Willcuts v. Minnesota Tribune Co.

• Decision Date: 09 May 1939
• Docket Number: No. 11270.,11270.
• Citation: 103 F.2d 947
• Parties: WILLCUTS et al. v. MINNESOTA TRIBUNE CO.
• Court: U.S. Court of Appeals — Eighth Circuit

103 F.2d 947 (1939)

WILLCUTS et al. v. MINNESOTA TRIBUNE CO.

No. 11270.

Circuit Court of Appeals, Eighth Circuit.

April 18, 1939.

Rehearing Denied May 9, 1939.

Paul S. McMahon, Sp. Asst. to Atty. Gen. (James W. Morris, Asst. Atty. Gen., Sewall Key and J. Louis Monarch, Sp. Assts. to Atty. Gen., and Victor E. Anderson, U. S. Atty., and Linus J. Hammond, Asst. U. S. Atty., both of St. Paul, Minn., on the brief), for appellants.

Arnold L. Guesmer, of Minneapolis, Minn., for appellee.

Before STONE, WOODROUGH, and THOMAS, Circuit Judges.

THOMAS, Circuit Judge.

In computing its corporate gross income tax for the years 1924 to 1928 inclusive the Minnesota Tribune Company claimed three items of deduction under section 234 of the Revenue Act of 1926, c. 27, 44 Stat. 9, 41, and section 23 of the Revenue Act of 1928, c. 852, 45 Stat. 791, 799, 26 U.S.C.A. § 23. They were not allowed by the Commissioner; paid under protest; and this action brought against the Collector to recover them. Judgment was rendered in favor of the taxpayer and the government appeals.

For convenience the facts and issues respecting each of the three items will be considered separately.

1. The Purchase of the Daily News. The appellee is a corporation. It owns and publishes the Minneapolis Tribune, a daily newspaper. On June 26, 1923, it entered into a contract with the publishers of the Minneapolis News by the terms of which the Tribune purchased the entire circulation, the circulation lists, trade names, advertising lists and certain supplies of the News. In consideration for the title to these properties and rights the Tribune agreed to assume the payment of a note obligation of the News in the sum of $38,043.23, to pay $1000 in cash, and to deliver the Daily Tribune to all paid-in-advance subscribers to the News for the unexpired part of the terms of their several subscriptions. These ran for periods of from one to five years, and in some instances longer. The publishers of the News retained all money collected by them on these paid-in-advance subscriptions and none of it passed to the Tribune. The agreement to deliver the Tribune for the unexpired portion of the News subscriptions constituted a part of the purchase price of the News.

In recording its obligation to fill the prepaid News subscriptions by delivery of the Tribune the appellee estimated the value of the unexpired portion of these subscriptions at the Tribune subscription rate of $5 per year. Computed on this basis the resulting figure amounted to the sum of $164,608.86. This was, of course, a purely fictitious sum. No cash had been received from this source and no subscription income was expected until new subscriptions to the Tribune were acquired as a result of the expiration of those for the Daily News. However, the appellee treated this amount in its accounts as though it represented paid-in cash subscription money. Accordingly this sum was carried into its income account by crediting that account at the end of each month with 41.66¢ for each News subscriber to whom the Tribune had been delivered for that period. This practice was followed during the taxable years involved. The appellee's witnesses testified that this accounting method was used because the Tribune regarded these News subscriptions as having a definite value. The increased circulation resulted in additional advertising revenue. There was also the contingency of adding a new subscriber to the Tribune on the expiration of the Daily News subscription. But whatever the reason, a total of $164,608.86 of purely fictitious income was carried into the appellee's income account during the taxable years involved and included in the computation of net income in its income tax returns for these years.

Whenever a new subscription to the Tribune was not obtained on the expiration of that for the Daily News the appellee "reversed out" of its accounts the amount of fictitious income originally credited as arising from that particular News subscription. Its theory was that events had demonstrated the worthlessness of the original credit. The reversal was accomplished by calculating the period of the News subscription at the rate of 41¢ per month and deducting the total from gross income. Thus amounts that had been filtered into the income account over a period of several years were deducted in one lump sum. The following deductions in the aggregate amount of $112,407.54 were taken from the appellee's gross income:

                  1924 .................... $49,438.00
                  1925 ....................  12,053.26
                  1926 ....................  19,969.55
                  1927 ....................  14,640.49
                  1928 ....................  16,306.24
                

The appellee made no claim for refunds based on erroneously reported income. It however claimed the right to enter the above amounts as deductions from gross income in computing its income tax for these years. The Commissioner of Internal Revenue disallowed the deductions and imposed a tax on each amount at the applicable rate. This was done on the theory that these amounts were representative of the expenditures made by the appellee in carrying out its contract to furnish the Tribune to the subscribers of the Daily News; and that the expense thus incurred was a capital expenditure made for the purpose of acquiring the News Circulation and was therefore not deductible as an ordinary and necessary expense of carrying on business. Section 234 of the Revenue Act of 1926 provides that:

"Sec. 234. (a) In computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions:

"(1) All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered, and including rentals or other payments required to be made as a condition to the continued use or possession of property to which the corporation has not taken or is not taking title, or in which it has no equity."

The Commissioner's position may be summarized as follows: (1) That the actual cost of furnishing the Tribune to the News subscribers was approximately equal to the Tribune subscription rate for a like period; (2) that this money was spent by the appellee in the purchase of the News Circulation and was therefore a capital expenditure not deductible from gross income as an ordinary business expense; (3) that the fictitious items of income placed on the books of the appellee were offset by the deductions taken from gross income for the expense of sending the Tribune to the News subscribers; and (4) that the taxpayer is not entitled to deduct both the amounts of fictitious income reversed out of its accounts and the sums expended by it in acquiring a capital asset.

The appellee contends (1) that the expense of furnishing the Tribune to the News subscribers was not a capital expenditure but one that produced current revenue in the form of increased advertising income and was therefore properly treated as an ordinary expense of carrying on business and (2) that the government has received a tax on augmented income as a result of the inclusion of these fictitious items and should not object when they are used to reduce income.

The trial court adopted the appellee's theory in its findings of facts and conclusions of law and entered judgment accordingly. It refused the appellant's requested finding that: "The plaintiff, when it acquired the Daily News circulation, purchased a capital asset. The price that it paid could not be deducted from its gross income. This plaintiff did when it deducted from gross income the expense of sending the Tribune to the prepaid subscribers to the News. The fictitious item of income placed on the books of the plaintiff was offset by the deduction from gross income of the expense of sending the paper to these prepaid subscribers. It could not also deduct the item when the subscriber failed to renew."

Two questions are thus presented: (1) Was the appellee entitled to deduct the cost of furnishing the Tribune to the News subscribers as an ordinary and necessary expense of carrying on business? and (2), if so, was it entitled to deduct from its gross income in later years the reversals which represented fictitious income entered in earlier years?

It is well settled that the circulation of a newspaper is an intangible capital asset. Perkins Bros. Co. v. Commissioner of Internal Revenue, 8 Cir., 78 F.2d 152 and cases cited. It is equally well settled that money expended in increasing its circulation is a capital expenditure not deductible as an ordinary and necessary expense of carrying on business; and that the opposite is true of expenditures made for the purpose of maintaining but not increasing the present circulation structure. It can not be doubted, therefore, that money expended in purchasing the circulation of a newspaper must be held to be a capital expenditure. Perkins Bros. Co. v. Commissioner of Internal Revenue, supra; Public Opinion Pub. Co. v. Jensen, 8 Cir., 76 F.2d 494; Meredith Pub. Co. v. Commissioner of Internal Revenue, 8 Cir., 64 F.2d 890, and see Newspaper Printing Co. v. Commissioner of Internal Revenue, 3 Cir., 56 F.2d 125.

In the instant case the contract of purchase specifically provided "That first parties, (the publishers of the Daily News) in consideration of the agreements of second party (the appellee) * * * hereby sell, transfer and convey to second party, its successors and assigns, the circulation of their newspaper, known as the Minneapolis News" consisting of "34,000 paid-in-advance country circulation by mail direct to subscribers", 12,500 carrier circulation within Minneapolis and 5500 circulation by street sales. Part of the expressed consideration for this sale was the appellee's agreement to deliver the Tribune to the paid-in-advance subscribers of the News for the balance of their...