March 01, 2014


In the July 2013 opinion issued by the Court of Federal Claims in Deseret Management Corporation v. The United States (the “Opinion”)1 reiterated the conclusions of existing tax court opinions regarding goodwill in broadcast transactions and emphasized the importance of being able to qualitatively and quantitatively ascribe value to goodwill. While the case itself was centered around the like-kind provisions of Section 1031 (“§1031”) of the Internal Revenue Code of 1986, as amended (the “Code”), the Opinion provides some valuable insight into the tax court’s view of goodwill and the appropriate valuation methodology used to determine the level of goodwill in a broadcast transaction. Further, given the increase in merger and acquisition (“M&A”) activity in the broadcasting industry over the past several years, the allocation of assets in broadcasting transactions is once again a concern for broadcasters. This article will examine the valuation methodology used to value Federal Communications Commission (“FCC”) licenses and goodwill in broadcasting transactions and highlight the key issues addressed in the Opinion regarding the exchange of assets of radio station KZLA (the “KZLA Exchange”).

In a broadcasting transaction, the primary assets of the station (or the business) include tangible assets (i.e., tower, antenna, broadcast equipment), intangible assets (i.e., FCC licenses, programming agreements, advertiser relationships, retransmission consent agreements (television only), and goodwill. As with any acquisition, the allocation of value amongst the various asset categories has both tax and financial reporting implications, which can be a sensitive issue for both the buyer and the seller. Most broadcast transactions are structured as asset deals, meaning the transaction is taxable, triggering capital gains and other tax implications for the buyer and the seller. In a financial reporting context, the allocation of value between amortizable and non-amortizable intangible assets, particularly for public companies, can be a more sensitive subject given the impact on earnings. As a result, the valuation methodologies and the underlying assumptions used to assign value to the individual assets can have a meaningful impact on the financial performance of the business.

Background on KZLA Exchange

KZLA-FM (“KZLA”) is an FM radio station licensed to Los Angeles, California. On October 6, 2000, Deseret Management Corporation, through its subsidiaries Bonneville International Corporation and Bonneville Holding Company (collectively, the “Sellers”) and Emmis Communications (the “Buyer”) executed an Asset Exchange Agreement (the “Agreement”), in which the parties agreed to exchange the assets of KZLA for those of four stations in the St. Louis radio market. The transaction was structured as a like-kind exchange, as outlined in the provision of §1031 of the Code.

Per §1031, the buyer is allowed to postpone paying tax on the gain if the proceeds of the sale are reinvested in similar property, as part of a qualifying like-kind exchange.2 “Like-kind” broadly refers to property of the same nature, character, or class, with certain exceptions as explicitly defined in §1031.3 Further, certain types of property are excluded from the “like-kind” definition, including inventory, stocks, bonds, other securities or debt, and partnership interests, among others.4 The issue at the heart of the KZLA Exchange was whether or not KZLA possessed goodwill.5 Deseret Management Corporation (the “Plaintiff”), claimed that KZLA did not possess goodwill and therefore, under §1031, no capital gains taxes were required to be paid. The United States (the “Defendant”), claimed that a portion of the value of KZLA should be allocated to goodwill, in which case that amount should be taxed as capital gains.

In determining whether or not KZLA possessed goodwill at the time of the transaction, the testifying experts employed differing methodologies and had opposing valuation opinions as to the ultimate value or existence of goodwill.6 The Plaintiff argued that the station possessed no goodwill and that the residual value should be attributed to the station’s FCC license. The Plaintiff’s expert did not attempt to directly value the FCC license of KZLA (or its goodwill) and took a residual approach, assigning the remaining value7 to the FCC license. The Defendant’s expert took a direct approach to valuing the FCC license, with the difference between the enterprise value and the identified tangible and intangible assets (including the FCC license) allocated to goodwill. The Plaintiff’s approach resulted in no goodwill, whereas the Defendant’s initial approach indicated the presence of goodwill.

Role of FCC License in Broadcast Transactions

  • An FCC license gives the owner the right to broadcast a radio signal in an interference-protected area around the transmitter site of the station. Without the rights to this license, the owner of the station would have to find an alternative means to distribute content to its audience. Over the past few decades, a number of different content-delivery platforms have been introduced and gained popularity (cable, satellite radio and television, the Internet, etc.), resulting in the content itself increasing in value relative to the content-delivery platform as a percentage of the total intangible gap.8 However, particularly with radio stations, the FCC license continues to be a primary intangible asset of the station.9

Court’s Opinion Regarding Goodwill in the KZLA Exchange

In rendering its opinion, the court ultimately decided that there were qualitative indications that KZLA may have possessed some degree of goodwill with respect to its audience, and relatedly, its advertisers. As stated in the Opinion, “goodwill” is neither specifically referenced in §1031 of the Code, nor defined in any Treasury Regulation thereunder. The term is employed elsewhere in the Code, most notably in Section 197, dealing with the amortization of intangibles. The regulations under that Section define “goodwill” as “the value of a trade or business attributable to the expectancy of continued customer patronage,” which expectancy may be due “to the name or reputation of a trade or business or any other factor.” See Treas. Reg. §1.197-2(b)(1). The court asserted that there is no “black-and-white” distinction as to whether or not KZLA possessed goodwill, rather that the “truth is more grey” and stated that an attempt to indirectly quantify the level of goodwill was necessary.

Depending on facts and circumstances, goodwill is often a material asset acquired in a broadcast transaction, particularly in transactions of stations with substantial operating cash flow or a history of above average ratings performances. Goodwill is typically a residual calculation, determined by the excess of the purchase price over the assessed values of the identifiable financial, tangible and intangible assets. The level of value attributable to goodwill in a broadcast transaction can vary significantly across stations. Further, because there is no way to directly value goodwill independent of other assets, we often rely on qualitative support to test the reasonableness of the level of calculated or residual goodwill.

Quantification of Goodwill in the KZLA Exchange

To quantify the amount of goodwill in the KZLA Exchange, the court ultimately relied upon the approach used by the Defendant, which relied on the residual approach to determine the level of goodwill by directly valuing the FCC license through a Greenfield Approach.10

However, the value of the FCC license as determined by the Defendant’s expert was ultimately flawed as numerous errors were found. The court identified issues with the expert’s selection of a discount rate, various mathematical errors, and an incorrect calculation of the tax amortization benefit. After the court adjusted for even one, let alone all, of the errors in the Defendant’s expert analysis, the analysis indicated a value of zero for KZLA’s goodwill. Ultimately, the court concluded that the value of KZLA’s goodwill was zero, as originally reported post-Transaction by the Plaintiff. However, the court confirmed that the residual value methodology utilized by the Defendant is “the proper method of valuing goodwill.”

The Greenfield Approach

  • The Greenfield Approach is a modified Income Approach, whereby a hypothetical scenario that assumes a revenue base of zero as the starting point, as though the operations of the station would begin on the valuation date. This approach effectively strips out any “going-concern” value (or value from the existing advertisers), as those revenues are excluded from the analysis.
  • In practice, the application of the Greenfield Approach can prove challenging given the difficulty in ascertaining the necessary assumptions, and the ultimate sensitivity of the valuation analysis to those assumptions. The analysis must consider key factors such as a station’s market share (typically determined through a review of the station’s historical audience shares and power ratios, as well as metrics for stations with similar signals in the market), operating costs, the capital costs associated with putting the station on the air, and determining the period over which a mature revenue share could be achieved. These types of inputs or assumptions can be difficult to determine, as they may be materially different than the company’s current operations and business plans. Also, finding market benchmarking data to validate assumptions can be challenging. Further, as with any Income Approach, discount rates and long-term growth rate assumptions add additional sensitivity to those inputs.11
  • However, despite these challenges, the Greenfield Approach continues to be the preferred methodology of the U.S. tax courts, the Securities and Exchange Commission (“SEC”), and the American Institute of Certified Public Accountants (“AICPA”) in valuing FCC licenses.


The challenges surrounding the valuation of FCC licenses and goodwill have been brought to the forefront given the increase in M&A activity in the industry. However, the court’s opinion in Deseret Management Corporation v. The United States provides a recent affirmation in the use of a “Greenfield” or direct methodology to value FCC licenses and goodwill in broadcast transactions. Because the specific tangible assets, intangible assets, and residual goodwill will vary by transaction due to station-specific attributes, it is important for the acquirer, their auditors, and valuation specialists to understand the valuation intricacies involved in valuing the FCC licenses and other broadcast assets so that the allocation of assets is properly accounted for in both a tax and financial reporting context.


1 See Deseret Management Corporation v. U.S., No. 09-273T (Fed. Cl. July 31, 2013).
3 Ibid.
4 Ibid.
5 We note that the Opinion also included a ruling as to whether assets placed in service were properly classified. However, this issue is not the subject of this article. The second issue in the case involved the proper classification of certain assets under the depreciation rules provided by Sections 167 and 168 of the Code. This issue is not addressed in this article.
6 Both parties agreed on the enterprise value of KZLA, the value of its tangible assets, and the value of its intangible assets (apart from the station’s FCC license and any goodwill).
7 In the case of KZLA, the experts (and the court) agreed on the enterprise value of KZLA, the value of its tangible assets, and the value of its intangible assets (apart from the station’s FCC license and any goodwill). Therefore, the difference between the enterprise value and the tangible and intangible assets (including the FCC license) would be attributable to goodwill.
8 The intangible gap refers to the intangible assets and goodwill in a transaction or what remains of the purchase price after allocation to financial and tangible assets.
9 With television stations, the FCC license is also an important asset, however, network affiliation agreements and retransmission consent agreements also account for significant value.
10 The use of the Greenfield Approach to value the FCC license is also consistent with the ruling in Jefferson-Pilot, 98 T.C. at 450-55.
11 For a more detailed discussion of the Greenfield Approach, refer to Spectrum Licenses: Valuation Intricacies, SRR Journal, Spring 2011.