Opinion ID: 569102
Heading Depth: 2
Heading Rank: 3

Heading: The Case Law in Overview

Text: 36 It would appear that Houston Chronicle and Donrey are directly in conflict. Before charting our own course, it therefore behooves us to look beyond the cases involving newspaper subscriber lists to the plethora of other cases that have considered the depreciability of customer or subscriber lists in other industries. This exercise, we believe, clearly indicates that the case law division is greatly overstated by Morning Ledger. Viewed in the context of the case law as a whole, there is undeniably some authority consistent with Donrey and supportive of the argument advanced by Morning Ledger. The overwhelming weight of the authority, however, lines up squarely behind the Service's reading of Houston Chronicle. Given the amount of ink that has been spilled over this subject already both in the literature, see supra 561, and in the case law, we will not survey the case law in detail. The following review of some of the better authorities should suffice. 37 Several cases support, to some degree or another, Morning Ledger's argument that any intangible asset which possesses a determinable useful life and which is capable of valuation is not goodwill. For example, a line of cases from the Court of Claims comes very close to adopting Morning Ledger's definition of goodwill. See Meredith Broadcasting Co. v. United States, 405 F.2d 1214, 1224-25, 186 Ct.Cl. 1 (1968); KFOX, Inc. v. United States, 510 F.2d 1365, 1376-77, 206 Ct.Cl. 143 (1975); Richard S. Miller & Sons, Inc., v. United States, 537 F.2d 446, 450-54, 210 Ct.Cl. 431 (1976). Perhaps the clearest statement of the Court of Claims' view is found in the following passage from Richard S. Miller: 38 The term goodwill has a varying content, depending on its usage. Goodwill sometimes is used to describe the aggregate of all of the intangibles of a business, including such items as patents, trademarks, leases, contracts, and franchises. Since a normal rate of return usually is calculated on tangible assets only, goodwill has been used as a synonym for the return on all the intangibles of a business. In a more restricted sense, goodwill is the expectancy that the old customers will resort to the old place. It is the sum total of all the imponderable qualities that attract customers and bring patronage to the business without contractual compulsion. Another definition equates goodwill with a rate of return on investment which is above normal returns in the industry and limits it to the residual intangible asset that generates earnings in excess of a normal return on all other tangible and intangible assets. In this court for tax purposes, the intangible value of a business is divisible into its identifiable constituent elements.... The most significant indication that an intangible asset is separate and distinct from goodwill is whether its useful life can be shown with reasonable accuracy to be of limited duration. The most important criterion is whether in fact it is a wasting asset. 39 Richard S. Miller, 537 F.2d at 450-52 (citations omitted) (emphasis added). 40 There are also a few cases that, like Donrey, provide implicit, and consequently somewhat less persuasive, authority for Morning Ledger's asserted definition of goodwill. In Super Food Services, Inc. v. United States, 416 F.2d 1236 (7th Cir.1969), for example, the taxpayer, who had purchased a supermarket chain as ongoing business, was permitted to depreciate, as an intangible asset, 184 terminable-at-will retail franchise contracts acquired as part of the deal. The implicit reasoning of the court was that, having demonstrated that the contracts had limited useful lives, and having provided a reasonable estimate of those lives, the taxpayer was not obligated further to prove that the contracts were distinct from the goodwill value of the acquiree. See also Business Service Industries, Inc. v. Commissioner, 51 T.C.M. (CCH) 539, 543 (1986) (upholding taxpayer's claimed depreciation deductions for acquired terminable-at-will MUZAK customer contracts on implicit ground that it was sufficient that taxpayer had demonstrated that contracts had ascertainable value and useful life). 41 Still other cases appear confused in their analyses, ultimately providing support for both conflicting definitions advanced in the case at bar. In Los Angeles Central Animal Hospital, Inc. v. Commissioner, 68 T.C. 269, 273-74 (1977), for example, the Tax Court noted, consistent with the Service's position here, that goodwill is typically defined as the expectancy that old customers will resort to the old place of business. Id. at 273 (citations omitted). Seemingly switching definitions of goodwill in midstream, the court then held that the taxpayer could depreciate the cost of 12,000 medical record cards purchased as part of the sale of a veterinary practice. 42 From those [medical] records, the operator of the business is able to generate business by contacting the pet owners whose animals require periodic immunization and innoculation. The repeat business which was obtained through the use of these records was not dependent solely on the normal elements of goodwill. These specific records do not retain their value indefinitely as part of the continuing operation of the practice. 43 Id. at 274. 44 The strongest authority mustered by Morning Ledger in support of its argument is the recent memorandum decision of the Tax Court in Colorado National Bankshares, Inc. v. Commissioner, 60 T.C.M. (CCH) 771 (1990). 7a The case involved the depreciability of so-called core deposits (i.e., checking account and saving account deposits) following the acquisition of the assets and accounts of one bank by another. On the theory that such deposits represent a valuable source of prospective income to a bank--inasmuch as the deposits are obtained at no or relatively low cost but can be continuously reinvested by the bank at higher rates of return--the acquiror bank sought to depreciate the portion of the purchase price attributable to the core deposits as an intangible asset. In an attempt to satisfy the requirements of § 1.167(a)-3, the acquiror bank employed sophisticated financial and statistical methods to estimate the average length of time that depositors would maintain their deposits and, based on these estimates, to calculate the total net value of the core deposits. 45 The Service responded that, in effect, the acquiror bank was attempting to depreciate the value of its expectation that the depositors would continue to patronize the bank--i.e., the value of the goodwill of the acquired bank. The Tax Court rejected the Service's position, clearly adopting the view that any intangible asset possessing a determinable life and an ascertainable value is, by definition, not goodwill. 46 Goodwill, by definition, has an indefinite life and is valued using the residual method. By contrast, the deposit accounts of the acquired banks could be, and were, identified; had limited lives that could be estimated with reasonable accuracy; and could be, and have been, valued directly with a fair degree of accuracy. Moreover, petitioner's deposit accounts were not self-regenerating. Therefore, the deposit accounts were assets with values separate and apart from goodwill. It is these characteristics which separate them from general goodwill and permits separate valuation. We conclude that petitioner has proven that the core deposits intangible at issue here has an ascertainable cost basis separate and distinct from the goodwill and going-concern value of the acquired banks. 47 Colorado National, 60 T.C.M. (CCH) at 789 (citations omitted). 48 We could attempt to distinguish Colorado National and Citizens & Southern from the instant dispute. We believe, however, that such an exercise ultimately would prove pointless and would be somewhat disingenuous. The unavoidable fact is that there does exist authority bolstering Morning Ledger's position. 49 It is equally clear, however, that Colorado National and the other cases referenced by Morning Ledger represent no more than a minority strand amid the phalanx of cases that have considered the definition and application of the term goodwill in the context of § 1.167(a)-3, and which support the Service's position. See, e.g., Brooks v. Commissioner, 36 T.C. 1128, 1133 (1961) (defining goodwill as  'the probability that old customers will resort to the old place'  (quoting Horton v. Commissioner, 13 T.C. 143, 148 (1949), acq. and petition dismissed, 180 F.2d 354 (10th Cir.1950))); Boe v. Commissioner, 307 F.2d 339, 343 (9th Cir.1962) (essence of good will is the expectancy of continued patronage, for whatever reason); Nelson Weaver Realty Co. v. Commissioner, 307 F.2d 897, 901 (5th Cir.1962) (good will [is] the probability that the old customers will resort to the old place); Commissioner v. Killian, 314 F.2d 852, 855 (5th Cir.1963) (quoting Nelson Weaver); Commissioner v. Seaboard Finance Co., 367 F.2d 646, 649 (9th Cir.1966) (quoting Boe and Brooks); Golden State Towel and Line Service, Ltd. v. United States, 373 F.2d 938, 941, 179 Ct.Cl. 300 (1967) (quoting Boe); Skilken v. Commissioner, 420 F.2d 266, 270 (6th Cir.1969) ( '[Goodwill] ... is constituted in the tendency of customers to return for trade to those with whom they are accustomed to deal.'  (quoting Burke v. Canfield, 121 F.2d 877, 880 (D.C.Cir.1941)); Winn-Dixie Montgomery, Inc. v. United States, 444 F.2d 677, 681 (5th Cir.1971) ([G]oodwill is acquired by the purchaser of a going concern where the 'transfer enables the purchaser to step into the shoes of the seller,'  (quoting Balthrope v. Commissioner, 356 F.2d 28, 32 n. 1 (5th Cir.1966)); Houston Chronicle Publishing Co. v. United States, 481 F.2d 1240, 1247 (5th Cir.1973), cert. denied, 414 U.S. 1129, 94 S.Ct. 867, 38 L.Ed.2d 754 (1974) (quoting Nelson Weaver, Boe, and Balthrope); Robins & Weill, Inc. v. United States, 382 F.Supp. 1207, 1214 (M.D.N.C.1974) (quoting Killian); Computing & Software, Inc. v. Commissioner, 64 T.C. 223, 233 (1975), acq., 65 T.C. 1153 (1976) (essence of goodwill is a preexisting business relationship, based on a continuous course of dealing, which may be expected to continue indefinitely); Los Angeles Central Animal Hospital, Inc. v. Commissioner, 68 T.C. 269, 273 (1977) (citing Houston Chronicle, Killian, Boe, and Computing & Software, Inc.); General Television, Inc. v. United States, 449 F.Supp. 609, 612 (D.Minn.1977), aff'd, 598 F.2d 1148 (8th Cir.1979) (the expectancy of continued patronage is the essence of goodwill); Illinois Cereal Mills, Inc. v. Commissioner, 46 T.C.M. (CCH) 1001, 1023 (1983), aff'd, 789 F.2d 1234 (7th Cir.1986), cert. denied, 479 U.S. 995, 107 S.Ct. 600, 93 L.Ed.2d 600 (1986) (citing Seaboard Finance Co. and Computing & Software, Inc.); Banc One Corp. v. Commissioner, 84 T.C. 476, 508 (1985), aff'd without opinion, 815 F.2d 75 (6th Cir.1987) (quoting Boe); Decker v. Commissioner, 864 F.2d 51, 54 (7th Cir.1988) (quoting Winn-Dixie); AmSouth Bancorporation and Subsidiaries v. United States, 681 F.Supp. 698, 712 (N.D.Ala.1988) (quoting Houston Chronicle). 50 A brief review of the application of this definition to the facts of a few of these cases demonstrates convincingly that the Service has more accurately characterized the prevailing case law in relation to the facts of the current dispute. In General Television, Inc. v. United States, 449 F.Supp. 609 (D.Minn.1977), aff'd, 598 F.2d 1148 (8th Cir.1979), for example, the taxpayer purchased two community antenna television (CATV) stations. Among the assets of the two stations were over 7,000 at-will subscriber contracts, which the taxpayer sought to depreciate as intangible assets. When the Service disallowed the depreciation deductions, the taxpayer paid the tax and filed a refund suit. The district court, viewing the totality of the subscriber contracts as essentially a customer or subscriber list, denied the taxpayer's request stating: 51 It is true that certain types of customer or subscriber lists have an ascertainable value separate and apart from goodwill. However, in the instances in which customer or subscriber lists have been determined to have an ascertainable value separate and apart from goodwill, the lists alone carried with them no expectancy of continued patronage. In the present case, what the plaintiff purchased was more than mere subscriber lists which could be used to identify potential customers; what it purchased was customer structures which included the expectancy of continued patronage. Therefore, because the purchases of the subscriber lists were actually purchases of customer structures with the expectancy of continued patronage and because the expectancy of continued patronage is the essence of goodwill, the subscriber lists constitute non-depreciable goodwill. 52 Id. at 611-12 (citations omitted). 53 Similarly, in Panichi v. United States, 834 F.2d 300 (2d Cir.1987), the Second Circuit upheld a district court ruling that a taxpayer who purchased a list of customers from a trash collection business was entitled to depreciate the value of the list. The court was careful to note that the list was depreciable because the taxpayer had not acquired it as part of a going concern. Thus, there was no possibility that the value of the list reflected the value of the seller's goodwill. Id. at 301-02. 8 54 Finally, it is worth noting the decision in AmSouth Bancorporation and Subsidiaries v. United States, 681 F.Supp. 698 (N.D.Ala.1988), a case which, like Colorado National, and Citizens & Southern considered the depreciability of core deposits, or customer deposit base, in the context of a bank acquisition. By opting for the traditional definition of goodwill in the tax context, AmSouth arrives at a holding directly at odds with the Tax Court's holdings in Colorado National, see supra at 564, and Citizens & Southern, see supra n. 8. While we recognize that the validity of AmSouth is questionable after the Eleventh Circuit's decision in Citizens & Southern, we find the reasoning of AmSouth sufficiently persuasive and well-articulated to merit quoting from the case at length. 55 When deposits are made, two accounting entries result. First, there is a debit (asset) entry for cash or its equivalent. Second, there is an equal and offsetting credit (liability) entry for the liability to the depositor. Any additional asset must be different from the cash thereby acquired. Its creation must, somehow, result from the expectation that the depositor will allow the cash, or its equivalent, to remain as an asset and that earnings will result therefrom. This expectation is akin to, if not tantamount, to the expectancy that old customers will resort to the old place of business or continued customer patronage. The additional asset does not just materialize out of nowhere. It is geared to the expectancy of the continued deposit relationship (patronage).... 56 For accounting purposes, a bank may be able to identify a customer deposit base even though it may not be separate and distinct from goodwill. To the extent that deposits remain after some contractually stipulated period, they result from, continued patronage. The mere fact that the deposits themselves are identifiable, does not make their value separate and distinct from goodwill. Other facets of bank activities such as safe deposit expectations, loan expectations, etc. could perhaps be similarly identified so as to phase out the concept of goodwill. There is no indication that tax law permits or contemplates this result. 57 Id. at 720 (citations omitted) (emphasis in original).