Broad. Measurement Bureau, Inc. v. Comm'r of Internal Revenue

Decision Date10 May 1951
Docket NumberDocket No. 21519.
Citation16 T.C. 988
PartiesBROADCAST MEASUREMENT BUREAU, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
CourtU.S. Tax Court

OPINION TEXT STARTS HERE

Petitioner is a non-profit membership corporation whose members are the National Advertiser, Inc., and the American Association of Advertising Agencies. Petitioner has been engaged in the compilation and distribution of nationwide surveys measuring radio station and network audiences according to a uniform standard. Its first nationwide survey of stations and networks, Study No. 1, was commenced in March 1946 and was financed by subscription fees paid both by individual stations and networks. Petitioner's receipts for the fiscal year ended June 30, 1946, consisted entirely of such subscription fees paid over to it by subscribers under subscription contract which provided that petitioner was obligated to use the fees to meet the costs of Study No. 1 and return any unexpended fees to subscribers in the form of refunds or credits on future studies after the close of the study. At the end of the fiscal year June 30, 1946, petitioner's receipts exceeded the expenses of Study No. 1 in that period. Study No. 1 came to a close on June 30, 1947, leaving an excess of subscription fees over expenses which petitioner accrued as a liability on its books. On the facts, held:

1. Petitioner did not realize any income in the fiscal year ended June 30, 1946, because the subscription fees it received in that year constituted a fund in the nature of a trust fund in its hands conditioned that the permissible use thereof be confined to expenditures for certain specified purposes and that the excess thereof, if any, be refunded or credited to the subscribing contributors thereto.

2. Petitioner was not liable for a 5 per cent delinquency penalty for failure to timely file its excess profits tax return for the fiscal year ended June 30, 1946. Laurence F. Casey, Esq., for the petitioner.

Sheldon V. Ekman, Esq., for the respondent.

Respondent determined deficiencies in petitioner's income, declared value excess-profits, and excess profits taxes for the fiscal year ended June 30, 1946, in the respective amounts of $18,355.08, $13,116.87, and $29,414.92, together with a penalty of $1,470.75 for failure to timely file the excess profits tax return for that year. Three questions are presented for our determination in this proceeding:

1. Did petitioner realize any income in the fiscal year ended June 30, 1946?

2. If petitioner realized income in the fiscal year ended June 30, 1946, was it exempt from income and excess profits taxes thereon under sections 101(7) and 727(a) of the Internal Revenue Code, respectively?

3. Was petitioner liable for a 5 per cent penalty for failure to file its excess profits tax return for the fiscal year ended June 30, 1946, within the time prescribed by law?

FINDINGS OF FACT.

Part of the facts were stipulated and are so found.

Petitioner (hereinafter sometimes called 7) is a membership corporation organized under Delaware laws on December 28, 1944. The incorporators of petitioner were J. Harold Ryan, president, National Association of Broadcasters (hereinafter referred to as NAB); Paul b. West, president, Association of National Advertisers, Inc., (hereinafter referred to as ANA); and Frederick R. Gamble, president, American Association of Advertising Agencies (hereinafter referred to as AAAA). It was stated in its certificate of incorporation that petitioner ‘shall be a non-profit membership corporation and shall have no capital stock.‘ Petitioner never authorized any capital stock. As stated in its certificate of incorporation, the purposes for which petitioner was organized were

To foster, promote and conduct research and investigations to establish measurements of broadcasting of all types; to develop standards for the measurement practices in connection with the collection, tabulation, evaluation, and authentication of audience data with respect to the entire broadcasting industry; to prepare and issue statements and reports of audience data of the broadcasting industry and to perform other acts and services which will further the mutual interests of advertisers, advertising agencies and the broadcasting industry in the accurate and scientific evaluation of the broadcast advertising medium.

At all times since its organization petitioner has had only three members, the NAB, the ANA, and the AAAA. From its organization and throughout the taxable year involved, the control and management of petitioner has been vested, pursuant to petitioner's by-laws, in a board of 21 directors appointed as follows: each member appointed 6 directors, and in addition to the 18 directors so appointed, the respective presidents of ANA, AAAA, and NAB served as directors ex officio. The by-laws provided that the by-laws should be amended or modified only by a majority vote of the directors present, including the affirmative vote of at least three directors appointed by each member.

The chief reason for the organization of petitioner was to meet a crying need for a uniform reliable standard of radio audience measurement for individual stations and networks. Radio broadcasting grew at a rapid pace over a period of 25 years so that by 1945 the Government had licensed about 900 stations. From the very first a need was felt in the broadcasting industry for some sort of acceptable measurement whereby it could be determined how many people were listening to the radio signal of a given station. Competition between radio stations for advertising business became very keen. Stations and networks in the same area laid claim to the largest audience in the area, so that conflicting claims resulted. Different measurement techniques were used by various stations or by concerns which they hired. Due to inadequate preparation and poor formulae, the results were unreliable in many instances. The effect of this chaotic condition on advertisers was that they came to believe none of the conflicting claims of the stations. A good many advertisers refused to send programs into certain areas where the claims were in greatest conflict. This condition was harmful to the broadcasting industry which was in competition with such other advertising media as newspapers and billboards, which had authenticated means of proving their circulation.

The immediate background for petitioner's formation started in the summer of 1944 when the research committee of NAB agreed upon a technique for a radio station measurement which it recommended to the broadcasting industry. In August 1944 the NAB convention adopted the program for station audience measurement recommended by the NAB research committee, authorized the NAB board to proceed with the formation of a bureau to carry it out, and to negotiate with AAAA and ANA to solicit their cooperation in the organization of such a bureau. Thereafter Hugh Feltis, chairman of NAB research committee, met with committees representing ANA and AAAA. These committees and later their respective associations, approved the plan proposed by NAB for a uniform method for determining station audiences and the establishment jointly by the three associations of a bureau to conduct such measurements based upon the number of radio families which listened to a station at least once during the weekly broadcast cycle, the information to be obtained by a controlled, sample, mailed-ballot research. Thereafter the presidents of the respective associations, acting for their associations, executed and filed petitioner's certificate of incorporation, and organization of petitioner was completed on or about January 1, 1945. Prior to the formation of petitioner, it was understood not only by the three associations but by the broadcasters themselves that the entire expense of the measurement project and operations would be borne through subscriptions by the latter.

In 1945 and 1946 BMB as well as NAB and various national advertisers and advertising agencies carried on an intensive sales campaign to enlist stations and networks to become subscribers in order to make the BMB surveys as valid as possible and give them the greatest possible integrity as a nationwide report. By January 1, 1946, out of a total of approximately 900 licensed stations in this Nation, 605 had become BMB subscribers. By June 30, 1947, the total number of subscribers to BMB was 711.

Study No. 1 was commenced by petitioner in March 1946. In this study 515,000 ballots were mailed to radio families by BMB, of which 310,000 were returned, bearing responses indicating the station listened to by such families once a week. The ballots were thereafter subjected to various mechanical and tabulating operations to show the total audiences of particular stations and networks, and the locations thereof. BMB did not perform certain mechanical operations itself, but ‘farmed‘ out to various commercial concerns the gathering of names, mailing of ballots, tabulating responses, and publication of the results, since it was not staffed to do such work. At this time, petitioner had only approximately 15 full-time employees. What petitioner paid out to such various concerns and what it paid its own employees out of the funds contributed by subscribers for their services in the performance of the functions for which petitioner was set up represented only cost and not compensation to it for such performance.

In August 1946 BMB published a report entitled 1946 Radio Families— U.S.A.‘ The data contained therein were compiled in order to estimate the number of families owning radio sets in each of the places to be reported upon by BMB throughout the country's 48 states and 3,000 counties. ‘Radio Families‘ listed by states, by countries and by municipalities, the total families in each of such localities, the number of families owning radios and the ratio thereof to total families. The information in...

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