Gulf Tel. Corp. v. Commissioner , 52 T.C. 1038 ( 1969 )

Gulf Television Corporation, Petitioner v. Commissioner of Internal Revenue, Respondent

Gulf Tel. Corp. v. Commissioner

Docket No. 3348-66

United States Tax Court

52 T.C. 1038; 1969 U.S. Tax Ct. LEXIS 54;

September 25, 1969, Filed

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">*54 Decision will be entered for the respondent.

In 1956 petitioner purchased a television station for $ 4,800,000 of which $ 2,700,000 was allocated by petitioner to the purchase price of a network affiliation contract which the station had with CBS. This contract like all network affiliation contracts was for 2 years (the maximum period permitted by the FCC) but was automatically renewable for successive 2-year terms unless either party gave 6 months' written notice of intention not to renew. At the time it was acquired by petitioner at an allocated cost of $ 2,700,000, 19 months of a 2-year term had yet to run. The contract was still in force at the time of the trial herein. On its books petitioner amortized its allocated cost of this contract initially on the basis of an assumed useful life of 19 months. Six months prior to the expiration of the 2-year term beginning Mar. 1, 1956, when the contract was automatically renewed for another 2-year term ending Mar. 30, 1960, the amortization was computed on an assumed life of the contract of 30 months (24 months plus 6 months). This was the method used by petitioner in computing the amortization deductions taken in its returns">*55 for the taxable years. These deductions were disallowed by respondent on the ground that the contract "does not have a useful life which can be determined with reasonable accuracy as required by section 167 of the Internal Revenue Code of 1954." In the original petition filed herein petitioner alleged that the useful life of the contract was 20 years and that the amortization deductions should be computed accordingly. At the trial herein and consistent with the allegations of its amended petition filed at that time petitioner now contends that the amortization deductions should be computed on the assumption that in each tax able year the contract will not be renewed for more than six 2-year terms after the expiration of the current period. Held, on the proof presented herein petitioner has failed to show that the network affiliation contract was of use in petitioner's business "for only a limited period, the length of which can be estimated with reasonable accuracy" or that the useful life of such contract is other than "indefinite" or "indeterminate" and therefore has failed to prove that respondent erred in his determination of deficiency and that the method of computing ">*56 the amortization of this contract which petitioner now advocates is appropriate to the facts of this case.

">*57 Whitman Knapp, Donald Shapiro, Michael O. Finkelstein, and Paul R. Herman, for the petitioner.

George H. Jelly, for the respondent.

Kern, Judge. Hoyt, J., concurs in the result. Dawson, J., concurring. Fay, Tannenwald, Irwin, and Sterrett, JJ., agree with this concurring opinion. ">*58 Tannenwald, J., concurring.

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KERN

">*1039 Respondent determined the following deficiencies in petitioner's income tax:

Taxable year ended --	Deficiency
Aug. 31, 1957	$ 338,523.82
Aug. 31, 1958	365,084.33
Aug. 31, 1959	399,137.47
Dec. 31, 1959	152,614.43

Other issues having been disposed of by agreement of the parties, the remaining issue presented for decision is whether the useful life of the network affiliation contract between Columbia Broadcasting System and television station KHOU-TV (formerly KGUL-TV), an intangible asset which was acquired by the petitioner on August 31, 1956, can be estimated with reasonable accuracy, thus making the cost of the network affiliation interest subject to the allowance for depreciation under section 167 of the Internal Revenue Code of 1954. ¹

FINDINGS OF FACT

Some of the facts and exhibits have been stipulated and are incorporated herein by this reference.

">*59 Petitioner is a corporation organized under the laws of the State of Delaware on February 6, 1956. Its principal office is at 1945 Allen Parkway, Houston, Tex.

The Federal income tax returns of petitioner for the taxable years ended August 31, 1957, August 31, 1958, and August 31, 1959, and for the taxable period September 1, 1959, to December 31, 1959, were duly filed with the district director of Internal Revenue, Austin, Tex. Petitioner's books of account were maintained, and its Federal income tax returns prepared, on the basis of an accrual method of accounting. Petitioner used a fiscal year ended August 31, except for the period ">*1040 ending December 31, 1959. Thereafter petitioner was a member of an affiliated group filing a consolidated return.

The petitioner was first organized as the Lone Star Television Corp. In the period May 8 through August 23, 1956, the Lone Star Television Corp. acquired all of the outstanding stock and some notes of Gulf Television Co. On August 20, 1956, the purchase of the stock of Gulf Television Co. by the petitioner was approved by the Federal Communications Commission (hereinafter called FCC).

Gulf Television Co. owned and operated">*60 television station KGUL-TV whose city of license was Galveston, Tex. at the time petitioner acquired its stock and notes. The call letters KGUL-TV were changed to KHOU-TV on June 1, 1959. KHOU-TV rather than KGUL-TV will be used to refer to the television station acquired and thereafter owned by petitioner throughout the Findings of Fact and Opinion in this case.

On August 29, 1956, Gulf Television Co. adopted a plan of complete liquidation. On August 31, 1956, Gulf Television Co. liquidated pursuant to the plan and, as of that date all of its assets were transferred to petitioner and petitioner assumed all of its liabilities in the amount of $ 368,571. This liquidation qualified under section 334(b)(2) of the 1954 Code. Petitioner acquired in this manner, all the assets and assumed all the liabilities of KHOU-TV. Petitioner Lone Star Television Corp. then changed its name to Gulf Television Corp.

Petitioner acquired the stock and notes of Gulf Television Co. for a total consideration (including acquisition expenses and assumption of Gulf Television Co.'s liabilities) of $ 4,828,107. On its income tax returns for the years 1957-59 petitioner allocated the cost of the assets">*61 acquired from Gulf Television Co. as follows:

CBS affiliation contract	$ 2,740,000.00
Goodwill	795,416.55
Tangible assets	1,292,690.56
	4,828,107.11

Petitioner's allocation of $ 1,292,690.56 to tangible assets was not disturbed on audit by respondent.

Among the assets acquired by petitioner from Gulf Television Co. was a television network affiliation contract with the Columbia Broadcasting System (hereinafter referred to as CBS) with respect to station KHOU-TV. The CBS affiliation contract of KHOU-TV was an agreement dated March 30, 1956, which had an initial term expiring on March 30, 1958, but which was automatically renewable for additional 2-year terms in a manner to be described below. Pursuant to the provisions of the affiliation contract, CBS consented in writing to its transfer to petitioner and petitioner assumed the obligations of the contract.

">*1041 The pertinent provisions of the network affiliation contract between CBS and KHOU-TV in effect at the time of petitioner's acquisition may be summarized as follows:

1. The contract recited that the parties "recognize that the regular audience of Station will be increased, to their mutual benefit, if CBS">*62 Television provides Station with television programs not otherwise locally available."

2. CBS agreed to offer KHOU-TV for broadcasting by that station (a) CBS network sustaining (i.e., nonsponsored) programs, and (b) CBS network sponsored programs (i.e., programs sold by CBS Television for sponsorship by its own client-advertisers).

3. The station has a right of "first refusal" of each network-sponsored or sustaining program good against any television station licensed to operate in the same community.

4. Subject to specified limitations, the station agreed to accept and broadcast all network-sponsored programs offered to it for broadcast during certain hours of the day known as "network option time." (In an order released on May 31, 1963, the FCC amended this rule to prohibit network option time, effective September 10, 1963.)

5. CBS agreed to pay the station for broadcasting sponsored programs 30 percent of the gross rates charged to sponsors by CBS for the broadcasting time of the station, less certain deductions specified in the affiliation contract.

6. CBS also agreed to furnish sustaining programs delivered to the station by coaxial cable or microwave relay facilities without">*63 charge, but where such programs were delivered in the form of TV recordings, the station agreed to pay CBS's charges for the recordings.

7. The affiliation contract further provided that "unless either party shall send notice to the other at least six months prior to the expiration of the then current two-year period that the party sending such notice does not wish to have the term extended beyond such original period, the term of this Agreement shall be automatically extended upon the expiration of the original term and each subsequent extension thereof for an additional period of two years; and provided further, that this Agreement may be terminated effective at any time by either party sending notice to the other at least twelve months prior to the effective date of termination specified therein."

Between September 1, 1956, and September 3, 1963, the network affiliation contract between CBS and KHOU-TV was amended on six different occasions. The amendments related to station acceptance of programs from other networks and the broadcasting of CBS programs it did accept, permission for KHOU-TV to authorize rebroadcast of network programs by another television station, changes ">*1042 ">*64 in the provisions relating to network option time, rebroadcasting of excerpts from network news programs, reduction in the notice period for terminating the affiliation contract from 6 to 4 months in 1961, and elimination of the provision for option time.

Affiliation contracts are generally made for a term of 2 years (the maximum period allowed by FCC), subject to renewal for additional 2-year terms if neither party gives notice a specified time in advance of the termination date. The provisions of the KHOU-TV affiliation contract with CBS relating to the duration of the affiliation were substantially similar to the provisions relating to the duration of CBS and NBC affiliation contracts generally in use at the time. Either party to such network affiliation contracts can terminate them by giving notice to the other party prior to a designated period in advance of the expiration of the contractual period. Unless this action is taken they are automatically renewed. Both networks and stations have exercised their right to terminate these types of arrangements. Under the Chain Broadcasting Rules of the FCC, the maximum term of a network affiliation contract is 2 years, provided that">*65 such 2-year term may be entered into or renewed not more than 6 months in advance of the commencement of any 2-year term. ²

When a television market has less than three stations, the existing one or two stations will generally have affiliations with more than one network. These affiliations will be both of a primary and secondary nature. A primary affiliation is a network contract specifying option time and that the station shall have the right of first refusal to the programs which the network is broadcasting in that community. During the taxable years at issue, station KHOU-TV had a primary affiliation with CBS and no secondary affiliations.

Factors deemed significant by CBS in determining questions of initial or continuing affiliation with a local station are the station's clearance of network programs for broadcast, the qualifications of management, including newspaper ownership of the station, multiple station ownership, the local station's share of the local audience and location">*66 of the station in the principal city of its market area. In 1956, in response to a questionnaire propounded by the Federal Communications Commission Network Study Staff, CBS gave reasons for termination of television affiliation contracts between January 1952 and August 1956. Among the reasons most frequently cited were the following: The affiliate was primarily interested in carrying NBC programs; to affiliate with another station in order to secure maximum viewership, larger service area and lower cost per thousand; to minimize duplication; to affiliate with a station with more aggressive or ">*1043 superior management; preference for having an affiliate in the larger of two adjoining communities; to affiliate with a station owned by a newspaper; to affiliate with a station which had multiple ownership interests; the new affiliate was primarily interested in carrying CBS programs while disaffiliated station was interested in carrying selected programs of two or more networks; dispute over network rate; rejection of network programs in option time for national spot or local programs; and to affiliate with another station with which CBS was affiliated in radio. In January 1958, ">*67 CBS announced that an existing business relationship between the owners of a television station and the CBS radio network would no longer be taken into consideration in making affiliation decisions. Absent the difficulties mentioned above, if the station adequately bears its community responsibilities and performs its promotional functions within the local community it is to the advantage of both a network and its affiliated station to continue an affiliation as long as practicable in order to develop a pattern of viewing where the local audience associates the network with the station.

Substantially all the revenue of a television station is provided by charges for broadcast time paid by advertisers, who in buying such time are interested in the opportunity to present their advertising messages to the largest audience possible for the cost incurred. Thus, the rates charged by a station will vary with the estimated size of the audience viewing the station -- varying from community to community according to their size, from station to station within a community according to the typical audience of the stations, and varying for a particular station according to the normal audience">*68 for different times of the day.

Since the station's revenue depends on the size of the audience it is able to reach, a station makes efforts to get the largest possible viewing audience. The primary factor in securing a high audience level is programing, that is, securing programs that will attract more viewers than the programs of the competing stations. In this competitive effort, there are two basic sources of programs, network programs and local programs, the latter category including not only programs actually produced locally but also film programs produced in Hollywood or other television centers and delivered to the station on film.

Throughout the history of television to date, network programs have been one of the most important sources of programing for an affiliated television station. The affiliated television station usually receives approximately 30 percent of the "network card rate," explained below, for broadcasting the network shows. A station with ">*1044 this kind of arrangement can rely completely on the network for a significant portion of its programing.

A station's revenue from network program time sales provides only part of its total revenue. For example, ">*69 petitioner's total television revenue from KHOU-TV for the year ended August 31, 1957, was $ 2,464,479 of which $ 566,368.26, or about 23 percent, was derived from network program time sales. On the other hand, a total of $ 1,820,051.89, or approximately 74 percent of the total television revenue, was derived from time sales for nonnetwork programs and announcements. The revenue from announcements alone was about 66 percent of the total television revenue. The figures for the 2 succeeding taxable years and period at issue show approximately the same relationship. On a nationwide basis market financial data published by the FCC for the years in issue, reveals that the revenue of affiliated stations from network program time sales averaged about 25 percent of total revenue.

The revenue to a station from network program sales is received from the network at "network card rate," i.e., the local station's share, computed in accordance with the affiliation contract, of the time charges paid to the network by the advertisers for broadcast time over the local station. However, the revenue for nonnetwork programs and announcements comes not from the network but directly from advertisers">*70 as a result of time sales made by the station's advertising salesmen or its national sales representative. The substantial revenue from announcements is derived from broadcasting brief advertising messages in the "break" which occurs between programs or between segments of larger programs.

During evening "prime time," when the viewing audience is at its largest and a station like KHOU-TV is broadcasting network programs for almost the entire period, the announcements will usually occur adjacent to network programs or in the "break" within a network program. Consequently, in a typical hour of evening prime time for the taxable years in issue KHOU-TV derived about $ 330 revenue for the 59 minutes of a network program and approximately $ 660 from the sale of several announcements totaling some 60 seconds of time. In view of the interest of the advertisers in securing the maximum audience for the advertising messages broadcast in these announcements, and the effect of network programing in attracting a large audience, the audience appeal of the network programs has an important effect upon the revenue a station can derive from announcements, even though the station sells such announcements">*71 independently of the network.

Petitioner's stock is held in common ownership with that of three other corporations by Corinthian Broadcasting Corp. These corporations ">*1045 operate a total of five television stations which are known in the industry as "The Corinthian Stations." Each is affiliated with the CBS television network. The Corinthian stations, including petitioner's station, are:

Market	Tulsa, Okla	Sacramento,	Indianapolis,
		Calif.	Ind.
Licensee	Corinthian	Great Western	Indiana Broadcasting
	Television	Broadcasting	Corp.
	Corp.	Corp.
Call letters and	KOTV Channel	KXTV Channel	WISH-TV
channel.	6.	10.	Channel 8.
Date on air	October 1949	March 1955	July 1954
Date CBS affiliation	November 1949	March 1955	July 1954
commenced.
Date acquired as	May 1954	April 1959	November 1956
Corinthian
station.

Market	ForT Wayne,	Houston, Tex.
	Ind.
Licensee	Indiana Broadcasting	Gulf Television
	Corp.	Corp.
Call letters and	WANE-TV	KHOU-TV
channel.	Channel 15.	Channel 11.
Date on air	September 1954	March 1953.
Date CBS affiliation	September 1954	March 1953.
commenced
Dated acquired as	November 1956	August 1956.
Corinthian
station.

Petitioner ">*72 has never owned or operated a radio station. In the taxable years in issue, Indiana Broadcasting Corp. owned and operated radio stations (which it has since sold) but none of the other corporations operating the Corinthian Stations has at any time either owned or operated radio stations. During the years in issue and for some time thereafter the principal partner of the major shareholder of the licensee corporations had a substantial interest in companies owning radio stations in the suburbs of New York City, but none of these stations were at any time affiliated with a national network. During the years at issue, the major shareholder of the licensee corporations also acquired control of the New York Herald Tribune (which has since ceased publication) and Parade magazine.

Television broadcasting stations operate on channels assigned by the 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, distance from other cities and other aspects of potential need for stations, engineering considerations, ">*73 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 1 year until 1955 and since then the usual term of new and renewal licenses has been 3 years. Under FCC requirements, a television station has to put a city-grade signal over its city of license.

">*1046 Six commercial television stations were operating in the United States in 1945. 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 allocation of VHF channels, and its first allocation of UHF channels, to cities throughout the country. ">*74 The number of VHF and UHF commercial television stations in operation on January 1 of each year succeeding the period of the freeze was as follows:

Year	VHF	UHF
1953	120	6
1954	234	121
1955	305	117
1956	357	102
1957	398	96
1958	433	90
1959	461	84
1960	474	85
1961	488	91
1962	501	102
1963	512	113
1966	494	113

Prior to the freeze, all commercial stations in operation were VHF stations and all television sets manufactured for sale to the public could receive only VHF stations. After the freeze many UHF station licenses were issued to entrepreneurs who wished to build up UHF audiences, and thus obtain an advantage in procuring network affiliation contracts in communities where they expected that VHF licenses would not be issued until after lengthy FCC hearings. Because equipment was poor, transmitting facilities were low powered, and few UHF receivers were in the hands of the public, many of these ventures were unsuccessful. After the freeze, most television sets still were manufactured to receive only VHF stations, and the owner of a VHF set had to purchase and install a UHF converter of some type in order to be able to receive both VHF and UHF stations. ">*75 Some television sets were manufactured after the freeze to receive both VHF and UHF stations. Of the total number of television sets manufactured in the United States each year from 1953 to 1961, the percentage that were all-channel receivers declined each year, from 20.2 percent of the sets manufactured in 1953 to 5.5 percent of those manufactured in 1961, but the percentage increased to about 9.4 percent (based on estimated production figures) in 1962. The Congress, in 1962, enacted the "All-Channel Receiver" law (Pub. L. 87-529), which authorized the FCC to make rules requiring that all television sets shipped in interstate commerce be capable of receiving both VHF and UHF signals. Such rules were adopted by the FCC, effective April 30, 1964.

">*1047 In the 1950's Congress and the FCC, in an effort to develop a nationwide competitive system of television, were actively considering several proposals to increase the number of television stations by improving conditions for the use of the UHF spectrum. As an interim program in order to make UHF a more viable service the FCC proposed to add VHF channels in some areas, and to eliminate them in others, for the purpose of creating">*76 a number of exclusively UHF markets. This interim program was known as "deintermixture," and it was implemented with difficulty in a few television markets. Ultimately the All-Channel Receiver legislation was adopted as an attempt to make "intermixture" work and to provide a long-term solution to the UHF problem. When the All-Channel Receiver legislation was pending, the FCC was summoned before a congressional committe and gave a commitment that, if the bill were passed, the FCC would refrain for 10 years from making any rule requiring the shifting of all commercial television broadcasting from the VHF to the UHF channels. That commitment will expire within the next few years.

The number of UHF television stations on the air has grown from 84 in 1959 to 113 in 1966. Replacement of pre-1964 receivers with sets equipped for UHF has been greatly accelerated by the demand for new sets with color capability. It is estimated that by 1972 most television sets in use will be all-channel receivers capable of receiving both VHF and UHF

In comparison with transmission by VHF signals, UHF transmission suffers certain technical disadvantages. Factors of power and tower height being equal, ">*77 a UHF signal will not carry as far as a VHF signal and will be more greatly attenuated by rough terrain, buildings, trees, or other physical obstacles. On the other hand, an advantage of UHF is that its sound and picture signal is less disturbed than a VHF signal by manmade "noise" such as interference from electric motors. Because of its vulnerability to terrain factors and its shorter carry, UHF reception is best in markets where the terrain is flat, there is little foliage, and the population is concentrated.

A UHF signal can be made roughly comparable to a VHF signal by increasing the power of UHF transmitters and the sensitivity of receivers. The FCC set a maximum power limit for UHF stations of 5,000 kilowatts in order "to make UHF coverage more comparable to VHF." VHF stations are restricted to a maximum of 316 kilowatts for operation on channels 7 through 13, and 100 kilowatts for operation on channels 2 through 6. With this differential, a maximum power UHF signal is comparable in its reach to a maximum power VHF signal. In the early 1960's television receivers were improved to the point where UHF reception is almost comparable to VHF reception ">*1048 though an outdoor">*78 antenna may be necessary beyond a short distance from the station. Transmission of a UHF signal is more expensive than transmission of a comparable VHF signal. But because of its resistance to manmade "noise," good UHF reception tends to be clearer in terms of picture quality than VHF; so that if certain additional unrealized improvements are achieved in UHF transmission and reception this superiority in clarity will be particularly advantageous in color broadcasts.

The growing number of all-channel receivers and improvements in UHF transmission and reception have encouraged the construction of UHF stations in market areas formerly served only by more limited numbers of VHF stations. Although the FCC has deleted several UHF permits because of failure to construct facilities, and several UHF licenses because the licensees could not remain on the air for economic reasons, in the last few years broadcasters have shown an active interest in obtaining construction permits for UHF stations. However, before 1966 none of the three major national networks have affiliated exclusively with a UHF station when there is an available VHF station in the same market. As compared to other television">*79 markets in the United States, Houston-Galveston is a particularly desirable market for UHF broadcasting because the terrain is flat, there is little foliage, and the population is concentrated. In the Houston-Galveston market reception of a high-power UHF transmission would be almost comparable to VHF reception.

In 1948, the American Telephone & Telegraph Co. (AT&T) opened for commercial traffic extensive facilities for the transmission of television programs between cities by means of coaxial cable and, later, microwave relay. Such facilities originally connected the major cities in the eastern half of the United States. With the opening of these AT&T "interconnection" facilities, network operations in television began on a large-scale basis. The AT&T facilities were ultimately expanded to interconnect all the major cities in the United States. Interconnection by means of AT&T facilities reached Houston in 1952.

There are three national television networks: Columbia Broadcasting System (CBS), National Broadcasting Co. (NBC), and American Broadcasting Co. (ABC). Network operations of Allen B. DuMont Laboratories, Inc. (DuMont) ceased in 1955.

NBC, CBS, and ABC each owned five">*80 VHF stations at the time of trial of the instant case. Under FCC regulations ³ each network is entitled to own two UHF stations in addition to five VHF stations. No network owned a UHF station at the time of trial of the instant case.

">*1049 The FCC allocation of channels in the Houston area market as of August 1956 consisted of two VHF and three UHF commercial channels and one VHF educational channel allocated to Houston; one VHF and two UHF commercial channels and one UHF educational channel allocated to Galveston; and one UHF commercial channel allocated to Rosenberg, a city located approximately 30 miles southwest of the center of Houston. As of October 1967 the FCC allocation of channels in the Houston area market consisted of three VHF and three UHF commercial channels, one VHF educational channel and one UHF educational channel allocated to Houston; one UHF commercial channel and one UHF educational channel allocated to Galveston; and one UHF commercial channel allocated">*81 to Rosenberg.

The three commercial VHF channels in Houston are presently being used by stations KHOU-TV, KPRC-TV, and KTRK-TV. The educational VHF channel is being used by station KUHT, which belongs to the University of Houston.

As of the trial of the instant case, two of the three commercial UHF stations allocated to Houston and the commercial UHF station allocated to Rosenberg were on the air. A construction permit had been obtained to operate on the commercial UHF channel allocated to Galveston, and the FCC was to hold hearings to determine which of two applicants would obtain a construction permit to build facilities to operate on the third commercial UHF channel allocated to Houston.

At the time petitioner acquired television station KHOU-TV, there were only three national networks. In Houston, station KHOU-TV was affiliated only with CBS, station KTRK-TV was affiliated only with ABC, and station KPRC-TV was affiliated only with NBC.

The first television station on the air in Houston was KPRC-TV, channel 2, which commenced commercial broadcasting on January 1, 1949, as station KLEE-TV. In May 1950 the station was purchased by the owners of the Houston Post Co., publisher">*82 of the Houston Post and other newspapers. The Houston Post Co. currently owns radio station KPRC-AM and the owners of the Post also own a 32.5 percent interest in television station KFDM-TV (a CBS affiliate) in Beaumont, Tex.

KHOU-TV, channel 11, now owned by petitioner, commenced broadcasting in the Houston area market on March 22, 1953. Its city of license was Galveston. In 1958, with the approval of FCC its city of license was changed to Houston.

KTRK-TV, channel 13, commenced broadcasting on November 20, 1954. During the taxable years in issue it was owned by a group of stockholders, the largest of which was KTRH which owned 32 percent of the stock and which in turn was 70 percent owned by the Houston ">*1050 Chronicle. KTRH owned radio station KTRH, which was affiliated with the CBS radio network. In 1967 the station was purchased by Capital Cities Broadcasting Corp.

When KPRC-TV came on the air in 1949 it affiliated with NBC, CBS, and later, in 1952, with ABC. By 1952, KPRC-TV had affiliations with all three of these networks. When KHOU-TV came on the air, in March 1953, it affiliated with CBS and, in July 1953, also with ABC. Shortly thereafter, CBS and KPRC-TV ">*83 terminated their affiliation contract. KTRK-TV came on the air in November 1954, and affiliated with ABC shortly thereafter. At about the same time, the affiliation contracts between ABC and both KPRC-TV and KHOU-TV were terminated.

In 1958, the same year petitioner obtained a change of city of license for KHOU-TV from Galveston to Houston, petitioner also changed its station management. Within 2 or 3 years after 1958, petitioner also changed its programing in nonnetwork-time periods. Petitioner built a new studio and office building in 1959 and opened it in 1960 in Houston. In 1962 or 1963, petitioner filed a request to move the transmitting tower of KHOU-TV.

In 1956, the transmitting tower of KHOU-TV was located in Alvin, Tex., some 25 miles from downtown Houston. The transmitting tower of KPRC-TV was located within the city limits of Houston until 1964. Both KHOU-TV and KPRC-TV desired to utilize a higher transmitting tower, and KHOU-TV desired to have its tower closer to downtown Houston. In 1964 both KHOU-TV and KPRC-TV began to use a common transmitting tower located at DeWalt, Tex., approximately 18 miles southwest of downtown Houston. At all times the transmitting ">*84 tower of KTRK-TV has been located on Alameda Road, some 14 miles from downtown Houston.

During the taxable years in question, the percentage shares of television audience for stations KPRC-TV, KHOU-TV, and KTRK-TV were determined by the American Research Bureau (measured during prime time evening hours on a weekly basis) to be as follows:

	KPRC-TV	KHOU-TV	KTRK-TV
	(NBC)	(CBS)	(ABC)
	Percent	Percent	Percent
November 1956	37.5	37.6	24.5
May 1957	34.7	31.3	33.7
November 1957	36.7	34.3	28.6
March 1958	36.6	32.4	30.5
May 1958	37.9	32.0	30.0
September 1958	36.9	29.1	33.4
October-November 1958	35.7	28.0	35.9
January-February 1959	35.2	30.6	33.6
May 1959	35.0	30.4	34.5
October 1959	35.1	29.2	35.3
November 1959	34.9	30.5	32.8
November 1964	35.0	25.0	40.0

">*1051 During the taxable years in issue, the nationwide average evening (6-11 p.m.) share of television audience for affiliates of the three networks as determined from the reports of the Nielsen rating service was as follows:

	CBS affiliates	NBC affiliates	ABC affiliates
October-April	Percent	Percent	Percent
1956-57	43.0	34.0	22.9
1957-58	38.0	34.9	27.1
1958-59	37.4	33.0	29.6
1959-60	36.9	31.4	31.3

">*85 At the present time, none of the three commercial VHF television stations in Houston is in a dominant position. Advertisers consider both the American Research Bureau ratings and the Nielsen ratings as reliable bases on which to reach a decision to purchase network time or spot commercial time.

In 1967 Capital Cities Broadcasting Corp. purchased station KTRK-TV, the ABC affiliate in Houston, for a consideration of $ 21,289,500. Capital Cities' president, Thomas S. Murphy, testified on behalf of petitioner.

The president of Taft Broadcasting Co., Mr. Lawrence H. Rogers, also testified on behalf of petitioner. Taft Broadcasting Co. presently owns AM radio stations, FM radio stations and VHF television stations in each of five markets: In Buffalo, N.Y., in Columbus, Ohio, in Cincinnati, Ohio, in Birmingham, Ala., and in Kansas City, Mo. Taft also owns a UHF television station in Scranton-Wilkes-Barre, Pa. The Taft television stations in Buffalo and Kansas City are affiliated with NBC, the others are affiliated with ABC.

The television industry is an industry subject to and affected by new technological developments. Aside from the previously mentioned developments in UHF broadcasting, ">*86 other technological developments may alter industry patterns substantially within the next several years. Recent improvements in UHF transmission and reception have encouraged independent group television station operators and others to develop additional sources of programing to supply programs to the additional viable UHF stations as well as to the established VHF stations.

Chief among these other developments are: The anticipated further growth of community antenna television systems (CATV) which can be utilized in Pay-TV; the potential use of satellites in broadcasting; and home video-recording devices. These technical developments, along with developments in UHF broadcasting, increase the likelihood that the three largest national television networks will encounter increased competition from other program sources and raise the possibility that the television industry will not continue to be bound as ">*1052 rigidly as at present by a local limited-channel broadcasting system dominated by these networks.

CATV is a technique whereby television signals are brought to homes by way of a coaxial cable rather than through the air. CATV was originally designed to serve areas where">*87 reception was poor due to terrain factors. Typically a large antenna would be erected on a hilltop to receive television signals within air transmission range, and the signals would be conveyed by cable into the homes of persons who subscribed to receive the service. As many as 20 channels can be brought into the home on a single cable. In past years the number of CATV operating systems and subscribers increased rapidly and this trend still continues. As of January 1, 1957, there were 500 such systems serving some 350,000 subscribers; 10 years later there were 1,770 operating systems with 2,100,000 subscribers.

Pay-TV is a related development whereby programs are sent through CATV-type cables to viewers who pay on a per program basis. As of the time of trial Pay-TV broadcasts have been on an experimental basis.

The FCC has recognized that the ability of CATV systems to import signals from distant sources in major television markets poses a substantial economic threat to licensed television stations in these markets. Up until the time of trial of this case, the FCC has taken the position that CATV must be a supplemental service and that the dominant service of the United States">*88 in television is over-the-air service. Also at the time of trial, there was no large CATV system in any major market except New York, and this system was prohibited from bringing outside signals into New York or instituting its own programing. In 1966 a majority of the FCC adopted a rule which disallows the future importation of television signals from distant communities within the so-called "Grade A contours" of the 100 largest television markets in the absence of a full evidentiary hearing before the Commission. ⁴ Still under discussion is the possibility that CATV systems may in the future deliver programs of the present national networks or of new networks by wire from distant sources rather than by local broadcasting stations.

Several proposals have been made for the use in television broadcasting of synchronous satellites stationary relative to the rotation of the earth. One such proposal, satellite-to-home broadcasting, involves the contemplated use of synchronous satellites">*89 to beam programs directly from central studios to homes throughout the country, thus bypassing local stations. Use of satellites for direct broadcasting would enable networks to eliminate both costly AT&T interconnection charges ">*1053 and the need to affiliate with local stations. Home television sets which could receive such a signal are not now being commercially produced and distributed. It is contemplated, however, that the equipment needed for satellite-to-home broadcasting may be developed within the next 10 years. There has also been discussion of the use of satellites in place of the AT&T ground facilities to interconnect the network studios with local stations rather than with private homes. Discussion of these possibilities had become widespread in the broadcast industry, Congress and among the manufacturers near the end of the 1950's. Satellite to relay-station hookups are now being used to relay television signals between nations and continents but they are not being currently used to implement any of the proposals mentioned above.

Electronic video recording (EVR) is a device recently developed by CBS which allows for the recording of entire television programs">*90 on a convenient tape. From the EVR tape the program can be replayed on a suitably modified television set. There is the possibility that EVR tapes eventually will be made available to home viewers either by purchase or rental, thus offering "television on a library basis." As of the time of trial of the instant case, no EVR tapes had been produced for commercial sale.

Exhibit 19-S, stipulated by the parties, shows the facts with respect to the history of television network affiliations in each of the 84 television market areas which had three or more operating commercial television stations on December 31, 1962, including the dates of commencement and termination, and thus duration, of all network contracts between these stations and each of the networks during the years 1948 through 1962. Exhibit 26-Z, also stipulated by the parties, is a continuation of the same historical data in the same markets during the years 1963 through 1965. These data show that 81 CBS network affiliation contracts were in existence at the end of 1956 in these television markets; that between 1956 and 1965 CBS commenced 15 network affiliations; and that of the 96 affiliations in existence during 1957-65">*91 only 16 were terminated. Of these 16 terminations, 6 occurred in three VHF station markets and, in the case of 1 of these terminations, CBS purchased a station other than its prior affiliate. These data also show that in markets with exactly three commercial VHF stations, in all cases where contracts have terminated there has been a "switching" of affiliations and no VHF station has thereafter operated without a network affiliation contract. The stipulated exhibits indicate generally that in a three-station television market the longer a network is affiliated with a station the greater the tendency is for the affiliation to becomes permanent. In the taxable years in question, Houston was a three-station market.

">*1054 When station KHOU-TV came on the air in March 1953, it affiliated with CBS and has been continuously affiliated with CBS since that time. The CBS affiliation contract with KHOU-TV had been in existence over 14 years as of the time of trial of the instant case and has been renewed six times. The value of the petitioner's CBS network affiliation contract is greater now than the value which petitioner allocated as the basis of the network affiliation contract ">*92 in 1956.

The useful life of the network affiliation contract between CBS and television station KHOU-TV is indefinite and indeterminate.

OPINION

Petitioner in its income tax returns for the taxable years took deductions on account of the depreciation or amortization of a "CBS Network affiliation contract." The methods used by petitioner in calculating the amounts of these deductions are described in the stipulation as follows:

On September 1, 1956, petitioner, on its books of account, commenced to amortize its claimed basis of $ 2,740,000 allocated to the CBS affiliation contract, in nineteen equal monthly installments ending March 30, 1958. Beginning October 1, 1957, when the contract was extended for an additional two-year term, by virtue of neither party exercising its option to terminate the contract six months prior to its expiration date, petitioner commenced to amortize the then-remaining unamortized balance of the claimed basis of the contract in equal monthly installments over the contract as extended (thirty months through March, 1960). A similar recalculation of the period for amortization of the remaining unamortized claimed balance was made as of October 1, 1959, when">*93 the contract was extended for another two-year term.

Respondent disallowed these deductions on the ground that the network affiliation contract "does not have a useful life which can be determined with reasonable accuracy as required by section 167 of the Internal Revenue Code of 1954." This is equivalent to a determination that the contract had an indeterminable useful life under the pertinent statute and regulations.

In its petition petitioner alleges that respondent erred in failing to allow deductions for depreciation or amortization with regard to this contract not in the amounts claimed in the returns but in amounts reflecting an estimated useful life of the contract of 20 years. This allegation was consistent with our holding in Indiana Broadcasting Corporation, 41 T.C. 793">41 T.C. 793, revd. 350 F.2d 580 (C.A. 7), certiorari denied 382 U.S. 1027">382 U.S. 1027, which involved a similar contract held by a television corporation owned by the same interests as those which owned petitioner. In that case we held that the testimony adduced by the taxpayer warranted a conclusion that the taxpayer had proved with reasonable">*94 accuracy an average or useful life or probable number of ">*1055 renewals of its CBS network affiliation contract which entitled the taxpayer to deduct its cost of such contract on a 20-year straight-line method.

At the trial of this case petitioner announced that it would no longer rest its argument on the theory advanced by it in the Indiana case. On brief it states that it "does not now elect to challenge the Court of Appeals decision in Indiana and is therefore not requesting a finding of average or useful life." In his opening statement counsel for petitioner stated in effect that petitioner would contend that depreciation or amortization should be computed by a so-called reasonable-certainty rule under which, it is argued, a contract providing for successive renewals should be amortized "over the original term plus that number of renewals as are reasonably certain." ⁵ Subsequent to the trial petitioner filed a motion under Rule 17(d) for leave to amend the petition to conform to the proof which was granted. This amended petition alleges inter alia that at the close of each of the taxable years "there was no reasonable certainty of more than six future renewals">*95 of petitioner's network affiliation contract beyond the then current year" and that its cost basis for the contract "depreciated over a period including the then current term and six two-year renewal terms produces a reasonable allowance for depreciation."

At the trial petitioner's expert witnesses testified that in their opinion there was not reasonable certainty at the close of each taxable year that the affiliation contract would be renewed for more than six future terms in that there was at least one chance in three that the contract would not be renewed. ⁶

">*96 On brief petitioner states its position to be "that for each tax year depreciation of that portion of the contract cost which was unrecovered as of the beginning of the year should be allowed on the basis of a period which includes the then current term of the contract and six future renewal terms. Under this method, the period for depreciation ">*1056 is continually extended and the contract cost is never fully recovered as long as the contract lasts."

Respondent's argument may be summarized as follows: Petitioner's network affiliation contract which provided for automatic renewal unless one of the parties gave notice 6 months "prior to the expiration of the then current two-year period that the party sending such notice does not wish to have the term extended," which therefore might continue indefinitely and which fluctuates and even increased in value, is not a wasting asset properly subject to depreciation; and even if the contract be considered as an intangible asset useful for only a limited period, the length of such limited period cannot be estimated with reasonable accuracy by reference to the testimony adduced herein by the petitioner or on the record before us and therefore">*97 no depreciation thereon is allowable.

The Code section pertinent to the instant controversy is section 167(a), which provides as follows:

SEC. 167. DEPRECIATION.

(a) General Rule. -- There shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion, wear and tear (including a reasonable allowance for obsolescence) --

(1) of property used in the trade or business, or

(2) of property held for the production of income.

Pursuant to his authority granted by section 7805(a) to prescribe all needful rules and regulations under the Internal Revenue title, respondent has promulgated Income Tax Regulation section 1.167(a)-3 interpreting the applicability of section 167 to intangible property used in a taxpayer's trade or business. That regulation states as follows:

Sec. 1.167(a)-3. Intangibles.

If an intangible asset is known from experience or other factors to be of use in the business or in the production of income for only a limited period, the length of which can be estimated with reasonable accuracy, such an intangible asset may be the subject of a depreciation allowance. Examples are patents and copyrights. An intangible asset, the useful life of">*98 which is not limited, is not subject to the allowance for depreciation. No allowance will be permitted merely because, in the unsupported opinion of the taxpayer, the intangible asset has a limited useful life. No deduction for depreciation is allowable with respect to goodwill. For rules with respect to organizational expenditures, see section 248 and the regulations thereunder. For rules with respect to trademark and trade name expenditures, see section 177 and the regulations thereunder.

Although section 167(a) itself does not mention intangible property, as interpreted by respondent's regulations over the years beginning with Treasury Regulations 45, art. 163, issued under the Revenue Act of 1918, through section 1.167(a)-3 of the regulations issued under section 167 of the 1954 Code, the statute has been construed as permitting a reasonable allowance for the depreciation of an intangible ">*1057 asset only if its duration can be ascertained with "reasonable certainty" or "reasonable accuracy."

As we understand petitioner's contentions, petitioner does not directly attack respondent's interpretation of section 167 as stated in his regulations. Instead petitioner, relying">*99 on Westinghouse Broadcasting Co., 36 T.C. 912">36 T.C. 912, affd. 309 F.2d 279 (C.A. 3), certiorari denied 372 U.S. 935">372 U.S. 935, and certain cases cited therein, ⁷ contends that the regulation's test applied to determining the useful life of a renewable intangible asset such as a lease or other contract is met where the evidence of record shows that only a certain number of renewals, and no more, can be anticipated with "reasonable certainty." Petitioner argues that in these cases a doctrine relating to intangible assets created by and existing pursuant to the renewable contracts was developed which was stated as an administrative rule by respondent in T.D. 4957, 1939-2 C. B. 87, in pertinent part as follows:

In determining deductions from gross income of items in respect of depreciation or amortization of the cost of improvements erected upon leased premises or the cost or other basis of a lease, including all capital expenditures in connection therewith, in cases in which the lease contains an unexercised option of renewal, the manner of spreading such depreciation or amortization">*100 over the term of the original lease, together with the renewal period or periods, depends upon the facts in the particular case. As a general rule, unless the lease has been renewed or the facts show with reasonable certainty that the lease will be renewed, the cost or other basis of the lease or the cost of improvements shall be spread only over the number of years the lease has to run, without taking into account any right of renewal. * * *

The logical connotation of this rule is that if the facts show with reasonable certainty that a lease will be renewed "the cost or other basis of the lease * * * shall be spread * * * over the number of years the lease has to run, * * * taking into account any right of renewal." It seems obvious to us that there is also implicit in this "rule" a requirement that the facts show with reasonable certainty not only the extent of the original or primary term granted by the lease but also the length of the period or periods for which the lease will be renewed so that the cost of the lease can be spread over the entire number of years the lease has to run taking into account the reasonably certain renewals.

">*101 ">*1058 Petitioner stresses the language used by us in 36 T.C. 912">Westinghouse Broadcasting Co., supra at 920, 921, as follows:

Petitioner points to Flynn, Harrison & Conroy, Inc., 21 B.T.A. 285">21 B.T.A. 285, 21 B.T.A. 285">287 (1930), which seems to hold that contract renewal provisions or actual renewals may be ignored in determining useful lives of contracts and that estimates need not be made of the probability of renewal. This doctrine has not been followed by this Court in subsequent cases involving leases (23 B.T.A. 566">William Penn Hotel Co., supra;Harris-Emery Co., 37 B.T.A. 958">37 B.T.A. 958, 37 B.T.A. 958">965 (1938); Leonard Refineries, Inc., 11 T.C. 1000">11 T.C. 1000, 11 T.C. 1000">1010 (1948); 15 T.C. 534">Alamo Broadcasting Co., supra;19 T.C. 305">Hens & Kelly, Inc., supra;Jos. N. Neel Co., 22 T.C. 1083">22 T.C. 1083 (1954)), franchises (Cleveland Railway Co., 36 B.T.A. 208">36 B.T.A. 208 (1937); 11 T.C. 1014">East Kauai Water Co., Ltd., supra), and licenses (12 T.C. 1204">Morris Nachman, supra;Tube Bar, Inc., supra;">*102 V .P. Shufflebarger, 24 T.C. 980">24 T.C. 980 (1955); KWTX Broadcasting Co., 31 T.C. 952">31 T.C. 952 (1959), affd. 272 F.2d 406 (C.A. 5, 1959)). This Court specifically stated, in 36 B.T.A. 208">Cleveland Railway Co., supra at 211, that the same rationale governs leases, franchises, and contracts and affirmed that view in Harris-Emery Co., 37 B.T.A. 958">37 B.T.A. 958, 37 B.T.A. 958">964-965 (1938). This Court made clear its divorcement from the Flynn, Harrison view in its unanimous opinion in 12 T.C. 1204">Morris Nachman, supra at 1211; "In addition, we are confronted with the fact of actual renewal of the license during the year before us, and the vitality of this even cannot be minimized." We decline to follow the Flynn, Harrison doctrine in this proceeding.

Petitioner argues that by the use of this language, even though it was obviously directed only to the proposition that contract-renewal provisions are not to be ignored in determining the useful lives of contracts, we have committed ourselves to the proposition that the rules relating to the depreciation of a lease contract">*103 or a contract granting a franchise to use the public streets for long periods with options of negotiating renewals granted either by contract or custom should be equally applicable to all contracts, including a network affiliation contract for a short initial period and automatically renewable for successive periods in perpetuity unless one of the parties formally notifies the other of its election not to renew. Therefore, petitioner would have us conclude, this Court has indicated its acceptance of the so-called reasonable-certainty rule under which petitioner justifies the depreciation now claimed by it.

In our opinion this argument is vitiated by other observations made in that case which are more relevant to the ratio decidendi therein, as for example the following from pages 918 and 919:

We agree with respondent that this contract has not been shown to have a determinable useful life.

The contract was renewable automatically unless, at least 90 days prior to the expiration of any 2-year term, either party sent the other written notice of intention not to renew. Petitioner says this renewal clause adds nothing to the contract since parties to any contract may, by agreeing">*104 to do so, renew any contract whether or not a renewal clause is present. Absent the renewal clause, it might appear that this contract had a 2-year term and its cost should be depreciated ">*1059 over the 7 months of that term remaining when petitioner purchased the contract.

By the same token, this automatic renewal clause is no different in effect from a provision for an indefinite term with the right in either party to cancel as of the next biennial anniversary date of the contract. Under such circumstances, the contract has an indeterminate useful life and therefore no deduction may be taken on account of depreciation. Coca-Cola Bottling Co., 6 B.T.A. 1333">6 B.T.A. 1333 (1927). See David Dab, 28 T.C. 933">28 T.C. 933 (1957), affd. 255 F.2d 788 (C.A. 2, 1958).

We also pointed out (at page 919) that the large amount of money paid by the taxpayer for the contract ⁸ made it "incredible that petitioner was not reasonably certain of renewals"; and that "The fact that the contract conforms to the maximum term permissible under the Federal Communications Commission * * * suggests that the ostensible term is not necessarily">*105 the term * * * contemplated by the parties to such a contract."

We also said that "Petitioner must show more than uncertainty as to the length of the contract's useful life," and in concluding that the taxpayer not only failed to prove that the contract had the specific useful life claimed by the taxpayer but also failed to prove that "respondent erred in his determination that the contract had an indeterminable useful life," we again pointed out that "In form, the contract was perpetually renewable on the same terms without either party thereto taking any action or attempting to reach a fresh meeting of the minds." 36 T.C. 912">36 T.C. 921, 922.

We are unable to agree with petitioner's contention that the language used by us in 36 T.C. 912">Westinghouse Broadcasting Co., supra, requires the application in this case of a test similar to the test stated in T.D. 4957,">*106 supra.

It is true that in some cases the courts have concluded that the useful life of the contract for depreciation purposes is ascertainable and may be estimated with reasonable accuracy as being the period of the original term without regard to renewals. Birmingham News Co. v. Patterson, 224 F. Supp. 670">224 F. Supp. 670 (1963) affirmed on opinion below, 345 F.2d 531 (C.A. 5), is an example. In that case the initial term of the contract was a long period (30 years) with optional renewals for long periods (10 years) unless notices to terminate were given so long before the end of the term or renewals (2 years) as to indicate the contemplation by the parties of the necessity or desirability of renegotiating the contract, the amount paid for the contract was not obviously excessive if there were not renewals, and the initial term of the contract was not a short one selected by the parties only to conform to a regulation of an administrative body. The facts involved in those cases differ so ">*1060 materially from the facts in this case that they are not helpful in a solution of this case and do not sustain the burden of petitioner's">*107 argument.

In further support of its contention, petitioner cites section 178(c), ⁹">*108 enacted into the 1954 Code as part of the Techical Amendments Act of 1958, and regulations promulgated thereunder ¹⁰ for the proposition ">*1061 that both Congress and respondent regard the reasonable-certainty rule which petitioner contends should be applied in the instant case as a sound, proper, and administratively workable rule when dealing with the problem of leases or other contracts having multiple possible renewal terms.

">*109 Section 178 by its terms relates to "Depreciation or Amortization of Improvements made by Lessee on Lessor's Property." Its context as well as its legislative history ¹¹ clearly indicate that it was intended to apply only to depreciation problems incident to a lease of improved real estate with a substantial initial term and a provision for a limited number of optional renewals or extensions thereof also for substantial periods. Income Tax Regulations section 1178-3 (b) and (c) use as examples leases having an initial term of 30 years with two renewal options of 5 years each. In such a case there is no question but that the intangible (i.e. the lease) is "for only a limited period" and that the length of it "can be estimated with reasonable accuracy" within the purview of Income Tax Regulations section 1.167(a)-3, supra. The period will be not less than 30 years and if certain facts are shown with reasonable certainty it may be 35 years or 40 years. Thus the reasonable-certainty ">*1062 test referred to in section 178(c) of the Revenue Code of 1954 and Income Tax Regulations section 1.178-3 presupposes that Income Tax Regulations section 1.167(a)-3 has been satisfied in">*110 that the intangible asset (i.e., the lease of improved real estate) has been shown to be "of use in the business or in the production of income for only a limited period, the length of which can be estimated with reasonable accuracy" (Emphasis supplied.)

We dismiss as completely untenable any suggestion that the provisions of section 178 and regulations section 1.178-3 referring to a reasonable certainty test in connection with the amortization of leases indicate congressional approval of any reasonable-certainty rule such as that advocated herein by petitioner having general application to all intangible assets created by contracts or having particular application to a network affiliation contract such as the one involved in the instant case which was for a nominal term of 2 years (obviously fixed in a formal compliance with the rules of the Federal Communications Commission) "perpetually renewable on the same terms without either party taking">*111 any action * * * to reach a fresh meeting of the minds" unless either party sent to the other a written notice of intention not to renew, and acquired by the taxpayer at a cost (in this case of $ 2,740,000) which clearly indicated that both parties to the contract contemplated the automatic renewals of the contract over an indefinite period of time.

Petitioner has made no attempt to prove the length of the useful life of the network contract here involved. As we have pointed out it specifically abjures the theory advanced by the taxpayer in 41 T.C. 793">Indiana Broadcasting Corporation, supra, and on brief stated its election not to challenge the Court of Appeals in that case as a reason for "not requesting a finding of average or useful life." While there are certain statistics in the record with regard to terminations of network contracts petitioner has not urged that there was such a definite or consistent pattern as to provide a basis for estimating under any statistical method (the "Poisson exponential theory of failure" or other less esoteric method) the average of useful life of the network contract. Thus we do not have before us here the problem considered">*112 by this Court and the Court of Appeals in 41 T.C. 793">Indiana Broadcasting Corporation, supra, or by the Court of Appeals in the recent case of Super Food Services, Inc. v. United States, 416 F.2d 1236 (C.A. 7, 1969). The absence of any contention as to a statistical pattern of terminations also distinguishes this case from the situation covered by Rev. Rul. 67-113, 1967-1 C.B. 55, referred to in footnote 6, supra.

">*1063 We also point out that petitioner's proof herein does not form the basis of predicting the useful life of its contract by estimating some definite future date before which a termination of the contract is more probable than after such date or after which a termination is more probable than before. As we have indicated petitioner's proposed reasonable-certainty rule assumes a future date with reference to which estimates of probability of terminations are made (12 years after the date of the expiration of the current contract period) which recedes into the future -- every 2 years -- and thus constantly extends the estimate of the limited period of the useful ">*113 life of the intangible.

Petitioner has attempted to meet its burden of proving that respondent erred in his determination that the network affiliation contract sought to be amortized by petitioner did not have a useful life which could be determined with reasonable accuracy by the testimony of one of its officers and of certain witnesses expert in the field of communications and particularly in that of television to the effect that in their opinion there was no reasonable certainty at the close of each of the taxable years here in question that the contract then in existence would be renewed for more than six future terms in that there was at least one chance in three that it would not be so renewed.

These witnesses predicated their opinions principally on the following considerations: (1) Their view that technological and regulatory developments in the field of UHF broadcasting would lead to a rapid increase in the number of UHF stations in competition with existing VHF stations resulting in a period of instability in the television industry similar to that experienced at the end of the "freeze" in 1952 when many new televisions came on the air and many affiliation contracts were ">*114 terminated, ¹² (2) their view that the development of CATV and, possibly, Pay-TV might lead to changes in network affiliation relationships and result in terminations, and (3) their view that the development of satellite-to-home broadcasting and of home record devices might completely destroy the network system.

Their testimony does not indicate that any of these technological or regulatory possibilities will precipitate events causing the termination of petitioner's contract at the end of, but not beyond or before, any particular period of time after it was acquired. It does not show which of the various potential developments had the greater likelihood of precipitating termination, how such a termination-causing">*115 event would would be most likely to happen, or when it would occur. In our opinion this testimony would only support a finding that there was a lingering ">*1064 possibility during the taxable years that changing economic, legal, and technological conditions might in some way cause a termination of petitioner's contract at some time subsequent to the then current term which could not be even roughly approximated -- much less "estimated with reasonable accuracy." The proper adjective to describe the possibility of termination disclosed by this testimony is "indefinite." We have held that "indefinite expectations and suppositions are not enough to support a claim for obsolescence," see James D. Dunn, 42 T.C. 490">42 T.C. 490, 42 T.C. 490">495; Steven's Pass, Inc., 48 T.C. 532">48 T.C. 532, 48 T.C. 532">541. In this case the potential developments referred to in the testimony of petitioner's expert witnesses are quite similar to elements contributing to economic obsolescence and we feel that "indefinite expectations and suppositions" are equally inappropriate in cases involving the amortizations of intangibles.

Any doubts as to the indefiniteness of the elements making ">*116 up petitioner's theory are laid at rest by the testimony of respondent's expert witness who was not only thoroughly qualified (as were also petitioner's expert witnesses) but who was also completely disinterested in the outcome of this litigation (which could not be said of petitioner's witnesses). This witness testified that a study of 60 TV markets in which there were three commercial VHF stations in operation (as in the Houston-Galveston area) made by him covering the years subsequent to 1955 disclosed that there were changes in network affiliations in only 6, that the changes were made for various reasons, some terminations being at the election of the stations and the others being made by the networks, and that these changes resulted not in a complete loss of a network contract but only in a change of affiliation. He was of the opinion that the danger of termination did not increase with the passing of time and that the time when the termination of a network affiliation contract might be anticipated was completely unpredictable.

In view of the testimony of respondent's expert witness and of the facts disclosed by the record we are not bound by the conclusions of petitioner's">*117 experts even though each of them testified that he had an opinion as to whether there was reasonable certainty that an affiliation contract such as the one involved herein would be renewed for more than six successive terms, that his opinion was that there was no reasonable certainty that it would be so renewed, that he had an opinion as to whether there was more than one chance in three that such a contract would not be renewed for more than six successive terms, and that his opinion was that there was more than one chance in three that such a contract would not be renewed for more than six successive terms. See Fitts' Estate v. Commissioner, 237 F.2d 729, 732-733 (C.A. 8). For the reasons indicated above we are in disagreement with their opinions as ">*1065 to the periods of time to be used in computing the amortization of petitioner's contract.

The testimony of petitioner's officer pointed to disadvantageous circumstances surrounding station KHOU-TV during the taxable year which caused him to fear the possibility that CBS might terminate the affiliation contract and to share the opinion of petitioner's expert witnesses that there was no ">*118 reasonable certainty that the contract would be renewed for more than six successive terms and that there was more than one chance in three that the contract would not be renewed for more than six successive terms. This officer particularly viewed with alarm the facts that prior to 1958 the station was licensed to Galveston instead of Houston, that its broadcasting tower was so located that it could not send a completely satisfactory signal over the entire Houston area, that it had no local newspaper affiliation, that it had not had prior radio affiliation with CBS, and that as a result of mediocre management of the station prior to its acquisition by petitioner it did not have a satisfactory share of business in the Houston market area. Again we point out the causative and chronological indefiniteness of the depressing elements referred to in this testimony. We also point out that within 2 years after petitioner acquired the station and the contract its city of license was changed to Houston, it acquired within 7 or 8 years a completely satisfactory broadcasting tower, it was affiliated through common ownership of stock with three other corporations operating four television stations">*119 all of which had CBS affiliation, and the major stock interest in these corporations (including petitioner) was held by the parties controlling the New York Herald Tribune which was at that time a newspaper well known and influential throughout the country. We also point out that petitioner's officers as of the end of the taxable year in which the network affiliation contract was acquired allocated as its cost the sum of $ 2,740,000 and that it was worth more in 1968 than in the year of its acquisition. Again we conclude that in view of the testimony of respondent's expert (and disinterested) witness and of the facts of record herein the opinion expressed by petitioner's officer with regard to the certainty or lack of certainty in connection with the renewal of this contract for more than 6 times is unconvincing and does not persuade us that respondent erred in his determination.

After a thorough consideration of the entire record in the instant proceedings, including the expert testimony introduced on behalf of both petitioner and respondent, we conclude that petitioner has not shown a reasonable basis for predicting, with reasonable accuracy or reasonable certainty, the expected">*120 useful life of it network affiliation contract. The evidence of record fails to show beyond the level of ">*1066 speculation when petitioner's contract may become valueless to it or to CBS and thus cause its termination by either, nor does the evidence show beyond the level of speculation which of the many possible causes for termination of network affiliation contracts in general, if any, might render petitioner's contract valueless to petitioner or to CBS and lead to its termination or the time when the event constituting such a cause might occur. Cf. Burnet v. Niagara Falls Brewing Co., 282 U.S. 648">282 U.S. 648. ¹³ In our opinion petitioner has failed to prove facts upon which we could form even a "reasonable approximation" of the useful life of the intangible here in question. Certainly it has failed to prove that the depreciation of the contract "over a period including the then current term and six two-year renewal terms" produces a reasonable allowance for depreciation.

">*121 In our opinion the so-called reasonable-certainty rule advocated by the petitioner has no proper application in the computation of the amortization of the intangible asset here involved. It is our further opinion that even if it be assumed arguendo that such a rule might properly have application to the amortization problem before us the factual basis for its application has not been proved.

Decision will be entered for the respondent.

DAWSON; TANNENWALD

Dawson, J., concurring: On the basis of this record and the theory urged by petitioner, I agree with the conclusion reached in the majority opinion. However, I would like to stress that, if the petitioner in this case had established an estimated useful life of the network affiliation contract with reasonable accuracy by using statistical data and analyses based upon the general experience of the television industry, I would allow a depreciation deduction on a straight-line method. My reasons are fully spelled out in this Court's opinion in Indiana Broadcasting Corporation, 41 T.C. 793">41 T.C. 793 (1964). I recognize, of course, that the Court of Appeals for the Seventh Circuit has rejected this view. ">*122 I believe that if it can be established that an intangible asset will in all probability terminate or exhaust, the courts should more readily accept a reasonable estimate of useful life, derived from competent ">*1067 statistical formulae, to determine the period over which the cost of the asset can be depreciated. In this connection industry experience may be adequate proof of the "period" of the intangible asset's useful life to a particular taxpayer. Under such circumstances I would discard the unrealistic differentiation often drawn between tangible and intangible assets.

Tannenwald, J., concurring: I agree with Judge Dawson's reservations. In addition, I continue to be concerned with the manner in which depreciation and amortization are seemingly used interchangeably in opinions of this Court, of which the majority opinion is an example. While such use does not affect either the rationale or the result in the instant case, there are other situations in which a careful delineation between depreciation and amortization is essential. See my dissenting opinion in Allen M. Early, 52 T.C. 560">52 T.C. 560 (1969).

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Footnotes

• 1. Hereafter all section references are to the Internal Revenue Code of 1954 unless otherwise indicated.↩

• 2. See 47 C.F.R. sec. 3.658↩ (c).

• 3. See 47 C.F.R. sec. 73.636↩(a)(2).

• 4. See 47 C.F.R. sec. 74.1107↩.

• 5. On brief petitioner also refers to this technique as the multiple-renewal method.↩

• 6. In connection with this latter phase of its argument, petitioner cites Rev. Rul. 67-113, 1967-1 C.B. 55. In that revenue ruling, respondent ruled in favor of an airline which sought to amortize costs of obtaining temporary certificates of public convenience and necessity issued by the Civil Aeronautics Board (CAB) for the purpose of serving a new air route. The facts as stated in that revenue ruling were that CAB temporary route certificates are limited to run for stated periods of time, usually 5 years, and renewal of such certificates is contingent upon approval by the CAB after a full-scale hearing held by the CAB. The CAB may also revoke these temporary certificates before their terms expire on its own initiative if the CAB determines, for example, that the certified air routes have not generated sufficient traffic to justify their operation. Upon information submitted by the taxpayer which indicated that during a 10-year period the CAB revoked or did not renew the taxpayer's temporary certificates as to approximately one third of the cities which the CAB had certified on a temporary basis↩, the respondent ruled that renewals of the authority granted on a temporary basis did not occur with "reasonable certainty" and consequently that amortization was to be allowed for the stated term of the CAB temporary certificate.

• 7. Petitioner cites the following 12 cases cited in the Westinghouse case: William Penn Hotel Co., 23 B.T.A. 566">23 B.T.A. 566 (1931), acq. X-2 C.B. 77; Harris-Emery Co., 37 B.T.A. 958">37 B.T.A. 958, 37 B.T.A. 958">965 (1938); Leonard Refineries, Inc., 11 T.C. 1000">11 T.C. 1000, 11 T.C. 1000">1010 (1948), acq. 1949-2 C.B. 2; Alamo Broadcasting Co., 15 T.C. 534">15 T.C. 534 (1950), acq. 1951-1 C.B.; Hens & Kelly, Inc., 19 T.C. 305">19 T.C. 305 (1952), acq. 1953-1 C.B.; Jos. N. Need Co., 22 T.C. 1083">22 T.C. 1083 (1954), acq. 1954-2 C.B. 5; Cleveland Railway Co., 36 B.T.A. 208">36 B.T.A. 208 (1937), acq. 1937-2 C.B 5; East Kauai Water Co., 11 T.C. 1014">11 T.C. 1014 (1948); Morris Nachman, 12 T.C. 1204">12 T.C. 1204 (1949), affd. 191 F.2d 934 (C.A. 5, 1951); Tube Bar, Inc., 15 T.C 922 (1950); V. P. Shufflebarger, 24 T.C. 980">24 T.C. 980 (1955); KWTX Broadcasting Co., 31 T.C. 952">31 T.C. 952 (1959), affd. 272 F.2d 406↩ (C.A. 5, 1959).

• 8. In this case the amount of the total purchase price allocated by petitioner to the contract was $ 2,740,000.↩

• 9. SEC. 178. DEPRECIATION OR AMORTIZATION OF IMPROVEMENTS MADE BY LESSEE ON LESSOR'S PROPERTY.

  (a) General Rule. -- Except as provided in subsection (b), in determining the amount allowable to a lessee as a deduction for any taxable year for exhaustion, wear and tear, obsolescence, or amortization --

  (1) in respect of any building erected (or other improvement made) on the leased property, if the portion of the term of the lease (excluding any period for which the lease may subsequently be renewed, extended, or continued pursuant to an option exercisable by the lessee) remaining upon the completion of such building or other improvement is less than 60 percent of the useful life of such building or other improvement, or

  (2) in respect of any cost of acquiring the lease if less than 75 percent of such cost is attributable to the portion of the term of the lease (excluding any period for which the lease may subsequently be renewed, extended, or continued pursuant to an option exercisable by the lessee) remaining on the date of its acquisition,

  the term of the lease shall be treated as including any period for which the lease may be renewed, extended, or continued pursuant to an option exercisable by the lessee, unless the lessee establishes that (as of the close of the taxable year) it is more probable that the lease will not be renewed, extended, or continued for such period than that the lease will be so renewed, extended, or continued.

  (b) Related Lessee and Lessor. --

  * * * *

  (c) Reasonable Certainty Test. -- In any case in which neither subsection (a) nor subsection (b) applies, the determination as to the amount allowable to a lessee as a deduction for any taxable year for exhaustion, wear and tear, obsolescence, or amortization --

  (1) in respect of any building erected (or other improvement made) on the leased property, or

  (2) in respect of any cost of acquiring the lease, shall be made with reference to the term of the lease (excluding any period for which the lease may subsequently be renewed, extended, or continued pursuant to an option exercisable by the lessee), unless the lease has been renewed, extended, or continued or the facts show with reasonable certainty that the lease will be renewed, extended, or continued.↩

• 10. Sec. 1.178-3. Reasonable certainty test.

  (a) In any case in which neither section 178(a) nor (b) applies, the determination as to the amount of the deduction allowable to a lessee for any taxable year for depreciation or amortization in respect of any building erected, or other improvements made, on leased property, or in respect of any cost of acquiring a lease, shall be made with reference to the original term of the lease (excluding any period for which the lease may subsequently be renewed, extended, or continued pursuant to an option exercisable by the lessee) unless the lease has been renewed, extended, or continued, or the facts show with reasonable certainty that the lease will be renewed, extended, or continued. In a case in which the facts show with reasonable certainty that the lease will be renewed, extended, or continued, the term of the lease shall, beginning with the taxable year in which such reasonable certainty is shown, be treated as including the period or periods for which it is reasonably certain that the lease will be renewed, extended, or continued. If the lessee has given notice to the lessor of his intention to renew, extend, or continue a lease, the lease shall be considered as renewed, extended, or continued for the periods specified in the notice. See paragraph (e) of sec. 1.178-1.

  (b) The reasonable certainty test is applicable to each option to which the lease is subject. Thus, in a case of two successive options, the facts in a particular taxable year may show with reasonable certainty that the lease will be renewed pursuant to an exercise of only the first option; and, beginning with such year, the term of the lease will be treated as including the first option, but not the second. If in a subsequent taxable year the facts show with reasonable certainty that the second option will also be exercised, the term of the lease shall, beginning with such subsequent taxable year, be treated as including both options. Although the related lessee and lessor rule of section 178(b) and paragraph (d) of sec 1.178-1 does not apply in determining the period over which the cost of acquiring a lease may be amortized, the relationship between the lessee and lessor will be a significant factor in determining whether the "reasonable certainty" rule of section 178(c) and this section applies.

  (c) The application of the provisions of this section may be illustrated by the following examples:

  Example (1). Corporation A leases land from lessor B for a period of 30 years beginning with January 1, 1958. Corporation A and lessor B are not related persons. The lease provides that Corporation A will have two renewal options of 5 years each at the same annual rental as specified in the lease for the initial 30 years. Corporation A constructs a factory building on the leased land at a cost of $ 100,000. Corporation A was not, on July 28, 1958, under a binding legal obligation to erect the building. The construction was commenced on August 1, 1958, and was completed and placed in service on December 31, 1958. On January 1, 1959, Corporation A has 29 years remaining in the initial term of the lease. The estimated useful life of the building on January 1, 1959, is 40 years. The location of the leased property is particularly suitable for Corporation A's business and the annual rental of the property is lower than A would have to pay for other suitable property. No factors are present which establish that these conditions will not continue to exist beyond the initial term of the lease. Since the period remaining in the initial term of the lease on January 1, 1959 (29 years) is not less than 60 percent of the estimated useful life of the building (60 percent of 40 years, or 24 years), the provisions of section 178(a) and paragraph (b) (1) of sec. 1.178-1 do not apply, and since Corporation A and lessor B are not related, section 178(b) and paragraph (d) of sec. 1.178-1 do not apply. However, since the facts show with reasonable certainty that Corporation A will renew the lease for the period of the two options (10 years), the cost of the building shall be amortized over the term of the lease, including the two renewal options, or 39 years.

  Example↩ (2). Assume the same facts as in example (1), except that a term of 30 years is the longest period that lessor B is willing to lease the unimproved property; that there was no agreement that Corporation A will have any renewal options; and that any other location would be as suitable for Corporation A's business as the leased property. Since the facts do not show with reasonable certainty that the initial term of the lease will be renewed, extended, or continued, Corporation A shall amortize the cost of the building over the remaining term of the lease, or 29 years.

• 11. See S. Rept. No. 1983, 85th Cong., 2d Sess., pp. 25-27, 134-138.↩

• 12. In connection with the fear expressed by these witnesses that contract terminations might result from an increase in the number of UHF stations it was pointed out that the Houston-Galveston area was ideally suited for UHF stations since it was flat, had little foliage and its population was concentrated.↩

• 13. We point out that unlike such cases as Northern Natural Gas Co. v. O'Malley, 277 F.2d 128 (C.A. 8), reversing 174 F. Supp. 176">174 F. Supp. 176 (D. Neb.) and Shell Pipe Line Corp. v. United States, 267 F. Supp. 1014">267 F. Supp. 1014↩ (S.D.Tex.), the period of the usefulness of the intangible in this case cannot be approximated by approximating the period of usefulness of a tangible asset to which it relates, e.g., the approximation of the period of usefulness of pipeline rights by way of approximating the useful life of the gas wells served by the pipelines.