                           113 T.C. No. 27



                     UNITED STATES TAX COURT



SOUTHERN MULTI-MEDIA COMMUNICATIONS, INC., FORMERLY WOMETCO CABLE
 CORP. AND SUBSIDIARIES f/k/a WEXA CABLE, INC. AND SUBSIDIARIES,
                          Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No 19455-96.               Filed December 8, 1999.



               Held: $1,927,396 in costs of certain
          improvements to cable television systems does
          not qualify for investment tax credit under
          the “supply or service” transition rule of
          sec. 204(a)(3) of the Tax Reform Act of 1986,
          Pub. L. 99-514, 100 Stat. 2085, 2149.


     Val J. Albright and Chester W. Grudzinski, Jr., for

petitioners.

     Robert M. Morrison, Michael C. Prindible, and

George E. Gasper, for respondent.
                                 - 2 -

     SWIFT, Judge:   For the years in issue, respondent determined

deficiencies in petitioners' Federal income taxes as follows:


                     Year                Deficiency
                     1990                $3,318,947
                     1991                 1,512,979
                     1992                 2,272,661
                     1993                 2,727,882


     Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the years in issue, and

all Rule references are to the Tax Court Rules of Practice and

Procedure.

     After settlement of some issues, the issue remaining for

decision is whether costs of certain improvements to petitioners’

cable television systems qualify for investment tax credit (ITC)

under the supply or service transition rule of section 204(a)(3)

of the Tax Reform Act of 1986, Pub. L. 99-514, 100 Stat. 2085,

2149.


                            FINDINGS OF FACT

     Some of the facts have been stipulated and are so found.

     Petitioners constitute an affiliated group of companies

engaged in the cable television business.       During the taxable

years in issue, Wometco Cable Corp., a Delaware corporation, was

the common parent of the affiliated group of companies and

maintained its principal office in Miami, Florida.       Hereinafter,

petitioners will be referred to simply as Wometco.
                               - 3 -

     Cable television companies seeking to establish cable

television service in particular communities enter into franchise

agreements with local municipal government entities for the right

to construct, operate, and maintain cable television systems

within the communities.   The franchise agreements reflect the

cable television companies’ general obligations and commitments

regarding construction and maintenance of the cable television

systems and the service to be provided to customers.

     As of 1985, under such franchise agreements, Wometco

operated cable television systems in 179 communities throughout

the Southeastern United States.

     From 1989 through 1991, at a total cost of approximately $22

million, Wometco undertook extensive improvements to six

particular cable television systems that it operated in the

suburbs of Atlanta, Georgia (hereinafter sometimes referred to as

“the six systems”).   These improvements involved replacement of

coaxial cable, power supplies, amplifiers, and other electronic

components and an increase in the maximum capacity of the six

systems from either 36 or 54 channels to 62 channels.   In the

cable television industry, such improvements are typically

referred to as a “rebuild”.

     With regard to Wometco's six cable television systems that

were rebuilt from 1989 through 1991 (hereinafter sometimes

referred to as “the six rebuilds”), three of the systems had been
                               - 4 -

previously rebuilt in 1979.   The evidence does not indicate

whether the other three cable television systems had been

previously rebuilt.

     Wometco operated the six cable television systems under

approximately 42 separate, local franchise agreements.   Wometco's

rights under the franchise agreements were nonexclusive and had

terms of 10 to 15 years.   Most of the franchise agreements

contained general language that required Wometco to maintain its

cable television systems consistently with the highest accepted

standards of the cable television industry so that the customers

would receive the highest and most desirable form of service.

Also, most of the franchise agreements required Wometco to

maintain the systems at a minimum capacity of 20 channels.

     Wometco's franchise agreements typically included language

that set forth the following requirements:


    (a) The CATV system shall be installed and maintained in
    accordance with the highest accepted standards of the
    industry to the end that the subscriber may receive the
    highest and most desirable form of service.

    (b) In determining satisfactory compliance with the
    provisions of this section, the following, among other
    things, shall be considered:

        (1) That the CATV system is installed and remains
        capable of using all band equipment and of passing
        the entire VHF and FM spectrum and that it shall have
        the further capability of converting UHF for the
        distribution to subscribers on the VHF band.
                                 - 5 -

        (2) That the CATV system as installed is capable of
        transmitting and passing the entire color television
        signals without the introduction of material
        degradation of color fidelity and intelligence.

        (3) That the CATV system is designed and capable of
        twenty-four (24) hours a day continuous operation.

        (4) That the CATV system is capable of and will
        produce a picture upon any subscriber's television
        screen in black and white or color (provided the
        subscriber's television set is capable of producing a
        color picture) that is undistorted and free from
        ghost images and accompanied by proper sound,
        assuming the technical, standard production
        television set is in good repair and that the
        television broadcast signal transmission is
        satisfactory. In any event, the picture produced
        shall be as good as the state of the art allows.

        (5) That the CATV system shall transmit or distribute
        signals of adequate strength to produce good pictures
        with good sound in all television receivers of all
        subscribers without causing cross modulation in the
        cables or interference with other electrical or
        electronic systems.

        (6) That the CATV system as installed has a minimum
        capacity of twenty (20) channels.


     If Wometco failed to comply with requirements of the

franchise agreements, the franchise agreements could be

terminated by the local municipal governments.

     As of December 31, 1985, and through January 1, 1991, all of

Wometco's cable television systems met the minimum channel

capacity requirements set forth in the franchise agreements.1



1
     Two of Wometco's franchise agreements reflected a minimum
capacity of 35 channels, and a number of Wometco's franchise
agreements reflected no minimum channel capacity.
                                - 6 -

     As of December 31, 1985, neither the franchise agreements

nor any other contracts specifically required Wometco during the

years 1989 through 1991 to rebuild the six systems.

     In addition to the requirements already set forth, Wometco's

franchise agreements generally contained line-extension

provisions specifying conditions under which Wometco was required

to build new cable lines to serve additional residents of a

community.    In the cable television industry, such improvements

typically are referred to as “line extensions”.

     Generally, the line-extension provisions provided that if

requests for new cable service were received from at least five

residents who resided within 660 feet of existing cable lines,

Wometco would be required to build a line extension and extend

service at no cost to those residents.

     In 1990, also with regard to Wometco's six cable television

systems that were rebuilt from 1989 through 1991, Wometco spent

an additional $6 million to extend the cable lines of the six

systems to provide cable television service to additional

customers.    As of December 31, 1985, Wometco was not by contract

or otherwise specifically required to build these particular line

extensions.

     Wometco's franchise agreements reflected various specific

requirements relating to surety bonds, franchise fees, insurance

coverage, and other matters.
                                 - 7 -

     No local government has terminated any of Wometco's

franchise agreements for noncompliance with the terms thereof,

has declined to extend any of Wometco’s franchise agreements

after expiration of the term, or has at any time specifically

requested Wometco to rebuild any of its cable television systems.

     For 1990 through 1993, Wometco timely filed consolidated

U.S. Corporation income tax returns claiming $1,927,396 in

cumulative ITC relating to costs of the six rebuilds that were

undertaken from 1989 through December 31, 1990, the line

extensions that were built in 1990, and a small ITC carryforward

relating to costs of line extensions built in 1986, 1987, and

1989.

     On audit, respondent disallowed the total $1,927,396 in ITC

claimed by Wometco relating to the six rebuilds and the line

extensions.


                                OPINION

     Before 1986, ITC was allowed under section 46 for the costs

of certain types of property.    In 1986, Congress eliminated ITC

for the costs of property placed in service after December 31,

1985.   See Tax Reform Act of 1986 (TRA 1986), Pub. L. 99-514,

sec. 211(a), 100 Stat. 2085, 2166, adding Code sec. 49(a).

     Several transition rules, however, were provided that

preserved ITC for the costs of qualified property placed in

service after December 31, 1985, and before January 1, 1991, as
                                - 8 -

long as the contracts relating to the costs of the property were

entered into on or before December 31, 1985.   See TRA 1986,

sec. 204(a), 100 Stat. 2146, as amended by TRA 1986, sec. 211,

100 Stat. 2167 (adding Code sec. 49(e)(1)(B)).

      Under one of the transition rules that relates specifically

to “supply or service” contracts, taxpayers were allowed ITC for

qualified property costs that were “readily identifiable with and

necessary to carry out” written contracts that were binding on or

before December 31, 1985 (hereinafter referred to as “the supply

or service transition rule”).   TRA 1986, sec. 204(a)(3), 100

Stat. 2149, as amended by TRA 1986, sec. 211, 100 Stat. 2167

(adding Code sec. 49(e)(1)(B)).   The supply or service transition

rule, as amended and in effect for the years in issue, provided

as follows:


           (3) Supply or service contracts.--The amendments made
      by section 201 shall not apply to any property which is
      readily identifiable with and necessary to carry out a
      written supply or service contract, or agreement to lease,
      which was binding on December 31, 1985.


Id.

      With regard to the January 1, 1991, cutoff date, the

transition rules provided as follows:


           (2) Requirement that certain property be placed in
      service before certain date.--
                (A) In general.--Paragraph (1) and section
           204(a)(other than paragraph (8) or (12) thereof) shall
           not apply to any property unless such property has a
                                    - 9 -

          class life of at least 7 years and is placed in service
          before the applicable date determined under the
          following table:

          In the case of property                The applicable
          with a class life of:                         date is:
          At least 7 but less than 20 years . . January 1, 1989
          20 years or more . . . . . . . . . . January 1, 1991.

          *           *         *            *       *        *         *

                (C) * * *
                     (ii) property described in section 204(a)
                shall be treated as having a class life of 20
                years * * *.


TRA 1986, sec. 203(b)(2), 100 Stat. 2144.

     In interpreting statutory language, courts look first to

whether the relevant statutory language itself is plain and

unambiguous.   See United States v. Ron Pair Enters., Inc., 489

U.S. 235, 241 (1989); Chevron, U.S.A. v. Natural Res. Def.

Council, 467 U.S. 837, 842 (1984).          If the statutory language is

plain and unambiguous, courts ordinarily do not look beyond the

statutory language.       See United States v. Ron Pair Enters., Inc.,

supra; Tele-Communications, Inc. v. Commissioner, 95 T.C. 495,

510 (1990), affd. 12 F.3d 1005 (10th Cir. 1993) (the “plain

language of a statute is the source of its interpretation.”).         If

the statutory language is ambiguous, courts may consider the

legislative history.      See Robinson v. Shell Oil Co., 519 U.S.

337, 340 (1997); Golden Rod Farms, Inc. v. United States, 115

F.3d 897, 899 (11th Cir. 1997); Greenberg Bros. Partnership #4 v.

Commissioner, 111 T.C. 198, 203 (1998).
                              - 10 -

     Wometco bears the burden of showing that it meets the

requirements of the supply or service transition rule and that it

is entitled to the tax credits sought.   See Rule 142(a).

     Wometco argues that the costs associated with the six

rebuilds and the line extensions in issue were readily

identifiable with, and necessary to carry out, its related

franchise agreements that were outstanding as of December 31,

1985.   Wometco contends that the general language of the

franchise agreements that existed as of December 31, 1985,

requiring Wometco to maintain its cable television systems in a

state-of-the-art condition, is sufficient to qualify the six

rebuilds and the line extensions under the supply or service

transition rule.

     Respondent argues that under Wometco's franchise agreements

Wometco was not expressly required to undertake particular

rebuilds or line extensions, that only 20-channel capacity

systems were generally required, that Wometco's systems already

met that requirement, and that as of December 31, 1985, the six

rebuilds and the line extensions were not necessary to carry out

and were not readily identifiable with Wometco's general

franchise agreements that existed on December 31, 1985.

     The language of the supply or service transition rule

specifically used the words “necessary to carry out”.    The word

“necessary” connotes essential, mandatory, indispensable, or
                               - 11 -

requisite.   See Webster's Third New International Dictionary 1510

(1986).   The language in Wometco's franchise agreements does not,

as of December 31, 1985, mandate, make indispensable, or make

necessary the rebuilds in issue.   Wometco's rebuilds that

occurred after December 31, 1985, and before January 1, 1991, may

reflect sound business decisions by Wometco in order to maintain

the competitiveness of its cable television systems and to

facilitate eventual renewal of the franchise agreements.     As of

December 31, 1985, however, Wometco was not required by specific

contract to undertake the six rebuilds.

     In interpreting the supply or service transition rule,

Wometco relies heavily on discussions that occurred on June 24,

1986, on the floor of the U.S. Senate as part of the

congressional debate over provisions of the Tax Reform Act of

1986 as follows:


          Mr. FORD: * * * I simply want to make sure that
     those agreements to build and rebuild cable systems
     under cable franchise are treated as transition
     property under the supply or service contract rule. * *
     * Was it the intention of the Finance Committee to
     include cable television franchise agreements within
     the service and supply contract rule?

          Mr. PACKWOOD: The Senator is correct. The
     committee intends that cable television franchises
     generally do qualify as “supply or service contracts”
     for purposes of section 202(d)(3) relating to
     transition rules. * * *


132 Cong. Rec. 15039 (1986).
                               - 12 -


          Mr. MATSUNAGA: I would like to ask the bill
     managers to clarify another point. The supply or
     service contract transition rule requires that the
     property be readily identifiable with and necessary to
     carry out the contract. The committee report explains
     that the specifications and the amount of the property
     must be readily ascertainable from the terms of the
     contracts or from related documents.

     Is this Senator's understanding correct that the
     requirement is met when a binding power purchase
     contract specifies the type of generating equipment in
     terms of primary energy source and specifies the amount
     of generating equipment in terms of total generating
     capacity of the turbines necessary to produce the
     contracted power? In other words, the rule does not
     require the technical details of the generating
     property to be spelled out.

          Mr. PACKWOOD:   The Senator from Hawaii is correct.


132 Cong. Rec. 15028 (1986).

     Wometco argues that the above discussions between Senators

bolsters its argument that (in order to qualify under the supply

or service transition rule) specific rebuilds and line extensions

need not be expressly identified in construction contracts

outstanding as of December 31, 1985, but rather that the general

language of its franchise agreements that were outstanding as of

December 31, 1985 (requiring that Wometco's systems be maintained

according to the “highest accepted standards of the industry”,

the “highest and most desirable form of service”, and the “state

of the art”), is sufficient to bring the six rebuilds and line

extensions that in fact were undertaken and built between
                              - 13 -

December 31, 1985, and January 1, 1991, within the supply or

service transition rule.

     Although this Court has not yet interpreted the supply or

service transition rule, three other Federal courts have.    In

Bell Atl. Corp. v. United States, 82 AFTR 2d 98-7375, at 98-7379,

99-1 USTC par. 50,119, at 87,037 (E.D. Pa. 1998), the taxpayer

argued that because franchise agreements outstanding as of

December 31, 1985, required that it broadly “maintain, expand,

and improve their telephone networks” to meet industry standards,

property purchased after December 31, 1985, to upgrade telephone

network equipment satisfied the supply or service transition

rule.   The Federal District Court for the Eastern District of

Pennsylvania, however, concluded that none of the property was

necessary to carry out any of the taxpayer's franchise

agreements.   The court stated that the general language of the

franchise agreements involved in that case was not sufficient to

qualify under the supply or service transition rule.

     In United States v. Zeigler Coal Holding Co., 934 F. Supp.

292, 295 (S.D. Ill. 1996), the Federal District Court for the

Southern District of Illinois, in denying summary judgment,

stated that “in order to be eligible * * * [under the supply or

service transition rule] the property must have been specifically

described.”   The court noted that it could not find language in

the taxpayer's relevant contracts as they existed as of
                              - 14 -

December 31, 1985, that sufficiently described most of the

property upon which ITC was claimed.

     In United States v. Commonwealth Energy Sys., 49 F. Supp. 2d

57 (D. Mass. 1999), after December 31, 1985, the taxpayer

installed new power generating equipment in its power plant.        The

taxpayer claimed that the new equipment was necessary to carry

out specific power supply contracts that had been entered into

before December 31, 1985.   Language of the contracts indicated

the type of power generating equipment to be installed in terms

of primary energy source and total generating power.    The

contracts specifically stated that the taxpayer agreed and was

bound under the contracts “to cause to be built a new

conventional steam plant * * * of an expected net economic

capability of approximately 560 megawatts”.   Id. at 59.      The

Federal District Court for the District of Massachusetts

concluded that despite the absence in the contracts of explicit

language describing the precise equipment to be installed, the

new generating equipment that was to be installed was readily

identifiable with the contracts and was plainly required to

fulfill the specific additional power commitments that were

explicitly set forth in the contracts.

     The District Court in Commonwealth Energy Sys., however, did

not allow ITC for all of the costs associated with the new power

generating equipment.   The court disallowed ITC for costs of
                              - 15 -

certain property that was not “intimately connected to the

generation of power at the plant”.     Id. at 61.   Property that was

too tenuously tied to generation of the new power commitment

reflected in the contracts as of December 31, 1985, was held not

to qualify under the supply or service transition rule.

     Under Wometco's argument, most if not all of its otherwise

eligible property costs incurred after December 31, 1985, and

before January 1, 1991, would likely qualify under the supply or

service transition rule because all improvements to its systems

arguably would be readily identifiable with and necessary to

carry out the broad franchise agreements that were in effect as

of December 31, 1985.   As we read the supply or service

transition rule, however, the plain meaning of the statute does

not permit this interpretation.   Congress granted only limited,

transition relief to businesses that, as of December 31, 1985,

had binding commitments to undertake specific investments in

qualified property.   See Bell Atl. Corp. v. United States, 82

AFTR 2d at 98-7378, 99-1 USTC at 87,036; H. Conf. Rept. 99-841

(Vol. II), 1986-3 C.B. (Vol. 4) 60.

     Much like the franchise agreements involved in Bell Atl.

Corp. v. United States, supra, the general language of Wometco's

franchise agreements, without more, reflects only broad industry

standards, not specific contractual commitments to undertake

rebuilds.
                                 - 16 -

     The language of Wometco's franchise agreements does reflect

various specific requirements for surety bonds, franchise fees,

and insurance coverage.      Specific language, however, regarding

rebuilds is conspicuously absent from the franchise agreements.

The only language in Wometco's franchise agreements expressly

referencing channel capacity, the key factor triggering rebuilds,

is the language that requires maintenance of a minimum channel

capacity.

     Technology growth in the cable television industry has been

particularly rapid.   As of the time of trial, utilizing new

digital video compression and fiber optic cable, the latest

technology would enable cable television companies to rebuild

their systems to a capacity of 500 channels and to provide high

speed Internet access.    To maintain, during each year, completely

state-of-the-art systems, cable television companies would have

had to rebuild their systems every few years.2       To the contrary,

with regard to the six cable television systems in issue, Wometco


2
     The schedule below reflects the changing cable television
technology available throughout the years with regard to channel
capacity:

                                       Maximum
                      Year        Channel Capacity
                      1967               23
                      1979               40
                      1981               54
                      1982               60
                      1984               80
                      1993              115
                      1995              136
                      1999              500
                               - 17 -

has rebuilt three of the systems only twice since the late

1970's.

     Wometco notes that since franchise agreements entered into

by cable television companies in the 1970's and 1980's rarely

included express rebuild requirements, few companies would

receive any benefit under a narrow interpretation of the supply

or service transition rule.   We disagree.   Rebuilds and line

extensions that were specifically under contract as of

December 31, 1985, would be readily identifiable with and would

be treated as necessary to carry out specific contracts for such

improvements and would qualify for ITC under the supply or

service transition rule.

     We conclude that Wometco is not entitled to ITC for the

costs of the six rebuilds.    As of December 31, 1985, Wometco was

not under contract to install the six rebuilds, and the rebuilds

were not necessary to carry out Wometco's extant franchise

agreements.   With regard to the line extensions, no evidence

indicates that Wometco had specific binding commitments, as of

December 31, 1985, to install the line extensions.3

     Wometco is not entitled to the claimed ITC for the costs of

the rebuilds and the line extensions.


3
      As indicated, we decide this case on the basis that the six
rebuilds and line extensions were not necessary to carry out
Wometco's franchise agreements. We do not decide the issue of
whether the six rebuilds and line extensions were “readily
identifiable with” Wometco's franchise agreements.
                        - 18 -

To reflect the foregoing,

                                  Decision will be entered

                             under Rule 155.
