Full opinion text
OPINION PER CURIAM : This is an action for the recovery of federal income taxes plus interest claimed to have been overpaid for the taxable years ending June 30, 1962 through 1968. Timely claims for refund were disallowed, and this suit was timely brought thereafter. Plaintiff, Forward Communications Corporation (Forward), is a corporation with principal place of business in Wausau, Wisconsin. For the taxable years in issue, plaintiff and its subsidiaries were engaged in the business of radio and television broadcasting and newspaper publishing. On December 1, 1965, plaintiff purchased all of the assets of Station KVTV, Sioux City, Iowa, from Peoples Broadcasting Company (Peoples). The questions presented for determination in this case with regard to the KVTV purchase are: (1) May plaintiff deduct annually part of the price for the amortization of a 5-year covenant by the seller not to compete? (2) May plaintiff deduct annually part of yje p^g for the amortization of the Federal Communications Commission (FCC) Kcense it acquired? (3) May plaintiff deduct as a 1967 loss a portion of the price it paid attributable to a primary Columbia Broadcasting System (CBS) network affiliation contract which it terminated after entering into a new American Broadcasting Company (ABC) network affiliation contract in September 1967? (4) May plaintiff deduct in 1966 and 1967 against the income from the performance of advertising contracts an allocated portion of the purchase price attributable to such contracts? (5) Is plaintiff entitled to establish an increased basis for the depreciation of its tangible operating equipment in the absence of such a contention in its claims for refund? Between October 30, 1964 and September 1,1967, plaintiff acquired all of the stock of the News Publishing Company of Marsh-field, Wisconsin, which published the Marshfield News-Herald, a daily newspaper. On September 30, 1967, plaintiff liquidated the News Publishing Company and received all of its assets under a plan of liquidation qualifying under section 334(b)(2) of the Internal Revenue Code. The issues presented with regard to the newspaper acquisition are the fair market value of (1) the machinery and equipment, and (2) the newspaper’s goodwill on September 30, 1967. Although all of the significant events necessary to determine the issues took place from and after 1965, the taxable years 1962 through 1964 are also involved due to loss carrybacks and unused investment credits. I. Covenant Not To Compete In 1965, there were only two television stations in Sioux City, Iowa: KVTV, which had a primary CBS-network affiliation, and KTIV, which had a primary National Broadcasting Company (NBC) network affiliation. Both were VHF (very high frequency) stations. Although the FCC had allocated a UHF (ultra high frequency) channel to the Sioux City area as far back as 1952, up through the end of 1965 no one had thought it sufficiently worthwhile to apply for it. Station KVTV was owned by Peoples Broadcasting Company, a subsidiary of a large insurance company with headquarters at Columbus, Ohio. In March 1965, plaintiff began negotiations with Peoples to purchase that station. From the start, Peoples indicated that it would not sell the station for less than $3.5 million, and plaintiff acquiesced in that basic price. The negotiations thereafter related largely to the clauses which plaintiff desired to include in the agreement of sale. One of the clauses which plaintiff proposed was a covenant by Peoples that it would not compete with plaintiff in Sioux City for a period of 5 years. The 5-year period was chosen because plaintiff felt that after that period Peoples would lose its effectiveness in the Sioux City market. On April 26, 1965, Peoples forwarded to plaintiff its draft of the sale contract. The contract set forth the agreed upon $3.5 million price plus reimbursement of Peoples’ share of the cost of a new tall transmission tower then under construction for joint use by both Sioux City television stations. Although the parties had discussed the covenant not to compete, the draft agreement did not contain one. After plaintiff conveyed to Peoples its insistence that there be such a covenant, Peoples supplemented its draft by adding a 5-year covenant but did not change the price. The final contract was executed July 16, 1965. Section 1, entitled “Sale, Assignment and Delivery of Assets”, provided for the conveyance by Peoples to plaintiff of the FCC license, the call letters KVTV, the tangible assets and the leases, agreements and contracts pertaining to the business of the station. Section 3, entitled “Purchase Price and Terms of Payment”, provided that “the purchase price for the assets purchased hereunder” was $3.5 million plus the seller’s costs and expenses incurred up to the closing date in connection with the new tall tower and related facilities. It recited that $150,000 was paid by plaintiff on the execution of the contract, to be held in escrow, and the remainder was due at the closing. The final section of the contract provided in full: Section 25. Covenant not to Compete. Seller agrees not to engage, directly or indirectly, in the business of operating a television station in Sioux City, Iowa, for a period of five years from the Closing Date. There was no provision in the contract for payment or for any allocation of the purchase price for the covenant not to compete. At closing, on December 1, 1965, plaintiff paid Peoples a total of $3,928,033.11 in the form of three bank cashier’s checks as follows: First National Bank of Chicago $3,200,000.00 First National Bank of Chicago 250,000.00 Continental Illinois National Bank and Trust Co. of Chicago 478,033.11 $3,928,033.11 The $478,033.11 check represented reimbursement for Peoples’ outlays in connection with the new tall transmission tower. Although the $250,000 check then contained no notation as to what it represented, plaintiff’s president, Richard Dudley, and its attorney, Stanley Staples, for the first time orally informed Peoples’ representatives that the amount on the separate check was what plaintiff was paying for the covenant not to compete. Peoples’ representatives were noncommittal. Neither Dudley nor Staples was willing to testify that Peoples agreed to the proposal. Indeed, Staples testified, “I certainly would not be correct if I stated that the sellers accepted our allocation.” Although no representative of Peoples testified at trial, in its income tax return Peoples treated the entire purchase price as the proceeds from the sale of capital assets. The $3,200,000 represented the remainder of the purchase price. Plaintiff urges that irrespective of the contract provisions, $250,000 of the $3,928,-033.11 is allocable to Peoples’ covenant not to compete and that it is amortizable over the 5-year life of the covenant. Defendant, on the other hand, contends that since the entire contract price was paid for the transferred assets nothing was paid by plaintiff for Peoples’ covenant not to compete, and, hence, there was no cost to amortize. A covenant by the seller of a business that he will not compete with the purchaser for a limited period after the sale is often merely a protective device to insure the conveyance of goodwill. In that event, the entire sum received by the seller represents the proceeds from the sale of his capital assets, and correspondingly the purchaser’s investment in such assets. On the other hand, where the parties agree that the seller should be separately compensated for his loss of earnings (not from the transferred business but from other sources) for a limited period, where the parties bargain in good faith as to the sum to be paid therefor, and the amount agreed upon has economic reality, then other tax consequences may ensue. The seller may be required to treat the substituted earnings as ordinary income, and correspondingly the buyer may become entitled to deduct them from ordinary income as business expenses. See Davee v. United States, 444 F.2d 557, 195 Ct.Cl. 184 (1971), cert. denied sub nom. Lea Associates, Inc. v. United States, 425 U.S. 912, 96 S.Ct. 1507, 47 L.Ed.2d 762 (1976); and Ullman v. Commissioner, 264 F.2d 305, 307-08 (2d Cir. 1959). In determining whether the amount may be separately allocated to a covenant not to compete, the courts have applied at least four tests, the importance of each varying with the context in which the issue arises — i. e., whether the covenantor is taxable upon part of the proceeds as ordinary income, or whether the covenantee is entitled to deduct part of the payment as an actual or amortizable expense, and whether the taxpayer or the Commissioner is challenging the form of the agreement. The first of these tests is whether the compensation paid for the covenant is separable from the price paid for the goodwill. This test is aptly stated in Ullman v. Commissioner, supra at 307-08: It is well established that an amount a purchaser pays to a seller for a covenant not to compete in connection with a sale of a business is ordinary income to the covenantor and an amortizable item for the covenantee unless the covenant is so closely related to a sale of good will that it fails to have any independent significance apart from merely assuring the effective transfer of that good will. And see also General Insurance Agency, Inc. v. Commissioner, 401 F.2d 324, 329 (4th Cir. 1968); Wilson Athletic Goods Mfg. Co. v. Commissioner, 222 F.2d 355 (7th Cir. 1955); Commissioner v. Gazette Tel. Co., 209 F.2d 926 (10th Cir. 1954); Toledo Blade Co. v. Commissioner, 180 F.2d 357 (6th Cir.), cert, denied, 340 U.S. 811 (1950). One rationale for the application of such test, at least with respect to deductions by the purchaser, as is the issue herein, is that where the goodwill and the covenant are closely related the benefits of the elimination of competition may be permanent or of indefinite duration and hence the value of the covenant is not exhaustible or a wasting asset to be amortized over a limited period. See 4 J. Mertens, Law of Federal Income Taxation § 23.68 (1973 rev.); Marsh & McLennan, Inc. v. Commissioner, 51 T.C. 56 (1968), aff’d on other grounds, 420 F.2d 667 (3d Cir. 1969); Falstaff Beer, Inc. v. Commissioner, 37 T.C. 451 (1961), aff’d, 322 F.2d 744 (5th Cir. 1963); Dane County Title Co. v. Commissioner, 29 T.C. 625 (1957); and Michaels v. Commissioner, 12 T.C. 17, 19 (1949). The second test is whether either party to the contract is attempting to repudiate an amount knowingly fixed by both as allocable to the covenant, the calculable tax effect which may fairly be assumed to have been a factor in determining the final price. This is referred to as the Danielson rule, after Commissioner v. Danielson, 378 F.2d 771 (3d Cir.), cert. denied, 389 U.S. 858, 88 S.Ct. 94, 19 L.Ed.2d 123 (1967). There the sales agreement explicitly allocated a sum to the selling stockholders’ covenants not to compete, and in accordance with such agreement the buyer amortized the part of the purchase price which had been allocated to the covenants. Nevertheless, each selling stockholder reported the entire amount received by him as proceeds from the sale of a capital asset. On the sellers’ appeals from the imposition of tax deficiencies, the Tax Court upheld the taxpayers’ position, finding in effect that the taxpayers had produced strong proof that the amounts allocated by the buyer to the covenants were not realistically arrived at. (44 T.C. 549, 556 (1965).) The Third Circuit reversed the Tax Court. Reasoning that since the amount a buyer of a business pays a seller for his covenant not to compete is ordinary income to the covenantor and an amortizable item for the covenantee, that its reasonably predictable tax consequences may be presumed to have been a component of the overall purchase price for the business, and that its repudiation by one party may have the effect either of a unilateral reformation of the contract with resulting unjust enrichment of one party at the expense of the other or a whipsawing of the Commissioner of Internal Revenue by both, the court applied the following rule (378 F.2d at 775): [A] party can challenge the tax consequences of his agreement as construed by the Commissioner only by adducing proof which in an action between the parties to the agreement would be admissible to alter that construction or to show its un-enforceability because of mistake, undue influence, fraud, duress, etc. This court has cited Danielson with approval on several occasions. KFOX, Inc. v. United States, 510 F.2d 1365, 206 Ct.Cl. 143 (1975); Dakan v. United States, 492 F.2d 1192, 203 Ct.Cl. 655 (1974); Davee v. United States, supra; Eckstein v. United States, 452 F.2d 1036, 196 Ct.Cl. 644 (1971). The third test is one of mutual intent. Where there is no precise allocation of the purchase price in the agreement to the covenant not to compete, is there proof nevertheless that both parties intended when they signed the agreement that some portion of the price be assigned to the covenant? The leading case on this test is Annabelle Candy Co. v. Commissioner, 314 F.2d 1, 7-8 (9th Cir. 1962). There the court recognized that the covenant had played a very real part in the negotiations and a valuable benefit to the buyer. Despite such fact, the court denied deductions for the amortization of the covenant because— In the purchase agreement involved in the case before us, there is no allocation of consideration to the covenant not to compete. While this is pretty good evidence that no such allocation was intended it is not conclusive on the parties as would be the case if there had been an express affirmance or disavowal in the agreement. But the petitioner, which was asking for a redetermination of a tax deficiency, had the burden of proving that, notwithstanding the lack of any recital to that effect in the agreement, the parties intended to allocate consideration to the covenant. * * * ****** [A]t the time the contract for the purchase of Sommers’ stock was executed there was no expressed intention one way or the other as to allocation and tax consequences. It follows that the petitioner failed to sustain its burden of proving that, notwithstanding the lack of any recital to that effect in the agreement, the parties intended to allocate consideration to the covenant. Accord, Harvey Radio Laboratories, Inc. v. Commissioner, 470 F.2d 118 (1st Cir. 1972); Leslie S. Ray Insurance Agency, Inc. v. United States, 463 F.2d 210 (1st Cir. 1972); General Insurance Agency, Inc. v. Commissioner, supra; Delsea Drive-In Theatres, Inc. v. Commissioner, 379 F.2d 316 (3d Cir. 1967); and Rich Hill Insurance Agency, Inc. v. Commissioner, 58 T.C. 610 (1972). The fourth test is whether the covenant was economically real. The essence of this test is that however the parties divide up the purchase price they cannot prevent the Commissioner from attacking the allocation to the covenant not to compete as sham or unreal rather than the product of bona fide bargaining. See Harvey Radio Laboratories, Inc. v. Commissioner, supra at 120. The role of this test was stated in Bal-thrope v. Commissioner, 356 F.2d 28, 31 (5th Cir. 1966)— Courts generally honor the parties’ bargaining for tax consequences dependent upon the price of a vendor’s covenant not to compete. [Citation omitted.] But there are limits. Courts need not honor a vendor’s covenant which has no basis in economic reality. Or, as put in Schulz v. Commissioner, 294 F.2d 52, 55 (9th Cir. 1961), “[T]he covenant must have some independent basis in fact or some arguable relationship with business reality such that reasonable men, genuinely concerned with their economic future, might bargain for such an agreement.” Plaintiff distorts this test by claiming that it allows a purchaser to support an allocation for the covenant, even though there is an absence of mutual intent, i. e., where he could not persuade the seller to place any value on it. In Leslie S. Ray Insurance Agency, Inc. v. Commissioner, supra at 212, the court met just such an argument with the following response: Plaintiff’s seeming contention, * * that it may allocate without any agreement, by proving the fair and reasonable value of the covenant not to compete, finds no support in the cases. In this well-traveled area we do not propose to lay out a new path. And in Harvey Radio Laboratories, Inc. v. Commissioner, supra at 120, the same court further explained: While we do not agree that a taxpayer, to suit his convenience, can freely avoid the consequences of his agreement by showing that the “economic realities” were otherwise, we have no quarrel with those cases which accord such an option to the Commissioner. * * * The parties are free to make their own agreement. The Commissioner, on the other hand, has to deal with the apparent agreement he is faced with. It does not seem unfair that he should be less strictly bound to its bona fides than are the parties themselves. [Citations omitted]. Plaintiff cites two cases as authority for use of the economic reality test to support allocation of part of the purchase price to the covenant where no allocation was provided in the agreement and there was no proof of intent by the parties to make such an allocation: Kinney v. Commissioner, 58 T.C. 1038 (1972), acq. 1974-2 C.B. 3, and Allison v. United States, 25 AFTR 2d 70-1107 (E.D.Cal.1970). Both involved sales of highly personal service businesses: Kinney, an insurance agency; and Allison, an accounting practice. Both agreements failed to allocate any value to the covenants of the sellers not to compete. In both, however, it was the Commissioner, and not the parties to the agreement, who challenged the agreements as shams and not reflecting economic reality. The courts agreed and required the sellers to include parts of the proceeds in ordinary income. As another court characterized the Allison holding, “Just because the parties failed to make an allocation with respect to the value of the covenant, does not prevent the Internal Revenue from assigning a value to the covenant.” Shields v. United States, 34 AFTR 2d 74-5649, 74-5650 (W.D.Tex.1974). Neither is authority for the argument advanced by the plaintiff here that a party to a voluntary agreement, who has failed to persuade the other side to place a value on his covenant not to compete, may unilaterally amend the agreement to make such an allocation in his own favor without changing the total price. Moreover, Kinney met the intent test. In Kinney, both parties did intend that the covenant should have value — they simply could not agree on the proper amount. The Tax Court has itself noted that the rationale of Kinney is limited to such facts. Plaintiff’s argument for the amortization of its $250,000 allocation to the covenant not to compete fails to satisfy any of these tests. First, the covenant was not a separable wasting asset but merely protective of the goodwill plaintiff acquired in the purchase. There was no evidence that Peoples had any plans to return to the Sioux City market right after it sold its station and transferred its license to plaintiff. Peoples could not have competed with plaintiff without an FCC license, and it could only have obtained such a license by purchase of the other existing television station in Sioux City or by applying for the long-unused UHF channel. In its application for transfer of its existing license to plaintiff, Peoples represented to the FCC that its reason for the transfer of the license to plaintiff was that it desired— to concentrate its resources on the operation of its existing and newly-acquired broadcast properties, on its plans for the development of UHF television in Columbus [Ohio], and on the properties closer to Columbus, its home base of operations. Plaintiff’s president testified that his concern was that after Peoples obtained its $3.5 million from the sale, with $1 million of the proceeds it could turn right around, put a UHF station back on the air in Sioux City and be a substantial direct competitor. He felt Peoples would have a substantial advantage “that could be classed as goodwill” in that three to five of its principal personnel had ingrained themselves within the community. However, he thought the 5-year covenant was enough for plaintiff to acquire such goodwill because “that was a period of time that they would lose their effectiveness within the market”, while “[i]f I’ve been in the market for five years and I get to know people within that market, then I have no problem, and I don’t care who * * * wants to be my competitor.” Thus, the covenant was closely tied to the acquisition of goodwill. It protected the goodwill until it no longer needed protection. At the expiration of the term of the covenant plaintiff would not suffer a loss but would have a continuing benefit from the preservation of its goodwill. Cf. Golden State Towel and Linen Service v. United States, 373 F.2d 938, 179 Ct.Cl. 300 (1967); and Meredith Broadcasting Co. v. United States, 405 F.2d 1214, 1229, 1231, 186 Ct.Cl. 1, 28, 30 (1968). Plaintiff asserts that it complies with the second test, the Danielson rule, because at the closing it delivered a separate $250,000 check to Peoples, that it informed the latter that it was allocating that sum to the covenant not to compete, and that Peoples accepted the check. Therefore, plaintiff concludes, both buyer and seller agreed to a specific allocation of $250,000 for the covenant and the parties are now bound by that allocation. For different reasons, defendant also relies on Danielson. Defendant avers that the sales agreement unambiguously assigned the full purchase price to the assets not including the covenant not to compete and therefore the parties assigned a zero value to the covenant. It also points to section 23 of the agreement which recites that the agreement contains the entire understanding of the parties and may not be modified or amended except by written agreement of the parties. Therefore, it concludes, plaintiff is bound by the zero dollars allocated to the covenant. Neither party’s position is persuasive. The short answer to plaintiff’s contention is that the Danielson rule does not bind the Commissioner to the terms of any formal agreement or transaction, but only bars the taxpayer from repudiating it as against the Commissioner. Contrary to both parties’ contentions, the record indicates that no value was specified in the sales agreement for the covenant not to compete, neither zero nor $250,000. While the evidence reflects that plaintiff made an attempt, at the closing, to place a $250,000 value on the covenant, Peoples never indicated in any way its approval. Peoples’ acceptance of the cheek cannot be taken to mean acceptance of the proposal, because under the sales agreement Peoples was entitled to the full purchase price without any strings attached. Moreover, there is no testimony in the record that plaintiff made its tender of the purchase price conditional upon Peoples’ acceptance of the allocation. That plaintiff cannot meet the third test, that there be mutual intent to allocate $250,000 or some other value to the covenant, is apparent from the record. From the start of the negotiations in March 1965, Peoples insisted on the $3.5 million price for the assets other than the tall tower and taxpayer agreed to pay it. Peoples’ first draft of the contract, which contained no covenant not to compete, stated that the “purchase price for the assets” was to be $3.5 million plus its out-of-pocket cost for the tall tower. When Peoples added the covenant that it would not compete for 5 years, there was no reduction in the stated purchase price for the assets. The contract was executed by both parties on July 16, 1965, without any mention by either of a separate allocation or consideration for the covenant not to compete. It was not until the closing on December 1, 1965, when the terms of the purchase and sale had been fixed for more than 4 months, that plaintiff first informed Peoples that it was paying $250,000 less than had been agreed upon for Peoples’ assets and allocating that sum as compensation for Peoples’ covenant not to compete. It was not a condition of the closing that Peoples agree to such an allocation, and plaintiff’s president, Dudley, and its attorney, Staples, conceded that Peoples did not agree. Indeed, in its income tax return for that year, Peoples treated the entire sum received as proceeds from the sale of capital assets. Nor can plaintiff meet the requirement of the fourth test, that there be economic reality to its $250,000 allocation to the covenant. There was no showing that Peoples was likely to incur any comparable loss of earnings by not competing in the Sioux City market for 5 years so that it would bargain for $250,000 in substitute compensation. There was no evidence that Peoples had any plans to resume television broadcasting in the Sioux City area. To the contrary, it represented to the FCC that it had made the sale in order to enable it to concentrate its resources on its existing and newly acquired broadcast properties in other areas closer to its home base in Columbus, Ohio. It would not have been an easy matter for Peoples to repudiate such representation in an application for a new license in the same market within a short time thereafter, and it would have conveyed to the FCC the reasonable inference that Peoples’ sale of KVTV was a mere trafficking in licenses for profit. Furthermore, the undisputed testimony was that it would have taken 2 years to put a new UHF station into operation. On the other side of the transaction, there was no showing that the $250,000 represented any approximation of what plaintiff stood to lose by Peoples’ competition. Plaintiff’s president chose the $250,-000 because it represented about 7 percent of the purchase price. He alighted on the 7 percent because he had seen some other purchase agreements in the industry which had covenants and the sums allocated to them came out to between 5 and 15 percent of the price, without regard to any other similarities or differences. Although plaintiff claimed it was concerned with the effectiveness of plaintiff’s personnel as competitors, the personnel of Station KVTY came over to Forward with the business but plaintiff made no effort to retain them by placing them under contract or otherwise, as for example, was done in KFOX, Inc. v. United States, 206 Ct.Cl. 143, 161, 510 F.2d 1365, 1374 (1975). Accordingly, it is concluded that there was no bona fide mutual allocation of value to the covenant not to compete, that plaintiff has failed to prove that it incurred a $250,000 cost or any other ascertainable sum for a covenant not to compete, and that it is not entitled to amortization deductions for the cost of such covenant as a wasting asset. II. FCC License Prior to the sale of Station KVTV to plaintiff, the license had last been issued to Peoples on January 14, 1965, for a 3-year period ending February 1, 1968. On October 27,1965, the FCC agreed to the transfer of the license from Peoples to plaintiff and on January 30, 1968, it renewed plaintiff’s license for another 3-year term ending February 1, 1971. Plaintiff contends that the holder is entitled to depreciate the value of an FCC television-broadcasting license over a 3-year useful life. Plaintiff’s position is that: (1) the FCC license represents an intangible asset separate from goodwill and subject to independent valuation; (2) recent developments in the FCC practice have indicated a tighter adherence to broadcast standards and a greater likelihood of a license revocation or denial of a renewal; and, therefore, (3) the period of useful life of an FCC license is ascertainable and for tax purposes should be limited to its 3-year term. The government argues that, because of the high probability of an indefinite succession of automatic renewals, the license does not have a determinable useful life and is thus not depreciable. Section 167(a)(1) of the Internal Revenue Code provides for a deduction from gross income of a reasonable allowance for the depreciation of property used in the taxpayer’s trade or business. Treasury Regulations section 1.167(a)-l(a) (1956) provides that such allowance is to be measured by the cost and by the estimated useful life of the property. The 'atter is then defined as (§ 1.167(a)-l(b) (1956)) “the period over which the asset may reasonably be expected to be useful to the taxpayer in his trade or business * * With respect to intangibles, Treasury Regulations section 1.167(a)-3 (1956) states that: If an intangible asset is known from experience or other factors to be of use in the business * * * for only a limited period, the length of which can be estimated with reasonable accuracy, such an intangible asset may be the subject of a depreciation allowance. * * * An intangible asset, the useful life of which is not limited, is not subject to the allowance for depreciation. * * * In Meredith Broadcasting Co. v. United States, 405 F.2d 1214, 1230-31, 186 Ct.Cl. 1, 30 (1968), and Miami Valley Broadcasting Corp. v. United States, 499 F.2d 677, 687, 204 Ct.Cl. 582, 600 (1974), this court found that the FCC television licenses involved did not have determinable useful lives because of the history of almost automatic renewals and the failure of the taxpayers there to show that the licenses at issue did not possess any reasonable prospects of continuity. Similar holdings may be found in Richmond Television Corp. v. United States, 354 F.2d 410, 412 (4th Cir. 1965); Knipe v. Commissioner, 24 T.C.M. 668, 692-93 (1965), aff’d per curiam on other issues sub nom. Equitable Publishing Co. v. Commissioner, 356 F.2d 514 (3d Cir.), cert. denied, 385 U.S. 822, 87 S.Ct. 50, 17 L.Ed.2d 60 (1966); KWTX Broadcasting Co. v. Commissioner, 31 T.C. 952, 961, aff’d per curiam, 272 F.2d 406 (5th Cir. 1959); and Times-World Corp. v. United States, 251 F.Supp. 43 (W.D.Va. 1966). Plaintiff relies upon the contrary determination in WDEF Broadcasting Co. v. United States, 215 F.Supp. 818 (E.D.Tenn.1963). But in that case, the district court ruled that the “material inquiry here is as to the stated term of the television license in question, rather than as to the custom or practice of the Federal Communications Commission in granting license renewals in other cases”, and that it was immaterial that there was “little or no history of failure to renew licenses”. (215 F.Supp. at 820.) This legal position has been either explicitly or implicitly rejected in all of the subsequent cases cited. Between 1949 and 1968, the 20-year period up to and including the last year involved in this ease, there were only four commercial television broadcast licenses which were not renewed by the FCC. During that same period of time, there was an average of 343 licensed commercial television stations each year. Since each of those stations had to apply for a license renewal once every year until 1955 and once every 3 years thereafter, then the FCC denied a television renewal application only about 0.1 percent of the time, and there is no indication that the denials were not caused by the licensee’s misconduct rather than some other factor. Plaintiff’s license renewal has never been challenged competitively, and as of the valuation date plaintiff had no particular reason to fear that it would be found not to be operating in the public interest or that its license would not be renewed. In the course of its operations, plaintiff has incurred large expenditures for improving Station KVTV, including $300,000 for a new transmitter. Plaintiff has never hesitated to make an expenditure for the television station because of a possibility that its license might not be renewed. Finally, plaintiff argues that since the issuance of the decisions in the cited cases, as a result of two court decisions (Greater Boston Television Corp. v. F.C.C., 143 U.S.App.D.C. 383, 444 F.2d 841 (D.C.Cir. 1970), cert. denied, 403 U.S. 923, 91 S.Ct. 2229, 29 L.Ed.2d 701 (1971); and Citizens Communications Center v. F.C.C., 145 U.S.App.D.C. 32, 447 F.2d 1201 (D.C.Cir. 1971)), a change has occurred in the attitude and policies of the FCC, so that “a finding of a reasonable certainty of non-renewal * * * or of a reasonably determinable useful life for the FCC license is justified.” In the first of these, the Greater Boston Television Corp. case, the crucial fact was that after the FCC had awarded a television broadcasting license to an applicant in a competitive hearing and the decision was on appeal to the court, it came to the court’s attention that the original proceeding had been tainted by ex parte contacts by an officer of the applicant with the chairman of the FCC. As a result, the Commission set aside its original award of the license to the applicant and substituted a special temporary authorization. When the time for renewal came up, the FCC ordered that the renewal application should be treated as an original fresh comparative proceeding between the licensee and the other applicants. As a result of the hearing, the Commission approved issuance of the license to a different applicant. On appeal the court held that (143 U.S.App. D.C. at 399, 444 F.2d at 857) “we cannot say that the Commission was unreasonable when in the last analysis it used the tainted overtures of WHDH as a reason for fresh consideration of all applicants, without any special advantage to WHDH by virtue of its operation under lawful but temporary authority.” It is difficult to see how this decision may be construed as retroactively casting any substantial measure of doubt on plaintiff’s prospects for renewal of its license during the taxable years 1966-1968. To the contrary, in the second case, Citizens Communications Center, supra, the court confirmed the relative degree of assurance that a licensee could have had as to renewal throughout the taxable years by noting (145 U.S.App.D.C. at 38, 447 F.2d at 1208), “[I]n the very controversial WHDH case [decided by the Commission in 1969], the Commission for the first time in its history, in applying comparative criteria in a renewal proceeding, deposed the incumbent and awarded the frequency to a challenger. [Emphasis supplied.]” Citizens Communications Center, supra, invalidated a 1970 FCC policy statement that if a licensee could demonstrate a record of “substantial” service to the community, without serious deficiencies then it would be entitled to renewal and all other applications would be dismissed without a hearing on their own merits. The court held that even in a renewal proceeding all other applicants were entitled to be heard on the merits. The decision does not deal with the merits of any final decision granting or withholding the renewal of a license after a proper hearing. In its opinion the court stated (145 U.S.App.D.C. at 44, 447 F.2d at 1213), “Indeed, as Ashbacker [Radio Corp. v. F.C.C., 326 U.S. 327, 66 S.Ct. 148, 90 L.Ed. 108 (1945)] recognizes, in a renewal proceeding, a new applicant is under a greater burden to ‘make the comparative showing necessary to displace an established licensee.’ 326 U.S. at 332, 66 S.Ct. 148 * * *.” And (145 U.S.App.D.C. at 44 n. 35, 447 F.2d at 1213 n. 35), “The court recognizes that the public itself will suffer if incumbent licensees cannot reasonably expect renewal when they have rendered superior service.” Thus, there is little in the decision to warrant the belief that even after 1971 plaintiff’s reliance on renewal of its license is any less secure. In any event, Citizens Communications Center, decided in 1971, no more than Boston Television Corp., decided in 1970, could make ascertainable the limits of the useful life of plaintiff’s broadcast license as of 1966 through 1968. The next question posed by the parties is the proper portion of the purchase price to be allocated to the FCC license. Plaintiff’s expert witness, Richard P. Do-herty, a former economics professor with 9 years’ experience as an official of the broadcasting industry trade association and more than 20 years as an appraiser of television stations for buyers, sellers and financing institutions, found it difficult to place any independent value on the license. In his opinion, an FCC television broadcasting license has no separable fair market value. While it has a great value to a station in a profitable market, and without the license the remaining assets have only salvage value, he was of the opinion that such value cannot be determined except as a part of the going-concern value of the business as a whole, since the license cannot be sold independently of such business. If for tax purposes a value has to be placed on it, it was his opinion that ordinarily such value should be limited to the costs incurred in obtaining it from the government without a competitive hearing, /. e., the legal, accounting, engineering and consulting fees necessary to make a proper application for the license. He estimated such costs to total approximately $30,000. Defendant’s expert witness, Edgar C. Henry, a member of a media brokerage firm for 5 years, and an independent appraiser of newspapers and television and radio stations for buyers, sellers and lending institutions for the last 17 years, like Mr. Doherty, ordinarily deems the television license a part of the total intangible assets. He knew of no reason, apart from tax purposes, for making a separate valuation of the license. On the assumption that some separate valuation is essential here, he valued the license at $250,000. However, he could not support it by any evidence of comparable purchases and sales. Instead, he based it merely on figures he had seen used by other television stations. In Meredith Broadcasting Co., supra, 405 F.2d at 1230, 186 Ct.Cl. at 29, the plaintiff did not assign a separate value to the license, and since there was no necessity to find a separate value for it, the court included the license as a part of going-concern value of $175,000. In Miami Valley Broadcasting Corp., supra, 499 F.2d at 687, 689, 204 Ct.Cl. at 601, 604, the court found a value of $1,156,495 for the license therein involved, based on 35 percent of the total value of the station, but it did not lay down any standards for fixing such values. Upon careful consideration, the court finds itself unpersuaded as to the value urged by either side. It is more convinced by the expert testimony that ordinarily the license is not susceptible of independent valuation because it cannot be bought or sold: and any comparison of sales prices for stations with and without licenses would be fruitless, since without a license it is not a station or a business, but a collection of tangible assets having mere salvage value. With respect to a profitable station, the license should ordinarily be worth much more than the cost of obtaining it, but how much more has not been demonstrated on the record in this case. In view of the determination that the license may not be depreciated or amortized and the failure of the parties here to demonstrate that it is necessary to place a separate value on the license as an aid in ascertaining the value of any other asset, there appears to be no necessity for finding an independent value herein. It will, therefore, be treated as a part of the total intangible value under the broad rubric of going-concern value or goodwill. III. Network Affiliation Contracts A. ** Plaintiff claims a $572,000 deduction for the loss of its CBS-network affiliation contract. At the time of the purchase of Station KVTV from Peoples, the station had two separate network-affiliation agreements, one with CBS and one with ABC. At that time the only other television station in the Sioux City area, VHF Station KTIV, was affiliated with NBC and ABC. Plaintiff renewed its ABC contract on June 27,1966, for the period of May 22,1966 through May 22, 1968, and renewed its CBS contract on November 28, 1966, for the period September 11, 1966 to March 31, 1967, with a provision for automatic 2-year renewals unless canceled by either party at least 6 months prior to the commencement of a renewed period. In a network-affiliation agreement, the network agrees to compensate the station for its broadcasting of network-furnished programs and commercials. The compensation is based upon a negotiated hourly rate for broadcasts by the particular station, which the network charges the national advertisers sponsoring the network programs. The network and the station then split the hourly rate in predetermined percentages. In both affiliation contracts, the station’s hourly rate was $650. In the CBS contract, CBS agreed to pay plaintiff from 7 to 32 percent of the hourly rate, depending upon the time of day and day of week for the broadcast, with the 32-percent share for prime-time broadcasts. In the ABC contract, ABC agreed to pay 40 percent of the hourly charge for live broadcasts of ABC-furnished programs, and 30 percent for delayed broadcasts. A television station also receives revenues directly from advertisers or advertising agencies for broadcast of advertisements between, prior to, or after programs. Where such advertisements are for nationally sold products, they are referred to as national spots, while others are referred to as local spots. The national spots are invariably prepared by the advertising agencies and distributed in the form of videotapes. Since, naturally, the spot advertisements adjacent to popular network programs are the most prized and command the highest prices, a television station derives secondary benefits from its network-affiliation agreements. Furthermore, a station may also increase its total viewership as a result of its network programs, thus enabling it to charge higher rates for all its advertising. During the taxable years, Station KVTV received about one-third of its revenues from each of the three different sources: networks, national advertising and local advertising. Because the Sioux City, Iowa, television market in December 1965 had less than three local television stations, Station KVTV was able to have a primary network affiliation with CBS and a secondary network affiliation with ABC, the latter of which it shared with Station KTIV. By having both affiliations, plaintiff had the advantage of being able to choose the most popular ABC programs in addition to its regular CBS schedule. However, the CBS contract prohibited plaintiff from recording the CBS programs for rebroadeast at a different time than received without CBS permission. Plaintiff understood also that if it preempted the CBS-network broadcast time substantially for other purposes (over 20 percent of the time), renewal of its CBS contract, or renewal at the same rates, would have been jeopardized. During the years at issue, plaintiff was aware that CBS had the highest viewer rating among the networks and that if CBS became dissatisfied with plaintiff’s performance such network could probably have found a more compliant outlet in the same market in KTIV, which then had NBC. Furthermore, KVTV was motivated by its own spot advertisers’ desires to present consistent CBS programming, week-after-week, rather than random selections of ABC and CBS programs. KVTV did have the option of taping and delaying broadcasts of the secondary affiliation (ABC) programs to hours when they did not conflict with its CBS programs, such as after 10:30 p. m. Although KVTV received a reduced rate of compensation from ABC for such delayed telecasts, it remained advantageous to the station, because ABC would pay it for such broadcasts and the station did not have to purchase syndicated nor locally produced programs to fill in those time periods. Furthermore, the ABC network shows were generally more popular and of higher quality than the non-network programs and more attractive to the spot advertisers. In plaintiff’s operation of Station KVTV, during the period of dual affiliation, KVTV averaged approximately 73.5 hours per week of CBS programming and 6-7 hours per week of ABC programming of which only as little as 1 to IV2 hours was prime time. At the time that plaintiff acquired Station KVTV, the FCC had allocated a UHF channel for the Sioux City market for more than a dozen years, but no one had applied for it. However, with the maturing of the television industry and the imposition of the requirement in the early sixties that all new receiving sets have UHF capability, plaintiff anticipated that the third station would become operational within 2V2 years from 1965. Plaintiff also reasonably assumed that when the third station went on the air, each of the three stations would then exclusively affiliate with a single network. In mid-1966, when plaintiff learned that an applicant had applied for an FCC license for the UHF station in Sioux City, plaintiff knew that it could not retain both its CBS and ABC affiliations once the third station began broadcasting. The third station actually stated in its application to the FCC that it would have the ABC-network affiliation. Nevertheless, plaintiff believed it had a choice as to which network it would retain or obtain on an exclusive basis, since in a mixed market with both VHF and UHF television stations a network would prefer to be affiliated with a VHF station rather than a UHF station. In July 1966, William Turner, plaintiff’s station manager, began a study to determine which affiliation should be retained. Plaintiff’s new tall tower, which had been placed in operation December 6, 1965, extended KVTV’s range from a 25-mile radius to a 75-80-mile radius from Sioux City. This had been expected to increase markedly the station’s viewership. However, Turner’s study reflected that there were six other CBS-affiliated stations whose broadcast ranges overlapped that of plaintiff and thus detracted from the number of homes viewing plaintiff’s CBS-network programs. On the other hand, there were only two ABC-affiliated stations which overlapped plaintiff’s coverage and not as substantially as the CBS-affiliated stations, and, in addition, on the fringes of plaintiff’s coverage there were community antenna systems with no other ABC-affiliated stations within their reach. Based on the study’s findings, and also on Turner’s favorable opinion of the abilities of key members of ABC’s management, he recommended an exclusive affiliation with ABC rather than with CBS, depending on how favorable a contract could be negotiated. He was of the view that a change to an exclusive affiliation with ABC at that time would result in some loss of viewers in the short term but not in the long term. Turner and Dudley, plaintiff’s president, visited CBS at its headquarters in New York but received no encouragement that CBS would give them better terms than the $650-per-hour rate with 32 percent for prime time. Knowing that ABC had fewer affiliates than either CBS or NBC and was especially interested in expanding its affiliation agreements wherever it could, preferably with VHF stations, they then went to ABC. Although plaintiff’s prior arrangement with ABC had been at the rate of $650 per hour with no more than 40 percent for plaintiff’s share, in the negotiations with ABC for a primary and exclusive contract Dudley pressed for a rate of $1,000 per hour and a 50-percent share. They compromised on a $900-per-hour rate with a 40-percent share for plaintiff, and Turner and Dudley agreed to recommend it to plaintiff’s board of directors. Plaintiff’s board approved their decision to affiliate exclusively with ABC and relinquish CBS, provided an acceptable contract with ABC could be obtained. On April 28, 1967, plaintiff executed a primary affiliation contract with ABC effective from September 1, 1967 to September 1, 1969, providing for a compensation rate of $900 per hour with 40 percent going to plaintiff. When plaintiff informed CBS of its decision to switch its primary affiliation to ABC, CBS countered with an offer to increase plaintiff’s hourly rate by $50 without any increase in plaintiff’s percentage, which plaintiff rejected. Effective September 2, 1967, the day after its primary affiliation with ABC commenced, plaintiff terminated its contract with CBS. On September 5, 1967, UHF Station KMEG commenced broadcasting as the CBS affiliate in Sioux City. The change in plaintiff’s network affiliations had both positive and negative effects on plaintiff economically. On the negative side, plaintiff incurred additional production and sales costs. ABC then provided fewer hours of network programming per week than did CBS, and, therefore, plaintiff had to purchase films or syndicated programs, or to produce local programming, to fill in the full broadcasting day. Plaintiff’s 1967 programming costs increased by 12 percent in 1968 (from $226,474 to $253,712), and its national spot sales declined 3 percent (from $357,013 to $346,904). In addition, a rating service report for a week in November 1967, 2 months after the addition of the third station and the change in affiliation, showed that plaintiff’s home viewership during evening hours declined by 28 percent over the same week during the prior year when there were only two stations sharing the viewers. However, there is no comparable data for the entire year nor for subsequent periods, and Turner testified that his prediction that in the long range the situation would reverse itself proved out. On the positive side, plaintiff’s network revenues increased as a result of the higher hourly rate and increased percentage for all of its network broadcasts provided in its network affiliation contract with ABC. For the 12 months immediately preceding September 1,1967, Forward’s network revenue was $490,686, while for the 12 months immediately following that date it was $691,935. Moreover, for the 7 months ended June 30, 1966 and the full fiscal year ended June 30, 1967, KVTV had net losses of $97,572 and $220,667, while for fiscal 1968 it had net earnings before income taxes of $108,655. Its network revenues for fiscal 1968 ($664,616) increased by 34 percent over the prior year ($495,768). Its gross sales from all sources for 1968 were also up by 15.5 percent ($1,497,649 as against $1,296,563). B. 1. The trial judge stated that the defendant had conceded that the plaintiff had a loss resulting from the termination of the CBS affiliation in 1967 and merely disputed the basis for computing the loss. He nevertheless held that the plaintiff had no recognizable loss upon the termination of that affiliation contract. He noted that “in the year after plaintiff changed to ABC exclusively, with increased hourly compensation, its network revenues greatly increased over what it had received in the previous year from the two networks, and it turned its fortunes around from a $220,677 net loss to a $108,655 net profit.” The trial judge pointed out that section 165(a) of the Internal Revenue Code of 1954 permits deduction of “any loss sustained during the taxable year and not compensated for by insurance or otherwise.” He ruled that “even if plaintiff would otherwise have had a loss on its relinquishment of its CBS affiliation, it has failed to establish that it was ‘not compensated’ by ABC for having done so.” Alternatively, the trial judge held that recognition of the loss was barred by section 1031(a) of the Code, which prohibits recognition of gain or loss resulting from the exchange of property held for productive use in a trade or business solely for other similarly-held property. We hold that the plaintiff had a recognizable loss in 1967 upon the termination of its CBS affiliation. Although the government now disputes that it conceded the loss, we think that its submissions to the trial judge, fairly read, made that concession. Ordinarily a court does not go behind a party’s concession of a legal issue and itself undertake to adjudicate a point the parties have decided to remove from contention. We therefore could properly conclude that plaintiff incurred a loss based on the defendant’s concession. Because of the probable importance of the issue in future cases and our disagreement with the trial judge’s analysis, however, we think it appropriate to discuss the matter. (a) The findings of the trial judge establish that the dual affiliation KVTV had with CBS and ABC when the plaintiff acquired the station in 1965 was more valuable than a single affiliation would have been, because it provided the station with additional benefits. The trial judge found that [b]y having two network affiliations, Station KVTV had the advantage of being able to choose the most popular ABC programs to broadcast in addition to its regular CBS schedule, and in a few instances in lieu thereof, thereby obtaining a total program structure superior to either CBS or ABC alone. He further found that the station’s right to take the ABC programs and to rebroadcast them at a time when they did not conflict with CBS programs was advantageous to the local station because ABC would pay it for such broadcasts, and the station did not have to purchase syndicated shows or locally produced programs to fill in those time periods. Furthermore, the ABC network shows were generally more popular and of higher quality than the non-network programs and more attractive to the spot advertisers. After the CBS affiliation was terminated in 1967, the plaintiff no longer had these benefits. It therefore suffered a loss in that year reflecting the additional value of the second affiliation. This court and the Tax Court have recognized that a TV station that has affiliations with more than one network incurs a loss when any of its affiliations is terminated. Meredith Broadcasting Co. v. United States, 405 F.2d 1214, 186 Ct.Cl. 1 (1968); Roy H. Park Broadcasting, Inc. v. Commissioner, 56 T.C. 784 (1971); Miami Valley Broadcasting Corp. v. United States, 499 F.2d 677, 204 Ct.Cl. 582 (1974). The trial judge did not disagree with this analysis. Instead he concluded that because plaintiff’s network revenues increased after it terminated its CBS affiliation in favor of the ABC affiliation, any loss it may have suffered from the termination of the CBS affiliation was “otherwise” “compensated” within the meaning of section 165(a) of the Code and therefore not deductible. As noted, section 165(a) permits a deduction for “any loss sustained during the taxable year and not compensated for by insurance or otherwise.” The loss plaintiff suffered upon the termination of the CBS affiliation was not otherwise “compensated” for by the additional network revenues it received under its exclusive affiliation with ABC. The provision is designed to insure that before a taxpayer may take a deduction for a loss, he must in fact have realized one, i. e., he has not been reimbursed for the loss, 5 Mertens, Law of Federal Income Taxation § 28.07. If his loss is made whole from some other source, then in actuality he has not sustained a loss. Payment from insurance is one example of such compensation. Another is where the person who inflicted the loss makes it good as a result of litigation or for some other reason. The bar in section 165(a) against a loss deduction thus applies only if the taxpayer has an existing legal right of recovery from some source. For example, in United States v. S. S. White Dental Manufacturing Co., 274 U.S. 398, 47 S.Ct. 598, 71 L.Ed. 1120 (1927), and Post v. Commissioner, 12 B.T.A. 510 (1928), the taxpayers were allowed a deduction in the year of loss despite a later gratuitous payment by another party. In Parmelee Transportation Co. v. United States, 351 F.2d 619, 173 Ct.Cl. 139 (1965), where the taxpayer was denied a deduction because of a possible recovery through litigation, the court in so holding rejected an argument similar to defendant’s contention here. The taxpayer had lost the value of goodwill relating to one of several businesses in which it engaged. The court ruled that the fact that the taxpayer continued to operate other businesses did not establish that the loss did not result from a closed transaction. The statute does not bar a deduction for a loss actually incurred merely because the taxpayer is able to effect an offsetting gain on a different although contemporaneous transaction. In the present case, plaintiff suffered a loss upon the termination of the CBS affiliation, measured by the value of that affiliation. That loss was not “compensated” under section 165(a) by the fact that plaintiff’s new exclusive affiliation with ABC was more profitable than its prior joint affiliation with either that station or CBS. (b) At oral argument the government attempted to sustain the trial judge’s ruling that plaintiff realized no loss on the alternative theory that plaintiff received everything it had purchased when it acquired KVTV. The argument ran as follows: What plaintiff actually acquired was the right to one permanent affiliation and to one temporary affiliation during the interim period until a third station began operating in Sioux City; the termination of the CBS affiliation 2V2 years later was in accord with plaintiff’s understanding of what would happen when it acquired the station; plaintiff therefore did not realize any loss upon the termination. In colloquial terms, the defendant’s argument is that the plaintiff got what it paid for. What the plaintiff paid for, however, were affiliations with both CBS and ABC. As developed in the next section of this opinion, the CBS affiliation was the more valuable of the two and at that time it appeared likely that KVTV would retain CBS rather than ABC. There is no indication that the plaintiff viewed the transaction as the government now characterizes it or that it suffered no loss when it terminated the CBS affiliation because from the outset it knew that it could not retain both affiliations indefinitely. Indeed, most assets purchased for use in a trade or business are expected to have limited useful lives. That fact, however, does not prevent a taxpayer from taking a loss deduction when the useful life ends. (c) The defendant does not attempt to defend the trial judge’s alternative holding that section 1031(a) of the Code bars the recognition of plaintiff’s loss. As noted, that section provides that “[n]o gain or loss shall be recognized if property held for productive use in trade or business * * * is exchanged solely for property of a like kind to be held * * * f0r productive use in trade or business * * The trial judge su a sponte raised the applicability of this provision in letters to counsel after the trial had been completed and the briefs filed. The government responded that the change in network affiliation did not constitute an “exchange” within the meaning of section 1031(a). We agree with that view. For property to have been “exchanged” under section 1031(a), there must have been “a mutual grant of equal interests,” “the giving of one thing for another.” Trenton Cotton Oil Co. v. Commissioner, 147 F.2d 33, 36, rehearing denied, 148 F.2d 208 (6th Cir. 1945). “The very essence of an exchange is a transfer of property between owners * * *.” Carlton v. United States, 385 F.2d 238, 242 (5th Cir. 1967). “The purpose of Section 1031(a), as shown by the legislative history, is to defer recognition of gain or loss when a direct exchange of property between the taxpayer and another party takes place * * Coastal Terminals, Inc. v. United States, 320 F.2d 333, 337 (4th Cir. 1963). See also 3 Mertens, Law of Federal Income Taxation § 20.28. Assuming without deciding that the trial judge correctly viewed the affiliations as “property held for productive use” in plaintiff’s business, the termination of the CBS affiliation involved no exchange between the tax