T.C. Memo. 2000-270
UNITED STATES TAX COURT
NEWHOUSE BROADCASTING CORPORATION AND
SUBSIDIARIES, ET AL.,1 Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 19448-97, 23753-97, Filed August 25, 2000.
24489-97, 6210-98.
P and R have both moved for partial summary
judgment on the issue of whether property used in
extending and maintaining a cable television system
pursuant to a cable television franchise agreement
qualifies for investment tax credit under the "supply
or service" transition rule of sec. 204(a)(3) of the
Tax Reform Act of 1986, Pub. L. 99-514, 100 Stat. 2085,
2149.
Held: (1) Property to be used by P’s subsidiary M
in extending and maintaining the cable television
system is described in sufficient detail in the
1
Cases of the following petitioners are consolidated herewith:
Advance Publications, Inc., and Subsidiaries, docket No. 23753-
97; Cox Enterprises, Inc., and Subsidiaries, docket No. 24489-97;
and Chronicle Publishing Co., Richard T. Thieriot, Tax Matters
Person, docket No. 6210-98.
- 2 -
franchise agreement to permit a determination of
whether property actually used by M for that purpose
may be considered "readily identifiable with" such
agreement within the meaning of sec. 204(a)(3), id.,
and (2) there are genuine issues of material fact in
determining whether all the property actually used is
"readily identifiable with and necessary to carry out"
the franchise agreement as required by sec. 204(a)(3),
id. Both motions for partial summary judgment shall be
denied.
Bernard J. Long, Jr., David E. Mills, and James R. Saxenian,
for petitioner.
Gary D. Kallevang and William J. Gregg, for respondent.
MEMORANDUM OPINION
HALPERN, Judge: Both petitioner Newhouse Broadcasting Corp.
(petitioner) and respondent have moved for partial summary
judgment. Each party objects to the other’s motion. The issue
common to those motions (petitioner’s motion, respondent’s
motion, or, together, the motions) is whether MetroVision of
Livonia, Inc. (MetroVision), a wholly owned subsidiary of
petitioner’s, is entitled to an investment tax credit (ITC) on
account of certain property placed in service by it during its
taxable years ended July 31, 1989 and 1990 (the 1989 and 1990
taxable years or the audit years). The property in question
relates to a cable television franchise awarded to MetroVision in
1983. The motions require us to interpret the supply or service
- 3 -
transition rule (supply or service transition rule) of section
204(a)(3) of the Tax Reform Act of 1986 (TRA of 1986 or the Act),
Pub. L. 99-514, 100 Stat. 2085, 2149, to determine whether
MetroVision properly claimed the ITC (transition ITC). We shall
deny both motions. Our reasons follow.
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
I. Introduction
Approximately 186 cable franchise agreements are involved in
petitioner’s case and about 200 similar agreements are involved
in the cases consolidated with petitioner’s case. Although the
motions relate to a single cable television franchise agreement,
the issue presented is common to all of the cable franchises and
systems in dispute. Therefore, resolution of the issue in this
case will facilitate resolution of the same issue as it arises in
the other cases.
II. Background
A. Introduction
For purposes of the motions, the parties have stipulated
certain facts. We accept the stipulated facts as being true for
purposes of deciding the motions. The stipulation of facts, with
attached documents, is incorporated herein by this reference.
- 4 -
The parties have also filed various memoranda of law, some with
attached affidavits, and other documents. The following
recitation of facts is drawn primarily from the stipulation of
facts. Certain other facts (which facts we deem
noncontroversial) are included in that recitation. In section
II.C., infra, we summarize pertinent parts of the various
affidavits submitted by the parties. Those affidavits are
relevant principally with respect to petitioner’s motion. We
believe that those affidavits support our conclusion that, with
respect to the requirements of the supply or service transition
rule, there are genuine issues of fact that foreclose summary
judgment for petitioner.
B. Facts Pertaining to the MetroVision Television Franchise
1. Granting of the Cable Franchise to MetroVision
On August 23, 1982, the council of the City of Livonia,
Michigan, enacted Ordinance No. 1651 (Ordinance 1651). Ordinance
1651 contains the procedures pursuant to which the City of
Livonia issued a request for proposals (request for proposals)
with respect to the construction of a cable television system
within the city. In response to the request for proposals,
MetroVision submitted a franchise application, dated December 13,
1982 (the MetroVision application). On May 18, 1983, the City of
Livonia enacted Ordinance 1685, which awarded a 15-year
nonexclusive cable television franchise to MetroVision (the
- 5 -
Livonia Franchise Agreement or franchise agreement). On June 1,
1983, MetroVision sent a letter to the City of Livonia accepting
the cable television franchise (MetroVision letter of
acceptance). The parties have stipulated that, for purposes of
the motions, the Livonia Franchise Agreement was, as of December
31, 1985, a binding written contract between MetroVision and the
City of Livonia.
2. Relevant Terms of the Franchise Agreement
By the franchise agreement, MetroVision was awarded
the right to construct, operate, and maintain a cable
television system within the corporate boundaries of
the City of Livonia, and to construct, operate and
maintain * * * all necessary poles, towers, anchors,
wires, cables, electronic conductors, underground
conduits, manholes, terminals and other structures and
appurtenances integral to this cable television
system.2
The franchise agreement defines the term "cable television
system" as follows:
A system of coaxial cables or other electrical
conductors and equipment used to receive or originate
or receive television radio signals and to transmit
them via cable to subscribers for a fixed or variable
fee, including the origination, receipt, transmission,
and distribution of voices, sound signals, pictures,
visual images, digital signals, telemetry, or any other
type of closed circuit transmission by means of
2
The franchise agreement defines the term “Franchise” as
follows: “The rights of grantee [MetroVision] to construct and
operate a cable television system in the City, subject to the
City Charter, the Cable Television Regulatory Ordinance, this
ordinance and all other applicable ordinances of the City, and
the franchise agreement.”
- 6 -
electrical impulses; and as defined by the FCC Rules
and Regulations (47 CFR 76.5).
In consideration of the award of the franchise, MetroVision
agreed to pay the City of Livonia a fee of 5 percent of
MetroVision’s annual gross revenues generated by the cable
television system. The term of the franchise is 15 years from
the date of execution of the franchise agreement, subject to
renewal, and the franchise area extends "throughout the present
corporate limits of the City of Livonia and to any area * * *
annexed to the City during the term of this franchise."
In addition to meeting the requirements of the Livonia
Franchise Agreement itself, the franchise agreement requires
MetroVision to "provide all services and meet all requirements
of" (1) the request for proposals, (2) Ordinance 1651, (3) the
MetroVision application, and (4) "all other written and oral
representations made by the Grantee". (Hereafter, those
documents and representations, along with the franchise
agreement, are referred to collectively as the pre-1986
documents.)
Ordinance 1651 requires:
[a]ll facilities and equipment * * * shall be
constructed and maintained at a state-of-the-art level
in accordance with applicable requirements and
specifications, including, but not limited to, those of
the National Electrical Code, the rules and regulations
of the Federal Communications Commission, and all other
pertinent ordinances and codes of the City of Livonia.
- 7 -
The term "state-of-the-art equipment" is defined by the franchise
agreement to encompass "[a]ny components or equipment accepted
and used by leaders in the industry and considered to be the most
modern and advanced equipment commercially available."
Consistent with the requirement to install state-of-the-art
equipment, the franchise agreement also requires MetroVision to
"meet or exceed all the material construction and service
requirements set out in * * * [petitioner’s] franchise
applications." (Emphasis added.)
Exhibits A through F attached to the Livonia Franchise
Agreement contain detailed requirements concerning cable system
design and performance (exhibit A), the system construction
schedule (exhibit B), system services and programming
(exhibit C), support for public access and local programming
(exhibit D), the initial schedule of rates and charges for all
services to be provided by MetroVision (exhibit E), and the
construction procedures for installation of the system
(exhibit F).
Various subsections of exhibit A list the required
capacities, capabilities, and technical standards of the
equipment and facilities to be installed. For example,
MetroVision is required to build a cable system that, at a
minimum, delivers signals at frequencies up to 440 MHz (60
channel capacity); has satellite earth stations capable of
- 8 -
receiving signals from all operational communications satellites
that generally carry programs available to cable systems;
provides compatibility for various interactive residential
services such as security alarm monitoring, home shopping, video
games, and one-way or interactive education; and provides certain
specified cablecasting facilities for use by the City of Livonia
and its residents. The equipment for the cablecasting facilities
is required to be "as indicated in * * * [MetroVision’s]
franchise application" although "[e]quivalent or superior items
may be provided, with Grantor concurrence." Exhibit C requires
MetroVision to broadcast certain television signals, including
10 Detroit area television broadcast stations, 3 distant
television broadcast stations (WGN (Chicago), WOR (New York), and
WTBS (Atlanta)), 5 other specified stations, 20 video programming
services distributed by communications satellite (e.g., CNN,
ESPN, C-Span, The Weather Channel), 10 alphanumeric programming
services (e.g., AP News cable, Dow-Jones News Service), 12 local
channels for community and governmental use, 2 local origination
programming services, and certain pay TV services (Bravo and Home
Theater Network).
The MetroVision application also contains schedules listing
(1) the types of equipment (often by manufacturer and anticipated
unit cost) that would be needed, (2) the technical standards for
the equipment, both in terms of the Federal Communications
- 9 -
Commission (FCC) requirements and, where they exceed the FCC
requirements, in terms of MetroVision’s own requirements, and
(3) channel capacity and system capability. One of the volumes
comprising the MetroVision application details the proposed
maintenance procedures to be employed by MetroVision. Volume II,
section VI of the MetroVision application, entitled "System
Design", contains detailed descriptions of the equipment to be
used in installing and maintaining the Livonia cable system.
Thus, one subsection, entitled "Summary of Proposed System
Distribution Equipment List", lists equipment by manufacturer and
model number (e.g., "Trunk Amplifiers -- Scientific Atlanta
6500/440 series"; "Power Supplies -- Electro model SV-L-4-60 BC
(Dual) with status monitoring and stand by power"). Another
subsection, entitled "Satellite Earth Stations", describes the
"major hardware elements of the earth terminal installation" for
satellite reception as consisting of "TVRO Antenna System - RSI
‘Torus’, Model 450 TC", and contains a detailed description of
the capabilities and features of this antenna system, which is to
be installed at two locations. A third example of this kind of
equipment detail is provided by a subsection describing "headend
equipment" and "subscriber premises equipment to be installed
initially for home interactive services." Here, again, the
equipment is described by manufacturer and model number.
- 10 -
3. MetroVision’s Activities Pursuant to the Franchise
MetroVision commenced construction of the Livonia cable
system in 1984. By 1985, construction was substantially
complete. During the 1988-90 period, the construction activity
undertaken by MetroVision was to (1) extend the cable system into
newly constructed subdivisions, (2) deliver service to new
customers in existing service areas, and (3) replace worn out,
broken, or otherwise obsolete cable television equipment.
Respondent does not dispute, and we find, that those activities
were required by and undertaken pursuant to the terms of the
Livonia Franchise Agreement. No significant changes to the
system, in terms of the number of channels or the channel
selection, were undertaken during the 1988-90 period.
Petitioner has been unable to locate the invoices, purchase
orders, or any other list of the items of property placed in
service during the audit years for which it is claiming
transition ITC (the subject property). As a result, petitioner
has been unable to demonstrate that the subject property is
property described in the Livonia Franchise Agreement. The
parties have stipulated, however, as to the authenticity of
certain charts of accounts and general ledger materials
pertaining to MetroVision which show, by dollar amount and
general category of expenditure (e.g., "Distribution System",
"Head End Equipment", "Local Production Equipment", "Traps &
- 11 -
Decoders", "Technical Equipment", etc.), MetroVision’s
expenditures during the audit years for property placed in
service in expanding and maintaining the Livonia cable television
system.3 The various categories encompass types of equipment
common to cable television systems generally and to the Livonia
system in particular.
During the 1989 and 1990 taxable years, the number of miles
of plant increased from 421 to 430 and the number of subscribers
from 23,337 to 25,497.
C. Affidavits
Petitioner submitted affidavits of Thomas Bjorklund who,
during the audit years and until he left petitioner’s employment
in 1996, was responsible for the installation and maintenance of
the Livonia cable system, and Edward P. Kearse, an attorney who,
for more than 25 years, "specialized in the administration and
law affecting cable television systems and cable franchise
agreements."
Respondent submitted an affidavit by Charles Gramlich, a
self-employed cable television and telecommunications consultant
who provides consulting services to city and county governmental
cable franchising authorities.
3
By stipulating as to authenticity, respondent has not
stipulated as to the truth of the material contained in the
general ledger accounts except for purposes of respondent’s
motion for summary judgment.
- 12 -
By his affidavit, Mr. Bjorklund declares: From the date of
its organization in 1983, MetroVision has been engaged solely in
the business of providing cable television service to the
residents of the City of Livonia. The subject property was
installed in compliance with specific provisions of the Livonia
Franchise Agreement. In some instances, MetroVision installed
updated versions of equipment illustrated in MetroVision’s
application, which "had the incidental effect of increasing by
two channels the potential capacity of the sixty-two channel
Livonia cable television system."
By his affidavit, Mr. Kearse describes cable television
franchise agreements generally and declares that the core
provisions of the Livonia Franchise Agreement are consistent with
the terms of such agreements. By his affidavit, respondent’s
affiant, Mr. Gramlich, acknowledges that the Livonia Franchise
Agreement "contains fairly specific details as to such things as
performance standards, programming, and installation." He
rejects, however, Mr. Kearse’s declaration that a cable franchise
generally carries with it "the obligation to incorporate new
‘state of the art’ technology in the facilities and to extend and
improve service over the life of the franchise", and he concludes
that the Livonia Franchise Agreement contains no such obligation.
In reaching this conclusion, Mr. Gramlich apparently ignores the
state-of-the-art requirement contained in Ordinance 1651.
- 13 -
Mr. Gramlich also disagrees with petitioner’s statement that all
of the subject property was placed in service solely in order to
comply with the terms of the Livonia Franchise Agreement. That
disagreement appears to be based upon his observation that,
generally, a cable television operator makes all decisions for
"business reasons", and that, if the business reasons conflict
with a requirement of the franchise agreement, "the cable
operator will seek relief from the franchising authority."
III. Discussion
A. Introduction
As stated, we shall deny both motions. We shall deny each
motion for a different reason. We shall deny respondent’s motion
because we disagree with respondent’s determination that the pre-
1986 documents fail to contain sufficient descriptions to
determine whether the subject property is "readily identifiable
with" such documents. See infra sec. III.E. We shall deny
petitioner’s motion because there are genuine issues of fact as
to whether all of the subject property is "readily identifiable
with and necessary to carry out" the Livonia Franchise Agreement.
See id.
B. Statutory Provisions
Prior to 1986, an investment tax credit was available
pursuant to sections 38(b), 46, 48, for investments in certain
types of tangible property placed in service during the taxable
- 14 -
year (qualifying property). The amount of the credit depended
upon the useful life of the qualifying property. The maximum
credit was 10 percent of the cost of qualifying property with a
useful life of 7 years or more. The credit was repealed by
section 211 of TRA of 1986, 100 Stat. 2166, which added section
494 to the Internal Revenue Code. Section 49(a), made the
investment credit inapplicable to property placed in service
after December 31, 1985. Because TRA of 1986 did not become law
until October 22, 1986, the repeal of the investment credit was
necessarily retroactive. Therefore, the Act contains a number of
transitional rules to provide relief for taxpayers who may have
committed to post-1985 investments in qualifying property in
reliance on the availability of the credit.5 Pursuant to section
49(b)(1), the section 49(a) repeal of the credit does not apply
4
Sec. 11813 of the Omnibus Budget Reconciliation Act of 1990,
Pub. L. 101-508, 104 Stat. 1388-536, repealed sec. 49 and
replaced it with existing sec. 49 (at-risk rules).
5
See H. Rept. 99-426 at 146 (1985), 1986-3 C.B. (Vol. 2) 1,
146, in which the House Ways and Means Committee makes the
following observation with respect to the repeal of the then
existing cost recovery rules, including the investment tax
credit:
The committee is aware that commitments have
already been made on the basis of present law capital
cost recovery rules. The committee bill provides for
equitable transition rules in such cases, which are
estimated to cover more than 50 percent of the new
personal property to be placed in service in the first
year the bill is effective.
- 15 -
to "transition property." In relevant part, section 49(e)(1)
defines "transition property" as:
any property placed in service after December 31, 1985,
and to which the amendments made by section 201 of the
Tax Reform Act of 1986 do not apply, except that in
making such determination--
* * * * * *
(B) [section] * * * 204(a)(3) of such Act shall be
applied by substituting "December 31, 1985" for
"March 1, 1986,"[6]
Section 204(a)(3) of the Act provides the supply or service
transition rule, upon which petitioner relies. As modified by
section 49(e)(1)(B), section 204(a)(3) of the Act (section
204(a)(3)) provides that "section 201 shall not apply to any
property which is readily identifiable with and necessary to
carry out a written supply or service contract, or agreement to
lease, which was binding on * * * [December 31, 1985]."
Under section 203(b)(2)(A) of the Act, section 204(a)
transition property with a useful life of 20 years or more may be
placed in service before January 1, 1991, and still qualify for
the section 204(a) transition rules. Section 203(b)(2)(C)(ii) of
the Act provides that "property described in section 204(a) shall
6
Sec. 201 of the Tax Reform Act of 1986, Pub. L. 99-514, 100
Stat. 2121, modified the accelerated cost recovery system and
sec. 203 of the Act provided that such modifications were
generally effective for assets placed in service after Dec. 31,
1986. Secs. 203 and 204 of the Act provided a number of
transition rules postponing the effective date of the sec. 201
changes.
- 16 -
be treated as having a class life of 20 years". Those section
203(b)(2) placed-in-service rules apply without modification in
determining eligibility for transition ITC, provided that the
property has a class life of at least 7 years.7 Petitioner
states (and respondent does not dispute) that all of the subject
property has a class life of at least 7 years. Therefore,
assuming the subject property qualifies as transition property,
there is no question that it was timely placed in service so as
to be eligible for transition ITC.
C. Summary Judgment
A summary judgment is appropriate "if the pleadings, answers
to interrogatories, depositions, admissions, and any other
acceptable materials, together with the affidavits, if any, show
that there is no genuine issue as to any material fact and that a
decision may be rendered as a matter of law." Rule 121(b). “A
partial summary adjudication may be made which does not dispose
7
See sec. 49(e)(1)(C) which provides:
(C) in the case of transition property with a class
life of less than 7 years--
(i) section 203(b)(2) of such Act shall apply, and
(ii) in the case of property with a class life--
(I) of less than 5 years, the applicable date
shall be July 1, 1986, and
(II) at least 5 years, but less than 7 years, the
applicable date shall be January 1, 1987, * * *
- 17 -
of the issues in the case.” Id. Summary judgment is a device
used to expedite litigation and is intended to avoid unnecessary
and expensive trials of phantom factual questions. See, e.g.,
Espinoza v. Commissioner, 78 T.C. 412, 415-416 (1982). It is
not, however, a substitute for a trial in that disputes over
factual issues are not to be resolved in such proceedings. See
id. The party moving for summary judgment has the burden of
showing the absence of a genuine issue as to any material fact.
See id.
D. Summary of the Arguments of the Parties
1. Petitioner’s Arguments
With respect to the requirement of the supply or service
transition rule that property be “readily identifiable” with a
written supply or service contract, petitioner cites dictionary
definitions of the terms "readily", "identifiable", and
"identify" to support its argument that "for property to be
‘readily identifiable’ with a contract simply means that one
could, with a fair degree of ease, link such property to the
contract". Petitioner states that such "linkage is established
by Mr. Bjorklund, who has testified that MetroVision of Livonia
placed in service the subject property solely in order to provide
cable television service within the City of Livonia, pursuant to
its obligations under the Livonia Franchise Agreement."
- 18 -
With respect to the requirement of the supply or service
transition rule that property be “necessary” to carry out a
written supply or service contract, petitioner argues:
Expenditures incurred by a cable operator acquiring
property placed in service to provide cable television
service under the terms of a cable television franchise
agreement are normal, appropriate expenses and hence
‘necessary’ as that term is understood in the context
of business expenditures.
In support of that argument, petitioner cites Commissioner v.
Heininger, 320 U.S. 467 (1943), and Carbine v. Commissioner,
83 T.C. 356 (1984), affd. 777 F.2d 662 (11th Cir. 1985), cases
dealing with the requirement that business or profit seeking
related expenses be “ordinary and necessary”. Secs. 162(a), 212.
Petitioner relies on Messrs. Bjorklund’s and Kearse’s affidavits
to establish that the expenses in question are normal and
appropriate expenses to provide cable television service.
2. Respondent’s Arguments
In support of respondent’s motion, respondent argues that
property is "readily identifiable with and necessary to carry out
a written supply or service contract" only if it is "specifically
described" in the contract and/or related (pre-1986) documents.
Respondent argues that, because the subject property was not
"mentioned, described, referred to, particularized, or identified
in any way * * * as to quantity, description, cost, vendor, model
number, purpose or any other characteristics" in either the
contract or in any pre-1986 related document, such property
- 19 -
cannot qualify under the transition rule for supply or service
contracts.
In support of his argument, respondent relies on H. Conf.
Rept. 99-841 at 60 (1986), 1986-3 C.B. (Vol. 4) at 60. H. Conf.
Rept. 99-841 is the report of the committee of conference
(conference report) accompanying H.R. 3838, 99th Cong. 1st Sess.
(1985), which, when enacted, became the TRA of 1986. Respondent
relies primarily upon the following language in the conference
report describing the supply or service transition rule in
support of his argument that the property must be specifically
identified in pre-1986 documents: "This transitional rule is
applicable only where the specifications and amount of the
property are readily ascertainable from the terms of the
contract, or from related documents." H. Conf. Rept. 99-841,
supra at 60, 1986-3 C.B. at 60. Respondent’s position appears to
be that the description in the franchise agreement of property to
be used in implementing such agreement is not sufficiently
detailed to meet that test. Respondent also appears to be
arguing, that because of its inability to identify in any way the
subject property, petitioner cannot sustain its burden of proving
that such property is "readily identifiable with" (i.e.,
"specifically described" in) the franchise agreement.
In opposition to petitioner’s motion, respondent argues that
there are genuine issues of material fact as to whether all of
- 20 -
the subject property was "necessary to carry out" petitioner’s
obligations under the franchise agreement.
E. Analysis
1. The Equipment To Be Installed by Petitioner in
the Livonia Cable Television System Is Described In
Sufficient Detail in the Pre-1986 Documents To
Permit a Determination of Whether the Equipment
Actually Installed Is "Readily Identifiable With"
Such Documents.
a. Relevant Case Law
We are not the first court called upon to interpret the term
“readily identifiable with”, as that term is used in section
204(a)(3). The meaning of that term has been addressed in three
cases by four different courts.8 In two of those cases, Bell
Atl. Corp. v. United States, 82 AFTR 2d 98-7375 at 98-7384, 99-1
USTC par. 50,119 at 87,041 (E.D. Pa. 1998), affd. __ F.3d __ (3d
Cir., Aug. 17, 2000), and United States v. Zeigler Coal Holding
Co., 934 F. Supp. 292, 295 (S.D. Ill. 1996), the courts reasoned
that, in order to be eligible for transition ITC under the
transition rule for supply or service contracts, "the property
must have been specifically described" in the contract or in a
related document. In both cases, the District Court relied upon
8
In a fourth case, Southern Multi-Media Communications, Inc. v.
Commissioner, 113 T.C. 412 (1999), discussed below, we recently
addressed the issue of whether improvements to a cable television
system were "necessary to carry out" the applicable franchise
agreements. We specifically refrained from deciding "whether
* * * [the improvements] were ‘readily identifiable with’ * * *
[the cable] franchise agreements." Id. at 422 n.3.
- 21 -
the language of the conference report quoted above and stated
that "[t]o allow a supply contract to implicitly require the
acquisition of property means that the transition rule exception
would swallow the rule eliminating the ITC."
In the third case, United States v. Commonwealth Energy
Sys., 49 F. Supp. 2d 57 (D. Mass. 1999), the taxpayer sought
transition ITC for post-1985 capital additions to its existing
power plant in connection with its performance of four pre-1986
power supply contracts. The contracts specifically required the
taxpayer "to cause to be built a new conventional steam plant
* * * of an expected net economic capability of approximately
560 megawatts". Id. at 59. Because the contracts specified both
the primary energy source and the total generating capacity, the
Court reasoned that the facts of the case were precisely the
facts of the following colloquy that occurred during Senate
debate of the ITC transition rule for supply or service
contracts:
MR. MATSUNAGA: I would like to ask the bill
managers to clarify another point. The supply or
service contract transition rule requires that the
property be readily identifiable with and necessary to
carry out the contract. The committee report explains
that the specifications and the amount of the property
must be readily ascertainable from the terms of the
contract or from related documents.
Is this Senator’s understanding correct that the
requirement is met when a binding power purchase
contract specifies the type of generating equipment in
terms of primary energy source and specifies the amount
of generating equipment in terms of total generating
- 22 -
capacity of the turbines necessary to produce the
contracted power? In other words, the rule does not
require the technical details of the generating
property to be spelled out.
MR. PACKWOOD: The Senator from Hawaii is correct.
MR. LONG: The Senator’s understanding is correct.
132 Cong. Rec. 15028 (1986).
The court held that, "in the power supply context * * *
generating equipment/property is ‘readily identifiable with’ the
written supply contract where the contract specifies (1) the
primary energy source; and (2) the total generating capacity."
United States v. Commonwealth Energy Sys., supra at 60. In
reaching that result, the court rejected as "unduly narrow" the
Government’s interpretation of the statute and conference report
"as a manifestation of congressional intent to limit the
transition tax credit provision to property explicitly designated
in a supply contract." Id. at 58.
b. Discussion
In deciding whether to grant or deny respondent’s motion, we
find it unnecessary to resolve the parties’ conflicting
interpretations of the phrase "readily identifiable with".
Rather, we find that the description contained in the pre-1986
documents of the equipment to be utilized in installing and
maintaining the Livonia cable system is sufficiently detailed for
us to determine whether any particular property is "specifically
described" in such documents. Thus, assuming arguendo that
- 23 -
"specifically described" is the applicable standard for
determining entitlement to transition ITC in this case, as argued
by respondent, we find that such standard is satisfied in the
pre-1986 documents.
Petitioner has been unable to furnish "any documents
contemporaneous with * * * [the audit years], such as equipment
invoices, purchase orders, or budget approval documents * * * to
provide an itemized identification of the alleged Transitional
Property." However, we do not consider petitioner’s inability,
to date, to specifically identify the subject property as grounds
for granting respondent’s motion. The general categories of
expenditures for equipment described in MetroVision’s charts of
account and general ledger materials for the audit years (which
we accept as accurate only for purposes of respondent’s motion)
are consistent with the descriptions of equipment contained in
the pre-1986 documents. Therefore, we cannot conclude, as a
matter of law, that the subject property (as represented in
MetroVision’s charts of account and general ledger materials) is
not "specifically described" in such documents. We also conclude
that even updated versions of the equipment described in the pre-
1986 documents that petitioner acknowledges were installed in the
Livonia cable television system during the audit years may be
said to be "specifically described" in and, therefore, "readily
identifiable with" such documents in light of the requirement to
- 24 -
provide state-of-the-art equipment, including equipment that will
"meet or exceed" the material requirements contained in the
MetroVision application.
c. Conclusion
For the above reasons, we shall deny respondent’s motion.9
2. There Are Genuine Issues of Material Fact in
Determining Whether the Property Placed in Service by
Petitioner During the Audit Years Is "Readily
Identifiable With and Necessary to Carry Out" the
Livonia Franchise Agreement.
a. Discussion
Petitioner attempts to compensate for its inability, to
date, to document the items of subject property actually placed
in service during the audit years by relying upon the sworn
statements of its two experts, Messrs. Bjorklund and Kearse, to
the effect that all of the subject property "was placed in
service solely in order to provide cable television service to
residents of Livonia as required by the Livonia Franchise
Agreement" and that "this property was necessary for an
operational cable system." Respondent disputes these conclusions
on the basis of the affidavit of his expert, Mr. Gramlich, who
9
As indicated supra in sec. III.A., our denial of respondent’s
motion is not intended to imply our agreement with petitioner
that all of the property actually used by MetroVision in
extending and maintaining the Livonia cable system is "readily
identifiable with" the Livonia Franchise Agreement. Because of
petitioner’s inability to document the subject property, whether
such property is "readily identifiable with" the franchise
agreement remains an issue of fact to be resolved at trial.
- 25 -
states that business reasons, not franchise agreements,
ultimately determine equipment acquisitions. Respondent argues
that, without more information regarding the property actually
placed in service during the audit years, there is an issue as to
whether all such property was "necessary to carry out" the
Livonia Franchise Agreement.
Recently, in Southern Multi-Media Communications, Inc. v.
Commissioner, 113 T.C. 412 (1999), we considered whether certain
improvements to cable television systems were "necessary to carry
out" the cable franchise agreements and, therefore, eligible for
transition ITC under section 204(a)(3). The case involved
"rebuilds" (replacement of cable equipment to effect an increase
in the maximum channel capacity of the system) and "line
extensions" (extensions of the system to additional customers).
We determined that neither the franchise agreements nor any other
pre-1986 contracts specifically required the rebuilds or the line
extensions. We, therefore, held that those improvements were not
"necessary to carry out" the franchise agreements and, on that
basis, denied transition ITC to the taxpayer.
The taxpayer had argued that the rebuilds and line
extensions were made necessary by language in the franchise
agreements requiring taxpayer to maintain the cable systems in a
state-of-the-art condition. We rejected the taxpayer’s argument
on the basis that "[t]he word ‘necessary’ connotes essential,
- 26 -
mandatory, indispensable, or requisite", and that the state-of-
the-art requirement, as set forth in the franchise agreements,
reflected "only broad industry standards, not specific
contractual commitments to undertake rebuilds." Id. at 418, 421.
Similarly, we found no evidence to indicate that the taxpayer
"had specific binding commitments, as of December 31, 1985, to
install the line extensions." Id. at 422.
Under our opinion in Southern Multi-Media Communications,
Inc., in order to prove that property placed in service during
the audit years was "necessary to carry out" the Livonia
Franchise Agreement, petitioner must demonstrate that such
property was placed in service pursuant to "specific contractual
commitments" contained in the franchise agreement or in a related
(pre-1986) document. Petitioner argues that it has satisfied
that requirement because MetroVision was "at all times material
engaged solely in the business of providing cable television
service to residents of Livonia, under the authority of the
Livonia Franchise Agreement" and because MetroVision "installed
each unit of property solely to provide cable television service
to residents [of the City of Livonia] as it agreed to do in the
Livonia Franchise Agreement."
We agree with respondent that there are genuine issues of
material fact to be resolved in determining whether all of the
property placed in service by petitioner was "necessary to carry
- 27 -
out" the Livonia Franchise Agreement. In the existing record,
there is inadequate identification of the items of property that
were actually placed in service during the audit years. Even if
we were to assume that all such items of property fit within the
general categories listed in petitioner’s charts of account, it
is possible that "business considerations", not the franchise
agreement, led to the installation of one or more items. If, for
example, any of such items exceeded the performance capabilities
called for by the franchise agreement, they would not have been
placed in service pursuant to a specific contractual commitment.
In addition, it is not clear what portion, if any, of the
property consisting of "updated versions" of equipment
illustrated in MetroVision’s application may have qualified for
transition ITC.10 That all such items may have been installed to
10
One justification for such upgrades is the requirement, in
the Livonia Franchise Agreement, to construct and maintain the
Livonia cable system "at a state-of-the-art level in accordance
with applicable requirements and specifications of the National
Electrical Code, the rules and regulations of the [FCC], and all
other pertinent ordinances and codes of [the City of Livonia]."
That state-of-the-art requirement, together with a specific
definition in the franchise agreement of the term "state-of-the-
art equipment", and the requirement that MetroVision "meet or
exceed * * * the material construction and service requirements"
of its franchise application may provide the objective touchstone
that was lacking in Southern Multi-Media Communications, Inc. v.
Commissioner, 113 T.C. 412, 414 (1999), where the franchise
agreements required the cable systems to be maintained "in
accordance with the highest accepted standards of the industry to
the end that the subscriber may receive the highest and most
desirable form of service." Depending upon the nature and extent
of the upgrades in this case, it is possible that one or more was
needed to satisfy what we consider to be an explicitly defined
state-of-the-art contractual requirement in the Livonia Franchise
(continued...)
- 28 -
provide cable television service to the residents of the City of
Livonia is not sufficient to establish that they were "necessary
to carry out" the agreement.11
As indicated supra in footnote 9, the same uncertainties,
which are the result of petitioner’s failure to document the
items of the subject property actually placed in service during
the audit years, raise material issues of fact whether such
property is "readily identifiable with" the Livonia Franchise
Agreement.
10
(...continued)
Agreement.
Even in the absence of a state-of-the-art requirement,
however, it is possible that an upgrade might qualify for
transition ITC, e.g., where a broken part in need of replacement
is obsolete and no longer in production. Thus, if the channel
capacity increase from 60 to 62 channels acknowledged by
Mr. Bjorklund truly was "incidental" to an otherwise required use
of upgraded models of equipment described in the pre-1986
documents (e.g., where the upgrade was the only model readily
available for use at the time of installation) it may be that the
upgrade was "necessary to carry out" the franchise agreement.
11
In this case, the issue is whether the equipment used to
carry out contractually required service obligations was
"necessary to carry out" such obligations. In Southern Multi-
Media Communications, Inc. v. Commissioner, supra, it was the
contractual need to perform the service obligations themselves
(i.e., the rebuilds and line extensions) that was in issue.
Because we held that the service obligations were not "necessary
to carry out" the franchise agreement, it followed that none of
the equipment could qualify for transition ITC. In this case,
because the service obligations are required by the franchise
agreement, we must determine, after a trial, which specific items
of equipment were "necessary to carry out" those obligations and
which were not. Therefore, the two cases involve somewhat
different applications of the principle that there must exist a
"specific contractual commitment" for equipment placed in service
if such equipment is to qualify for transition ITC.
- 29 -
b. Conclusion
Because there are genuine issues of material fact in
determining whether all of the subject property is "readily
identifiable with and necessary to carry out" the Livonia
Franchise Agreement, we shall deny petitioner’s motion.
IV. Conclusion
Both petitioner’s and respondent’s motions for partial
summary judgment shall be denied.
To reflect the foregoing,
An appropriate order
will be issued.