Petition for Writ of Certiorari — Westinghouse Broadcasting Co. v. Commissioner

& '\ > AF Office-Supreme Court, U.S.

| FILED-~

No. 7 53 JAN. 1'7 1963

Ai . ~ | JOHN F. DAVIS, CLERK

IN THE

OctToBer TERM, 1962

WESTINGHOUSE BROADCASTING COMPANY,

INC.,

Petitioner,

; Vv.

COMMISSIONER OF INTERNAL REVENUE,

% ve

12,

PETITION FOR A WRIT OF CERTIORARI TO THE |

UNITED STATES COURT OF APPEALS FOR THE

THIRD CIRCUIT

¥

ALBERT, R. CONNELLY

GeorGcE G. TYLER

Counsel for Petitioner,

1 Ciise Manhattan Plaza,

New York 5, N. Y.

">

LEonaArD E. Kust

GeorcE S. PARLIN, Jr.

Of Counsel.

January 16, 1963

INDEX <

PAGE

Opinions Below eee esc kane pikes ehbesns "

Jurisdiction ........ pel KxGnekes ocak: anaes ae

Question Promnned pie as hie Se eaGetenaacua 2

Statutes and Regulations Involved ................ 3

I 5k unk NSN KWka Wee see < | eee ee 3

__—Fige-Natare of the Decision Ee re Peerere 5

| Reasons for Granting the ‘Writ .................. 8

IR Na i ene 6:0 60's hed Otten scenes 14

Appendix-. ips Vea ce hs eeek us ae +. Weise ae

5 ;

i Table, of Authorities Cited |

Cases: .

Automatic Heating and Cooling Company, P-H 1942

B. T. A. Mem. Dec. para, 42,561.(1942) 2....... 13

Bernicedale Coal Co., 16 B. B; A."696 (1929),-acg.,

Se I, a CE a kb sv ches uw sinuneas 13

Bonwit Teller & ‘Co. v. Commissioner, 53 F. 2d 381

(2d Cir. 1931), cert. denied, 284 U. S. 690( 1932) . 8, 10

Fisher Brown, 9 TCM 1054 (1950) ......6..0°.2... 10

ii

°

Cleveland Railway Company, 36 B. T. A. 208 (1937),

acq., 1937- i: SE as bates basleaekes ene 10, 13

Commissioner v. Chicago Natiénal League Ball Club,

74 F. 2d 1010 (7th Cir. 1935) ....... cae atacaeen

«f ommissioner v. Pittsburgh Athletic Co., 72 F. 2d 883 ©

Ct A ID Ao cee hachat cet nneccdenquceees : 8

East*Kauai Water Co., Ltd.,11 T..C. 1014 (1948) ... 10

Flynn, Hdrrison & Conroy, Inc., 21 B. T. A. 285

(1930), »acq., X-1 Cum. Bull. 22 (1931) Pea haan 13. -

Harris-Emery Co., 10 B. T. A. 297 (1928) aa sae

Harris-E imery Co., av &. 1< Ph. Soe CURR) oc 2 so s.. _ 10

| Helvering v. Kansas City American Ass'n Baseball

Ce, 75 F. SAGO Cth Cir. TFS)... jew sxe 8,9

Helvering v. R. J. Reynolds Tobacco Co., 306 a.

Ree, ers Orr el ay eae 12-.

Hickok Oil Corporation v. Caniibinaletiel, 120 F..2¢

133 (6th Cir. A) ere 13

Kentue cky. Tobacco Products Co. v. Lucas, 5 F. 2d 723,

ME MES cu inc ck nk osanaakds<oedris ne i

Pasadena City Lines, 23 T. C. 34 (1954), acq.; 1955-1 |

RT MON See te Oe cee ea aa eee

Pennsylvania Salt Manufacturing Co., 18 B. T. A.

1148 (1930), acg., IX-2 Cum. Buil. 47 (1930).. 13

Powell Coal Co., 12 B. T. A. 492 (1928), i VII- 2

Cum. Bull. 32 [EE civbistenhkeunecewehetes t3

Syracuse Washing Machine Corp., 17 B. T. A. 11

1929, acq., IX-1 Cum. Bull. 53 (1930) des ceuews aa ee

i. ane Dihetd-dleutene Oil Co., 288 U. S. 459

RETR RIAN Tay tines gel A ety 12 .

130 (1936) Regs SRD Ea See 13

William Penn Hotel Co., 23 B. : A. 566 any ae Fr

a # ;

PAGE

ili

< : PAGE

Statutes and Regulations: “ater

* Revenue, Act of 1918, Section 214(a)(8) .: seen me

. Infernal Revenue Com of 1939, Section 2 23(1) a | Ss

| Internal Revenue Code of 1954, Section PSS

Internal Revenue Regulations 45, Article 163 ..... “e13

47 CFR (Revised 1953) Section 3.636 a)(2), oc oe

47 CER (Revised 1953) Section 3.658(c) ........ “4

T. D.4957, 1939-2 Cum, Bull. 87°. rabasiad RERoe 13

°

a ’

a

e

i >

~

e

°

& X

& IN THE

Supreme Court of the United States

OctoBer TERM, 1962

W ESTINGHOUSE BROADCASTING COMPANY,

ig te 8,"

° : Petitioner,

v. ’ \

COMMISSIONER OF INTERNAL REVENE,

. ° Respondent.

Pd

\

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR THE

THIRD CIRCUIT ‘

Westinghouse Broadcasting Company, Inc., (Broad- -

casting) prays that.a writ of certiorari issue to review the

judgment of the United States Court of Appeals for the

Third Circuit, entefed i in this action October 19, 1962.

Opinions. Below

. ° The opinion of the Tax Court (R. 104a-123a*). is re-

ported at 36 T. C.912. The opinion of the Court-of Appeals

affirming the decision Ax. the Tax Court (App. 4a-lla**)

is reported at 309 F. 2a 279.

rie, references-are to Petitioner's Appendices in the Court of

Appeals: . /

, **“App.” references are to the Appendix to this Petition.

2

\ Jurisdiction

The judgment of the Court of Appeals was entered

October 19, 1962 (R. _), The jurisdiction of

this Court is invoked under 28 U. S. C. $1254(1).

e

Question Presented

Is a business contract for a fixed term, with a provision |

for renewal terms if the parties mutually consent, rendered

non-depreciable as a matter of law for Federal income tax

Purposes by reason of the fact that there is uncertainty

' whether the parties will consent to renewal?

- The Court below answered that question in the affirma-

tive and adopted as its rule of law that depreciation was

not allowable because there was uncertainty as to the

number of renewals. It held that in order to be allowed

depreciation Broadcasting should have proved that there

' was-—reasonable* certainty that the contract would not be

renewed, either at the end of the current term er at the

end of an identified future renewal term,

It is Broadcasting’s contention that under the proper

rule of law the contract was depreciable over its term in .

effect at the end. of the taxable year becausé there was un-

certainty as to renewal. It is only where it appears from -

the record that a renewal term or terms are reasonably

' certain to occur that such renewal terms are added to the

depreciable life of the.contract. ~ -

Under the rule-of law contended for by Broadcasting,

the uncertainty as to the exercise of the renewal provision

renders the contract depreciable over its term in effect at

the end of the taxable year; but under the rule of law

adopted by the Court below, such uncertainty of renewal

renders the contract non-depreciable.

» ' ~ 7

<

ie]

“11(b)(2) and 1.167(a)-3, 26 CFR (Revised 1

‘tions 1.162-11(b)(2) and 1.167(a)-3. Said statutes and

3

The Court Below stated that Broadcasting had failed

contended for by Broadcasting such proof was not required.

The question presented to this Court thus does not ihvolve

‘to prove with reasonable certainty the number of renewal .

terms which would actually oceur ; but under the rule of law

burden of proof®but rather what is the proper rule of law’

to beaapplied to the ndisputed facts, jo

\

Statutes and Regulations Involved,

The statutes and regulations inv olyed are, Section 23(1)

of the Internal Rev enue Code of 1939, 53 Stat. Part I 14,

&°.

as amended by 36 Stat. ‘798,819; Section 167 (a) (1) of the

Intern&l Revenue Code of 1954, 68A Stat. 51-52; Regula-

tions 118, Sections 39.23(a)-10(b) and 39. (1)- 3, 26

CFR (Revised 1953)° Sections 39.23(a)- dbo and

39.23(1)-3; and Income Tax Regulations, Sections 1.162-

53) Sec-

regulations are set forth i in the — hereto at pages |

la-3a.

Q

‘Statement

This petition seeks review of a judgment, determining

deficiencies in Federal income tax of ‘Broadcasting for the

years 1953 and 1954 in the amounts of $363,371.93 and

$622,410.13, respectively, and denying Broadv Sting re-

funds of Federal income tax for those years.

Broadcasting commenced this proceeding on eof 7.

1959, in the Tax Court of the United States (R. la).

basic facts in the case are not disputed, being in part itang

lated by the parties and in part established by the und§ntra-

dicted testimony of an expert witness‘(R. 2a-103a, 125a).

Those facts are:

>

4

On June 1, 1953, Broadcasting purchased from Philco

Corporation (Philco) all the assets of the Philadelphia

_.television’station WPTZ for $8,534)924.94. Among such

assets of WPTZ was<a network affiliation agreement be-

tween National Broadcasting Company (NBC) and Philco

: for a to year term ending January 1, 1954. Of the aggre-

_gate purchase ’price, $5,000,000 was allocated to the net-

work affiliation agreerfient (R. 3a-4a, 105a- 106a).

On June 1, 1953, Broadcasting commenced operation _—

of television statton WPTZ as ba) NBG affiliate under the. °

network affiliation agreement ( 4a, 106a).

Federal Cothmunications Commission’ (FCO) regula-—

tions in effect during,1953 and 1954 prohibited any contract —

providing for network affiliation for a term longer than two

years, 47 CFR (Revised 1953) Sec. 3.558(c).* The net-

work affiliation satel contained the following provi-

sion:

“23... This agre ment... sha'l remain in effect

. for a period of,twc years. It shall then be renewed

*on the sarne terms and conditions for. a further

period of two years, and so on for successive further

periods of two years each unless and until either

_ party shall, at least three months prior to the expira-

‘tion of the then. current term, give the atfer party

written notice that it does not desire to have the

— renewed for a further -period.” (R. 35a-

) |

=(c) Term of affiliation. No license shall be granted to a tele-

vision broadcast station having any contract, arrangement,. or under-

standing, express or implied, with a network organization which

provides, by original terms, psovisions for reriewal, or otherwise for

the affiliation of the station with the network organization for a period

than 2 years: Provided, That a contract, arrangement, or

standing for a period up to2 years may be entered into within

6 ‘aati 94 to the commencement of such period.” (47 CFR (Re-

vised 1953) § 3.658(c).) : or “

so

&?-

e , : ve :

Neither Broadcasting nor NBC gave notice of non-

renewal pursuant to the above-mentioned provision of the

network dffiliation agreement’on @r prior to October 1,

1953,. and on that date the affiliation agreement between

NBC and WPTZ was therefore renewed for a two-year

term expiring January 1, 1956 (R. 13a). .

Television networks found it advantageous to own the

maximum number: of VHF television stations (five) per-

mitted by regulations of the FCC, 47 CFR (Revised 1953)

§ 3.636(a)(2), and to own such stations in ‘the largest

markets. In 1953 Philadelphia wis the fourth ranking

United’ States city in terms of potential television audience

and the largest market in which NBC gid not own a televi-

sion station (R. 11a; 101a,109a).°

On September .28, 1954, Broadcasting was informed

‘that NBC desired to acqufre a television station in Phila-

delphia. Prior to November 15, 1954, Broadcasting was

informed by NBC that the latter would not renew the net-

work affiliation agreement as to WPTZ beyond January

1, 1956. In‘1955, NBC gave formal notice to Broadcasting

of termination of the network nfiiation agreement on

January 1, 1956. Broadcasting’s Philadelphia television

and radio stations were sold to NBC on January 21, 1956.

(R. 13a-15a, 110a-111a).

Both the Tax Court and the Court of Appeals for

the Third Circuit held that the network affiliation agree-

ment was not subject to depreciation dufing 1953 and 1954.

?

The Nature of the Decision Below

The decision below turns upon a question of law, not of

iact. ed, aad ae

There was no basic disputed question of fact to be:

decided either by the Tax Court or.by the Courf below.

The contract was used in Broadcasting’s business. It had-

. .

6 ly

a cost basis. At the end of each of the taxable years 1953

and 1954, it had a fixed term expiring on January 1, 1956,

which was subject to renewal only by mutual consent of

Broadcasting and NBC. .Under the FCC regulations there

could be no binding agreement as of the end of the

taxable years 1953 and 1954 for any renewal beyond

January 1, 1956. There was no reasonable certainty of

any renewal beyond January 1, 1956 and, in fact, NBC

declined to renew it beyond that date. Even before the

announcement in 1955 of NBC’s final decision not to

renew, renewal of the agreement was a matter of pos-

sibility, not of reasonable certainty. NBC informed Broad-

casting in 1954 that the contract would not be renewed

beyond January 1, 1956 (R. 14a, 110a).

Between January 1, 1953 and April 1, 1960, a total of 266

affiliation agreements (of which 87 were NBC affliation

agreements) were not renewed: for reasons other than a

station going off the air or a network acquiring its affiliate

(R. 8a, 112a). The uncontradicted testimony | establishes

thai even °s a matter of business risk, no purchaser could

reasonably count on more than two renewals, 1.e., to January

1, 1958, the terminal date used by Broadcasting for deprecia-

tion on its books and in its tax returns (R. 100a, 116a).

On those undisputed facts. the basic question ‘in the

case is one of law. What rule of law is to be applied in

determining the life of such a contract for the purposes of

depreciation? ,

Broadcasting urged the application pf the rule of law

applied in previous ¢ases and rulings: ;

A business contract with a fixed term is to be de-

-preciated over the term in existence at the end of the

_taxable year if there is uncertainty as to renewal. -It

is only where it appears from, the record that a renewal

term or terms are reasonably certain to occur that such

o. }

"i

‘

ey

7

renewal térms are added to the depreciable life of the

contract. .

The Court below repudiated that rule of law and adopted

the following rule: -

A busiriess contract. with a fixed term cannot be de-

preciated where there is uncertainty as to the number:

of renewals. In order to be allowed depreciation the

taxpayer must prove that there is reasonable certainty

that the contract will not be renewed, either at the end |

_of the current term or at the end of an identified future

va

term. | :

While factual questions may arisé in. applying either

“* rule of law, the basic question in the case is which of the

rules just stated is the proper rule of law to be followed.

The rule of law adopted by the Court below resulted in

a finding that the contract, although for a fixed term, had

an indefinite life.°

If the Court below had adopted the rule of iaw urged

by Broadcasting, it would have found that the contract

could be depreciated during 1953 and 1954 over a term

ending on (1) January 1, 1956 (the term in effect at the

end of the taxable years) or, at the maximupap (2) January

1, 1958 (the term over which it was depreciated on Broad-

casting’s books and in its tax returns). :

- Both the Tax Court and the Court below held that the

contract was non-depreciable because Broadcasting had

failed to prove with reasonable certainty the number of

~ renewal terms which would actually occur. Under the rule

of law cantended for by Broadcasting, however, such proof

was not required. All that Broadcasting was required to

prove was that there was no reasonable certainty of renewal

beyond January 1, 1956, the.close of the term in effect at

the end of 1953 and 1954.

8

‘REASONS FOR GRANTING THE WRIT

I ¢

, c)

The Court below has decided an important question of

Federal law in a way that is in conflict with a pfior deci-

sion of that Court (Commissioner v. Pittsburgh Athletic

Co., 72 F. 2d 883 (3d Cir. 1934)) and with decisions of

other Courts of Appeals (H elvering v. Kansas City Ameri-

can Ass'n Baseball Co., 75 F. 2d 600 (8th Cir. 1935) ; Com-

missioner V. Chicago National League Ball Club, 74 F. 2d

1010 (7th Cir. 1935); Bonwit Teller & Co. v. Commis- —

stoner, 53 F: 2d 381 (2d Cir, 1931), cert. denied, 284 U.S.

690. ( 1932)).

(a) Baseball Player Contracts—Helvering v. Kansas

City American Ass'n Baseball Co., 75 F. 2d 600 (8th Cir.

1935); Commissioner v. Chicago National League Ball

Club, 74 F. 2d 1010 (7th Cir. 1935) ; and Commissioner v.

Pittsburgh Athletic Co., 72 F. 2d 883 (3d Cir. 1934), all

involved similar fact situations. In those cases the taxpayer

ball clubs had purchased contracts with players which had

one-year*terms with provision for renewal for successive

terms of one year each at salaries to be agreed upon between

the players and the ball clubs. If an agreement as to salary

was not reached, the player was to receive the same salary

for the renewal term or was not to play professional base-

ball for one year. Many of the contracts had actually been

renewed at the.time of the hearing. It was held in each

case that the cost of the contracts should be deducted in

the year of acquisition, i.e., that the renewal provisions

should be disregarded, because renewals which depended

cn agreement of the parties were not certain. As was stated

by the Court’in the Pittsburgh Athletic Co. case e (72 F. 2d

at p. 884):

a

@_

9

. the option to renew the players’ contracts

in the instant case might enhance the value of the

contracts but would not change the period during

which the contracts would become exhausted.”

a

In the present case, the Court below denied the claimed

depreciation ‘deductions on the ground that Broadcasting’

had failed to prove with reasonable certainty the number

of renewals of the network affiliation agreement which

would actually occur. In other words, the Court below held

that “uncertainty” as to renewal made the life of the

affiliation agreement indefinite. That result is directly con-

trary to the holdings in the baseball player contract cases,

as stated in the Kansas City case (75 F. 2d at p. 604):

“Obviously, the options add to the value of the

contracts; but it cannot be. said that they extend the

life of the contracts beyond one year, because of

the uncertainty of their pes

The only distinction between thiose cases and the present

one is that the baseball player contracts specifically provided

for renegotiation of salary whereas the network affiliation

agreement was silent on renegotiation of terms. That dis-

tinction is not significant. Either Broadcasting or NBC

could have refused to consent to a renewal of the affiliation

agreement unless any one of the terms was changed to its

satisfaction. Moreover. there actually was renegotiation of

the terms of the affiliation agreement with the billing rate

being incrgased two times between June 1, 1953, and July

1, 1954. (R. 69a, 73a)

The fact that a contract is renewed by the mutual con-

sent of the parties, with provisions which except for the

term are identical to those contained in the prior contract,

does not mean that there is a single contract of unlimited

duration. To the contrary, a long line of decisions has held

)

10

that the renewal does not affect the deductibility of the

unamortized cost, but merely extends the period over which

the unamortized cost is deducted. That rule is applicable

whether or not the contract itself contains a provision for

renewal.* | ; 0

(b) Leases—Bonwit Teller & ‘Co. v. Commissioner, 53

. F: 2d 381 (2d Cir. 1931), cert. denied, 284 U. S. 690

_ (1932), first enunciated the rule that a business contract

should be depreciated over the term in effect at the end of

the taxable year unless renewal | provisions were reasonably

certain to be exercised. That case involved a lease having

a remaining term of 19 years with an option for the tax-

payer to renew for an additional term of 21 years. The

rt held that depreciation should be based on the initial

____term_alone because there was no evidence that the renewal

option, would be exercised. The taxpayer was not required

to prove that the renewal option would not be exercised. It*

was sufficient that there was during the taxable year no

reasonable certainty that it would be exercised.

The baseball contract cases simply applied the Bonwit

Teller dogtrine to business contracts other than leases. Since

1934,.there has not been any case (other than the decisions

in the present case) which has held that uncertainty as to

the exercise of renewal provisions would prevent the depre-

ciation of a business contract with a fixed term. As long

as renewal is uncertain, the contract is to be depreciated

over the term in effect at the end of the taxable year. This

- rule is especially applicable to television network affiliation

*Zast Kauai Water Co., Ltd., 11 T. C. 1014 (1948); Harris-

ree ¥ 37 B. T. A. 958 (1938) ; Cleveland Railwa Company,

36 B. T. A. 208 (1937), acq., 1937- 2 Cum. Bull. 5; William Penn

Hotel Co., 23 B. T. A. 566. (1931); Syracuse Washing Machine

Corporation, 17 B. T. A. Il (1929), acq., IX-1 Cum. Bull. 53

(1930) ; Harris Emery Co., 10 B. T. A. 297 (1928) ; Fisher Brown,

9 TCM 1054 (1950).

11

a

contracts, the term of which is prescribed by FCC regula-

tion and the renewal of which must be by mutual consent

of the parties.

&

II

The question presented in this case is of importance in

the administration of Federal tax law: and has not been,

but should be, decided by this Court.

(a) The precise issue in this case, namely, the depre-

ciable nature of a television network affiliation agreement,

is present in at least six other cases now pending in the

Tax Court and in the Court of Claims.* In addition, based

upon a partial survey conducted by the National Association

of Broadcasters, there appear to be at least twelve cases

involving this issue now under consideration by the Internal

/Revenue Service. The income taxes involved in the pending

cases amount to many millions of dollars. In addition. a

number of casey involving the issue have not yet been con- .

sidered for the Internal Revenue Service. . Review by this

Court would furnish the’ rule for decision of the many

proceedings involving this issue and would prevent years

of litigation. °

(b) So long as the issue as to whether an affiliation

agreement is depreciable for income tax purposes is in

doubt, it adds an element of great uncertainty to price nego-

tiations in the purchase and sale of television stations. A

prospective purchaser can afford to pay more for an affilia-

*Aladdin Broadcasting Corporation—Tax Court (No. 86155),

Court of Claims (No. 458-60) ; Indiana Broadcasting Corp.—Tax

Court (No. 95414); Meredith Engineering Company—Court of

Claims (No. 30-59) ; Northern.Pacific Television Corp.—Tax Court

(Nos, 76838-41, 77411-2) ; Triangle Publications, Inc—Tax Court

(Nos. 80231, 81175); Wichita-Hutchinson Company—Tax Court

(No. 87228). ;

12

tion agreement if it is depreciable than if it is a non-depre-

ciable asset. Until this Court settles the question, this ele-

ment of uncertainty in price negotiations will continue.

(c) The decision below is also important because the

rule of law which it adopts is applicable to every case

involving depreciation of a contract for a term of years.

Every contract can be renewed by mutual agreement

whether or not there is a provision fer renewal in the

contract. The decision below would require every tax-

payer to show that his contract«will not be renewed, or

just how many times it wifi be renewed, before it can be

allowed depreciation. Such a showing is normally impos-

sible because future intentions of private parties ‘with

respect to business contracts are not susceptible of objec-

tive proof. Thus, the decision below may have significance

far beyondéthe field of television affiliation aes

II

The Court below has decided an important question

of Federal law in.a way that is probably in conflict with

applicable decisions of this Court (U. S. v. Dakgta-Mon-

tana Oil Co., 288 U.S. 459 (1933): Helvering v. R. J.

Reynolds Tobacco Co., 306 U. S. 110 (1939)). ’

The Dakota-Montana and Reynolds Tobacco cases held

that consistent administrative interpretation of provisions

of Revenue Acts was adopted by Congress when it reenacted

in succeeding Revenue Acts the provisions which had been

subject to such interpretation. The depreciation provisions

under which the presefit case arises (the Internal Revenue

Codes of 1939 and 1954*) are substantially the same as

*Section 23(1) of the 1939 Code and Section 167 of the 1954:

.% " .

o>

13

those appearing in the Revenue Act of 19I8* and all suc-

ceeding Revenue Acts. The regulations with respect to

the depreciation of intangibles have remained substantially

the same since regulations were adopted under the Revenue

Act of 1918.** The courts with the concurrence of the

Commissioner of Internal Revenue have uniformly held

that depreciation of business contracts over the term in

effect at the close of the taxable year was required despite

uncertainty as to renewal. Certain of those cases have

involved contracts with renewal provisions similar to that

‘involved in the present case. Flynn, Harrison & Conroy,

Inc.,21 B. T. A. 285 (1930), acg., X-1 Cum. Bull, 22 (1931) :

Automatic Heating and Cooling Company, P-H 1942 B.T.A.

Mem. Dec. para, 42,561 (1942) ; Hickok Oil Corporation

v. Commissioner, 120 F. 2d 133 (6th Cir’? 1941); Kentucky

Tobacco Products Co. v. Lucas, 5 F. 2d 723, (D. Ky. -

1925): Powell Coal Co., 12 B. T. A. 492 (1928), acq.,

VII-2 Cum. Bull. 32 (1928); Bernicedale Coal Co., 16

B. T.. A. 696 (1929), aeqg., X-1 Cum. Bull. 6 (1931):

» Syracuse Washing Machine Corp., 17 B. T. A. 4 (1929),

acg., IX-1 Cum. Bull. 53; Pennsylvania Salt Manufacturing

Co., 18 B. T. A. 1148 (1930), acg., IX-2 Cum. Bull. 47

(1930); Cleveland Railway Company, 36 B.. T. A. 208

(1937), acqg., 1937-2 Cum. Bull. 5; Pasadena City Louies,

23 T. C. 34 (1954), aeqg., 1955-1 Cum. Bull. 6. Cf. Van

Landingham Western Sales, Inc., 35 B. T. A. 130 (1936).

: As was stated in T. D. 4957, 1939-2 Cum. Bull. 87, with

respect to leases:

. As a general rule, unless the lease has been

PINE or the facts show with reasonable certainty

that the lease will be renewed, the cost or other basis

of the lease or the cost of iniprovements shall -be

spread only over the number of years the lease has

*Section 214(a)(8).

**Internal Revenue Regulations 45, Article 163.

14.

a

to run? without taking into a¢count any right of

renewal. Rs

The Court below has construed the re-enacted depreci-

ation provisions and regulations in a manner | inconsistent

with that settled judiciaf and administrative interpretation.

Conclusien

‘For che foregoing reasons, this petition for certiorari

should bg granted.

Respectfully submitted,

> ALBERT R. CONNELLY

‘ GEoRGE G. TYLER

Counsel for Petitioner,

roe 1 Chase Manhattan Plaza, —

ca New York 5, N. -Y.

LEoNnARD E. Kust

GrorGE"'S. ParLin, Jr.

ee _ Of Counsel.

January 16, 1963

1 la

APPENDIX ‘

Statutes and Régulations Involved

ternal Revenue Code of 1939, 53 Stat., Part 1, as

amended, 56 Stat. 819: |

Section 23. . Depuctions From Gross INcoME.

‘

°

“In computing net income there shall be allowed as

deductions:

“(1) Depreciation—A reasonable allowance for

the exhaustion, wear and tear (including a reasonable

allowance for obsolescence )—

~“(1) ®&f property used in the trade or busi-

AR 0 |

Internal ‘Revenue Code a 1954, 68A Stat.:

~ Section 167. Depreciation. 5

“(a) General Rule.—There shall be allowed as a

depreciation deduction a reasonable allowance for the

exhaustion, wear and tear (including a reasonable al-_

lowance for obsolescence )— ,

“(1) of property used in the trade or busi-

\ nesb...

Regulations 118: a an

§ 39.23 (a)-10. Rentals. . f .

“(b) ... In cases in which the lease contains an un-

exercised option of renewal,. the matter of spreading

such depreciation or amortiZation over the term of the

original lease, together with the renewal period or

periods, depends upon the facts in the particular case.

As a general rule, unless the lease has been renewed

or the facts show with reasonable certainty that the

lease will be renewed, the cost or other basis of the lease

Ca

, 2a nt seat

Statutes and Regulations oie

or the cost of improvements shall b¢ spread only over 3

the:number of years the lease has to run, without taking

into account any right of renewal.”

§ 39.23 (1)-3. Depreciation of intangible property.

.

“Intangibles, the use of which in the trade or busi-

ness or in the production of income is definitely limited

in duration, may be the subject of a depreciation allow-

ance. Examples are patents and copyrights, licenses,

and franchises. Intangibles, the use of which in the

business or trade or in the production of income is not

so limited, will not usually be a proper subject of such

an allowance. If. however, an intangible asset acquired

through capital ontlay is known from experience to be

of value in the business or in the production of income

for only a limited period, the length of which can be

estimated from: experience with reasonable certainty,

such intangible asset may be the subject of a deprecia-

tion allowance, provided the facts are fully shown in

the return or prior thereto to the satisfaction of the

‘Commissioner. No deduction for depreciation, includ-

ing obsolescence, is allowable in respect of good will.”

Income Tax Regulations (Internal Revenue Code of 1954) :

§ 1.162-11. Rentals.

ge Ce °

“(2) If the lessee began improvements on leased

property before July 28, 1958, or if the lessee was. on

such date and at all gimes thereafter under a binding

obligation to make such improvements, the matter

of spreading the cost of erecting buildings or making

conan improvements over the term of the original

lease, together with the renewal period or periods de-

pends upon the facts in the particular case, including the

presence or absence of an obligation of renewal and the

relationship between the parties. As a general rule,

unless the lease has been renewed or the facts show with

reasonable certainty that, the lease Will be renewed, the

wed

3a ss :

Statute$ and Regulations 1 nvolved ;

cost or other basis of the lease, or the cost of 1 improve-

ments shall be spread only over the number of yéars

the lease has to run without taking into account a

Lal

right of renewal. <

§ 1.167(a)-3. Nice ay

“Tf an intangible asset is known from experience

or other factors to be of use in the business or in the

production of income for only a limited period, the length

of which can be estimated with reasonable accuracy,

such an intangible asset may be the subject of a de-

preciation allowance. I-xamples are patents and copy-.

rights. An intangible asset, the usetul life of which is

not limited, is not subject to the allowance for depreci: i-

tion. No allowance will be permitted merely because, in

the unsupported opinion of the taxpayer, the intangible

asset has a limited usefut life. ipgonce en fy for ce aca ;

ciation is allowable with regpect to goodwill. ”

&

.! 4a°

%

_ Opinion of the Court of Appeais for the

Third Circuit

UNITED STATES COURT OF APPEALS

For THE THIRD CIRCUIT

¢

No. 13,839

WESTINGHOUSE BROADCASTING

COMPANY, INC.

Petitioner

2

COMMISSIONER’ OF INTERNAL REVENUE

On PETITION FoR REVIEW OF THE DECISION OF THE

Tax Court OF THE UNITED STATES |

Argued May t7, 1962

Before KALopner, HAsTIE and SMITH, Circuit Judges

OPINION OF THE COURT

(Filed October 19, wai

By KALODNER, Circuit Judge

Is a television network afiitiati contract for a two-

year term, automatically panorene, the absence of ter-

mination notice for successive-two- “year terms, a depreciable

asset?

That is the question presented by this petition for re-

view of the Decision of the Tax Court which answered it in

the, negative’ pyqnised on its determination that the con-—

136T.C.912 (1961). . ; ;

5a

”

j :

Rage Opinion of the Court of Appeals for the

Third Circuit

¢

tract had “an indeterminate useful lity '‘as of the close of «4

the tax years here involved. ; - 7

The facts critical to our disposition may be summarized

as follows: pier

On June 1, 1953, Westinghouse Broadcasting Company, |

* Inc.. (“taxpayer”) purchased from Philco Corporation

(“Philco”) for $8,534,000 all of ‘the assets of television

station WPTZ in Philadelphia, Pennsylvania, including its

“network affiliation contract with National Broadcasting

Company (NBC) which was to expire on January 1, 1954

The network affiliation contract was rengwable auto-

matically for successivé two-year terms unless, at least 90

days, prior to the expiration of any two-year term, either

party sent the other written notice of its intention not to

Ss . &

hynew

~ ;

*The network affiliation contract set forth the terms of WPTZ’s

affiliation with NBC. By the terms of the affiliation contract NBC

agreed to supply to WPTZ a variety of network television programs,

sponsored or unsponsored and to give WPTZ the right of first re-

fusal to broadcast such programs in the Philadelphia area. WPT Z

agreed,,with certain exceptions, to’ broadcast sponsored programs of

the NBC network during hours designated. in the contract as “net-

work option time”. The financial arrangements set forth in the

contract called for a division between WPTZ and NBC of gross

. billings to network advertisers for WPTZ’s station time, WPTZ

receiving a one-third share“’nd NBC receiving a two-thirds share,

except that for the first 24 hours of network programs broadcast by

©) WPTZ each month billings were to be paid entirely to NBC. Billing

4 rates were specified in the contract and were subject to change by

NBC under conditions therein specified. .

’The renewal proWision reads as follows:

“23. This agreement ... shall remain in effect for a period of

two years. It shall then be renewed on the same terms and con-

ditions for a further period of two years, and so on for successive

further periods of two years each unless‘and until either party

shall, at least three months prior to the expiration of the the

current term, give the other party written notice that it doe

not desire to have the contract renewed for a further period.”

‘

ey _

6a

Opinion of the Court of Appeals for the

Third Circuit ue

The agreement between Philco and taxpayer aliocated

$5,000,000 of the $8,500,000 purchase price of WPTZ to

the network affiliation contract, $1,500,000 to good will and

the balance to tangible assets and receivables.

The network affiliation contract was automatically re-

newed on January 1, 1954 for a two-year term expiring,

January 1, 1956. On September 28, 1954 NBC informed

taxpayer that it desired to acquire a television station in

Philadelphia and sometime prior t6 Nov ember 15, 1954

taxpayer was further advised by NBC that it would not re-

new the network affiliation contract beyond January 1,

1956. On October 1, 1955 pursuant to the 90-day notice

‘ provision of the affiliation contract NBC gave formal notice

to taxpayer of termination of the network affiliation con-

tréct on January 1, 1956.’

The network affiliation contract had been entered into .

between NBC and Philco Television Broadcasting Corpora-

tion on November 23, 1949 for a two-year term commiencing

January 1, 1950‘and automatically renewed on January 1,

1952 for a further two-year term expiring January 1, 1954.

It had been assigned to Philca by Philco Television Broad-

casting Corporation on My 14, 1952 during the renewed

term.

‘Federal Communications Commission (FCC) regula-

tions jn effect during 1953 and 1954 prohibited any contract

providing ad network affiliation for a term longer than

two years.”

‘On May 16, 1955 — entered into an agreement with NBC

whereby it agreed to exchange the assets of WPTZ and its Phila-

delphia radio station for the assets of NBC’s Cleveland, Ohio tele-

vision and radio station plus $3,000,000. The actual exchange of

stations took place on January 21, 1956.

“847 CFR (Revised 1953) Sec. 3.658(c).

= —

>

. > 7a

Opinion of the Court of A ppcals for the

Third Circuit

The’ average earnings before taxes of WPTZ for 1951

and 1952 were $1,704,459. The net broadcast income of

WPTZ for 1951 and 1952 exceeded the broadcast income of

_WFIL-TV, the ABC affiliate in Philade!phia, by $748,000

and $1,250,000 respectively, and such excess was attribhted

by taxpayer’s expert, Ho vard E. Stark, to WPTZ’s affilia-

tion with NBC.

Between January 1, 1953, and April 1,, 1960, a total of

87 NBC affiliation agreements expired in circumstances

other than a station going off the air or the acquisition of

the affiliate by the network.

Taxpayer, on its books, and federal income tax returns

for 1953 and 1954, depreciated its cost of the $5,000,000 net-

work affiliation contract over a 55-month period ending ,

January 1, 1958, i.e. the 7-month term in existence on June

1, 1953, plus two renewal terms of two years each (Janu-

ary 1, 1954 to January 1, 1956 and January 1, 1956 to

January-1, 1958) based on taxpayer’s assumption that net-

work affiliation contracts may normally be expected to be

renewed for.two terms. Subsequently, in the course of the

‘proceedings below, taxpayer contended that .the network

affiliation contract was depreciable over a 31-month period

—the 7-month term ending January 1, 1954 and the 24-

month period ending January 1, 1956 worn the contract

‘as actually terminated.

Taxpayer here contends that the Tax Court erred in its

finding that the network affiliation contract did not have a

“determinable useful life” as of the close of 1953 and 1954,

the tax years under review. It urges that “as a matter of

law, a business contract with 4 specific term and provision

for renewal is definitely limited in duration to that term

¢

8a

x

Opinion of the Court of Appeals for the

- Third°Circuit

and such renewal terms as are reasonably certain to occur,”

_and, that “as a matter of fact, there: was no reasonable

certainty of renewal indefinitely with respect to the affilia-

tion agreement” and that “the maximum period of renewal -

was to January 1, 1958.”

The record, taken as a whole, says taxpayer, “estab-

lishes that at the time of acquisition of the affiliztion agree-

ment on June 1, 1953, two renewals, i.e. renewals to

January 1, 1958, might be reafonably certain, but that a

renewal beyond January I, 1959, was not reasonably cer-

tain,” and that “Thus the contract, under the reasonable

certainty rule, had a maximum useful life of 55 months at

the end of 1953 and 1954. In support, taxpayer cites the

testimony of its expert, Stark: “Ifyou could not assume ,

_ two renewals, I don’t think I would advise anyone to enter

into a contract, but beyond that you can’t foresee anything

in this business.’”®

The sum of the Commissioner’s position is that Section

23(1) of the Internal Revenue Code of 1939 (applicable

here to the year 1953) and Section 167(a) of the Internal

Revenue Code of 1954 (applicable here to 1954) provide for

a depreciation deduction in circumstances where such de-

duction: represents “a reasonable allowa¥ice for the exhaus-

tion . . . of property used in the trade or business”; that

Treasury Regulations 11 939) Code, Sec. 39.23(1)-3

and Treasury Regulations 6n Income Tax (1954 Code),

Section 1.167(a)-3,, provide that if an intangible asset is

known from experience to be of use in the business or ir. the

production of income for only a limited period, the length o

Stark, a broker specializing in the purchase and sale of radio and

television stations, played no part in the transaction in which tax-

payer ieee station WPTZ from Philco.

a

9a

Opinion of the Court of Appeals for the

Third Circuit

wz. Which can be estimated with “reasonable” certainty, such

intangible asset may be the subject of a depreciation al-

lowance; that beth the 1939 and 1954 Treasury Regulations

impose upon the taxpayer the burden of establishing the

reasonableness of the deduction for depreciation allow-

ancs;’ and finally, that the record discloses that taxpayer

had failed to establish’ with “reasonable” certainty that the

maximum period of renewal of the network affiliation con-

tract was to January 1, 1958.

«The Tax Court held that “Insufficient evidence was

introduced from which could be calculated either the aver-

age useful life of network affiliation contracts or their use-

ful life span”, and further stated its conclusion “that

petitioner [taxpayer] has not only failed to persuade us

that the contract had a 55-month useful life but also that

it has failed to persuade us respondent [Commissioner ]

erred in his determination that the contract had an indeter-

minable useful life”.

On review of the record we Coree with the Tax Court’s

holding that taxpayer failed to prove that at the close of

the taxable years 1953 and 1954 it was “reasonably cer-

tain” that the network affiliation contract had a maximum

useful life but 55 months from the date of its acquisition

by taxpayer on June 1, 1953. :

The burden of proof to do so was on taxpayer not only

under the applicable revenue statutes and the Treasury

Regulations pertaining to thém, earlier cited, but by reason

of the well-settled principle that the Ggmmissioner’s deter-

mination of a deficiency in tax bears a presumption of cor-

ER

"Treas. Reg. 118, Sec. 39.23(1)-5 (1939) ; Treas. Reg. on Th-

come Tax Sec. 1. 167(b)-O (1954 am?

| 10a ) °

* Opinion of the Court of Appeals for the

Third Circuit

rectness. Hoffman v. ieee 298 F. 2d 784,°788 (3

Cir. #962).

Taxpayer did not adduce any testimony to the effect

that based on “experience” in the television industry the

number of renewals of the network affiliation contract could

be “estimated” with “reasonable certainty” or ‘reasonable

accuracy” as required by the Treasury Regulations earlier

cited.

While taxpayer’s expert, Stark, in substantiating the

$5,000,000 consideration paid for the network affiliation

contract, testified that he had assumed a useful life for the

contract which contemplated two renewals after acquisi-

tion, or 55 months in this ease,she did not say that his

assumed premise of such two renewals was based-on—“ex-

_ perience” with such contracts. All that Stark said was that

it was the “practice” of experts in evaluating network

affiliation contracts ‘‘to anticipate the likelilgood of two sep-

arate renewals . . . following the expiration of the unexpired

term of the contract,” to which he added that in his post- .

evaluation of the contract here involved he had in mind that

anticipation and “the hope that it would be continued beyond

that date [two separate renewals].” .

> It must be stressed that nowhere in his testimony did

Stark say that the “practice” of experts in anticipating two

renewals of network affiliation contracts was based on

-“experience” with respect to contract renewals.

Under the circumstances we agree with the Tax Court

that the “practice” of the experts in figuring on two renew-

als of a network affiliation contract was‘not “a sufficient

indication of that contract’s probable useful life.” |

Nor can any probative value with respect to the “prob-

able useful life” of the network affiliation contract here be \

; lla

Opinion of the Court of Appeals for the

Third Circuit

sad

attributed to the stipiilated fact that “between January 1,

1953 and April 1, 1900, a total of 87 NBC afiiliation agree-

ments expired in circumstances other than a station going

off the air or the acquisition of the affiliate by the network”

~ since there was no evidence as to the actual life span of

those agreements or as to the number of their renewals.

This too must be said. Taxpayer based its 55-month

useful life estimate of the network affiliation contract on

its premise that there was reasonable certainty of only 48

months plus the 7 months of its unexpired term. The

premise was in turn sub-based, so to say, on the theory

that network affiliation contracts have a life span of 72

months,. their original two-year term and two renewals.

Taxpayer disregards the: fact that the network affiliation

contract here had actually run for 24 months (January 1,

1950 to January 1, 1952) prior to the renewed term (Jan-

uary 1, 1952 to January 1, 1954) during which it was ac-

quired by taxpayer on June (1, 1953. ,

It would serve no useful purpose to discuss the cases

cited by taxpayer and the Commissioner since the facts in

those cases vary significantly irom. those existing here.

For the reasons stated the decision of the Tax Court

will be affirmed.

-. A True Copy:

Teste:

-

Clerk of the United States Court of Appeals

for the Third Circuit.

be