Filed: Sep. 01, 2011
Latest Update: Mar. 03, 2020
Summary: ROBERT AND KIMBERLY BROZ, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT Docket No. 21629–06. Filed September 1, 2011. Ps were shareholders in a wholly owned S corporation (S) engaged in providing wireless cellular service. S acquired wireless cellular licenses from the FCC and built networks to service the license areas. S never operated any on-air net- works. Instead, P formed related holding companies to hold title to the licenses and equipment. Many issues raised ques- tions of
Summary: ROBERT AND KIMBERLY BROZ, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT Docket No. 21629–06. Filed September 1, 2011. Ps were shareholders in a wholly owned S corporation (S) engaged in providing wireless cellular service. S acquired wireless cellular licenses from the FCC and built networks to service the license areas. S never operated any on-air net- works. Instead, P formed related holding companies to hold title to the licenses and equipment. Many issues raised ques- tions of f..
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ROBERT AND KIMBERLY BROZ, PETITIONERS v.
COMMISSIONER OF INTERNAL REVENUE,
RESPONDENT
Docket No. 21629–06. Filed September 1, 2011.
Ps were shareholders in a wholly owned S corporation (S)
engaged in providing wireless cellular service. S acquired
wireless cellular licenses from the FCC and built networks to
service the license areas. S never operated any on-air net-
works. Instead, P formed related holding companies to hold
title to the licenses and equipment. Many issues raised ques-
tions of first impression because transactions were structured
in this ever-changing technology industry. Our holdings on
these issues include:
1. Held: Ps were not sufficiently at risk for sec. 465, I.R.C.,
purposes when stock of a related corporation was pledged.
2. Held, further, the mere grant of a license by the FCC is
not sufficient for an activity to qualify as an active trade or
business under sec. 197, I.R.C.
Stephen M. Feldman and Eric T. Weiss, for petitioners.
Meso T. Hammoud, Elizabeth Rebecca Edberg, and Steven
G. Cappellino, for respondent.
KROUPA, Judge: Respondent determined over $16 million of
deficiencies 1 in petitioners’ Federal income tax for 1996,
1998, 1999, 2000 and 2001 (years at issue). Respondent also
determined that petitioners were liable for accuracy-related
penalties of $563,042 for 1998, $386,489 for 1999, and
$591,213 for 2000.
After concessions, 2 we are asked to decide several issues,
many of which present questions of first impression as they
relate to the ever-evolving cellular phone industry. We must
1 Respondent determined a $100,003 deficiency for 1996, a $4,671,608 deficiency for 1998, a
$3,385,533 deficiency for 1999, a $4,954,056 deficiency for 2000, and $3,395,214 for 2001.
2 Petitioners concede that the amortization period for the license acquired as part of the Michi-
gan 2 acquisition should be 15 years and that the Schedule M–1 adjustment should be dis-
allowed. Respondent concedes a sec. 1231 adjustment and all penalties set forth in the deficiency
notice. Respondent also concedes that petitioners are entitled to recapture for 1998 $3,548,365
of losses Alpine claimed in earlier years.
46
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(46) BROZ v. COMMISSIONER 47
first decide a procedural issue, whether respondent is bound
by equitable estoppel to a settlement offer made and subse-
quently withdrawn by respondent’s Appeals Office before the
deficiency notice was issued. We find that respondent is not
bound by the settlement offer. Second, we must decide
whether petitioners properly allocated $2.5 million of the
$7.2 million purchase price to depreciable equipment when
the allocation in the purchase agreement remained
unchanged despite a 2-year delay in closing the transaction.
We find that petitioners’ allocation was improper. Third, we
must determine whether petitioners had sufficient debt basis
under section 1366 in stock of Alpine PCS, Inc. (Alpine), an
S corporation, to claim flowthrough losses. We find that peti-
tioners had insufficient debt basis and therefore cannot claim
the flowthrough losses. Fourth, we must determine whether
petitioners were at risk under section 465 3 and can therefore
claim flowthrough losses from Alpine and related holding
companies. We must decide whether petitioners’ pledge of
stock in a related S corporation is excluded from the at-risk
amount because it was ‘‘property used in the business.’’ This
issue presents a question of first impression. We find that
petitioners were not sufficiently at risk and therefore cannot
claim the flowthrough losses because the stock they pledged
was related to the business. Fifth, we must decide whether
Alpine and Alpine PCS-Operating, LLC (Alpine Operating), an
equipment holding company, were engaged in an active trade
or business permitting them to deduct business expenses. We
find that neither entity was engaged in an active trade or
business and therefore may not deduct the expenses. Finally,
we must decide whether the related license holding compa-
nies are entitled to amortization deductions for cellular
licenses from the FCC upon the grant of the license or upon
commencement of an active trade or business. This issue pre-
sents a question of first impression. We hold that they are
not entitled to any amortization deductions upon the license
grant because they were not engaged in an active trade or
business during the years at issue.
3 All section references are to the Internal Revenue Code (Code) in effect for the years in issue,
and all Rule references are to the Tax Court Rules of Practice and Procedure, unless otherwise
indicated.
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48 137 UNITED STATES TAX COURT REPORTS (46)
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
We incorporate the stipulation of facts and the accompanying
exhibits by this reference. Petitioners resided in Gaylord,
Michigan, at the time they filed the petition.
I. RFB Cellular, Inc. (RFB)
Robert Broz (petitioner) began his career as a banker
before becoming involved with the cellular phone industry.
He was president of Cellular Information Systems (CIS), a
cellular company, for approximately seven or eight years in
the 1980s.
Petitioner decided to invest personally in the development
of cellular networks in rural statistical areas (RSAs) in the
1990s. Most large cellular service providers, like CIS, were
focused on developing cellular networks in major statistical
areas (MSA) and were less interested in RSA networks. The
FCC began offering RSA licenses by lottery to any interested
person to encourage development of cellular networks in
rural areas. The RSA lotteries attracted an average of 500
participants nationwide.
Petitioner participated in approximately 400 lotteries for
RSAs across the country. He won and purchased an RSA
license for Northern Michigan (the Michigan 4 license) in
1991.
A. The Organization of RFB
Petitioner organized RFB Cellular, Inc. (RFB), an S corpora-
tion, in 1991, the year he acquired the license. He contrib-
uted the Michigan 4 license and received in exchange 100
percent of RFB’s issued and outstanding stock. Petitioner did
not contribute any other money or property, nor did he make
any loans to RFB from its inception through 2001. Petitioner
was CEO of RFB and his brother, James Broz, served as CFO.
Petitioner wife was involved in marketing.
RFB received between $4 and $4.2 million in vendor
financing from Motorola to cover startup expenses. Approxi-
mately two-thirds of the financing went to construct and
install the cellular equipment. When Motorola constructed
and installed the equipment, petitioner began operating the
network and used the remaining funds for working capital.
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(46) BROZ v. COMMISSIONER 49
The Michigan 4 license that petitioner contributed to RFB
serviced the northern portion of the lower Michigan penin-
sula by providing analog cellular service during the years at
issue. RFB acquired a second license, the Michigan 2 license,
which serviced the eastern upper Michigan peninsula. Most
of RFB’s revenue came from roaming charges for the use of
two networks in Michigan. RFB also sold cellular phones to
people to generate airtime.
RFB made $241,500 of cash distributions to petitioner in
1996, $613,673 in 2000 and $342,455 in 2001. RFB made Fed-
eral income tax payments on petitioners’ behalf in 1995 and
1996. These tax payments were reflected as shareholder
loans on RFB’s tax returns. No promissory notes were issued
for the tax payments RFB made on petitioners’ behalf.
B. The Michigan 2 Acquisition
entered into a purchase agreement with Mackinac Cel-
RFB
lular to acquire the Michigan 2 license and related equip-
ment in 1994 (1994 purchase agreement). Mackinac Cellular
had paid $1.6 million for the equipment in 1994. RFB
arranged to purchase the license and equipment by issuing
promissory notes and assuming debt.
The Michigan 2 acquisition by RFB was stalled for two
years. It was stalled for various reasons but primarily
because of a lawsuit petitioner’s former employer, CIS, filed
against petitioner for usurpation of a corporate opportunity.
The license and equipment were transferred to Pebbles Cel-
lular Corporation (Pebbles), a wholly owned subsidiary of CIS,
through the negotiations. Pebbles did not change or improve
the equipment during these two intervening years. Pebbles
sold the Michigan 2 assets to RFB.
RFB and Pebbles entered into a purchase agreement in
1996 (1996 purchase agreement) after the lawsuit was
resolved. The parties again undertook a series of negotiations
and made some adjustments to the transaction. Nevertheless,
the purchase price and the allocations in the 1996 purchase
agreement were the same as those in the 1994 agreement.
Both purchase agreements allocated $2.5 million of the $7.2
million purchase price to the equipment. Approximately
$909,000 of the purchase price was allocated to costs
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50 137 UNITED STATES TAX COURT REPORTS (46)
incurred by Pebbles between 1994 and 1996. Yet there was
no allocation for these costs.
II. The Alpine Entities
Petitioners sought to expand RFB’s existing cellular busi-
ness to new license areas. RFB’s lenders agreed to fund the
expansion. The lenders required, however, that RFB form a
new entity to isolate the liabilities to the thinly capitalized
new business entities RFB would form to hold title only to the
licenses. Petitioners formed various entities (the Alpine enti-
ties) to further this expansion.
A. Alpine
Petitioners organized Alpine, an S corporation, to bid on
FCC licenses in RSA lotteries and to construct and operate dig-
ital networks to service the new license areas. Petitioner held
a 99-percent interest in Alpine and his brother held the
remaining one percent.
Alpine bid on licenses for geographic areas with demo-
graphics similar to those of RFB’s existing network areas, and
Alpine bid on licenses for areas in Michigan where RFB was
already providing analog service. The FCC financed the pur-
chase of most of the licenses Alpine won at auction. The FCC
required, however, as a condition for financing, that the
license holder make services available to at least 25 percent
of the population in the geographic license area within five
years of the grant (build out requirement). The FCC licenses
were issued for a period of ten years from the date of the
grant. RFB and commercial lenders funded the bidding and
constructed and operated the new networks.
B. The Alpine License Holding Entities
Alpine successfully bid on 12 licenses during the years at
issue. Alpine made downpayments on the licenses and issued
notes payable to the FCC for the balance of the purchase
prices. Alpine then transferred the licenses to various single-
member limited liability companies (collectively, the license
holding companies) formed to hold the licenses and lease
them to Alpine. 4 Petitioner held a 99-percent interest in each
4 The Alpine license holding entities were Alpine-California F, LLC, Alpine Michigan F, LLC,
Alpine Hyannis F, LLC and Alpine Fresno C, LLC.
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(46) BROZ v. COMMISSIONER 51
license holding entity and his brother owned the remaining
one percent. Each Alpine license holding entity assumed the
FCC debt in exchange for receiving the license. Alpine contin-
ued to make payments on the FCC debt even after the
licenses were transferred to the Alpine license holding enti-
ties. Alpine maintained the books and records of Alpine, the
Alpine entities and the Alpine license holding entities.
No Alpine entities operated any on-air networks during the
years at issue. RFB operated the only on-air networks. RFB
used Alpine’s licenses to provide digital service in geographic
areas RFB’s analog licenses already covered. RFB provided
digital service by adding digital equipment onto RFB’s
existing cellular towers. RFB owned the equipment that serv-
iced the Michigan licenses. RFB allocated income and
expenses related to the licenses to Alpine.
No Alpine license holding entities met the FCC’s build out
requirements for any of its licenses. Consequently, the FCC
canceled two of the three licenses Alpine retained. Alpine
returned the third license to the FCC and forfeited its
$900,000 initial downpayment.
The only income Alpine reported was income that RFB had
allocated to Alpine from RFB’s use of Alpine’s licenses. Alpine
did not report income during any of the other years at issue.
Alpine claimed depreciation deductions 5 and other deduc-
tions. 6 Alpine deducted interest on debt owed to the FCC.
Alpine also deducted interest on debt owed to RFB, even
though Alpine never made any interest payments. Alpine
amortized and deducted expenses for alleged startup costs 7
even though Alpine had not made a formal election under
section 195(b).
The only income any of the Alpine license holding entities
reported was income allocated to them from RFB’s use of the
licenses. The Alpine license holding entities each claimed
amortization deductions related to the licenses and deducted
interest paid on amounts borrowed from a related entity to
service the FCC debt.
5 The depreciation deductions were for leasehold improvements for a California office, fur-
niture, fixtures, computers and vehicles.
6 The other deductions were for expenses such as salaries, office expenses, telephone and utili-
ties, rent, insurance, and dues and subscriptions.
7 Such expenses included consulting expenses, travel and entertainment expenses, salaries,
rent, legal fees, relocation expenses, contract labor, fringe benefits, and miscellaneous expenses.
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52 137 UNITED STATES TAX COURT REPORTS (46)
Alpine and the license holding entities ceased all business
activities by the end of 2002.
C. Alpine Operating and Alpine Investments, LLC
Petitioner formed Alpine Operating, a single-member lim-
ited liability company, to hold the digital equipment and
lease it to Alpine. Petitioner wholly owned Alpine Operating,
a disregarded entity for Federal income tax purposes. Alpine
Operating reported no income and did not claim any depre-
ciation deductions for the equipment during the years at
issue. Alpine Operating claimed interest and automobile
depreciation deductions for 1999 and 2000.
Petitioner formed Alpine Investments, LLC (Alpine Invest-
ments), a single-member limited liability company, to serve
as an intermediary for transferring money to the Alpine enti-
ties. Petitioner’s tax advisers advised petitioner that he
needed to increase his bases in the Alpine entities. Addition-
ally, CoBank prohibited the distribution of loan proceeds to
an individual. Petitioner wholly owned Alpine Investments, a
disregarded entity.
III. The CoBank Loans
CoBank was the main commercial lender to RFB and the
Alpine entities during the years at issue. RFB used CoBank
loan proceeds to expand its existing business through Alpine
and the related entities. CoBank specifically acknowledged
that RFB would advance the proceeds directly or indirectly to
the Alpine entities. Alpine allocated some of the funds to
other Alpine entities.
RFB refinanced the CoBank loan several times. Petitioner
pledged his RFB stock as additional security but he never
personally guaranteed the CoBank loan. The loan was
secured by the assets of the Alpine license holding entities.
Several of the Alpine entities also guaranteed the loan.
RFB recorded the advances on its general ledger as
‘‘advances to Alpine PCS.’’ 8 Alpine recorded the same
advances as ‘‘notes payable.’’ Some of the advances to Alpine
were allocated to other Alpine entities, which recorded the
allocations as advances or ‘‘notes payable’’ on the general
ledgers. RFB, Alpine and the other Alpine entities made year-
8 RFB initially recorded the advances in its books as ‘‘other assets’’.
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(46) BROZ v. COMMISSIONER 53
end adjusting entries reclassifying the advances as loans
from a shareholder. Alpine reflected the advances as long-
term liabilities on the returns for the years at issue.
Promissory notes were executed between petitioner and
RFB, and between petitioner and Alpine, to reflect accrued
but unpaid interest on the purported loans. RFB indicated in
financial statements for the years at issue that it would not
demand repayment of any of the advances. No security was
provided with respect to the promissory notes. No cash pay-
ments of either principal or interest were ever made by any
of the parties with respect to the promissory notes. Petitioner
nevertheless reported interest income and income expense
from the promissory notes on his individual returns.
Beginning in 1999, the advances from RFB were reclassified
through yearend adjusting entries as loans from Alpine
Investments. Alpine Investments assumed the promissory
notes executed between petitioner and Alpine, and between
petitioner and RFB. Alpine Investments executed promissory
notes with the Alpine entities and RFB to document the pur-
ported loans.
IV. IRS Appeals Proceeding
The Appeals case involved all five years at issue. Appeals
Officer Thomas Dolce (Officer Dolce) was assigned to peti-
tioners’ case and negotiated with petitioners’ attorney, Sean
Cook (Mr. Cook). Petitioners, RFB and the Alpine license
holding entities filed for bankruptcy protection in 2003. Peti-
tioners’ bankruptcy proceedings ran concurrently with their
IRS Appeals case.
Officer Dolce and Mr. Cook exchanged several settlement
offers over the course of the negotiations. Officer Dolce orally
proposed a ‘‘sum certain settlement’’ (settlement offer) during
a telephone conference in October 2005. The settlement offer
made no changes to petitioners’ tax liabilities for the years
at issue but increased petitioners’ tax liability for 2002,
which was not under examination.
Petitioners accepted the settlement offer. Officer Dolce
informed petitioners that he needed his manager’s approval
before the settlement could be finalized. He also advised Mr.
Cook that the parties needed to draft a closing agreement to
finalize the settlement. Mr. Cook provided Officer Dolce with
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54 137 UNITED STATES TAX COURT REPORTS (46)
a draft closing agreement petitioners had reviewed, but
Officer Dolce did not sign it. The parties did not enter into
any written agreement regarding the settlement offer.
Officer Dolce orally informed petitioners that he had
obtained the necessary approval but later learned that the
offer exceeded the scope of his settlement authority. His
authority extended to litigation risk, not collectibility. He
made the settlement offer because he determined petitioners
could not afford to pay the entire outstanding liability rather
than on the merits of the case. Officer Dolce decided to with-
draw the settlement offer when he learned the offer had yet
to be finalized.
Officer Dolce informed Mr. Cook two weeks later that the
offer was withdrawn. The parties waited to meet until
December 2005 to discuss the withdrawal because they were
in different areas of Michigan, not close to each other.
V. The Deficiency Notice
Respondent issued petitioners the deficiency notice for the
years at issue in 2006. Respondent determined that peti-
tioners had insufficient debt basis in Alpine to claim
flowthrough losses for the years at issue. Respondent also
determined that petitioners were not at risk with respect to
their investments in the Alpine license holding entities and
Alpine Operating and were therefore not entitled to claim
flowthrough losses.
Respondent determined that Alpine was not entitled to
interest, depreciation, startup expense, and other deductions
because it was not engaged in an active trade or business
during those years. Respondent also determined that Alpine
Operating was not entitled to deduct interest and deprecia-
tion because it was not engaged in an active trade or busi-
ness. Respondent determined that the Alpine license holding
entities amortization deductions for the licenses were dis-
allowed because they were not engaged in an active trade or
business at the relevant time.
Petitioners timely filed a petition.
OPINION
We are asked to resolve the tax consequences of the ever-
evolving cellular phone industry with rapidly changing tech-
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(46) BROZ v. COMMISSIONER 55
nology. Several issues raise questions of first impression.
These include whether in an S corporation there is a sepa-
rate definition in the at-risk rules involving whether the
shareholder’s pledge of stock of a related corporation is
excluded from the at-risk amount because it was property
used in the business. We must also focus on when a cellular
phone entity begins business for purposes of deducting begin-
ning expenses and for amortization of the FCC license under
section 197. Specifically, we must decide whether a cellular
phone business begins upon the grant of the license from the
FCC or when contracts for wireless services are sold. We
address these substantive issues in turn.
I. The Settlement Offer
We must first decide a procedural issue of whether
respondent is bound to an oral settlement offer made and
subsequently withdrawn by respondent’s Appeals Office
before the deficiency notice was issued. Petitioners argue
that the oral settlement offer is enforceable, notwithstanding
the lack of a written closing agreement, because Officer
Dolce’s supervisor approved the offer. They argue alter-
natively that respondent should be bound by equitable
estoppel to the settlement offer because Officer Dolce reck-
lessly withdrew the offer after petitioners had relied on it.
Respondent denies that the oral settlement offer is enforce-
able because it was not memorialized in a written closing
agreement. Respondent also argues that petitioners have not
established the elements necessary for us to apply equitable
estoppel. We address the parties’ arguments in turn.
A. Enforceability of the Settlement Offer
We begin with petitioners’ argument that the oral settle-
ment offer is an enforceable agreement. The compromise and
settlement of tax cases is governed by general principles of
contract law. Dorchester Indus. Inc. v. Commissioner, 108
T.C. 320, 330 (1997) affd. without published opinion
208 F.3d
205 (3d Cir. 2000). The law for administrative, or pre-peti-
tion, settlement offers is well established. See Dormer v.
Commissioner, T.C. Memo. 2004–167; Rohn v. Commissioner,
T.C. Memo. 1994–244. The procedures for closing agreements
and compromises are set forth in section 7121 (relating to
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56 137 UNITED STATES TAX COURT REPORTS (46)
closing agreements), section 7122 (relating to compromises)
and the regulations thereunder. See secs. 7121 and 7122;
secs. 301.7121–1, 301.7122–1, Proced. & Admin. Regs. These
procedures are exclusive and must be satisfied for a com-
promise or settlement to be binding on both a taxpayer and
the Commissioner. Rohn v. Commissioner, supra; see also
Urbano v. Commissioner, 122 T.C. 384, 393 (2004). Negotia-
tions with the IRS are enforceable only if they comply with
the procedures. Rohn v. Commissioner, supra. A settlement
offer must be submitted on one of two special forms the
Commissioner prescribes. Id.; sec. 301.7122–1(d)(1), (3),
Proced. & Admin. Regs. Form 866, Agreement as to Final
Determination of Tax Liability, is a type of closing agreement
that is to be a final determination of a taxpayer’s liability for
a past taxable year or years. Form 906, Closing Agreement
on Final Determination Covering Specific Matters, is a
second type of closing agreement that finally determines one
or more separate items affecting the taxpayer’s liability. The
parties never put the sum certain settlement in writing, let
alone on one of the prescribed forms. Officer Dolce’s oral
settlement offer is therefore not legally enforceable.
B. Equitable Enforcement of the Settlement Offer
We now address whether equity principles nonetheless
require us to enforce the settlement offer. Equitable estoppel
is a judicial doctrine that requires finding the taxpayer relied
on the Government’s representations and suffered a det-
riment because of that reliance. Estoppel precludes the IRS
from denying its own representations if those representations
induced the taxpayer to act to his or her detriment.
Hofstetter v. Commissioner, 98 T.C. 695, 700 (1992). The doc-
trine of equitable estoppel is applied against the Government
with utmost caution and restraint. Boulez v. Commissioner,
810 F.2d 209, 218 (D.C. Cir. 1987), affg.
76 T.C. 209 (1981);
Kronish v. Commissioner, 90 T.C. 684, 695 (1988).
The Court of Appeals for the Sixth Circuit, to which this
case is appealable, requires a litigant to establish affirmative
misconduct on the Government’s part as a threshold to
proving estoppel. See United States v. Guy, 978 F.2d 934, 937
(6th Cir. 1992). Affirmative misconduct is more than mere
negligence. Id. It requires an affirmative act by the Govern-
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(46) BROZ v. COMMISSIONER 57
ment to either intentionally or recklessly mislead the tax-
payer. Mich. Express, Inc. v. United States, 374 F.3d 424, 427
(6th Cir. 2004). The taxpayer must also prove the traditional
three elements of estoppel. These three traditional elements
include (1) a misrepresentation by Government; (2) reason-
able reliance on that misrepresentation by the taxpayer; and
(3) detriment to the taxpayer. See Heckler v. Community
Health Servs., 467 U.S. 51, 59 (1984).
Petitioners’ equitable estoppel argument fails for several
reasons. First and foremost, we find that petitioners failed to
meet the threshold in the Sixth Circuit of showing any
affirmative misconduct on respondent’s part. They argue that
Officer Dolce’s failure to personally notify them for 40 days
that the offer was withdrawn constituted ‘‘affirmatively reck-
less conduct.’’ We disagree.
We find instead that the delay was due to the considerable
geographical distance between Officer Dolce and petitioners
rather than to any affirmative misconduct on the part of
Officer Dolce. Moreover, even though Officer Dolce failed to
notify petitioners in person for 40 days, Officer Dolce notified
petitioners’ counsel, Mr. Cook, within two weeks that the
offer was withdrawn. We find that Officer Dolce’s actions do
not rise to the level of affirmative misconduct.
Additionally, petitioners have failed to prove the tradi-
tional elements of equitable estoppel. Petitioners have failed
to establish that Officer Dolce made any misrepresentations
to them regarding the settlement offer. Officer Dolce made a
conditional settlement offer to petitioners that needed to be
approved by Officer Dolce’s supervisor. He withdrew the
offer, which had yet to be finalized, upon realizing that a
sum certain settlement was beyond his authority. Officer
Dolce notified petitioners that the offer was withdrawn. He
also explained to petitioners his reasons for withdrawing the
offer.
Petitioners’ reliance, if any, on the oral settlement offer
was unreasonable. Petitioners knew that the settlement offer
was not final until they entered into a written closing agree-
ment. They discussed the need for a written closing
agreement with Mr. Dolce and reviewed a draft closing
agreement Mr. Cook prepared.
Finally, respondent did not induce petitioners to take any
adverse action. Petitioners claim they conceded certain rights
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58 137 UNITED STATES TAX COURT REPORTS (46)
in the bankruptcy proceeding in reliance on the oral settle-
ment offer. Petitioners have not established what rights, if
any, they conceded attributable to the bankruptcy pro-
ceeding.
Accordingly, we conclude that equitable estoppel principles
do not require respondent to be bound by the sum certain
settlement offer.
II. Valuation of the Michigan 2 Acquisition
Next, we must determine whether petitioners properly allo-
cated $2.5 million of the $7.2 million Michigan 2 purchase
price to equipment for depreciation purposes. Petitioners
relied on the allocations made in the Michigan 2 purchase
agreement even though there was a 2-year delay in acquiring
the equipment and license.
RFB acquired both depreciable and nondepreciable property
when it paid $7.2 million to acquire the cellular phone equip-
ment and license from Pebbles, the seller. When a combina-
tion of depreciable and nondepreciable property is purchased
for a lump sum, the lump sum must be apportioned between
the two types of property to determine their respective costs.
The cost of the depreciable property is used to determine the
amount of the depreciation deduction. The relevant inquiry is
the respective fair market values of the depreciable and non-
depreciable property at the time of acquisition. Weis v.
Commissioner, 94 T.C. 473, 482–483 (1990); Randolph Bldg.
Corp. v. Commissioner, 67 T.C. 804, 807 (1977). Petitioners
bear the burden of proving that respondent’s allocation is
incorrect. See Rule 142(a); see Elliott v. Commissioner, 40
T.C. 304, 313 (1963).
Petitioners contend that the $2.5 million allocation to
depreciable assets is proper. They first argue it is proper
because it is the amount the parties agreed to in the 1994
and 1996 purchase agreements. 9 An allocation in a purchase
agreement is not necessarily determinative, however, if it
fails to reflect a bargained-for amount. See Sleiman v.
Commissioner, 187 F.3d 1352, 1361 (11th Cir. 1999), affg.
9 Petitioners also rely on the Michigan 4 acquisition as best evidence of the value of the Michi-
gan 2 equipment. Petitioners estimated the value of the Michigan 4 equipment using only the
costs they incurred and the vendor financing they received. They have not provided sufficient
evidence of the equipment’s value. Moreover, petitioners have not established that the Michigan
4 equipment is comparable to the Michigan 2 equipment.
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(46) BROZ v. COMMISSIONER 59
T.C. Memo. 1997–530. Petitioners further argue that the $2.5
million allocation to depreciable assets is proper because it
represents the cost they would have to pay to replace the
wireless cellular equipment. Petitioners have not provided
any evidence beyond their own self-serving testimony to
substantiate the replacement cost. We need not accept the
taxpayer’s self-serving testimony when the taxpayer fails to
present corroborative evidence. Beam v. Commissioner, T.C.
Memo. 1990–304 (citing Tokarski v. Commissioner, 87 T.C.
74, 77 (1986)), affd. without published opinion
956 F.2d 1166
(9th Cir. 1992).
Moreover, we find it implausible that the equipment had
a value of $2.5 million at the time RFB acquired it from Peb-
bles. Mackinac’s original purchase of the Michigan 2 equip-
ment for $1.6 million in 1994 indicates that the equipment
was worth, at most, only $1.6 million when RFB purchased it
in 1996. See Estate of Cartwright v. Commissioner, T.C.
Memo. 1996–286. Moreover, petitioners testified that the
equipment was rapidly depreciating on account of advancing
cellular technology. In fact, some of the Michigan 2 equip-
ment became obsolete between 1994 and 1996 and had to be
decommissioned after RFB’s acquisition. Nevertheless, the
allocation amount remained unchanged between the 1994
and 1996 purchase agreements. Petitioners have not shown
that they made any additions or improvements to explain
why the allocation amount remained unchanged over the 2-
year period. We accordingly find that petitioners’ allocation
of $2.5 million to equipment was improper and instead sus-
tain respondent’s determination that $1.5 million be allo-
cated to the equipment.
III. Basis Limitations on Flowthrough Losses
We now turn to basis in Alpine. We must determine
whether petitioners, shareholders of Alpine, an S corporation,
had sufficient debt basis to claim flowthrough losses during
the years at issue. Petitioners argue that the payments peti-
tioner made to Alpine with the loan proceeds from CoBank
gave them basis in Alpine. Respondent contends that the
payments did not create basis. Instead, petitioners served as
a mere conduit to the transfer of loan proceeds from RFB to
Alpine. Respondent further asserts that petitioners did not
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60 137 UNITED STATES TAX COURT REPORTS (46)
make any economic outlay that would entitle them to
increase their basis in the S corporation.
A. Basis to S Corporation Shareholder
First, we state the general rules governing when a share-
holder in an S corporation is entitled to deduct losses the S
corporation sustained. A shareholder of an S corporation can
directly deduct his or her share of entity-level losses in
accordance with the flowthrough rules of subchapter S. See
sec. 1366(a). The losses cannot exceed the sum of the share-
holder’s adjusted basis in his or her stock and the share-
holder’s adjusted basis in any indebtedness of the S corpora-
tion to the shareholder. Sec. 1366(d)(1)(A) and (B). This
restriction applies because the disallowed amount exceeds
the shareholder’s economic investment in the S corporation
and, because of the limited liability accorded to S corpora-
tions, the amount does not have to be repaid. The share-
holder bears the burden of establishing his or her basis.
Estate of Bean v. Commissioner, 268 F.3d 553, 557 (8th Cir.
2001), affg. T.C. Memo. 2000–355; Parrish v. Commissioner,
168 F.3d 1098, 1102 (8th Cir. 1999), affg. T.C. Memo. 1997–
474.
A shareholder who makes a loan to an S corporation gen-
erally acquires debt basis if the shareholder makes an eco-
nomic outlay for the loan. The indebtedness must run
directly from the S corporation to the shareholder and the
shareholder must make an actual economic outlay for debt
basis to arise. Kerzner v. Commissioner, T.C. Memo. 2009–76.
When the taxpayer claims debt basis through payments
made by an entity related to the taxpayer and then from the
taxpayer to the S corporation (back-to-back loans), the tax-
payer must prove that the related entity was acting on behalf
of the taxpayer and that the taxpayer was the actual lender
to the S corporation. Ruckriegel v. Commissioner, T.C. Memo.
2006–78. If the taxpayer is a mere conduit and if the transfer
of funds was in substance a loan from the related entity to
the S corporation, the Court will apply the step transaction
doctrine and ignore the taxpayer’s participation. Id.
A taxpayer makes an economic outlay for purposes of debt
basis when he or she incurs a ‘‘cost’’ on a loan or is left
poorer in a material sense after the transaction. Putnam v.
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(46) BROZ v. COMMISSIONER 61
Commissioner, 352 U.S. 82 (1956); Estate of Bean v. Commis-
sioner, supra at 558; Bergman v. United States, 174 F.3d 928,
930 n.6 (8th Cir. 1999); Estate of Leavitt v. Commissioner,
875 F.2d 420, 422 (4th Cir. 1989), affg.
90 T.C. 206 (1988).
The taxpayer may fund the loan to the S corporation with
money borrowed from a third-party lender in a back-to-back
loan arrangement. Underwood v. Commissioner, 535 F.2d
309, 312 n.2 (5th Cir. 1976), affg.
63 T.C. 468 (1975);
Hitchins v. Commissioner, 103 T.C. 711, 718 & n.8 (1994);
Raynor v. Commissioner, 50 T.C. 762, 771 (1968). The tax-
payer has not made an economic outlay, however, if the
lender is a related party and if repayment of the funds is
uncertain. See, e.g., Oren v. Commissioner, 357 F.3d 854 (8th
Cir. 2004), affg. T.C. Memo. 2002–172; Underwood v.
Commissioner, supra at 312.
B. Direct Loan From RFB
Against this background, we now address whether peti-
tioner acquired basis in Alpine in the amount of the loan.
Petitioners claim they advanced the CoBank loan proceeds to
the Alpine entities as part of a back-to-back loan arrange-
ment. 10 Petitioners have not established that they lent,
rather than advanced, the CoBank loan proceeds to Alpine.
See Yates v. Commissioner, T.C. Memo. 2001–280; Culnen v.
Commissioner, T.C. Memo. 2000–139, revd. and remanded 28
Fed. Appx. 116 (3d Cir. 2002). Petitioner never substituted
himself as ‘‘lender’’ in the place of RFB. There is no evidence
that the Alpine entities were indebted to petitioner rather
than to RFB. Interest on the unsecured notes accrued and
was added to the outstanding loan balances. No payments
were ever made. Moreover, petitioners signed the promissory
notes on behalf of all the entities, making it unlikely that
any of the entities would seek payment from petitioners. See
Oren v. Commissioner, supra at 859. The promissory notes,
therefore, do not establish bona fide indebtedness between
petitioners and Alpine.
Moreover, the payments petitioners made to Alpine from
the CoBank loan proceeds were characterized as advances,
rather than loan distributions, at the time the payments
10 Petitioners substituted themselves for Alpine Investments, a disregarded entity they wholly
owned, beginning in 1999.
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62 137 UNITED STATES TAX COURT REPORTS (46)
were made. See Ruckriegel v. Commissioner, supra. The pay-
ments were recharacterized as loans only through yearend
reclassifying journal entries and other documents. The loan
ran from RFB to the Alpine entities, and petitioners served as
a mere conduit for the funds. Accordingly, we find that the
Alpine entities were not directly indebted to petitioners.
Petitioners also have not shown that RFB made the pay-
ments to Alpine on petitioners’ behalf. We have found that
direct payments from a related entity to the taxpayer’s S cor-
poration constituted payments on the taxpayer’s behalf
where the taxpayer used the related entity as an ‘‘incor-
porated pocketbook.’’ See Yates v. Commissioner, supra;
Culnen v. Commissioner, supra. The term ‘‘incorporated
pocketbook’’ refers to the taxpayer’s habitual practice of
having his wholly owned corporation pay money to third par-
ties on his behalf. See Ruckriegel v. Commissioner, supra.
Whether an entity is an incorporated pocketbook is a ques-
tion of fact. Id. Petitioners have not established that RFB
habitually or routinely paid petitioners’ expenses so as to
make RFB an incorporated pocketbook.
C. Economic Outlay
We now turn to the economic outlay requirement. Peti-
tioners also contend that their pledge of RFB stock as collat-
eral for the CoBank loan constituted an economic outlay
justifying an increase in petitioners’ basis in their Alpine
entities. A pledge of personal assets is insufficient to create
basis until and unless the shareholder pays all or part of the
obligation that the shareholder guaranteed. See Estate of
Leavitt v. Commissioner, supra at 423; Maloof v. Commis-
sioner, T.C. Memo. 2005–75, affd. 456 F.3d 645 (6th Cir.
2006). Petitioners have not shown that they incurred any
cost with regard to their pledge of RFB stock.
Moreover, petitioners have not shown that they incurred a
cost with respect to the loan or were otherwise left poorer in
a material sense. 11 See Maloof v. Commissioner, supra. Peti-
11 Petitioners contend that they suffered actual economic loss with respect to the pledge of
stock when the banks obtained RFB’s assets in the bankruptcy proceedings. The bankruptcy
case was settled after the years at issue, however, and is therefore irrelevant for purposes of
determining economic outlay at the time the payments were made. Petitioners also argue that
they were left ‘‘poorer in a material sense’’ by RFB’s use of undistributed after-tax profits for
advances to the Alpine entities. Petitioners’ argument is irrelevant because we have determined
that RFB was not an ‘‘incorporated pocketbook’’ for petitioners. Cf. Yates v. Commissioner, T.C.
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(46) BROZ v. COMMISSIONER 63
tioners never personally guaranteed or were otherwise
personally liable on the CoBank loan. See id. Petitioners
signed the promissory notes on behalf of all the entities,
making it unlikely that any of the entities would seek pay-
ment from petitioners. See Oren v. Commissioner, supra at
859. Furthermore, RFB indicated in its financial statements
that it would not demand repayment on any advances made
to petitioners.
We therefore will apply the step transaction doctrine and
ignore petitioners’ participation in the advances from RFB to
Alpine. We find that petitioners had insufficient debt basis in
Alpine to claim flowthrough losses during the years at issue.
IV. At-Risk Limitation on Flowthrough Losses
We now focus on whether petitioners were at risk with
respect to Alpine, Alpine Operating and the Alpine license
holding entities because of the unique way the transactions
were structured. We must decide for the first time whether
stock in a related S corporation is property used in the busi-
ness to preclude petitioners from being at risk for any pledge
of property used in the business.
We begin with an overview of the at-risk rules. The at-risk
rules ensure that a taxpayer deducts losses only to the extent
he or she is economically or actually at risk for the invest-
ment. Sec. 465(a); Follender v. Commissioner, 89 T.C. 943
(1987). The amount at risk includes cash contributions and
certain amounts borrowed with respect to the activity for
which the taxpayer is personally liable for repayment. Sec.
465(b)(2)(A). Pledges of personal property as security for bor-
rowed amounts are also included in the at-risk amount. Sec.
465(b)(2)(B). The taxpayer is not at risk, however, for any
pledge of property used in the business. Id.
The parties disagree whether the RFB stock petitioners
pledged constitutes property used in the business. Petitioners
contend that RFB stock is not property used in the business
for at-risk purposes because the stock represents an owner-
ship interest in the business that can be sold or transferred
without affecting corporate assets. According to petitioners,
stock is therefore inherently separate and distinct from the
Memo. 2001–280; Culnen v. Commissioner, T.C. Memo. 2000–139, revd. and remanded 28 Fed.
Appx. 116 (3d Cir. 2002).
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64 137 UNITED STATES TAX COURT REPORTS (46)
activities of a corporation and the pledge of stock of the
related corporation should allow petitioners to be treated as
at risk. We disagree.
We reject petitioners’ narrow interpretation of property
used in the business. Pledged property must be ‘‘unrelated to
the business’’ if it is to be included in the taxpayer’s at-risk
amount. See sec. 465(b)(2)(A) and (B); Krause v. Commis-
sioner, 92 T.C. 1003, 1016–1017 (1989), affd. sub nom.
Hildebrand v. Commissioner, 28 F.3d 1024 (10th Cir. 1994);
Miller v. Commissioner, T.C. Memo. 2006–125. 12 The Alpine
entities were formed by petitioner to expand RFB’s existing
cellular networks. RFB also used some of Alpine’s digital
licenses to provide digital service to RFB’s analog network
areas. RFB then allocated income from the licenses back to
Alpine. The RFB stock is related to the Alpine entities. Cf.
sec. 1.465–25(b)(1)(i), Proposed Income Tax Regs., 44 Fed.
Reg. 32244 (June 5, 1979).
Moreover, even if the RFB stock is unrelated to the cellular
phone business, petitioners were not economically or actually
at risk with respect to their involvement with the Alpine
entities. Petitioners contend that petitioner was the obligor of
last resort on the CoBank loan. Petitioners were not actually
at risk because they never personally guaranteed the
CoBank loan, nor were they ever personally liable on the
purported loans to the Alpine entities. Additionally, peti-
tioners were not economically at risk. We have held that
where the transaction has been structured so as to remove
any realistic possibility of loss, the taxpayer is not at risk for
the borrowed amounts. See Oren v. Commissioner, 357 F.3d
at 859; Levien v. Commissioner,
103 T.C. 120, 126 (1994),
affd. without published opinion 77 F.3d 497 (11th Cir. 1996).
We have already determined that the structured transaction
made it highly unlikely that petitioners would experience a
loss.
We find that petitioners’ pledge of RFB stock did not put
them at risk in Alpine and the other Alpine entities to allow
them passthrough losses.
12 Furthermore, the flush language of sec. 465(b)(2) provides that no property shall be taken
into account as security for borrowed amounts if such property is directly or indirectly financed
by indebtedness which is secured by the property. The RFB stock qualifies as ‘‘property * * *
directly or indirectly financed by indebtedness’’ because RFB borrowed the funds from CoBank.
Petitioners’ pledge of RFB stock therefore cannot be taken into account to determine whether
petitioners were at risk.
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(46) BROZ v. COMMISSIONER 65
V. Business and Startup Expenses
A. Business Expenses
We now must decide whether Alpine and Alpine Operating
were engaged in an active trade or business for purposes of
deducting certain expenses. Alpine and Alpine Operating
deducted interest, depreciation, startup and certain other
business expenses (beginning expenses). Respondent argues
that none of the Alpine entities are entitled to deductions for
the beginning expenses because they were not involved in an
active trade or business during the years at issue. Petitioners
contend that the Alpine entities acquired licenses and related
equipment to expand RFB’s existing cellular business and are
therefore entitled to the deductions for the beginning
expenses. We begin with the general rules for deducting busi-
ness expenses.
Taxpayers may deduct ordinary and necessary expenses
paid or incurred during the taxable year in carrying on a
trade or business. Sec. 162(a). The taxpayer is not entitled to
deduct expenses incurred before actual business operations
commence and the activities for which the trade or business
was formed are performed. Johnsen v. Commissioner, 83 T.C.
103, 114 (1984), revd.
794 F.2d 1157 (6th Cir. 1986). Whether
the taxpayer is actively carrying on a trade or business
depends on the facts and circumstances. Commissioner v.
Groetzinger, 480 U.S. 23, 36 (1987). A taxpayer is not
engaged in a trade or business even if he has made a firm
decision to enter into business and over a considerable period
of time spent money in preparing to enter that business.
Richmond Television Corp. v. United States, 345 F.2d 901,
907 (4th Cir. 1965). The taxpayer is not engaged in any trade
or business until the business has begun to function as a
going concern and has performed the activities for which it
was organized. Id.
The determination of whether an entity is actively engaged
in a trade or business must be made by viewing the entity
in a stand-alone capacity and not in conjunction with other
entities. See Bennett Paper Corp. & Subs. v. Commissioner,
78 T.C. 458, 463–465 (1982), affd.
699 F.2d 450 (8th Cir.
1983). RFB’s business therefore cannot be attributed to Alpine
and Alpine Operating. Instead, we must examine the Alpine
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66 137 UNITED STATES TAX COURT REPORTS (46)
entities individually to determine whether they were engaged
in a trade or business during the years at issue. We begin
with Alpine.
Petitioners organized Alpine to obtain FCC licenses and to
construct and operate networks to service the new license
areas. Petitioners claim that Alpine had two on-air networks
in September 2001. Petitioners failed to provide any evidence
beyond petitioner’s own self-serving testimony to substan-
tiate this claim, however. Instead, the record reflects that the
on-air networks were operated by RFB rather than Alpine.
RFB used Alpine’s Michigan licenses and allocated any
income earned from the licenses to Alpine or the Alpine
license holding entities. 13 Petitioners failed to establish here
that Alpine was engaged in an active trade or business
during the years at issue, and it is not entitled to any deduc-
tions for beginning expenses.
We now turn to Alpine Operating. Alpine Operating was
formed for the sole purpose of serving Alpine’s business and
depended on Alpine for revenue. We have already determined
that petitioners failed to establish that Alpine was engaged
in an active trade or business during the years at issue. We
therefore find, by extension, that Alpine Operating was not
engaged in an active trade or business and is not entitled to
deduct any beginning expenses.
B. Startup Expenses
Petitioners alternatively argue that they are entitled to
amortize and deduct the beginning expenses as startup
expenses. Taxpayers are entitled to amortize and deduct
startup expenses only if they attach a statement to the
return for the taxable year in which the trade or business
begins. See sec. 195(b)(1), (c). Petitioners did not file the
appropriate statement with their returns and are only now
electing to amortize and deduct the expenses. We find there-
fore that they are ineligible to amortize and deduct the
beginning expenses.
13 We find compelling that Alpine did not meet the FCC’s build out requirement to make serv-
ice available to at least 25 percent of the population in any license areas within five years of
the grant. The FCC canceled two of the three licenses Alpine retained, and Alpine returned the
third license to the FCC and forfeited the downpayment.
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(46) BROZ v. COMMISSIONER 67
VI. Amortization of the FCC Licenses
We now turn to amortization of the FCC licenses. The par-
ties agree that the licenses are amortizable but disagree on
when amortization should begin. Their dispute is based on
their different interpretations of section 197. Respondent con-
tends that the licenses are amortizable upon commencement
of a trade or business. Petitioners argue that the licenses are
amortizable upon acquisition. We must decide for the first
time whether section 197 requires that the taxpayer be
engaged in a trade or business to claim amortization deduc-
tions. If we determine that section 197 imposes a trade or
business requirement, we must also determine the extent of
that requirement. We begin with the general rules for amor-
tizing intangibles.
Intangibles were amortized and depreciated under section
167 before the enactment of section 197. Sec. 1.167(a)–3,
Income Tax Regs. Taxpayers could claim depreciation deduc-
tions for intangible property used in a trade or business or
held for the production of income if the property had a useful
life that was limited and reasonably determinable. Id. There
was some uncertainty, however, over what constituted an
amortizable intangible asset and the proper method and
period for depreciation. See Omnibus Budget Reconciliation
Act of 1993, Pub. L. 103–66, sec. 13261, 107 Stat. 532.
Congress enacted section 197 to resolve some of the
uncertainty surrounding the regulation. H. Rept. 103–111, at
777 (1993), 1993–3 C.B. 167, 353. An ‘‘amortizable intan-
gible’’ is now defined as an intangible acquired by and held
in connection with the conduct of a trade or business. Sec.
197(c)(1). Such intangibles include ‘‘any license, permit or
other right granted by a governmental unit or an agency or
instrumentality thereof ’’ that is held in connection with the
conduct of a trade or business. See sec. 197(c)(1)(B), (d)(1)(D).
The cost of the intangible is amortizable over a fixed 15-year
period. Sec. 197(a).
Petitioners contend that section 197 lacks a specific trade
or business requirement. Thus, petitioners argue that they
may begin amortizing the FCC licenses upon grant even
though no trade or business has begun. They argue that the
statute lacks a specific trade or business requirement
because the phrase ‘‘trade or business’’ does not appear in
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68 137 UNITED STATES TAX COURT REPORTS (46)
subsection (a), which provides the general rule. They argue
that the plain meaning of the statute permits them to begin
amortizing the licenses in the month of the license grant
regardless of whether any business had begun.
We turn to the language of section 197. It is a central tenet
of statutory construction that, when any provision of a
statute is interpreted, the entire statute must be considered.
See, e.g., Lexecon Inc. v. Milberg Bershad Hynes & Lerach,
523 U.S. 26, 36 (1998); Huffman v. Commissioner,
978 F.2d
1139, 1145 (9th Cir. 1992), affg. in part and revg. in part
T.C. Memo. 1991–144. The phrase ‘‘trade or business’’
appears five times in section 197. An intangible is not
amortizable under the general rule of subsection (a) unless it
is an ‘‘amortizable section 197 intangible.’’ See sec. 197(a). An
amortizable section 197 intangible is defined as an intangible
that is held ‘‘in connection with the conduct of a trade or
business.’’ See sec. 197(c)(1)(B). The statute requires that
there be a trade or business for amortization purposes. Mere
grant of an FCC license does not satisfy the requirement.
Moreover, to interpret section 197 as allowing amortization
without regard to the taxpayer’s trade or business ignores
the purpose behind section 197. Section 197 was enacted to
provide taxpayers acquiring intangible assets with a deduc-
tion similar to the depreciation deduction under section 167
for tangible assets. Taxpayers are allowed a depreciation
deduction for property used in a trade or business. See sec.
167(a). There is no indication in the legislative history of sec-
tion 197 that Congress intended to change depreciation prin-
ciples established in section 167 to allow taxpayers to amor-
tize intangible assets without regard to whether there was a
trade or business.
We now must determine the nature of the section 197
trade or business requirement. Several Code sections impose
an active trade or business requirement. For example, tax-
payers are allowed to deduct business expenses incurred in
carrying on a trade or business, sec. 162, depreciation
expenses for tangible personal property used in a trade or
business, sec. 167, and startup expenses for an ‘‘active trade
or business’’, sec. 195. The taxpayer must be carrying on or
engaged in a trade or business at the time of the expenditure
to be eligible for the deduction. See Weaver v. Commissioner,
T.C. Memo. 2004–108. In contrast, only a passive trade or
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(46) BROZ v. COMMISSIONER 69
business is required for deductibility of research and develop-
ment costs under section 174 (‘‘in connection with a trade or
business’’). Moreover, the taxpayer claiming a research and
development cost need not be engaged in a trade or business
at the time of the expenditure to qualify for the deduction.
Smith v. Commissioner, 937 F.2d 1089, 1097 n.9 (6th Cir.
1991) (quoting Diamond v. Commissioner, 930 F.2d 372 (4th
Cir. 1991)), revg. 91 T.C. 733 (1988).
Petitioners argue that the trade or business requirement
imposed by section 197 is similar to the less stringent
requirement imposed by section 174. See Snow v. Commis-
sioner, 416 U.S. 500 (1974). They argue that both sections
174 and 197 contain the phrase ‘‘in connection with’’ and
both should therefore have the same meaning. Petitioners’
interpretation fails, however, to consider the entire phrase.
The entire phrase in section 197 is ‘‘in connection with the
conduct of a trade or business.’’ (Emphasis added.) The inclu-
sion of the word ‘‘conduct’’ indicates to us that the intangi-
bles must be used in connection with a business that is being
conducted. We find, therefore, that section 197 contains an
active trade or business requirement similar to the require-
ment imposed by section 162. 14
We have already determined that Alpine was not engaged
in an active trade or business. The Alpine license holding
entities were formed for the sole purpose of serving Alpine’s
business and depended on Alpine for revenue. We therefore
find, by extension, that the Alpine license holding entities
were not engaged in an active trade or business and are not
entitled to amortization deductions for the licenses.
We earlier issued an Opinion, Broz v. Commissioner, 137
T.C. 25 (2011), in which we found for respondent as to the
class life for depreciation purposes.
14 Moreover, regulations have been promulgated that reinforce the trade or business require-
ment in sec. 197. The regulations clarify that amortization under sec. 197 begins on the later
of—
(A) The first day of the month in which the property is acquired; or
(B) In the case of property held in connection with the conduct of a trade or business or in
an activity described in section 212, the first day of the month in which * * * the activity be-
gins.
[Sec. 1.197–2(f)(1)(i), Income Tax Regs.]
The regulations apply only to property acquired after Jan. 25, 2000. Nevertheless, the regula-
tions further support our determination that intangible property cannot be amortized if the
trade or business or activity to which it relates has yet to commence. See Frontier Chevrolet
Co. v. Commissioner, 116 T.C. 289, 294 n.10 (2001).
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70 137 UNITED STATES TAX COURT REPORTS (46)
We have considered all arguments made in reaching our
decision, and, to the extent not mentioned, we conclude that
they are moot, irrelevant, or without merit.
To reflect the foregoing,
Decision will be entered under Rule 155.
f
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