
    405 F. 2d 1214
    MEREDITH BROADCASTING COMPANY v. THE UNITED STATES
    [No. 30-59.
    Decided December 13, 1968]
    
      
      Warren O. Seieroe, attorney of record for plaintiff. James M. Boche, McDermott, Will <& Emery, of counsel.
    
      Joseph Kovner, with, whom was Assistant Attorney General Mitchell Bogovin, for defendant. Philip B. Miller and Leonard 8. Togman, of counsel.
    Before Cowen, Ohief Judge, Laramore, Dureee, Davis, ColliNS, SeeltoN and Nichols, Judges.
    
   Nichols, Judge,

delivered the opinion of the court:

This is a suit to recover federal income taxes and assessed interest paid for the fiscal year ended June 30, 1953, plus statutory interest. The suit arises primarily as a result of defendant’s disallowance of a claimed deduction for amortization of certain television network affiliation contracts that were acquired by plaintiff in 1952 when it and its wholly owned subsidiary, Meredith Syracuse Television Corporation (hereafter referred to as Meredith Television), acquired all the operating assets of radio and television stations KPHO and KPHO-TY in Phoenix, Arizona.

The parties have agreed that the aggregate federal tax basis of such assets when received by plaintiff and Meredith Television was $1,504,239, of which $489,668 was the basis of the land and buildings received by Meredith Television and $1,014,571 was the basis of all the remaining assets which were received by plaintiff. With respect to plaintiff’s $1,014,571, it has been agreed that $514,571 thereof is properly allocable to tangible assets and that $40,294 is properly allocable to a so-called tower lease.

The parties have further agreed that the remaining amount of $459,706 is plaintiff’s total cost basis for all intangible assets (other than the tower lease), and it is only this amount which is involved in the present controversy. Ordinarily plaintiff would be required to prove that it had a cost basis for such contracts and that a part of such cost basis was deductible in that year. Prior to trial, however, the parties after thorough consideration entered into an agreement, embodied in a pretrial memorandum, that the only question in controversy was plaintiff’s cost basis for the network contracts and that plaintiff will be allowed a deduction for its fiscal year ended June 30,1953, for whatever portion of such $459,706 the court determines is properly allocable as the cost basis of the television network affiliation contracts acquired by plaintiff as part of the operating assets of KPHO-TV.

The primary question is thus whether any part of the purchase price of $459,706 for the intangible assets (other than the tower lease) is properly allocable as the cost basis of the television network contracts, and, if so, specifically what portion. In addition, if any part of the $459,706 is determined to be allocable to intangible assets other than the network contracts, there are subsidiary questions of whether such amounts are amortizable.

In order to understand fully the facts and issues here involved, it is necessary to consider first by way of background the basic elements of television broadcasting.

At the outset, it is to be noted that the nature of the broadcasting spectrum requires exclusive use of a given frequency in the area in which the signal is received to prevent electrical interference between stations. For this reason, television broadcast stations operate on channels assigned by the Federal Communications Commission (FCC). There are 12 very high frequency or “VHF” channels, numbered 2 ¡to 13, and 70 ultra high frequency or “UHF” channels, numbered 14 to 83. Varying numbers of channels are allocated to particular cities by the FCC on the basis of population and other factors, and each allocated channel may be assigned to a particular applicant by the granting of a construction permit, and then a license. Until 1955, the license was generally for a one-year term though in practice it was renewed by the FCC unless it was operated contrary to the public interest. Since 1955 the usual license term has been three years.

Commercial operation of television stations was first approved in 1941 when the FCC authorized 18 YHF channels, and by 1945, six commercial stations were in operation. In late 1945, the FCC adopted a table of assignments allocating YHF television channels throughout the United States. On September 30, 1948, the FCC stopped processing applications for new television station construction permits and did not resume processing such applications until July 1, 1952, at which date there were 108 VHF television stations in operation. This period is referred to in the industry as “the freeze.”

After the freeze was ended, many applications were filed with the FCC to obtain -licenses for the available channels. If more than one applicant filed for the same television assignment, the FCC was required by law to hold a formal comparative hearing to select the applicant best qualified. Since such hearings were expensive -and time-consuming, various methods were used to avoid them and obtain a license, such as merger of competing applicants and purchase by one applicant 'of the interests of another. A license, although not saleable as such, could also be acquired by transfer upon the purchase of an operating station. While FCC approval of the license transfer was required, such approval was not subject to a comparative hearing. This meant, as a practical matter, that if the transferee were otherwise qualified, he could count on favorable agency action.

Commercial television in the United States is supported by advertisers who purchase time and other services of television stations so that commercial messages may be presented to the television audience. As an advertising medium, its value is measured, like that of other media, by the size of the audience. The television audience is attracted primarily by the programs and not by the particular broadcast station, call letters, station personnel or management. The total audience of a given station thus depends upon the quality of the programs presented, the number of sets which can receive the station’s signal, the quality of program continuity achieved by the station and its competitors, and the promotional activities in which the station and its competitors engage.

There are three broad classes of advertising, known in the industry as network, national spot and local. (The term “spot” refers to placing advertising with selected individual stations.) An advertiser may obtain nationwide advertising coverage either by purchasing station time through a national network or by dealing with selected stations individually through station representatives. National and regional advertisers may also select stations in specific areas in which coverage is desired. Local advertisers are those who do not use networks but purchase program time or adjacencies from local stations. The advertising itself has taken various forms. An advertiser may present a program, together with a commercial message, on time purchased from the station. Several advertisers may purchase “participating” announcements, which are interspersed throughout an individual program. An advertiser may purchase an adjacency or announcement (generally of 8, 20 or 60 seconds duration) for presentation in the interval between programs — with the size of the audience which can be expected to see the announcement being determined by the audience for the programs which precede and/or follow the announcement.

There are three national television networks, Columbia Broadcasting System, Inc. (CBS); National Broadcasting Company, Inc. (NBC); and American Broadcasting Company, Inc. (ABC). A fourth network, Allen B. DuMont Laboratories, Inc. (DuMont), ceased operations in September 1955.

Television programming has, from the outset, been very expensive to produce. Because of high costs, television can be an economical and effective advertising medium only if it attracts large viewing audiences so that the cost per thousand viewers (cost per thousand) is minimized. Large viewing audiences, in turn, depend upon attractive programming, and in the late 1940’s and early 1950’s, the major sources of high level competitive programming for local stations were television networks and advertisers using television networks. Other programming sources consisted of old movies, public service shows, syndicated independent films, reruns of network programs and local live originations. The reason for network pre-eminence in programming stems from the fact that a network is able to spend vastly more for programs than individual stations simply because it can spread its costs over a much wider base. Thus, a network and the advertiser can incur high costs for a single program and yet have a low cost per thousand because the program is broadcast over a network of more than 50 stations. In these circumstances, not only is it feasible for the networks to produce the expensive live shows which are beyond the reach of single stations; the networks, in addition, are able to and do purchase the most attractive and expensive syndicated film programs and feature films. For an independent station to command the same audience as a competing network station, its programs would have to be of the same quality or attractiveness to the local audience as the network program being offered by a competing station at the same time. The attractiveness of a program to a local viewing audience does not, of course, depend solely upon the cost of the program. A local football game, for example, which could be televised at low cost might be watched by more people than an expensive entertainment program.

Traditionally, network programs have been most significant during the prime evening hours from 7:30 P.M. to 10:30 P.M. when potential audiences are greatest, advertisers’ interest the keenest, and time rates the highest. The independent station, broadcasting the type of programs that are available within the limits of its budget, cannot as a rule successfully compete for the viewing audience against network programs in that time period. As a result, prime time audience and advertising have been dominated by network affiliated stations with independents being only an insubstantial factor.

The advertising revenues of a network affiliated station are divided into the primary category of network revenues and non-network -revenues with the station having a schedule of time rates for network programs and separate schedules of non-network time rates for national spot and local programs, which rates are always higher than the station’s network rates. In the case of network revenues, the network in the first instance is paid by the advertiser (invariably a national advertiser) for the exposure of the program and commercial message over a line-up of individual stations affiliated with the network. The total paid by the advertiser is based upon the aggregate of the network time rate of each individual station in the line-up, plus the cost of the program if it is furnished by the network. The network, in turn, pays to the individual station for broadcasting the program and commercial message a specified percentage — usually around 30 percent— of the station’s network time rate paid by the advertiser. Thus an advertiser purchasing time on a network in effect purchases the facilities of each individually ordered station at the network rate of the station for the time in question. A significant aspect, in addition, is that the station retains short time periods called adjacencies around network programs which it may sell to other advertisers directly. Because of the large audiences attracted by popular network programs, such adjacencies are easily sold at rates that are higher than the station’s network time rate.

A station grosses more from broadcasting its own locally produced or purchased, program than it does from broadcasting a network program. However, the station incurs various expenses of production, selling, etc. with regard to non-network programs which have no counterpart with regard to network programs. Moreover, the relative quality of the non-network program as compared to the network program affects the saleability of adjacencies which, in turn, affects the station’s gross. The result is that a station’s profit from non-network programs is generally less than that realized from network programs.

In addition to network revenue, two things distinguish the independent station from its affiliated counterpart, namely, value of product and cost of product. The product, of course, is the audience and, to a major extent, the prime evening hour audience. The value of the product (as seen before) is directly related to the attractiveness of the programs the station is able to broadcast. As described above, whereas the network affiliate during prime hours offers the most expensive live and film network programs, the independent must rely on syndicated independent films, reruns of network programs, feature films within its budget, and live programs. With such programs, the independent, as a general rule, can capture in the prime evening hours only a small share of the potential audience in the market — which means that its time during such period is not readily saleable and hence, its revenue from sale of product is low in comparison to a network affiliate in the same market. Moreover, during the important prime evening hours, the cost of product in the ease of a network affiliate is insubstantial since the network rather than the station bears the cost of purchasing or producing most prime evening-hour shows and in order to broadcast them, the station has but to “flip the switch.” In the case of an independent, on the other hand, the station itself must at its own expense purchase or produce the audience-getting program. The third distinguishing factor is, of course, the share of network revenue paid to the affiliate by the network, which payment has no counterpart in the case of an independent.

These factors in concert have resulted in higher revenues, lower costs, and higher operating profits for affiliated stations as compared to independent stations. Stations with network affiliation usually operated at substantial profits during this same period. In such circumstances, during the 1950’s, and particularly 1952 and 1953, in most markets affiliated television stations were considerably more valuable than independent (non-affiliated) stations as going businesses, and as between the respective networks, an NBC affiliation might have been slightly more valuable than a CBS affiliation, and either an NBC or a CBS affiliation was substantially more valuable than one with ABC. A DuMont affiliation was of very minor value, becoming meaningless by 1955.

Considering now in greater detail the contractual arrange-' ments between the networks and stations, in any market where the number of stations is the same as or greater than the number of networks, each of the networks enters into an exclusive affiliation contract with one station in that market, and that station, in turn, affiliates only with that network. This is the standard affiliation contract for which the stations do not have to pay the networks. During the period relevant here, the standard affiliation contract was for a two-year term because the FCC Chain Broadcasting rules prohibit a longer term, but NBC and CBS contracts were automatically renewable if not terminated by either party. The contract provided (among other things) that: (1) the network agreed, at its expense, to provide programming to the station ; (2) the network promised the station to offer it first call for all programs broadcast in that community; (3) the station agreed to a so-called option-time arrangement whereby the station promised (with certain exceptions) to broadcast during nine specified hours of the broadcast day (which included the prime evening hours from 7:30 P.M. to 10:30 P.M.) all sponsored programs offered by the network; and. (4) the network agreed to pay the station for broadcasting the network programs a specified percentage (usually about 30 percent) of the station’s network time rate paid by the advertiser. In the market situations prevailing prior to July 1,1952, where there were more networks than stations, a station and a network in some cases entered into a secondary affiliation agreement which provided that the station would broadcast the network program at a specified rate at such time as the station could arrange. A network could have secondary affiliation agreements with several or all the stations in a given market. Under this type of arrangement, the network was not given option time by the station.

The period between 1952 and 1956 was a highly dynamic one in the development of television and was marked by unusual expansion in television facilities. While there were numerous affiliation changes during this period, in a substantial majority of cases networks and stations continued their contractual arrangements from term to term. In selecting television affiliates, the networks considered a number of factors including the station’s management, personnel and reputation in the community; the existence of a satisfactory relationship between the station’s Owners and operators; 'and the broadcaster’s experience and history in the broadcasting field. The networks in making an initial affiliation decision followed the general practice of granting the television affiliation to their radio affiliate when the latter succeeded in obtaining a competitive television facility in the same market. In this connection, the networks frequently held open their permanent television affiliation in the market while their radio affiliate was seeking a television license from the FCC. As an interim measure, a network might affiliate with an existing station in the market with the specific understanding that if the network’s radio affiliate obtained a television license, the affiliation would be transferred to it.

In actual practice, network affiliations have been freely transferable in connection with sales 'or transfers of station properties, and there does not appear to have been 'any instance where a network refused to make the transfer upon the sale of a station.

We come now to the facts of the present case. Plaintiff is engaged principally in television and radio broadcasting and related activities. It is a wholly owned subsidiary of Meredith Publishing Company, a corporation principally engaged in the publishing of magazines (BETTER ROMES AND DARDENS and SUOOESSFUL FARMING) and books. In 1948, the Meredith organization made a decision to enter the television broadcasting business which it viewed as a different facet of the broad field in which it was already engaged, i.e., advertising through mass communications media. Pursuant to this decision, plaintiff in the period prior to the freeze of September 30,1948, filed applications for new construction facilities in a number of cities, but only one — its application for Syracuse, New York — was acted upon by the FCC before the freeze went into effect. A construction permit for Syracuse was granted in July 1948 and in December 1948 the Meredith station, WHEN-TV (operated by Meredith Television), commenced broadcasting as the first television station in that city, with affiliation arrangements with all four networks until 1949 when a second station went on the air and became affiliated with NBC. In 1951, plaintiff acquired radio and television stations WOW in Omaha, Nebraska, which had been operating at a loss, for $2,525,000. WOW-TV then had a primary network affiliation contract and secondary affiliation arrangements with ABC and Du-Mont, with the other station in that market having a primary affiliation arrangement with CBS. WOW-TV was consistently profitable after its acquisition. In 1953, plaintiff purchased radio and television stations KCMO in Kansas City, Missouri, which, also had been operating at a loss, for $2,450,000. All the foregoing markets were allocated three stations or less so that in each such market the Meredith station was assured of having at least one network affiliation. Indeed, in acquiring television stations, plaintiff sought and was interested only in those having network affiliations— which was attributable to its considered judgment that it was not possible for an independent station to operate on a profitable basis except in such large cities as New York, Chicago or Los Angeles. It is also worthy of note that as a result of its entrance into television and radio broadcasting, together with the fact that its parent company, Meredith Publishing, was engaged in mass media advertising through its magazine publishing business, plaintiff had reason to believe that it enjoyed good business relations with the television networks, and particularly with NBC and CBS.

After its acquisition of the WOW stations in Omaha, plaintiff, in early 1952, became interested in the possibility of acquiring television station KPHO-TV in Phoenix, Arizona. Top management of the Meredith organization was personally familiar with the Phoenix area, acquainted with the station’s ownership, and very favorably impressed by the area’s growth rate. The area’s television broadcasting situation was then as follows: on November 28, 1945, the FCC had allocated VHF channels 2, 4, 5 and 7 to Phoenix-Mesa which was changed on April 11,1952, by allocation of VHF channels 3, 5, 8 (educational), 10 and 12. KPHO-TV had commenced television broadcasting on channel 5 in December 1949 under a construction permit issued by the FCC, and was later issued a broadcasting license. Until April 20,1953, it was the only television station licensed and broadcasting in the Phoenix-Mesa area and as a consequence had affiliation contracts with all four television networks. The station was owned and operated by Phoenix Television, Inc. (Phoenix Television) whose outstanding stock was owned by the same individuals who owned the outstanding stock of Phoenix Broadcasting, Inc. (Phoenix Broadcasting) which owned and operated radio station KPHO-AM in Phoenix.

Negotiations looking to tlie acquisition by plaintiff of Phoenix Broadcasting and Phoenix Television took place in March and April 1952, and on April 29, 1952, plaintiff and its wholly owned subsidiary, Meredith Television, contracted with the stockholders of Phoenix Broadcasting and Phoenix Television to purchase all the stock of the two corporations for a total price of some $1,500,000. Following approval by the FCC, the purchase of Phoenix Broadcasting and Phoenix Television stock was consummated on July 11,1952, and after further FCC approvals, plaintiff and Meredith Television caused the assets of Phoenix Broadcasting and Phoenix Television to be distributed in liquidation in exchange for all outstanding stock. The initial liquidation distribution comprising substantially all 'assets was made on August 18, 1952, with respect to Phoenix Broadcasting and on August 19,1952, with respect to Phoenix Television. Final liquidating distributions were completed and both Phoenix Broadcasting and Phoenix Television were dissolved on December 31, 1952.

As previously indicated, the parties have agreed that plaintiff’s total cost basis for all intangible assets (other than the tower lease) was $459,706; that only this amount is involved in the present controversy; and that the primary question is what part, if any, of this sum is properly alloca-ble as the cost basis of the network affiliation contracts. The parties have further agreed that the intangible assets comprising this amount of $459,706 are as follows: television network affiliation contracts; broadcast licenses issued by the FCC for KPIiO radio and television; radio and television advertising contracts; and goodwill, if any, of Phoenix Broadcasting and Phoenix Television and/or radio and television stations KPHO, as the case may be. In light of this agreement, we next examine each of the intangible assets acquired by plaintiff, beginning with the television network affiliation contracts which Phoenix Television had previously entered into with ABC, DuMont, NBC and CBS.

On August 12, 1952, as part of the initial distribution in complete liquidation, Phoenix Television assigned to plaintiff all its rights, title and interest in the four network contracts, and by 'agreement with each, of the four networks, plaintiff acquired the rights and assumed the obligations of Phoenix Television under each. The acquisition of such network affiliation contracts was of critical importance to plaintiff in the acquisition of KPHO-TY. In fact, plaintiff’s witnesses stated that had it not been confident of its ability to retain at least one network affiliation contract over successive two-year periods for an indefinite time in the future, it would not have purchased the Station, since it was of the opinion, based upon its industry knowledge and experience, that it could not operate profitably without a network affiliation. As of August 19, 1952, the affiliation contracts had unexpired terms as follows: ABC to November 27,1958; Du-Mont to November 27, 1952; NBC to January 1, 1954; and CBS to November 27,1953. Such temporary affiliations could have been acquired from the networks if the vendor had not already liad them, however.

At the time plaintiff acquired KPHO-TY, it knew that the freeze would end shortly; that four commercial stations were allocated to the Phoenix area; that other stations would come on the air in a matter of months; and that there were several applicants for the remaining stations, one of whom had close ties with NBC while another not only had close ties with CBS, but also owned the CBS radio affiliate in Phoenix as well. Plaintiff was of the opinion that if the applicant having close ties with NBC was successful in obtaining a television license, he would probably get the NBC affiliation. It expected, however, that it would retain the CBS affiliation in Phoenix even in the event the owner of the CBS radio affiliate (or anyone else) obtained a television license — which expectation was based on the following considerations: (a) plaintiff’s television station in Syracuse was already a CBS affiliate 'and plaintiff was thus developing rather close day-to-day contacts as a broadcaster with CBS; (b) among the factors which the networks considered in selecting a television affiliate Was the broadcaster’s experience and history in the broadcasting field; and (c) CBS gave plaintiff no indication that it might transfer affiliation to the owner of its radio affiliate in Phoenix in the event he obtained a television license. On April 29,1953, CBS entered into a standard two-year affiliation agreement with KPHO-TY starting June 15, 1953. The situation in short is that plaintiff purchased KPHO-TY recognizing that it would lose some of its television network affiliation contracts as more stations entered the market, but expecting that either NBC or more likely CBS would be retained on a rather permanent basis and with confidence that, at worst, ABC would be retained. Indeed, in negotiating the $1,500,000 purchase price for the assets of KPHO-TY and KPHO-AM, plaintiff’s witnesses testified it gave primary consideration to reasonably anticipated revenues, operating expenses, and operating profits, all of which assumed the continuation of a CBS or NBC television affiliation.

The fact that KPHO-TY was the only television station in operation in the Phoenix-Mesa area at the time of the acquisition was of significance or value to plaintiff in that plaintiff as a result succeeded to valuable business relationships with each of the television networks and thereby improved its chances of retaining at least one of its network affiliations. Other than that, plaintiff placed no significance upon KPHO-TV’s monopoly position in Phoenix at the time of acquisition since it knew that the freeze would be lifted shortly and that other stations would come on the air in Phoenix in a matter of months. Actually, from its knowledge of the industry and experience elsewhere, plaintiff looked forward to and welcomed other stations in order to better develop the market which was fully capable of supporting additional stations.

Nor did plaintiff’s witnesses attach any particular value to the television broadcast license which it acquired in 1952, since in the smaller markets such as Phoenix, given the state of the industry existing and foreseeable in 1952, plaintiff thought it was not possible to conduct a profitable operation except with the additional element of network affiliation.

Badio station KPHO-AM, which plaintiff acquired at the same time it acquired KPPIO-TY, was not regarded by it as a particularly good one and plaintiff’s witnesses assigned no value to it in excess of the tangible assets. For calendar year 1950, the station had experienced a net loss of $7,266.85; for calendar year 1951, it had an operating profit of $12,877.73, together with a gain on sale of assets of $9,256.99, for a gross profit before income taxes of $22,134.72 and a net profit after taxes of $18,230.36. The station did not have a good frequency; it ranked seventh among the eight stations in the the Phoenix 'area; its past history, in plaintiff’s view, was not encouraging from an earnings standpoint; and plaintiff considered that it had no particular earning potential. In addition, the radio industry as a whole was depressed in 1952 when plaintiff bought the station. KPHO-AM was affiliated with the ABC radio network at the time of plaintiff’s acquisition and plaintiff retained that affiliation through 1958. However, the affiliation had no particular value for in contrast to television the most attractive radio programming was available from non-network sources, and there was no dependence upon a network in this respect.

As part of the initial distribution in August 1952, Phoenix Television and Phoenix Broadcasting assigned their television and radio advertising contracts to plaintiff, none of which had a remaining term in excess of 51 weeks. These contracts, aggregating some $308,000, varied as to duration, type of 'advertising material, length of announcement or program, hours of the day when material was to be broadcast, number of broadcasts per week, and rate charged.

Another intangible asset which plaintiff acquired was going concern value (which is somewhat akin to goodwill). For when' KPHO-TV was purchased by plaintiff, it was operating as a stable business with a staff of operating personnel and advertising salesmen — which factors enabled plaintiff to get started right away, rather than developing the business from the ground up: Plaintiff did not consider the calibre of the operating management and staff of KPHO-TV (or KPHO-AM) as satisfactory, nor did plaintiff believe they enjoyed any particularly advantageous reputation in the community. As a result, during the months following the acquisition, the general manager and a substantial number of employees were replaced. 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.

It has previously been recounted that when plaintiff acquired KPHO-TV in 1952, it recognized that it would lose some of its television network affiliation contracts as more stations entered the market, but expected to retain either CBS or NBC, and at the worst was confident of retaining ABC. But contrary to these expectations, in the years that followed KPHO-TV lost all of its network affiliations. Thus, the station remained affiliated with NBC until August 1,1953, when the affiliation was terminated by NBC; with ABC until March 1,1954, when the affiliation was terminated by ABC; with DuMont until it went out of existence as a network in September 1955; and with CBS until June 15,1955, when the affiliation was terminated by CBS. Since June 15, 1955, KPHO-TV has operated as an independent station not affiliated with any television network. Following termination of its affiliation with KPHO-TV, NBC affiliated with KYTL-TV, channel 12 in Phoenix, which had gone on the air in April 1953, and ABC affiliated with KOOL-TV, channel 10, the owner of which also owned KOOL-AM, the CBS radio affiliate in Phoenix. After CBS terminated its KPHO-TV affiliation, the KOOL-TV affiliation with ABC was terminated and KOOL-TV became affiliated with CBS. ABC in turn affiliated with KTVK-TV, channel 3.

As a result of the termination of the CBS affiliation on June 15, 1955, (i) KPHO-TV lost all future revenues from network programs, which revenues amounted to $223,000 in the fiscal year ended June 30,1954, and $301,000 in the fiscal year ended June 30, 1955; (ii) it was deprived of network programs and forced to purchase substitute programs — principally syndicated half-hour films and feature films — at its own expense; (iii) its program costs, particularly film rental costs, were substantially increased (its film rental costs for fiscal 1956 were $213,000 as contrasted with $96,510 for the preceding fiscal year — while its total program costs for fiscal 1956 were $898,000 as compared with $308,000 for the preceding year); (iv) a large share of its national spot announcement contracts were canceled notwithstanding rate reduction; and (v) it dropped from top to bottom in audience ranking during the prime evening hours, although it was able to compete successfully with the network affiliated stations in other than prime time. Because of these factors, the termination of the CBS affiliation adversely affected KPHO-TV’s operating results. The station’s substantial operating profits became substantial operating losses which continued until 1963 when the station, for the first time after the CBS termination, began operating profitably. Thus, for fiscal 1954 and 1955, the station had operating profits of $307,000 'arid $246,000, respectively. By contrast, for fiscal 1956 — the first year after the CBS termination — it incurred an operating loss of $189,000. The station continued in the red for each succeeding year through 1961 with operating losses ranging from $124,000 to $207,000 per year. In 1962, the operating loss was reduced to $41,000 and in 1963, the station earned its first profit after the CBS termination — amounting to $122,000. Its profit in the following two years then increased steadily, the station earning $184,000 in 1964 and $481,000 in 1965.

Against this background, we hold that the network affiliation contracts were intangible assets of significant value. The question remains, however, as to whether such contracts are susceptible of valuation separate from all of the other intangible assets. The answer is in the affirmative for it is clear that the intangible value of a business is divisible into its identifiable constituent elements. E.g., Parmelee Transportation Co. v. United States, 173 Ct. Cl. 139, 148, 351F. 2d 619, 625 (1965); Indiana Broadcasting Corp., 41 T.C. 793, 807 (1964), rev'd on other grounds, 350 F. 2d 580 (7th Cir. 1965), cert. denied, 382 U.S. 1027 (1966); Maurice A. Mittelman, 7 T.C. 1162, 1170 (1946); Strauss v. United States, 199 F. Supp. 845, 850-51 (W.D. La. 1961); Webster Investors, Inc. v. Commissioner, 291 F. 2d 192 (2d Cir. 1961).

It is to be noted that considerable confusion has arisen in •this area because of the shifting meaning of the term “goodwill.” In some instances, the term “goodwill” is nsed in a broad sense — in accordance with terminology frequently used in the accounting profession — to describe the aggregate of all the intangibles of the business, including such items as patents, trademarks, leases, contracts, franchises, etc. In other instances, the term is used in its narrow sense to refer to the traditional concept of goodwill as a matter of favorable customer relations, i.e., as a reasonable expectancy that old customers will return to the old place without contractual compulsion. Merle P. Brooks, 36 T.C. 1128, 1133 (1961) ; Commissioner v. Seaboard Finance Co., 367 F. 2d 646, 649 (9th Cir. 1966) and cases cited; In re Brown, 242 N.Y. 1, 6, 150 N.E. 581, 582 (1926). See generally, McDonald, Goodwill and the Federal Income Tax, 45 Va. L. Rev. 645 (1959); Note, An Inquiry into the Nature of Goodwill, 53 Colum. L. Rev. 660 (1953). While at first blush there might appear to be a conflict among the cases as to the concept of goodwill and its divisibility, on analysis the differences are actually no more than differences in terminology employed to say the same thing. For example, this court in Parmelee, speaking of informal contractual arrangements between a taxpayer and certain railroads, stated that it agreed that such “arrangements were apart of the general goodwill or intangible value of the transfer business. * * *” 173 Ct. Cl. at 148, 351 F. 2d at 625. On the other hand, the Tax Court in Indiana Broadcasting, speaking of network affiliation contracts, stated that “* * * an asset or service [i.e., a network affiliation contract] that will attract customers is not goodwill.” 41 T.C. at 807. However, the two decisions reach the same result and are perfectly harmonious. In Parmelee, this court makes it apparent that it is equating “goodwill” with the total intangible value of the business and goes on to say that in this sense, goodwill is unquestionably divisible. “While we agree [the court declared] that the arrangements were a part of the general goodwill or intangible value of the transfer business * * * we reject the notion that goodwill is indivisible.” Ibid. In Indiana Broadcasting, the Tax Court is saying that particular and identifiable assets are not components of “goodwill” when that term is used in the narrow sense and thus achieves divisibility by not including other intangibles in the first instance. Both cases, therefore, say that the identity of a particular business arrangement or contract (informal contracts with the railroads in Parmelee and a network affiliation contract in Indiana Broadcasting) is not lost and that the aggregate intangible value of a going business is composed of separate intangible assets which may be separately identified, valued 'and treated for federal tax purposes, regardless of what terminology may be employed. Another Tax Court case exemplifying the same principle as Indiana Broadcasting and using the term “goodwill” in the narrow sense is Maurice A. Mittelman, supra. There, in considering whether a well-known shoe brand franchise and a lease were goodwill, the Tax Court stated that “they were assets, within themselves, separable and distinguishable from all other assets, including goodwill, and susceptible to separate valuation.” 7 T.C. at 1170. See also Nice Ball Bearing Co., 5 B. T.A. 484 (1926); Commissioner v. Seaboard Finance Co., supra. Other courts using their own mid somewhat different terminology have uniformly reached the same result. Thus, in Strauss v. United States, supra, the District Court used the term “goodwill” in a hybrid sense speaking of the goodwill attached to a particular franchise but clearly specified what was meant by its terminology and reached the same result as the previous cases holding the aggregate of the intangible value of the business to be divisible. See also Webster Investors, Inc. v. Commissioner, supra; Metropolitan Laundry Co. v. United States, 100 F. Supp. 803 (N.D. Calif. 1951).

The short of the matter is that when plaintiff acquired the operating assets of KPHO and KPHO-TV it acquired, among other things, television network affiliation contracts which were separate, identifiable and distinct assets which were susceptible of separate valuation and when it lost these network contracts, it lost separate, distinct and identifiable assets. Defendant disputed this before the commissioner but does not do so here.

It is clear, of course, that no deduction is allowable for an indivisible asset until the whole asset is lost. E.g., Golden State Towel & Linen Service Ltd. v. United States, 179 Ct. Cl. 300, 373 F. 2d 938 (1967); Boe v. Commissioner, 307 F. 2d 339 (9th Cir. 1962); Dodge Brothers v. United States, 118 F. 2d 95 (4th Cir. 1941). See also Note, Tax Treatment of Losses Incurred on the Sale or Abandonment of Purchased Goodwill, 62 Yale L.J. 640 (1953). But this has nothing to do with deductibility for the loss of a separate, distinct and readily identifiable intangible asset such 'as a network contract (or a lease, franchise, option, etc.). Upon the loss of such an intangible, a deduction is properly allowable. Parmelee Transportation Co. v. United States, supra, 173 Ct. Cl. at 150, 351 F. 2d at 626, and cases cited.

Again proceeding on the premise that the asset in question is a specific item of goodwill or the expectancy of continuing network affiliation, defendant further argues that Phoenix Television did not have such an expectancy to sell but that such expectancy arose from the stature of the Meredith organization. Therefore, the argument concludes that plaintiff did not purchase this expectancy from Phoenix Television and consequently has no basis for it. But again the premise of the argument is erroneous. For (as we have seen), the asset in question is not an “expectancy” or a form of goodwill; it is rather what it purports to be — an ordinary bilateral contract under which a station is 'assured of a supply of attractive programs and concomitant advertisers and advertising revenue. See Indiana Broadcasting Corp., supra. It may well be that plaintiff had a greater expectation or prospect of obtaining network renewals than Phoenix Television; this would hardly be an unusual type of situation, however. Buyer and seller seldom have identical expectations or prospects for property being sold — but this bears no rational relationship to basis determinations. Put another way, the network contracts constituted property and not goodwill for tax purposes and, therefore, whether the buyer or seller had the greater expectation of securing renewals is immaterial.

The task remaining — starting with the agreed proposition that plaintiff’s total cost and income tax basis for 'all intangible assets (other than the tower lease) is $459,706 — is to allocate this cost among the particular intangible assets which the parties have agreed consisted of (a) television network affiliation contracts; (b) television and radio broadcast licenses; (c) goodwill of the radio and television stations; and (d) television and radio advertising contracts. Since there are several distinct assets embraced by this aggregate of $459,706, such total cost must be allocated among them in accordance with the relative value of the intangible 'assets acquired. E.g., Clifford Hemphill, 25 B.T.A. 1351 (1932); Hazeltine Corp., 32 B.T.A. 4 (1935), aff'd 89 F. 2d 513 (3d Cir. 1937); C. D. Johnson Lumber Corp., 12 T.C. 348 (1949).

Television neiworlc affiliation contracts. There is little doubt that plaintiff was looking for a profitable business, and, indeed all of the evidence presented by plaintiff was designed to show that plaintiff’s ultimate object in purchasing KPHO-TV was to earn a profit; that in 1952, in a market the size of Phoenix, though a license was a sine qua non, it alone held forth little prospect of a profitable operation; that plaintiff believed the key to profitability was network affiliation; and that for this reason it was never interested in buying non-affiliated television stations in any market. But the value of the affiliation contracts plaintiff acquired must not be overrated.

Plaintiff emphasizes that part of the value of its affiliation contracts was its expectation that it would maintain at least one major affiliation. However, maintaining at least one affiliation after the freeze was lifted was not as certain as plaintiff would like us to believe. As early as 1945, four VHF channels had been assigned to the Phoenix-Mesa area. Before the freeze, however, only one license had been issued in 'that area, but at the time of purchase plaintiff was on notice that as many as three additional stations could operate within the area as soon as the freeze was lifted. At the time of purchase plaintiff also knew the date the freeze would be lifted. Thus, there existed the chance which eventuated that plaintiff’s station might end up without any affiliation at all.

This serves to differentiate the instant litigation from Parmelee, supra. In that case the asset which was lost was an arrangement with railroads operating into Chicago, by which. Parmelee and Parmelee alone carried transcontinental passengers and their baggage between the Eastern and Western railroad stations, there being no Union station nsed in common and no through rail passenger service. There was no competition and no one else rendered similar service on any scale or, apparently, had the equipment or expertise to do so. Therefore, though the arrangements were terminable at will, it was reasonably foreseeable that they would never be terminated. Parmelee had assigned them a value on its books of $1,322,819. That they were terminated was due to unforeseen circumstances including the “indiscreet” intervention of an ICC Chairman, which when aired in Congress led to his resignation. Here the contracts to be valued had fixed terms, but the loss was not suffered as to such terms. After those terms ran, they were in effect extendable at will, and so far the case resembles Parmelee. But instead of looking forward to indefinite extensions, plaintiff here knew that upon the end of the freeze, three out of four of its affiliation contracts were sure to be terminated. The most it could expect to retain was one. There would be an entirely new ball game. What the value alleged by plaintiff inheres in is a mere possibility of extension. Where in Parmelee the asset was carried on the books, before the loss, at a value equal to that claimed in the tax litigation, here we have no documentary evidence relied on that plaintiff ever assigned to its affiliation expectations, fer se, a value for any non-tax purpose.

The hope of retaining the CBS affiliation was clouded by the fact that the CBS radio affiliate in Phoenix was known to be a potential television licensee. It was testified that an official at CBS at some time said he was pleased that Meredith owned the Phoenix station and expressed the hope that CBS and Meredith would have a continued relationship over a number of years. If this occurred before plaintiff became committed to buy the station, plaintiff could not but have recognized it as the kind of assurance some businessmen, and some Government officials, are expert in giving, which induce others to invest effort and capital, while committing themselves and their organizations to absolutely nothing. It added no real value to plaintiff’s expectation.

The most one can say is this: the possibility of continued affiliation had value is shown by the fact that plaintiff was willing to gamble $1,500,000 because of its existence. A lottery ticket has some value. Clearly this gamble was worth nothing like the value that firm assurance of affiliation with a major network would have had, or even the kind of assurance Parmelee thought it enjoyed. The inference is inescapable that a substantial part of the value of the intangible assets must have inhered in assets other than the affiliation contracts, at least in the minds of plaintiff’s management at the time it purchased the stations. This conclusion is aided by our rejection of testimony 'assigning no value to the license, as discussed infra. The stipulation, fixing a total for all intangibles, makes the value of other assets a factor in appraising the affiliation contracts. The parties have offered evidence taking extreme all-or-nothing positions, neither of which we fine reasonable or based on a factual foundation. We think the value of the intangibles, that is, their capacity to produce a profit, was created largely by plaintiff’s vendor having combined them in one ownership, and would all alike have been destroyed by being severed. Obviously, e.g., an affiliation contract would have been worthless to one who had lost his TV license. If plaintiff had purchased the station without network affiliation it could have acquired temporary affiliations at once, so far as appears, such as the vendor had. Affiliations were hard to get only when stations had to compete for them.

In the circumstances, an accurate allocation of value among the several classes of intangibles is impossible, and we must make the broadest kind of estimate.

In the recent case of United States v. Northern Paiute Nation, Et Al., 183 Ct. Cl. 321, 346, 393 F. 2d 786, 800 (1968), we had to consider the extent to which, in determining the value of property, the trier of fact, there the Indian Claims Commission, is bound by opinion testimony. We said:

The Indians’ other complaint about the findings is that the Commission rejected its expert appraisers’ views, and did not spell out why in detailed findings. In legal appraisement, however, widely divergent opinion testimony is the rule rather than the exception. The trier of fact must decide first, of course, if such testimony is competent and admissible. Before us, no party claims that this case was decided with respect to any issue on inadmissible testimony. The Indians wanted the Commission to take up the reasoning of its appraisers step by step, and either 'accept each step or show reasons for rejecting it. Having competent testimony before it, the Commission was not restricted to swallowing it whole or rejecting it utterly. It did not have to refute what it did not accept as controlling. It could, and apparently did, synthesize in its mind the immense record before it, determine to what extent opinion evidence rested on facts, consider and weigh it all, and come up with figures supported by all the evidence, perhaps, though not identified with any of it. * * *

In light of the foregoing, we conclude that the value of intangibles allocable to the network affiliation contracts was $250,000.

Our trial commissioner, accepting plaintiff’s testimony, found the affiliation contracts were worth at least $500,000. In determining the true figure to be worth half that we give weight to the following apparent errors in plaintiff’s computations: (1) they failed to adjust sufficiently for the speculative character of plaintiff’s expectation that it would retain a profitable affiliation when all the prospective channels were licensed and operational; (2) they failed to recognize that affiliation contracts in the standard terminable form were available for the asking to anyone who had, during the freeze, the sole licensed and operational TV station in the area; (3) so far as the alleged value was supported by the alleged worthlessness of the license, that prop fails when one finds, as we do, that the license was not worthless.

Goodwill — going concern value. Plaintiff’s expert witness dealt with the question of going concern value specifically. In 'ascribing a value to the fact that KPHO-TV was an organized, viable business, the factors that plaintiff’s witness took into consideration were the assembling and training of a staff and the soliciting of advertising contracts. He also included the cost of obtaining an FCC license in 'his estimate although he did not consider the inherent value the license had for plaintiff in the context of going concern value in this case. Plaintiff argues that it did not attach any value to the licenses, while defendant, on the other hand, urges that all of the price plaintiff paid for the intangibles should be -attributed to the licenses. We cannot accept either position.

Plaintiff says it did not attach any value to the FCC broadcast licenses, but without them, plaintiff could not have operated its television or radio broadcast businesses. An FCC license is the sine qua non of broadcasting. We have found that all television stations necessarily consider an FCC license their most important asset in the sense that it is essential to the legal conduct of their business and without it their business would cease. The value of a broadcast station without an FCC license would not exceed the salvage value of its physical assets. Also, an FCC license is, from a practical standpoint, a more permanent arrangement than a network affiliation contract.

Plaintiff’s witnesses repeatedly emphasized the fact that plaintiff was only interested in affiliated stations as that was the key to profitability and that plaintiff was primarily looking for a profitable business. However, two of the three network-affiliated stations plaintiff acquired were operating at losses when plaintiff acquired them. This does not mean that they had no potential for profit; it does, however, show that plaintiff’s argument that a license without an affiliation was a license to lose money and therefore valueless is somewhat unpersuasive as in these situations the network affiliations did not guarantee a profitable operation. We believe that an asset need not guarantee an immediate profitable operation to have value. It may demand years of losses or starting-up costs. None of the assets plaintiff purchased could guarantee it a profitable operation, but this does not mean they were without value.

It also appears from the record that plaintiff preferred acquisition of licensed, operational stations rather than to seek new licenses in competitive hearings, which were often expensive and time-consuming. At the time plaintiff pui’-chased KPHO-TV the freeze was in effect and procuring a license through a comparative proceeding was temporarily impossible. Thus plaintiff used the only method it could to obtain a license. Had there been no freeze plaintiff would have had a difficult time getting a license in Phoenix because the FCC tended to favor local applicants in awarding licenses. Thus, apart from the freeze, the method used by plaintiff here was the quickest, least expensive and most certain method of obtaining a broadcast license.

Plaintiff’s expert conceded a going concern value, without the licenses, in the range of $25,000 to $50,000. We think the licenses raise this figure to $175,000. Even though severed for tax purposes, the licenses and the affiliations each added value to the other, and each would have alike been worthless without the other. They were in fact united on the valuation date and must be valued in that posture. Plaintiff’s evaluation of the licenses suggests a real estate appraiser who might testify that a city lot, on which stood a valuable building, was worthless because if the building were not there the lot would return the owner no income.

The licenses include the license of the radio station which has some slight value, we think, but minimal in relation to the other value figures in the case, for the reasons indicated, infra. Such amount includes the cost reasonably associated with starting from “scratch” and obtaining a license, training a staff, and the inherent value of the licenses in the conduct of a broadcasting business by a company having network affiliations.

Radio intangibles. The record establishes that apart from the value of the radio license the radio station had no intangible value. Plaintiff was not interested in KPHO radio which it did not consider a good station.' The station had not been a profitable one prior to plaintiff’s acquisition and its potential was not encouraging. As it turned out, plaintiff was justified in its gloomy view since KPHO radio showed steady operating losses for the first five years of plaintiff’s ownership.

.There were various reasons for this adverse situation. The radio industry in general was in a phase of decline' in this period and station prices were depressed. Television was making serious inroads. In Phoenix there were eight stations on the air in 1952 and KPHO’s frequency was not a particularly good one. The station ranked seventh among the eight stations. The fact that the station had an ABC radio affiliation was of no particular value, for in contrast to television the most attractive radio programming was available from non-network sources and there was no dependence upon a network in this respect.

Advertising contracts. Among the intangibles acquired by plaintiff were contracts for the sale of radio and television time to various local, regional and national advertisers. These contracts specified the type and frequency of advertising to be performed as well as the rate charged; they had varying periods of time remaining at the acquisition date from one week to one year but none were in excess of one year. The unearned gross revenues at the date of plaintiff’s acquisition were approximately $45,000 for radio contracts and $268,000 for television contracts, for a total of $308,000. However, the contracts had additional value because of the probability that some of the advertisers would continue their patronage. On the other hand, the contracts were, in practice, freely cancellable on 28 days’ notice.

Plaintiff’s expert witness indicated that it might be proper to ascribe a separate value of $26,000 to the television advertising contracts based on the assumption that the station would earn a 10 percent profit after tax on the aggregate $263,000 remaining. This estimated value of $26,000 would appear to be understated, however, for failing to give any consideration to the probability of renewals.

Defendant’s witness, on the other hand, estimated the value of the television and radio contracts at $100,000. He proceeded on the basis that it would cost one-third of the gross amount payable, namely $300,000, to reproduce such contracts, i.e., to hire and train competent personnel, make an extensive survey and solicit prospective advertisers. The estimate of $100,000 would appear, however, to be considerably overstated. For one thing, the radio station, as we have seen, had little intangible asset value. Therefore, limiting the inquiry to the television advertising contracts, their value, on the witness’ rationale, would be about $87,000 (ys of $263,000). But this amount would appear to be overstated too for the reason that the witness’ assumption of indefinite renewal of the contracts is not altogether appropriate. It will be recalled that at the time plaintiff acquired KPHO-TV, it was the only station on the 'air. Its advertisers had no other stations to turn to and it was likely that some of them, seeking better time slots, better programs, lower rates, etc., would terminate their contracts with KPHO-TV and deal with the new stations as they came on the air. Under these circumstances, it is apparent that any buyer would discount to a not insubstantial extent the element reflecting likelihood of renewal of these contracts. However, it will be remembered that plaintiff expected to benefit from competition as tending to develop the market.

Based on the foregoing considerations, it is concluded that a reasonable estimate for the value of the television advertising contracts acquired by plaintiff is $75,000.

Plaintiff’s independent audit filed with the FCC for its fiscal year ended June 30,1953, and its tax return and claim for refund for 1953, as originally filed, showed the allocated cost at date of acquisition of “network and advertising contracts,” $400,000. It will be noted that in our figures, the combined value of network and advertising contracts total $325,000. Plaintiff never assigned any value to the licenses but we value them as part of the “going concern value” $175,000.

This means that we estimate the value of the intangibles as follows:

TV network affiliation contracts_$250, 000
Going concern value, including licenses_ 175,000
TV advertising contracts_ 75,000
Total_ 500,000

The stipulated figure to be allocated is, however, $459,706. Since we have allocated just half of the value to be allocated to the TV network affiliation contracts, it follows that, pursuant to stipulation, plaintiff is entitled to a deduction for its June 30,1953, fiscal year in the amount of $229,853.

The final questions for our determination are whether the $175,000 of cost allocated to going concern value which in-eluded the licenses is amortizable and whether the $75,000 of cost allocated to the television advertising contracts is amortizable. In the case of intangible assets, it is indisputable that a taxpayer is entitled to recover his cost basis through amortization deductions — provided it is shown that such assets have an ascertainable useful life. Reg. § 1.167 (a)-3 (1954 Code) and Reg. 118, §39.23 (1)-3 (1939 Code). The difficulty here is that neither the licenses nor -the advertising contracts have a determinable useful life. Until 1955, a license was granted for a one year term and since then it has been for a three year term, although in practice licenses have been renewed almost automatically. In the case of the television advertising contracts “[t]hese contracts were not purchased as individual contracts. * * * [Plaintiff] purchased a mass [i.e., indivisible] asset whose value will fluctuate as contracts expire and as new contracts are signed. When confronted with this issue * * * [it] had [been] consistently held [that] such a mass asset [is] not depreciable because it did not have a determinable useful life.” Westinghouse Broadcasting Co., 36 T.C. 912, 923 (1961), and cases cited, aff’d on other issues, 309 F. 2d 279 (3rd Cir. 1962), cert. denied, 372 U.S. 935 (1963). It is quite true (as discussed before) that at the time of plaintiff’s acquisition of KPITO-TV advertisers had no other stations to turn to and that with the advent of other stations, there was a likelihood that some of them would terminate their contracts with KPHO-TV and deal with the new stations as they came on the air. However, there was also the probability that other advertisers would, in the ordinary course of business, renew their contracts for an indefinite time in the future. “ [Plaintiff] must show more than uncertainty as to the length of the * * * useful life.” Westinghouse Broadcasting Co., supra, 36 T.C. at 921. It must show that the intangible assets ether than the television network contracts licenses and the advertising conracts did not possess any reasonable prospect of continuity. And this showing plaintiff has failed to make.

It is eenelnded; therefore,- that plaintiff is net entitled te anaorfizatien deductions wife referenoo te fee eesf basis ef any; ’

It is concluded, therefore, that plaintiff is entitled to a loss deduction for the television network contracts, but is not entitled to any amortization deduction with reference to the cost basis of the other intangible assets.

Judgment is entered for plaintiff in accordance with the opinion with the amount of recovery to be determined pursuant to Rule 47(c).

Collins, Judge,

concurring in part and dissenting in part:

I agree with the court that only the television network contracts have .been shown to be conceivably deductible under the applicable law. I dissent, however, on the ground that plaintiff has failed so far to prove a reasonable value to be assigned to those contracts.

The court’s opinion fully states the relevant facts. On the purported basis of those facts, the court allocates $250',000 of the stipulated value of all the intangibles to the network contracts, candidly using “the broadest kind of estimate.” In so doing, the court does not refer to any evidence which suggests in a positive manner the precise value attributable to the contracts. This, in my opinion, is improper. The fault, admittedly, lies largely with the record. Nothing in the evidence authorizes a more precise statement than that the value of the contracts was an amount between zero and something less than $459,706.

It is well established that plaintiff has the burden of proving its right to a deduction. Implicit in this statement is the recognition of plaintiff’s obligation to prove each ’and every point necessary to qualify for the deduction it claims. Alt-hough I am aware of so ease te tías effee% it seems te me ebvieus that preef ef the basis ei a® asset is as seeessary an element as the asset's useful life in determining the amount - •» •V' ri Yl TT TTAYN TTA f> 1-» 3 TyV /". rtfl -Wt-/-!. . Ill tXXI V fil V vll V Clll T JLXX bllv ulliilv ■Ha /"v n ‘-•o 1~t 4-rv mí 1T Ullu ttSCxttt IIxU VY XXX X vwljtXO is regard, fe the to fee «flowed as < way tisafe imoortamty fea ameerta-laty (aad amount allowable as a depreeiatioa deduction feu a ecrta-i-B year,- an arbitrary selection oí tfee assefls basis fes? dcprooi-ation purposes w4fl result in similar unecrtainty and feaae-euraeyr It seems to me obvious that, in the same way that proof of an asset’s useful life is necessary before a depreciation deduction will be allowed, an asset’s cost basis is an essential element of proof before a loss deduction is permissible., As recognized in Westinghouse Broadcasting Co. v. Commissioner, 309 F. 2d 219, 282 (3d Cir. 1962), cert. denied, 372 U.S. 935 (1963), taxpayer’s failure to prove the useful life of a network affiliation contract with “reasonable certainty” — the test in the regulation — resulted in a denial of the claimed deduction. Certainly the similar importance of the asset’s basis to the determination of the deductible amount warrants our requiring a reasonable basis in fact for the value we attribute to the affiliated network contracts here. At least, something more than “the broadest kind of estimate” is required.

Since, however, the parties’ chief concern in previous litigation has been whether the television license had any value, plaintiff may not have presented all the available evidence concerning the value of the network contracts. For that reason, in light of the complexity of this case, I would not dismiss the petition, but would remand the case to a commissioner for trial on the sole and precise issue of the value of the network contracts.

Findings oe Fact

1. Plaintiff, Meredith Broadcasting Company (formerly Meredith Engineering Company), is an Iowa corporation which at all relevant times engaged principally in television and radio 'broadcasting and related activities. At all relevant times, plaintiff was a wholly-owned subsidiary of Meredith Publishing Company (hereafter “Meredith Publishing”), a corporation principally engaged in magazine (Better Homes and Gardens, and Successful Farming) and book publishing and related activities. Plaintiff, in turn, owned all of the stock of Meredith Syracuse Television Corporation (sometimes hereafter referred to as “Meredith Television”) through which it conducted certain broadcasting and related activities:

2. At all times material, plaintiff kept its books and records and filed its federal income tax returns on the accrual basis of accounting and on the basis of fiscal years ending June 30. Keferences herein to particular years refer to such fiscal years, i.e., reference to fiscal 1953 refers to the fiscal year ending June 30,1953.

3. Plaintiff duly filed its income and excess profits tax returns for fiscal 1953 on or about September 14, 1953, disclosing an income tax liability of $298,327.01, which amount was duly paid.

4. An income tax deficiency for fiscal 1953 of $42,450.66 and interest thereon of $6,308.86 were thereafter assessed against plaintiff and were paid by it on or about March 13, 1956. Subsequently, overassessments of income tax for fiscal 1953 of $3,020.16 and of related interest of $448.84 were determined and duly refunded or credited to plaintiff. Aecord-ingly, plaintiff has paid net amounts of $337,757.51 income tax, $5,860.02 interest, and no excess profits tax for fiscal 1953.

5. Plaintiff on its federal income tax return for fiscal 1953 claimed a deduction of $83,333.30 for amortization, exhaustion, depreciation or expiration of certain network affiliation contracts acquired by it in the acquisition of radio station KPHO and television station KPHO-TV. The amount of tbe claimed deduction was computed upon a cost basis of $400,000 and a useful life of four years. Tbe income tax deficiency assessed and paid for fiscal 1953, as described above, was based in part on the total disallowance of this deduction.

6. Ob September 14, 1956, plaintiff duly filed a timely refund claim for fiscal 1953 on tbe ground that it was entitled to a deduction for amortization or exhaustion with respect to tbe network and advertising contracts acquired in the acquisition of radio station KPHO and television station KPHO-TV, and further, that tbe allowable deduction for amortization or exhaustion properly should be computed on the basis of such contracts having a useful life no longer than two years, and a cost basis of $400,000.

7. On February 1, 1957, plaintiff was notified of the dis-allowance in full of its refund claim. On January 26, 1959, plaintiff timely filed the instant suit.

8. Except for the claimed deductions involved in this proceeding and not heretofore allowed, plaintiff’s correct taxable income and correct tax liability for fiscal 1953 are properly reflected by its return and adjustments thereto previously made.

9. In late 1947, Meredith Publishing became interested in the possibility of entering the television broadcasting business which it viewed as a different facet of the broad field in which it was already engaged, i.e., advertising through mass communications media. During late 1947 and 1948, an extensive investigation was made by Meredith Publishing of the television industry for the purpose of determining whether or not it or one of its affiliates should seek entry into the business and, if so, how. As a result of this investigation, the decision was reached and subsequently implemented to proceed with the acquisition of suitable television broadcasting stations. At this time the Meredith organization had no particular interest in radio stations. Subsequently, plaintiff also became interested in radio broadcasting, and by 1953, it had purchased at least three radio stations.

10. The nature of the broadcast spectrum requires exclusive use of a given frequency in the area in which the signal is received to prevent electrical interference between stations. For this reason television broadcasting stations operate on channels assigned by the Federal Communications Commission (FCC). There are 12 very high frequency or “VHF” channels, numbered 2 to 13, and 70 ultra high frequency or “UHF” channels, numbered 14 to 83. (During all times material to the case, the perfection and utilization of UHF had not taken place except in markets where only UHF stations were in operation without competition from VHF signals.) Varying numbers of channels are allocated to particular cities by the FCC on the basis of population, distance from other cities and other aspects of potential need for stations, engineering considerations and other factors. Each allocated channel for commercial broadcasting may be assigned by the FCC to a particular applicant by the granting of a construction permit and, upon completion of construction and demonstration of compliance with FCC technical requirements, by the granting of a license to the holder of the construction permit. The usual term of television broadcasting licenses granted by the FCC was one year until 1955, and since then the usual term of new and renewal licenses has been three years. As a practical matter, the license will be renewed unless the licensee conducts his facility in such manner as to be clearly contrary to the public interest.

11. Commercial operation of television stations was first approved in 1941 when the FCC authorized 18 VHF channels. By 1945, six commercial stations were in operation. In late 1945, the FCC adopted a table of assignments allocating VHF television channels throughout the United States. On September 30,1948, the FCC stopped processing applications for new television station construction permits and did not resume processing such applications until July 1, 1952, at which date there were 108 VHF television stations in operation. This period during which applications were not processed is referred to in the industry as “the freeze.” In April 1952, the FCC published a new proposed allocation of VHF channels and its first allocation of UHF channels to cities throughout the country. The number of VHF and UHF commercial television stations in operation on January 1 of years succeeding the period of the freeze is as follows:

Year VHE UHF
1953_ 119 6
1954.-____ 228 121
1965_____ — - 294 117
1966_ 313 99
1957_ 380 91
1968.-______ 408 84
1959...-.....-. 432 77
1960_ 441 76
1961_ 455 76
1962_ 461 84
1963_ 474 90

12. After the freeze was lifted, many applications were filed for the available channels. If more than one applicant filed for the same television assignment, the FCC was required by law to hold a formal proceeding to select the applicant best qualified. Comparative hearings are expensive and time-consuming, and some have extended over a period of several years, including final court review. Furthermore, it was most difficult to predict in advance the balancing factors that would ultimately weigh in favor of one applicant over another applicant, or group of applicants. However, there were various practical methods to avoid comparative hearings where competing applicants were filing for the same channel. One such method was the so-called “payoff hearing” whereby one applicant paid the out-of-pocket expenses of the other applicant. In such cases, the FCC would grant the latter applicant’s petition to dismiss its application and close the record, whereupon the hearing officer would issue a pro forma initial decision that became final in 30 days in the absence of exception. Another method for avoiding comparative hearings was through merger or combination of the competing applicants. A further method was the so-called Tuesday night procedure which was adopted by the FCC to bring television as fast as possible to small communities. Under this procedure (i) two applicants would merge or one was bought out by the other; (ii) a resulting amendment to or dismissal of an application was filed on Tuesday evening with the FCC; (iii) the FCC staff would immediately process it that evening; and (iv) the FCC would make the grant on the following morning.

13. In a comparative hearing for a TV license, the FCC considered a number of criteria and gave strong weight to the factor of local ownership; it also gave weight to its policy favoring diversification of ownership and control of broadcasting facilities.

14. Under the FCC procedures required by statute, licensing of transferred stations is not subject to a comparative hearing, and thus a transferee of a license may, from a practical standpoint, count on obtaining FCC approval of the transfer if it demonstrates that it is otherwise qualified. To date, all requests to transfer television licenses have been approved by the FCC.

15. In 1952, a VHF broadcast license had substantial commercial value in large markets such as New York, Chicago and Los Angeles. All television stations necessarily consider an FCC license their most important asset in the sense that it is essential to the legal conduct of their business, and that without it, their business would cease. The value of a television station without an FCC license would not exceed the salvage value of its physical assets. An FCC license is, from a practical standpoint, a more permanent arrangement than a network affiliation contract.

16. After lifting of the freeze, the FCC processed applications under a priority system set forth in its April 1952 report. Phoenix was allocated four VHF commercial channels, but had a very low priority because it was the smallest market in the country to which four such channels had been allocated. Due to Phoenix’s low priority, the FCC did not consider any of the Phoenix applications until 1958.

17. Commercial television broadcasting in the United States is supported by advertisers who purchase time and other services of television stations so that commercial messages may be presented to the television audience. The audience is attracted by the programs. The audience of a given station depends upon the quality of the programs presented, the number of sets which can receive the station’s signal, the quality of program continuity achieved by the station and its competitors, and the promotional activities in which the station and its competitors engage.

18. There are three broad classes of advertising, known in the industry as network, national spot and local. (The term “spot” refers to placing advertising with selected individual stations.) Thus, an advertiser may obtain nationwide advertising coverage either by purchasing station time through a network or by dealing with selected stations individually through station representatives. National and regional advertisers may also select stations in specific areas in which coverage is desired. Local advertisers are those who do not use networks but purchase program time or adjacencies from local stations.

19. Television advertising has taken various forms. An advertiser may present a program together with a commercial message on time purchased from the station. Several advertisers may purchase “participating” announcements, which are interspersed throughout an individual program. An advertiser may purchase an “adjacency” or announcement (generally of 8, 20 or 60 seconds duration) for presentation in the interval between programs. The size of the audience which can be expected to see the announcement is determined by the audience for the programs which precede and/or follow the announcement.

20. Television programming has, from the outset, been very expensive to produce. Because of high costs, television can only be an economical and effective advertising medium if it attracts large viewing audiences so that cost per thousand viewers (cost per thousand) is minimized. Large viewing audiences in turn depend upon attractive programming. The major sources of high level competitive programming for local stations in the late 1940’s and early 1950’s were television networks and advertisers using television networks. Other sources of programming for local stations were old movies, public service shows, syndicated independent films, reruns of network programs and local live originations, such as sporting events, women’s shows, news and children’s shows. Only certain types of network programs have been made available as reruns, while others, such as musical shows and variety shows featuring prominent entertainers, have never been sold for reruns. Such network shows as have been sold for reruns were sold at reduced prices.

21. (a) A network advertiser is able to incur high costs for a single program and yet have a low cost per thousand because the program is broadcast over a network of more than 50 stations simultaneously. In these circumstances, not only is it feasible for the networks to produce the expensive live shows which are simply beyond the reach of single stations, the networks are able to and do purchase the most attractive and expensive syndicated film programs and feature films. For an independent station to command the same audience as a competing network station, its programs have to be of the same quality or attractiveness to the local viewing audience as the network program being offered by a competing station at the same time. The attractiveness of a program to a local viewing audience, of course, does not depend solely upon the cost of the program. For example, a local football game which would be televised at a low cost might be watched by more people than an expensive entertainment program.

(b) Traditionally, network programs have been most significant during the prime evening hours from 7:30 P.M. to 10:30 P.M. when potential audiences are greatest, advertisers’ interest the keenest, and time rates the highest. The independent stations, broadcasting the type of programs that are available within the limits of its budget, cannot as a general rule successfully compete for the viewing audience against network programs during such period. This means that prime-time audience and advertising have been dominated by network affiliated stations with independents being only an insubstantial factor.

22. (a) An advertiser purchasing time on a network in effect purchases the facilities of each individual ordered station at the network rate of the station for the time in question. The total time charge paid by the advertiser to the network is thus based upon the aggregate of the charges for each individual station in the line-up. The network, in turn, pays to the station for broadcasting the program and message a specified percentage — usually around 30 per cent — of the station’s network time rate. Affiliated stations, in addition to tbeir network time rate, generally have two other time rates: a national spot rate and a local rate, which rates are always higher than the station’s network rate. The rate a station charges relates to the cost per thousand and, therefore, the larger the audience, the larger the station’s rate.

(b) Stations retain short time segments or “adjacencies” around the network program which they are able to sell to other advertisers directly. Because of the large audiences attracted by popular network programs, the adjacencies around such programs are easily sold and at rates higher than the stations’ network time rates. In the early 1950’s a television station affiliated with a network would derive a major portion of its revenue from the sale of network time and the sale of adjacencies around network programs.

23. A station grosses more from broadcasting its own locally produced or purchased program than it does from broadcasting a network program. However, the station incurs various expenses of production, selling, etc. with regard to non-network programs which have no counterpart with regard to network programs. This is to say that station expenses required in the non-network program portion of a station’s operations are typically much greater than its expenses associated with network business. Moreover, the relative quality of the non-network program as opposed to the network program affects the saleability of adjacencies which in turn affects the station’s gross. The result is that a station’s profit from non-network programs is generally less than that realized from network programs.

24. Apart from network revenue, two things distinguish the independent station from its affiliated counterpart, namely, value of product and cost of product. The product, of course, is the audience and to a major extent, the prime evening hour audience. The value of the product is directly related to size of the audience which, in turn, is directly related to the attractiveness of the programs the station is able to broadcast. As described, whereas the network affiliate during prime hours offers the most expensive live and film network programs, the independent must rely on syndicated independent films, reruns of network programs, feature films within its budget and live programs. With such programs the independent as a general rule can capture in prime evening hours only a small share of the potential audience in the market — which means, for one thing, that its time during such period is not readily saleable. Hence, revenue from sale of product is low in comparison to a network affiliate in the same market.

During the important prime evening hours, the cost of the product in the case of a network affiliate, for practical purposes, is insubstantial since the network rather than the station bears the cost of purchasing or producing most prime hour shows and in order to broadcast them, the station has but to “flip the switch.” In the case of an independent, on the other hand, the station itself must, at its own expense, purchase or produce the audience-getting program. The third distinguishing factor is, of course, the share of network revenue paid to the affiliate by the network, which payment has no counterpart in the case of an independent. These factors in concert inevitably result in higher revenues, lower costs and higher operating profits for affiliated stations as compared to independent stations. See finding 69.

25. There have been four national television networks, Columbia Broadcasting System, Inc. (CBS); American Broadcasting Company, Inc. (ABC); National Broadcasting Company, Inc. (NBC); and Allen B. DuMont Laboratories, Inc. (DuMont). DuMont ceased its network operations in September 1955.

26. (a) In any mai’ket where the number of stations is the same as, or greater than, the number of networks, the networks enter into exclusive contracts with stations, whereby each network has an affiliation relationship with only one station and that station in turn is affiliated with only that network. This is the “standard” relationship and the most desirable one for a station since it is difficult for a station to serve more than one network. Stations do not pay the networks for these affiliation contracts.

(b) Tlie standard contractual relationship between a network and a station is a two-year agreement under which (among other things) : (1) the network agrees, at its expense, to provide programming to the station; (2) the network promises the station to offer it first call for all programs broadcast in that community; (3) the station agrees to an option-time arrangement whereby it promises to broadcast during nine specified hours of the broadcast day (which include the prime evening hours from 7:30 P.M. to 10:30 P.M.) all sponsored programs offered by the network, unless the station considers a network program unsatisfactory, unsuitable or contrary to the public interest, or unless the station desires to substitute for the network program a program of outstanding local or national importance; and (4) the network agrees to pay the station for broadcasting the network programs a specified percentage (usually around 30 per cent) of the station’s network time rate paid by the advertiser.

27. In markets prevailing prior to July 1,1952, where there were more networks than stations, a station and a network, in some cases, entered into a secondary affiliation agreement which provided that the station would carry the network program at a specified rate at such time as the station could arrange. A network could have secondary affiliation agreements with several or all the stations in a given market rather than being restricted to any one station in that market. Under the secondary affiliation arrangement, the network was not given option time by the station.

28. The Chain Broadcasting Buies of the FCC specify that a network affiliation contract may not have a term of more than two years, but such two-year term may be entered into or renewed not more than six months in advance of commencement of any two-year term. The two-year limitation has been in effect in radio broadcasting since 1941 and was made applicable to television in 1945.

29. During relevant periods, the NBC and CBS standard affiliation contract was for a period of two years and was automatically renewed for succeeding two-year periods unless either party gave notice at least six months before the expiration of the then current term that it did not wish to have the contract renewed. The ABC standard affiliation contract specified a two-year period with no provision as to renewal of the contract.

30. The period between 1952 and 1956 was a highly dynamic one in the development of television and was marked by unusual expansion in television facilities. In a substantial majority of cases in this period, a network and a station continued their contractual arrangement from term to term. However, there were numerous affiliation changes during this period. Thus, NBC had 56 affiliate changes, of which 34 related to situations where the affiliation was with a station in a market which was not yet fully developed, and 12 of the 56 affiliation changes were initiated by the station. During this same period, CBS had 68 disaffiliations, most of which involved licensees with whom CBS was not affiliated in radio, and all but one of the disaffiliations were initiated by the network. ABC during this period had 64 affiliation changes, approximately half of which occurred at the stations’ request or because the stations ceased operating. Most of the other's occurred because the stations had acquired primary affiliations with NBC or CBS.

31. After the freeze period ended, a factor considered by a network in selecting a television affiliate was the existence of a satisfactory relationship between the network and the stations’ owners and operators.

32. (a) Since the freeze period ended, the networks have followed the general practice of granting the television affiliation to their radio affiliate when it succeeded in obtaining a competitive television facility in the same market. Towards this end, networks have made commitments to AM affiliates which in effect amounted to a first call on a television affiliation contract. The networks deemed these commitments to have a strong moral, if not legal, force. In the case of CBS, this factor of existing relationships between CBS and the owners of a television station in the radio broadcasting field has from time to time, but not invariably, played an important part in the affiliation decision of CBS. Thus, all other things being reasonably equal, CBS Television has affiliated with a television station with whose owners CBS Radio has had an historical and pleasant relationship. The policy of the networks, as described above, had reference to the initial affiliation decision by a network and was not applicable to the question of transferring an affiliation from one station to another. However, the networks frequently held open their permanent affiliation in the market while the radio affiliate was seeking a television license from the FCC. As an interim measure, a network might affiliate with an existing station in the market with a specific understanding that if the network’s radio affiliate obtained a television license, the affiliation would be transferred.

(b) The networks’ practice of favoring established radio affiliates does not cover a situation where there has been a complete change in the radio station’s ownership.

33. In actual practice, network affiliation contracts have been freely transferable in connection with sales or transfers of station properties, and there does not appear to have been any instance of objection or refusal by a network to a transfer in connection with a sale of a station. Most purchasers of network affiliated stations have already been in the television industry and know the network; however, if such purchasers are new to the business, one of the first things they will do is contact the network and establish a relationship in order to maintain continued affiliation.

34. In 1947, Payson Hall, who subsequently became the plaintiff’s president, was charged with the duty of investigating the television industry for Meredith Publishing, plaintiff’s parent company. Hall reported that television had an excellent future, and Meredith Publishing decided to enter the television industry. Meredith Publishing’s expectations, which were shared by others in the industry, have been realized as the industry has been financially rewarding. Hall, who became the head of the Meredith Publishing’s broadcasting operations, was responsible for deciding where applications would be made for construction permits and which stations should be purchased; he also conducted all the negotiations for the purchases. Hall presently owns 4,200 shares of stock in Meredith Publishing.

35. Prior to the freeze, plaintiff filed applications for construction permits with the FOC for television stations in Kochester, Syracuse, Albany, Schenectady, Troy (New York), and Waltham (Massachusetts), and also prepared an application for Buffalo. But only the application for Syracuse was acted upon prior to the freeze. In July of 1948, a construction permit was granted and Meredith Syracuse Television Corporation was established to operate the Syracuse facility — WHEN-TV—because it was desirable to have a unit which could be identified locally. The Syracuse application was the only one of the foregoing which was successfully completed. Plaintiff did not file the application for Buffalo for the reason, among others, that it felt the particular local applicant would probably prevail. Subsequently, during the freeze period, plaintiff filed applications for construction permits in St. Louis and Minneapolis, - but later withdrew these applications because it did not wish to merge with other applicants and did not wish to delay the granting of a license to those applicants who had merged.

36. On December 1, 1948, the Meredith station, WHEN-TV, commenced broadcasting as the first television station in Syracuse. It had affiliation arrangements with all four networks until sometime in 1949 when a second television station went on the air and became affiliated with NBC. The entry of the second station into the Syracuse market had no adverse effect on plaintiff’s station except a very temporary dip in revenue and, on balance, was a positive factor stimulating the growth of the Syracuse market which was welcomed by plaintiff.

37. In 1951 and 1952, when new licenses were unavailable due to the freeze, plaintiff was receptive to opportunities to acquire existing television stations.

38. In 1951, plaintiff acquired radio station WOW and television station WOW-TV in Omaha, Nebraska, which had been operating at a loss, for $2,525,000. WOW-TV then had a primary network affiliation contract with NBC and secondary affiliation arrangements with ABC and DuMont. The other television station then.broadcasting in Omaha had a primary affiliation agreement with CBS. WOW-TV was consistently profitable after its acquisition.

39. In 1953, plaintiff purchased KCMO radio and television in Kansas City, which had been operating at a loss, for $2,450,000.

40. As a result of its entrance into television and radio broadcasting, together with the fact that its parent company was engaged in mass-media advertising through its magazine publishing business, plaintiff had reason to believe that it enjoyed good business relations with the television networks, and particularly with NBC and CBS.

41. In acquiring television stations, plaintiff sought and was interested only in those having network affiliations. This was in accord with plaintiff’s considered judgment that it was not possible for an independent television station non-affiliated) to operate on a profitable basis (except, possibly, in, such large cities as New York, Chicago or Los Angeles).

42. In 1952, Hall would have recommended the purchase of KPHO-TV at $1,500,000 without its having any network affiliation if,' as was the case, such affiliation could have been obtained immediately after purchase.

43. All the markets in which the plaintiff prepared applications, and all the markets in which it purchased stations, with the exception of Phoenix, had three stations or less, thereby insuring a network affiliation. St. Louis eventually became a four-station market sometime after the plaintiff expressed an interest in it.

44. The television broadcasting stations and allocations in Phoenix, Arizona, were as follows: On November 28, 1945, the FCC allocated VHF Channels 2, 4, 5 and 7 to the Phoenix-Mesa market area. On April 11, 1952, this allocation was changed and VHF Channels 3, 5, 8 (educational), 10 and 12 were allocated to the Phoenix-Mesa market area. See finding 16. During December 1949, under a construction permit issued by the FCC, station KPHO-TV commenced television broadcasting on 'Channel 5 in Phoenix. An application for license was filed November 17, 1951, and the license was thereafter issued by the FCC. Until approximately April 20, 1953, KPHO-TV on Channel 5 was the only television station licensed and broadcasting in the Phoenix-Mesa area.

45. In early 1952, plaintiff became interested in the possibility of acquiring a television station in Phoenix, Arizona. Top management of the Meredith organization was personally familiar with the Phoenix area, acquainted with the broadcaster ownership there and were favorably impressed by the area’s rapid growth rate. By March or April of 1952, discussions and then negotiations had begun concerning the possible acquisition by plaintiff of Phoenix Broadcasting, Inc. (hereafter “Phoenix Broadcasting”), an Arizona corporation which owned and operated radio station KPHO-AM in Phoenix, Arizona, and Phoenix Television, Inc. (hereafter “Phoenix Television”), an Arizona corporation which owned and operated television station KPHO-TV in Phoenix, Arizona. The outstanding stock of both of these corporations was owned by the same individuals, none of whom was related in any manner to plaintiff or any affiliated company.

46. Plaintiff and its wholly-owned subsidiary, Meredith Television, eventually purchased and acquired all of the assets of Phoenix Broadcasting and Phoenix Television through acquisitions of stock and subsequent liquidation as follows: On April 29,1952, plaintiff and Meredith Television contracted with the individual stockholders of Phoenix Broadcasting and Phoenix Television to purchase all of the stock of both Phoenix Broadcasting and Phoenix Television for a total price of approximately $1,500,000.

Following approval by the FCC, the purchase of Phoenix Broadcasting and Phoenix Television stock was consummated on July 11, 1952, and after further FCC approvals, plaintiff and Meredith Television caused the assets of Phoenix Broadcasting and Phoenix Television to be distributed in liquidation in exchange for all outstanding stock. The initial liquidating distribution comprising substantially all assets was made on August 18,1952, with respect to Phoenix Broadcasting, and on August 19, 1952, with respect to Phoenix Television. Final liquidating distributions were completed and both Phoenix Broadcasting and Phoenix Television were dissolved on December 31,1952.

Through the foregoing transactions, Meredith Television and plaintiff each received certain cash and assumed certain liabilities and, in addition, Meredith Television received all of the land and buildings of Phoenix Broadcasting and Phoenix Television, and plaintiff received all other assets of Phoenix Broadcasting and Phoenix Television. For income tax purposes the land and buildings so received' by Meredith Television had an aggregate cost and tax basis of $489,668 and the assets received by plaintiff had an aggregate cost and tax basis of $1,014,571 as shown below:

Plaintiff Meredith Television
Cost of stocks of liquidated operating companies_ $966,865 $502,501
Plus liabilities assumed upon liquidation_ 213,115 53,855
Less cash and collections from receivables_ (165,409) (66,688)
Cost and tax basis of assets acquired.... $1,014,571 $489,668

47. The cost and federal income tax basis of the assets received by plaintiff were as follows:

Tangible assets (including television, radio and general equipment)- $614,571
Intangible assets: Nwer site lease- 40,294
All other intangible assets- 459, 706
Total_$1, 014, 571

48. With no inference as to whether such cost is or is not divisible and no inference that cost is allocable to each category, and no inference that any item has any value whatever, the parties agree that the intangible assets comprising “all other intangible assets” of $459,706 are, as follows:

(a) Affiliation contracts with each of the four then existing television networks, i.e., CBS, NBC, ABC and DuMont, and an affiliation contract with the ABC radio network;
(b) Broadcast licenses issued by the FCC to Phoenix Broadcasting with respect to radio station KPHO and to Phoenix Television with respect to television station KPHO-TV:
(c) Goodwill, if any, of Phoenix Broadcasting and Phoenix Television and/or radio station KPHO and television station KPHO-TV, as the case may be; and
(d) Contracts between Phoenix Broadcasting and Phoenix Television and various radio and television advertisers.

49. Subsequent to the acquisition of the assets of Phoenix Broadcasting and Phoenix Television, plaintiff has operated AM radio station KPHO and television station KPHO-TV as a division of that company.

50. On August 19,1952, as part of the initial distribution in complete liquidation, Phoenix Television assigned to plaintiff all of its right, title and interest in the television network affiliation contracts which had been entered into previously with ABC, DuMont, NBC and CBS. On that date such contracts had unexpired remaining terms as follows:

ABC to 11/27/53
DuMont to 11/27/52
NBC to 1/1/54
CBS to 11/27/53

By agreement with each of’the four networks, plaintiff acquired the rights and assumed the obligations of Phoenix Television under each of the above affiliation contracts.

51. (a) The acquisition of the network affiliation contracts was of critical importance to plaintiff in the acquisition of KPHO-TV. Had plaintiff not been confident of its ability to retain at least one network affiliation contract over successive two-year periods for an indefinite time in the future, plaintiff would not have purchased KPHO-TV, since it was plaintiff’s opinion, based upon its industry knowledge and experience, that it could not operate profitably without a network affiliation. More particularly, plaintiff purchased KPHO-TV (i) with the expectation and probability that either NBC or more likely CBS would be retained on a rather permanent basis; and (ii) with confidence that, at worst, ABC would be retained.

(b) No representations were made to plaintiff by any of the networks to the effect that if their radio affiliates in the Phoenix market obtained a television license, they would in all likelihood transfer their television affiliation to them. See finding 32(a).

52. Plaintiff’s expectation that it would retain the CBS affiliation in Phoenix irrespective of who obtained the other television licenses was based on the considerations (i) that its television station in Syracuse was already a CBS affiliate and it was thus developing rather close day-to-day contacts as a broadcaster with CBS; (ii) among the factors which the networks considered in selecting a television affiliate was the broadcaster’s experience and history in the broadcasting field; and (iii) CBS gave plaintiff no indication that it might transfer the television affiliation in the event station KOOL, its radio affiliate in Phoenix, obtained a television license. See finding 32(a). The vice president of CBS in charge of station relations advised plaintiff that he was pleased that plaintiff had the station in Phoenix and that while he could not make a legal commitment (which is not permitted under the FCC rules), he expected and hoped that CBS and KPHO-TV would have a satisfactory relationship over a continued number of years. However, it is uncertain whether this conversation occurred before or after the purchase. On April 29, 1953, CBS entered into a standard two-year primary affiliation agreement with KPHO-TV starting June 15,1953.

53. Although KPHO-TV, Channel 5, was the only station broadcasting in Phoenix until April 1953, plaintiff at the time of acquisition knew that the freeze was to end shortly; that four commercial stations were allocated to the Phoenix area; that there were several applications for the remaining licenses; and that other stations would come on the air in a matter of months. From its knowledge of the industry and experience elsewhere, plaintiff looked forward to and welcomed other stations in order to better develop the market which was fully capable of supporting additional stations.

54. The only significance or value to plaintiff of KPHÓ-TV being the only television station in operation in the Phoenix-Mesa market area at the date of acquisition lay in the fact that as a result plaintiff succeeded to valuable business relationships with each of the television networks and thereby improved its chances of retaining at least one of its network affiliations.

55. (a) At the time it purchased KPHO-TV, plaintiff knew that some of the applicants for the remaining licenses had close ties with the networks.

(b) Among such applicants were station KOY, a locally-owned and operated radio station; station KOOL, a local radio station owned by Gene Autry which was affiliated with CBS; station KTAR, the Phoenix NBC radio affiliate owned by John Lewis; and Harry Nace, the owner of a local theater chain.

(c) John Lewis was a foundling partner in the firm of Needham, Lewis and Burbee, a major advertising agency located in Chicago; he was a member of the family which owned Johnson Wax which had long associations with NBC, and as the owner of a radio station affiliated with NBC, had close ties with NBC. Plaintiff was of the opinion that if Lewis obtained the FCC license, he would probably get the NBC affiliation.

(d) Gene Autry, as a TV performer, as well as through his friendship with a long-time CBS client, Phil Wrigley, and as the owner of KOOL, a CBS radio affiliate in Phoenix, had been associated with CBS from the days of its founding.

56. Although plaintiff recognized that it would lose some of its television network affiliation contracts as more stations entered the market, it expected to be able to retain either CBS or NBC, and at the worst was confident of retaining ABC. See finding 51(a).

57. Pursuant to television network contracts and assignments set forth hi finding 50, modifications and extensions thereof, KPHO-TV remained affiliated with ABC until March 1,1954, when such affiliation was terminated by ABC; with DuMont until DuMont went out of existence as a network in September 1955; with NBC until August 1, 1953, when such affiliation was terminated by NBC; and with CBS until June 15,1955, when such affiliation was terminated by CBS. Since June 15, 1955, station KPHO-TV has operated as an independent station not affiliated with any television network. (The DuMont affiliation had become meaningless by 1955.)

58. The events leading to the NBC termination of its affiliation with KPHO-TV were as follows:

(a) On February 18, 1958, a construction permit was granted for the construction of television station KTYL-TV (later changed to KVAR-TV and then to KTAR-TV) in the Phoenix-Mesa market. Special temporary authority to operate was granted KTYL-TV in April of 1953 and operations were then begun on Channel 12. This station was owned by Harry Nace, the owner of a local theater chain (see finding 55(b)), who began operations on April 23, 1953.

(b) Following the termination of KPHO-TV’s affiliation with NBC on August 1, 1953, KTYL-TV became affiliated with NBC. In 1954, this NBC affiliated station, which was incurring substantial operating losses, was sold for $251,-242 to KTAR Broadcasting Company, which was principally owned by John Lewis. See finding 55(c).

59. The events leading to the CBS and ABC termination of their affiliation with KPHO-TV were as follows:

(a) On April 29, 1953, CBS entered into a standard primary affiliation with KPHO-TV for a two-year period commencing June 15, 1953. See finding 52.

(b) On May 27, 1953, a construction permit was granted to two local radio stations (KO0L and KOY) for the construction of a VHF television station to be operated on a share-time basis. In October of 1953, a special temporary authority to operate was granted and operations were begun by KOOL-TV and KOY-TV on a share-time basis using Channel 10. This share-time arrangement, whereby two applicants for a license shared a frequency, was a new practice in the industry. On May 5, 1954, Gene Autry (see findings 55 (b), (d)), the principal owner of KOOL-TV, purchased KOY-TV and merged it with KOOL-TV.

(c) On June 10, 1954, a construction permit was granted for the construction of television station KTVK-TV in Phoenix, an application for which was filed on February 17,1953. Special temporary authority to operate was granted KTVK-TV in February 1955, and operations were begun using Channel 3. The principal stockholder of KTVK-TV was Ernest W. McFarland, a former Senator and former Governor of Arizona.

(d) Following the termination of KPHO-TV’s affiliation with ABC on March 1, 1954, KOOL-TV became affiliated with ABC. Following the termination of KPHO-TV’s affiliation with CBS on June 15, 1955, KOOL-TV’s affiliation with ABC was terminated and KOOL-TV became affiliated with CBS. ABC in turn became affiliated with KTVK-TV.

(e) As one of the reasons for terminating its affiliation with KPHO-TV and switching to KOOL-TV, CBS mentioned to plaintiff that it (CBS) had a clause in its radio affiliation contract with KOOL which gave that radio station the right to a television affiliation if the station acquired a television license in Phoenix. Contracts between networks and stations were not a matter of public record, and the commitment referred to by CBS (if it actually existed) was unknown to plaintiff at the time of its acquisition of KPHO-TV. Further, when CBS affiliated with KPHO-TV, it gave plaintiff no indication that the affiliation might be transferred in the event its radio affiliate KOOL obtained a television license. See finding 32 (a).

60. Prior to August 19, 1952, Phoenix Television entered into contracts with advertising customers concerning television advertising to be performed over station KPHO-TV. Such contracts varied as to duration, type of advertising material, length of amiouncement or program, hour of the day when material was to be broadcast, number of broadcasts per week and rate charged. On August 19, 1952, as part of the initial distribution in complete liquidation, Phoenix Television assigned such contracts to plaintiff. None of the contracts so assigned had a remaining term in excess of 51 weeks. The maximum gross amount pertaining to broadcasting to be performed on August 30,1952, and thereafter under these contracts was $263,263.80, but there was also the probability that some of the advertisers would continue their patronage, from which standpoint the contracts had additional value. The contracts, however, were freely cancellable in practice and did not necessarily tend to be renewed regularly.

61. The television advertising contracts in question were primarily from local advertisers and such, local advertising was not significantly affected by KPHO-TV’s loss of a network affiliation.

62. Prior to August 18,1952, Phoenix Broadcasting entered into contracts with advertising customers concerning radio advertising to be performed over station KPHO. Such contracts varied as to duration, type of advertising material, length of announcement or program, hour of the day when material was to be broadcast, number of broadcast hours per week and rate charged. On August 18, 1952, as part of the initial distribution in complete liquidation, Phoenix Broadcasting assigned such contracts to plaintiff. None of the contracts so assigned had a remaining term in excess of 51 weeks. The maximum gross amount pertaining to 'broadcasting to be performed on August 30,1952, and thereafter under these contracts was $45,075.85, but the contracts had additional value because of the probability that some of the advertisers would continue their patronage. The contracts, however, were freely cancellable in practice and did not necessarily tend to be renewed regularly.

63. Television stations, including KPHO-TV in 1952, do not have any particular goodwill in the sense of viewer preference or loyalty to the station. Television audiences are attracted primarily by the programs and not by the particular broadcast station, call letters, station personnel or management. Television viewers to a major degree seek out programs without regard for other factors. See finding 17.

64. Television stations, including KPHO-TV in 1952, do not have any particular goodwill in the sense of advertisers’ 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.

65. (a) Plaintiff did not consider the calibre of the operating management and staff of KPHO-TV (or KPHO-AM) as satisfactory, nor did plaintiff believe they enjoyed any particular regard or reputation in the community which was advantageous to it. During the months following the purchase of these stations, the general manager and a substantial number of employees were replaced by plaintiff.

(b) In the selection of an affiliate, the networks give consideration, among other things, to the station’s management, personnel and its reputation in the community.

66. (a) An FCC broadcasting license is a license to do business. It is not saleable as such, although one may be acquired by transfer upon the purchase of an operating station.

(b) Plaintiff did not attach any separate substantial value to the FCC broadcast license which it acquired in 1952 upon the liquidation of Phoenix Broadcasting and Phoenix Television.

67. (a) Although plaintiff acquired radio station KPI10-AM at the same time and from the same owners as it acquired KPHO-TV, it did not regard this radio station as a particularly good one and i't attributed no value in excess of the tangible assets to it. For calendar year 1950, the station had experienced a net loss of $7,266.85; for calendar year 1951, it had an operating profit of $12,877.73, together with a gain on sale of assets of $9,256.99 for a gross profit before income taxes of $22,134.72 and a net profit after taxes of $18,230.36. The station did not have a good frequency; it ranked seventh among the eight stations in the Phoenix area; its past history, in plaintiff’s view when it acquired the station, was not encouraging from an earnings standpoint; and plaintiff considered that it had no particular potential from an earnings standpoint.

(b) Following plaintiff’s acquisition, KPHO-AM had operating profits and losses as follows:

Fiscal Year Ended: Operating Profits ana (Losses)
6/30/53 _$(10,814.00)
6/30/54 _ (28,852.00)
6/30/55 _ (24, 593. 00)
6/30/56 _ (31,678.00)
6/30/57 - (20,539.00)
6/30/58 _ 20,953.00

(c) In 1952, when plaintiff acquired the station, the radio industry as a whole was depressed; by late 1954, however, there was a resurgence in radio interest and in Phoenix, the radio business generally was excellent and improving.

68. Although KPTIO-AM was affiliated with the ABC network at the time of plaintiff’s acquisition and plaintiff retained its ABC radio affiliation through 1958, the affiliation had no particular value. In contrast to television, the most attractive radio programming was available from non-network sources and there was no dependence upon a network in this respect.

69. During the period of the early 1950’s, it was not possible to operate a television station at a profit without network affiliation except in the very largest television markets. During the same period, television stations with network affiliation customarily operated at substantial profits. The comparison of the profitability during 1955 of 30 affiliated stations and 16 independent (non-affiliated) stations is set forth below:

Network Affiliates Independent Stations
A. Number of stations.. 30 16
Number operated at a profit. 26 5
Number operated at a loss. 4 11
B. Average per station:
Broadcast revenues. $3,906,000 $2,681,000
Broadcast expenses... $2,444,000 $2,669,000
Broadcast income or (loss)... $1,462,000 ($78, 000)
O. Number of stations by ratio of broadcast income to broadcast revenue:
Loss. 4 11
0 to 9 per cent.._. 1 3
10 to 19 per cent. 7 2
20 to 29 per cent______ 4 .
30 to 39 per cent...... 7 __
40 per cent and over.... 7 ..
Total number of stations.-... 30 16
Average ratio of income to revenue___ 37.4 Loss
D. Number of stations by ratio of broadcast income to depreciated tangible broadcast property:
Loss. 4 11
0 to 9 per cent. 1 1
10 to 24 per cent. 4 1
25 to 49 per cent. 2 .
60 to 99 per cent. 5 1
100 to 199 per cent. 4 2
200 per cent and over... 10 .
Total number of stations. 30 16
Median return on tangible broadcast property (percent). . 90 Loss

70.During the early 1950’s and particularly 1952 and 1953, other factors being equal, affiliated television stations were considerably more valuable than independent (non-affiliated) stations as going businesses, and as between the respective networks, an NBC affiliate might have been slightly more valuable than a CBS affiliate; either án NBC affiliate or a CBS affiliate was substantially more valuable than an ABC affiliate. DuMont affiliation was of very minor value, becoming meaningless by 1955.

71. The value of a television station, like the value of any going business enterprise, depends primarily upon its reasonably anticipated earnings and earnings potential.

72. In negotiating the $1,500,000 purchase price for the assets of KPHO-TV and KPHO-AM, plaintiff gave primary consideration to reasonably anticipated revenues, operating expenses and operating profits, all of which assumed the continuation of television affiliation with CBS or NBC.

73. As an immediate and proximate result of the termination of CBS affiliation on June 15,1955, KPHO-TV lost all future revenue from “network programs.” Prior to such termination, network program revenue had been:

Fiscal 7ear Ending (F7E): Network Program Revenue
8/19/52 to 6/30/53_$175, 096
6/30/54 _-_ 223,993
6/30/55 _ 301,619

74.As an immediate and proximate result of the termination of CBS affiliation on June 15, 1955, KPHO-TV was deprived of network programs and forced to purchase substitute programs — primarily syndicated half-hour films and feature films — at its own expense. Prior to the CBS termination, network commercial programs had accounted for the following percentages of KPHO-TV’s total programming:

Network Commercial Programming
ECC Composite Week
6:00 to Entire 11:00 PM Broadcast Day
1951...61% 61%
65.8% 44.4%
53% 34.8%
1954-55 43% 40.4%
Thereafter..0% 0%

75.As an immediate and proximate result of the termination of CBS affiliation on June 15,1955, KPHO-TV program costs, particularly film rental costs, were substantially increased as shown below:

Program Costs
FYE -
Film Rental Total
8/10/52 to 6/30/53 $44,315 $203,016
6/30/54. 80, 682 277, 654
6/30/55. 96,310 308,873
6/30/56. 213,073 398,571
6/30/57. 286,582 483,991
6/30/58. 315,691 490,390
6/30/59. 331,902 506,811
6/30/60. 407,483 597,326

The increased film rental expenses included the right to show many of the films again in subsequent years, and such increased expenses were partially offset by larger revenues since non-network purchasers pay a higher rate than network purchasers. See finding 22(a).

76. As an immediate and proximate result of the termination of CBS affiliation on June 15,1955, KPHO-TV dropped from top to bottom in audience ranking during the prime evening television hours. It has, however, been able to compete successfully with the network affiliated stations in other than the prime evening hours.

77. (a) As an immediate and proximate result of the termination of CBS affiliation on June 15,1955, a large share of KPI-IO-TV’s national spot announcement contracts were canceled notwithstanding rate reductions. KPHO-TV monthly revenue from national announcements for the year preceding and following the CBS termination on June 15, 1955, was as follows:

Month: National Announcements
July 1954-_§24,959
August - _ 20,355
September_ _ 18,830
October_ _ 27,574
November_ _ 30,809
December-_ 23,574
January 1955 _ 21,257
February-_ 22,280
March-_ 28,456
April-_ 30,449
Month: National Anno uncements
May_ _ 30,949
June_ _13, 771
July-_ 12,160
August_ _ 12,905
September_ _ 16,338
October-_ 21,983
November-_ 24,042
December-_ 18,076
January 1956-_ 14,512
February _ _ 14,038
March_ April _ _ 17,227 _ 17,908
May_ June_ _ 20,296 _ 19,034

(b) Ill the year following the CBS termination, i.e., fiscal year ending June 30,1956, KPHO-TY’s national announcement revenue decreased but thereafter increased significantly. This was largely due to the fact that KPHO-TV had a great many one-minute spot announcements to sell — which number far exceeded those which network affiliated stations could sell since, in their case, such announcements were largely taken up by the networks. Another reason for the increase in such revenues was the station’s ability to provide better programming. KPHO-TY’s yearly revenue from national announcements was as follows:

FYE: National . Announcements
From 8/18/52 to 6/30/53_ $121, 323
6/30/54 _ 289,566
6/30/55 _ 293,263
6/30/56 _ 208,519
6/30/57 _ 258,480
6/30/58 _ 305,941
6/30/59 _ 309,793
6/30/60 _ 398,733
6/30/61 _ 398,433
6/30/62 _ 542,270
6/30/63 _ 666, 925
6/30/64 _ 798,732
6/30/65 _ 1,199,297

78. The termination of the CBS affiliation on June 15,1955, adversely affected KPHO-TY’s operating results. The station’s operating results went from substantial operating profits to substantial operating losses which, continued until 1963 when the station began operating profitably as shown below:

FTE: Operating Profit or (Loss)
8/19/52 to 6/30/53- $451, 561
6/30/54 _ 307,723
6/30/55 _ 246,786
6/30/56 _ (189,769)
6/30/57 _ (207,504)
6/30/58 _ (124,926)
6/30/59 _ (125,508)
6/30/60 _ (178, 001)
6/30/61 _ (177,994)
6/30/62 _ (41,295)
6/30/63 _ 122,442
6/30/64 _ 184,730
6/30/65 _ 481,897

79. There were various other factors affecting KPHO-TV’s operating results in the period prior to CBS termination on June 15, 1955. This included increased expenses resulting .from a general upgrading of both programming and personnel after plaintiff’s acquisition; the addition of personnel; changes in compensation of local salesmen from commission to salary; and lengthening of the broadcast day. While its net revenues did not vary significantly, in view of the foregoing increased expenses, KPHO-TV operated at a loss of $11,438 in calendar year 1954 — prior to CBS termination on June 15,1955. Following the CBS termination, other factors beyond the termination affecting KPHO-TV operating results included increased emphasis on selling and promotional activities and curtailment of other expenses.

80. At approximately the same time that the plaintiff’s network affiliation with CBS in Phoenix was terminated, plaintiff acquired CBS affiliations for its stations in Kansas City, Missouri, and Omaha, Nebraska. The Kansas City station, which had previously been affiliated with CBS, had changed ownership in the preceding year. There was no relationship, however, between the CBS termination in Phoenix and its affiliation with plaintiff’s stations in Kansas City and Omaha.

81. After plaintiff lost its CBS affiliation in Phoenix in 1955, it did not attempt to sell KPPIO-TV — rather, it made a decision to continue to operate KPHO-TV even though at a loss and to attempt to obtain a network affiliation in the years ahead. It considered it had a 50-50 chance of obtaining such an affiliation.

82. After the CBS termination of the KPHO-TV affiliation, plaintiff received numerous inquiries about selling the station from brokers whom it considered of doubtful integrity, and who customarily solicited all station owners. The inquiries were ignored by plaintiff without reply as a matter of policy.

83. By the late 1950’s, plaintiff also considered the possibility of purchasing one of the network affiliated stations in Phoenix for $4 million and disposing of KPHO-TV for $2 million. More particularly, in the late 1950’s plaintiff’s representatives discussed with Gone Autry the possibility of buying KOOK-TV, plaintiff’s main purpose in this respect being to obtain the latter’s network affiliation. Autry indicated that he would sell the station for $4 million but plaintiff was not interested in the station at that price because of the following considerations: (1) plaintiff would necessarily have to sell KPHO-TV (since it could not, under the FCC multiple ownership rule, operate two stations in the same market); and (2) it felt that it could not then obtain more than $2 million for KPHO-TV, thus leaving a net cost for KOOL-TV of $2 million or more which plaintiff believed too high, particularly since it would have no assurance that it would retain a network affiliation over a period of years.

84. When plaintiff acquired KPHO-TV, it retained the newscasters who were then with the station. The station’s loss of its network affiliation did not affect the audience for its news programs.

85. The Class A rates, as published in the Standard Bate and Data Service for the Phoenix television stations as of July 10, 1955, were as follows:

KOOL-TV, a CBS affiliate_ $500 an hour
KPHO-TV, an independent- $450 an hour
KVAJEh-TV, an NBO affiliate_ $450 an hour
KTVK-TV, an ABC affiliate_ $300 an hour

86.The Class A rates, as published in the Standard Rate and Data Service for the Phoenix stations as of August 10, 1956, were as follows:

IÍOOL-TV, a CBS affiliate_ $500 an hour
KPHO-TV, an independent- $450 an hour
KVAR-TV, an NBC affiliate- $450 an hour
KTVK-TV, an ABO affiliate- $400 an hour

87.The Class A rates, as published in the Standard Rate and Data Service for the Phoenix stations as of July 10,1957, were as follows:

KOOL-TV, a OB'S affiliate_ $550 an hour
KPHO-TV, an independent- $450 an hour
KVAR-TV, an NBO affiliate_ $460 an hour
KTVK-TV, an ABO affiliate_ $400 an hour

88. Plaintiff consistently makes promotional use of the fact that KPHO-TV was the first television station in Arizona and the first in Phoenix.

89. There is a demand among advertisers for one-minute announcements which independent stations are able to sell in far greater amount than affiliated stations. See finding 81 (b). The ability of the independent stations thus to sell longer commercial time slots than network affiliated stations has been an important factor in helping them make progress.

90. In 1955, certain operators were enthusiastic over the long-run potential of independent television stations; however, the majority of people in the industry were not. The selling price of television stations, both affiliated and independent, has risen continually from 1952 to the present.

Expert Testimony

91. (a) Plaintiff called one expert witness, James W. Blackburn. For the past 20 years Blackburn has headed a large media brokerage firm (originally Blackburn & Hamilton and now Blackburn & Company, Inc.) which is engaged in handling the sale, financing and appraisal of radio and television stations and other media properties throughout the United States and which has probably sold, as brokers, more television stations than anyone else in the country. He has had contact directly or through his organization with virtually all the television stations in the country and has had actual business dealings with well over a hundred stations involving such matters as purchases, sales, appraisals and financing.

(b) Blackburn testified that the affiliation agreements here involved had a minimum value of $500,000; that network affiliation was the key to earnings and earnings potential, and thus the only intangible of significant value; and that after the loss of its network affiliation, KPHO-TV had no intangible value and could not have been sold for any amount in excess of tangible asset values. He further testified that KPHO-TV, when purchased by plaintiff, was organized and operating as a viable business (which included a staff of advertising salesmen) and had a going concern value of from $25,000 to $50,000; that the advertising contracts had a value of $26,000; that this figure, while arbitrary, was based upon the assumption that the station would earn a 10 per cent after-tax profit on the approximately $260,000 remaining on such contracts (which overlooks, however, the factor of renewals); that the value of the radio station was worth between $75,000 to $100,000 for the entire package of fixed assets, transmitter, broadcaster, etc. (which was somewhat less than the value allocated to the tangible assets of the station); and that the FCC broadcast license for the television station 'had no monetary value on the basis that without a network affiliation, an FCC license in a smaller market such as Phoenix was then, in effect, a license to lose money.

(c) Blackburn represented a group of purchasers in offering in 1953 to purchase KFEL-TV in Denver — which then had an NBC affiliation — for $3,000,000, which offer was turned down. After NBC terminated the affiliation, Black-bum handled the sale of the station in 1955 for $700,000— the approximate value of its tangible assets. See finding 72(a). In early 1953, Blackburn acted on behalf of two persons in negotiating for the purchase of KMO-TV in Tacoma — which was then an NBC affiliate — at a price range of between $900,000 and $1,000,000. When one of Black-bum’s principals heard a rumor that NBC was about to terminate its affiliation, they lost interest. Several months later, KMO-TV lost its affiliation and Blackburn handled the sale of the station as an independent for a price of $300,000 — the approximate value of its tangible assets. See finding 73(a). He also handled the sale of KCOP-TV in Los Angeles during 1953 and was familiar with the sale during 1953 of WPTZ-TV in Philadelphia. See finding 74.

(d) Blackburn was a credible witness and his testimony was persuasive.

92. Defendant called two witnesses as experts — Edgar C. Henry and John Alden Grimes.

93. (a) Henry’s background was as follows: He served two years as an Internal [Revenue agent; a period as an auditor and assistant controller for a newspaper; several years (approximately 1946-1948) as assistant controller and business manager for another newspaper organization; and approximately four years (1955-1959) as vice president, on a contractual basis, of Allen Kander & Co., a media brokerage firm; about two years as vice president of a mortgage loan organization; and the last few years as a self-employed consultant.

(b) Henry testified on direct examination that during the period of time he was with Allen Kander (i.e., 1955-1959) and since then “I had probably set up in the neighborhood of 250 appraisals”; and that “We probably sold somewhere between 150 and 200 radio and television stations.” However, in the course of voir dire examination, he testified that in his entire career he participated in only 15 television appraisals — 14 while he was with Allen Kander and one for the Internal [Revenue Service thereafter. He later made it clear that he had never personally negotiated the purchase or sale of a television station and was principally responsible for one negotiation involving a television station in Birmingham.

(c) Henry testified that the $459,706 allocable to all intangible assets as a group should be attributed as follows: $200,000 to broadcast licenses; $200,000 to what he referred to as viewer and listener appeal; and $100,000 to advertising contracts. He expressed the opinion that no part of the $459,-706 was allocable or attributable to network affiliation agreements.

(d) The allocation of $200,000 for a broadcast license was arrived at by Henry on the basis that there was every indication that hearings for the television channels in Phoenix would be severely contested; that the cost of obtaining a license after a competitive hearing would be very expensive; and that an unsuccessful applicant had admitted to him that he had spent over a period of years about $200,000 seeking to obtain a license. With respect to his allocation of $200,-000 for viewer and listener appeal, he testified that in 1952, KPHO-TV was the only television station then in Phoenix; that it was reaching a coverage of about 50 per cent of the homes in Phoenix (i.e., the number of families that had purchased television receivers by this time); that had KPHO-TV not 'been in existence and not produced an interest in 50 per cent of the families in Phoenix to purchase television sets, a new station operating in Phoenix would have been faced with a situation in which there would be no television receivers; and that a purchaser thus acquired a station with a coverage of 50 per cent of the homes. He estimated the value of the television and radio advertising contracts at $100,000 on the basis that they amounted in the aggregate to $300,000 and that, in his opinion, it would cost $100,000 to obtain advertising contracts in this amount — which task would involve hiring and training competent salesmen, making an extensive survey, and soliciting prospective advertisers. In arriving at this estimate, he assumed that there would be no cancellations and that the contracts would, by and large, be renewed.

(e) Henry’s reasoning in concluding that the network affiliation agreements were of no value in the sense that no part of plaintiff’s purchase price was allocable to them was apparently based on the premise that no capital expenditure is involved when a television station initially enters into an affiliation agreement with a network and that, therefore, reproduction cost cannot be determined as in the case of physical or tangible property. He recognized, however, that network affiliation was “an extremely valuable working tool”; that it had “tremendous value in the operation of a station” and was “one of tbe most valuable tools the industry lias.” However, he testified that one could not evaluate it either on a reproduction cost or a cost basis because one cannot identify direct costs to it. He was also impressed by the fact (i) that he had “never known of any instance where a network affiliation by itself was sold or that anyone had the right of sale to it of a third person,” and (ii) that he had “never heard of * * * [any case] where a network charged a television station for an affiliation agreement.”

(f) Throughout his testimony it was clear that Henry was of the opinion that value could be attributed to an intangible only if the transferor had incurred a capital cost in its acquisition. Since the network contracts had not cost the predecessor organization anything, they could not, in Henry’s view, have value when transferred to plaintiff.

(g) Henry was of the opinion that the value of KPHO-TV was never lower than the price paid by plaintiff in 1952— which seemingly led to his conclusion that the network affiliations had no value because their loss assertedly had not diminished the overall value of the station.

94. (a) John Alden Grimes, defendant’s second expert witness, had the following background: After formal training in the fields of mining and electrical engineering, metallurgy and geology, he was employed as a geologist with a copper mining company from 1910 to 1920. From 1920 to 1956, he was employed by the Internal Bevenue Service in the following capacities: From 1920 to 1921, he served as a valuation engineer; from 1921 to 1925, he was assistant chief of a section dealing with valuation of metals and non-metals mining; from 1925 to 1928, he worked on depreciation studies for an Assistant Commissioner; from 1931 to 1949, he was assigned to the Office of the Chief Counsel and worked on valuation issues which were in prospect of trial; and from 1949 until his retirement from the Service in 1956, he headed the Special Services work of the Appellate Division — which work involved final recommendations to the Commissioner as to settlement or trial of valuation matters. After his retirement, he was retained by the Service as a consultant until 1958. For a year and a half after Ms retirement from tlie government, be was associated with Allen Kander & Co. (tbe same media broker with which Henry was associated, see finding 97(a)), where he did appraisal and valuation work on a fee-sharing basis. Since then he has worked out of his home as a valuation consultant. He was senior author of a book entitled Principles of Valuation, published by Prentice-Hall, Inc., in 1928. His interest in television arose in 1956, and since then he has appraised about 10 stations but has never been engaged in buying or selling stations.

(b) The basic thesis of Grimes’ testimony was that a network affiliation was not a significant factor contributing to the overall intangible value of a television station and that the significant intangible asset was the FCC license. To support this conclusion, Grimes testified from information he indicated he had obtained from FCC files regarding sales of four other stations which had no network affiliation. These stations, according to Grimes’ direct testimony, were all sold at prices significantly in excess of tangible asset values and, therefore, the inference, according to Grimes, would be that the excess was paid for some intangible asset or assets other than a network affiliation agreement.

(c) The four station sales on which Grimes relied were KTSP-TV, St. Paul; KTSL-TV, Los Angeles; WOR-TV, New York; and KFI-TV, Los Angeles. He testified that based on data he had obtained from the public FCC files, each of these independent stations had substantial intangible value without network affiliation. However, it became clear on cross-examination (i) that Grimes had omitted and misstated material facts about KTSP-TV; (ii) that though he had testified that the “indicated intangible value” of KTSL-TV was $1,631,000, there was no such figure in the FCC files and no combination of figures from which such a figure rationally could be derived; and (iii) that in the case of WOR-TV, Grimes had not inspected the FCC files at the time of his direct examination and had used a figure to obtain the tangible asset value which was based not on the facts of the transaction but on bis estimate of what the tangible asset value was.

(d)The four asserted comparable sales upon which Grimes relied have no probative weight. In the first place, three of the four stations were located in New York and Los Angeles — which are markets totally dissimilar to the Phoenix market. Second, the assumed facts regarding the comparative transactions upon which Grimes based his opinions were, in all substantial respects, incorrectly stated. Third, the comparatives, even if they had been properly constructed, were in fact absent of meaning. For Grimes sought to compare sales price with “book value” of tangible assets, implying that any difference was “indicated intangible value.” The “book value” he used was original cost less depreciation, as shown for balance sheet purposes. This bore no necessary relation to actual value. For instance, “book value” would not, and could not, reflect any appreciation in values of lands, buildings, etc. which might have occurred over a period of years. It took no account of depreciation methods which, in the case of rapid write off, would tend to artifically decrease “book value” in relation to actual value. It took no account of the nature of the transaction by which the assets were acquired. For example, if tangible property were acquired by a corporation in a tax-free exchange, the predecessor’s basis would be reflected as ’’book value.” Moreover, the comparison made no effort to identify the nature of the intangible assets if, in fact, there were any.

(e) In the course of his direct examination, Grimes testified that he relied upon comparative sales strictly in any opinion of value on any matter. In the latter part of cross-examination, he testified — contrary to his earlier testimony— that comparative sales constituted only a very small part of the basis for his opinion.

(f) In order further to demonstrate that KPHO-TV’s network affiliations had no value, Grimes testified that the value of the station was not diminished by the loss of the affiliations, and that after the loss of the CBS affiliation in 1955, the intangible assets of KPHO-TV were worth more than $500,000. He indicated that six sales of non-affiliated stations in 1955 supported his opinion in this respect. These six sales, he testified, were (1) the sale of KCTO-TV, Channel 2, Denver, which he said had a depreciated value of $321,-000 and was sold for $400,000, giving an “indicated intangible” of $79,000; (2) the sale of KTSM-TV, a UHF station in St. Louis, as to which he had no data and which he said was not comparable since a UHF station is not comparable to a VHF station; (3) the sale of KWG-TV, a UHF station in Tulare-Fresno which he said had tangible assets of $485,000 and was sold for $350,000, giving a negative “indicated asset value” of $135,000; (4) the sale of WATV-TV, Newark, on which he had no data but which he said was “sold for considerable intangible asset value”; (5) the sale of WOBr-TV which he said was a package deal that he could not separate, of. finding 98 (c); and (6) the sale of WVUE-TV, Wilmington, Delaware, which he indicated was another package deal on which he had no data. Thus, Grimes’ opinion that KPHO-TV’s intangibles were worth more than $500,000 in 1955 after the loss of the CBS affiliation was based on six transactions, one assertedly indicating intangibles of $79,000, a second indicating a negative intangible of $135,000, and four indicating nothing one way or the other.

(g) Grimes further testified that KPHO-TV’s intangible value would have been “much more” in 1955 if it had not lost the CBS affiliation and computed that the intangibles (including CBS affiliation) would have had a value of about $1,240,000. Thus, assuming there was a sound basis for Grimes’ $500,000 estimate for intangibles absent the CBS affiliation, the loss of the CBS affiliation by his own calculation caused a decrease of over $700,000 in intangible value. Nonetheless, Grimes held to the view that KPHO-TV lost nothing of value when CBS terminated.

(h) Grimes expressed the opinion (i) that a business’ intangible value is indivisible and is not allocable separately, and (ii) that network affiliation agreements had no value to the purchaser of a station since the network had to consent to any transfer from the seller to the buyer — which, in his opinion, meant the buyer did not purchase the asset from the seller but rather obtained it at no cost from the network.

(i) In light of all the considerations set forth above, it is concluded that the testimony of Grimes cannot be given any probative weight.

Ultimate Findings

95. On the valuation date of August 19,1952, the television network affiliation contracts received by plaintiff had an estimated value of $250,000, the going concern value is estimated at $175,000, and the value of the television advertising contracts is estimated at $75,000. Other intangibles are assigned no value. The proper allocation of the stipulated value of these intangibles to the television network affiliation contracts is 50%, a figure of $229,853.

CONCLUSION OK Law

On the basis of the foregoing findings of fact which are made part of the judgment herein, the court concludes as a matter of law (i) that the amount of $229,853 is properly allocable as the cost basis of the television network affiliation contracts acquired by plaintiff as part of the operating assets of station KPHO-TV; (ii) that pursuant to the agreement of the parties plaintiff is entitled to a deduction in this amount for the fiscal year ended June 30, 1953; and (iii) that plaintiff is not entitled to amortization deductions with reference to the cost basis of the television advertising contracts acquired by plaintiff as part of the operating assets of station KPHO-TV.

Judgment is entered to this effect. The amount of the recovery will be determined pursuant to rule 47(c). 
      
      This opinion incorporates, with modification and addition, the report of the then commissioner,' now judge, Herbert N. Maleta, prepared for the court under the order of reference and Rule 57(a), and we wish to acknowledge his great assistance.
     
      
       Opinion amended by/ the Order dated January 31, 1969.
     
      
      Opinion amended by the Order dated January 81, 1969.
     
      
      
         See, e.g., Oliver v. Commissioner, 364 F. 2d 575 (8th Cir. 1966) ; Parmelee Transp. Co. v. United States, 173 Ct. Cl. 139, 351 F. 2d 619 (1965).
     
      
      
         See, e.g., Mayrath v. Commissioner, 357 F. 2d 209 (5th Cir. 1966) (property not shown to have been used in trade or business) ; Schubert v. Commissioner, 286 F. 2d 573 (4th Cir.), cert. denied, 366 U.S. 960 (1961) (plaintiff must prove interest in depreciable property).
     
      
      
        See Oliver v. Commissioner, 364 F. 2d 575 (8th Cir. 1966), wherein It was held, In regard to the deductibility of medical expenses, that:
      “* * * The taxpayer bears the burden of proving the facts necessary to establish his right to a deduction and the burden of proving the amount of the deduction. * * *” Id. at 577.
      Treas. Reg. § 1.167(g)-! (1956) (originally numbered 1.167(f) — 1) provides that the basis for depreciation shall be the adjusted basis as provided In Int. Rev. Code of 1954, § 1011, for determining the gain from the sale or other disposition of property. A similar regulation existed under §23(1) of the Internal Revenue Code of 1939. See 26 C.F.R. § 3.23(l)-4 (1st ed. 1939).
     
      
      Opinion amended by the Order dated January 31, 1969.
     
      
       ünfler the NBC affiliation agreement with KPHO-TV, either party had the right of cancellation npon three months’ notice to the other.
     
      
       The ECC composite week for 1954-55 includes five days before 6/15/55 and two days after 6/15/55.
     
      
      CBS termination at mid-montli.
     
      
       The KCTO-TV transaction described by Grimes seems to be the same one as described by Blackburn as KFEL-TV, the call letters of Channel 2 in Denver, being first KEEL, then KTUR and now KCTO. It would appear that Grimes was unaware that the price involved not only $400,000 cash but also the assumption of $300,000 in liabilities. Actually, the record makes clear that KEEL-TV, after losing its NBC affiliation, was sold for a price of $700,000— the approximate value of its tangible assets. See findings 72(a), 95(c).
     