Meredith Corp. & Subsidiaries v. Comm'r of Internal Revenue

Decision Date14 March 1994
Docket Number17091–91.,Nos. 13165–91,s. 13165–91
Citation102 T.C. No. 15,102 T.C. 406
PartiesMEREDITH CORPORATION AND SUBSIDIARIES, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
CourtU.S. Tax Court

OPINION TEXT STARTS HERE

James L. Malone, III, Gary C. Karch, and Lydia R.B. Kelley, for petitioner.

Lawrence C. Letkewicz and Dana Hundrieser, for respondent.

P purchased all of the assets of a consumer magazine business. As part of the purchase, P became the employer of E and acquired subscriber relationships and subscription lists. The purchase agreement made no allocation of consideration among the acquired assets. Noncompetition agreements were executed at the time of the purchase by the selling corporation and its majority shareholder. The noncompetition agreements unambiguously recited the amounts of consideration paid for each.

1. Held: P has failed to establish the remaining useful life and value of the employment relationship with E.
2. Held, further, P has failed to adduce the strong proof necessary to support its allocation of additional consideration to the noncompetition agreements.

3. Held, further, P's basis in the subscriber relationships during the years in issue determined, and amortization deductions allowed, based on agreed useful lives. Newark Morning Ledger Co. v. United States, 507 U.S. 546, 113 S.Ct. 1670 (1993), applied.

NIMS, Judge:

Respondent determined deficiencies in Federal income tax with respect to petitioner's fiscal year ended June 30, 1986 (FYE 1986), in the amount of $6,466,674.82, and with respect to petitioner's fiscal year ended June 30, 1987 (FYE 1987), in the amount of $11,493,459. In addition to contesting these deficiencies, petitioner claims overpayments in Federal income tax with respect to FYE 1986 in the amount of $4,760,484 and with respect to FYE 1987 in the amount of $5,033,291.

Unless otherwise indicated, all section references are to sections of the Internal Revenue Code in effect for the years in issue. All Rule references are to the Tax Court Rules of Practice and Procedure.

These cases were consolidated for trial, briefing, and opinion. Following concessions, the issues for decision are the amounts of the amortization deductions under section 167, if any, to which petitioner is entitled with respect to three intangible assets acquired upon its purchase of the assets of Ladies' Home Journal (LHJ). These intangible assets consist of (1) an employment relationship with the editor-in-chief of LHJ, (2) noncompetition agreements, and (3) LHJ's subscriber relationships.

FINDINGS OF FACT

Some of the facts have been stipulated. The stipulation of facts and the attached exhibits are incorporated herein by this reference.

Petitioner is an Iowa corporation having its principal place of business at 1716 Locust Street, Des Moines, Iowa 50336. It is an accrual basis taxpayer which keeps its books and records, and files its Federal income tax returns, on a fiscal year ending June 30.

Petitioner is a diversified media company involved in magazine and book publishing, television broadcasting, real estate marketing/franchising and, until recently, printing. In 1985, petitioner published, among other things, the following magazines: Better Homes and Gardens, Successful Farming, Country Homes, Metropolitan Home, Midwest Living, and SAIL.

LHJ, founded in 1883, is one of a group of magazines commonly referred to in the magazine industry as “the Seven Sisters. The other members of the Seven Sisters are Better Homes and Gardens (founded in 1922), Good Housekeeping (founded in 1885), McCall's (founded in 1876), Woman's Day (founded in 1937), Family Circle (founded in 1932), and Redbook (founded in 1903). Each of the Seven Sisters tends to compete for similar kinds of women readers and similar kinds of advertisers. The Seven Sisters reached a plateau in total circulation in 1966 and in total advertising pages and total advertising revenue in 1977. After those dates, increases in circulation or advertising market share of any one of the Seven Sisters were generally achieved only at the expense of another.

Family Media, Inc. (FMI), a New York corporation, purchased LHJ from Charter Publishing in August 1982, for $12 million. FMI continued to publish LHJ until January 3, 1986, when it sold LHJ to petitioner. In 1985, FMI published the following magazines: LHJ, Golf Illustrated, Savvy, 1001 Home Ideas, Health, The Homeowner, and World Tennis. From 1980 until 1986, Robert Riordan was the president of FMI as well as its principal shareholder, owning approximately 83 percent of its outstanding common stock.

Charter Publishing sold LHJ in 1982 because it was not profitable and because Charter Publishing had decided to terminate its involvement in the magazine business. Riordan was interested in buying LHJ in 1982 because it was a large circulation magazine which had been around a long time and which he considered to have a great name, a strong reputation, and a good editor-in-chief. Most importantly, he believed, it was a publication which could be made profitable. FMI's operating philosophy was to acquire underperforming publications and improve them through increases in advertising revenue, circulation, and prices.

Under Riordan's direction, FMI employed a number of strategies which helped in making LHJ more profitable. These strategies included the following:

(a) Gradually increasing the price of a one-year subscription from $11.97 to $20;

(b) offering subscribers the opportunity to renew their subscriptions at the existing price prior to a price increase;

(c) utilizing sweepstakes promotions as part of its direct mail effort;

(d) making selective temporary reductions in the single copy prices of LHJ in order to introduce more newsstand readers to the magazine;

(e) maintaining the full advertising and editorial budget which Charter Publishing had established for LHJ; and

(f) purchasing data from Simmons Market Research Bureau, Inc. regarding the number and type of people who read and remembered LHJ, which data facilitated advertising sales.

In October 1985, an investment banker contacted Robert Burnett, then petitioner's president and chief executive officer, regarding whether petitioner would have any interest in purchasing some or all of the magazines being published by FMI. Following an initial meeting, petitioner's senior staff members conducted due diligence. After a series of meetings, petitioner indicated that it was willing to pay in the range of $100 million for FMI's magazines. FMI indicated early in the negotiations its willingness to receive roughly 80 percent of the proposed purchase price in cash and the remaining 20 percent in the form of a note.

On November 11, 1985, officers of petitioner presented a recommendation to its board of directors that petitioner proceed with negotiations to purchase LHJ and Health. Petitioner's board of directors approved this recommendation and authorized a purchase price for the assets of both magazines not to exceed $105 million. Prior to November 21, 1985, petitioner conducted an analysis of the projected revenues and expenses of the magazines in years following the proposed acquisition in order to determine whether a purchase price of $100 million was within a reasonably prudent range. Petitioner concluded from this analysis that a purchase price of $100 million was within a reasonable range. Negotiations between petitioner and FMI continued until November 21, 1985, when the proposed acquisition by petitioner was announced to the public.

Petitioner provided FMI with a letter of intent dated November 21, 1985, which was accepted and agreed to by FMI, confirming petitioner's intention to purchase the assets of LHJ and Health for $96 million, less cash of $2.8 million, and subject to the assumption of certain liabilities. The letter of intent set conditions precedent to the closing of the proposed purchase which included the absence of any material adverse change in the condition of the LHJ assets and the execution of a satisfactory consulting agreement and five-year covenant not to compete between Riordan and petitioner.

On December 23, 1985, petitioner entered into an agreement for the purchase and sale of LHJ (the Purchase Agreement), but not Health. The Purchase Agreement stated that petitioner would acquire all the assets, except those specifically excluded by the terms of the agreement, of LHJ for a purchase price consisting of $74 million cash, an $18 million deferred payment obligation and the assumption of certain liabilities and obligations of FMI. The Purchase Agreement set conditions precedent to the closing of the purchase which included (1) the lack of any “change in the Business, taken as a whole, its financial condition or prospects which would have a material adverse effect thereon,” (2) the execution of five-year covenants not to compete between Riordan and petitioner and between FMI and petitioner, and (3) the execution of a consulting agreement between Riordan and petitioner. The terms of the $18 million installment note indicated that it was specifically in exchange for the sale by FMI to petitioner of its interest in the LHJ trademarks. The sale was closed on January 3, 1986.

Paragraph 2.1 of the purchase agreement specified the details of the consideration to be paid by petitioner and stated that such consideration was being paid for the “Purchased Assets”. Paragraph 1.2 set forth a detailed list of the “Purchased Assets”, which included, in part, “all subscription lists both for active and, to the extent maintained by Seller or its fulfillment company, expired subscribers”. The only reference in this paragraph to employment relationships or agreements stated that Purchased Assets included

Rights under agreements with employees concerning confidentiality and the assignment of rights to manuscripts, story ideas, editorial materials, employee names or other publication materials whether or not copyrighted or otherwise...

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