News Publishing Co. v. Commissioner of Internal Revenue
| Decision Date | 06 May 1927 |
| Docket Number | Docket No. 8078. |
| Citation | 6 BTA 1257 |
| Parties | NEWS PUBLISHING CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
Harvey D. Jacob, Esq., and Walter A. Bolinger, Esq., for the petitioner.
P. J. Rose, Esq., for the respondent.
This proceeding is for the redetermination of deficiencies of $11,114.62 and $8,072.29 for the calendar years 1918 and 1919, respectively.
The errors assigned by the petitioner are: (1) The failure of the Commissioner to allow certain proved tangible and intangible assets as invested capital; (2) the failure of the Commissioner to permit petitioner to file consolidated returns for itself and its subsidiary, the Washington News Co., of Washington, Pa.; (3) the failure of the Commissioner to allow as a deduction for bad debts in the years on appeal advances made to the Washington Daily News of Washington, Pa. (This error is contended for only if the second error is not found.)
FINDINGS OF FACT.
The petitioner is a West Virginia corporation which was organized in 1890 with a capital stock of $14,000, and is engaged primarily in the publication of a daily afternoon and Sunday morning paper. This capitalization was increased from time to time by stock dividends and one sale of stock to employees for $5,000 cash so that its outstanding capital stock was $75,000 on January 16, 1904, when its total capital stock was acquired by the newly formed Wheeling Printing & Paper Co. (hereinafter sometimes referred to as the Holding Company) in exchange for $310,000 capital stock of the latter company.
Another corporation which it is necessary to consider in connection with this appeal is the Intelligencer Publishing Co., (hereinafter referred to as the Intelligencer a business begun prior to the Civil War and continued, either under individual or partnership form of organization, until 1893 when it was incorporated with a capital stock of $100,000, and had such an outstanding capital stock when 89 per cent of its capital stock was acquired by the Wheeling Printing & Paper Co. in 1904. Its business was that of publishing a daily morning paper.
In the negotiations leading up to the consolidation of the petitioner and the Intelligencer, considerable discussion took place as to the basis on which the consolidation would be effected. Finally, it was decided that the Holding Company would be formed with a capital stock of $400,000, $310,000 of which would be issued for the stock of the petitioner and $90,000 for the stock of the Intelligencer. On January 15, 1904, the day before the consolidation was to have become effective and after announcement to that effect had been made, a fire occurred in the plant of the petitioner resulting in a loss of approximately $75,000. The majority stockholder of the Intelligencer thereupon objected to the old basis of its entering the consolidation, but the agreement was ultimately effected as decided upon except that one stockholder of the Intelligencer, owning approximately $11,000 capital stock, refused to enter the consolidation. The Holding Company held as its only assets $75,000 capital stock of the petitioner and $89,000 capital stock of the Intelligencer.
The three corporations continued in existence until 1914, when, for reasons of economy in state taxation, the petitioner secured an amendment to its charter by which its authorized capital stock was increased from $75,000 to $400,000, and new stock issued to the old stockholders of the petitioner in exchange for the stock of the Holding Company of like par value. The Holding Company was thereupon dissolved and its assets, consisting of $89,000 par value of the stock of the Intelligencer and $75,000 par value of stock of the petitioner, were taken over by the petitioner, the old stock of the petitioner being canceled.
The petitioner and the Intelligencer were ruled nonaffiliated for the years on appeal.
No exact evidence was given as to petitioner's earnings from date of incorporation, though the business was successful. Dividends were paid for the greater part of the period from 1892 to 1904 at the rate of 6 per cent on the capitalization. The stock was closely held, no sales being made at or prior to 1904, except one sale of $5,000 to employees, three or four years prior to this date. In addition to the payment of dividends, earnings were left in the business to the extent that its net worth on January 1, 1904 (including that represented by outstanding capital stock), was approximately $170,000. On account of a fire loss in 1904, no dividends were paid in 1904 and 1905, but dividend payments were resumed in 1906, in which year and in the following year dividends were paid on the outstanding capital stock of the Holding Company at the rate of 2 per cent. Subsequently, with the exception of one year, up to and including 1913, dividends were paid at the rate of 6 per cent on the capital stock of the Holding Company.
Subsequent to the 1914 merger, the petitioner paid dividends at the rate of 6 per cent upon its total capitalization. In addition thereto, it paid one preferred-stock dividend of 50 per cent and one preferred-stock dividend of 20 per cent and has paid 7 per cent on these issues of stock.
The net worth of the petitioner as shown by its books of account on January 1, 1904, was approximately $170,000. Due to a fire on January 15, 1904, which caused a loss of approximately $75,000, the net worth on January 16, 1904, the date of the consolidation, was substantially less than that on January 1, 1904. The next statement of its net worth was on December 31, 1905, when it was $149,321.10. At the end of subsequent years it was as follows:
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Year. | Net worth. | Increase
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1906 _____________________________________________ | $175,250.28 | $25,929.18
1907 _____________________________________________ | 203,789.52 | 28,539.24
1908 _____________________________________________ | 229,437.38 | 25,647.86
1909 _____________________________________________ | 230,550.26 | 1,112.88
1910 _____________________________________________ | 253,321.82 | 22,771.56
1911 _____________________________________________ | 267,472.77 | 14,150.95
1912 _____________________________________________ | 285,729.92 | 18,257.15
1913 _____________________________________________ | 310,805.72 | 25,075.83
1914 _____________________________________________ | Not given | __________
1915 _____________________________________________ | 337,673.00 | 26,867.28
1916 _____________________________________________ | 341,065.62 | 3,392.62
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Various sums were spent by petitioner in building up circulation structure from 1892 to 1904 by means of popularity contests and other schemes common to the newspaper business, which amounts were charged to expenses. These expenditures from 1899 to 1916 were $76,139.20 for salaries and expenses of solicitors who were engaged solely in securing new business for the petitioner. Prior to 1904 various amounts had been expended in the acquisition and production of plates, many of which were used beyond the year in which acquired or manufactured in the lithographing and engraving business which was run as a branch of the newspaper. These expenditures were not capitalized, but charged to expense when made. Some of these plates had become obsolete by 1904.
The Intelligencer paid dividends on its capital stock from 1893 to 1898. In 1899 the majority of its stock was sold. From 1899 to 1904, the operation of the business was not so successful though it did prove a fair competitor in publishing the Wheeling Intelligencer, a morning paper, to the petitioner which published the Wheeling News, an afternoon and Sunday morning paper. Subsequent to 1904 no dividends were ever paid by the Intelligencer, though its net worth increased $78,309.08 from December 31, 1905, to January 1, 1914.
In computing the invested capital of the petitioner for 1918 and 1919, the Commissioner allowed as invested capital the capital stock and surplus as reflected by its books at the time of the reorganization in 1904 plus such earnings as had accrued since that date, thus disallowing the difference between the par value of the Holding Company's stock which was issued for petitioner's stock in 1904 and the net book value of petitioner's assets at that date. The Commissioner allowed no value for circulation structure or for plates, expenditures for both of which had been charged to expense.
The pertinent facts as far as necessary to a consideration of errors (2) and (3) alleged are as follows:
In 1913 or 1914, certain wealthy citizens of Washington, Pa., interested the petitioner in organizing the Washington News Co. (hereinafter referred to as the News), for the purpose of publishing a regular Republican newspaper in that town, the two papers published having joined the so-called Progressive Party, headed by the late Theodore Roosevelt. It was agreed that the corporation would be capitalized at $25,000, that the citizens would contribute $15,000 and the petitioner would contribute $10,000. The amount pledged by the petitioner was paid and stock issued therefor, but only approximately $11,000 was paid in by the citizens.
The corporation began the publication of the News on April 1, 1914, and continued until 1920, when operations were suspended and the affairs of the corporation wound up. The entire management of the corporation was carried on by the petitioner, and no further contributions were made, or assistance given, by the citizens for the operation or management of the News. Print paper was furnished by the petitioner and advances were made to cover a part of the cost of operations, which...
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