Forward Communications Corp. v. United States

DAVIS, Judge,

dissenting in part:

I dissent only from the court’s holding that plaintiffs loss upon termination of the CBS network affiliation amounted to $572,000. I would fix that loss at $125,000.

1. Were it not for defendant’s concession at the trial level that taxpayer did suffer such a loss, taken together with the stipulation that the two affiliations (CBS and ABC) were worth $1,000,000 in total, I would find it hard to disagree with Trial Judge Miller’s conclusion (though not with all of his reasoning) 1 that plaintiff suffered no deductible loss on termination of the CBS agreement. It seems to me immaterial in this instance whether one says that no loss was incurred at all or whether a loss was incurred but compensated for. In either event no deductible loss existed. I do not agree with the court that the bar in section 165(a) of a loss deduction (because it has been "compensated for by insurance or otherwise”) applies only if the taxpayer has an existing legal right of recovery for *639 that loss from some source. It is enough, in my view, if the "compensation” comes about simultaneously and as an integral part of the transaction which is claimed to have resulted in the loss. 2 That is precisely what occurred here. The termination of the CBS affiliation and the substitution of the exclusive ABC agreement were all part (from plaintiffs standpoint) of a single transaction designed to avoid any loss. As Trial Judge Miller put it: "As astute businessmen, plaintiffs officers took anticipatory action to avoid such loss. Knowing that ABC was anxious to expand its affiliation agreement to cover larger numbers of viewers for its national programs and that ABC would prefer a VHF station to a UHF station in the same area, plaintiff entered into an advantageous deal with ABC. In return for an exclusive ABC affiliation at hourly compensation rates from ABC substantially in excess of what either network had been paying it (40 percent of $900 per hour versus 32 percent or less of $650 per hour), plaintiff would relinquish its primary [CBS] affiliation. * * * * It is clear that plaintiffs relinquishment of its CBS affiliation was contingent upon its prior receipt of the new exclusive ABC contract. Plaintiffs witness, Turner, conceded it. Plaintiffs board approved the prospective termination of the CBS affiliation on condition that its officers could obtain from ABC the acceptable contract that they had tentatively negotiated. It is reasonable to infer that ABC offered plaintiff the substantial increase in compensation because it was anxious to expand its viewership and believed that it would take that kind of increased compensation to induce plaintiff to substitute ABC for CBS.

"The record does not reflect the precise value of the exclusive ABC affiliation, but plaintiffs own evidence is that after the station manager’s study of plaintiffs broadcast coverage he believed that even without regard to *640 any increase in compensation a full time ABC affiliation was worth more to plaintiff than the CBS affiliation. In addition, the hourly rate for every hour of plaintiffs network broadcasting went up by 38 percent (from $650 to $900) and plaintiffs share of it for prime time alone increased by 25 percent, (from 32 to 40 percent). The fact is also that in the year after plaintiff changed to ABC exclusively, with increased hourly compensation, its network revenues greatly increased over what it had received in the previous year from the two networks, and it turned its fortunes around from a $220,677 net loss to a $108,655 net profit.”

This being the record before us, I do not think that taxpayer can be said to have proved — apart from defendant’s concession of a loss — that it suffered an uncompensated loss in the termination of the CBS affiliation. The "loss” taxpayer puts forward did not exist in the real world and should not be recognized for tax purposes. Forward insists, however, that its "loss” of the CBS agreement is exactly the same as if a manufacturer decides to abandon one of two machines and run another at fuller capacity to obtain its needed output. But the network affiliation agreements in this case were not comparable to a machine or other such asset which necessarily has a separate life of its own. These affiliation contracts could not be sold or transferred on their own for value, nor did they have salvage value. Their value inhered in the financial benefits accruing therefrom during the life of the affiliation. In this instance, plaintiff knew when it purchased the station that one of the two affiliations would have to be relinquished in 2M years. And if, when that time came, plaintiff could arrange (as it did) with ABC to give it all the benefits it had previously had from the dual affiliation (or more), it would suffer no loss, or at least no uncompensated loss. The court assumes that, after the CBS affiliation was terminated in 1967, the plaintiff no longer had the financial benefits arising from dual affiliation. But that assumption seems to me to run counter to the trial judge’s factual analysis — set forth, supra — which shows that taxpayer deliberately sought and obtained a distinctly better "deal” with its exclusive ABC affiliation than it had had in the previous 2Vz years.

*641 The prior cases on dual affiliation contracts 3 do not point us the other way because in none of them was there a claim or a showing that on termination of one network agreement another such contract was designed to and did take over the whole ground (and more). The present case is significantly new in that respect.

2. The fact remains that defendant did concede a loss; on that point I concur with the court. This important concession cannot be disregarded since taxpayer might very well have tried its case differently if the Government had maintained that there was no uncompensated loss at all. In the circumstances, I am thrust into the difficult position of evaluating a loss where, to my mind, the present record shows that plaintiff has failed to prove any. For me the solution is to hold that plaintiff, which has the burden, has failed to demonstrate any loss greater than the $125,000 which defendant’s expert found as the extra value of a dual affiliation. True, the expert’s analysis is subject to infirmities pointed out by the court. But taxpayer has the burden and it has not proven any greater loss. On the view I have taken in part 1, supra, plaintiffs value of $572,000 is quite excessive, theoretical, and erroneous. The only other figure in the record (put forth by defendant itself) is $125,000. 4

I agree that section 1031(a) should not be held to apply to this case.

In United States v. S.S. White Dental Manufacturing Co., 274 U.S. 398 (1927) and Post v. Commissioner, 12 B.T.A. 510 (1928), the unanticipated and gratuitous relief payment was made years after the loss was incurred. In Parmelee Transportation Co. v. United States, 173 Ct. Cl. 139 , 351 F.2d 619 (1965), the businesses which continued to prosper had no relation to the one business in which goodwill was lost. In Shanahan v. Commissioner, 63 T.C. 21 (1974), the only issue was whether the forgiveness of the indebtedness was a pure gift or in the nature of insurance. None of these cases holds that the compensation mentioned in section 165(a) must always be compensation to which the taxpayer has some legal right.

Meredith Broadcasting Co. v. United States, 186 Ct. Cl. 1 , 405 F.2d 1214 (1968); Roy H. Park Broadcasting, Inc. v. Commissioner, 56 T.C. 784 (1971); Miami Valley Broadcasting Corp. v. United States, 204 Ct. Cl. 582 , 499 F.2d 677 (1974).

I do not share defendant’s view that plaintiff should have amortized the $125,000 over the 2½ years following the purchase of the station. There is insufficient basis in this record for thinking that taxpayer could or should have determined in advance that there existed a $125,000 asset to be amortized.