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states that business reasons, not franchise agreements,
ultimately determine equipment acquisitions. Respondent argues
that, without more information regarding the property actually
placed in service during the audit years, there is an issue as to
whether all such property was "necessary to carry out" the
Livonia Franchise Agreement.
Recently, in Southern Multi-Media Communications, Inc. v.
Commissioner, 113 T.C. 412 (1999), we considered whether certain
improvements to cable television systems were "necessary to carry
out" the cable franchise agreements and, therefore, eligible for
transition ITC under section 204(a)(3). The case involved
"rebuilds" (replacement of cable equipment to effect an increase
in the maximum channel capacity of the system) and "line
extensions" (extensions of the system to additional customers).
We determined that neither the franchise agreements nor any other
pre-1986 contracts specifically required the rebuilds or the line
extensions. We, therefore, held that those improvements were not
"necessary to carry out" the franchise agreements and, on that
basis, denied transition ITC to the taxpayer.
The taxpayer had argued that the rebuilds and line
extensions were made necessary by language in the franchise
agreements requiring taxpayer to maintain the cable systems in a
state-of-the-art condition. We rejected the taxpayer’s argument
on the basis that "[t]he word ‘necessary’ connotes essential,
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