Gazette Tel. Co. v. Comm'r of Internal Revenue

Decision Date22 January 1953
Docket NumberDocket No. 24861.
Citation19 T.C. 692
PartiesGAZETTE TELEGRAPH CO., PETITIONER, V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
CourtU.S. Tax Court

OPINION TEXT STARTS HERE

Dana Latham, Esq., and John S. Welch, Esq., for the petitioner.

W. Lee McLane, Jr., Esq., for the respondent.

1. DEPRECIATION.— Cost of covenant not to compete held depreciable over the term of the covenant.

2. DEDUCTIONS— INTEREST.— Notes issued by petitioner to shareholders held to be an indebtedness and interest payments thereon deductible.

3. ADDITIONAL SURTAX— SECTION 102, I.R.C.— Held that petitioner was not formed or availed of for purpose of preventing imposition of surtax on shareholders; held, further, petitioner's earnings were not permitted to accumulate beyond the reasonable needs of the business in years subject to review.

FINDINGS OF FACT AND OPINION.

TIETJENS, Judge:

Petitioner contests a determination of deficiencies in income tax and surtax under section 102 of the Internal Revenue Code for the fiscal years ended March 31, 1947 and 1948, as follows:

+--------------------------------------+
                ¦      ¦Income tax  ¦Deficiency under  ¦
                +------+------------+------------------¦
                ¦Year  ¦deficiency  ¦sec. 102, I.R.C.  ¦
                +------+------------+------------------¦
                ¦1947  ¦$18,709.15  ¦$30,714.82        ¦
                +------+------------+------------------¦
                ¦1948  ¦18,127.65   ¦44,982.73         ¦
                +--------------------------------------+
                

Several issues raised by the pleadings have been abandoned by petitioner. The following questions remain for decision:

Issue No. 1. Did petitioner properly deduct amounts representing amortization of the cost of a covenant not to compete?

Issue No. 2. Did petitioner properly deduct amounts paid as interest expense?

Issue No. 3. Is petitioner in either year subject to the surtax imposed by section 102 of the Internal Revenue Code?

FINDINGS OF FACT.

The facts stipulated by the parties are found as stipulated.

Petitioner's income tax returns were filed with the collector for the district of Colorado.

Issue No. 1.

Petitioner is a corporation organized under the laws of Colorado on March 28, 1946. During a portion of the fiscal years in question it engaged in the publication of two daily newspapers and during the rest of the period, one daily newspaper in Colorado Springs, Colorado.

Petitioner is one of a number of newspaper businesses owned by members of the R. C. Hoiles family or by corporations in which that family was interested. The Hoileses have been engaged in the newspaper business for many years, R. C. Hoiles himself for more than 50 years. During this period many newspapers have been acquired and at various times the Hoileses, either directly or through corporations, have owned and operated three papers in Ohio, two in California, one in New Mexico, and two in Texas, in addition to petitioner.

On March 31, 1950, three of these newspaper corporations, including petitioner, were merged with the Register Publishing Company, Ltd., at Santa Ana, California, the name of the surviving corporation being immediately changed to Freedom Newspapers, Inc.

These various newspapers are and have been published in cities ranging in population from 10,000 to 40,000. They are dailies and when acquired were in areas where the subscriber and advertising fields were thought not to be saturated. The Hoiles family have pursued a plan of expanding their newspaper interests by acquiring newspapers in new and relatively undeveloped fields.

In negotiating for the purchase of newspapers the Hoileses or the corporations in which they were interested have, without exception, insisted upon and obtained agreements by the sellers to refrain from competition in the area for a fixed period of years. Such covenants have been of value and and importance to the buyers.

In August 1945 the Hoileses became interested in the purchase of Gazette and Telegraph Company, a corporation which was publishing newspapers in Colorado Springs, Colorado, the stock of which was owned by the following shareholders (hereinafter sometimes called the sellers) in the amounts set opposite their names:

+-----------------------------------------------------+
                ¦Clarence Clark Hamlin Trust              ¦1146 shares¦
                +-----------------------------------------+-----------¦
                ¦T. E. Nowels                             ¦950 shares ¦
                +-----------------------------------------+-----------¦
                ¦Richard W. Nowels                        ¦100 shares ¦
                +-----------------------------------------+-----------¦
                ¦El Pomar Investment Company by Charles L.¦           ¦
                +-----------------------------------------+-----------¦
                ¦Tutt, Vice Pres                          ¦1248 shares¦
                +-----------------------------------------+-----------¦
                ¦Charles L. Tutt                          ¦703 shares ¦
                +-----------------------------------------+-----------¦
                ¦John A. Carruthers                       ¦254 shares ¦
                +-----------------------------------------+-----------¦
                ¦Mae A. Carruthers                        ¦77 shares  ¦
                +-----------------------------------------+-----------¦
                ¦Marguerite Ross                          ¦156 shares ¦
                +-----------------------------------------+-----------¦
                ¦Elizabeth H. Hylbom                      ¦2 shares   ¦
                +-----------------------------------------+-----------¦
                ¦Frank R. Wadell                          ¦100 shares ¦
                +-----------------------------------------+-----------¦
                ¦Grace C. Foster and Helen Francis Foster ¦104 shares ¦
                +-----------------------------------------+-----------¦
                ¦James R. Miller                          ¦60 shares  ¦
                +-----------------------------------------+-----------¦
                ¦Seddie G. Hamlin                         ¦100 shares ¦
                +-----------------------------------------------------+
                

T. E. Nowels was the president and general manager of Gazette and Telegraph Company. He was well known in the community and had had wide experience as a newspaper publisher. He was in good health, and had no intention of retiring. Richard W. Nowels was the son of T. E. Nowels and was employed by Gazette and Telegraph Company. He presently publishes a newspaper in or near San Francisco. Charles L. Tutt was a man of great wealth who controlled El Pomar Investment Company, a substantial investment corporation, and was head of the Broadmoor Hotel, a very wealthy and influential organization. He was well known in Colorado Springs. John A. Carruthers was a lawyer who devoted most of his time to the affairs of the organizations headed by Tutt. He too was well known and highly respected in the community. Frank R. Wadell was managing editor of Gazette and Telegraph Company. He was a capable man and had had wide experience in the newspaper business. The Clarence Clark Hamlin Trust had been created by Hamlin, former president and manager of Gazette and Telegraph Company. James R. Miller was bookkeeper for the company. The other stockholders were relatives of or otherwise closely connected with persons who were or had been associated with the company.

In the fall of 1945 a series of letters was exchanged between R. C. Hoiles and T. E. Nowels regarding the acquisition of the Colorado Springs newspaper properties. Hoiles made it clear that the buyers would insist upon a covenant not to compete from the sellers and indicated the buyers' intention to treat the covenant not to compete as a capital asset subject to amortization over its fixed life. In the fall of 1945, R. C. Hoiles went to Colorado Springs and inspected the properties and looked over the area. At that time he made an oral offer of $750,000 to the sellers for their stock. On December 4, 1945, Nowels wrote Hoiles rejecting the offer and stating that he and the other stockholders thought that their entire setup was worth no less than a million dollars.

After asking for and obtaining additional information as to paper supplies, union scales, salaries, and other items, Hoiles wrote Nowels on December 24, 1945, offering to pay one million dollars for all the stock of the corporation and a ‘restraining order‘ from entering the newspaper business in the area for ten years.

On December 27, 1945, Nowels replied to the offer stating that it would be given immediate and serious consideration, pointing out that it would be hard for him to make a decision since he would be selling not only his stock, but also his occupation.

On or about January 8, 1946, R. C. Hoiles and his two sons, C. H. Hoiles and Harry Hoiles, went to Colorado Springs and conducted final negotiations for the purchase. On January 10, the following written contract was executed by the selling stockholders and the three Hoileses:

AGREEMENT Made and entered into this 10th day of January, A.D., 1946, by and between R. C. HOILES, CLARENCE HOILES, and HARRY HOILES, all of Santa Ana, California, as First Parties, and the undersigned stockholders of The Gazette and Telegraph Company, as Second Parties,

WITNESSETH:

WHEREAS, First Parties desire to purchase all of the shares of stock of The Gazette and Telegraph Company or at least seventy percent (70%) thereof, and,

WHEREAS, Second Parties desire to sell and dispose of their stock in the said The Gazette and Telegraph Company at the price and on the terms hereinafter set forth.

NOW THEREFORE, in consideration of the mutual covenants and agreements of the parties hereto, it is understood and agreed:

1. First Parties agree to pay to each of the undersigned Second Parties the sum of Two Hundred Dollars ($200.00) per share for each share set opposite the name of each of the Second Parties upon proper assignment and delivery to First Parties of the certificate or certificates representing the ownership of Second Parties in the stock of The Gazette and Telegraph Company.

2. Second Parties and each of them agree as part of the consideration hereof that they and each of them will not engage in the newspaper publication or distribution business in competition with First Parties, their successors and assigns, in the ...

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1 books & journal articles
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