Crowell-Collier Publ'g Co. v. Comm'r of Internal Revenue

• Decision Date: 19 March 1956
• Docket Number: Docket No. 40202.
• Citation: 15 T.C.M. (CCH) 326,25 T.C. 1268
• Parties: THE CROWELL-COLLIER PUBLISHING COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

15 T.C.M. (CCH) 326

25 T.C. 1268

THE CROWELL-COLLIER PUBLISHING COMPANY, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 40202.

Tax Court of the United States.

Filed* March 19, 1956.

1. Petitioner, during the base period years 1936 to 1939, inclusive, was the publisher of four national magazines, namely Collier's, Woman's Home Companion, The American Magazine, and Country Home. In each of the base period years the publication of Country Home showed a substantial loss. At the end of 1939, its publication was discontinued and a substantial saving in expenses of petitioner annually was achieved thereby. Held, the discontinuance by petitioner of publication annually was achieved thereby. Held, the discontinuance by petitioner of publication of Country Home and the savings in expenses annually achieved thereby was a change in the character of petitioner's business within the meaning of section 722(b)(4), Internal Revenue Code of 1939, and entitles petitioner to relief under section 722.

2. Prior to the base period petitioner used the letterpress method of printing its magazines. During the base period petitioner changed to a substantial degree to the gravure method of printing and this change resulted in substantial savings in printing costs of its magazines. Held, this change was a change in the character of petitioner's business within the meaning of section722(b)(4) of the 1939 Code and entitles petitioner to relief under section 722.

3. Reconstruction due to the two foregoing section 722(b)(4) factors determined.

4. In addition to relief under section 722, petitioner claims relief under section 721(a)(2)(C) of the 1939 Code because of research and development expenditures which it allegedly made in the base period years in the art of gravure printing. Held, petitioner has not proved research and development costs within the meaning of section 721 which would entitle it to relief under the provisions of that section.

5. Petitioner claims relief under section 711 of the 1939 Code on the ground that expenditures which it made in 1936 in payment of a bonus to its employees and in 1938 in the moving of certain power lines located in its printing plant at Springfield, Ohio, were abnormal in class. Petitioner also claims that expenditures which it made in 1936 and 1937 in the payment of executive bonuses were abnormal in amount. Held, petitioner's payments of the bonus to employees and its expenditure of the amounts required to move its power lines were not abnormal in class within the meaning of section 711 (b)(1)(J)(i). Hence petitioner is not entitled to have these expenditures disallowed. Held, further, that although petitioner's payments of bonuses to its executives in 1936 and 1937 were abnormal in amounts within the meaning of section 711(b)(1) (J)(ii), petitioner has not established that the abnormality or excess in amount was not the consequence of an increase in its gross income as required by section 711(b)(1)(J)(ii) of the 1939 Code and petitioner is not entitled to have these abnormalities in amount disallowed. Jay O. Kramer, Esq., G. I. Falk, Esq., and Josiah Willard, Esq., for the petitioner.

Arthur N. Mindling, Esq., and John A. Clark, Esq., for the respondent.

OPINION.

BLACK, Judge:

The deficiency notice mailed to petitioner on February 1, 1952, among other things, stated as follows:

You are advised that the determination of your income tax liability for the taxable year ended December 31, 1942, discloses an overassessment of $447.86; that the determination of your income tax liability for the taxable years ended December 31, 1943 and 1944, discloses a deficiency of $33,759.96; that the determination of your declared value excess profits tax liability for the taxable year ended December 31, 1943, discloses a deficiency of $576.82; that the determination of your declared value excess profits tax liability for the taxable year ended December 31, 1944, discloses an overassessment of $3,798.99; and that the determination of your excess profits tax liability for the taxable years ended December 31, 1943, 1944 and 1945, discloses a deficiency of $1,866,250.35, as shown in the statement attached.

After careful consideration of your applications for relief under sections 711, 721, and 722, of the Internal Revenue Code, filed June 15, 1944, July 30, 1945, October 10, 1946, October 7, 1948, and June 21, 1949, it has been determined that you have not established your right to the relief requested in such applications.

Because of the deferment under section 710(a)(5) of the Internal Revenue Code of the tax liability shown on your return, the determination of your excess profits tax liability results in a deficiency.

The relief now claimed by petitioner in its petition is for overassessments and/or refunds' as follows:

+----------------------------------------+
                ¦Calendar year      ¦Overassessment of   ¦
                +-------------------+--------------------¦
                ¦ended December 31  ¦excess profits tax  ¦
                +-------------------+--------------------¦
                ¦1943               ¦$1,699,248.64       ¦
                +-------------------+--------------------¦
                ¦1944               ¦609,527.74          ¦
                +-------------------+--------------------¦
                ¦1945               ¦432,169.68          ¦
                +----------------------------------------+
                

The assignments of error in the petition are numerous and need not be set out here in detail. These assignments of error raise the following issues:

1. Whether or not petitioner is entitled to relief under section 722(b)(4) of the 1939 Code on the ground that its average base period net income was an inadequate standard of normal earnings because of the discontinuance at the end of the base period of its magazine Country Home.

2. Whether or not petitioner is entitled to relief under section 722(b)(4) of the 1939 Code on the ground that its average base period net income was an inadequate standard of normal earnings because of changes which it made during the base period from the letterpress method of printing to a substantial use of the high-speed multicolor gravure method of printing.

3. The determination of petitioner's constructive average base period net income resulting from both or either of the qualifying factors set forth in 1 and 2 above.

4. Whether or not petitioner is entitled under section 721 of the 1939 Code to eliminate abnormal income resulting from gravure research and development.

5. Whether or not petitioner is entitled under section 711 of the 1939 Code to eliminate certain abnormal expenses incurred during base period.

Thus it will be seen that the only questions litigated in this proceeding involve petitioner's claim for relief and refunds under section 722(b)(4), section 721(a)(2)(C), and section 711(b)(1)(J) and (K). The years involved are 1943, 1944, and 1945.

Petitioner, for years the publisher of national magazines including Collier's, Woman's Home Companion, The American Magazine, and Country Home, was two primary contentions in support of its claim for relief under section 722(b) (4). It contends, first, that its average base period net income was an inadequate standard of normal earnings because Country Home magazine, which had experienced losses in prior years, including all the base periods, was discontinued at the end of the base period. Petitioner contends that it is also entitled to relief under section 722(b)(4) because during the base period it introduced a change from the letterpress method of printing its magazines to the use in a substantial degree of a high-speed multicolor gravure method, with resulting cost savings. Should it be held to have established that it is entitled to relief by reason of these two 722(b)(4) grounds, petitioner contends that its proper constructive average base period net income (CABPNI) would be approximately $4,000,000, instead of average base period net income, adjusted for section 711(b) relief allowed, of $2,804,170.60 to $2,811,837.76. Its unadjusted average base period net income was $2,712,338.90.

Extended findings of fact have been made and are filed as a part of the official record of the case. Such part of these findings of fact as is deemed necessary will be stated as we rule upon the several issues which have been presented to us for our decision.

Discontinuance of Country Home Magazine.

The parties are in no serious dispute that the discontinuance during the base period of Country Home suffices to meet the initial ‘qualifying factor’ requirement and has been established in our findings. A matter of dispute between the parties is the amount of the Country Home loss which should be eliminated during the base period years. The publication of this magazine was discontinued in December 1939. Prior to that time and during the base period petitioner had experienced losses from its publication of Country Home shown on its books in amounts approximately as follows:

+--------------------------+
                ¦Year           ¦Amount    ¦
                +---------------+----------¦
                ¦1936           ¦$165,000  ¦
                +---------------+----------¦
                ¦1937           ¦364,000   ¦
                +---------------+----------¦
                ¦1938           ¦749,000   ¦
                +---------------+----------¦
                ¦1939           ¦685,000   ¦
                +---------------+----------¦
                ¦               ¦$1,963,000¦
                +---------------+----------¦
                ¦Annual average ¦$490,750  ¦
                +--------------------------+
                

Petitioner's publication of various magazines in reality was the operation of one business, and the elimination of one of the magazines would not effect a cost saving of all the charges allocated to it on petitioner's books. Some such charges would not be reduced at all and others would be only partially reduced. Both parties are in agreement as to this but dispute the amount of expenses which should be eliminated in arriving at the losses to be used for adjustment. Petitioner would fix these continuing costs for 1939, for example, at approximately $32,000, while respondent contends that at least $334,000 of Country Home costs...