41 T.C. 793">*793 Respondent determined the following deficiencies in petitioner's income tax:

One issue has been disposed of by agreement of the parties and will be reflected in the Rule 50 computation.

The issues presented for decision are:

(1) Whether the basis to petitioner of the two network affiliation contracts with the Columbia Broadcasting System was at least $ 4,625,000 and properly1964 U.S. Tax Ct. LEXIS 136">*139 allocated to the WISH-TV and WANE-TV contracts in the respective amounts of $ 4 million and $ 625,000.

41 T.C. 793">*794 (2) Whether the network affiliation contracts of WISH-TV and WANE-TV constituted the going-concern value of petitioner's business or its customer structure, viz, goodwill.

(3) Whether petitioner, who acquired the network affiliation contracts with the Columbia Broadcasting System in the purchase of television broadcasting stations WISH-TV and WANE-TV, is entitled to depreciation deductions of the cost of such contracts over a period, which takes into account possible renewals of their existing terms, calculated on the basis of a life-expectancy table developed by recognized statistical methods from industry experience as to renewal or termination of such contracts.

FINDINGS OF FACT

Some of the facts and exhibits have been stipulated and are incorporated herein by this reference.

Indiana Broadcasting Corp. (hereinafter called petitioner) is a corporation organized under the laws of the State of Delaware with its principal office located at 1440 North Meridian Street, Indianapolis, Ind.

Petitioner filed its Federal income tax returns for the taxable period July 20, 1956, 1964 U.S. Tax Ct. LEXIS 136">*140 to November 30, 1956, and for the taxable years ended November 30, 1957, November 30, 1958, and November 30, 1959, with the district director of internal revenue at Indianapolis. Its books of account were maintained, and its Federal income tax returns prepared, on the basis of the accrual method of accounting and a fiscal year ended November 30.

By agreement dated July 26, 1956, petitioner contracted to purchase all of the issued and outstanding stock of Universal Broadcasting Co., Inc., subject to the approval of the Federal Communications Commission (hereinafter called FCC) for the aggregate price of $ 10 million. This purchase of the Universal stock was approved by the FCC on October 10, 1956, and petitioner acquired the stock on November 15, 1956, at a total cost, including commissions and other acquisition expenses, of $ 10,208,165.89.

At the time of petitioner's acquisition of the Universal stock, Universal owned and operated television station WISH-TV and radio station WISH in Indianapolis. Universal also owned all of the stock of Tri-State Television, Inc., an Ohio corporation, which owned and operated television station WINT in the Fort Wayne, Ind., area. The call letters1964 U.S. Tax Ct. LEXIS 136">*141 WINT were later changed to WANE by petitioner with FCC approval effective April 1, 1957. (WANE-TV rather than WINT-TV will be used throughout the Findings of Fact and Opinion in this case.) In addition, Universal owned all of the stock of Radio Fort Wayne, Inc., an Indiana corporation, which owned and operated radio station WANE in Fort Wayne.

41 T.C. 793">*795 On November 29, 1956, Tri-State Television, Inc., and Radio Fort Wayne, Inc., were merged into Universal, which thereupon acquired all of their assets and assumed all of their liabilities.

On November 30, 1956, Universal was merged into petitioner, which thereupon acquired all of Universal's assets and assumed all of its liabilities. Consequently, petitioner acquired all of the assets and assumed all of the liabilities involved in the ownership and operation of television station WISH-TV and radio station WISH in Indianapolis and television station WANE-TV and radio station WANE in Fort Wayne.

It is stipulated that, after giving effect to liabilities of Universal assumed by petitioner, the total basis of the assets owned by petitioner after the acquisition of assets from Universal on November 30, 1956, was $ 11,098,800.67. And that1964 U.S. Tax Ct. LEXIS 136">*142 after adjustments by respondent, agreed to by petitioner, such basis is properly allocated among such assets as follows:

The amount of $ 6,629,325.33 indicated above as the proper basis for all other assets, including television network affiliation contracts, acquired by petitioner consists of the sum of (a) amounts allocated by petitioner on its books of account as follows:

and (b) adjustments by respondent agreed to by petitioner increasing the aggregate amount of the above items by1964 U.S. Tax Ct. LEXIS 136">*143 $ 428,483.33.

Among the assets acquired by petitioner from Universal were television and radio network affiliation contracts with the Columbia Broadcasting System (hereinafter called CBS) with respect to station WISH-TV and WISH radio in Indianapolis and with respect to television station WANE-TV and radio station WANE in Fort Wayne, and a television network affiliation contract with the American 41 T.C. 793">*796 Broadcasting Co. (hereinafter called ABC) with respect to television station WANE-TV.

The CBS-affiliation contract of WISH-TV was an agreement dated March 30, 1956, which prior to petitioner's acquisition had been renewed for a term ending August 18, 1958.

The CBS-affiliation contract of WANE-TV was an agreement dated March 30, 1956, which had previously been renewed for a term ending September 26, 1958.

The ABC network affiliation contract of WANE-TV was an agreement dated October 26, 1956, for a term ending September 29, 1957.

Pursuant to provisions of the affiliation contracts, CBS and ABC consented in writing to the transfer of the respective affiliation contracts to petitioner and petitioner assumed the obligations of the contracts.

The term of the ABC-affiliation contract 1964 U.S. Tax Ct. LEXIS 136">*144 of WANE-TV ended September 29, 1957. No further affiliation contract was entered into by petitioner and ABC.

The CBS-affiliation contract of WANE-TV was amended by letter agreement dated September 27, 1957, and by a revised contract form dated March 13, 1958.

The CBS-affiliation contracts of WISH-TV and of WANE-TV were renewed in 1958 for 2-year terms ending, respectively, August 18 and September 26, 1960. Both contracts were thereafter successively renewed for additional 2-year terms ending on the same dates in 1962 and 1964.

On December 1, 1956, petitioner on its books of account began amortizing the basis of $ 4 million allocated to the CBS affiliation contract of WISH-TV and the basis of $ 625,000 allocated to the CBS-affiliation contract of WANE-TV, in equal monthly installments, taking as the period of amortization the respective remaining terms of the affiliation contracts (21 months to August 1958 in the case of WISH-TV and 22 months to September 1958 in the case of WANE-TV).

In February and March 1958, when the contracts were respectively renewed for additional 2-year terms, petitioner commenced to amortize the then-remaining unamortized balance of the basis of each contract1964 U.S. Tax Ct. LEXIS 136">*145 in equal monthly installments over the remaining periods of the contracts as thus extended (30 months to August 1960 in the case of WISH-TV and 30 months to September 1960 in the case of WANE-TV). Petitioner took deductions for amortization in accordance with the foregoing method of amortization on its tax returns for the taxable years ended November 30, 1957, 1958, and 1959.

Television broadcasting stations operate on channels assigned by the FCC. There are 12 very high frequency or "VHF" channels, numbered 2 to 13, and 70 ultrahigh frequency or "UHF" channels, 41 T.C. 793">*797 numbered 14 to 83. Varying numbers of channels are allocated to particular cities by the FCC on the basis of population, distance from other cities, and other factors. Each allocated channel for commercial broadcasting may be utilized by a television station pursuant to a license granted by the FCC, with the usual term of such broadcasting licenses since 1955 being 3 years.

Six commercial television stations were operating in the United States in 1945. On September 30, 1948, the FCC stopped processing applications for new television station construction permits, and did not resume processing such applications1964 U.S. Tax Ct. LEXIS 136">*146 until July 1, 1952. This period was referred to in the television industry as the "freeze." At the end of the freeze there were 108 VHF commercial television stations in operation, and the number of VHF commercial television stations in operation on January 1 of each succeeding year has grown each year to 474 stations on January 1, 1963.

Prior to the end of the freeze, there were no UHF commercial television stations and all television sets manufactured for sale to the public could receive only VHF stations. At the end of the freeze the FCC authorized the use of UHF channels for commercial broadcasting, and by January 1, 1954, there were 121 UHF commercial stations on the air. However, in the postfreeze period most television sets still were manufactured to receive only VHF stations, so that the owner of a VHF set had to purchase and install a UHF converter of some type in order to be able to receive UHF stations. The number of UHF commercial stations in operation declined annually to a low of 76 by 1960, as did the percentage of television sets manufactured to receive all television channels. But, pursuant to the long-established policy of Congress and the FCC to encourage the1964 U.S. Tax Ct. LEXIS 136">*147 use of UHF to increase the number of commercial television stations, an objective toward which efforts had been made prior to 1956, the Congress in 1962 enacted the "All-Channel Receiver Law" (Pub. L. 87-529), which authorized the FCC to make rules requiring that all television sets shipped in interstate commerce be capable of receiving both VHF and UHF stations. The FCC has adopted such rules, to take effect April 30, 1964.

The number of UHF stations on the air had increased to 90 by January 1, 1963, and the percentage of sets capable of receiving UHF manufactured in 1962 increased substantially over the immediately preceding year. It has been estimated that the replacement of existing television receivers by newly manufactured sets will result by 1970 in most of the television sets actually in use being equipped to receive UHF. This development, together with other factors, is expected to encourage the construction of UHF stations in market areas heretofore served only by the more limited number of VHF stations.

Network operations in television began on a large-scale basis in 41 T.C. 793">*798 1948 with the opening of extensive "interconnection" facilities of the American Telephone and1964 U.S. Tax Ct. LEXIS 136">*148 Telegraph Co. for transmission of television programs between cities by means of coaxial cable and, later, by microwave relay. Interconnection by means of these facilities reached Indianapolis in 1950 and Fort Wayne in 1954.

There are three national television networks: The Columbia Broadcasting System (CBS), the National Broadcasting Co. (NBC), and the American Broadcasting Co. (ABC). Network operations of Alan B. Du Mont Laboratories, Inc., ceased in September 1955.

The FCC allocation of channels for commercial broadcasting in the Indianapolis-Bloomington market area (Bloomington being about 45 miles to the southwest of Indianapolis) consists of the four VHF channels presently on the air, namely, WFBM-TV, WTTV, WISH-TV, and WLWI. There are also three UHF channels, none of which is in use.

In 1949, station WFBM-TV began commercial broadcasting in Indianapolis and station WTTV began broadcasting from Bloomington. WISH-TV came on the air in Indianapolis on July 1, 1954, as did station WLWI in October 1957.

A number of changes in affiliation between the networks and the stations in the Indianapolis-Bloomington market area occurred before 1956. When petitioner acquired WISH-TV in1964 U.S. Tax Ct. LEXIS 136">*149 November 1956, it was affiliated only with CBS. WFBM-TV was affiliated only with NBC and WTTV was affiliated with ABC. When WLWI came on the air in October 1957, ABC commenced affiliation with that station and the ABC affiliation of WTTV was terminated. WTTV has not had a network affiliation since that time.

The FCC allocation of commercial channels for Fort Wayne consists of the three UHF channels now on the air, namely, WKJG-TV, WANE-TV, and WPTA, and one additional UHF channel not in use.

WKJG-TV commenced commercial television broadcasting in Fort Wayne in November 1953. It has been affiliated with NBC since it came on the air and was also affiliated with ABC during its first year. In September 1954, station WINT (WANE) came on the air. It has been affiliated with CBS since then and was also affiliated with ABC from October 1954 to September 1957. Station WPTA came on the air in September 1957 as an ABC affiliate.

Petitioner's stock is held in common ownership with that of three other corporations operating television stations in Tulsa, Houston, and Sacramento. These stations, known in the television industry as the Corinthian Stations, are each affiliated with the CBS1964 U.S. Tax Ct. LEXIS 136">*150 television network. A major share of the stock of Corinthian is owned by Whitney Communications Corp. whose controlling stockholder and chairman of the board is John Hay Whitney. The New York Herald-Tribune 41 T.C. 793">*799 has been under common ownership with petitioner since August 1958.

The terms and conditions of the affiliation between a network and a station are defined in each case in a network affiliation contract. Although the contracts of particular stations are individually negotiated and there may be variations from the standard provisions, the three networks each have basic forms of affiliation contracts.

The pertinent provisions of the network affiliation contract between CBS and WISH-TV in effect at the time of petitioner's acquisition may be summarized as follows:

1. The contract recited that the parties "recognize that the regular audience of Station will be increased, to their mutual benefit, if CBS Television provides Station with television programs not otherwise locally available."

2. CBS agreed to offer WISH-TV for broadcasting by that station (a) CBS network sustaining (i.e., nonsponsored) programs and (b) CBS network sponsored programs (i.e., programs sold by CBS1964 U.S. Tax Ct. LEXIS 136">*151 television for sponsorship by its client-advertisers) for which such advertisers may request broadcasting by the station.

3. The station has a right of "first refusal" of each network-sponsored or sustaining program good against any television station licensed to operate in the same community.

4. Subject to specified limitations, the station agreed to accept and broadcast all network-sponsored programs offered to it for broadcast during certain hours of the day known as "network option time." (On May 28, 1963, the FCC amended this rule to prohibit network option time, effective September 10, 1963.)

5. CBS agreed to pay the station for broadcasting sponsored programs 30 percent of the gross rates charged to sponsors by CBS for the broadcasting time of the station, less certain deductions specified in the affiliation contract.

6. CBS also agreed to furnish sustaining programs delivered to the station by coaxial cable or microwave relay facilities without charge, but where such programs were delivered in the form of TV recordings, the station agreed to pay CBS's charges for the recordings.

7. The affiliation contract further provided that "unless either party shall send notice to the1964 U.S. Tax Ct. LEXIS 136">*152 other at least six months prior to the expiration of the then current two-year period that the party sending such notice does not wish to have the term extended beyond such original period, the term of this Agreement shall be automatically extended upon the expiration of the original term and each subsequent extension thereof for an additional period of two years; and provided further, that this Agreement may be terminated effective at any time by either party by sending notice to the other at least twelve months prior to the effective date of termination specified therein."

41 T.C. 793">*800 The network affiliation contract between CBS and WANE-TV contained provisions identical with those of the WISH-TVCBS contract just described. Both contracts were substantially similar to the form of CBS contract generally in use at the time. The provisions of network affiliation contracts of the NBC and ABC networks were generally comparable to those of the CBS contracts.

Affiliation contracts are generally made for a term of 2 years, subject to automatic extension of additional 2-year terms if neither party gives notice a specified time in advance of the termination date. As in the case of the WISH-TV1964 U.S. Tax Ct. LEXIS 136">*153 contract, the initial term may be a shorter period in order to conform to a prior anniversary date. Under the Chain Broadcasting Rules of the FCC (applicable to radio since 1941 and to television since 1945), the maximum term of a network affiliation contract is 2 years, provided that such 2-year term may be entered into or renewed not more than 6 months in advance of commencement of any 2-year term. ²

Networks, including CBS, consider many factors in determining whether to end or to acquire a particular affiliation. These factors, inter alia, include the following: Coverage of concentrated market by the station; whether the station is in the central city or whether it is located outside of the city; whether the station is controlled by a multiple owner with considerable experience in the field; whether the multiple owner has other stations in other markets which are desirable; whether the station is controlled by an owner who has interest in the newspaper field; the nature of1964 U.S. Tax Ct. LEXIS 136">*154 the working relationship between the station and the network; clearance of network programs for broadcast; relative share of audience; qualifications of management; and certain intangible and psychological factors, including the general personal impression which the owners and managers of a proposed affiliate make on the CBS television network personnel who make the decisions, expressions of congressional and other official interest, and public reaction.

Substantially all the revenue of a television station is provided by charges for broadcast time paid by advertisers, who in buying such time are interested in the opportunity to present their advertising messages to the largest audience possible for the cost incurred. Thus the rates charged by a station will vary with the estimated size of the audience viewing the station -- varying from community to community according to their size, from station to station within a community according to the typical audience of the stations, and varying for a particular station according to the normal audience for different times of the day.

Since the station's revenue depends on the size of the audience it is able to reach, a station makes efforts1964 U.S. Tax Ct. LEXIS 136">*155 to get the largest possible viewing 41 T.C. 793">*801 audience. The primary factor in securing a high audience level is programing, that is, securing programs that will attract more viewers than the programs of the competing stations. In this competitive effort, there are two basic sources of programs, network programs and local programs, the latter category including not only programs actually produced locally but also film programs produced in Hollywood for other television centers and delivered to the station on film.

Throughout the whole history of television, including the years in issue in this case, network programs have been the most important source of programing for a television station. For example, WISH-TV during these years had an average broadcasting day of 17 1/2 hours, during which network programs were televised for an average of approximately 11 hours daily, or about 63 percent of total broadcast time. During the 3 1/2 hours of evening "prime time" (from 7:30 to 11 p.m.) network programs were televised on the average of 95 percent of the time. This substantial extent of the broadcasting of network programs was then typical of affiliated stations in markets the size 1964 U.S. Tax Ct. LEXIS 136">*156 of Indianapolis, and approximately the same conditions continue today.

Statistical data shows that in the years 1956 through 1959, CBS was the dominant network in terms of audience appeal or audience level, i.e., the number of homes or viewers watching programs. For the year 1955, network program time sales of stations affiliated with CBS were $ 121 million, of stations affiliated with NBC were $ 106 million, and of stations affiliated with ABC were $ 26.5 million. According to the statistics submitted, CBS is still the leading network in audience level and dollar sales.

A station's revenue from network program time sales provides only part of its total revenue. For example, petitioner's total television income from WISH-TV for the year ended November 30, 1957, was $ 3,288,821.45, of which $ 869,025.13, or about 26 percent, was derived from network program time sales. On the other hand, a total of $ 2,296,865.35, or approximately 70 percent of the total television income, was derived from prime sales for nonnetwork programs and announcements. The revenue from announcements alone was about 54 percent of the total television revenue. The figures for the 2 succeeding years at issue1964 U.S. Tax Ct. LEXIS 136">*157 show approximately the same relationship. The figures for WANE-TV are similar, although in that smaller market network program revenue accounted for an average of about 35 percent of total television income during these years. On a nationwide basis, market financial data published by the FCC reveal that the revenue of affiliated stations from network program time sales averages around 25 percent of total revenue.

The revenue to a station from network program sales is received from the network as the station's share, computed in accordance with 41 T.C. 793">*802 the affiliation contract, of the time charges paid to the network by the advertisers for the broadcast time of the particular station. However, the revenue for nonnetwork programs and announcements comes not from the network but directly from the advertisers as a result of time sales made by the station's advertising salesmen or its national sales representative. The substantial revenue from announcements is derived from broadcasting brief advertising messages in the "break" which occurs between programs or between segments of longer programs.

During evening "prime time," when the viewing audience is at its largest and a station1964 U.S. Tax Ct. LEXIS 136">*158 like WISH-TV is broadcasting network programs for almost the entire period, the announcements will usually occur adjacent to network programs or in the "break" within a network program. Consequently, in a typical hour of evening "prime time" WISH-TV derived about $ 500 revenue for the 58 minutes 50 seconds of a network program and approximately $ 1,200 from the sale of several announcements totaling some 70 seconds of time. In view of the interest of the advertisers in securing the maximum audience for the advertising messages broadcast in these announcements, and the effect of network programing in attracting a large audience, the audience appeal of the network programs has an important effect upon the revenues a station can derive from announcements, even though the station sells such announcements independently of the network.

While an affiliated station has available to it a substantial program service with large audience appeal, furnished by the network with no dollar outlay by the station, an unaffiliated station must pay for its programing, a factor of substantial impact on profits of an unaffiliated station. Moreover, it may be impossible for the unaffiliated station to1964 U.S. Tax Ct. LEXIS 136">*159 buy programing at any price that will compete effectively with affiliated stations for audience.

As between affiliated stations in the market area, since the costs of operation of a television station are substantial, and roughly equivalent as among the stations, the amount of their respective revenues has a substantial bearing upon profits. During the years in issue the greater audience appeal of CBS programs, and consequent high revenues of CBS-affiliated stations, resulted in the profit of the CBS-affiliated station typically being greater than that of the competing ABC-affiliated station.

The price of $ 10 million for the stock purchased by petitioner was negotiated at arm's length. If WISH-TV and WANE-TV had had network affiliation contracts only with ABC, rather than with CBS, the value of the stock purchased would have been less than $ 5 million, and without any affiliation contracts for the television stations the stock would have been worth still less. The $ 5 million difference in value is attributable to the value of the CBS-affiliation contracts. 41 T.C. 793">*803 According to the prevailing price-earnings ratio for television stations in 1956, the fair market value of a station1964 U.S. Tax Ct. LEXIS 136">*160 was approximately 6 times its annual earnings before taxes.

The broadcast net income before taxes of the Indianapolis-Bloomington television stations, as reported by the stations to the FCC, for the calendar years 1956, 1957, and 1958 were as follows:

Thus the net income of WISH-TV for each of the 3 years was roughly $ 1 million or more in excess of the net income of the station affiliated with ABC, while the unaffiliated station in 1958 operated at a substantial loss.

The basis to petitioner of the CBS affiliation contract with WISH-TV alone was not less than $ 4,625,000 allocated by petitioner to the CBS contracts of both WISH-TV and WANE-TV in its books of account and on its Federal income tax returns. This basis was reasonably allocated between the two contracts in the respective amounts of $ 4 million 1964 U.S. Tax Ct. LEXIS 136">*161 to the CBS affiliation contract of WISH-TV and $ 625,000 to the CBS affiliation contract of WANE-TV, particularly in view of the relationship of the value of $ 1,500,000 placed on WANE-TV in 1956 to petitioner's total purchase price of $ 10 million.

Exhibit 19-S stipulated by the parties, shows the facts with respect to the history of television network affiliations in each of the 84 television market areas which had three or more operating commercial television stations on December 31, 1962, including the dates of commencement and termination, and thus the duration, of all network affiliations between these stations and each of the networks during the years 1948 through 1962. For this period there were 250 affiliations of stations in these markets with either CBS or NBC, excluding stations owned and operated by these networks. Of this total, 134 affiliations were with CBS and 116 were with NBC.

The useful life of petitioner's network affiliation contracts for depreciation purposes in the taxable years in issue could properly be estimated by taking into account two segments of industry experience reflected in the historical data as to termination of network affiliations set forth1964 U.S. Tax Ct. LEXIS 136">*162 in Exhibit 19-S: (1) The experience with respect to all 41 T.C. 793">*804 250 CBS- and NBC-affiliation contracts in the 84 markets (aggregate experience); and (2) the experience with respect to CBS-affiliation contracts in these markets during periods after which there had been at least one other station in the market for a minimum period of 12 months that was neither affiliated with NBC nor owned and operated by ABC (selected CBS experience).

The statistical data regarding aggregate experience and selected CBS experience is consistent with the Poisson exponential theory of failure, a statistical method widely used in the determination of life expectancy and useful lives of various types of properties, including materials subject to physical failure (e.g., vacuum tubes, loading coils, and restaurant tumblers) as well as in the determination of probability of occurrence of human actions. The characteristic of items whose failure or termination rate is consistent with the Poisson exponential theory is that the proportion or percentage of those that will fail in a given period of time is constant, that is, if the rate is 5 percent per year, at the end of 1 year 95 percent of the original group1964 U.S. Tax Ct. LEXIS 136">*163 will have survived, 5 percent of this 95 percent will fail to survive the second year, 5 percent of the survivors at that time will fail to survive the third year, etc.

The actual rates of termination with respect to aggregate experience and selected CBS experience are ascertainable by calculating for each of the pertinent periods (a) the total number of years commenced by all of the affiliation contracts in the respective experience during the period in question, (b) the total number of terminations occurring during such period, and (c) an annual rate of termination derived by dividing (a) into (b). The rates of termination separately calculated for each of these two segments of experience through the end of 1957, the end of 1958, and the end of 1959 ranged from 0.040 to 0.068 as shown in the following table:

Taking into consideration the several rates of termination calculated through the years 1957, 1958, and 1959, the rate of 0.050 (or 5 percent) is the single figure representing an annual rate of termination that best reflects both segments of experience with respect to the taxable years here in issue.

41 T.C. 793">*805 Using this rate of termination, a table ³ of life expectancy applying the Poisson exponential theory was constructed by petitioner's expert statisticians. Based on this life-expectancy table, two types of average life can be determined -- a "median" life and a "mean" life. The median life of network affiliation contracts is between 13 and 14 years; that is, the probability is that more than half of the contracts out of a large group of affiliations will not survive 141964 U.S. Tax Ct. LEXIS 136">*165 years. Further, on the basis of the life-expectancy table, the mean life of an affiliation in a large group of contracts is 20 years; that is, the sum of the ages at which all contracts in the group would terminate, divided by the number of contracts in the group, would be 20 years. In this connection the life-expectancy table shows that 64.15 percent of the group of contracts will terminate by the end of the 20th year.

The statistical methods thus employed are customarily used and relied upon for many purposes, including the determination of prices, costs, charges, terms of warranties, and requirements for maintenance, and the design and cost of complex apparatus used in our defense program.

In his notice of deficiency dated September 27, 1961, the respondent gave the following explanation of the adjustments made to the depreciation deductions claimed in petitioner's Federal income tax returns for the years1964 U.S. Tax Ct. LEXIS 136">*166 in issue:

It is determined that deductions claimed on your Federal income tax returns for the taxable years ended November 30, 1957, November 30, 1958, and November 30, 1959, for amortization of television network affiliation contracts in the respective amounts of $ 2,910,714.32, $ 972,063.49, and $ 493,809.60 are not allowable deductions under the provisions of section 167 of the Internal Revenue Code of 1954 or under the provisions of any other section of the Internal Revenue Code of 1954.

ULTIMATE FINDINGS

1. The basis to petitioner of the two network affiliation contracts with CBS was at least $ 4,625,000, and this basis was properly allocated $ 4 million to the WISH-TV contract and $ 625,000 to the WANE-TV contract.

2. The two CBS network affiliation contracts with WISH-TV and WANE-TV do not constitute goodwill.

3. From the statistical data and analyses based upon the general experience of the television industry, the estimated useful life of the two CBS network affiliation contracts with WISH-TV and WANE-TV is ascertainable with reasonable accuracy.

4. Use of a 20-year straight-line method produces a reasonable allowance for depreciation.

41 T.C. 793">*806 OPINION

Is the petitioner 1964 U.S. Tax Ct. LEXIS 136">*167 entitled to deductions for depreciation or amortization of CBS television network affiliation contracts it acquired by the purchase of television broadcasting stations WISH-TV and WANE-TV? That is the principal question presented in this case. The parties agree that its resolution involves the three subsidiary questions of (1) the proper allocation of basis to the contracts in accordance with their value, (2) whether such contracts constitute goodwill, and (3) whether the useful lives of such contracts can be estimated with reasonable accuracy, as required by section 167(a), I.R.C. 1954, and the regulations promulgated thereunder. ⁴

1964 U.S. Tax Ct. LEXIS 136">*168 We are satisfied, as set forth in our Findings of Fact, that the proof adduced by petitioner establishes the basis to it of the two network affiliation contracts with CBS at $ 4,625,000 and that this basis was properly and reasonably allocated $ 4 million to the WISH-TV contract and $ 625,000 to the WANE-TV contract. ⁵ Petitioner's evidence, based upon the testimony of a broker experienced in the purchase and sale of television stations and proof of comparative income of WISH-TV and its competitors, was not challenged in any respect by respondent's witnesses and stands uncontradicted.

41 T.C. 793">*807 Respondent contends, in the alternative, that the CBS network affiliation contracts of WISH-TV and WANE-TV represent the going concern value of petitioner's business or its customer structure, viz, goodwill, which is 1964 U.S. Tax Ct. LEXIS 136">*169 not subject to an allowance for depreciation under section 1.167(a)-3, Income Tax Regs. These contracts, respondent argues, gave the two stations assurance of advertisers as customers and, therefore, either directly or indirectly, provided the stations with the opportunity of securing substantial revenue. Petitioner counters with the assertion that the network affiliation contracts do not constitute goodwill. We agree with the petitioner.

The value of a CBS-affiliation contract lies in obtaining programs with high audience appeal which is necessary for securing advertising revenues. ⁶ The principal value and function of the CBS contracts to petitioner consisted of the supply of attractive programs which it assured. Attractive programs bring advertisers and advertisers produce income.

1964 U.S. Tax Ct. LEXIS 136">*170 The fallacy of respondent's position is in the legal conclusion which he draws from the facts. The acquisition of an asset or service that will attract customers is not goodwill. An efficient plant or machine will bring customers, as will an attractive sign or handsome decor, but their cost is not considered a part of goodwill. Nor does a contract to acquire such assets or services constitute goodwill. Cf. Pittsburgh Athletic Co., 27 B.T.A. 1074">27 B.T.A. 1074 (1933), affd. 72 F.2d 883 (C.A. 3, 1934), involving baseball player contracts which were held not to be goodwill. We do not see how the acquisition of the means of attracting customers can be goodwill. ⁷

1964 U.S. Tax Ct. LEXIS 136">*171 The evidence demonstrates that by far the largest portion of petitioner's revenue came from sources other than the network. Approximately 74 percent came from nonnetwork programs and announcements derived entirely from sales made by WISH-TV itself through 41 T.C. 793">*808 the efforts of its own advertising salesmen or its national sales representative. Therefore, it is clear that the network contract does not provide the bulk of the station's revenues but provides only, by its supply of attractive programs and the audiences they draw, a substantial advantage in the competition for advertising dollars.

Even with respect to the 26 percent of its total revenue which flowed to WISH-TV from network programs, the affiliation contract did not constitute goodwill. This revenue was derived by petitioner from a single affiliation contract with the network itself and not from a collection of individual contracts between petitioner and the advertisers. The station's continued receipt of this revenue can be terminated by a decision of the network not to renew the affiliation contract. This single contract is totally unlike the case of a mass of contracts with a number of customers, which are in 1964 U.S. Tax Ct. LEXIS 136">*172 a constant state of flux as some let their contracts expire and other persons are continually solicited as additional customers. See and compare Thrifticheck Service Corporation, 33 T.C. 1038">33 T.C. 1038 (1960), affd. 287 F.2d 1 (C.A. 2, 1961); U.S. Industrial Alcohol Co., 42 B.T.A. 1323">42 B.T.A. 1323 (1940), affirmed on this issue 137 F.2d 511 (C.A. 2, 1943); and Richard M. Boe, 35 T.C. 720">35 T.C. 720 (1961), affd. 307 F.2d 339 (C.A. 9, 1962).

It is significant that WISH-TV and WANE-TV began broadcasting in 1954, little more than 2 years before their acquisition by petitioner, and that other television stations had preceded them in their communities. WISH-TV and WANE-TV were not old established businesses of the type normally deemed to have acquired goodwill. We think the sum of $ 1,974,325.33, allocated to goodwill and other intangible property, including FCC licenses, was sufficient to provide a substantial amount for whatever amount of goodwill, as such, these two stations had built up in their 2 years of operation.

Lastly, we turn to a 1964 U.S. Tax Ct. LEXIS 136">*173 consideration of the important and pivotal question of whether it is possible on this record to estimate the useful life of these network affiliation contracts with reasonable accuracy and, if so, what that useful life is.

Petitioner asserts that the capital cost of the contracts is properly recoverable through annual deductions over a period of 14 years either (a) because the estimated useful life of the contracts including renewal periods, for depreciation purposes, is 14 years or (b) because no more than six 2-year renewals can be reasonably anticipated. Petitioner also asserts that from the statistical data and analyses in evidence, the estimated useful life of the contracts, within the meaning of section 167(a) and the regulations governing depreciation, can be determined with the degree of accuracy required for depreciation purposes; and that use of a straight-line method of depreciation over a period of 14 years (or original term plus six renewals) produces a reasonable allowance for depreciation. Respondent argues to the 41 T.C. 793">*809 contrary that, regardless of the statistical data and calculations based upon industry experience, no deduction for depreciation or amortization1964 U.S. Tax Ct. LEXIS 136">*174 should be allowed because the life of television network affiliation contracts is not limited but is indefinite and indeterminate.

We must necessarily approach this problem against the backdrop of our prior opinion in Westinghouse Broadcasting Co., Inc., 36 T.C. 912">36 T.C. 912 (1961), affd. 309 F.2d 279 (C.A. 3, 1962), certiorari denied 372 U.S. 935">372 U.S. 935 (1963), the only other case involving depreciation of network affiliation contracts. ⁸ There the network affiliation contract had 7 months to run on an existing term at the time of its acquisition by the taxpayer, but was renewed during the initial taxable year for an additional term of 24 months. The taxpayer contended, among other things, that the cost should be amortized over this 31-month period without taking into account possibilities of further renewals by the parties to the contract.

1964 U.S. Tax Ct. LEXIS 136">*175 At the beginning of our opinion the effect of the renewal provision in the affiliation contract was analyzed and the two extreme positions of the parties set forth. One of the extremes would allow depreciation over the 2-year term; the other would automatically deny all depreciation (36 T.C. 912">36 T.C. 918-919). In addition to these two extremes, there was available the middle ground, based on several decisions involving renewal clauses in leases and other contracts, that depreciation should be calculated by reference to the initial contract term plus "all its probable renewals." We adopted this middle ground by declaring that "there remains to be determined the probable useful life of the contract with all its probable renewals"; that "the probability of renewals is a question of fact"; that "petitioner must show more than uncertainty as to the length of the contract's useful life"; that "for the purposes of depreciation, determination as to probable useful life must be based upon facts known or estimates made at the time a return is filed" (citing cases); and that while the practice in the trade in valuing network affiliation contracts was to assume two renewals, 1964 U.S. Tax Ct. LEXIS 136">*176 we did not consider "that an industry practice as to valuation of a contract is a sufficient indication of that contract's probable useful life." Consequently, we concluded (36 T.C. 912">36 T.C. 922):

Insufficient evidence was introduced from which could be calculated either the average useful life of network affiliation contracts or their usual life span.

In affirming our decision the Court of Appeals for the Third Circuit, 41 T.C. 793">*810 after noting that the burden of proof was on the taxpayer, stated (309 F. 2d at 282-283):

Taxpayer did not adduce any testimony to the effect that based on "experience" in the television industry the number of renewals of the network affiliation contract could be "estimated" with "reasonable certainty" or "reasonable accuracy" as required by the Treasury Regulations earlier cited.

* * * *

Nor can any probative value with respect to the "probable useful life" of the network affiliation contract here be attributed to the stipulated fact that "between January 1, 1953 and April 1, 1960, a total of 87 NBC affiliation agreements expired in circumstances other than a station going off the air or the acquisition 1964 U.S. Tax Ct. LEXIS 136">*177 of the affiliate by the network" since there was no evidence as to the actual life span of those agreements or as to the number of their renewals. [Emphasis supplied.]

The trial of the instant case was devoted primarily to supplying the essential evidence upon which to determine the probability of future renewals. Since petitioner's own experience during the pertinent taxable years did not provide an adequate basis for making this determination, the inquiry, directed in the Westinghouse case, as to the usual lifespan of network affiliation contracts must, according to respondent's regulations, be determined by reference to the "general experience of the industry." This provision is an obvious necessity for new corporations, such as the petitioner, and for others acquiring assets of a type not owned previously. It is essential to a practical administration of the revenue laws. Indeed, we fail to see how the revenue would suffer from the use by a group of taxpayers of a rate derived from general industry experience.

Depreciation, by its very nature, is an estimate of future events distilled from the prologue of history. Precision is not required. Massey Motors, Inc., v. United States, 364 U.S. 92">364 U.S. 92 (1960).1964 U.S. Tax Ct. LEXIS 136">*178 Analysis of historical evidence traditionally serves as the means for forecasting probabilities of future life. It is commonplace in the tax law to use forecasts of duration of life made in this manner. ⁹

1964 U.S. Tax Ct. LEXIS 136">*179 Selection of the past experience upon which to base a life-expectancy table in the instant case was made by petitioner's witness Tower. In making this judgment as to the selection of experience, Tower had before him Exhibit 19-S, a compilation of the history of network affiliation contracts from the beginning of the television industry to substantially the date of trial. This compilation covered all of the 84 41 T.C. 793">*811 market areas in the United States in which there were three or more television stations in operation on December 31, 1962. It was the joint product of the efforts of petitioner and respondent; and the information thus developed was integrated and, at respondent's request, the result was verified by the CBS and NBC television networks. In the case of each affiliation contract mentioned in the compilation, its date of commencement and, if terminated, its date of termination, was established and stipulated.

From this totality of information, Tower selected those segments of the industry experience which, in his judgment, were germane to the issue, namely, the determination of the estimated useful life of the petitioner's network affiliation contracts for depreciation1964 U.S. Tax Ct. LEXIS 136">*180 purposes. Tower testified that he thought two types of experience should be taken into account -- one of a broad nature designated "aggregate experience" and a second, narrower type, designated "selected CBS experience."

The "aggregate experience" represented the experience with respect to all of the CBS and NBC network affiliation contracts from 1948 through 1962. These contracts contained comparable provisions to the ones before us. Eliminated from this experience were the ABC contracts, which had a higher incidence of termination, and the few stations owned and operated by CBS and NBC, which were not subject to the risk of termination because of the contractual relationship between the network and the station. The "aggregate experience" included the period of the FCC "freeze" on new stations, in which there were relatively few terminations, and a subsequent period (1953-55) in which there were relatively more terminations as an increased number of new stations came on the air. As Tower explained, over the years of commercial television history there have been "ebbs and flows in the incidents of termination of network contracts."

"Selected CBS experience" took into account 1964 U.S. Tax Ct. LEXIS 136">*181 experience regarding CBS affiliations only "for periods after which there was at least one other station in the market for 12 months or more that was neither affiliated with NBC nor owned and operated by ABC." This experience was analyzed because it is comparable to the present case in being limited to CBS contracts after there were sufficient stations in the particular market to give CBS the opportunity to choose between its existing affiliate and at least one other station in the community not affiliated with ABC. In order to prevent this experience from being affected by terminations directly occasioned by the third station in the community coming on the air, experience prior to the end of a minimum 12-month stabilizing period following that event was eliminated from consideration.

Then, petitioner's expert statisticians were asked to analyze the "aggregate experience" and "selected CBS experience" as described 41 T.C. 793">*812 by Tower. As a part of their analysis, they derived an annual rate of termination of the contracts for each of the two types of experience through the end of the year 1957. They also made similar determinations for each type of experience through the end of 1958, 1964 U.S. Tax Ct. LEXIS 136">*182 the end of 1959, and the end of 1962. The annual rates of termination separately so computed showed some variations according to the type of experience and the length of period considered. These separately determined annual rates of termination were then presented to Tower and he was asked his judgment, based on the six rates through 1957, 1958, and 1959 (ranging from 0.040 to 0.068), as to an appropriate single annual rate of termination that might be used by the statisticians in constructing a life expectancy table applicable to these network affiliation contracts.

Tower testified that, taking all factors into consideration, he would use for preparation of a life-expectancy table and calculation of average life an annual rate of termination of 0.050 or 5 percent. In addition to the factors contained in our Findings of Fact, Tower said he also took into account: (1) The long-established policy of Congress and the FCC to encourage the use of UHF to bring on the air a greater number of commercial television stations; (2) the serious consideration given by the FCC to moving television broadcasting "upstairs" whereby all stations would be transmitting on the UHF band; (3) the advent1964 U.S. Tax Ct. LEXIS 136">*183 of pay television; and (4) possible technological advances, such as Telstar.

Petitioner's statisticians analyzed the information contained in "aggregate experience" and "selected CBS experience" and found that the statistical data was consistent with the Poisson exponential theory of failure, a statistical method which has been widely used to calculate tables of life expectancy and average life of various items. Based upon the 0.050 annual rate of termination and applying the statistical methods explained in their report and testimony, the statisticians developed the life-expectancy table for network affiliation contracts. This table shows that the median life of the contracts is just under 14 years and that the mean life of the contracts is approximately 20 years. The mean life gives effect to the fact that under the life-expectancy table a small proportion of the contracts may be expected to have lives that are relatively long in comparison with those of the bulk of the contracts. The calculations with respect to the mean life show that there are about two chances out of three that a contract will terminate before it completes its 20th year.

The answer to respondent's1964 U.S. Tax Ct. LEXIS 136">*184 contention that the contracts in question cannot be depreciated or amortized because their life is "indefinite" or "indeterminable" is that almost every asset subject to depreciation has an indefinite or indeterminable life in the sense that no one can 41 T.C. 793">*813 foretell the exact date of its coming to an end. ¹⁰ The life of a particular asset, whether it be an automobile, a telephone pole, or a racehorse, cannot be foretold because human beings are not gifted with such clairvoyance. All that can be said is that there are certain probabilities of survival and that "average" lives can be determined. To be sure, the respondent's own regulations recognize this lack of human clairvoyance by referring to "estimated useful life" throughout the depreciation provisions, and, in dealing specifically with intangibles, the regulations refer to the length of life which "can be estimated with reasonable accuracy." Consequently, we think it is irrelevant that some network contracts in a group of such contracts may be expected to have an unusually long life as compared with the average life of the group. The statistical analysis presented by petitioner's expert witnesses takes such probability1964 U.S. Tax Ct. LEXIS 136">*185 into account and, in determining average life, gives it the proper mathematical weighting. The fact that experience, opinions, or statistical projections may indicate that a few units may attain an exceptional or unusual age is disregarded in depreciation practice, except to the extent that such long-lived assets influence calculation of average life.

At the trial and on brief the respondent criticized1964 U.S. Tax Ct. LEXIS 136">*186 Tower's selection of an annual rate of termination of 0.050 (5 percent) on two grounds. First, respondent argues that the rate used in determining the probability of termination of petitioner's affiliation contracts is distorted by a heavy concentration of terminations in the years 1953-55 (period of adjustment) and should be lower than the rate of termination reflected in the segments of industry experience selected by Tower. Second, as a general matter, respondent asserts that a more restricted subgrouping of industry experience was required to prepare an applicable life-expectancy table. We think these assertions are refuted by the record and are contrary to the well-established practices for determining life expectancy in tax matters. Perhaps the most we can say about respondent's evidence is that it presents a modest challenge to the rate of termination used. Of course, any selection of prior experience on which to base an estimate of future life can be subjected to some criticism. But the controlling considerations relevant here are that petitioner's contracts are of the same type as the contracts whose history of termination is reflected in Exhibit 19-S, and that petitioner's1964 U.S. Tax Ct. LEXIS 136">*187 contracts are subject to many and varied competitive economic forces such as gave rise to the prior terminations of such contracts.

41 T.C. 793">*814 Likewise, we are not persuaded by respondent's contention that the standard error used by petitioner in preparing the life-expectancy table is unreliable because the "underlying conditions and circumstances in the television industry do not constitute a stable force extending into the future." This general contention, without more, carries little weight, especially since the same thing can be said about any youthful industry in these times of rapidly changing scientific technology. As we have previously pointed out, depreciation requires only an estimate, not exactness. It seems to us that the petitioner has offered sufficient evidence, based on general industry experience over 15 years, to establish the "average" lives of these network affiliation contracts with reasonable accuracy.

Respondent's attack on the petitioner's position stresses the "lack of comparable data" upon which petitioner's estimates were based. This assertion totally disregards the testimony of Tower, who gave his opinion as to the industry experience "reasonably1964 U.S. Tax Ct. LEXIS 136">*188 comparable to the situation as it existed in Indianapolis for WISH-TV during the years" in issue.

On brief the respondent makes a station-by-station examination of industry data attempting to show that individual stations experiencing terminations included in the industry experience selected by Tower are in certain details dissimilar to petitioner's television stations. ¹¹1964 U.S. Tax Ct. LEXIS 136">*190 We think this approach is wholly inconsistent with the respondent's regulation which permits a determination of useful life to be made by reference to "general experience in the industry." ¹² What respondent has done in his brief is to ferret out factors reflected in general experience which he argues would tend to project an unduly long-life expectancy as applied to petitioner, and to ignore all countervailing factors. Naturally, some instances included in any general experience will contain factors tending to a longer life expectancy than might be 41 T.C. 793">*815 appropriate to a particular taxpayer, while other instances included in the general experience will contain factors tending to a shorter expectancy. The theory behind the regulation is that these factors will tend to balance off, and that the statistically1964 U.S. Tax Ct. LEXIS 136">*189 derived life expectancy, uniformly applied, will produce a result proper both for the taxpayers and the Government. It is inconceivable that a petitioner before this Court, endeavoring in good faith to develop a rate of depreciation based on "general experience in the industry," can be required at its peril to prove that all cases included in its statistics are in every respect identical to the petitioner's circumstances, or else forfeit all depreciation. This rule permitting use of general industry experience is both logical and practical: Logical because the National Treasury cannot suffer from the use of a general average by a group of taxpayers; and practical because it alleviates the burden which would be placed on the courts to hear testimony of numerous witnesses regarding the detailed facts of other cases in the industry to determine case by case the degree of their similarity to the taxpayer's situation.

In the light of the evidence adduced by petitioner, we are convinced that none of respondent's criticisms warrant our holding that petitioner's case is so different1964 U.S. Tax Ct. LEXIS 136">*191 from that of the general experience of the industry that the useful life or probable number of renewals of its contracts cannot be determined with the degree of accuracy required to permit a "reasonable allowance" for depreciation. Accordingly, we hold that the petitioner is entitled to depreciation deductions on its CBS network affiliation contracts on a 20-year straight-line method. Cf. WDEF Broadcasting Co. v. United States, 215 F. Supp. 818">215 F. Supp. 818 (E.D. Tenn. 1963); and Birmingham News Co. v. Patterson, Jr., 224 F. Supp. 670">224 F. Supp. 670 (N.D. Ala. 1963).

Decision will be entered under Rule 50.