Florida Publ'g Co. v. Comm'r of Internal Revenue
| Decision Date | 22 May 1975 |
| Docket Number | Docket No. 6986-70. |
| Citation | 64 T.C. 269 |
| Parties | FLORIDA PUBLISHING COMPANY, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Kenneth G. Anderson, Fred M. Cone, Jr., Hugh F. Culverhouse, and Dennis J. Lanahan, Jr., for the petitioner.
Donald W. Williamson, Jr., for the respondent.
Held, no part of the consideration paid to acquire the circulation and all other tangible and intangible assets of a competing newspaper business as a going concern may be currently deducted as an expense of maintaining circulation within the meaning of sec. 173 or under sec. 162. Held further, since the petitioner did not realize a loss evidenced by a closed or completed transaction or fixed by identifiable events during the taxable year in issue, no part of such purchase price is deductible under sec. 165.
The Commissioner determined a $412,304.87 deficiency in petitioner's Federal income tax for the taxable year 1966. Certain adjustments made in the statutory notice of deficiency were not raised by the petitioner. The only issue before the Court is whether the petitioner may currently deduct under section 173, 165, or 1621 any part of the consideration paid to acquire the circulation and all other tangible and intangible assets of a competing newspaper business as a going concern.
Some of the facts have been stipulated. The stipulation of facts and attached exhibits are incorporated by this reference.
Petitioner Florida Publishing Co. (Florida Publishing) is a Florida corporation organized in 1888. Its principal place of business and office at the time it filed the petitioner in this case, and at all times pertinent hereto, was at Jacksonville, Fla. Petitioner filed its Federal income tax return for 1966 with the District Director of Internal Revenue, Jacksonville, Fla.
Since the late 1880's petitioner has been engaged in the newspaper business. Prior to 1959, it published a daily morning edition and a Sunday edition of the Florida Times Union (the Times Union). About 1959, petitioner purchased a Jacksonville daily evening newspaper published under the name Jacksonville Journal (the Journal), and since that time, petitioner has published a morning and evening newspaper and a Sunday newspaper, the Florida Times Union-Jacksonville Journal. The Times Union has been published since 1866, the Journal since 1887.
Prior to the 1960's, Florida was, and still is, one of the fastest growing areas in the United States. Commencing in the late 1950's or early 1960's, newspaper groups located outside Florida were actively seeking and acquiring Florida-based newspapers in order to reach Florida's potential market. Without an established circulation structure, it was very difficult for an outside publisher to move into an area, establish, and successfully operate an entirely new newspaper. It was much easier to acquire the circulation of an existing newspaper and then gradually upgrade and expand its circulation. Thus, a seller's market existed in Florida during all times relevant.
The larger newspaper chains or groups brought to Florida improved technological and mechanical advantages, such as offset type, computerized typesetting, and better use of color, as well as editorial knowledge, sales aggressiveness, and financial backing. Florida Publishing and other newspapers had to compete with such improved newspaper products.
Since Florida Publishing was in a good position to improve its plant and its product, the ability to offer an improved product was not limited to outside groups. If competition moved to update and improve their facilities and product, Florida Publishing normally did likewise. Also, when a newspaper in its circulation area offered a new type of aggressive competition, Florida Publishing became more aggressive.
Although Florida Publishing was concerned about competition moving into its circulation area, it is not unusual in the newspaper business for circulation areas to overlap or for a new competitor to move into an established circulation area of another paper. Thus, circulation areas of local weeklies, local dailies, metropolitan, regional, national news media, shoppers' papers, and other type news media may overlap.
Petitioner's circulation has always been primarily located in Duval County and the northeast section of Florida. Its total net paid circulation has fluctuated over the years. In years after 1960, petitioner began to suffer a decline in its average net paid circulation. With respect to the Times Union (morning newspaper), its circulation in Jacksonville and Duval County declined from 102,817 in 1960 to 97,650 in 1966. Petitioner's average net paid circulation in areas outside Jacksonville and Duval County declined from 66,161 in 1960 to 51,394 in 1966. The Times Union circulation in areas outside Jacksonville and Duval County continued to decline after 1966. With respect to the Journal (evening newspaper), Jacksonville and Duval County circulation declined from 48,319 in 1960 to 45,953 in 1966. During the same period, the circulation of the Journal in areas outside Jacksonville and Duval County increased from 4,529 in 1960 to 6,907 in 1966. On a combined daily and Sunday basis, the average net paid circulation for the Times Union and Journal as audited by the Audit Bureau of Circulation for the years 1960 through 1966 was as follows:
+--------------------------------+
¦Year ¦Combined daily ¦Sunday ¦
+------+----------------+--------¦
¦ ¦ ¦ ¦
+------+----------------+--------¦
¦1960 ¦221,826 ¦171,977 ¦
+------+----------------+--------¦
¦1961 ¦196,816 ¦152,984 ¦
+------+----------------+--------¦
¦1962 ¦203,097 ¦163,164 ¦
+------+----------------+--------¦
¦1963 ¦202,473 ¦166,928 ¦
+------+----------------+--------¦
¦1964 ¦198,620 ¦166,435 ¦
+------+----------------+--------¦
¦1965 ¦199,174 ¦169,879 ¦
+------+----------------+--------¦
¦1966 ¦201,904 ¦171,057 ¦
+--------------------------------+
Petitioner was having a major problem maintaining its circulation outside Duval County and especially in west Florida and south Georgia. This had been due primarily to the improved product and aggressiveness of competitors in the outlying areas as well as the additional costs of producing and delivering its newspapers to those areas.
The management and directors of petitioner had for several years prior to July 1, 1966, discussed the possible purchase of neighboring newspapers (including the St Augustine Record) for additional revenue and for long-range protection of its circulation and advertising sales. Prior to acquisition of the St. Augustine Record (the Record), the management and directors of petitioner knew the purchase price would be high because of the market for such small newspapers being generated by outside chains, groups, and other competitors. Nevertheless, by acquiring the Record's entire business, petitioner acquired the Record's circulation which, in turn, provided maintenance and protection of petitioner's circulation from possible outside competition. Without the benefit of the Record's circulation structure, an outside publisher normally would not be able to come into the St. Augustine area and compete with petitioner or otherwise establish a base of operations in the area. Thus, be effectively eliminating competition in the St. Augustine area, acquisition of the Record gave petitioner a benefit lasting at least as long as it maintained ownership and control of that business.
For many years prior to 1966, the Tebault family of St. Augustine, St. Johns County, Fla., published the St. Augustine Record. This newspaper business was incorporated in 1961 and conducted by the Tebaults from 1961 to July 1966 in a Florida corporation, the St. Augustine Record, Inc., (also sometimes referred to as the Record). Publication of the Record commenced in 1894.
Prior to June 22, 1966, petitioner's management had a general knowledge of the circulation, equipment, and income of the Record. After discovering in May or June of 1966 that a third party was negotiating for the purchase of the Record, the management and directors of petitioner decided to meet or beat the offer made by the third party to acquire the Record. On July 6, 1966, petitioner purchased, as of July 1, 1966, all of the assets and business of the St. Augustine Record., Inc., including the machinery, circulation, routes, goodwill, and all other tangible and intangible things necessary and useful in connection with the Record's newspaper business. In addition, the purchase agreement provided that Elizabeth B. Tebault, A. H. Tebault, and Elizabeth Tebault Olson, the sole officers, directors, and shareholders of the St. Augustine Record, Inc., would not, for a period of 5 years from the date of purchase, compete in any manner in St Johns County with petitioner or any subsidiary of petitioner. For the Record's newspaper business, the petitioner paid a total consideration of $1,590,956.52 consisting of $1,500,000 in cash and the petitioner's assumption of $90,956.52 in liabilities of the selling corporation. The $1,500,000 cash payment consisted of a binder fee of $50,000 paid to the Tebaults on June 22, 1966, and $1,450,000 paid at closing on July 6, 1966. The liabilities assumed by petitioner as of July 1, 1966, were as follows:
+----------------------------------------+
¦Prepaid subscriptions ¦$3,962.28¦
+------------------------------+---------¦
¦Accounts payable ¦12,044.06¦
+------------------------------+---------¦
¦Payroll taxes payable ¦3,810.01 ¦
+------------------------------+---------¦
¦Accrued property tax ¦1,140.17 ¦
+------------------------------+---------¦
¦Mortgage payable—Frank Harrold¦70,000.00¦
+------------------------------+---------¦
¦Total liabilities assumed ¦90,956.52¦...To continue reading
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