Broadcasting Telecasting (Apr-Jun 1957)

BROADCASTING TELECASTING Vol. 52, No. 17 APRIL 29, 1957 NO AFFILIATION TAX WRITE-OFFS? • Government says network contracts can't be depreciated • ff tax courts agree, market prices of tv stations could fall A TAX ruling which may cost broadcasters millions of dollars has been issued by the Internal Revenue Service, B«T learned last week. If the ruling is sustained in the courts, it could deflate the sales prices of network affiliated television stations and considerably alter the profit positions of broadcasters who have bought such stations in the expectation of gaining tax benefits by depreciating the value of network contracts. In unannounced instructions to its agent in Pittsburgh, the Washington headquarters of IRS has ordered the disallowance of a claim by Westinghouse Broadcasting Co. to depreciate a network affiliation valued at $5 million. This was the asset value placed on the NBC affiliation of WPTZ (TV) Philadelphia when WBC bought the assets of the ch. 3 outlet from the Philco Corp. in 1953 for $8.5 million. WBC filed its first tax return with this property among its holdings in 1954, taking a five year depreciation allowance on the $5 million affiliation value. It is this claim which the Washington IRS office has ordered disallowed. The revenue service has maintained, it is understood, that a network affiliation cannot be depreciated because it has no fixed term. Depreciation is allowed on tangible property and on some intangible assets, it was pointed out, when there is a fixed "life" to the asset. But it was emphasized the life of certain assets cannot be calculated, and therefore cannot be depreciated. An example of this type of asset, it was suggested, is "good will." The federal tax laws permit capital outlays to be written off — usually over a fixed period. Broadcast equipment (transmitters, antennas, towers, consoles, etc.) can be depreciated, with each piece of apparatus having a definite term. Depreciation works this way: If a certain piece of equipment costs $10,000, and is considered to have a life of 10 years, then the taxpayer can deduct $1,000 per year from his taxable income as depreciation on this gear. WBC's claim for a five-year depreciation on the $5 million network affiliation valuation comes to $1 million per year. WBC made this claim on the basis of prior IRS and court rulings. In fact, when WBC bought KEX Portland, Ore., in 1944 for $400,000, the Blue Network affiliation was valued at $187,500 and the revenue agency permitted this to be written off in five years. WBC maintained that network contracts have a fixed term — two years as permitted by FCC regulations. The fact that renewals are made has no bearing on determining that an affiliation contract is a fixed-term contract, WBC emphasized. It was understood that the revenue department made a proposal to KWFT Wichita Falls, Tex., several years ago when it was bought by Kenyon Brown and his associates, which pro-rated the write-off over a period of years, based on renewals. In this manner, it was understood, the valuation is never completely written off, but the asset becomes smaller and smaller. The IRS ruling is considered precedentmaking in the broadcast field. Up to now, it is understood, depreciation of network affiliation values has been permitted by IRS field agents. However, the amounts have not approached the $5 million involved in the WBC case. In the aggregate, however, a major sum running into the millions of dollars is involved — particularly in the light of the increased number of multi-milliondollar television station sales in recent years. Reopening the Cases It was pointed out that in many of the more recent cases where such depreciation has been permitted by Internal Revenue field agents, the adverse ruling by IRS' Washington office means the reopening of these tax returns and the recomputation of taxes. The statute of limitations for prosecution in tax cases is operative after three years. It is expected that when WBC is formally notified that its depreciation claim cannot be allowed, an appeal will be filed with the U. S. Tax Court. The case will then be heard by a tax commissioner and a decision rendered. The tax commissioner's decision can be appealed to the full Tax Court. The usual tax case of this magnitude runs for several years. WBC transferred the Philadelphia ch. 3 station, plus its am adjunct, KYW in the same city, to NBC last year in exchange for NBC's WNBK (TV) and WTAM-AM-FM Cleveland, plus $3 million. The Dept. of Justice has charged that this transaction was forced on WBC by the network's threat to cancel its affiliations with WBC stations. This complaint was answered by RCA-NBC earlier this month [B«T, April 15]. Among some of the larger station sales during the past three years are the following (but which of them involve depreciation claims similar to the WBC case is unknown) : KBTV (TV) Denver, Colo., bought by John C. Mullins and Frank Leu (later William Zeckendorf bought Mr. Leu's 50% interest) for $900,000. KLZ-AM-TV Denver, Colo., bought by Time Inc. for $3.5 million. WNHC-AM-TV New Haven, Conn., bought by Triangle Publications Inc. for $5.4 million. WIBG-AM-FM Philadelphia and WPFH (TV) Wilmington, Del., bought by Storer Broadcasting Co. for $6.5 million. Previously WPFH (TV) (then WDEL-TV) was bought by Paul F. Harron for $3.7 million. WTVT (TV) Tampa, bought by WKY Television System Inc. for $3.5 million. WFBM-AM-TV Indianapolis, WTCNAM-TV Minneapolis and WOOD-AM-TV Grand Rapids, bought by Time Inc. for $15.75 million. WISH-AM-TV Indianapolis and WANE Fort Wayne and WINT (TV) Waterloo, Ind., bought by J. H. Whitney & Co. for $10 million. KTVH (TV) Hutchinson, Kan., bought by Wichita-Hutchinson Co. (80% owned by Minneapolis Star & Tribune Co.) for $1 million. KMBC-AM-TV Kansas City and KFRM Concordia, Kan., bought by Cook Paint & Varnish Co. for $1.75 million. KOB-AM-TV Albuquerque, N. M.. bought by KSTP Inc. for $1.5 million. WNBF-AM-TV Binghamton, N. Y., bought by Triangle Publishing Co. for $3 million. WHAM-AM-TV Rochester, N. Y., bought by Transcontinent Television Corp. for $5 million. WJW-TV Cleveland (then WEXL [TV]) and KPTV (TV) Portland, Ore., bought by Storer Broadcasting Co. for $8.5 million (including Empire Coil Co., manufacturing company). KOTV (TV) Tulsa, Okla., bought by J. H. Whitney & Co. for $4 million. WFBG-AM-TV Altoona, Pa., bought by Triangle Publications Inc. for $3.5 million. KDKA-TV Pittsburgh, Pa., bought by Westinghouse for $9.75 million. WHBQ-AM-TV Memphis, Tenn., bought by RKO Teleradio Pictures Inc. under leasing arrangement for $2.8 million. KGUL-TV Galveston. Tex., bought by Gulf Television Corp. (90% owned by J. H. Whitney & Co.) for $4.25 million. KENS-AM-TV San Antonio, Tex., bought by Express Publishing Co. for $3.5 million. WISN-TV Milwaukee. Wis., bought by Hearst Corp. for $2 million. Broadcasting • Telecasting April 29,1957 • Page 33