useful lives were 5 and 4.3 years, respectively, whereas petitioner's expert concluded that the useful lives for the same categories were 4 and 6 years, respectively. Likewise, with respect to the vendor and marketing agreements, the parties' experts both concluded that the useful lives were 5 and 3 years, respectively.

The similarities result from the fact that both parties' experts used petitioner's account life experience in their analysis because there was a paucity of information available from Rose regarding the acquired accounts. The major difference between the experts' approaches as to useful life is attributable to their categorization of the accounts. Although both experts used petitioner's useful lives experience, they used different categories within which to analyze the useful lives of the accounts. Respondent's expert sought to replicate Rose's categories for its accounts, whereas petitioner's expert used petitioner's categorization.

That difference resulted in respondent's expert's carving out one more category than petitioner's expert had. Respondent's expert used a 10.3-year life in a category that did not exist in petitioner's business practice or nomenclature. In addition to those differing approaches, the parties disagree about the interpretation and application of a regulation providing for approaches to be used in determining the useful lives of acquired assets.

In particular, section 1.167(a)-1(b), Income Tax Regs., requires the use of a taxpayer's experience with respect to the useful lives of similar property in order to determine the useful life of an acquired asset.22 In these cases, petitioner and respondent both used petitioner's useful life experience to determine the useful life of the customer accounts acquired from Rose.23 The parties disagree about the degree

22 Sec. 1.167(a)-1(b), Income Tax Regs., in pertinent part, provides the following standards and approach for determining the useful life of "similar" assets:

For the purpose of section 167 the estimated useful life of an asset is not necessarily the useful life inherent in the asset but is the period over which the asset may reasonably be expected to be useful to the taxpayer in his trade or business or in the production of his income. This period shall be determined by reference to his experience with similar property taking into account present conditions and probable future developments. *** If the taxpayer's experience is inadequate, the general experience in the industry may be used until such time as the taxpayer's own experience forms an adequate basis for making the determination. ***

23 Respondent argues that Rose's experience should have been used, but that respondent's expert was forced to use petitioner's data because insufficient Rose data was available.

of similarity necessary before a taxpayer can use its own experience to determine the useful life of an acquired asset. Respondent contends that petitioner is not entitled to use its own experience because it has not shown that the acquired Rose accounts are similar to petitioner's accounts. To that end, respondent argues that historical information was not available on the Rose accounts and that the information that was available reflected that Rose's active accounts had declined and were older than petitioner's and that there were categorical differences between them.24

Petitioner contends that Mr. Dodds's testimony regarding the similarity of petitioner's and Rose's accounts was sufficient to meet the spirit and letter of the subject regulation. Mr. Dodds's uncontradicted testimony reflected that there were some differences in the categorization of accounts25 and in the individual trading volume or activity of customers, but that the clientele of both firms was substantially similar. Both were discount brokerages, and they competed in the same market for their clientele.

Petitioner also notes that respondent's expert's report, using petitioner's preacquisition revenue experience, resulted in predictions of the postacquisition revenue stream from Rose accounts with better than 80-percent accuracy in early years and 98-percent accuracy for the third and fourth years after acquisition. Further, petitioner highlights the fact that it was the leader in the discount broker industry with a 42.4percent market share. That fact made petitioner's experience, within the meaning of the regulation, sufficiently “adequate” to determine the useful lives that the Rose accounts were likely to have in the context of petitioner's business.

Ultimately, the disagreement between the parties boils down to the degree of similarity needed to invoke the use of one's own experience regarding useful life. Respondent contends that a high degree of similarity is required, whereas petitioner's approach implies that a reasonable amount of

24 Respondent's argument that the Rose customers varied substantially from petitioner's customers is, to a great extent, paradoxical. Respondent acknowledges that there is insufficient Rose data. Notwithstanding that acknowledgment, respondent saw fit to argue that the Rose accounts are dissimilar from petitioner's accounts.

25 Specifically, Rose had more institutional customers. Respondent also argues that petitioner's expert (Mr. Knoblick) used shorter lives in his analysis than were estimated by Mr. Dodds in connection with the preacquisition analysis of Rose. We pay little heed to respondent's point because Mr. Knoblick's analysis was based on an actuarial approach, comprising a complete historical analysis of all of petitioner's accounts.

similarity is sufficient. The regulation merely uses the term "similar property" without describing any particular degree of similarity.

As a practical matter, petitioner's experience with discount brokerage customer accounts is vast. The record we consider, including Mr. Dodds's testimony, does not differentiate, in any meaningful way, among the accounts or customers of the various brokers within the universe of discount brokerages. On that basis alone, we believe that it would be prudent to hold that the Rose accounts were sufficiently similar to permit petitioner to invoke the use of its useful life experience under section 1.167(a)–1(b), Income Tax Regs.26

Petitioner also references a case where this Court held that comparable assets were sufficient to meet the "similar" requirement. In Colo. Natl. Bankshares, Inc. v. Commissioner, T.C. Memo. 1990-495, affd. 984 F.2d 383 (10th Cir. 1993), the Court recognized that NOW bank accounts were relatively new with little data available on their useful life. Recognizing that fact, this Court held that checking and savings accounts were similar to NOW accounts for purposes of section 1.167(a)-1(b), Income Tax Regs. We have little difficulty using the same reasoning here; i.e., discount brokerage customers are generically similar enough for purposes of the regulation to allow petitioner to use its own data to determine the useful lives of the acquired customer accounts.

Respondent also relies on the Colo. Natl. Bankshares case with respect to the method used to analyze the useful life of acquired bank deposits. Respondent points out that the Court relied on the historical data on deposits where it was available. Where the data was missing, however, the life of the acquired deposits was estimated on the basis of the historical data of other banks. The object lesson of that rationale, however, is that historical data of the acquired asset is not essential to determining similarity. Indeed, the regulation itself permits industry experience as a substitute.

Respondent also argues that Colo. Natl. Bankshares shows that deposits at different banks "behaved" differently and, on the basis of that fact, respondent contends we should expect

26 Petitioner also notes that the regulation provides that in situations where a taxpayer's experience is not adequate, industry experience is to be used. In that regard, petitioner states that no such industry study exists but rationalizes that petitioner's experience would dominate any industry study because of its 42.4-percent market share.

that Rose's discount brokerage accounts would not necessarily be similar to those of petitioner. We cannot rely on such analogies without some factual predicate in this record. The record we consider, especially Mr. Dodds's testimony, supports a contrary factual finding.

Central to the structure and approach of section 1.167(a)– 1(b), Income Tax Regs., is the use of the acquiring taxpayer's experience to determine useful life because the acquired asset will probably perform like similar property in the context of the acquirer's business. Setting the similarity standard at an extremely high level, as contended for by respondent, could undermine the intended purpose of the regulation. There is little question that petitioner's customer accounts were sufficiently similar to the acquired accounts to permit petitioner to use section 1.167(a)-1(b), Income Tax Regs., in determining the useful lives of the acquired accounts. We sustain the useful lives petitioner derived.

Considering the parties' experts' approaches, we conclude and hold that petitioner has shown sufficient similarity to use its own useful life data and categorization to determine the useful lives of the acquired Rose accounts. In addition, we hold that petitioner's approach in deriving the useful lives of the acquired Rose accounts is reasonable and appropriately reflects the useful lives for purposes of amortization.

Reiterating, for the acquired cash and margin accounts, Mr. Knoblick performed an actuarial study of petitioner's comparable account activity. He developed a survival curve reflecting the rate of retirement and the age of the assets. The starting and ending dates for all accounts in existence from 1975 to 1989 were reviewed. On the basis of that analysis he determined that cash and margin customer accounts had useful lives of 4 and 6 years, respectively.

Mr. Knoblick used that same methodology to determine the useful life of the pension customer accounts to be 14.66 years (rounded to 15). For the same reasons as stated for cash and margin accounts, we accept petitioner's use of 15 years for the pension customer accounts. We also note that we likewise accept and hold that the fair market value of the pension accounts was $2,110,000.

The value of Rose's institutional customer accounts, which represented a small portion of Rose's customer accounts in actual numbers and revenue, was allocated between the

intangible assets denominated "Chase Vendor Agreements" and "Chase Priority Marketing Access Agreement". The vendor and marketing agreements were valued, as intangibles, at $592,000 and $690,000, respectively, and were assigned tax bases of $575,000 and $671,000, respectively. We also find for petitioner on those valuations and useful lives.27

In summary, we sustain the values and useful lives petitioner advocates.28

To account for concessions of the parties and to reflect the foregoing,

Decisions will be entered under Rule 155.

CAPITAL BLUE CROSS AND SUBSIDIARIES, PETITIONER v.
COMMISSIONER OF INTERNAL REVENUE,

RESPONDENT

Docket No. 13322-01.

Filed March 12, 2004.

As part of its statutory conversion under sec. 1012(a) and (b) of the Tax Reform Act of 1986, Pub. L. 99-514, 100 Stat. 2390, from a tax-exempt to a taxable entity, petitioner generally was entitled to step up its tax basis in its assets to their Jan. 1, 1987, fair market value. Held, among other things, for 1994: (1) The basis step-up provision of sec. 1012(c)(3)(A)(ii) of the Tax Reform Act of 1986, Pub. L. 99– 514, 100 Stat. 2394, is not limited to "sale or exchange" transactions; and (2) because petitioner's valuation of its health insurance group contracts did not constitute a contract-by-contract valuation, did not establish a credible discrete value for each contract, and is otherwise deficient, claimed loss deductions under sec. 165, I.R.C., in the cumulative total amount of $3,973,023 relating to petitioner's 376 health insurance group contracts that were terminated in 1994 are not allowable.

27 We note that our findings and holdings in these cases result in a total fair market value for the acquired Rose customer accounts of $12,951,000, which was adjusted to $12,587,000 for purposes of allocating petitioner's acquisition cost to the tax bases of the assets under petitioner's sec. 338 election.

28 Because we have sustained petitioner's position with respect to the values and useful lives of the acquired intangible assets, it is unnecessary to consider petitioner's argument that it is entitled to an abandonment loss with respect to the assets it disregarded in connection with the acquisition of Rose.