                        T.C. Memo. 2000-270



                      UNITED STATES TAX COURT



              NEWHOUSE BROADCASTING CORPORATION AND
              SUBSIDIARIES, ET AL.,1 Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos.   19448-97, 23753-97,   Filed August 25, 2000.
                   24489-97, 6210-98.



           P and R have both moved for partial summary
     judgment on the issue of whether property used in
     extending and maintaining a cable television system
     pursuant to a cable television franchise agreement
     qualifies for investment tax credit under the "supply
     or service" transition rule of sec. 204(a)(3) of the
     Tax Reform Act of 1986, Pub. L. 99-514, 100 Stat. 2085,
     2149.
           Held: (1) Property to be used by P’s subsidiary M
     in extending and maintaining the cable television
     system is described in sufficient detail in the


1
   Cases of the following petitioners are consolidated herewith:
Advance Publications, Inc., and Subsidiaries, docket No. 23753-
97; Cox Enterprises, Inc., and Subsidiaries, docket No. 24489-97;
and Chronicle Publishing Co., Richard T. Thieriot, Tax Matters
Person, docket No. 6210-98.
                                  - 2 -

     franchise agreement to permit a determination of
     whether property actually used by M for that purpose
     may be considered "readily identifiable with" such
     agreement within the meaning of sec. 204(a)(3), id.,
     and (2) there are genuine issues of material fact in
     determining whether all the property actually used is
     "readily identifiable with and necessary to carry out"
     the franchise agreement as required by sec. 204(a)(3),
     id. Both motions for partial summary judgment shall be
     denied.



     Bernard J. Long, Jr., David E. Mills, and James R. Saxenian,

for petitioner.

     Gary D. Kallevang and William J. Gregg, for respondent.



                           MEMORANDUM OPINION


        HALPERN, Judge:   Both petitioner Newhouse Broadcasting Corp.

(petitioner) and respondent have moved for partial summary

judgment.    Each party objects to the other’s motion.      The issue

common to those motions (petitioner’s motion, respondent’s

motion, or, together, the motions) is whether MetroVision of

Livonia, Inc. (MetroVision), a wholly owned subsidiary of

petitioner’s, is entitled to an investment tax credit (ITC) on

account of certain property placed in service by it during its

taxable years ended July 31, 1989 and 1990 (the 1989 and 1990

taxable years or the audit years).        The property in question

relates to a cable television franchise awarded to MetroVision in

1983.    The motions require us to interpret the supply or service
                                   - 3 -

transition rule (supply or service transition rule) of section

204(a)(3) of the Tax Reform Act of 1986 (TRA of 1986 or the Act),

Pub. L. 99-514, 100 Stat. 2085, 2149, to determine whether

MetroVision properly claimed the ITC (transition ITC).      We shall

deny both motions.      Our reasons follow.

       Unless otherwise indicated, all section references are to

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

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

Procedure.

I.    Introduction

       Approximately 186 cable franchise agreements are involved in

petitioner’s case and about 200 similar agreements are involved

in the cases consolidated with petitioner’s case.      Although the

motions relate to a single cable television franchise agreement,

the issue presented is common to all of the cable franchises and

systems in dispute.      Therefore, resolution of the issue in this

case will facilitate resolution of the same issue as it arises in

the other cases.

II.    Background

       A.   Introduction

       For purposes of the motions, the parties have stipulated

certain facts.       We accept the stipulated facts as being true for

purposes of deciding the motions.      The stipulation of facts, with

attached documents, is incorporated herein by this reference.
                                 - 4 -

The parties have also filed various memoranda of law, some with

attached affidavits, and other documents.     The following

recitation of facts is drawn primarily from the stipulation of

facts.    Certain other facts (which facts we deem

noncontroversial) are included in that recitation.     In section

II.C., infra, we summarize pertinent parts of the various

affidavits submitted by the parties.     Those affidavits are

relevant principally with respect to petitioner’s motion.       We

believe that those affidavits support our conclusion that, with

respect to the requirements of the supply or service transition

rule, there are genuine issues of fact that foreclose summary

judgment for petitioner.

     B.    Facts Pertaining to the MetroVision Television Franchise

            1.   Granting of the Cable Franchise to MetroVision

     On August 23, 1982, the council of the City of Livonia,

Michigan, enacted Ordinance No. 1651 (Ordinance 1651).     Ordinance

1651 contains the procedures pursuant to which the City of

Livonia issued a request for proposals (request for proposals)

with respect to the construction of a cable television system

within the city.    In response to the request for proposals,

MetroVision submitted a franchise application, dated December 13,

1982 (the MetroVision application).      On May 18, 1983, the City of

Livonia enacted Ordinance 1685, which awarded a 15-year

nonexclusive cable television franchise to MetroVision (the
                               - 5 -

Livonia Franchise Agreement or franchise agreement).    On June 1,

1983, MetroVision sent a letter to the City of Livonia accepting

the cable television franchise (MetroVision letter of

acceptance).   The parties have stipulated that, for purposes of

the motions, the Livonia Franchise Agreement was, as of December

31, 1985, a binding written contract between MetroVision and the

City of Livonia.

          2.   Relevant Terms of the Franchise Agreement

     By the franchise agreement, MetroVision was awarded

     the right to construct, operate, and maintain a cable
     television system within the corporate boundaries of
     the City of Livonia, and to construct, operate and
     maintain * * * all necessary poles, towers, anchors,
     wires, cables, electronic conductors, underground
     conduits, manholes, terminals and other structures and
     appurtenances integral to this cable television
     system.2

The franchise agreement defines the term "cable television

system" as follows:

     A system of coaxial cables or other electrical
     conductors and equipment used to receive or originate
     or receive television radio signals and to transmit
     them via cable to subscribers for a fixed or variable
     fee, including the origination, receipt, transmission,
     and distribution of voices, sound signals, pictures,
     visual images, digital signals, telemetry, or any other
     type of closed circuit transmission by means of



2
   The franchise agreement defines the term “Franchise” as
follows: “The rights of grantee [MetroVision] to construct and
operate a cable television system in the City, subject to the
City Charter, the Cable Television Regulatory Ordinance, this
ordinance and all other applicable ordinances of the City, and
the franchise agreement.”
                                - 6 -

     electrical impulses; and as defined by the FCC Rules
     and Regulations (47 CFR 76.5).

     In consideration of the award of the franchise, MetroVision

agreed to pay the City of Livonia a fee of 5 percent of

MetroVision’s annual gross revenues generated by the cable

television system.   The term of the franchise is 15 years from

the date of execution of the franchise agreement, subject to

renewal, and the franchise area extends "throughout the present

corporate limits of the City of Livonia and to any area * * *

annexed to the City during the term of this franchise."

     In addition to meeting the requirements of the Livonia

Franchise Agreement itself, the franchise agreement requires

MetroVision to "provide all services and meet all requirements

of" (1) the request for proposals, (2) Ordinance 1651, (3) the

MetroVision application, and (4) "all other written and oral

representations made by the Grantee".   (Hereafter, those

documents and representations, along with the franchise

agreement, are referred to collectively as the pre-1986

documents.)

     Ordinance 1651 requires:

     [a]ll facilities and equipment * * * shall be
     constructed and maintained at a state-of-the-art level
     in accordance with applicable requirements and
     specifications, including, but not limited to, those of
     the National Electrical Code, the rules and regulations
     of the Federal Communications Commission, and all other
     pertinent ordinances and codes of the City of Livonia.
                               - 7 -

The term "state-of-the-art equipment" is defined by the franchise

agreement to encompass "[a]ny components or equipment accepted

and used by leaders in the industry and considered to be the most

modern and advanced equipment commercially available."

Consistent with the requirement to install state-of-the-art

equipment, the franchise agreement also requires MetroVision to

"meet or exceed all the material construction and service

requirements set out in * * * [petitioner’s] franchise

applications."   (Emphasis added.)

     Exhibits A through F attached to the Livonia Franchise

Agreement contain detailed requirements concerning cable system

design and performance (exhibit A), the system construction

schedule (exhibit B), system services and programming

(exhibit C), support for public access and local programming

(exhibit D), the initial schedule of rates and charges for all

services to be provided by MetroVision (exhibit E), and the

construction procedures for installation of the system

(exhibit F).

     Various subsections of exhibit A list the required

capacities, capabilities, and technical standards of the

equipment and facilities to be installed.   For example,

MetroVision is required to build a cable system that, at a

minimum, delivers signals at frequencies up to 440 MHz (60

channel capacity); has satellite earth stations capable of
                               - 8 -

receiving signals from all operational communications satellites

that generally carry programs available to cable systems;

provides compatibility for various interactive residential

services such as security alarm monitoring, home shopping, video

games, and one-way or interactive education; and provides certain

specified cablecasting facilities for use by the City of Livonia

and its residents.   The equipment for the cablecasting facilities

is required to be "as indicated in * * * [MetroVision’s]

franchise application" although "[e]quivalent or superior items

may be provided, with Grantor concurrence."   Exhibit C requires

MetroVision to broadcast certain television signals, including

10 Detroit area television broadcast stations, 3 distant

television broadcast stations (WGN (Chicago), WOR (New York), and

WTBS (Atlanta)), 5 other specified stations, 20 video programming

services distributed by communications satellite (e.g., CNN,

ESPN, C-Span, The Weather Channel), 10 alphanumeric programming

services (e.g., AP News cable, Dow-Jones News Service), 12 local

channels for community and governmental use, 2 local origination

programming services, and certain pay TV services (Bravo and Home

Theater Network).

     The MetroVision application also contains schedules listing

(1) the types of equipment (often by manufacturer and anticipated

unit cost) that would be needed, (2) the technical standards for

the equipment, both in terms of the Federal Communications
                                 - 9 -

Commission (FCC) requirements and, where they exceed the FCC

requirements, in terms of MetroVision’s own requirements, and

(3) channel capacity and system capability.   One of the volumes

comprising the MetroVision application details the proposed

maintenance procedures to be employed by MetroVision.   Volume II,

section VI of the MetroVision application, entitled "System

Design", contains detailed descriptions of the equipment to be

used in installing and maintaining the Livonia cable system.

Thus, one subsection, entitled "Summary of Proposed System

Distribution Equipment List", lists equipment by manufacturer and

model number (e.g., "Trunk Amplifiers -- Scientific Atlanta

6500/440 series"; "Power Supplies -- Electro model SV-L-4-60 BC

(Dual) with status monitoring and stand by power").   Another

subsection, entitled "Satellite Earth Stations", describes the

"major hardware elements of the earth terminal installation" for

satellite reception as consisting of "TVRO Antenna System - RSI

‘Torus’, Model 450 TC", and contains a detailed description of

the capabilities and features of this antenna system, which is to

be installed at two locations.    A third example of this kind of

equipment detail is provided by a subsection describing "headend

equipment" and "subscriber premises equipment to be installed

initially for home interactive services."   Here, again, the

equipment is described by manufacturer and model number.
                               - 10 -

     3.   MetroVision’s Activities Pursuant to the Franchise

     MetroVision commenced construction of the Livonia cable

system in 1984.   By 1985, construction was substantially

complete.   During the 1988-90 period, the construction activity

undertaken by MetroVision was to (1) extend the cable system into

newly constructed subdivisions, (2) deliver service to new

customers in existing service areas, and (3) replace worn out,

broken, or otherwise obsolete cable television equipment.

Respondent does not dispute, and we find, that those activities

were required by and undertaken pursuant to the terms of the

Livonia Franchise Agreement.   No significant changes to the

system, in terms of the number of channels or the channel

selection, were undertaken during the 1988-90 period.

     Petitioner has been unable to locate the invoices, purchase

orders, or any other list of the items of property placed in

service during the audit years for which it is claiming

transition ITC (the subject property).   As a result, petitioner

has been unable to demonstrate that the subject property is

property described in the Livonia Franchise Agreement. The

parties have stipulated, however, as to the authenticity of

certain charts of accounts and general ledger materials

pertaining to MetroVision which show, by dollar amount and

general category of expenditure (e.g., "Distribution System",

"Head End Equipment", "Local Production Equipment", "Traps &
                              - 11 -

Decoders", "Technical Equipment", etc.), MetroVision’s

expenditures during the audit years for property placed in

service in expanding and maintaining the Livonia cable television

system.3   The various categories encompass types of equipment

common to cable television systems generally and to the Livonia

system in particular.

     During the 1989 and 1990 taxable years, the number of miles

of plant increased from 421 to 430 and the number of subscribers

from 23,337 to 25,497.

     C.    Affidavits

     Petitioner submitted affidavits of Thomas Bjorklund who,

during the audit years and until he left petitioner’s employment

in 1996, was responsible for the installation and maintenance of

the Livonia cable system, and Edward P. Kearse, an attorney who,

for more than 25 years, "specialized in the administration and

law affecting cable television systems and cable franchise

agreements."

     Respondent submitted an affidavit by Charles Gramlich, a

self-employed cable television and telecommunications consultant

who provides consulting services to city and county governmental

cable franchising authorities.



3
   By stipulating as to authenticity, respondent has not
stipulated as to the truth of the material contained in the
general ledger accounts except for purposes of respondent’s
motion for summary judgment.
                                - 12 -

     By his affidavit, Mr. Bjorklund declares:   From the date of

its organization in 1983, MetroVision has been engaged solely in

the business of providing cable television service to the

residents of the City of Livonia.    The subject property was

installed in compliance with specific provisions of the Livonia

Franchise Agreement.   In some instances, MetroVision installed

updated versions of equipment illustrated in MetroVision’s

application, which "had the incidental effect of increasing by

two channels the potential capacity of the sixty-two channel

Livonia cable television system."

     By his affidavit, Mr. Kearse describes cable television

franchise agreements generally and declares that the core

provisions of the Livonia Franchise Agreement are consistent with

the terms of such agreements.    By his affidavit, respondent’s

affiant, Mr. Gramlich, acknowledges that the Livonia Franchise

Agreement "contains fairly specific details as to such things as

performance standards, programming, and installation."    He

rejects, however, Mr. Kearse’s declaration that a cable franchise

generally carries with it "the obligation to incorporate new

‘state of the art’ technology in the facilities and to extend and

improve service over the life of the franchise", and he concludes

that the Livonia Franchise Agreement contains no such obligation.

In reaching this conclusion, Mr. Gramlich apparently ignores the

state-of-the-art requirement contained in Ordinance 1651.
                                   - 13 -

Mr. Gramlich also disagrees with petitioner’s statement that all

of the subject property was placed in service solely in order to

comply with the terms of the Livonia Franchise Agreement.       That

disagreement appears to be based upon his observation that,

generally, a cable television operator makes all decisions for

"business reasons", and that, if the business reasons conflict

with a requirement of the franchise agreement, "the cable

operator will seek relief from the franchising authority."

III.   Discussion

       A.   Introduction

       As stated, we shall deny both motions.      We shall deny each

motion for a different reason.       We shall deny respondent’s motion

because we disagree with respondent’s determination that the pre-

1986 documents fail to contain sufficient descriptions to

determine whether the subject property is "readily identifiable

with" such documents.      See infra sec. III.E.    We shall deny

petitioner’s motion because there are genuine issues of fact as

to whether all of the subject property is "readily identifiable

with and necessary to carry out" the Livonia Franchise Agreement.

See id.

       B.   Statutory Provisions

       Prior to 1986, an investment tax credit was available

pursuant to sections 38(b), 46, 48, for investments in certain

types of tangible property placed in service during the taxable
                              - 14 -

year (qualifying property).   The amount of the credit depended

upon the useful life of the qualifying property.     The maximum

credit was 10 percent of the cost of qualifying property with a

useful life of 7 years or more.     The credit was repealed by

section 211 of TRA of 1986, 100 Stat. 2166, which added section

494 to the Internal Revenue Code.    Section 49(a), made the

investment credit inapplicable to property placed in service

after December 31, 1985.   Because TRA of 1986 did not become law

until October 22, 1986, the repeal of the investment credit was

necessarily retroactive.   Therefore, the Act contains a number of

transitional rules to provide relief for taxpayers who may have

committed to post-1985 investments in qualifying property in

reliance on the availability of the credit.5    Pursuant to section

49(b)(1), the section 49(a) repeal of the credit does not apply




4
   Sec. 11813 of the Omnibus Budget Reconciliation Act of 1990,
Pub. L. 101-508, 104 Stat. 1388-536, repealed sec. 49 and
replaced it with existing sec. 49 (at-risk rules).
5
   See H. Rept. 99-426 at 146 (1985), 1986-3 C.B. (Vol. 2) 1,
146, in which the House Ways and Means Committee makes the
following observation with respect to the repeal of the then
existing cost recovery rules, including the investment tax
credit:

          The committee is aware that commitments have
     already been made on the basis of present law capital
     cost recovery rules. The committee bill provides for
     equitable transition rules in such cases, which are
     estimated to cover more than 50 percent of the new
     personal property to be placed in service in the first
     year the bill is effective.
                                  - 15 -

to "transition property."       In relevant part, section 49(e)(1)

defines "transition property" as:

     any property placed in service after December 31, 1985,
     and to which the amendments made by section 201 of the
     Tax Reform Act of 1986 do not apply, except that in
     making such determination--

               *    *       *      *    *     *

       (B) [section] * * * 204(a)(3) of such Act shall be
     applied by substituting "December 31, 1985" for
     "March 1, 1986,"[6]

     Section 204(a)(3) of the Act provides the supply or service

transition rule, upon which petitioner relies.       As modified by

section 49(e)(1)(B), section 204(a)(3) of the Act (section

204(a)(3)) provides that "section 201 shall not apply to any

property which is readily identifiable with and necessary to

carry out a written supply or service contract, or agreement to

lease, which was binding on * * * [December 31, 1985]."

     Under section 203(b)(2)(A) of the Act, section 204(a)

transition property with a useful life of 20 years or more may be

placed in service before January 1, 1991, and still qualify for

the section 204(a) transition rules.        Section 203(b)(2)(C)(ii) of

the Act provides that "property described in section 204(a) shall



6
   Sec. 201 of the Tax Reform Act of 1986, Pub. L. 99-514, 100
Stat. 2121, modified the accelerated cost recovery system and
sec. 203 of the Act provided that such modifications were
generally effective for assets placed in service after Dec. 31,
1986. Secs. 203 and 204 of the Act provided a number of
transition rules postponing the effective date of the sec. 201
changes.
                               - 16 -

be treated as having a class life of 20 years".     Those section

203(b)(2) placed-in-service rules apply without modification in

determining eligibility for transition ITC, provided that the

property has a class life of at least 7 years.7    Petitioner

states (and respondent does not dispute) that all of the subject

property has a class life of at least 7 years.     Therefore,

assuming the subject property qualifies as transition property,

there is no question that it was timely placed in service so as

to be eligible for transition ITC.

      C.   Summary Judgment

      A summary judgment is appropriate "if the pleadings, answers

to interrogatories, depositions, admissions, and any other

acceptable materials, together with the affidavits, if any, show

that there is no genuine issue as to any material fact and that a

decision may be rendered as a matter of law."     Rule 121(b).   “A

partial summary adjudication may be made which does not dispose



7
    See sec. 49(e)(1)(C) which provides:

        (C) in the case of transition property with a class
      life of less than 7 years--

        (i) section 203(b)(2) of such Act shall apply, and

        (ii) in the case of property with a class life--

            (I) of less than 5 years, the applicable date
            shall be July 1, 1986, and

            (II) at least 5 years, but less than 7 years, the
            applicable date shall be January 1, 1987, * * *
                               - 17 -

of the issues in the case.”    Id.   Summary judgment is a device

used to expedite litigation and is intended to avoid unnecessary

and expensive trials of phantom factual questions.    See, e.g.,

Espinoza v. Commissioner, 78 T.C. 412, 415-416 (1982).    It is

not, however, a substitute for a trial in that disputes over

factual issues are not to be resolved in such proceedings.    See

id. The party moving for summary judgment has the burden of

showing the absence of a genuine issue as to any material fact.

See id.

     D.   Summary of the Arguments of the Parties

           1.   Petitioner’s Arguments

     With respect to the requirement of the supply or service

transition rule that property be “readily identifiable” with a

written supply or service contract, petitioner cites dictionary

definitions of the terms "readily", "identifiable", and

"identify" to support its argument that "for property to be

‘readily identifiable’ with a contract simply means that one

could, with a fair degree of ease, link such property to the

contract".   Petitioner states that such "linkage is established

by Mr. Bjorklund, who has testified that MetroVision of Livonia

placed in service the subject property solely in order to provide

cable television service within the City of Livonia, pursuant to

its obligations under the Livonia Franchise Agreement."
                              - 18 -

     With respect to the requirement of the supply or service

transition rule that property be “necessary” to carry out a

written supply or service contract, petitioner argues:

     Expenditures incurred by a cable operator acquiring
     property placed in service to provide cable television
     service under the terms of a cable television franchise
     agreement are normal, appropriate expenses and hence
     ‘necessary’ as that term is understood in the context
     of business expenditures.

In support of that argument, petitioner cites Commissioner v.

Heininger, 320 U.S. 467 (1943), and Carbine v. Commissioner,

83 T.C. 356 (1984), affd. 777 F.2d 662 (11th Cir. 1985), cases

dealing with the requirement that business or profit seeking

related expenses be “ordinary and necessary”.   Secs. 162(a), 212.

Petitioner relies on Messrs. Bjorklund’s and Kearse’s affidavits

to establish that the expenses in question are normal and

appropriate expenses to provide cable television service.

          2.   Respondent’s Arguments

     In support of respondent’s motion, respondent argues that

property is "readily identifiable with and necessary to carry out

a written supply or service contract" only if it is "specifically

described" in the contract and/or related (pre-1986) documents.

Respondent argues that, because the subject property was not

"mentioned, described, referred to, particularized, or identified

in any way * * * as to quantity, description, cost, vendor, model

number, purpose or any other characteristics" in either the

contract or in any pre-1986 related document, such property
                              - 19 -

cannot qualify under the transition rule for supply or service

contracts.

     In support of his argument, respondent relies on H. Conf.

Rept. 99-841 at 60 (1986), 1986-3 C.B. (Vol. 4) at 60.   H. Conf.

Rept. 99-841 is the report of the committee of conference

(conference report) accompanying H.R. 3838, 99th Cong. 1st Sess.

(1985), which, when enacted, became the TRA of 1986.    Respondent

relies primarily upon the following language in the conference

report describing the supply or service transition rule in

support of his argument that the property must be specifically

identified in pre-1986 documents:   "This transitional rule is

applicable only where the specifications and amount of the

property are readily ascertainable from the terms of the

contract, or from related documents."   H. Conf. Rept. 99-841,

supra at 60, 1986-3 C.B. at 60.   Respondent’s position appears to

be that the description in the franchise agreement of property to

be used in implementing such agreement is not sufficiently

detailed to meet that test.   Respondent also appears to be

arguing, that because of its inability to identify in any way the

subject property, petitioner cannot sustain its burden of proving

that such property is "readily identifiable with" (i.e.,

"specifically described" in) the franchise agreement.

     In opposition to petitioner’s motion, respondent argues that

there are genuine issues of material fact as to whether all of
                               - 20 -

the subject property was "necessary to carry out" petitioner’s

obligations under the franchise agreement.

     E.   Analysis

           1. The Equipment To Be Installed by Petitioner in
           the Livonia Cable Television System Is Described In
           Sufficient Detail in the Pre-1986 Documents To
           Permit a Determination of Whether the Equipment
           Actually Installed Is "Readily Identifiable With"
           Such Documents.

           a.   Relevant Case Law

     We are not the first court called upon to interpret the term

“readily identifiable with”, as that term is used in section

204(a)(3).   The meaning of that term has been addressed in three

cases by four different courts.8    In two of those cases, Bell

Atl. Corp. v. United States, 82 AFTR 2d 98-7375 at 98-7384, 99-1

USTC par. 50,119 at 87,041 (E.D. Pa. 1998), affd. __ F.3d __ (3d

Cir., Aug. 17, 2000), and United States v. Zeigler Coal Holding

Co., 934 F. Supp. 292, 295 (S.D. Ill. 1996), the courts reasoned

that, in order to be eligible for transition ITC under the

transition rule for supply or service contracts, "the property

must have been specifically described" in the contract or in a

related document.    In both cases, the District Court relied upon



8
   In a fourth case, Southern Multi-Media Communications, Inc. v.
Commissioner, 113 T.C. 412 (1999), discussed below, we recently
addressed the issue of whether improvements to a cable television
system were "necessary to carry out" the applicable franchise
agreements. We specifically refrained from deciding "whether
* * * [the improvements] were ‘readily identifiable with’ * * *
[the cable] franchise agreements." Id. at 422 n.3.
                               - 21 -

the language of the conference report quoted above and stated

that "[t]o allow a supply contract to implicitly require the

acquisition of property means that the transition rule exception

would swallow the rule eliminating the ITC."

     In the third case, United States v. Commonwealth Energy

Sys., 49 F. Supp. 2d 57 (D. Mass. 1999), the taxpayer sought

transition ITC for post-1985 capital additions to its existing

power plant in connection with its performance of four pre-1986

power supply contracts.   The contracts specifically required the

taxpayer "to cause to be built a new conventional steam plant

* * * of an expected net economic capability of approximately

560 megawatts".   Id. at 59.   Because the contracts specified both

the primary energy source and the total generating capacity, the

Court reasoned that the facts of the case were precisely the

facts of the following colloquy that occurred during Senate

debate of the ITC transition rule for supply or service

contracts:

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

     Is this Senator’s understanding correct that the
     requirement is met when a binding power purchase
     contract specifies the type of generating equipment in
     terms of primary energy source and specifies the amount
     of generating equipment in terms of total generating
                                   - 22 -

     capacity of the turbines necessary to produce the
     contracted power? In other words, the rule does not
     require the technical details of the generating
     property to be spelled out.

     MR. PACKWOOD:    The Senator from Hawaii is correct.

     MR. LONG:    The Senator’s understanding is correct.

132 Cong. Rec. 15028 (1986).

     The court held that, "in the power supply context * * *

generating equipment/property is ‘readily identifiable with’ the

written supply contract where the contract specifies (1) the

primary energy source; and (2) the total generating capacity."

United States v. Commonwealth Energy Sys., supra at 60.      In

reaching that result, the court rejected as "unduly narrow" the

Government’s interpretation of the statute and conference report

"as a manifestation of congressional intent to limit the

transition tax credit provision to property explicitly designated

in a supply contract."        Id. at 58.

          b.     Discussion

     In deciding whether to grant or deny respondent’s motion, we

find it unnecessary to resolve the parties’ conflicting

interpretations of the phrase "readily identifiable with".

Rather, we find that the description contained in the pre-1986

documents of the equipment to be utilized in installing and

maintaining the Livonia cable system is sufficiently detailed for

us to determine whether any particular property is "specifically

described" in such documents.       Thus, assuming arguendo that
                              - 23 -

"specifically described" is the applicable standard for

determining entitlement to transition ITC in this case, as argued

by respondent, we find that such standard is satisfied in the

pre-1986 documents.

     Petitioner has been unable to furnish "any documents

contemporaneous with * * * [the audit years], such as equipment

invoices, purchase orders, or budget approval documents * * * to

provide an itemized identification of the alleged Transitional

Property."   However, we do not consider petitioner’s inability,

to date, to specifically identify the subject property as grounds

for granting respondent’s motion.   The general categories of

expenditures for equipment described in MetroVision’s charts of

account and general ledger materials for the audit years (which

we accept as accurate only for purposes of respondent’s motion)

are consistent with the descriptions of equipment contained in

the pre-1986 documents.   Therefore, we cannot conclude, as a

matter of law, that the subject property (as represented in

MetroVision’s charts of account and general ledger materials) is

not "specifically described" in such documents.   We also conclude

that even updated versions of the equipment described in the pre-

1986 documents that petitioner acknowledges were installed in the

Livonia cable television system during the audit years may be

said to be "specifically described" in and, therefore, "readily

identifiable with" such documents in light of the requirement to
                              - 24 -

provide state-of-the-art equipment, including equipment that will

"meet or exceed" the material requirements contained in the

MetroVision application.

          c.   Conclusion

     For the above reasons, we shall deny respondent’s motion.9

          2. There Are Genuine Issues of Material Fact in
          Determining Whether the Property Placed in Service by
          Petitioner During the Audit Years Is "Readily
          Identifiable With and Necessary to Carry Out" the
          Livonia Franchise Agreement.

          a.   Discussion

     Petitioner attempts to compensate for its inability, to

date, to document the items of subject property actually placed

in service during the audit years by relying upon the sworn

statements of its two experts, Messrs. Bjorklund and Kearse, to

the effect that all of the subject property "was placed in

service solely in order to provide cable television service to

residents of Livonia as required by the Livonia Franchise

Agreement" and that "this property was necessary for an

operational cable system."   Respondent disputes these conclusions

on the basis of the affidavit of his expert, Mr. Gramlich, who



9
   As indicated supra in sec. III.A., our denial of respondent’s
motion is not intended to imply our agreement with petitioner
that all of the property actually used by MetroVision in
extending and maintaining the Livonia cable system is "readily
identifiable with" the Livonia Franchise Agreement. Because of
petitioner’s inability to document the subject property, whether
such property is "readily identifiable with" the franchise
agreement remains an issue of fact to be resolved at trial.
                               - 25 -

states that business reasons, not franchise agreements,

ultimately determine equipment acquisitions.    Respondent argues

that, without more information regarding the property actually

placed in service during the audit years, there is an issue as to

whether all such property was "necessary to carry out" the

Livonia Franchise Agreement.

     Recently, in Southern Multi-Media Communications, Inc. v.

Commissioner, 113 T.C. 412 (1999), we considered whether certain

improvements to cable television systems were "necessary to carry

out" the cable franchise agreements and, therefore, eligible for

transition ITC under section 204(a)(3).   The case involved

"rebuilds" (replacement of cable equipment to effect an increase

in the maximum channel capacity of the system) and "line

extensions" (extensions of the system to additional customers).

We determined that neither the franchise agreements nor any other

pre-1986 contracts specifically required the rebuilds or the line

extensions.   We, therefore, held that those improvements were not

"necessary to carry out" the franchise agreements and, on that

basis, denied transition ITC to the taxpayer.

     The taxpayer had argued that the rebuilds and line

extensions were made necessary by language in the franchise

agreements requiring taxpayer to maintain the cable systems in a

state-of-the-art condition.    We rejected the taxpayer’s argument

on the basis that "[t]he word ‘necessary’ connotes essential,
                                - 26 -

mandatory, indispensable, or requisite", and that the state-of-

the-art requirement, as set forth in the franchise agreements,

reflected "only broad industry standards, not specific

contractual commitments to undertake rebuilds."   Id. at 418, 421.

Similarly, we found no evidence to indicate that the taxpayer

"had specific binding commitments, as of December 31, 1985, to

install the line extensions."    Id. at 422.

     Under our opinion in Southern Multi-Media Communications,

Inc., in order to prove that property placed in service during

the audit years was "necessary to carry out" the Livonia

Franchise Agreement, petitioner must demonstrate that such

property was placed in service pursuant to "specific contractual

commitments" contained in the franchise agreement or in a related

(pre-1986) document.   Petitioner argues that it has satisfied

that requirement because MetroVision was "at all times material

engaged solely in the business of providing cable television

service to residents of Livonia, under the authority of the

Livonia Franchise Agreement" and because MetroVision "installed

each unit of property solely to provide cable television service

to residents [of the City of Livonia] as it agreed to do in the

Livonia Franchise Agreement."

     We agree with respondent that there are genuine issues of

material fact to be resolved in determining whether all of the

property placed in service by petitioner was "necessary to carry
                               - 27 -

out" the Livonia Franchise Agreement.   In the existing record,

there is inadequate identification of the items of property that

were actually placed in service during the audit years.    Even if

we were to assume that all such items of property fit within the

general categories listed in petitioner’s charts of account, it

is possible that "business considerations", not the franchise

agreement, led to the installation of one or more items.    If, for

example, any of such items exceeded the performance capabilities

called for by the franchise agreement, they would not have been

placed in service pursuant to a specific contractual commitment.

In addition, it is not clear what portion, if any, of the

property consisting of "updated versions" of equipment

illustrated in MetroVision’s application may have qualified for

transition ITC.10   That all such items may have been installed to

10
   One justification for such upgrades is the requirement, in
the Livonia Franchise Agreement, to construct and maintain the
Livonia cable system "at a state-of-the-art level in accordance
with applicable requirements and specifications of the National
Electrical Code, the rules and regulations of the [FCC], and all
other pertinent ordinances and codes of [the City of Livonia]."
That state-of-the-art requirement, together with a specific
definition in the franchise agreement of the term "state-of-the-
art equipment", and the requirement that MetroVision "meet or
exceed * * * the material construction and service requirements"
of its franchise application may provide the objective touchstone
that was lacking in Southern Multi-Media Communications, Inc. v.
Commissioner, 113 T.C. 412, 414 (1999), where the franchise
agreements required the cable systems to be maintained "in
accordance with the highest accepted standards of the industry to
the end that the subscriber may receive the highest and most
desirable form of service." Depending upon the nature and extent
of the upgrades in this case, it is possible that one or more was
needed to satisfy what we consider to be an explicitly defined
state-of-the-art contractual requirement in the Livonia Franchise
                                                   (continued...)
                                 - 28 -

provide cable television service to the residents of the City of

Livonia is not sufficient to establish that they were "necessary

to carry out" the agreement.11

     As indicated supra in footnote 9, the same uncertainties,

which are the result of petitioner’s failure to document the

items of the subject property actually placed in service during

the audit years, raise material issues of fact whether such

property is "readily identifiable with" the Livonia Franchise

Agreement.

10
   (...continued)
Agreement.

     Even in the absence of a state-of-the-art requirement,
however, it is possible that an upgrade might qualify for
transition ITC, e.g., where a broken part in need of replacement
is obsolete and no longer in production. Thus, if the channel
capacity increase from 60 to 62 channels acknowledged by
Mr. Bjorklund truly was "incidental" to an otherwise required use
of upgraded models of equipment described in the pre-1986
documents (e.g., where the upgrade was the only model readily
available for use at the time of installation) it may be that the
upgrade was "necessary to carry out" the franchise agreement.
11
   In this case, the issue is whether the equipment used to
carry out contractually required service obligations was
"necessary to carry out" such obligations. In Southern Multi-
Media Communications, Inc. v. Commissioner, supra, it was the
contractual need to perform the service obligations themselves
(i.e., the rebuilds and line extensions) that was in issue.
Because we held that the service obligations were not "necessary
to carry out" the franchise agreement, it followed that none of
the equipment could qualify for transition ITC. In this case,
because the service obligations are required by the franchise
agreement, we must determine, after a trial, which specific items
of equipment were "necessary to carry out" those obligations and
which were not. Therefore, the two cases involve somewhat
different applications of the principle that there must exist a
"specific contractual commitment" for equipment placed in service
if such equipment is to qualify for transition ITC.
                              - 29 -

           b.   Conclusion

      Because there are genuine issues of material fact in

determining whether all of the subject property is "readily

identifiable with and necessary to carry out" the Livonia

Franchise Agreement, we shall deny petitioner’s motion.

IV.   Conclusion

      Both petitioner’s and respondent’s motions for partial

summary judgment shall be denied.

      To reflect the foregoing,


                                         An appropriate order

                                    will be issued.
