                                                                                                                           Opinions of the United
2008 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


7-28-2008

Technicolor Holdings v. Comm IRS
Precedential or Non-Precedential: Non-Precedential

Docket No. 07-2398




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"Technicolor Holdings v. Comm IRS" (2008). 2008 Decisions. Paper 784.
http://digitalcommons.law.villanova.edu/thirdcircuit_2008/784


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                                                                   NOT PRECEDENTIAL

                        UNITED STATES COURT OF APPEALS
                             FOR THE THIRD CIRCUIT


                                       No. 07-2398


                       TECHNICOLOR USA HOLDINGS, INC.,
                as successor in interest to new CCI, Inc. and subsidiaries,
                                                                      Appellant
                                              v.

                     COMMISSIONER OF INTERNAL REVENUE



                APPEAL FROM THE UNITED STATES TAX COURT
                           (Tax Court No. 99-14384)
                       Judge: Honorable Maurice B. Foley


                       Submitted Under Third Circuit L.A.R. 34.1(a)
                                     July 24, 2008

                 Before: McKee, FUENTES and WEIS, Circuit Judges.

                                   (Filed: July 28, 2008)


                                        OPINION


WEIS, Circuit Judge.

              Technicolor Holdings, Inc. appeals the denial of a deduction under § 165 of

the Internal Revenue Code, 26 U.S.C. § 165, for the loss of relationships with three of its

film processing customers because the Tax Court found that there was zero basis in the

                                             1
relationships because they had no useful life.1 On appeal, Technicolor argues that the

Court erred because each of the customer relationships had a reasonably ascertainable

value. We will affirm the Tax Court’s conclusion.

              The evidence here indicates that the film processing industry became

extremely competitive in the 1980's. This led to a high rate of client turnover, which

caused Technicolor to lose many of its customers despite its previous long-term

relationships. At the same time, Technicolor gained new customers. The evidence thus

shows that the long-term history of Technicolor’s customer relationships is not indicative

of their strength at the time it was acquired by Carlton Communications Plc in 1998.

              We agree with the Tax Court that the client relationships at issue here had

no useful life. Any expectation that the customer relationships were likely to continue

into the future was unreasonable because of the intense competition in the film processing

market in the 1980's. See Capital Blue Cross & Subsidiaries v. Comm’r, 431 F.3d 117,

126 (3d Cir. 2005) (“[A]n at-will relationship may constitute a valuable asset if it is

reasonably likely to continue into the future.”).

              We also reject Technicolor’s argument that the Tax Court’s finding was

incorrect because it failed to establish the existence of goodwill or going concern assets

other than customer relationships to account for the agreed Class IV basis. The Court

found that Technicolor “had an experienced management team, sophisticated equipment,


              1
                Under § 165, the amount of a deduction is limited to the taxpayer’s
adjusted basis in a lost asset. 26 U.S.C. § 165(b).

                                              2
and proximity to the studios’ filming locations. In addition, personal relationships,

between Technicolor’s and the major film studios’ executives, facilitated client

development and retention.” The evidence supports the Commissioner’s contention that

these factors account for the Class IV basis.2

              Accordingly, we will affirm the Order of the Tax Court entered April 10,

2007.




              2
                We need not address Technicolor’s contention that the Tax Court applied
the incorrect valuation burden and an improper standard to determine the separate values
of the relationships at issue here because we agree with the Court that they had no useful
life.

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