Booth Newspapers, Inc. v. United States

• Decision Date: 06 June 1962
• Docket Number: 84-60.,No. 57-59,57-59
• Citation: 303 F.2d 916
• Parties: BOOTH NEWSPAPERS, INC. v. The UNITED STATES. The EVENING NEWS ASSOCIATION v. The UNITED STATES.
• Court: U.S. Claims Court

303 F.2d 916 (1962)

BOOTH NEWSPAPERS, INC. v. The UNITED STATES.

The EVENING NEWS ASSOCIATION v. The UNITED STATES.

Nos. 57-59, 84-60.

United States Court of Claims.

June 6, 1962.

N. Barr Miller, Washington, D. C., for plaintiffs. J. Marvin Haynes, Joseph H. Sheppard, Arthur H. Adams and Haynes & Miller, Washington, D. C., were on the briefs.

Cynthia Holcomb, Washington, D. C., with whom was Asst. Atty. Gen. Louis F. Oberdorfer, for defendant. Edward S. Smith, Lyle M. Turner and Philip R. Miller, Washington, D. C., were on the briefs.

JONES, Chief Judge.

Plaintiffs, Booth Newspapers, Inc. and The Evening News Association, bring these suits to recover alleged overpayments of corporate income taxes, plus deficiency interest, paid for the taxable year 1954. Since both suits involve many of the same material facts and present identical issues, they were consolidated for trial, argument and joint findings of fact. It is asserted in both suits that the Commissioner of Internal Revenue erroneously determined that certain losses sustained by both plaintiffs in 1954 from the sale of the stock of a third corporation were capital losses and hence deductible only to the extent of capital gains for that year.

Both plaintiffs are Michigan corporations and both are engaged in the business of publishing newspapers in that state. Aside from their joint participation in the transaction hereinafter described, however, plaintiffs are not in any way connected.

Being in the business of publishing newspapers, an inventory of newsprint in sufficient quantity is essential to each plaintiff. Prior to 1947, both plaintiffs purchased their entire newsprint requirements from established manufacturers of that commodity under long-term contracts. The contract price for newsprint to each plaintiff was approximately $90 per ton in early 1947 and immediately prior thereto. Except during World War II, when newsprint was rationed by the War Production Board, plaintiffs' contract suppliers were able to furnish them with adequate quantities of the product for their normal operations. Consequently, neither plaintiff had occasion to own or control any manufacturer or supplier of newsprint, or become involved in any way with the manufacture of that product. It was, in fact, the policy of both plaintiffs not to invest in the capital stock of other companies at all.

In 1946 and 1947, an unprecedented demand for newsprint developed in the United States and, when normal sources of supply were unable to cope with it, a severe shortage resulted throughout the publishing industry. Plaintiffs' regular suppliers were unable to fulfill their contractual obligations, and plaintiffs were thus unable to obtain adequate supplies for the needs of their businesses. Moreover, plaintiffs could obtain no assurance from their suppliers that adequate quantities of newsprint would be available to them during the next 2 to 4 years.

As a result of this shortage of newsprint, both Booth and Evening News were compelled to reduce the normal size of their publications by curtailing news content and advertising. Booth found it necessary to discontinue all circulation promotional activities and, in February of 1947, Evening News was forced to the extreme of omitting all display and classified advertising for three successive days. This was particularly onerous to Evening News because competing newspapers, which were members of newspaper chains and thus able to divert newsprint from other areas to the Evening News competitive area, made extensive efforts to capture the advertising business of Evening News.

In order to circumvent the difficulties caused by the newsprint shortage, plaintiffs were compelled to resort to the so-called "spot" or "gray" market which had developed by mid-1947. This was the only available source of additional newsprint in the country, and consisted primarily of newsprint imported from European sources. Therefore, plaintiffs attempted, when possible, to meet their requirements by going into this market for special purchases at exorbitant prices. In 1947 alone, Evening News purchased some 4,618 tons of newsprint in the "spot" market at an average price of $200 per ton, and Booth purchased some 1,514 tons at an average price of $196.29 per ton. Similar purchases were made by Evening News during 1948 and 1949 at an average price of $175 per ton, while Booth was compelled to pay an average of $175 per ton for the purchases it made during 1948.

As both plaintiffs were simultaneously experiencing an unprecedented shortage of newsprint, they collaborated in extensive efforts to find additional newsprint to meet their needs. In March of 1947, they joined in engaging the services of a firm of consulting engineers to investigate possible sources of newsprint. This firm was a consultant to the Canadian pulp and paper industry and was familiar with the world newsprint markets. After the consulting engineers had explored the newsprint situation, including the foreign market, without success in locating sufficient additional supplies for plaintiffs, they recommended to plaintiffs the purchase of a small paper mill for the purpose of augmenting their supply of newsprint by manufacturing their own. This recommendation was initially rejected by plaintiffs on the grounds that they were adverse to entering the newsprint manufacturing business and preferred to retain their regular sources of supply to the fullest possible extent. Nonetheless, the newsprint shortage subsequently became so acute that plaintiffs reconsidered and decided to investigate the possibility of acquiring a small paper mill which could be suitably converted to the production of newsprint.

It became known to plaintiffs, through the consulting engineers, that the Michigan Paper Company of Plainwell, Michigan (hereinafter referred to as "Michigan"), could be purchased. This company was engaged in the operation of a paper mill for the manufacture and sale of fine quality writing paper and book paper. While it was not then manufacturing newsprint, plaintiffs were advised that a part of its equipment could be converted to the production of newsprint and thus provide a supplemental source of supply during the period of shortage.

No other solution to their problem being apparent and being unsuccessful in attempting to persuade the management of Michigan to manufacture newsprint for them, each plaintiff finally agreed to purchase one-half the available stock of the paper company. During the period from November 17 through December 1, 1947, they each acquired 45,000 shares of the 100,000 shares in Michigan outstanding. Since they deemed it necessary for business reasons to acquire all of the outstanding stock of Michigan, if possible, plaintiffs were required to pay $25 per share to the former stockholders. The remaining 10,000 shares were purchased by plaintiffs, at $25 per share, as they became available subsequently during the period 1948 through 1951. Thus, plaintiffs ultimately acquired all of the stock of Michigan, 50,000 shares each, for a total consideration of $2,500,000, one-half of which was paid by each plaintiff. In addition, each plaintiff incurred substantial expenses relative to the acquisition of this stock.

Thereafter, a part of Michigan's production equipment was converted to the manufacture of newsprint and utilized as a supplemental source of that product to offset the short shipments plaintiffs were receiving from their contract suppliers. All of Michigan's production facilities were not so converted, however, because the acquisition of Michigan was an expediency to relieve plaintiffs' shortages of newsprint, and their ownership of the company was intended to continue only until an adequate supply could be assured by their regular suppliers. Consequently, during the period of plaintiffs' ownership, Michigan continued the manufacture and sale of its regular products for the purpose of fulfilling existing contracts and retaining its competitive position in its regular market as much as possible so that plaintiffs could dispose of the company on attractive terms as soon as the newsprint shortage ended.

In this manner, then, plaintiffs were able to mitigate the difficulties caused by the severe national shortage of newsprint. Although the newsprint product turned out by Michigan was not of the quality of that furnished by plaintiffs' regular suppliers, it was, apparently, adequate to meet their needs. Michigan was, however, able to turn out a highly satisfactory rotogravure paper, which was used by Evening News for its Sunday pictorial magazine. In any event, both plaintiffs purchased, at cost, substantial quantities of Michigan newsprint from late 1947 to early 1953, although there was a period of 13 continuous months when Evening News purchased no newsprint from Michigan and a period of 7 continuous months when Booth also found it unnecessary to make any purchases. Both of these periods occurred, principally, during the year 1950.

By mid-1949 and 1950, Michigan commenced efforts to restore its position in the field of fine writing paper and book paper, replacing much of the effort that had been directed to the manufacturing of newsprint. This resulted from the fact that, insofar as plaintiffs were concerned, the newsprint shortage had eased and appeared to be pretty well over by that time. Nevertheless, plaintiffs still had no assurances from their regular suppliers that the shortage was definitely over then and, as a matter of fact, newsprint procurement did become more difficult with the outbreak of the Korean War. The record shows that plaintiffs considered the Michigan mill to be insurance for them during this period of time against the threatened recurrence of a newsprint shortage.

It was not until 1953 that supply and demand for newsprint in the United States were brought into balance for short periods of time. Even then, however, shortages recurred intermittently...