Appeal from decision of United States Tax Court, Sterrett, J., that appellee Goodson-Todman is entitled to receive Investment Tax Credit with respect to the production costs of its tapes of the television program "To Tell The Truth." Affirmed.
This is an appeal from a decision of the United States Tax Court, Sterrett, J., that appellee Goodson-Todman is entitled to receive the Investment Tax Credit (ITC) with respect to the production costs of its tapes of the television program "To Tell The Truth" (TTTT). Goodson-Todman Enterprises v. Commissioner, 84 T.C. 255 (1985). We affirm, but on grounds different from those relied on by the tax court.
At issue in this case is the application of section 48(k)(1)(B) of the Internal Revenue Code, 26 U.S.C. § 48(k)(1)(B) (1982), and Treasury Regulation 1.48-8 (a)(3)(iii), Treas. Reg. § 1.48-8(a)(3)(iii) (1979), promulgated thereunder, to television game shows as a class and to a particular game show. We begin out analysis with the statute.
The Tax Reform Act of 1976, Pub. L. No. 94-455, 1976 U.S. Code Cong. & Ad. News (90 Stat.) 1520, 1591-96, amended section 48 of the Internal Revenue Code by creating a new subsection (k) which comprises special rules for the application of the ITC to motion picture and television films. Prior to the amendment, it has been established that motion pictures and television films were tangible personal property eligible for the ITC, Walt Disney Productions v. United States, 327 F. Supp. 189 (C.D.Cal. 1971), aff'd and modified, 480 F.2d 66 (9th Cir. 1973), cert. denied, 415 U.S. 934, 39 L. Ed. 2d 493, 94 S. Ct. 1451, 181 U. S. P. Q. (BNA) 1 (1974). However, the question of how to determine the useful life of such films was unsettled. Useful life was important, because under then existing law no ITC was available with respect to property with a useful life of less than three years; one-third credit was available for property of at least three years useful life; the credit increased to two-thirds with a useful life of at least five years; and a full credit was available only for property whose useful life was seven years or more. The 1976 amendment was designed, inter alia, to eliminate the useful life question:
Due to the uncertainties of present law with respect to the questions of useful life and predominant foreign use, it is often difficult to determine whether a film is entitled to a full credit, a partial one-third or two-thirds credit, or possibly to no credit. It is desirable to clear up these issues, in order to avoid costly litigation with respect to the past, and to allow accurate investment planning for the movie industry in future years.
To achieve the objective set out above, the committee amendment, for past years, allows taxpayers to determine their investment credit on a film-by-film basis in accordance with certain statutory rules prescribed under the bill with respect to useful life and predominant foreign use, or to elect to take a 40-percent compromise credit for all their films, regardless of the actual useful life or foreign use of any particular film.
As to the issue of useful life [of future films], taxpayers many [sic] take a two-thirds credit on all their films (regardless of the useful life of particular films), or they may elect to determine useful life on a film-by-film basis.
S. Rep. No. 94-938, 94th Cong., 2nd Sess. 185-86, reprinted in 1976 U.S. Code Cong. & Ad. News 3439, 3616-17 (Senate Report). See H.R. Rep. No. 94-658, 94th Cong., 2nd Sess. 188-89, reprinted in 1976 U.S. Code Cong. § Ad. News 2897, 3082-83 (House Report).
The amended statute provided that the ITC would be available with respect to motion picture films or videotapes "only if such film or tape is new section 38 property (determined without regard to useful life) which is a qualified film." 26 U.S.C. § 48(k)(1)(A)(i) (emphasis added). "Qualified film" was defined as follows:
For purposes of this subsection, the term "qualified film" means any motion picture film or video tape created primarily for use as public entertainment or for educational purposes. Such a term does not include any film or tape the market for which is primarily topical or is otherwise essentially transitory in nature.
26 U.S.C. § 48(k)(1)(B) (emphasis added). The intended meaning of the underscored phrase is at the heart of this case.
The legislative history provides some clues as to Congress' intent. There is language indicating that Congress saw the set of "topical" and "transitory" films as generally contained within the old set of films with useful lives of less than three years: "A taxpayer is not to receive a credit for any films of a transitory or topical nature (because almost all of these films have a useful life of less than three years)." House Report at 196, reprinted in 1976 U.S. Code Cong. & Ad. News at 3090; Senate Report at 193, reprinted in 1976 U.S. Code Cong. & Ad. News at 3625. This, however, does not solve our problem. It does not show how far back from the old, highly litigable three year line Congress chose to take its stand. The answer to that precise question appears in the following passage:
For the future, as a general rule, under the committee bill, taxpayers are to receive two-thirds of a full credit for all their films regardless of the actual useful life (or foreign use) of any particular film. This rule will apply to all films placed in service (i.e., initially released for public exhibition in any medium[)] in taxable years beginning after December 31, 1974, regardless of whether any particular film had a useful life of 7 years or more (so that it would be entitled to a full credit if judged on an individual basis), or less than 3 years (so that it would not be entitled to any credit if judged separately). The credit is to be available only for "qualified films", i.e., motion picture films or television films or tapes created primarily for use as public entertainment (thus, for example, excluding industrial training films). Also, the credit would be available for TV pilot films and dramatic or comedy series, such as "Mod Squad" or "The Mary Tyler Moore Show." However, the credit would not be available for films which were topical or transitory in nature, such as news shows, interview shows such as "Johnny Carson" or "Firing Line", or films or tapes of sports events, even though some of these shows might be shown in subsequent years.
House Report at 189, reprinted in 1976 U.S. Code Cong. & Ad. News at 3083-84 (emphasis added). See Senate Report at 186-87, reprinted in 1976 U.S. Code Cong. & Ad. News at 3617-18.
Congress chose to define "topical or transitory" by listing programs which fit that description and others which did not. The examples chosen indicate that Congress meant to establish a new line well short of that which had caused the furor under the old law. This approach was consistent with the stated objective of avoiding costly litigation on the useful life issue. News reports, "Firing Line" interviews and broadcasts of sports events generally become dated almost as soon as they are aired. At least to the extent that it is an "interview show" dealing with current events in the world and in personalities' lives, "The Tonight Show" also becomes "old news" very quickly.*fn1 The comment regarding broadcasting of such shows "in subsequent years" implies that such shows' useful lives would normally be less than one year. By limiting its prohibition to quickly dated programs like these, Congress sought to lay the troublesome useful life issue to rest: only tapes with useful lives clearly much shorter than three years would be barred; the remainder, tapes whose status might have been uncertain under prior law, would qualify for the ITC.
On April 5, 1979, the Commissioner, pursuant to 26 U.S.C. § 38(b) (repealed 1984), promulgated new regulations designed to "provide necessary guidance to the motion picture and television industry for compliance with the law" regarding the ITC. 44 Fed. Reg. 20,416 (1979). Included in the package of regulations was the following definition:
Topical or transitory films and tapes.  The term "qualified film" does not include any film or tape the market for which is primarily topical or is otherwise essentially transitory in nature.  A film or tape is topical or essentially transitory in nature if it primarily deals with events and personalities of current interest at the time the film or tape is placed in service.  It does not matter that a film or tape which is topical or essentially transitory in nature may be shown in subsequent years or is actually shown in subsequent years.  These films or tapes include news shows such as the evening news and news specials relating to current affairs, interview shows such as "The Tonight Show" or "Meet the Press", game shows, award shows, and shows consisting of sporting events.  Similarly, variety shows do not qualify for the credit since they present entertainers primarily as personalities of ...