbing room) Salt Lake City

1984 48.2 Tenant improvements (electrical work – installation of dimmer in Salt Lake City

duplication room)

1986 48.2 Tenant improvements (installation of duct in dubbing room) Salt Lake City

16286 48.2 Tenant improvements (partitions, doors, carpentry, painting, Washington, DC

wallpaper, hardware and carpet)

18866 48.2 Tenant improvements (studio design and construction, wood Washington, DC

shelving and custom wood cabinets)

1047 48.2 Special purpose structure (house equipment at transmitter site) Salt Lake City

11063 48.2 Special purpose structure (house equipment at transformer site) Washington, DC

18867 48.2 Special purpose structure (house equipment at transmitter site) Washington, DC

23338 48.2 Special purpose structure St. Louis

Based on plaintiff’s claims, these assets largely fall into three broad categories: (i) tenant

improvements, such as x-ray machine (security) equipment, carpentry, glazing, millwork,

painting, wallpaper, doors, hardware, and carpet; (ii) tenant improvements such as air

conditioning units and associated duct work, and equipment to cool transmitters and associated

support equipment, cable wire, and electrical work for broadcasting newsrooms; and (iii) special

purpose structures located at transmitter sites used to house specialized equipment relating to

such transmitters. Plaintiff claims that the assets in the first of these categories should be

properly classified within asset type 0.11 – office furniture, fixtures, and equipment, and the

latter two categories as within asset activity class 48.2 – radio and television broadcastings. See

Rev. Proc. 87-56. The court will discuss each of the categories seriatim.

1. Tenant Improvements – Class 0.11

This first category contains ten assets that plaintiff believes should be in the revenue

procedure’s Class 0.11 Office Furniture, Fixtures, and Equipment category, which class has a

ten-year class life and seven-year depreciation period.36 This class “includes furniture and

fixtures that are not a structural component of a building,” such as “desks, files, safes, and

communications equipment.” Rev. Proc. 87-56, § 5.03. This class “[d]oes not include

communications equipment that is included in other classes.” Id.

As is true of many of the assets in question, plaintiff’s factual assertions regarding the

nature of the assets suffer from a relative dearth of supporting evidence, owing to a variety of

reasons. Take, for example, plaintiff’s claims regarding assets 21934, 21935, and 21936, which

inexplicably relate to a single invoice that was split into three “assets.” Plaintiff claims that this

asset is an x-ray machine used for security at building entrances. But, that is not clear from the

invoice in question, which does not refer to such a machine, but rather to “LABOR,

EQUIPMENT, & MATERIALS FOR RADIOTOGRAPHY (X-RAYING) AND

36

Asset Nos. 21934, 21935, 21936, 22384, 20456, 16284, 16285, 19438, 9555, and

9560.

- 30 -

ELECTRICAL.” Nor is it supported by BIC’s records, which refer to this “asset” as “Building

Xrays for Handrails.” It appears that the invoice was not for an asset, but for a service, and thus

does not support plaintiff’s attempt to reclassify these three “assets” as office furniture, fixtures,

and equipment.

As it turns out, more evidence exists with respect to these “assets” than as to many of the

other assets at issue, for which the only document provided is the internal BIC form recording

information about the asset and perhaps a receipt. In other instances, some evidence is provided,

but it is impossible to tell the exact nature of what was procured – for example, attached to the

BIC form for Assets 20456, 9555, and 9560 is a master schedule of hundreds of Deloitte

adjustment that does not identify the particular asset(s) in question, which purportedly relate, in

the case of Asset 20456, to the remodeling of an office, and in the case of Assets 9555 and 9560,

to glazing and millwork, respectively. No other information – no invoice, work order, purchase

order, pictures, descriptions, etc. – is provided to define these assets, leading the court to

conclude that the evidence presented is insufficient to support plaintiff’s claim. Other evidence

in the record indicates that the remaining assets in this category were plainly structural

components of a building, among them, Asset 22384 (which was a demising wall to subdivide

existing space), as well as Assets 16284, 16285, and 19438 (which relate to leasehold

improvements, such as partitions, carpentry, ceilings, electrical, millwork, and painting).37 Many

of these items, in fact, are specifically listed as structural components of a building in Treas. Reg.

§ 1.48-1(e)(2), and thus are subject to the recovery period for nonresidential real property. See

also Amerisouth XXXII, Ltd. v. Comm’r of Internal Revenue, 103 T.C.M. (CCH) 1324, 1330

(2012); Rev. Proc. 87-56, § 5.

In seeking to reclassify many of these assets, plaintiff seems to proceed from the notion

that all it needed to do, to prevail, was to introduce Mr. Seabrook’s opinions that a given asset

was eligible, occasionally with a bit of supporting testimony by Mr. Florence. However, many

of the facts upon which Mr. Seabrook relied do not otherwise appear in the record. In this

regard, Federal Rules of Evidence 703 and 705 indicate that the facts underlying an expert’s

opinion do not come into the record as substantive evidence, but rather are admitted only for the

limited purpose of enabling the trier of fact to scrutinize the expert’s reasoning. See 5860 Chi.

Ridge, LLC v. United States, 104 Fed. Cl. 740, 766 n.42 (2012); see also United States v. Wright,

783 F.2d 1091, 1100 (D.C. Cir. 1986); United States v. Affleck, 776 F.2d 1451, 1457 (10th Cir.

1985); 29 Charles Alan Wright & Victor James Gold, Federal Practice and Procedure § 6273

(1997). The fact that the documentation may have once existed, but was subsequently lost or

destroyed, does not relieve plaintiff of its burden of demonstrating that the Commissioner’s

determinations were erroneous. See Boddie-Noell Enters. v. United States, 36 Fed. Cl.722, 741

(1996) (noting that “summary appraisals based on non-contemporaneous records, or data

37

A portion of these “assets” relate to carpeting, which is eligible for classification as

office furniture and equipment. However, there is no way to trace between a quote attached to

these assets and the asset values themselves (the total figures do not match), preventing the court

from knowing whether, and to what extent, the assets plaintiff seeks to reclassify actually include

an amount for carpeting.

- 31 -

reconstructed from accidentally lost or destroyed documents, are unpersuasive”); Jupiter Corp. v.

United States, 2 Cl. Ct. 58, 71 (1983) (rejecting similar summaries prepared by an accounting

firm).

Accordingly, the court denies plaintiff’s claim as to all ten of the “assets” listed in this

category.

2. Tenant Improvements Allegedly Used to Protect, Maintain,

or House Broadcasting Equipment – Class 48.2

This second category contains eighteen assets, including ventilation systems, air

conditioning units and air handling systems, and related ductwork, filters, internal air blowers,

motors, electrical work, construction, ceiling installation, and building upgrades that plaintiff

contends were installed or completed specifically to protect broadcasting equipment.38 Plaintiff

claims that these assets fall within Class 48.2, Radio and Television Broadcastings, which has a

six-year class life and a five-year depreciation period. This class “includes assets used in radio

and television broadcasting, except transmitting towers.” Rev. Proc. 87-56, § 5.

Plaintiff contends that this equipment and construction are needed to meet the

temperature, humidity, and other environmental requirements necessary for the proper

functioning of the broadcast equipment. Defendant admits that five of these items (Nos. 22152,

7323, 7324, 7501 and 7502) fit this description. It contends that the remaining thirteen assets

constitute structural components of the building.

Section 5.05 of Rev. Proc. 87-56 provides that a building can be included in an asset class

if it is so closely related to the use of the property it houses that it can be expected to be replaced

when the housed property is replaced. In setting forth this rule, the revenue procedure cites the

regulations involving the investment tax credit provided in sections 38 and 48 of the Code.39

Specifically, it cites Treas. Reg. § 1.48-1, subparagraph (e)(1) of which states, in pertinent part,

that:

The term “building” generally means any structure or edifice enclosing a space

within its walls, and usually covered by a roof, the purpose of which is, for

example, to provide shelter or housing, or to provide working, office, parking,

display, or sales space. . . . Such term does not include (i) a structure which is

38

Asset Nos. 22152, 21073, 21074, 7323, 7324, 7501, 7502, 2792, 2793, 2252, 1927,

1981, 1982, 1983, 1984, 1986, 16286, and 18886.

39

During various periods over the last 30 years, section 38 of the Code authorized an

investment tax credit for so-called “section 38 property.” Section 48(a) of the Code defines

“section 38 property” to include “tangible personal property” and “other tangible property,” such

as industrial machinery, but to exclude “a building and its structural components.” 26 U.S.C. §

48(a)(5)(D)(i).

- 32 -

essentially an item of machinery or equipment, or (ii) a structure which houses

property used as an integral part of an activity specified in section 48(a)(1)(B)(i)

if the use of the structure is so closely related to the use of such property that the

structure clearly can be expected to be replaced when the property it initially

houses is replaced. Factors which indicate that a structure is closely related to the

use of the property it houses include the fact that the structure is specially

designed to provide for the stress and other demands of such property and the fact

that the structure could not be economically used for other purposes. Thus, the

term “building” does not include such structures as oil and gas storage tanks,

grain storage bins, silos, fractionating towers, blast furnaces, basic oxygen

furnaces, coke ovens, brick kilns, and coal tipples.

Treas. Reg. § 1.48-1(e)(1). Under this regulation, a structure generally is not a building if: (i) it

was specially designed to meet the demands of the equipment it houses; and (ii) it could not be

economically used for other purposes. See L & B Corp. v. Comm’r of Internal Revenue, 862

F.2d 667, 674 (8th Cir. 1988), cert. denied, 491 U.S. 905 (1989); Consol. Freightways, Inc. v.

Comm’r of Internal Revenue, 708 F.2d 1385, 1389 (9th Cir. 1983).

Treas. Reg. § 1.48-1(e)(1) treats the structural components of a building the same as the

building itself. Treas. Reg. § 1.48(e)(2) defines such “structural components” to include –

such parts of a building as walls, partitions, floors, and ceilings, as well as any

permanent coverings therefor such as paneling or tiling; windows and doors; all

components (whether in, on, or adjacent to the building) of a central air

conditioning or heating system, including motors, compressors, pipes and ducts;

plumbing and plumbing fixtures, such as sinks and bathtubs; electric wiring and

lighting fixtures; chimneys; stairs, escalators, and elevators, including all

components thereof; sprinkler systems; fire escapes; and other components

relating to the operation or maintenance of a building. However, the term

“structural components” does not include machinery the sole justification for the

installation of which is the fact that such machinery is required to meet

temperature or humidity requirements which are essential for the operation of

other machinery or the processing of materials or foodstuffs.

See also Hosp. Corp. of Am. v. Comm’r of Internal Revenue, 109 T.C. 21, 54 (1997). Under this

definition, an item can be a structural component of a building even if it is not permanent, as

long as it functions as an integral part of the building. Consol. Freightways, 708 F.2d at 1390;

Publix Supermarkets, Inc. v. United States, 26 Cl. Ct. 161, 175 (1992). Air conditioning

equipment comes within the exception in Treas. Reg. § 1.48-1(e)(1), and is not treated as a

structural component of a building under Treas. Reg. § 1.48-1(e)(2), if the primary motivation

for installing the equipment is to allow other equipment to function, with only incidental benefit

to employees and customers. See Publix Supermarkets, 26 Cl. Ct. at 175, 177; see also

Albertson’s Inc. v. Comm’r of Internal Revenue, 38 F.3d 1046, 1057 n.25 (9th Cir. 1993), vacated

in part, on other grounds, 42 F.3d 537 (9th Cir. 1994); see generally, Fed. Tax Coordinator,

- 33 -

“Heating Equipment, Cooling Equipment, Air Conditions and Other Air Handling Equipment,”

L-17246 (2d ed. 2013).

Apart from the five assets specifically mentioned above, plaintiff’s case as to this

category is weak and overly relies upon uncorroborated factual assertions made by its expert

witness. For example, Assets 21073, 21074, 2252, and 1986 relate to air conditioning equipment

and duct work installed in several of plaintiff’s radio studios, a duplication room, and a dubbing

room. But the scant documentation attached to the BIC forms does not reveal the purpose of this

equipment and, in particular, does not support plaintiff’s claim that this equipment was used to

meet temperature or humidity requirements for the operation of machinery in those studios (with

only incidental benefit to the occupants). The documentation for other assets in this category

(Assets 1981, 1982, 1983, and 1984) reveals that they constituted structural components of the

building (e.g., the walls of a video taping room, the ceiling of a duplication room, electrical

work) and thus were properly characterized by the Commissioner. The same can be said of

Asset 16286, which, like some of the assets in the prior category, relates to leasehold

improvements, such as partitions, carpentry, ceilings, electrical, millwork, and painting. The

next two assets in this category (Assets 1927 and 18866) defy accurate description/

characterization because they again are based upon broad descriptions of groups of items – the

former based on the master schedule of Deloitte’s adjustment discussed above, the latter on a

generic description of improvements (e.g., “miscellaneous leasehold improvements including

studio design and construction”) – with little or no explanation as to how what is on the schedule

relates to the asset description.40 Likewise, plaintiff’s claims with respect to other assets in this

category, such as Assets 2792 and 2793, are based solely on the cryptic BIC forms, with no

supporting documentation whatsoever. And, again, for the reasons stated above, the court does

not believe that these sketchy forms meet plaintiff’s burden in seeking to set aside the

Commissioner’s determinations.

Based on defendant’s concession, the court allows for the reclassification of Asset Nos.

22152, 7323, 7324, 7501, and 7502, but denies plaintiff’s claims as to the remainder of the assets

in this category based on a failure of proof.

40

In its post-trial briefs, plaintiff repeatedly repines that it has failed to provide

explanations as to how evidence like this supports its claims because of “space limitations.” The

court, however, afforded each party 160 pages for post-trial briefing – well in excess of what is

normally provided and exactly what was requested. Accordingly, the notion that plaintiff could

not squeeze into its briefs explanations of how the record supports its specific depreciation

claims has a decidedly hollow ring – particularly, as the record does not hold much evidence for

plaintiff to summarize.

- 34 -

3. Structures Designed and Built to House and Protect

Specialized Broadcasting Equipment – Class 48.2

This final category contains four assets allegedly designed and built to house and protect

broadcast equipment.41 Defendant takes the position that these structures are buildings.

Plaintiff, however, maintains that under Treas. Reg. § 1.48-1(e)(1), they are what are known as

“special purpose structures” and, therefore, exempted from the definition of “building.”

As noted above, under the regulations, among the factors which indicate that a structure

is a special purpose structure are “the fact that the structure is specifically designed to provide for

the . . . demands of [the] property [which it houses] and the fact that the structure could not be

economically used for other purposes.” Treas. Reg. § 1.48-1(e)(1)(ii); see Bundy v. United

States, 1986 WL 13364, at *5 (D. Neb. Nov. 19, 1986). In applying the regulation, courts

typically have focused less on appearances, e.g., whether a structure has walls and a roof, and

more on the function of the structure, e.g., does it provide shelter, or furnish working spaces. See

King Radio Corp., Inc. v. United States, 486 F.2d 1091, 1096 (10th Cir. 1973); Consol.

Freightways, 708 F.2d at 1388; Hart. v. Comm’r of Internal Revenue, 78 T.C.M. (CCH) 114,

117-19 (1999); cf. Minot Fed. Sav. & Loan Ass’n v. United States, 435 F.2d 1368, 1370-71 (8th

Cir. 1970).42 In applying that functional test, courts have split on the impact of having human

activity occur within the structure, with some finding the quantum of such activity important,

see, e.g., Consol. Freightways, 620 F.2d at 873; Munford, Inc. v. Comm’r of Internal Revenue,

87 T.C. 463, 481-83 (1986), aff’d, 849 F.2d 1398 (11th Cir. 1988); and others more inclined to

find that a structure is a building even if it only “provides shelter for significant machine or

animal activity,” L & B Corp., 862 F.2d at 672; see also, e.g., Boddie-Noell Enters., 36 Fed. Cl.

at 739-40. That said, most courts appear to agree that a structure is not a building if the structure

itself performs an activity. See Brown-Forman Distillers Corp. v. United States, 499 F.2d 1263,

1272 (Ct. Cl. 1974) (whiskey maturation facilities); Brown & Williamson Tobacco Corp. v.

United States, 369 F. Supp. 1283, 1287 (W.D. Ky. 1973) (tobacco drying sheds); Cent. Citrus

Co. v. Comm’r of Internal Revenue, 58 T.C. 365, 371 (1972) (atmospherically-controlled “sweet

rooms” to ripen fruit).

In the midst of this split, it would appear that the former Court of Claims was decidedly

amongst those courts that focus more heavily on whether a structure provided working space for

employees. Thus, in Brown-Forman, the Court of Claims, in holding that whiskey maturation

facilities were not “buildings,” held that the fact that a structure has features in common with a

“building” is not determinative, finding instead that “a major inquiry [is] whether the structures

provide working space for employees that that is more than merely incidental to the principal

function or use of the structure.” 499 F.2d at 1271. Later, in Consolidated Freightways, that

court refined this standard, noting that “in deciding whether the human activity is merely

41

Asset Nos. 1047, 11063, 18867, and 23338.

42

Compare Consol. Freightways, Inc. v. United States, 620 F.2d 862, 870 (Ct. Cl. 1980)

(“Of course, if a structure does not appear to be a ‘building,’ it is not a ‘building.’”).

- 35 -

incidental to the function or use of the structure or whether that structure functions to provide

working space for employees, more than merely the amount of such activity must be

considered.” 620 F.2d at 871. After examining the case law, the court then concluded that –

in determining whether the structure provides working space for employees which

is more than merely incidental to the principal function or use of the structure, we

must examine the frequency of the human activity inside the structure, how

essential such activity is to the basic process or use involved and how substantial

that activity is. . . . The human activity must be considered both qualitatively and

quantitatively to properly characterize its relationship to the principal function or

use of the structure involved.

Id. at 872-73. Employing this analysis, the court distinguished the loading docks that were the

subject of its case from the whiskey maturation facilities in Brown-Forman, finding that the

movement of freight that occurred on the former structure was fundamentally different from the

chemical activity that occurred in the latter. Id. at 873. As to the loading docks, the court thus

found that “[t]he essential human activity within the structures consists of the manual labor

expended in moving the freight, temporarily staging the freight and checking for overages,

shortages and damaged freight,” adding that “[n]othing about the structure allowed for this basic

function to occur without this essential human activity.” Id. And, on this basis, the court found

that the loading docks were a building and not subject to any of the exceptions in the regulations.

Id. at 874; see also Consol. Freightways, 708 F.2d at 1388-89.

The scant evidence provided by plaintiff as to the four buildings in question (Assets

1047, 11063, 18867, and 23338) largely takes the form of excerpts from the Deloitte report –

excerpts that, at least in some instances, readily admit that further documentation about the

nature of these assets is unavailable. This evidence does not demonstrate that these buildings

were built to house particular assets or that they could not serve other purposes if the equipment

therein was removed. In three instances (Assets 1047, 11063, and 23338), plaintiff has provided

no photos, plans or detailed descriptions of these buildings – and there was little testimony from

the witnesses who had seen these buildings. Plaintiff provided more detail as to Asset 18867 –

but that detail, indeed, revealed that this building contained not only transmitter facilities, but

also restrooms, offices, storage rooms, and an apartment. This information hardly served to

bolster plaintiff’s claim that this building – which was built in 1939 – was a “special purpose”

structure designed to house a modern transmitter. Plaintiff’s documentation did include some

very general information regarding the nature of human activity occurring in these buildings,

most often described as maintenance work (e.g., a listing of the individuals who worked in the

respective buildings, and an estimate of how many hours per month were spent working at the

structure). But, this information, which took the form of unsworn answers to a set of Deloitte

survey questions, is not detailed enough – let alone reliable enough – to allow the court to make

the sort of fine distinctions that were made in Consolidated Freightways. That said, the raw

number of hours reflected in these estimates – for one asset, 16-32 hours per month of

maintenance and 128-144 hours per month of office time within the structure – readily serve to

- 36 -

distinguish this case from those in which a special purpose structure was not deemed a

building.43

In sum, in the court’s view, plaintiff’s evidence as to these four assets falls far short of

what is necessary to overcome the Commissioner’s determinations.

* * * * *

Accordingly, based on defendant’s concession, the court allows for the reclassification of

Asset Nos. 22152, 7323, 7324, 7501, and 7502, but denies plaintiff’s claims as to the remainder

of the assets in question owing to a significant failure of proof.

III. CONCLUSION

The court need go no further. As to the exchange of KZLA, the court concludes plaintiff

has established that KZLA did not possess any significant goodwill that was accounted for in

that transaction. Rather, it would appear that KZLA’s value was exclusively in its FCC license,

as well as a few associated tangible and intangible assets. Regarding the reclassification issue,

the court upholds plaintiff’s claim with respect to the five assets identified above, but denies that

claim as to the remainder of the assets at issue.

The court will withhold the entry of a judgment to permit the parties to submit

computations consistent with the court’s determination of the issues, showing the correct amount

of the judgment to be entered herein. The following procedure (which loosely tracks Rule 155 of

the U.S. Tax Court’s Rules of Practice and Procedure) shall be employed:

1. On or before August 30, 2013, the parties shall file a status report

proposing the judgment amount that should be entered in this case.

2. Should the parties agree as to the amount of the proposed judgment, they

shall so indicate. Agreeing to the entry of such judgment neither signifies

agreement with this court’s findings and conclusions nor waives any

arguments or rights the parties might otherwise have, nor, in particular,

impacts upon any party’s right to an appeal.

43

In Brown-Forman, and later in Consolidated Freightways, the Court of Claims

distinguished the whiskey maturation facilities in Brown-Forman from the greenhouses that were

at issue in Sunnyside Nurseries v. Commissioner of Internal Revenue, 59 T.C. 113 (1972). In

this regard, the court noted that “no substantial employee activity” took place in the maturation

facilities, whereas employees periodically engaged in a broad range of processing activities at the

greenhouse. See Consol. Freightways, 620 F.2d at 872; Brown-Forman, 400 F.2d at 1272. In

the court’s view, the activity here appears to be more closely analogous to that which occurred in

the greenhouses – which were held to be buildings. Sunnyside Nurseries, 59 T.C. at 121-22.

- 37 -

3. If the parties disagree as to the proposed judgment, they shall, in the filing

described in paragraph 1, submit competing proposals for that judgment,

together with an explanation as to why they believe their proposal more

accurately tracks this court’s opinion. On or before September 30, 2013,

the parties may file a response to the proposed judgment and rationale

offered by the other party.

4. This process shall not be employed to reargue or seek reconsideration of

any of the points resolved by this court’s findings and conclusions. Nor

shall it be used by defendant to pursue setoff or equitable recoupments not

previously pled in this litigation. See Principal Life Ins. Co. & Subs. v.

United States, 76 Fed. Cl. 326 (2007).

IT IS SO ORDERED.

s/Francis M. Allegra

Francis M. Allegra

Judge

- 38 -