Deseret Management Corporation v. United States, 112 Fed. Cl. 438

Deseret Management Corporation (Deseret) and its subsidiary Bonneville International (BIC) swapped Los Angeles station KZLA-FM to Emmis in October 2000 as part of an asset exchange valued at $185 million; BHC received the FCC license, BIC received other station assets. Parties stipulated tangible assets = $3,384,637 and other intangibles (excluding FCC license and goodwill) = $4,858,317.
BIA Consulting appraised KZLA post-closing, assigned almost the entire residual to the FCC license and allocated no value to goodwill; Emmis retained the country format but replaced many on‑air personalities and implemented marketing changes.
IRS audited Deseret, asserted that $73.3 million of the exchange price represented goodwill (taxable), and assessed deficiencies; Deseret paid and filed a refund suit in the Court of Federal Claims.
Separately, Deloitte reviewed BIC’s fixed assets (placed in service 1988–2000) and requested accounting changes; IRS disagreed on classification of 32 assets (building/structural components vs. broadcasting or office property), affecting depreciation lives under §167/§168 and Rev. Proc. 87-56.
Trial focused on (1) whether KZLA’s transfer included appreciable goodwill (which is non-like-kind under §1031) and (2) proper class lives for the disputed assets (whether reclassified to shorter recovery periods).

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether KZLA’s exchange included appreciable goodwill for §1031 purposes	KZLA had no appreciable goodwill; residual purchase price is entirely attributable to the FCC license and identified assets (so exchange was like‑kind)	A portion of the residual should be allocated to goodwill (taxable capital gain); FCC license value is lower than plaintiff claims, leaving room for goodwill	Court held any goodwill was negligible and Emmis did not transfer appreciable goodwill; exchange did not include significant goodwill (plaintiff prevails)
Whether 32 assets placed in service 1988–2000 were misclassified as nonresidential real property (long life) rather than shorter‑life personal/broadcasting assets	Many items (tenant improvements, A/C, ductwork, transmitter‑housing structures) are personal/broadcasting assets (Classes 0.11 or 48.2) with shorter lives	Commissioner treated most as building or structural components (longer recovery)	Court allowed reclassification for five specific A/C/transmitter cooling assets (reclassify to shorter lives) but denied reclassification for the other disputed assets for failure of proof

United States v. Janis, 428 U.S. 433 (procedural presumption of IRS assessment correctness in refund suits)
Welch v. Helvering, 290 U.S. 111 (taxpayer burden of proof in refund suits)
Newark Morning Ledger Co. v. United States, 507 U.S. 546 (qualitative definition of goodwill as expectancy of continued patronage)
Jack Daniel Distillery v. United States, 379 F.2d 569 (residual method and valuation principles for goodwill)
R.M. Smith, Inc. v. Commissioner, 591 F.2d 248 (residual valuation and limits where bargain exists)
Thor Power Tool Co. v. Commissioner, 439 U.S. 522 (tax accounting principles do not override Code)
Republic Steel Corp. v. United States, 40 F. Supp. 1017 (Ct. Cl.) (parties’ negotiated allocation may show no value allocated to goodwill)