       In the United States Court of Federal Claims
                                            No. 09-273T

                                 (Filed under seal: July 31, 2013)

                                     Reissued: August 22, 20131
                                             _________

 DESERET MANAGEMENT                             *
 CORPORATION,                                   *   Tax refund claim; Trial; Exchange of radio
                                                *   stations; Like-kind exchange – section 1031
                                                *   of the Code; Goodwill – qualitative and
                        Plaintiff,
                                                *   quantitative aspects; Significant goodwill not
                                                *   transferred in exchange of radio stations;
           v.                                       Class lives of depreciable property – sections
                                                *
                                                *   167 and 168 of the Code; Air conditioning
 THE UNITED STATES,                                 equipment reclassified; Other assets received
                                                *
                                                    proper class lives; Refund process
                        Defendant.              *
                                                    established.
                                                *
                                            _________

                                             OPINION
                                            __________

       Eric C. Olson, Kirton & McConkie, Salt Lake City, UT, for plaintiff.

       Benjamin C. King, Jr., Tax Division, United States Department of Justice, Washington,
D.C., with whom was Assistant Attorney General Kathryn M. Keneally, for defendant.

ALLEGRA, Judge:

        This tax refund case is before the court following trial in Washington, D.C. There are
two distinct issues presented in this case. The first involves the tax treatment of a swap of radio
stations that occurred in 2000. More specifically, at issue is whether the agreed upon value of
radio station KZLA-FM (KZLA), the Los Angeles station that plaintiff swapped in that
transaction, included any component for goodwill. Plaintiff claims that the station, which was
the only country station in Los Angeles at the time, possessed no appreciable goodwill;
defendant contends otherwise. If plaintiff is correct, no additional taxes were owed on the swap,


       1
         An unredacted version of this opinion was issued under seal on July 31, 2013. The
parties were given an opportunity to propose redactions, but no such proposals were made.
Nevertheless, the court has incorporated some minor changes into this opinion.
which otherwise qualified as a like-kind exchange under section 1031 of the Internal Revenue
Code.2 If defendant is right, the portion of the value of KZLA allocated to goodwill is taxable as
capital gain. The second issue herein involves whether assets that were placed in service
between 1988 and 2000 are properly classified as non-residential buildings (or structural
components thereof) or, instead, property used in radio broadcasting. Resolution of this issue
affects the class lives of this property, thereby impacting the calculation of depreciation
allowances under section 168 of the Code.

         Based on its review of the record, and for the reasons that follow, the court finds that:
(i) for purposes of the like-kind exchange provisions of section 1031 of the Code, plaintiff did
not transfer appreciable goodwill as part of the KZLA exchange; and (ii) with the exception of
certain air conditioning equipment, plaintiff has failed to demonstrate that the assets in question
were improperly treated as non-residential buildings (or structural components thereof) for
purposes of their depreciation under section 168 of the Code. Procedures for the issuance of an
appropriate judgment are established.

I.     FINDINGS OF FACT

       Based upon the record, including the stipulation of facts, the court finds as follows:

        Plaintiff, Deseret Management Corporation (Deseret or plaintiff), is a Utah corporation
and a holding company for various subsidiaries. The latter include Bonneville International
Corporation (BIC), which owns and operates radio stations in large markets throughout the
United States. From 1998 to 2000 (the relevant time period), Bruce Reese was the president and
Chief Executive Officer (CEO) of BIC. In tandem with a sister company, Bonneville Holding
Company (BHC), BIC was in the business of owning and operating radio stations. Often, in
purchasing a radio station, BHC would acquire and hold the station’s Federal Communications
Commission (FCC) license,3 while BIC would acquire and hold the remainder of the station’s
assets. In these situations, BIC operated the radio station and paid royalties to BHC for use of
the license.

       2
          All references herein are to the Internal Revenue of 1986 (26 U.S.C.), as amended and
in force during the years in question.
       3
           Since 1934, the FCC has managed the electromagnetic spectrum that each radio station
uses. In any geographic area, there are a finite number of frequencies on which a radio station
can broadcast without signal interference. See Metro Broadcasting, Inc. v. FCC, 497 U.S. 547,
566-67 (1990); Red Lion Broadcasting v. FCC, 395 U.S. 367, 375-77 (1969). The lawful
operation of such a station in the United States requires an FCC license, which assigns a defined
coverage area, call letters, a transmitting power, a transmitting location, a band and class of
service (AM or FM and Class A FM or Class B FM) and, for FM stations, an antenna height.
An FM station’s signal coverage is, in part, a function of the location and elevation of the
station’s transmitting antenna (referred to as its “height above average terrain” or HAAT) and its
transmitting power (referred to as its “effective radiated power” or ERP).

                                                -2-
       A.      KZLA – Goodwill

        On April 3, 1998, BIC and BHC exchanged certain assets of radio station KBIG-FM
with Chancellor Media Corporation for those of KZLA. Both stations broadcast in the Los
Angeles, California radio market (the LA Market). Consistent with the pattern described above,
BHC acquired KZLA’s license, while BIC acquired all of the station’s other assets. After
acquiring KZLA, BIC kept the country format. From 1998 to 2000, David Ervin was the general
manager of KZLA, and Richard Meacham its President. In 1998 and 1999, KZLA’s revenue
was $17.25 million and $16.57 million, respectively. In 2000, revenue was approximately $16.4
million.4

       KZLA was the only FM station that used a country music format in the LA Market
between 1998 and 2000. Because this case turns upon a determination of what, if any,
“goodwill” KZLA possessed in 2000, it is necessary to review some basic facts about the radio
business and the LA Market.

        During the time in question, Los Angeles was the second largest radio market in the
country, and it was growing rapidly. Population in the LA Market grew from 13.2 million in
1998 to 13.6 million in 2000. Gross revenues for radio stations expanded from between $648.4
million and $658.2 million in 1998, to between $851 million and $914 million in 2000. By
2000, there were seventy stations in the market: seventeen Class A FM signals, twenty-two
Class B FM signals, and thirty-one AM signals. FM signals tend to have greater clarity and
coverage than AM signals. Within FM stations, Class A signals serve smaller areas or
communities and have smaller coverage than Class B signals, which tend to cover larger
metropolitan areas. One financial analyst reported that in 2000, only twenty-one of the LA
stations were “viable FMs,” that is, FM stations with ratings sufficiently “significant” to be
considered “serious competitors.”

        In Los Angeles, the mountainous terrain adversely impacts the broadcast coverage of FM
signals. This topography gives certain radio stations in the LA Market a few advantages over
their competitors. The first of these, for some of these stations, is antenna location: the antenna
farm located on Mt. Wilson offers the most elevated place in the LA Market from which to
broadcast a radio signal. In 2000, of the approximately forty FM stations that were licensed to
broadcast in the LA Market, only fourteen were licensed to transmit from this peak in the San
Gabriel Mountains, including KZLA. A second advantage is enjoyed by stations that are exempt
from FCC restrictions (dating to 1963) which limit the power stations can use to broadcast
signals from elevated antenna locations such as Mt. Wilson. Seventeen Los Angeles FM stations
were “grandfathered in” under those regulations because they were using power exceeding the

       4
         Actual revenue data for all of 2000 is unavailable, but through October 31 of that year,
revenue was $11.2 million. Duncan’s Radio Market Guide, a source of information about the
commercial radio industry that reports station revenues, estimated the year’s total revenue to be
$16.4 million. Duncan’s estimates for 1998 and 1999 were within $650,000 and $370,000 of
KZLA’s actual revenue figures, respectively, lending some credence to the 2000 estimate.

                                               -3-
restrictions when they were promulgated in 1963. KZLA, a Class B FM station broadcasting at a
frequency of 93.9, was one of those 17 “superpower” stations. Its signal covered approximately
6,400 square kilometers, capable of reaching a population of more than 12.7 million listeners.

        Like much of the country, the LA Market was dramatically impacted by the passage of
the Telecommunications Act of 1996 (the Telecommunications Act). Prior to 1996, the FCC
limited the number of stations that could be owned by a single entity in both a given market, as
well as nationwide: a single entity could not own more than three AM stations and three FM
stations in a large market such as Los Angeles, nor could it own more than thirty AM stations
and thirty FM stations nationally. The Telecommunications Act relaxed these limits. After
1996, in a large market, like Los Angeles, a single entity could own up to eight commercial radio
stations, so long as no more than five of them were either AM or FM. National ownership
limitations were eliminated entirely. These changes prompted major consolidations within the
radio industry – for instance, in March 1996, the two largest radio groups, Clear Channel and
Jacor held 113 stations between them; by March 2001, they owned more than 1,200 stations.
The Telecommunications Act also prompted owners to sell stations in one market and acquire
them in another, seeking to consolidate their holdings.5 Consolidations like these occurred in the
LA Market. Some of the transactions took the form of so-called “stick” transfers, in which the
only thing the buyer desired was the FCC license (and associated dial position), the transmitter,
and the tower/antenna – what one witness referred to as a “ticket to play in that market.” In
1995, the three largest radio station owners in the area (CBS, Cox, and Infinity) owned nine FM
and AM radio stations; by 2000, the then three largest owners (Clear Channel, Infinity, and
Hispanic) controlled 22 stations.

        During this same time, Spanish-language broadcasting blossomed as a driving economic
force in the LA Market, with broadcasters in this genre showing an intense demand for LA
stations with strong FM signals. This demographics-inspired sea change, combined with the
Telecommunications Act’s relaxation on ownership limits, created a demand for FCC licenses
and radio stations that outpaced supply. Not surprisingly, prices for radio stations increased
astronomically during this period.

       5
         One of plaintiff’s witnesses, Mary Beth Garber, who was once President of the
Southern California Broadcasters Association, testified that after the passage of the
Telecommunications Act:
       A number of groups realized that they could use scale, the scale of mass, to
       become more efficient and also to become more effective, that they could
       translate a lot of their expertise into shares in markets other than where they were
       and expand their footprint in the markets where they were.

       At that point we basically developed players and non-players. And people looked
       at where they were in a marketplace and determined whether it was worth it for
       them to stay there and try to acquire more stations or if it made more sense for
       them to sell what they owned to someone else and get out of dodge and basically
       go someplace else and consolidate their hold in that market.

                                               -4-
         A radio station is in the business of selling time to advertisers that are attempting to reach
the station’s listeners. Advertisers are interested in the size and demographics of a radio station’s
audience. Because listeners are drawn by the “format” of a radio station, a station may target
specific demographics for their listener base by playing the music or other content it believes
will appeal to those individuals. The station then looks to sell time to advertisers interested in
reaching listeners within those demographics. The majority of radio advertising time is sold to
advertising agencies, which buy on behalf of companies.

        Several metrics are used to gauge the success of a radio station. One of these is market
share. Arbitron is a nationally-recognized radio audience research firm. At the end of 2000, it
had designated 278 different local geographic areas, or “Metros,” in an attempt to reflect the
audiences reached by local radio stations. One of these Metros was the LA Market, consisting of
Los Angeles and Orange Counties, California. During the relevant time period, Arbitron
reported the percentage of all radio listening in each Metro area. It did so by sampling the total
persons twelve or older listening to the radio Monday through Sunday, 6:00 am to midnight. A
station’s percentage of all radio listening is referred to as its “audience share.” Sometimes this
share is adjusted to compare a station’s audience to all commercial radio audiences in the market
– the “adjusted share.”

        Duncan’s Radio Market Guide reported that revenue for stations in the LA Market rose
from $648.4 million in 1998 to $914 million in 2000. As reported in various Duncan
publications, between 1985 and 2001, retail sales in the LA Market grew at a compound annual
rate of 5.2 percent; between 1994 and 2000, radio station revenue in the LA Market grew at a
compound annual rate of 12.2 percent. By comparison, from 1998 to 2000, KZLA’s revenue
stayed relatively flat, at approximately $16 million per year. According to Duncan, KZLA’s
adjusted audience share in 1998 was 2.6, which was the twentieth best share out of the thirty-five
stations covered in the Duncan report for Los Angeles. In 1999, the share dropped to 2.4 (20th of
39), and in 2000, it went back up to 2.6 (17th of 39). Another indicator of station success is
revenue share, which is calculated by dividing a station’s revenue by the total gross radio
revenue in the market. KZLA’s revenue share was 2.6 in 1998, 2.1 in 1999, and 1.8 in 2000.6

       Finally, a radio station’s “power ratio” is obtained by dividing its revenue share by its
adjusted audience share. The higher the power ratio, the better a station is performing –
suggesting either a superior performance in marketing the station to advertisers or an unusually
desirable demographic. A power ratio of 1.0 indicates that the station is attracting the same share
of advertiser spending as its share of the market audience. In some situations, the power ratio
exceeds 1.0 by enough to make the station a “must buy” or “top tier”– a station so desirable that


       6
           The report of Mr. Bond, one of plaintiff’s experts, does not list rankings for revenue
shares in the LA Market, but does set forth rankings for raw revenue. In this ranking, KZLA was
reportedly 18th of 34 in 1998, 22nd of 35 in 1999, and 22nd of 40 in 2000. The numbers of
stations in the revenue rankings do not align exactly with the numbers of stations in the audience
share rankings. There is no explanation for this minor discrepancy.

                                                 -5-
an advertising agency would be doing its clients a disservice if it did not purchase advertising.7
Conversely, a ratio below 1.0 indicates either that the station is doing a less than adequate job in
marketing itself or has a less desirable audience. In 1998, KZLA had a power ratio of 1.0. In
1999, KZLA’s power ratio fell to 0.88, and in 2000, it dropped further, to 0.69. Accordingly, as
noted in various testimony, at a time where revenue in the LA Market was growing, KZLA’s
power ratio was shrinking.

        In late 1999, Mr. Ervin (KZLA’s general manager) hired Coleman Research (Coleman)
to study KZLA’s performance. Coleman does research and marketing for various media
companies, primarily radio stations. Pursuant to that contract, Chris Ackerman, a vice president
of Coleman, performed a “perceptual study” of KZLA in December 1999, designed to determine
audience perception of the station, “brand image position,” and how to improve audience share.8
Data for the study was developed through a survey instrument that a third party used to conduct
telephone interviews with a representative, random set of listeners – approximately 500 people
were surveyed.9 In January 2000, Coleman presented the results of its study and a set of
recommendations to Mr. Ervin and BIC. Its report found that KZLA listenership was “under-
developed,” that KZLA suffered from weak formatting, that the station lacked brand depth
beyond music,10 and that the on air personalities were “not particularly compelling.”11 In this



       7
           On this point, Ms. Garber used the example of a Honda passenger van. She suggested
that advertisers seeking to sell such vans would target women 25-54 years of age, who tend to
have children to transport. Regarding this example, she noted that “[i]f you’re after women 25-
54 years of age there are several radio stations in the market that have a significant enough share
of those women that you must buy them or you’d really better be in a position where you can
explain to your client why you didn’t.” Ms. Garber indicated that in such an instance, the
advertising agency would issue a request for proposals, indicating that it is going to buy a certain
number of rating points against women 25 to 54 at a specified price per rating point. Responses
to the request from radio stations would indicate how the desired demographic would be served.
       8
          Mr. Ackerman had considerable experience in the radio business – he had worked for
14 years in the business before joining Coleman and had been a vice president at Coleman since
1992.
       9
         Among the areas covered by the survey were: which radio stations can you list off the
top of your head; which radio station do you listen to the most; total time spent listening to radio;
which country music station is preferred; and preferences among country music fans in terms of
whether they preferred classic or contemporary.
       10
           As defined by Mr. Ackerman at trial, “brand depth” “refers to the nonmusic brand
elements that successful stations typically have,” and includes things like “morning show,
personalities, games and contests, concerts, parties, events, community involvement.” The
Coleman report found that even the station’s loyal users did not perceive that the station had such
elements to stimulate them to use the station more frequently.

                                                -6-
regard, the report indicated that “[w]hile the overall appetite for the Country format in Los
Angeles is somewhat lower than Coleman Research typically observes nationally, it still has the
potential to fuel a Top 5 25-54 rank position for KZLA, provided it can develop strong, dominant
ownership of the Country format image position.” Consistent with this view, the report found
that KZLA’s existing audience was “relatively loyal and committed to the station,” as reflected
by strong figures indicating that the station was the “absolute favorite” among country listeners.
The report concluded that there was an unrealized potential for the country format – specifically
that “there are Country share points being left on the table” – and that there was potential for
KZLA to “grow another full share point above its current ratings range.” The report concluded
with eleven recommendations designed to realize KZLA’s full potential, particularly focusing on
aggressive external marketing.12

         In early 2000, Mr. Reese negotiated a deal with Emmis Communications (Emmis) in
which Emmis would acquire KZLA’s assets. Emmis is an Indianapolis-based company that
owns and operates radio and magazine entities throughout the country. In 2000, it owned
approximately twenty radio stations, including KPWR-FM, a Class B FM station in Los Angeles.
It also owned or had the right to acquire four stations in the St. Louis radio market – WRTH-
AM, WIL-FM, WVRV-FM, and WKKX-FM (the St. Louis Stations). Jeff Smulyan was the
president and CEO of Emmis; Doyle Rose was the president of Emmis Radio, a division of
Emmis. Reese and Smulyan agreed to exchange the assets of the St. Louis Stations for the assets
of KZLA. These assets included the respective FCC licenses for each of the radio stations.

         On April 19, 2000, Mr. Reese briefed BHC regarding the progress of negotiations with
Emmis. In a letter, he explained that BHC and BIC would give up KZLA, which, according to
Mr. Reese, had increased in fair market value from the time it was acquired – from $155 million
to between $225 and $250 million. The letter listed the principal hard assets of KZLA as the
office building ($2.5 million), owned antenna and towers, and a leased transmitter site. The
letter further noted that KZLA’s cash flow was approximately $6.5 million in 1999 and $6.6
million in 2000. In exchange, BIC and BHC would acquire three or four St. Louis stations;
depending on the stations provided, and their cash flows, there would also be an exchange of
cash between the companies. “At the one extreme,” Mr. Reese explained, “Emmis might end up
giving [BIC and BHC] three stations plus $25-$35 million in cash. At the other end, [BIC and
BHC] could get four stations and pay up to $25 million in cash.” Mr. Reese asked BHC to

       11
           Most of these findings were supported by statistics. For example, one finding was that
only 18 percent of 25-54 year-olds associated the country format with KZLA. The report stated
that “[t]ypically, well-positioned Country stations achieve 25%-35% market images.” Further,
the report found that only 50 percent “of those expressing a Core Interest in the Country format
associate KZLA with the Country format image,” noting, by comparison, that “[n]ormally,
successful Country stations achieve 70%-80% format fit among Country format fans.”
       12
           These recommendations ranged from marketing points designed to strengthen the
station’s format and music image position; to ways to leverage KZLA’s position better with the
country music industry; to revamping KZLA’s roster of on-air personalities.

                                              -7-
authorize BIC management to proceed with negotiations, and recommended that tax advisors
from both BIC and BHC review the structure of the proposed transactions.

       On April 28, Mr. Reese wrote Messrs. Smulyan and Rose at Emmis outlining a proposal
for exchanging the assets of KZLA for the assets of the St. Louis Stations. In this letter, Mr.
Reese assessed that “the value of KZLA is well north of $200 million. . . . In fact, I suspect it
might go for as much as $240-$250 million on the open market. This presumption is based on
unsolicited but relevant inquiries since November, from both general market and Hispanic
operators.” However, because St. Louis was an “attractive opportunity,” he concluded that
“something less than an auction price is the right place for us to value KZLA.” At trial, Mr.
Smulyan testified that, during the negotiations, he did not believe that KZLA was worth as much
as Mr. Reese thought and that Emmis viewed the transaction as acquiring a “stick” for an entry
price.

         On June 21, 2000, BIC, BHC, and Emmis executed a letter of intent setting forth the
terms under which the exchange would occur.13 On October 6, 2000, they executed an Asset
Exchange Agreement (the Agreement), in which they agreed to exchange the assets of KZLA for
those of the St. Louis Stations. In the Agreement, the signatories agreed that the exchange value
of the assets on both sides was $185 million. A section in the Agreement described the assets
exchanged and discussed the “allocation of asset values.” In this section, the companies agreed
that “the fair market value of the [assets] shall be determined and allocated on the basis of an
appraisal (the Appraisal) prepared by [BIA Consulting, Inc.].” The parties agreed to file any
income tax schedules or forms required by the Internal Revenue Service (IRS, or the Service) in
conformity with the Appraisal. The parties to this litigation have further stipulated that as of
October 6, 2000, the value of all tangible assets of KZLA was $3,384,637, and that the value of
all intangible assets of KZLA, apart from the FCC License and any goodwill, was $4,858,317.

        As the Agreement envisioned, BIA performed an appraisal of the assets of KZLA as of
October 6, 2000. That appraisal was completed and delivered after the transaction closed. BIA
concluded therein that KZLA had a “Going Concern Value” of $156,000 and that its FCC license
was worth $176,757,046. As used in the BIA report, going concern value included the value of
KZLA’s preexisting systems and procedures for finances, administration, technology, and sales,
and “allows for the continued successful operation of the station.” BIA valued KZLA’s going
concern as the “cost that would be required to replicate the systems and procedures in place and
in use at the station.” It calculated the value of the FCC license using the residual fair market
value method – it subtracted the value of all other assets (tangible and intangible) from the
exchange value (the $185 million), and assigned the difference (the residual) to the FCC license.
BIA assigned no value to goodwill because: (i) as a matter of case law, “[i]t is well-established
that broadcast stations do not possess any goodwill;” (ii) broadcast stations in general “do not

       13
           The transaction was to close at a later date pending FCC approval of the deal and the
resolution of litigation Emmis had with Sinclair Communications, Inc. On July 31, 2000, BIC
and Emmis entered into Time Brokerage Agreements that allowed Emmis to begin operations in
Los Angeles before the deal closed.

                                              -8-
enjoy any goodwill in the sense of either listener or advertiser loyalty;” and (iii) KZLA, in
particular, “does not possess any other traditional manifestations of goodwill.”14

        Following the transfer, Emmis continued to maintain KZLA’s country format (and did so
until sometime in 2006).15 While it retained the program director and most of the sales staff,
Emmis terminated all but one of the on-air personalities at the station. It modified the music mix
in the country format, shifting from more traditional to contemporary country music. And it
added various brand depth elements. Emmis also had access to the Coleman report and began, in
consultation with Coleman, to implement some of the recommendations in that report.

        For each of the tax years 2000 through 2002, Deseret timely filed a consolidated federal
income tax return on behalf of itself and its subsidiaries, including BIC. In 2000, Deseret
reported the above-described exchange as a “like-kind” exchange and recognized gains owing to
the exchange. It based its report of gains on the BIA appraisal, and therefore assigned no value
to goodwill. Following an audit, on February 28, 2005, the IRS proposed an adjustment in
Deseret’s 2000 tax year with respect to the reporting of gain from the exchange. The IRS
determined that KZLA possessed goodwill with a value of $73,311,046 on the date of the
exchange. On May 6, 2005, the IRS issued to Deseret a thirty-day letter (IRS Form 950) with
respect to tax years 2000 through 2002, which asserted a deficiency regarding 2000 and


       14
           In his testimony at trial, the individual who performed this allocation, Geoffrey Price,
agreed that “no part of [his] analysis . . . was designed to ascertain the value of goodwill because
[he] operated under the assumption that because [he was] dealing with a radio station that there
was no such thing.” In assigning values to intangible assets, Mr. Price also did not assign a value
to KZLA’s assembled workforce or to any name recognition associated with the station’s call
letters.
       15
            In describing the rationale for this decision, Mr. Smulyan testified:
              I think it was based on three things, one it was based on the research that
       we had done, Coleman, and I’m sure we did independent research of Coleman. I
       know that we always tore apart the market . . . . So we looked at the demographic
       and psychographic trends. I think we based it on the fact that there was an
       outpouring of potential support from the country music community who felt that
       they needed to provide significant support to the format in Los Angeles.

                And I think we looked at it and said we weren’t absolutely certain that
       there was an alternative format that was going to be a top-five station. I think if
       we had said there is a format that we know will be top five we would have blown
       it up, absolutely, positively. And I’m certain that there was nothing in the
       Coleman report that told us this was a major radio station. I think they said if you
       do the following things you can improve its rank and position.



                                                 -9-
incorporated the conclusions previously set forth with respect to the value of the goodwill of
KZLA.

        In early 2008, Deseret and the IRS jointly executed an IRS Form 870-AD, on which
Deseret agreed to the assessment and collection of deficiencies for the tax years in question, but
also reserved “the right to timely file a claim for refund or credit or prosecute a timely claim.”
On December 15, 2008, Deseret did just that – it filed with the IRS an Amended U.S.
Corporation Income Tax Return, Form 1120X (Claim for Refund) for the tax year 2000, seeking
refund of what it alleged was an overpayment of $25,572,074, plus interest. On February 19,
2009, the IRS fully disallowed each item claimed in the Claim for Refund. On March 4, 2009,
Deseret executed IRS Form 2297 – Waiver of Statutory Notification of Claim Disallowance and
Form 3363 – Acceptance of Proposed Disallowance of Claim for Refund or Credit – and sent
them, along with a letter, to the IRS. In these documents, Deseret acknowledged the IRS’s
disallowance of their claim, but expressly preserved its right to bring an action for refund of the
disputed tax assessments.

               B.      Depreciation – Class Lives

        The thirty-two assets at issue were placed into service by plaintiff between 1988 and
2000. These assets were originally classified by plaintiff as buildings or structural components
of buildings, depreciable as nonresidential real estate over 39 or 31.5 years. Four of the assets
are buildings which were used by BIC to store equipment and to house its transmitters. The
other assets were air conditioning equipment and duct work; electrical wiring; partitions, walls,
ceilings, windows, and millwork; and other leasehold improvements.

        In 2002, BIC retained the accounting firm Deloitte and Touche (Deloitte) to review its
fixed asset records and determine whether BIC was depreciating assets correctly. John Seabrook
was the Deloitte partner primarily responsible for conducting the study. BIC provided Deloitte
with an electronic download of its fixed asset records, which contained information on each of
BIC’s approximately 18,600 fixed assets. Those records described each asset, the date on which
it was placed in service, the asset’s location, its cost, and information regarding the depreciation
of the asset, including original life and accumulated depreciation data. This data came from
Capital Asset Addition Forms, which were completed by the BIC employee who had acquired
the asset, and then submitted to BIC’s corporate office for entry into the Fixed Asset System. In
addition to reviewing this information, Mr. Seabrook viewed some assets and had conversations
with BIC employees about others. At the end of his study, he concluded that BIC had been
claiming less depreciation than was allowable under the Code with respect to 158 specific assets
which had been placed into service between 1988 and 2000.

        On or about September 10, 2002, Mr. Seabrook assisted BIC/Deseret in preparing and
submitting an IRS Form 3115 – Application for Change in Accounting Method – to request a
change in the method by which Deseret depreciated these assets, beginning in tax year 2001.
The IRS and plaintiff agreed on the treatment of the wide majority of these assets, but disagreed
as to the proper treatment of thirty-two of the assets described above. At Deloitte’s suggestion,
BIC reclassified them into one of two groups: (i) assets used in radio and television broadcasting

                                               - 10 -
as described in Asset Activity Class 48.2 of Revenue Procedure 87-56, 1987-2 C.B. 674,
depreciable over five years, or (ii) office furniture and fixtures, and equipment included in Asset
Class 0.11, also of Revenue Procedure 87-56, depreciable over seven years.

               *              *               *              *               *

        On April 29, 2009, Deseret filed this refund suit against the United States for recovery of
income tax payments including, inter alia, those paid relating to the KZLA exchange and those
relating to proper class lives of the BIC assets. Discovery was completed in May 2011. Trial in
this case was held between February 23, 2012, and March 1, 2012.16 Closing arguments were
heard November 20, 2012.

II.    DISCUSSION

        In a refund suit, the assessment made by the IRS is presumed to be correct, placing an
obligation on the taxpayer to come forward with evidence to rebut a presumption of correctness.
United States v. Janis, 428 U.S. 433, 440-41 (1976); Welch v. Helvering, 290 U.S. 111, 115
(1933). Viewed in these terms, the presumption of correctness “is a procedural device which
requires the taxpayer to come forward with enough evidence to support a finding contrary to the
Commissioner’s determination.” Rockwell v. Comm’r of Internal Revenue, 512 F.2d 882, 885
(9th Cir. 1975), cert. denied, 423 U.S. 1015 (1975). In addition, a taxpayer in a refund suit also
has the burden of proof – the ultimate burden of proving not only that it overpaid its taxes, but
also the amount of the overpayment. See Helvering v. Taylor, 293 U.S. 507, 515 (1935); Lewis
v. Reynolds, 284 U.S. 281, 283 (1932); Am. Airlines, Inc. v. United States, 204 F.3d 1103, 1108
(Fed. Cir. 2000).

        This case presents two distinct issues. The first involves the proper treatment of the
KZLA exchange under the like-kind exchange provisions of section 1031 of the Code. The
second focuses on the proper classification of certain assets under the depreciation rules provided
by sections 167 and 168 of the Code. The court will consider those claims seriatim.

       A.      KZLA – Goodwill

        Under section 1031 of the Code, a taxpayer may defer recognition of gain or loss from
qualifying exchanges of like-kind property. 26 U.S.C. § 1031(a). A like-kind exchange occurs if
property held for productive use in a trade or business or for investment is exchanged solely for

       16
            Using a practice employed by the United States Tax Court, see Tax Ct. R. 143(g), at
trial, the court received the experts’ reports in lieu of live expert testimony. This practice was
adopted by the court at the Rule 16 conference, at the outset of discovery, in order to give the
parties fair warning of its use prior to the time their experts generated their reports. Live
examination of the expert witnesses began with cross-examination. The use of this practice
saved considerable trial time. See Samuel R. Gross, “Expert Evidence,” 1991 Wis. L. Rev. 1113,
1215-16 (advocating this approach).

                                               - 11 -
property of like kind that is to be held either for productive use in a trade or business or for
investment. Id.; see also 3 Michael D. Houser, Mertens Law of Federal Income Taxation §
20B:1 (2013) (hereinafter “Mertens”). Such an exchange allows the exchanger to delay
recognizing gain on the exchanged property, as the tax basis of that property carries forward to
the newly-acquired property. 26 U.S.C. § 1031(d); see also Ocmulgee Fields, Inc. v. Comm’r of
Internal Revenue, 613 F.3d 1360, 1364 (11th Cir. 2010); Morton v. United States, 98 Fed. Cl.
596, 603 (2011).17 However, a taxpayer recognizes gain in a like-kind exchange under section
1031 to the extent of the fair market value of any nonqualifying property exchanged. See 26
U.S.C. 1001. In this regard, Treas. Reg. § 1.1031(a)-2(c)(2) provides that “[t]he goodwill or
going concern value of a business is not of a like kind to the goodwill or going concern value of
another business.” See also Beeler v. Comm’r of Internal Revenue, 73 T.C.M. (CCH) 1982,
1987 (1997); Mertens, supra, at § 20B:1.18

         “Goodwill” is neither specifically referenced in section 1031 of the Code, nor defined in
any Treasury Regulation thereunder. The term is employed elsewhere in the Code, most notably
section 197, dealing with the amortization of intangible assets.19 The regulations under that
section define “goodwill” as “the value of a trade or business attributable to the expectancy of
continued customer patronage,” which expectancy may be due “to the name or reputation of a
trade or business or any other factor.” See Treas. Reg. § 1.197-2(b)(1). This definition “falls
strictly in line with two centuries of the classic common law understanding of the term
‘goodwill.’” Kelly M. Haggar, “A Catalyst in the Cotton: The Proper Allocation of the
‘Goodwill’ of Closely Held Business and Professional Practices in Dissolution of Marriages,” 65
La. L. Rev. 1191, 1217 (2005). Courts grappling with the concept of goodwill have often done
so in tax cases, with the definitions in that setting having dimensions that are both qualitative
(i.e., focusing on characteristics of goodwill) and quantitative (i.e., focusing on arithmetic
calculations indicating the existence of goodwill). See Eric J. Skytte, “Changing the Rules, but
Not the Goodwill Game: Newark Morning Ledger in the Wake of I.R.C. Section 197,” 21 Wm.
Mitchell L. Rev. 485, 489 (1995).

       17
           As noted by a prominent commentator, “[t]he statutory nonrecognition of gain or loss
in the case of property held for productive use or investment has remained essentially unchanged
since 1924.” Mertens, supra, at § 20B:2.
       18
           “Congress afforded nonrecognition treatment to § 1031(a) like-kind exchanges
because it recognized that when a taxpayer merely exchanges one investment property for a
similar investment property, the taxpayer has not cashed in on his investment but continued that
investment, albeit in a different property.” Ocmulgee Fields, 613 F.3d at 1364; see also Starker
v. United States, 602 F.3d 1341, 1342 (9th Cir. 1979).
       19
           Section 197 entitles taxpayers to claim “an amortization deduction with respect to any
amortizable section 197 intangible.” 26 U.S.C. § 197(a). Section 197(d)(1)(A) defines the term
“section 197 intangible” to include, among other things, “goodwill.” Id. at § 197(d)(1)(A); see
generally, Recovery Grp., Inc. v. Comm’r of Internal Revenue, 652 F.3d 122, 125-26 (1st Cir.
2011).

                                              - 12 -
        Qualitatively speaking, goodwill has been defined in the case law as “the expectation of
continued patronage.” Newark Morning Ledger Co. v. United States, 507 U.S. 546, 555-56
(1993) (quoting Boe v. Comm’r of Internal Revenue, 307 F.2d 339, 343 (9th Cir. 1962)).20
Approximately 150 years earlier, Justice Story bundled together many of the indicia of goodwill
in the following oft-quoted definition, to wit, that goodwill is –

       the advantage or benefit, which is acquired by an establishment . . . in
       consequence of the general public patronage and encouragement which it receives
       from constant or habitual customers, on account of its local position, or common
       celebrity, or reputation for skill or affluence, or punctuality, or from other
       accidental circumstances or necessity, or even from ancient partialities or
       prejudices.

Joseph Story, Partnerships § 99 (1841); see also Des Moines Gas Co. v. Des Moines, 238 U.S.
153, 165 (1915) (goodwill is “that element of value which inheres in the fixed and favorable
consideration of customers, arising from an established and well-known and well-conducted
business); Metro. Nat’l Bank of N.Y. v. St. Louis Dispatch Co., 149 U.S. 436, 446 (1893) (relying
on the Story definition). Goodwill thus “provides a useful label with which to identify the total
of all the imponderable qualities that attract customers to the business.” Newark Morning
Ledger, 507 U.S. at 556; see also L.A. Gas & Elec. Corp. v. R.R. Comm’n, 289 U.S. 287, 313
(1933).

        Searching for more clarity, courts have also defined goodwill in quantitative terms, with
an eye towards value. Thus, the Supreme Court, relying on the Story definition quoted above,
has described goodwill as the value “beyond the mere value of the capital, stock, funds, or
property employed therein” associated with continued patronage. Newark Morning Ledger, 507
U.S. at 555 (quoting Metro. Nat’l Bank, 149 U.S. at 446); see also Baker v. Comm’r of Internal
Revenue, 338 F.3d 789, 793 (7th Cir. 2003); Globe Life & Accident Ins. Co. v. United States, 54
Fed. Cl. 132, 136 (2002). Accordingly, in setting the value of goodwill as an intangible asset,
goodwill is often described quantitatively as “the excess of cost over the fair value of the
identifiable net assets acquired.” Coast Fed. Bank, FSB v. United States, 323 F.3d 1035, 1039
(Fed. Cir. 2003); see also Jack Daniel Distillery v. United States, 379 F.2d 569, 579 (Ct. Cl.
1967). This residual value approach properly signals the existence of goodwill, of course, only if
both sides of a transaction are balanced; it does not work “when one party to the transaction
achieves a bargain.” R.M. Smith, Inc. v. Comm’r of Internal Revenue, 591 F.2d 248, 252 (3d Cir.
1979), cert. denied, 444 U.S. 829 (1979); see also Jack Daniel Distillery, 379 F.2d at 579.

       20
            In Newark Morning Ledger, the Supreme Court allowed the taxpayer to take
depreciation deductions for its subscriber base, finding that these “paid subscribers” “constituted
a finite set of subscriptions” and were not “composed of constantly fluctuating components.”
507 U.S. at 567. The latter fact distinguished the subscriber base from so-called “mass assets,”
that is, non-amortizable “customer-based intangibles” that were considered “self-regenerating
assets that may change but never waste.” 507 U.S. at 558; see also Capital Blue Cross v.
Comm’r of Internal Revenue, 431 F.3d 117, 126 (3d Cir. 2005).

                                               - 13 -
Because of this, courts sometimes combine the qualitative and quantitative approaches, seeking
to reinforce one with the other.

        So, under these definitions, did KZLA possess goodwill at the time that it was transferred
by plaintiff in exchange for the St. Louis Stations? There is no dispute that the enterprise value
of KZLA in the swap transaction was $185 million. Likewise, the parties agree that, as of the
date of the transaction, the value of KZLA’s tangible assets was $3,384,637, and the value of its
intangible assets (apart from the station’s FCC license and any goodwill) was $4,858,317. But,
what do we do with the residual – the $176,757,046 difference between the $185 million and the
stipulated value of the other assets ($8,242,954)? More specifically, the question is whether any
portion of that difference is attributable to KZLA’s goodwill? Plaintiff claims the answer to that
question is no – arguing that the station possessed no goodwill and that all the value associated
with the residual should be attributed to the station’s FCC license. Not so, defendant retorts,
asserting that the value of the FCC license was much less than what plaintiff claims, and that
what is left, when that reduced license value is subtracted from the residual, is the value of
KZLA’s goodwill. As to that amount, defendant argues, the exclusion under section 1031 is
triggered, producing gain under section 1001(a) of the Code. Determining which of the parties is
right presents several questions of fact that can be resolved only by weighing all the evidence, a
matter to which this court now turns.

       1.      Qualitative Indicia of Goodwill

        There are indications that KZLA may have possessed some degree of goodwill with
respect to its audience and, relatedly, its advertisers. KZLA was the only Class B station with a
country format in a market of nearly 13 million listeners. Listeners in portions of that market
closely followed KZLA – a factor that Emmis considered in retaining KZLA’s country format.
Since the real customers of a radio station are its advertisers, it bears noting that KZLA’s
retention of a set of loyal listeners was reflected in the market share numbers that, in turn, led to
advertising rates and ad placements. For KZLA, of course, those numbers reflected a mixed bag,
with the station seemingly not performing to its potential, as reflected by its declining revenue
share and power ratio during the relevant period. But, the record also hints at the notion that
advertisers selling products that might be appealing to country listeners might have been more
inclined to place ads with the dominant country station in the LA Market. Indeed, the evidence
indicates that companies in the country music industry, as well as media buyers, viewed having a
successful country station in Los Angeles – which at the time of the swap was the number one
market for country record sales – as essential to the success of the format. Moreover, it is
virtually undisputed that KZLA had a seasoned sales staff that had relationships with key
advertising firms and that those relationships provided the station with a slight advantage over its
competition.

        In deciding that KZLA may have possessed some goodwill, the court is also mindful of
the findings made by Coleman in its 1999 perceptual study of the station. In that study, Coleman
found, inter alia, that KZLA listenership was “under-developed,” and that the station lacked
“brand depth” beyond music and an appropriate “image profile.” The report indicated that the
country format had the potential to support a top-five station in the important 25-54 age group,

                                               - 14 -
further asserting that if KZLA realized its full potential it could grow a full share point above its
then rating. To aid KZLA in realizing these gains, Coleman made eleven separate
recommendations, e.g., that KZLA “will need aggressive external marketing to raise its top of
mind awareness and strengthen its format and music position,” as well as take a variety of other
steps to improve its “music image marketing” and “music image position.” But, what exactly
was the “brand depth” and “music image” that these extensive recommendations were designed
to enhance – the enhancement of which would allegedly lead KZLA to realize its full potential as
the dominant country station in the huge and burgeoning LA Market? In the court’s view, for tax
purposes, it appears that this “brand depth” and “music image” are reflective of the existence of
some degree of goodwill, albeit perhaps underdeveloped. This depth and image appear to
represent, to paraphrase Justice Story, an “advantage or benefit” beyond the value of KZLA’s
other assets “in consequence of the general public patronage and encouragement which [the
station] receive[d] from constant or habitual customers.” Presumably, the steps recommended by
Coleman were designed to enhance the station’s base of constant or habitual customers, with the
expectation that a resulting increased market share would translate readily into enhanced
advertising revenue.

         Both plaintiff, and BIA before it, flatly contend that a radio station can never possess
goodwill because audience loyalty is a matter of format and on-air personalities. That listeners
might flee a station that suddenly changes its format or on-air personalities, however, does not
prove plaintiff’s point – any more than it would be true to say that other types of businesses
cannot have goodwill because they would lose their customers if they fundamentally changed
their business plans. Can it be that nationally-recognized restaurant chains lack goodwill
because their customers might flee if they radically changed their menus; or that sporting goods
stores lack goodwill because they might decide to sell only flowers; or that familiar chains of
coffee purveyors lack goodwill because they would lose their current business if they sold only
soda? One would think not. For a host of strategic business reasons, an acquiring entity may
defenestrate the critical and identifying features that, either individually or collectively, gave the
acquired entity the expectation of continued patronage. That it may choose to do so – perhaps
hoping to gain still more patronage in a reformatted configuration – does not mean that the
business it acquired lacked goodwill. Put another way, whether goodwill exists as part of the
assets acquired in a transaction cannot depend upon whether the buyer concludes that it is in its
best interests to sustain the prior business model – that the prior goodwill must be accounted for
if the prior business model is maintained, but not if that model is modified.

        Nor does this court believe that KZLA necessarily lacked goodwill because it was
underperforming. There is undeniably a positive nexus between the existence of goodwill and
the ability to generate profit – but that is to say neither that only profitable firms have goodwill,
nor, especially, that only firms with profits above the norm possess that asset. See C.F. Hovey
Co. v. Comm’r of Internal Revenue, 4 B.T.A. 175, 177-78 (1926). The proclivity of ‘“old
customers . . . to resort to the old place,’” Houston Chronicle Publ’g Co. v. United States, 481
F.2d 1240, 1247 (5th Cir. 1993) (quoting Comm’r of Internal Revenue v. Killian, 314 F.2d 852,
855 (5th Cir. 1963)), may exist even where a firm is unprofitable, or at least not more profitable
than the “norm.” Plaintiff’s attempt to cabin goodwill to those stations earning above-average
profits would leave the concept with no independent content, substantive meaning, or permanent

                                                - 15 -
dimensions. According to plaintiff, goodwill is a fleeting concept, here one instant and gone the
next, depending upon a firm’s current profit status – much like a Harry Potter wizard who
disapparates in bad times and reappears in good.

        In contending otherwise, plaintiff relies on several decisions of the Court of Claims. For
example, it asseverates that Meredith Broadcasting established a per se rule that FCC-licensed
broadcasting stations can never possess goodwill. In that case, the taxpayer acquired all the
assets of a radio and a television station. At issue was whether a portion of the purchase price
attributed to intangible assets should be attributed to television network contracts. The Court of
Claims held that these contracts “were intangible assets of significant value” separate from all of
the other intangible assets. Meredith Broad., 405 F.2d at 1224. In so doing, it acknowledged
that “considerable confusion” has arisen in this area because of “the shifting meaning of the term
‘goodwill,’” which, in some instances was used to refer to the aggregate of all the intangibles of
the business, and, in others, “in its narrow sense to refer to the traditional concept of goodwill as
a matter of favorable customer relations.” Id. The court held that the network contracts were
assets separate and distinct from the narrower concept of goodwill. Id. at 1225-26. It was within
this context that the court commented, in regard to television stations:

       The station did not, however, have any particular goodwill in the sense of viewer
       preference or loyalty to the station. This is because television audiences are
       attracted primarily by the programs and not by the particular broadcast station,
       call letters, station personnel or management. Nor do television stations
       (including KPHO-TV in 1952) have any particular goodwill in the sense of
       advertiser preference for the station. Television advertisers basically buy the
       attention of an audience on the best terms available or the lowest cost per
       thousand, and they place business with a station on the basis of the station’s
       ability to reach an audience.

Id. at 1223. Ultimately, the court concluded that the network contracts were not an expectancy
or form of goodwill, but rather were separate, identifiable, and distinct assets.

        A fair reading of Meredith Broadcasting does not support the proposition that a licensed
radio station can never have goodwill. Rather, the opinion appears to reflect nothing more than
the court’s view of the factual record as it related to the television broadcasting industry in the
1950s. There is no reason for this court, after its own trial, to attribute those same factual
findings to a radio station broadcasting a half a century later – in the era of the internet, social
networking, and satellite broadcasting. Nor is there any other basis for concluding that unlike
other industries, radio stations universally lack any goodwill, at least as that concept is applicable
herein. See also KFOX, Inc. v. United States, 510 F.2d 1365, 1377 (Ct. Cl. 1975) (dealing with
case in which goodwill had been identified as an asset transferred with a radio station); Roy H.
Park Broad., Inc. v. Comm’r of Internal Revenue, 56 T.C. 784, 813 (1971) (indicating that a
radio station can have goodwill, albeit “little”). Rejection of this per se rule is significant
because BIA, the company that appraised KZLA’s assets following the swap, viewed Meredith
as establishing such a rule in concluding, in its valuation report, that “[i]t is well-established that
broadcast stations do not possess any goodwill.” It was on the basis of this faulty premise that

                                                - 16 -
BIA, after assigning values to KZLA’s tangible and intangible assets, as well as its going
concern value, used the residual basis for allocating the remainder of the purchase price to
KZLA’s FCC license ($176,757,046). Although the consequences of using this approach remain
to be seen, the decisional law plainly suggests that approach was legally erroneous.

        Plaintiff likewise claims that the Court of Claims adopted its view of the law in Richard
S. Miller & Sons, Inc. v. United States, 537 F.2d 446, 451 (Ct. Cl. 1976). But, that is untrue. To
be sure, in cataloguing various definitions of goodwill, the court there observed that one of them
“equates goodwill with a rate of return on investment which is above normal returns in the
industry and limits it to the residual intangible asset that generates earnings in excess of a normal
return on all other tangible and intangible assets.” Id. (citing Note, “Amortization of Intangibles:
An Examination of the Tax Treatment of Purchased Goodwill,” 81 Harv. L. Rev. 859, 861
(1967-68)).21 It also observed that “[t]he term ‘goodwill’ has a varying content, depending on its
usage.” Richard S. Miller & Sons, 537 F.2d at 450. The Court of Claims, accordingly, neither
suggested that its “excess return” definition was the controlling one for goodwill for Federal tax
purposes, nor, more generally, that a firm, to have goodwill, must currently have above-average
profits. Indeed, applying traditional notions of goodwill, the court found that a relatively poor-
performing insurance business had goodwill, indicated by a variety of factors, including a
“pattern of growth” and the fact that the acquirer negotiated a covenant not to compete from the
seller. Id. at 453 (noting that the covenant not to compete was “the most significant indication
that goodwill was transferred in the sale”). Notably, the court conducted no comparison between
the insurance company’s profits and the norm in the area – an omission that would make little
sense if plaintiff was right about what that case holds.

        Contrary to plaintiff’s claims then, it would seem that questions involving the presence of
goodwill in a given transaction must be resolved on the basis of the facts in a particular case, not
some bright-line rule of law. To be sure, goodwill can be viewed as the “premium” that is paid
over and above what other assets of the business would be worth if bought individually. See
R.M. Smith, Inc. v. Comm’r of Internal Revenue, 69 T.C. 317, 320-22 (1977), aff’d, 591 F.2d 248
(3d Cir.), cert. denied, 444 U.S. 828 (1979); Concord Control, Inc. v. Comm’r of Internal
Revenue, 78 T.C. 742, 745-47 (1982). But, logic and common sense suggests that such a
premium might be realized even where the acquired entity is not currently profitable – perhaps
based upon the expectation that it will become profitable. Yet, plaintiff assumed the contrary in
ascribing the residual of the price paid for KZLA, less the value of identifiable tangible and
intangible assets, entirely to the station’s FCC license. It made no attempt to determine
independently the value of that license so as to allow for the possibility that some premium

       21
           Law & Economics scholars Judge Posner and Professor Landes have described the
synergies related to sales and patronage, observing that “once the reputation [of a brand] is
created, the [owner of the brand name] will obtain greater profits because repeat purchases and
word-of-mouth references will generate higher sales and because consumers will be willing to
pay higher prices for lower search costs and greater assurance of consistent quality.” William M.
Landes & Richard A. Posner, “Trademark Law: An Economic Perspective,” 30 J.L. & Econ.
265, 270 (1987).

                                               - 17 -
effectively was paid for KZLA beyond the value of its tangible and intangible assets, that is, for
goodwill.

        Plaintiff’s reliance, moreover, on accounting conventions to support its per se rule is
similarly misconceived. Accounting principles, which are designed to yield a conservative
statement of current income, cannot be presumed to override the construct of the Internal
Revenue Code. See Thor Power Tool Co. v. Comm’r of Internal Revenue, 439 U.S. 522, 542-43
(1979) (given their different objectives, “any presumptive equivalency between tax and financial
accounting would be unacceptable”). Indeed, beginning in 2004, the Securities and Exchange
Commission began requiring public radio stations to value directly their FCC licenses and assign
the residual value to goodwill – a policy that caused companies, like Emmis, to identify and
value the goodwill associated with their stations. See SEC Staff Announcement, “Use of
Residual Method to Value Assets Other Than Goodwill” (Sept. 29, 2004) (citing Federal
Accounting Board’s Statement 141, paragraph 3).

        So where does this leave us? In plaintiff’s telling, the story here is black-and-white:
KZLA possessed no goodwill based on bright-line legal distinctions applicable to all (or virtually
all) broadcasting stations. The truth is more grey. There are a few indications that KZLA may
have possessed some goodwill – albeit far less than some other radio stations, as various market
metrics indicated. In the court’s view, determining whether that goodwill was appreciable – or,
alternatively, de minimis – requires an examination of the quantitative evidence that goodwill
was transferred here. See Jefferson-Pilot Corp. v. Comm’r of Internal Revenue, 98 T.C. 435, 450
(1992), aff’d, 995 F.2d 530 (4th Cir. 1993). That, in turn, requires a determination as to whether
there was some residual “cost over the fair value of the identifiable net assets acquired.” Coast
Fed. Bank, 323 F.3d at 1039; see also Jack Daniel Distillery, 379 F.2d at 579. On this valuation
point, both parties rely heavily on expert opinions. Critically, the court is not bound to accept, in
toto, those opinions, but may alter their findings based on its evaluation of the record. See
Jefferson-Pilot, 98 T.C. at 450-51; see also Miami Valley Broad. Corp. v. United States, 499
F.2d 677, 688-89 (Ct. Cl. 1979). It is to that evaluation that the court now turns.

               2. The Value of KZLA’s Goodwill

        Hewing to its view that KZLA lacked goodwill, plaintiff never offered a value for
KZLA’s goodwill. Defendant, for its part, employed its own version of a residual method – not
to calculate the value of KZLA’s FCC license, as BIA had done, but rather to assess the value of
the station’s goodwill.

        To determine the value of the license, defendant’s expert, Ms. Flynn, employed a direct
valuation method – the income or discounted cash flow (DCF) method – a method that has been
used by public radio stations, appraisers and, ultimately, the courts in valuing stations. See
Jefferson-Pilot, 98 T.C. at 450-55. Under this method, Ms. Flynn attempted to isolate the
income attributable to the FCC license by performing a discounted cash flow analysis of the
station, treating it as a start-up. She prepared projections for the revenue, operating cash flow,
and net free cash flow that KZLA could reasonably be expected to achieve in the market, giving
consideration to past performance, market operating and financial benchmarks, as well as the

                                               - 18 -
performance of other radio stations in the LA Market. The operating cash flow was derived by
subtracting from the revenue flow future operating expenses; the net cash flow was derived by
subtracting from the operating cash flow taxes, depreciation, capital expenditures and additions
to working capital. Discounting the net free cash flow to present value, Ms. Flynn then isolated a
value for KZLA’s license.22 Using this method, Ms. Flynn initially set the value of KZLA’s
license, as of October 6, 2000, at $131.4 million, leaving a residual value of goodwill, as of
October 6, 2000, of $45.4 million – a figure approximately $28 million below that employed by
the IRS in asserting its deficiency against plaintiff.

       Over time, Ms. Flynn further adjusted her calculations, each time reducing the value she
ascribed to goodwill.23 At trial, plaintiff produced testimony from several experts questioning
some of the remaining assumptions used by Ms. Flynn in her calculations. In the face of this
testimony, defendant has acknowledged some of the errors identified by plaintiff’s witnesses.

       This all obliges the court to examine further several of the critical steps employed by Ms.
Flynn in her DCF calculations. As presented at trial, those calculations incorporated the
following steps/assumptions:

        ●       Market Revenue: Ms. Flynn used estimates by BIA that KZLA would
                generate $851 million in revenue in 2000, growing to $1.102 billion by

        22
          For a case in which a similar DCF method was employed, see Jefferson-Pilot, 98 T.C.
at 452-53; see also Meredith Broad., 405 F.2d at 1228-29.
        23
           The following chart shows how defendant’s positions have varied regarding the
relative values of KZLA’s license and goodwill:
   Date      Procedural Posture                         License Value    Goodwill Value
   5/9/05    IRS’s Adjustment to Tax Return             $103,466,000     $73,311,046
                                                        $161,957,046 –   $14,800,000 -
   8/27/10   Besen Expert Report
                                                        $152,707,046     $24,050,000
   8/29/11   Flynn Expert Report                        $131,366,000     $45,391,000
   3/9/12    First post-trial submission                $140,247,000     $36,510,000
   7/20/12   Post-trial brief                           $156,957,046     $19,800,000
   7/28/13   Second post-trial submission               $156,999,000     $19,758,000

The Besen Expert Report was drafted by Dr. Stanley Besen, an expert for defendant who did not
testify at trial; the report, however, was received in evidence. Dr. Besen used a regression
analysis in an attempt to calculate the value of KZLA’s goodwill. His conclusion that between 8
to 13 percent of the total value in the exchange was attributable to goodwill was attacked by
plaintiff and largely abandoned by defendant. In its post-trial briefs, defendant attempted to
inject an entirely new argument into this case – that a significant portion of the value of the
exchange related to going concern value. But, the parties previously stipulated that the value of
all intangibles, except for goodwill, was $4,858,317. In the court’s view, that stipulation, as well
as defendant’s failure to raise its going concern argument much earlier in the case, preclude it
from relying on that argument at this late point.

                                               - 19 -
              2003 and $1.765 billion by 2009. In reaching this number, Ms. Flynn
              projected a gradual growth in the radio station’s average audience share to
              3.2 percent by the tenth year of the projection – slightly less than the
              average Class B FM station’s audience share in 2000 (3.31 percent). She
              likewise projected that KZLA’s power ratio would grow to 1.12 over time.

       ●      Expenses: Ms. Flynn broke the projected station operating expenses into
              three categories: programming and engineering; advertising/promotion
              and sales; and other (which included general and administrative expenses).
              In projecting the growth of expenses, she relied upon historic KZLA
              operating data, as well as industry data. The figures she used correlated
              well with at least one comparison data set, relating to industry statistics.24

       ●      Capital Expenditures and Working Capital: Ms. Flynn projected
              annual capital expenditures of $600,000 and a deduction for working
              capital equal to five percent of the change in revenues.

       ●      Taxes: In computing her income flows, Ms. Flynn computed taxes at a
              35 percent rate after deducting projected depreciation/amortization from
              operating cash flow. In calculating the amortization deductible with
              respect to the FCC license, Ms. Flynn assumed that the asset had a forty-
              year useful life and a value of $80 million.

       ●      Discount Rate: Ms. Flynn discounted future cash flows by a factor of
              11.7 percent that she derived by modifying figures available in Ibbotson’s
              Valuation Edition Yearbook for 2001. To derive this discount figure, Ms.
              Flynn estimated the cost of equity financing (14.54 percent) and the after-
              tax cost of debt financing (7.48 percent). She then allocated those figures,
              presuming 60 percent of financings to be equity and 40 percent to be debt,
              yielding a weighted average cost of capital (WACC) of 11.7 percent.

       ●      Terminal Value: Ms. Flynn arrived at her terminal values using the
              Gordon Growth formula, assuming a 4.5 percent perpetuity growth and a
              discount terminal value back ten years using the WACC of 11.7 percent.

       ●     Other Intangible and Tangible Assets: In determining the residual
       value of goodwill, Ms. Flynn also deducted the value of the other tangible and
             intangible assets of KZLA that were exchanged. Those values came to
             approximately $8.243 million.


       24
           That report was the National Association of Broadcasters’ Radio Financial Report,
published in 1992. Ms. Flynn’s assumed expenses correlate, as a percentage of net revenue, to
the data in this report.

                                              - 20 -
As noted, before trial, Ms. Flynn initially set the value of KZLA’s FCC license at $131.4 million,
leaving $45,391,000 in goodwill. At trial, however, she admitted that she had failed to include in
her calculations all of KZLA’s projected cash flow for 2009 and had incorrectly calculated
working capital. Correcting for these errors, her estimate of KZLA’s license value increased,
correspondingly dropping her estimate of the station’s goodwill to $36,510,000.

         At trial, plaintiff’s experts cited alleged errors in Ms. Flynn’s tax computations that she
did not correct before trial. They noted, for example, that she had failed to use the full value of
KZLA’s license in calculating the amortization deduction owed – instead, she used a proxy value
of $80 million. While Ms. Flynn claimed that she could not set the value of the license, for tax
amortization purposes, in the same calculation she was using to establish the value of that
license, in fact, the spreadsheet she employed appeared to permit that functionality – using that
spreadsheet, one could repeat the calculations until the value used for amortization and the final
value derived matched. Apart from this, defendant admits that Ms. Flynn made two additional
errors in her tax calculations: (i) she used a 40-year, rather than the 15-year, statutory period
prescribed by section 197 of the Code, as the useful life of the license, see Treas. Reg. § 1.197-
2(f); and (ii) she started the amortization of the license as of January 1, 2001, rather than as of
October 2000, as section 197 requires. Plaintiff asserts that if one corrects for all three of these
errors, i.e., the value of the license, the useful life, and the starting date, the value of KZLA’s
“stick” license increases to $179,626,000, leaving no portion of the $185 million purchase price
left to be allocated to goodwill.25 In the face of these claims, defendant, in its post-trial briefing,
presented yet another revised value for the license that reflected two of the three modifications
plaintiff proposed to the amortization deduction – that is, defendant still kept the proxy value of
the license at $80 million, but adjusted the useful life and starting point for the amortization.
According to defendant, that brought the value of the FCC license up to $157 million, leaving a
goodwill value of $19.8 million.

        Logic suggests that the value of the license employed in determining the amortization
deduction must closely approximate its actual value, lest the projected income stream from the
license be understated, thereby causing the value of the FCC license to be understated.26 Simply
picking a supposed “average” license value (e.g., $80 million), as Ms. Flynn essentially did,



       25
           $185,000,000 less $179,626,000 leaves $5,374,000. If one then deducts from that last
figure the value of KZLA’s other intangible and tangible assets ($8,243,000), the resulting figure
is negative (-$2,869,000).
       26
           An understatement of the cash flow would occur if the amortization value of the
license were too low because that would cause the amortization deductions associated with the
license to be understated. The latter understatement of deductions would, in turn, increase the
amount of taxes accounted for in the projections, which would reduce the projected income
stream and, when present-valued, the value of the FCC license.

                                                - 21 -
makes no sense in a DCF calculation.27 In addition, the court agrees with plaintiff that Ms.
Flynn’s discount rate (the WICC) was too high. That rate was calculated by separately deriving
a cost of equity financing and an after-tax cost of debt financing, and then averaging those
percentages in proportion to a market analysis reflecting how radio companies generally financed
their capital (e.g., how much equity versus debt financing the stations used). Changing this
discount factor impacts the value of the license derived: The higher the rate employed, the lower
the present value of the FCC license derived when the station’s future income is discounted –
and the higher the residual value of goodwill. Conversely, the lower the discount rate derived
via this calculation, the higher the present value of the FCC license obtained, and the lower the
residual value of goodwill. Because Ms. Flynn’s discount rate was overstated, it caused her to
derive values for the license that were too low, and ultimately caused her to set a value of
goodwill that was too high.

        With this in mind, the following are the specific errors that plaintiff demonstrated existed
in Ms. Flynn’s discount rate calculation: First, she based her risk-free rate on the average yield
of 20-year U.S. Treasury bonds in the year 2000 (6.8 percent), rather than focusing on the yield
of those bonds in October 2000 (6.04 percent). Consistent with the testimony of plaintiff’s
experts, the court believes that the 6.04 percent figure should be employed as the starting point
for determining the cost of equity that would have been incurred by a start-up radio station
looking to obtain equity financing in October 2000. This approach is consistent, inter alia, with
how Ms. Flynn approached the debt component of her discount rate, which began with the prime
rate as of October 2000. Second, while Ms. Flynn’s cash flow projections were somewhat rosy
as compared to KZLA’s historical performance, indications are that the equity risk premium she
used in calculating her cost of equity was too high.28 Several reliable economic sources cited by

       27
           Ms. Flynn derived her average by identifying what she argued were ten comparable
radio sales from around the country between October 1995 and March 2000. There are several
major problems with this approach. For one thing, Ms. Flynn failed to explain why the license
values she used – which involved station sales in places like Philadelphia, San Francisco,
Chicago, and New York City – were comparable to the value that should be assigned to a license
in Los Angeles. Since all but two of these transactions she used were between 1995 and 1997, it
is obvious that they did not capture the explosion in license values that was occurring in the LA
Market in 2000. Even more disturbing is the fact that Ms. Flynn disregarded a number of sales
(including four transactions in 2000) that occurred in the period immediately following the
KZLA transaction – perhaps not coincidentally, use of these transactions would have produced a
much higher proxy figure for the license.
       28
            The risk-free rate “is the rate of return an investor can obtain without taking market
risk,” often set at the rate of return on long-term Treasury securities. Ibbotson Assocs., Stocks
Bonds, Bills, & Inflation: Valuation Edition 2003 Yearbook, at 253 (2003) (hereinafter
“Ibbotson”). The equity risk premium is “the additional return an investor expects to
compensate for the additional risk associated with investing in equities as opposed to investing in
a riskless asset.” Id. at 251; see also Spectrum Sciences and Software, Inc. v. United States, 98
Fed. Cl. 8, 26 n.27 (2011); Franconia Assocs. v. United States, 61 Fed. Cl. 718, 764 (2004).

                                               - 22 -
plaintiff establish that this premium should not have been 8.1 percent, but rather no more than 6
percent.29 Finally, defendant agrees that the calculation of her discount factor should have taken
into account a greater projected use of debt (a 58 percent equity/42 percent debt ratio, rather than
the 60/40 split used in her report), thereby lowering the final discount factor further. The
following chart tracks the required changes:

                 WEIGHTED AVERAGE COST OF CAPITAL CALCULATION
                                             Original  Adjusted
                 Risk-free rate              6.80 %    6.04 %
                 Equity risk premium         8.10 %    6.00 %
                 Size premium                0.80 %    0.80 %
                 Industry risk premium       -1.16 %   -1.16 %
                 Cost of equity              14.54 %   11.68 %

                 Prime rate                              9.50 %       9.50 %
                 Prime adjustment                        2.0 %        2.0 %
                 Cost of debt                            11.50 %      11.50 %
                 After-tax COD                           7.48 %       7.48 %


                 % Equity                                60 %         58 %
                 % Debt                                  40 %         42 %
                 Total                                   100 %        100 %

                 WACC                                    11.71 %      9.91 %

As the chart indicates, making all three adjustments to Ms. Flynn’s discount rate calculation
reveals that her discount rate (the weighted average cost of capital or WACC) should have been
9.91 percent, rather than 11.71 percent.

        While defendant’s post-trial goodwill figure of $19.758 million reflects the 58 percent
equity/42 percent debt ratio, it does not account for the other changes that must be made to
correct Ms. Flynn’s calculations. Specifically, her post-trial figure must be adjusted further to
reflect: (i) a value of the license for amortization purposes that more closely corresponds to its
actual value; and (ii) the new discount factor (9.91 percent), with an equity component that
reflects a modified risk free rate of 6.04 rather than 6.8 percent and an equity risk premium of 6.0
rather than 8.1 percent. The following chart illustrates the impact of these changes in alternating
scenarios by: (i) modifying (in column C) the amortization value of the FCC license, and (ii)
showing (in column E) how the ultimate value of the license would be affected under four
discount rate scenarios: (a) where the equity rate is the same as in defendant’s calculation;



       29
            Mr. Jerry Hausman, one of plaintiff’s experts, convincingly testified that there are at
least a half a dozen articles that would indicate that 8.1 percent is “too high.” He pointed to a
paper by Professors Faumin and French, and to an opinion by Jeremy Siegel of the Wharton
School at the University of Pennsylvania.

                                                - 23 -
(b) where the equity rate is adjusted to modify the risk-free rate; (c) where the equity rate is
adjusted to modify the equity risk premium; and (d) where the equity rate is adjusted to modify
the risk-free rate and the equity risk premium.30 Here is that chart:

      (A)               (B)           (C)                   (D)                   (E)               (F)
 Transaction's Less Tangibles & Amortization Equity Rate: Changes to                         Goodwill Value
                                                                             License Value
  Total Value       Intangibles License Value Defendant's Calculations                        (Remainder)
                                              No Change                         156.999           19.758
                                              Modified Risk Free Rate           169.088           7.669
      185              8.243           80
                                              Modified Equity Risk Premium      194.934          -18.177
                                              Both Modifications                212.954          -36.197
                                              No Change                         167.298           9.459
                                              Modified Risk Free Rate           180.031           -3.274
      185              8.243          120
                                              Modified Equity Risk Premium      207.241          -30.484
                                              Both Modifications                226.202          -49.445
                                              No Change                         176.757           0.000
                                              Modified Risk Free Rate           190.083          -13.326
      185              8.243        156.742
                                              Modified Equity Risk Premium      218.545          -41.788
                                              Both Modifications                238.371          -61.614
                                              No Change                         180.170           -3.413
                                              Modified Risk Free Rate           193.710          -16.953
      185              8.243          170
                                              Modified Equity Risk Premium      222.624          -45.867
                                              Both Modifications                242.762          -66.005
* Data in millions of dollars


Several key findings flow from this chart. For one thing, it appears that KZLA’s goodwill values
(those listed in column F) fall below zero if the calculation is adjusted to reflect the two equity
rate adjustments discussed above – even if the court continues to use defendant’s extraordinarily
low proxy value of $80 million for the license. If, instead, the amortization value of the license
is increased toward its actual value – as can be seen by comparing the values in column C with
those in column E – it appears that, even using Ms. Flynn’s original discount factor of 11.71
percent, the value of KZLA’s residual goodwill falls below zero at an amortization value for the
license of around $156,742,000.31 This is because even using this still understated value to




        30
          The court generated these statistics by making simple modifications to the cells in the
spreadsheet provided to the court by defendant.
        31
           Modifying defendant’s spreadsheet reveals that, contrary to Ms. Flynn’s claims, one
may determine the point at which the amortization value of the FCC license and the calculated
license value equate. The following chart shows those points using various assumptions for the
equity portion of the discount rate:

                                                     - 24 -
calculate the amortization deduction leads to a calculated license value in excess of $176.7
million – which leaves nothing for goodwill. In short, the chart demonstrates that if the court
makes virtually any one of the changes that must be made to straighten out her calculations – let
alone all the changes required – Ms. Flynn’s discounted cash flow method yields a value for
KZLA’s goodwill that collapses to zero or below.

        So what does this mean? Indisputably, the burden of proof here is on the plaintiff. See
United States v. Janis, 428 U.S. 433, 440-41 (1976); see also Charron v. United States, 200 F.3d
785, 792 (Fed. Cir. 1999). Accordingly, to prevail, defendant need not prove that a positive
value should be assigned to goodwill; rather, plaintiff must prove otherwise. But, that does not
mean that the court must turn a blind eye to the results of defendant’s shrinking attempts to value
the goodwill supposedly present here in deciding whether plaintiff has met its burden of proof.
Per contra. Having embraced the residual value method as the proper method of valuing
goodwill here, defendant cannot avoid the results produced by that method when they turn
negative. As other cases illustrate, the use of discount calculations to value goodwill represents a
double-edged sword, in that the numbers can demonstrate either the presence or the absence of
goodwill. See Jack Daniel Distillery, 379 F.2d at 579; Phila. Steel & Iron Corp. v. Comm’r of
Internal Revenue, 344 F.2d 964 (3d Cir. 1965) (adopting the opinion of 23 T.C.M. (CCH) 558
(1964)); R.M. Smith v. Comm’r of Internal Revenue, 36 T.C.M. (CCH) 97, 112 (1977), aff’d, 591
F.2d 248 (5th Cir. 1979).32 Here, those calculations thoroughly undercut defendant’s position
and, in so doing, substantially aid plaintiff. Put another way – by consistently demonstrating that


                             Break Even (Amortization Value = License Value)
                             Equity Rate: Changes to
                                                              License Value
                             Defendant's Calculations
                             No Change                            183.696
                             Modified Risk Free Rate              202.639
                             Modified Equity Risk Premium         246.010
                             Both Modifications                   278.795
                             * Data in millions of dollars
                             ** Values "equal" when rounded to nearest 1,000
This chart perhaps explains why Ms. Flynn could not use the actual license value for
amortization purposes if she hoped to find a positive value for KZLA’s goodwill. That is
because the “break even” values for the license – the point at which the amortization and final
values of the license are the same – all are too high to leave any value for goodwill.
       32
          The record suggests that no value could be ascribed to goodwill if the court were to
compute the value of that asset by capitalizing projected “excess” earnings, as no proof was
adduced that such “excess” earnings could be projected. See Banc One Corp. v. Comm’r of
Internal Revenue, 84 T.C. 476, 506 (1985), aff’d, 815 F.2d 175 (6th Cir. 1987) (discussing the
relative merits of calculating goodwill via this formula method as opposed to the residual method
(and favoring the latter)).

                                               - 25 -
defendant’s calculations yield values for goodwill that are below zero, plaintiff has shown that,
under any set of reasonable assumptions, any goodwill present in this transaction was, at most,
negligible. That was true either because KZLA did not possess more than a negligible amount of
goodwill or because Emmis did not, for purposes of section 1031, exchange anything of value
for KZLA’s goodwill when it transferred its radio station assets for those held by BHC and BIC.

        The latter point bears a few additional words. A preponderance of the evidence suggests
that the parties to the KZLA exchange did not intend to attribute any part of the exchange value
to the station’s goodwill – that Emmis did not provide, and plaintiff did not receive, anything for
that goodwill as a part of the transaction. See Beeler, 73 T.C.M. at 1987. (for purposes of section
1031, transfer did not include business’ goodwill or going concern value). The buyer (Emmis)
determined the amount it was willing to pay BHC and BIC on the basis of the realities of the
marketplace and its apparent analysis of the value residing in the assets or operations of KZLA.
Under the circumstances of this case, KZLA’s license was the heart and backbone of the
station’s value. While the rest of its tangible and intangible assets offered some value to Emmis,
it would appear that Emmis parted with no appreciable value for the station’s goodwill. This
finding, again, is driven by the fact that no reasonable allocation of the exchange value – $185
million – leaves any room for assigning a transferred value to goodwill. It is not simply a matter
of giving effect to the parties’ expressed subjective intentions.

        In analogous circumstances, when use of the residual value method left nothing to be
allocated to goodwill, the Tax Court has held that a taxpayer need not allocate a separate value to
assets in the nature of goodwill. See, e.g., Charles Schwab Corp. v. Comm’r of Internal
Revenue, 122 T.C. 191, 214-15 (2004), supp. on other grounds, 123 T.C. 306 (2004); Monaghan
v. Comm’r of Internal Revenue, 40 T.C. 680, 686 (1963); see also R.M. Smith, 36 T.C.M. at 112;
see also Maseeh v. Comm’r of Internal Revenue, 52 T.C. 18, 24 (1969).33 Such was also the
holding in Republic Steel Corp. v. United States, 40 F. Supp. 1017 (Ct. Cl. 1941). In Republic,
the seller and buyer of patents agreed, in their price negotiations, that the value of the stock sale
designed to effectuate the transfer of the patents reflected the value of the patents and certain
other assets on the company’s books; the record reflected that the acquirer had no intention of
purchasing a continuing business and thus “placed no value on [goodwill] in determining
whether or not to pay the price demanded.” Id. at 1023. In such an instance, the Court of Claims
held that no part of the cost of the stock was allocable to goodwill. In so concluding, this court’s

       33
           The fact that the exchange was a genuine multiple-party transaction involving an
unrelated entity (Emmis) adds some credence to this position. As the Supreme Court put it in a
related context –
       where . . . there is a genuine multiple-party transaction with economic substance
       which is compelled or encouraged by business or regulatory realities, is imbued
       with tax-independent considerations, and is not shaped solely by tax-avoidance
       features that have meaningless labels attached, the Government should honor the
       allocation of rights and duties effectuated by the parties.

Frank Lyon Co. v. United States, 435 U.S. 561, 583-84 (1978).

                                               - 26 -
predecessor stated: “[i]t may be that the seller’s good will really did have a value, but if the
parties did not think so and, in computing the price to be paid, gave it no value, it must be
eliminated from consideration in computing the amount paid for the other assets.” Id.; see also
Meister v. Comm’r of Internal Revenue, 302 F.2d 54, 57 (2d Cir. 1962).34

         Now, of course, there is another possibility – that other errors in Ms. Flynn’s calculations
overstated the value of KZLA’s license and, concomitantly, understated the value of KZLA’s
goodwill. But, neither party has identified those errors with any specificity and the court will not
wade into this thicket on its own. That is particularly so because the notion that the value of the
KZLA’s FCC license was so great as to suggest that no goodwill was accounted for in the
exchange is confirmed by the sale of a radio station that occurred less than a month after the
KZLA transaction. Specifically, at trial, plaintiff showed that on November 3, 2000, radio
station KFSG was sold at auction for $250 million. KFSG was similar to KZLA in several
critical ways – it was, for example, a Los Angeles-based Class B station.35 Yet, KFSG did not
have as good a signal as KZLA – unlike the latter station, KFSG did not have a transmitter
located on Mt. Wilson. KFSG was acquired in a “stick” transaction – where only the license,
tower/antenna and transmitter were acquired – by a broadcaster that intended to and, indeed, did
drop the religious format of the station and replace it with Spanish programming. And, yet, that
broadcaster paid nearly $65 million more than the amount of the value exchanged in the KZLA


       34
           In Jefferson-Pilot, the Tax Court employed a similar rationale in rejecting the
Commissioner’s argument that an FCC license had no value separate and apart from goodwill.
In this regard, it reasoned:
       Respondent’s argument that an FCC license has no value separate and apart from
       goodwill does not withstand logical analysis. For example, a hypothetical
       purchaser of a station who wanted to change the format and hire a new staff
       would probably pay little, if anything, for goodwill. This is because the change in
       format would attract new listeners, and the old listeners would find a new station
       whose format was similar to the one they listened to before the purchase.
       Similarly, many of the station’s sponsors would advertise on other stations whose
       formats target their consumers. Goodwill would be of little value to this
       purchaser. The same would be true of a station that had not generated any profits
       in previous years. A prospective purchaser would probably pay very little for the
       goodwill associated with such a station. In arriving at a purchase price, this
       purchaser would probably determine the value of the station’s tangible assets and
       then place a value on the right to enter into the business of broadcasting.

98 T.C. at 455-56; see also Meredith Broad., 405 F.2d at 1228.
       35
           “A ‘comparable’ must be substantially similar to the entity or asset that is at issue.”
Caraci v. Comm’r of Internal Revenue, 456 F.3d 444, 459 (5th Cir. 2006); see also Van Zelst v.
Comm’r of Internal Revenue, 100 F.3d 1259, 1263 (7th Cir. 1996); Estate of Palmer v. Comm’r
of Internal Revenue, 839 F.2d 420, 423 (8th Cir. 1988).

                                               - 27 -
transaction, with every indication that all but a small portion of that $250 million was for one
thing, and one thing alone – KFSG’s FCC license. In the court’s view, this transaction confirms
that the values generated by Ms. Flynn’s adjusted calculations – numbers that suggest that the
value of KZLA’s license left no room for allocating any value to goodwill – were correct and
represent the high value that the LA Market placed on the FCC licenses of radio stations with
strong signals. See R.M. Smith, 591 F.2d at 253 (residual value method is appropriate where
supported “by other collateral evidence”).

               *               *              *               *              *

        To recapitulate, the “[e]xistence of ‘good will’ and the value thereof are primarily
questions of fact which ‘must necessarily be considered in the light of [the] facts in each case.’”
Miller v. Comm’r of Internal Revenue, 333 F.2d 400, 404 (8th Cir. 1964); see also Houston
Chronicle, 481 F.2d at 1245; Morton Bldgs. of Neb., Inc. v. Morton Bldgs., Inc., 333 F. Supp.
187, 196 (D. Neb. 1971); Concord Control, Inc. v. Comm’r of Internal Revenue, 78 T.C. 742,
744 (1982); Drybrough v. Comm’r of Internal Revenue, 45 T.C. 424, 435 (1966). Based on the
record as a whole, the court finds that if KZLA possessed any goodwill, its value was negligible
and insignificant. The court also finds that Emmis did not transfer any assets in exchange for
that goodwill, such as it was. While the record, as a whole, tends to support these findings, the
adjusted calculations summarized above prove the sockdolager on this count. Plaintiff thus
prevails on this first issue.

       B.      Classification of Station Assets for Depreciation Purposes

        The court now turns to the dispute concerning the proper class lives that should have
been assigned to certain assets placed into service by plaintiff between 1988 and 2000. Section
167(a) of the Code provides “as a depreciation deduction a reasonable allowance for the
exhaustion, wear and tear . . . . of property used in the trade or business.” 26 U.S.C. § 167(a).
For the property in question, section 168 of the Code sets forth rules for determining the amount
of the depreciation allowed under section 167(a). In pertinent part, section 168(c) provides the
time period over which an asset is depreciated, a function accomplished by placing assets into
particular classes of property. The class lives of depreciable assets can be found in a series of
revenue procedures issued by the IRS. See Treas. Reg. §§ 1.167(a)-11(b)(4)(ii); see also
§ 1.168-3, Proposed Income Tax Regs., 49 Fed. Reg. 5957 (Feb. 16, 1984). The revenue
procedure in effect for the years in question was Rev. Proc. 87-56, 1987-2 C.B. 674. See Iowa
80 Grp., Inc. v. Internal Revenue Serv., 406 F.3d 950, 952 (8th Cir. 2005); Saginaw Bay Pipeline
Co. v. United States, 338 F.3d 600, 605 (6th Cir. 2003). For nonresidential real property, Rev.
Proc. 87-56 generally sets a recovery period of 31.5 years. For non-real (personal) property,
Rev. Proc. 87-56 includes a lengthy table that breaks down that property into asset classes and
assigns recovery periods or class lives to those classes. Rev. Proc. 87-56, § 5.03. As noted by
the Tax Court in a recent case, the table breaks “assets into two broad categories: (1) asset
guideline classes 00.11 through 00.4, consisting of specific depreciable assets used in all
business activities (the asset category), and (2) asset guideline classes 01.1 through 80.0,
consisting of depreciable assets used in specific business activities (the activity category).” Broz


                                               - 28 -
v. Comm’r of Internal Revenue, 137 T.C. 25, 31 (2011); see also Norwest Corp. & Subs. v.
Comm’r of Internal Revenue, 111 T.C. 105, 158 (1988).

         In 2002, BIC retained Deloitte to determine whether it was properly depreciating its
assets. As part of this process, Deloitte reviewed the electronic records associated with
approximately 18,600 fixed assets. With a few exceptions, Deloitte did not review the individual
assets or discuss them with BIC employees, but merely reviewed the catalog of information
assembled by BIC. As part of this review, Deloitte determined that BIC was using an
impermissible depreciation method with respect to 158 assets. Deloitte assisted BIC in preparing
and submitting an IRS Form 3115 (Application for Change in Accounting Method), requesting a
change in the method by which BIC depreciated those assets. The Commissioner allowed, in
part, and disallowed, in part, the requested changes.

        The disputed assets were originally classified by BIC as nonresidential real property with
either a 39-year or 31.5-year life, depending upon when the asset was placed in service. Deloitte
determined that these assets should be reclassified as various forms of personal property. The
following table (drawn from one of plaintiff’s briefs) summarizes plaintiff’s claims with respect
to these disputed assets:

   Asset      New      Nature of the Asset                                                 Location of
   Number     Class                                                                        Asset
   21934      0.11     Tenant improvements (X‐ray machine equipment)                       Salt Lake City
   21935      0.11     Tenant improvements (X‐ray machine equipment)                       Salt Lake City
   21936      0.11     Tenant improvements (X‐ray machine equipment)                       Salt Lake City
   22384      0.11     Tenant Improvements (partition for sublease space, fire alarm,      Chicago
                       light switches, ductwork)
   20456      0.11     Tenant improvements (lights, design, etc.)                          Salt Lake City
   16284      0.11     Tenant improvements (partitions, carpentry, painting, wallpaper,    Washington, DC
                       doors, hardware and carpet)
   16285      0.11     Tenant improvements (partitions, doors, carpentry, painting,        Washington, DC
                       wallpaper, hardware and carpet)
   19438      0.11     Tenant improvements (partitions, doors, carpentry, painting,        Washington, DC
                       wallpaper, hardware and carpet)
   9555       0.11     Tenant improvements (glazing)                                       Salt Lake City
   9560       0.11     Tenant improvements (millwork)                                      Salt Lake City

   22152      48.2     Tenant improvements (air conditioning unit)                         Chicago
   21073      48.2     Tenant improvements (thermofuser and controls)                      San Francisco
   21074      48.2     Tenant improvements (thermostat )                                   San Francisco
   7323       48.2     Tenant improvements (10‐ton a/c unit to cool transmitter and        Chicago
                       associated support equipment)
   7324       48.2     Tenant improvements (duct work, internal air blower and motor       Chicago
                       and filters to cool transmitter and associated support equipment)
   7501       48.2     Tenant improvements (7‐ton a/c unit to cool transmitter and         Chicago
                       associated support equipment)
   7502       48.2     Tenant improvements (custom air handling system to cool             Chicago
                       transmitter and associated support equipment)
   2792       48.2     Tenant improvements (cable wire and electrical work for             Salt Lake City
                       newsroom)
   2793       48.2     Tenant improvements (cable wire and electrical work for             Salt Lake City
                       newsroom)
   2252       48.2     Tenant improvements (refrigerated air dryer)                        Salt Lake City


                                                     - 29 -
   1927           48.2     Tenant improvements (XMTR kitchen vent exhaust)                    Salt Lake City
   1981           48.2     Tenant improvements (construction of videotaping room)             Salt Lake City
   1982           48.2     Tenant improvements (installation of ceiling over taping room)     Salt Lake City
   1983           48.2     Tenant improvements (electrical work in dubbing room)              Salt Lake City
   1984           48.2     Tenant improvements (electrical work – installation of dimmer in   Salt Lake City
                           duplication room)
   1986           48.2     Tenant improvements (installation of duct in dubbing room)         Salt Lake City
   16286          48.2     Tenant improvements (partitions, doors, carpentry, painting,       Washington, DC
                           wallpaper, hardware and carpet)
   18866          48.2     Tenant improvements (studio design and construction, wood          Washington, DC
                           shelving and custom wood cabinets)

   1047           48.2     Special purpose structure (house equipment at transmitter site)    Salt Lake City
   11063          48.2     Special purpose structure (house equipment at transformer site)    Washington, DC
   18867          48.2     Special purpose structure (house equipment at transmitter site)    Washington, DC
   23338          48.2     Special purpose structure                                          St. Louis


Based on plaintiff’s claims, these assets largely fall into three broad categories: (i) tenant
improvements, such as x-ray machine (security) equipment, carpentry, glazing, millwork,
painting, wallpaper, doors, hardware, and carpet; (ii) tenant improvements such as air
conditioning units and associated duct work, and equipment to cool transmitters and associated
support equipment, cable wire, and electrical work for broadcasting newsrooms; and (iii) special
purpose structures located at transmitter sites used to house specialized equipment relating to
such transmitters. Plaintiff claims that the assets in the first of these categories should be
properly classified within asset type 0.11 – office furniture, fixtures, and equipment, and the
latter two categories as within asset activity class 48.2 – radio and television broadcastings. See
Rev. Proc. 87-56. The court will discuss each of the categories seriatim.

                   1.     Tenant Improvements – Class 0.11

        This first category contains ten assets that plaintiff believes should be in the revenue
procedure’s Class 0.11 Office Furniture, Fixtures, and Equipment category, which class has a
ten-year class life and seven-year depreciation period.36 This class “includes furniture and
fixtures that are not a structural component of a building,” such as “desks, files, safes, and
communications equipment.” Rev. Proc. 87-56, § 5.03. This class “[d]oes not include
communications equipment that is included in other classes.” Id.

         As is true of many of the assets in question, plaintiff’s factual assertions regarding the
nature of the assets suffer from a relative dearth of supporting evidence, owing to a variety of
reasons. Take, for example, plaintiff’s claims regarding assets 21934, 21935, and 21936, which
inexplicably relate to a single invoice that was split into three “assets.” Plaintiff claims that this
asset is an x-ray machine used for security at building entrances. But, that is not clear from the
invoice in question, which does not refer to such a machine, but rather to “LABOR,
EQUIPMENT, & MATERIALS FOR RADIOTOGRAPHY (X-RAYING) AND


          36
               Asset Nos. 21934, 21935, 21936, 22384, 20456, 16284, 16285, 19438, 9555, and
9560.

                                                        - 30 -
ELECTRICAL.” Nor is it supported by BIC’s records, which refer to this “asset” as “Building
Xrays for Handrails.” It appears that the invoice was not for an asset, but for a service, and thus
does not support plaintiff’s attempt to reclassify these three “assets” as office furniture, fixtures,
and equipment.

         As it turns out, more evidence exists with respect to these “assets” than as to many of the
other assets at issue, for which the only document provided is the internal BIC form recording
information about the asset and perhaps a receipt. In other instances, some evidence is provided,
but it is impossible to tell the exact nature of what was procured – for example, attached to the
BIC form for Assets 20456, 9555, and 9560 is a master schedule of hundreds of Deloitte
adjustment that does not identify the particular asset(s) in question, which purportedly relate, in
the case of Asset 20456, to the remodeling of an office, and in the case of Assets 9555 and 9560,
to glazing and millwork, respectively. No other information – no invoice, work order, purchase
order, pictures, descriptions, etc. – is provided to define these assets, leading the court to
conclude that the evidence presented is insufficient to support plaintiff’s claim. Other evidence
in the record indicates that the remaining assets in this category were plainly structural
components of a building, among them, Asset 22384 (which was a demising wall to subdivide
existing space), as well as Assets 16284, 16285, and 19438 (which relate to leasehold
improvements, such as partitions, carpentry, ceilings, electrical, millwork, and painting).37 Many
of these items, in fact, are specifically listed as structural components of a building in Treas. Reg.
§ 1.48-1(e)(2), and thus are subject to the recovery period for nonresidential real property. See
also Amerisouth XXXII, Ltd. v. Comm’r of Internal Revenue, 103 T.C.M. (CCH) 1324, 1330
(2012); Rev. Proc. 87-56, § 5.

         In seeking to reclassify many of these assets, plaintiff seems to proceed from the notion
that all it needed to do, to prevail, was to introduce Mr. Seabrook’s opinions that a given asset
was eligible, occasionally with a bit of supporting testimony by Mr. Florence. However, many
of the facts upon which Mr. Seabrook relied do not otherwise appear in the record. In this
regard, Federal Rules of Evidence 703 and 705 indicate that the facts underlying an expert’s
opinion do not come into the record as substantive evidence, but rather are admitted only for the
limited purpose of enabling the trier of fact to scrutinize the expert’s reasoning. See 5860 Chi.
Ridge, LLC v. United States, 104 Fed. Cl. 740, 766 n.42 (2012); see also United States v. Wright,
783 F.2d 1091, 1100 (D.C. Cir. 1986); United States v. Affleck, 776 F.2d 1451, 1457 (10th Cir.
1985); 29 Charles Alan Wright & Victor James Gold, Federal Practice and Procedure § 6273
(1997). The fact that the documentation may have once existed, but was subsequently lost or
destroyed, does not relieve plaintiff of its burden of demonstrating that the Commissioner’s
determinations were erroneous. See Boddie-Noell Enters. v. United States, 36 Fed. Cl.722, 741
(1996) (noting that “summary appraisals based on non-contemporaneous records, or data

       37
           A portion of these “assets” relate to carpeting, which is eligible for classification as
office furniture and equipment. However, there is no way to trace between a quote attached to
these assets and the asset values themselves (the total figures do not match), preventing the court
from knowing whether, and to what extent, the assets plaintiff seeks to reclassify actually include
an amount for carpeting.

                                                - 31 -
reconstructed from accidentally lost or destroyed documents, are unpersuasive”); Jupiter Corp. v.
United States, 2 Cl. Ct. 58, 71 (1983) (rejecting similar summaries prepared by an accounting
firm).

       Accordingly, the court denies plaintiff’s claim as to all ten of the “assets” listed in this
category.

               2.      Tenant Improvements Allegedly Used to Protect, Maintain,
                       or House Broadcasting Equipment – Class 48.2

        This second category contains eighteen assets, including ventilation systems, air
conditioning units and air handling systems, and related ductwork, filters, internal air blowers,
motors, electrical work, construction, ceiling installation, and building upgrades that plaintiff
contends were installed or completed specifically to protect broadcasting equipment.38 Plaintiff
claims that these assets fall within Class 48.2, Radio and Television Broadcastings, which has a
six-year class life and a five-year depreciation period. This class “includes assets used in radio
and television broadcasting, except transmitting towers.” Rev. Proc. 87-56, § 5.

        Plaintiff contends that this equipment and construction are needed to meet the
temperature, humidity, and other environmental requirements necessary for the proper
functioning of the broadcast equipment. Defendant admits that five of these items (Nos. 22152,
7323, 7324, 7501 and 7502) fit this description. It contends that the remaining thirteen assets
constitute structural components of the building.

          Section 5.05 of Rev. Proc. 87-56 provides that a building can be included in an asset class
if it is so closely related to the use of the property it houses that it can be expected to be replaced
when the housed property is replaced. In setting forth this rule, the revenue procedure cites the
regulations involving the investment tax credit provided in sections 38 and 48 of the Code.39
Specifically, it cites Treas. Reg. § 1.48-1, subparagraph (e)(1) of which states, in pertinent part,
that:

       The term “building” generally means any structure or edifice enclosing a space
       within its walls, and usually covered by a roof, the purpose of which is, for
       example, to provide shelter or housing, or to provide working, office, parking,
       display, or sales space. . . . Such term does not include (i) a structure which is

       38
         Asset Nos. 22152, 21073, 21074, 7323, 7324, 7501, 7502, 2792, 2793, 2252, 1927,
1981, 1982, 1983, 1984, 1986, 16286, and 18886.
       39
           During various periods over the last 30 years, section 38 of the Code authorized an
investment tax credit for so-called “section 38 property.” Section 48(a) of the Code defines
“section 38 property” to include “tangible personal property” and “other tangible property,” such
as industrial machinery, but to exclude “a building and its structural components.” 26 U.S.C. §
48(a)(5)(D)(i).

                                                - 32 -
       essentially an item of machinery or equipment, or (ii) a structure which houses
       property used as an integral part of an activity specified in section 48(a)(1)(B)(i)
       if the use of the structure is so closely related to the use of such property that the
       structure clearly can be expected to be replaced when the property it initially
       houses is replaced. Factors which indicate that a structure is closely related to the
       use of the property it houses include the fact that the structure is specially
       designed to provide for the stress and other demands of such property and the fact
       that the structure could not be economically used for other purposes. Thus, the
       term “building” does not include such structures as oil and gas storage tanks,
       grain storage bins, silos, fractionating towers, blast furnaces, basic oxygen
       furnaces, coke ovens, brick kilns, and coal tipples.

Treas. Reg. § 1.48-1(e)(1). Under this regulation, a structure generally is not a building if: (i) it
was specially designed to meet the demands of the equipment it houses; and (ii) it could not be
economically used for other purposes. See L & B Corp. v. Comm’r of Internal Revenue, 862
F.2d 667, 674 (8th Cir. 1988), cert. denied, 491 U.S. 905 (1989); Consol. Freightways, Inc. v.
Comm’r of Internal Revenue, 708 F.2d 1385, 1389 (9th Cir. 1983).

       Treas. Reg. § 1.48-1(e)(1) treats the structural components of a building the same as the
building itself. Treas. Reg. § 1.48(e)(2) defines such “structural components” to include –

       such parts of a building as walls, partitions, floors, and ceilings, as well as any
       permanent coverings therefor such as paneling or tiling; windows and doors; all
       components (whether in, on, or adjacent to the building) of a central air
       conditioning or heating system, including motors, compressors, pipes and ducts;
       plumbing and plumbing fixtures, such as sinks and bathtubs; electric wiring and
       lighting fixtures; chimneys; stairs, escalators, and elevators, including all
       components thereof; sprinkler systems; fire escapes; and other components
       relating to the operation or maintenance of a building. However, the term
       “structural components” does not include machinery the sole justification for the
       installation of which is the fact that such machinery is required to meet
       temperature or humidity requirements which are essential for the operation of
       other machinery or the processing of materials or foodstuffs.

See also Hosp. Corp. of Am. v. Comm’r of Internal Revenue, 109 T.C. 21, 54 (1997). Under this
definition, an item can be a structural component of a building even if it is not permanent, as
long as it functions as an integral part of the building. Consol. Freightways, 708 F.2d at 1390;
Publix Supermarkets, Inc. v. United States, 26 Cl. Ct. 161, 175 (1992). Air conditioning
equipment comes within the exception in Treas. Reg. § 1.48-1(e)(1), and is not treated as a
structural component of a building under Treas. Reg. § 1.48-1(e)(2), if the primary motivation
for installing the equipment is to allow other equipment to function, with only incidental benefit
to employees and customers. See Publix Supermarkets, 26 Cl. Ct. at 175, 177; see also
Albertson’s Inc. v. Comm’r of Internal Revenue, 38 F.3d 1046, 1057 n.25 (9th Cir. 1993), vacated
in part, on other grounds, 42 F.3d 537 (9th Cir. 1994); see generally, Fed. Tax Coordinator,


                                                - 33 -
“Heating Equipment, Cooling Equipment, Air Conditions and Other Air Handling Equipment,”
L-17246 (2d ed. 2013).

         Apart from the five assets specifically mentioned above, plaintiff’s case as to this
category is weak and overly relies upon uncorroborated factual assertions made by its expert
witness. For example, Assets 21073, 21074, 2252, and 1986 relate to air conditioning equipment
and duct work installed in several of plaintiff’s radio studios, a duplication room, and a dubbing
room. But the scant documentation attached to the BIC forms does not reveal the purpose of this
equipment and, in particular, does not support plaintiff’s claim that this equipment was used to
meet temperature or humidity requirements for the operation of machinery in those studios (with
only incidental benefit to the occupants). The documentation for other assets in this category
(Assets 1981, 1982, 1983, and 1984) reveals that they constituted structural components of the
building (e.g., the walls of a video taping room, the ceiling of a duplication room, electrical
work) and thus were properly characterized by the Commissioner. The same can be said of
Asset 16286, which, like some of the assets in the prior category, relates to leasehold
improvements, such as partitions, carpentry, ceilings, electrical, millwork, and painting. The
next two assets in this category (Assets 1927 and 18866) defy accurate description/
characterization because they again are based upon broad descriptions of groups of items – the
former based on the master schedule of Deloitte’s adjustment discussed above, the latter on a
generic description of improvements (e.g., “miscellaneous leasehold improvements including
studio design and construction”) – with little or no explanation as to how what is on the schedule
relates to the asset description.40 Likewise, plaintiff’s claims with respect to other assets in this
category, such as Assets 2792 and 2793, are based solely on the cryptic BIC forms, with no
supporting documentation whatsoever. And, again, for the reasons stated above, the court does
not believe that these sketchy forms meet plaintiff’s burden in seeking to set aside the
Commissioner’s determinations.

         Based on defendant’s concession, the court allows for the reclassification of Asset Nos.
22152, 7323, 7324, 7501, and 7502, but denies plaintiff’s claims as to the remainder of the assets
in this category based on a failure of proof.




       40
            In its post-trial briefs, plaintiff repeatedly repines that it has failed to provide
explanations as to how evidence like this supports its claims because of “space limitations.” The
court, however, afforded each party 160 pages for post-trial briefing – well in excess of what is
normally provided and exactly what was requested. Accordingly, the notion that plaintiff could
not squeeze into its briefs explanations of how the record supports its specific depreciation
claims has a decidedly hollow ring – particularly, as the record does not hold much evidence for
plaintiff to summarize.

                                               - 34 -
                3.     Structures Designed and Built to House and Protect
                       Specialized Broadcasting Equipment – Class 48.2

        This final category contains four assets allegedly designed and built to house and protect
broadcast equipment.41 Defendant takes the position that these structures are buildings.
Plaintiff, however, maintains that under Treas. Reg. § 1.48-1(e)(1), they are what are known as
“special purpose structures” and, therefore, exempted from the definition of “building.”

          As noted above, under the regulations, among the factors which indicate that a structure
is a special purpose structure are “the fact that the structure is specifically designed to provide for
the . . . demands of [the] property [which it houses] and the fact that the structure could not be
economically used for other purposes.” Treas. Reg. § 1.48-1(e)(1)(ii); see Bundy v. United
States, 1986 WL 13364, at *5 (D. Neb. Nov. 19, 1986). In applying the regulation, courts
typically have focused less on appearances, e.g., whether a structure has walls and a roof, and
more on the function of the structure, e.g., does it provide shelter, or furnish working spaces. See
King Radio Corp., Inc. v. United States, 486 F.2d 1091, 1096 (10th Cir. 1973); Consol.
Freightways, 708 F.2d at 1388; Hart. v. Comm’r of Internal Revenue, 78 T.C.M. (CCH) 114,
117-19 (1999); cf. Minot Fed. Sav. & Loan Ass’n v. United States, 435 F.2d 1368, 1370-71 (8th
Cir. 1970).42 In applying that functional test, courts have split on the impact of having human
activity occur within the structure, with some finding the quantum of such activity important,
see, e.g., Consol. Freightways, 620 F.2d at 873; Munford, Inc. v. Comm’r of Internal Revenue,
87 T.C. 463, 481-83 (1986), aff’d, 849 F.2d 1398 (11th Cir. 1988); and others more inclined to
find that a structure is a building even if it only “provides shelter for significant machine or
animal activity,” L & B Corp., 862 F.2d at 672; see also, e.g., Boddie-Noell Enters., 36 Fed. Cl.
at 739-40. That said, most courts appear to agree that a structure is not a building if the structure
itself performs an activity. See Brown-Forman Distillers Corp. v. United States, 499 F.2d 1263,
1272 (Ct. Cl. 1974) (whiskey maturation facilities); Brown & Williamson Tobacco Corp. v.
United States, 369 F. Supp. 1283, 1287 (W.D. Ky. 1973) (tobacco drying sheds); Cent. Citrus
Co. v. Comm’r of Internal Revenue, 58 T.C. 365, 371 (1972) (atmospherically-controlled “sweet
rooms” to ripen fruit).

         In the midst of this split, it would appear that the former Court of Claims was decidedly
amongst those courts that focus more heavily on whether a structure provided working space for
employees. Thus, in Brown-Forman, the Court of Claims, in holding that whiskey maturation
facilities were not “buildings,” held that the fact that a structure has features in common with a
“building” is not determinative, finding instead that “a major inquiry [is] whether the structures
provide working space for employees that that is more than merely incidental to the principal
function or use of the structure.” 499 F.2d at 1271. Later, in Consolidated Freightways, that
court refined this standard, noting that “in deciding whether the human activity is merely

       41
            Asset Nos. 1047, 11063, 18867, and 23338.
       42
          Compare Consol. Freightways, Inc. v. United States, 620 F.2d 862, 870 (Ct. Cl. 1980)
(“Of course, if a structure does not appear to be a ‘building,’ it is not a ‘building.’”).

                                                - 35 -
incidental to the function or use of the structure or whether that structure functions to provide
working space for employees, more than merely the amount of such activity must be
considered.” 620 F.2d at 871. After examining the case law, the court then concluded that –

       in determining whether the structure provides working space for employees which
       is more than merely incidental to the principal function or use of the structure, we
       must examine the frequency of the human activity inside the structure, how
       essential such activity is to the basic process or use involved and how substantial
       that activity is. . . . The human activity must be considered both qualitatively and
       quantitatively to properly characterize its relationship to the principal function or
       use of the structure involved.

Id. at 872-73. Employing this analysis, the court distinguished the loading docks that were the
subject of its case from the whiskey maturation facilities in Brown-Forman, finding that the
movement of freight that occurred on the former structure was fundamentally different from the
chemical activity that occurred in the latter. Id. at 873. As to the loading docks, the court thus
found that “[t]he essential human activity within the structures consists of the manual labor
expended in moving the freight, temporarily staging the freight and checking for overages,
shortages and damaged freight,” adding that “[n]othing about the structure allowed for this basic
function to occur without this essential human activity.” Id. And, on this basis, the court found
that the loading docks were a building and not subject to any of the exceptions in the regulations.
Id. at 874; see also Consol. Freightways, 708 F.2d at 1388-89.

         The scant evidence provided by plaintiff as to the four buildings in question (Assets
1047, 11063, 18867, and 23338) largely takes the form of excerpts from the Deloitte report –
excerpts that, at least in some instances, readily admit that further documentation about the
nature of these assets is unavailable. This evidence does not demonstrate that these buildings
were built to house particular assets or that they could not serve other purposes if the equipment
therein was removed. In three instances (Assets 1047, 11063, and 23338), plaintiff has provided
no photos, plans or detailed descriptions of these buildings – and there was little testimony from
the witnesses who had seen these buildings. Plaintiff provided more detail as to Asset 18867 –
but that detail, indeed, revealed that this building contained not only transmitter facilities, but
also restrooms, offices, storage rooms, and an apartment. This information hardly served to
bolster plaintiff’s claim that this building – which was built in 1939 – was a “special purpose”
structure designed to house a modern transmitter. Plaintiff’s documentation did include some
very general information regarding the nature of human activity occurring in these buildings,
most often described as maintenance work (e.g., a listing of the individuals who worked in the
respective buildings, and an estimate of how many hours per month were spent working at the
structure). But, this information, which took the form of unsworn answers to a set of Deloitte
survey questions, is not detailed enough – let alone reliable enough – to allow the court to make
the sort of fine distinctions that were made in Consolidated Freightways. That said, the raw
number of hours reflected in these estimates – for one asset, 16-32 hours per month of
maintenance and 128-144 hours per month of office time within the structure – readily serve to



                                               - 36 -
distinguish this case from those in which a special purpose structure was not deemed a
building.43

        In sum, in the court’s view, plaintiff’s evidence as to these four assets falls far short of
what is necessary to overcome the Commissioner’s determinations.

               *               *               *               *               *

        Accordingly, based on defendant’s concession, the court allows for the reclassification of
Asset Nos. 22152, 7323, 7324, 7501, and 7502, but denies plaintiff’s claims as to the remainder
of the assets in question owing to a significant failure of proof.

III.   CONCLUSION

        The court need go no further. As to the exchange of KZLA, the court concludes plaintiff
has established that KZLA did not possess any significant goodwill that was accounted for in
that transaction. Rather, it would appear that KZLA’s value was exclusively in its FCC license,
as well as a few associated tangible and intangible assets. Regarding the reclassification issue,
the court upholds plaintiff’s claim with respect to the five assets identified above, but denies that
claim as to the remainder of the assets at issue.

        The court will withhold the entry of a judgment to permit the parties to submit
computations consistent with the court’s determination of the issues, showing the correct amount
of the judgment to be entered herein. The following procedure (which loosely tracks Rule 155 of
the U.S. Tax Court’s Rules of Practice and Procedure) shall be employed:

       1.      On or before August 30, 2013, the parties shall file a status report
               proposing the judgment amount that should be entered in this case.

       2.      Should the parties agree as to the amount of the proposed judgment, they
               shall so indicate. Agreeing to the entry of such judgment neither signifies
               agreement with this court’s findings and conclusions nor waives any
               arguments or rights the parties might otherwise have, nor, in particular,
               impacts upon any party’s right to an appeal.


       43
            In Brown-Forman, and later in Consolidated Freightways, the Court of Claims
distinguished the whiskey maturation facilities in Brown-Forman from the greenhouses that were
at issue in Sunnyside Nurseries v. Commissioner of Internal Revenue, 59 T.C. 113 (1972). In
this regard, the court noted that “no substantial employee activity” took place in the maturation
facilities, whereas employees periodically engaged in a broad range of processing activities at the
greenhouse. See Consol. Freightways, 620 F.2d at 872; Brown-Forman, 400 F.2d at 1272. In
the court’s view, the activity here appears to be more closely analogous to that which occurred in
the greenhouses – which were held to be buildings. Sunnyside Nurseries, 59 T.C. at 121-22.

                                                 - 37 -
3.   If the parties disagree as to the proposed judgment, they shall, in the filing
     described in paragraph 1, submit competing proposals for that judgment,
     together with an explanation as to why they believe their proposal more
     accurately tracks this court’s opinion. On or before September 30, 2013,
     the parties may file a response to the proposed judgment and rationale
     offered by the other party.

4.   This process shall not be employed to reargue or seek reconsideration of
     any of the points resolved by this court’s findings and conclusions. Nor
     shall it be used by defendant to pursue setoff or equitable recoupments not
     previously pled in this litigation. See Principal Life Ins. Co. & Subs. v.
     United States, 76 Fed. Cl. 326 (2007).

IT IS SO ORDERED.



                                                    s/Francis M. Allegra
                                                    Francis M. Allegra
                                                    Judge




                                     - 38 -
