Opinion
Docket No. 37709.
1954-10-8
THE CONSTITUTION PUBLISHING COMPANY, BY ATLANTA NEWSPAPERS, INC., SUCCESSOR ON CONSOLIDATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
John E. McClure, Esq., Allen Post, Esq., Edward L. Updike, Esq., and William P. McClure, Esq., for the petitioner. George J. LeBlanc, Esq., for the respondent.
John E. McClure, Esq., Allen Post, Esq., Edward L. Updike, Esq., and William P. McClure, Esq., for the petitioner. George J. LeBlanc, Esq., for the respondent.
1. Claims for excess profits tax relief under section 722(b)(2), (4), and (5) of the Internal Revenue Code of 1939, based upon an alleged depression of base period income due to intense competition among petitioner and two other Atlanta, Georgia, daily newspapers denied where the evidence fails to show that there were depressed base period earnings because of a temporary or unusual circumstance in petitioner's experience.
2. There was no substantial change in the character of petitioner's business or other factors entitling petitioner to relief under section 722.
These proceedings are before this Court by reason of respondent's rejection of petitioner's application for relief and claims for refund under section 722 of the Internal Revenue Code of 1939.
The testimony was taken before a commissioner of this Court and his findings of fact were duly served on the parties. After a consideration of the objections to the commissioner's report as made by counsel for the respective parties, we make the following:
FINDINGS OF FACT.
Petitioner was organized under the laws of the State of Georgia, on November 13, 1899. From that date it was owned and controlled by local Atlanta interests, particularly Clark Howell, Sr., until November 14, 1936, and Clark Howell, Jr., from November 14, 1936 to 1950. On the latter date, the taxpayer consolidated with the Atlanta Journal Company under the corporate name of Atlanta Newspapers, Inc.
From the date of incorporation until 1950, petitioner's principal business was the publication of a morning and Sunday newspaper— the Atlanta Constitution—in the city of Atlanta. In addition to publishing the Constitution, the petitioner operated, as a division of its business, the Southern Engraving Company, which made all the engravings used by the Constitution, and also made engravings for other customers. Between the years 1929 and 1935, the petitioner published the Southern Cultivator, a rural newspaper.
Clark Howell, Jr., became petitioner's president to succeed his father, who died November 14, 1936, and continued as president and principal stockholder until the consolidation in 1950.
Shortly after the death of Clark Howell, Sr., petitioner received $204,204.04 in cash under insurance policies which it carried on his life.
Throughout 1936, 1937, and 1938 and until December 16, 1939, there were three daily newspapers published in Atlanta— the Atlanta Constitution, published by petitioner; the Atlanta Journal, published by other Atlanta interests; and the Atlanta Georgian, published by a department of Hearst Consolidated Publications, Inc. These papers will be referred to hereinafter as the Constitution, the Journal, and the Georgian. The Constitution was a morning paper while the Journal and the Georgian were both afternoon papers. All three published Sunday editions with special features.
In December 1939 both the Journal and the Georgian were purchased by James M. Cox of Dayton, Ohio, and publication of the Georgian was discontinued. The principal assets of the Georgian, consisting of a building and furnishings, circulation lists, and various equipment were transferred over to the Journal. The date of purchase of the Georgian by Cox was December 6, 1939, and of the Journal, December 16, 1939.
At all times since the Georgian started publication, and particularly at all times since 1926, there was intense competition among the three Atlanta newspapers for circulation and advertising. This competition tended to lessen the individual earnings of each of the newspapers and especially their advertising income. Large losses were sustained in all of the base period years from the publication of both the Journal and the Georgian. The following table shows the income (or loss) from the publication of each of the papers for the years 1926 to 1939, inclusive.
+---------------------------------------------------------------+ ¦Year ¦Constitution¦Georgian ¦Journal 1 ¦ +------------------------+------------+-------------+-----------¦ ¦1926 ¦$97,554 ¦($199,998) ¦$170,024 ¦ +------------------------+------------+-------------+-----------¦ ¦1927 ¦23,850 ¦(357,089) ¦216,361 ¦ +------------------------+------------+-------------+-----------¦ ¦1928 ¦54,588 ¦(413,805) ¦277,742 ¦ +------------------------+------------+-------------+-----------¦ ¦1929 ¦100,494 ¦(516,801) ¦223,730 ¦ +------------------------+------------+-------------+-----------¦ ¦1930 ¦(18,457) ¦(916,048) ¦(14,340) ¦ +------------------------+------------+-------------+-----------¦ ¦1931 ¦12,867 ¦(749,771) ¦9,156 ¦ +------------------------+------------+-------------+-----------¦ ¦1932 ¦(114,174) ¦(561,529) ¦(151,590) ¦ +------------------------+------------+-------------+-----------¦ ¦1933 ¦41,385 ¦(351,589) ¦5,061 ¦ +------------------------+------------+-------------+-----------¦ ¦1934 ¦52,297 ¦(221,595) ¦(94,518) ¦ +------------------------+------------+-------------+-----------¦ ¦1935 ¦121,432 ¦(244,799) ¦(218,267) ¦ +------------------------+------------+-------------+-----------¦ ¦1936 ¦105,184 ¦(183,307) ¦(208,799) ¦ +------------------------+------------+-------------+-----------¦ ¦1937 ¦28,277 ¦(179,306) ¦(263,820) ¦ +------------------------+------------+-------------+-----------¦ ¦1938 ¦5,880 ¦(197,732) ¦(141,110) ¦ +------------------------+------------+-------------+-----------¦ ¦1939 ¦66,499 ¦2 (188,276)¦(6,143) ¦ +------------------------+------------+-------------+-----------¦ ¦Computed annual average:¦ ¦ ¦ ¦ +------------------------+------------+-------------+-----------¦ ¦1926-1935 ¦37,184 ¦(453,302) ¦42,336 ¦ +------------------------+------------+-------------+-----------¦ ¦1936-1939 ¦51,460 ¦(187,155) ¦(154,968) ¦ +---------------------------------------------------------------+
The average annual advertising linage for the Constitution in the years 1933 through 1935 was 8,267,570 lines, from which it derived an average annual net revenue of $967,330, or an average annual revenue per line of $0.11700. The newspaper's average annual advertising linage in the base period, 1936 through 1939, was 8,597,141 lines, from which it derived an annual net revenue of $1,013,735, or an average annual yield per line of $0.11792.
The average annual circulation of the Constitution during the years 1933 through 1935 was 95,774, from which it derived an average annual net circulation revenue of $583,290, or an average annual yield of $6.090 per unit of circulation. In the base period, 1936 through 1939, its average annual circulation was 101,971, from which it derived an average annual net revenue of $742,770, or an average annual yield per unit of circulation of $7.284.
Petitioner's net income (and loss) to the nearest dollar, from its different divisions for the years 1922 through 1939, as shown by its audit reports and as determined by the Bureau of Internal Revenue were as follows:
+-----------------------------------------------------------------------------+ ¦Year¦Atlanta ¦Southern ¦Southern ¦Total (as per ¦Total (per Bureau of ¦ ¦ ¦Constitution¦Engraving ¦Cultivator¦audit reports) ¦Internal Revenue) ¦ +----+------------+----------+----------+---------------+---------------------¦ ¦1922¦$3,472 ¦ ¦ ¦$3,472 ¦$13,364 ¦ +----+------------+----------+----------+---------------+---------------------¦ ¦1923¦20,849 ¦ ¦ ¦20,849 ¦34,547 ¦ +----+------------+----------+----------+---------------+---------------------¦ ¦1924¦50,333 ¦ ¦ ¦50,333 ¦44,941 ¦ +----+------------+----------+----------+---------------+---------------------¦ ¦1925¦(39,363) ¦ ¦ ¦(39,363) ¦(39,433) ¦ +----+------------+----------+----------+---------------+---------------------¦ ¦1926¦97,554 ¦ ¦ ¦97,554 ¦148,866 ¦ +----+------------+----------+----------+---------------+---------------------¦ ¦1927¦23,850 ¦($442) ¦ ¦23,408 ¦29,086 ¦ +----+------------+----------+----------+---------------+---------------------¦ ¦1928¦54,588 ¦(569) ¦ ¦54,019 ¦63,546 ¦ +----+------------+----------+----------+---------------+---------------------¦ ¦1929¦100,494 ¦1,136 ¦($6,742) ¦94,888 ¦105,057 ¦ +----+------------+----------+----------+---------------+---------------------¦ ¦1930¦(18,457) ¦2,135 ¦(5,740) ¦(22,062) ¦(18,906) ¦ +----+------------+----------+----------+---------------+---------------------¦ ¦1931¦12,867 ¦(2,596) ¦(15,434) ¦(5,163) ¦1,595 ¦ +----+------------+----------+----------+---------------+---------------------¦ ¦1932¦(114,174) ¦(5,542) ¦(3,217) ¦(122,933) ¦(117,595) ¦ +----+------------+----------+----------+---------------+---------------------¦ ¦1933¦41,385 ¦3,247 ¦(7,612) ¦37,020 ¦46,928 ¦ +----+------------+----------+----------+---------------+---------------------¦ ¦1934¦52,297 ¦9,983 ¦(11,943) ¦50,337 ¦87,810 ¦ +----+------------+----------+----------+---------------+---------------------¦ ¦1935¦121,432 ¦23,752 ¦17,169 ¦162,353 ¦159,184 ¦ +----+------------+----------+----------+---------------+---------------------¦ ¦1936¦105,184 ¦28,809 ¦ ¦133,993 ¦151,070 ¦ +----+------------+----------+----------+---------------+---------------------¦ ¦1937¦28,277 ¦44,487 ¦ ¦72,764 ¦82,854 ¦ +----+------------+----------+----------+---------------+---------------------¦ ¦1938¦5,880 ¦71,405 ¦ ¦78,285 ¦93,841 ¦ +----+------------+----------+----------+---------------+---------------------¦ ¦1939¦66,499 ¦86,905 ¦ ¦153,404 ¦146,940 ¦ +-----------------------------------------------------------------------------+
Petitioner's computed average net income from publication of the Constitution for the years shown above, as determined from its audit reports, was as follows:
+------------------+ ¦1922-1939 ¦$34,054¦ +----------+-------¦ ¦1922-1935 ¦29,081 ¦ +----------+-------¦ ¦1936-1939 ¦51,460 ¦ +------------------+
Petitioner's net advertising revenue, circulation revenue, miscellaneous revenue, total operating expenses, and net operating profits from the publication of the Constitution for the years 1936 to 1942, inclusive, were as follows:
+-------------------------------------------------------------+ ¦The Constitution Publishing Company—Atlanta, Georgia ¦ +-------------------------------------------------------------¦ ¦ ¦¦ ¦ ¦ ¦ +-------------------------------------------------------------¦ ¦COMPARATIVE STATEMENT OF REVENUE AND EXPENSE ¦ +-------------------------------------------------------------¦ ¦ ¦¦1936 ¦1937 ¦1938 ¦ +--------------------++------------+------------+-------------¦ ¦ ¦¦ ¦ ¦ ¦ +--------------------++------------+------------+-------------¦ ¦Revenue ¦¦ ¦ ¦ ¦ +--------------------++------------+------------+-------------¦ ¦Advertising ¦¦$974,193.10 ¦$981,285.63 ¦$1,012,403.79¦ +--------------------++------------+------------+-------------¦ ¦Circulation ¦¦683,241.58 ¦717,069.66 ¦744,352.28 ¦ +--------------------++------------+------------+-------------¦ ¦Miscellaneous ¦¦2,652.70 ¦1,954.64 ¦2,320.75 ¦ +--------------------++------------+------------+-------------¦ ¦Expense ¦¦1,497,758.04¦1,627,440.89¦1,702,604.84 ¦ +--------------------++------------+------------+-------------¦ ¦Net operating profit¦¦162,329.34 ¦72,869.04 ¦56,471.98 ¦ +-------------------------------------------------------------+
1939 1940 1941 1942 Revenue Advertising $1,087,043.48 $1,413,414.45 $1,413,765.03 1,306,851.43 Circulation 826,415.21 990,554.45 1,029,461.07 1,103,002.21 Miscellaneous 1,113.09 1,473.01 2,208.06 1,466.43 Expense 1,828,135.94 2,306,072.34 2,358,768.36 2,093,370.40 Net operating profit 86,435.84 99,370.07 86,665.80 317,949,67
The losses sustained by Hearst Consolidated Publications, Inc., during the years 1936 to 1939, inclusive, from the publication of the Georgian, were offset against its net income from the publication of its other widely distributed newspapers and periodicals, while the losses of the Atlanta Journal Company from the publication of the Journal were largely, and in some years entirely, offset by the income which it received from the operation of a radio station, WSB, in Atlanta, Georgia. The radio profits amounted to:
+-------------------+ ¦Year ¦Profits ¦ +------+------------¦ ¦1936 ¦$148,965.15 ¦ +------+------------¦ ¦1937 ¦239,152.52 ¦ +------+------------¦ ¦1938 ¦232,848.91 ¦ +------+------------¦ ¦1939 ¦217,595.21 ¦ +------+------------¦ ¦1940 ¦193,632.78 ¦ +-------------------+
Most of the cities in the United States of comparable size to Atlanta had, during the base period, only two major daily newspapers. Usually there was one morning and one afternoon paper, published by different publishers, but in some instances the same publisher would put out both a morning and afternoon paper.
The circulation of the Constitution and the Journal for the years 1936 to 1942, inclusive, and of the Georgian up to the time its publication ceased, was as follows:
+----------------------------------+ ¦Year¦Constitution¦Journal¦Georgian¦ +----+------------+-------+--------¦ ¦1936¦104,093 ¦100,736¦100,388 ¦ +----+------------+-------+--------¦ ¦1937¦109,815 ¦109,823¦105,882 ¦ +----+------------+-------+--------¦ ¦1938¦91,991 ¦100,571¦86,619 ¦ +----+------------+-------+--------¦ ¦1939¦101,986 ¦109,599¦88,686 ¦ +----+------------+-------+--------¦ ¦1940¦123,545 ¦159,208¦ ¦ +----+------------+-------+--------¦ ¦1941¦130,045 ¦168,385¦ ¦ +----+------------+-------+--------¦ ¦1942¦138,244 ¦183,141¦ ¦ +----------------------------------+
The circulation of the Constitution, during the base period years, was approximately 20 per cent below the average of a representative group of 20 comparable southern newspapers.
The advertising linage of the three Atlanta papers for the base period years, and petitioner's percentage thereof, were as follows:
+-----------------------------------------------------------------------------+ ¦Advertising linages ¦ ¦ ¦ ¦ ¦ +---------------------------------+----------+----------+----------+----------¦ ¦ ¦1936 ¦1937 ¦1938 ¦1939 ¦ +---------------------------------+----------+----------+----------+----------¦ ¦Constitution (Morning and Sunday)¦8,503,130 ¦8,429,041 ¦8,421,108 ¦9,035,286 ¦ +---------------------------------+----------+----------+----------+----------¦ ¦Journal (Evening and Sunday) ¦10,307,175¦10,809,279¦10,263,292¦11,858,074¦ +---------------------------------+----------+----------+----------+----------¦ ¦Georgian (Evening and Sunday) ¦8,282,370 ¦8,524,355 ¦7,638,710 ¦7,819,345 ¦ +---------------------------------+----------+----------+----------+----------¦ ¦Totals ¦27,092,675¦27,762,675¦26,323,110¦28,712,705¦ +---------------------------------+----------+----------+----------+----------¦ ¦Constitution's percentage ¦31.39% ¦30.36% ¦31.99% ¦31.47% ¦ +-----------------------------------------------------------------------------+
The average advertising linage of 10 comparable southern daily newspapers, in the base period years, was from 122.9 per cent to 134.3 per cent above petitioner's. On the basis of population served, petitioner's total advertising linage, in the base period years, was approximately 20 per cent below that of the average of a comparable nationwide group of daily newspapers.
The competitive practices of the Georgian were responsible, largely, for the advertising competition among the Atlanta papers. The Georgian was the newest of the group and was less firmly established in both the circulation and advertising fields than either the Constitution or the Journal. While all three papers had fixed advertising rates, they deviated from the rate schedules by offering rebates, discounts, or other concessions to advertisers. The Constitution and the Journal met the competitive practices of the Georgian, with the result that their net revenues per line of advertising were below those of comparable newspapers.
The following table shows the combined rebates, allowances, and discounts made by the Constitution for the base period years as reflected in its books and records:
+------------------------------------------+ ¦ ¦Rebates and¦ ¦ ¦ +------+-----------+-----------+-----------¦ ¦Year ¦allowances ¦Discounts ¦Total ¦ +------+-----------+-----------+-----------¦ ¦1936 ¦$81,295.50 ¦$31,992.14 ¦$113,287.64¦ +------+-----------+-----------+-----------¦ ¦1937 ¦77,182.80 ¦34,317.71 ¦111,500.51 ¦ +------+-----------+-----------+-----------¦ ¦1938 ¦89,437.11 ¦32,636.78 ¦122,073.89 ¦ +------+-----------+-----------+-----------¦ ¦1939 ¦97,248.01 ¦35,380.92 ¦132,628.93 ¦ +------+-----------+-----------+-----------¦ ¦Totals¦$345,163.42¦$134,327.55¦$479,490.97¦ +------------------------------------------+
In the summer of 1939, petitioner decided that it would be to its advantage to purchase the Atlanta Georgian for the purpose of discontinuing its publication and eliminating the competition. It instructed its attorney to negotiate with the Hearst interests with that in view. In the course of negotiations petitioner's attorney made an offer of $750,000 for the Georgian, but before any action was taken on this offer the Hearst interests, in December 1939, sold the paper to James M. Cox for $800,000. At about the same time, Cox purchased the Atlanta Journal, and on December 16, 1939, discontinued the publication of the Georgian.
On learning of the discontinuance of the Georgian petitioner immediately set out to capture as much as possible of its circulation and advertising. First, it hired a number of the Georgian's best qualified employees; it added several new features to the Constitution, including the Associated Press Wire Photo Service, the full services of the Chicago Tribune, the magazine supplement ‘This Week,‘ which had been held by the Journal, and increased its United Press service. Most of the new employees were in petitioner's editorial, circulation, and mechanical departments.
Petitioner also acquired additional plant equipment, some of which had been used by the Georgian. This included five linotype machines, a proof press, and other composing room equipment. The following table shows petitioner's depreciable assets and total assets at the end of each of the years 1939 to 1942, inclusive:
+------------------------------------------+ ¦Year ¦Depreciable assets ¦Total assets ¦ +------+--------------------+--------------¦ ¦1939 ¦$872,059.84 ¦$1,047,008.47 ¦ +------+--------------------+--------------¦ ¦1940 ¦913,423.83 ¦1,245,335.28 ¦ +------+--------------------+--------------¦ ¦1941 ¦1,078,413.84 ¦1,366,750.19 ¦ +------+--------------------+--------------¦ ¦1942 ¦1,100,001.66 ¦1,584,795.94 ¦ +------------------------------------------+
Petitioner continued through 1940 and 1941 in its efforts to capture the circulation and advertising the Georgian had prior to its discontinuance and these efforts were responsible for a large portion of the increased expenses of those years.
The following table shows, separately, the circulation and advertising revenue of the Constitution for the base period years (average) and for each of the years 1940, 1941, and 1942, and the percentage increases in the latter years over the 1936-1939 average:
+-------------------------------------------------------------------+ ¦Advertising ¦ ¦Circulation¦ ¦ ¦ +-------------------+-------------+-----------+------------+--------¦ ¦Year ¦ ¦ ¦ ¦ ¦ +-------------------+-------------+-----------+------------+--------¦ ¦ ¦ ¦Per cent ¦ ¦Per cent¦ +-------------------+-------------+-----------+------------+--------¦ ¦ ¦Total ¦increase ¦Total ¦increase¦ +-------------------+-------------+-----------+------------+--------¦ ¦1936-1939 (average)¦$1,013,731.50¦100 ¦$742,769.68 ¦100 ¦ +-------------------+-------------+-----------+------------+--------¦ ¦1940 ¦1,413,414.45 ¦139 ¦990,554.45 ¦133 ¦ +-------------------+-------------+-----------+------------+--------¦ ¦1941 ¦1,413,765.03 ¦139 ¦1,029,461.07¦139 ¦ +-------------------+-------------+-----------+------------+--------¦ ¦1942 ¦1,306,851.43 ¦129 ¦1,103,002.21¦148 ¦ +-------------------------------------------------------------------+
The total advertising linage in the newspapers in 52 major cities in the United States showed a decrease in 1940, 1941, and 1942 from the 1936-1939 average as follows:
+----------------------------------------+ ¦Year ¦Advertising ¦Increase (or¦Index¦ +-------+-------------+------------+-----¦ ¦ ¦linage ¦decrease) ¦ ¦ +-------+-------------+------------+-----¦ ¦1936 ¦1,380,121,457¦ ¦ ¦ +-------+-------------+------------+-----¦ ¦1937 ¦1,409,666,418¦ ¦ ¦ +-------+-------------+------------+-----¦ ¦1938 ¦1,225,165,889¦ ¦ ¦ +-------+-------------+------------+-----¦ ¦1939 ¦1,243,549,515¦ ¦ ¦ +-------+-------------+------------+-----¦ ¦Average¦1,314,625,819¦ ¦100 ¦ +-------+-------------+------------+-----¦ ¦1940 ¦1,268,631,772¦(45,994,047)¦96.5 ¦ +-------+-------------+------------+-----¦ ¦1941 ¦1,313,233,254¦(1,392,565) ¦99.9 ¦ +-------+-------------+------------+-----¦ ¦1942 ¦1,241,671,534¦(72,954,285)¦94.5 ¦ +----------------------------------------+ At the same time, the advertising linage of the Constitution and the Journal for 1940, 1941, and 1942 increased over the 1936-1939 average, as follows:
+----------------------------------------------------+ ¦Year ¦The Constitution ¦The Journal ¦ +-------------------+------------------+-------------¦ ¦1936-1939 (average)¦8,597,141 ¦10,809,455 ¦ +-------------------+------------------+-------------¦ ¦1940 ¦11,959,602 ¦14,450,418 ¦ +-------------------+------------------+-------------¦ ¦1941 ¦11,534,908 ¦14,937,479 ¦ +-------------------+------------------+-------------¦ ¦1942 ¦9,992,226 ¦13,055,180 ¦ +----------------------------------------------------+ The combined average of advertising linage of the three Atlanta papers for the base period years was 27,472,791, while the combined average of the Constitution and the Journal were 26,410,020 for 1940; 26,472,387 for 1941; and 23,047,406 for 1942.
Beginning about 1930 and continuing through the base period years there was a steady downward trend in newspaper advertising in the United States. This was attributable, in part, to the development and growth of radio advertising and also the increasing amount of advertising going to magazines and news weeklies. General business conditions also added to the decline. Newspaper circulation revenue also declined somewhat during the early 1930's but began to rise about 1934 and continued upward through 1940.
Nationwide advertising revenues in millions of dollars for newspapers, periodicals, and radio, for the period 1929 to 1939, inclusive, were as follows:
+-----------------------------------------------+ ¦ ¦All ¦All ¦ ¦Total for¦ +----+----------+-----------+---------+---------¦ ¦Year¦newspapers¦periodicals¦All radio¦3 media ¦ +----+----------+-----------+---------+---------¦ ¦1929¦$797.3 ¦$322.9 ¦$22.8 ¦$1,141.0 ¦ +----+----------+-----------+---------+---------¦ ¦1931¦625.0 ¦243.6 ¦47.6 ¦916.2 ¦ +----+----------+-----------+---------+---------¦ ¦1933¦428.7 ¦141.0 ¦48.4 ¦618.1 ¦ +----+----------+-----------+---------+---------¦ ¦1935¦500.0 ¦186.1 ¦79.6 ¦765.7 ¦ +----+----------+-----------+---------+---------¦ ¦1937¦574.2 ¦235.9 ¦117.9 ¦928.0 ¦ +----+----------+-----------+---------+---------¦ ¦1939¦539.5 ¦224.5 ¦130.0 ¦894.0 ¦ +-----------------------------------------------+
During the 1929-1939 period, newspaper advertising rates remained at about the same level while the rates of other advertising media showed a downward trend. At the same time, there was an upward trend in newspaper circulation rates, which tended to restrict circulation. The loss of circulation, in turn, adversely affected advertising, so that the newspaper industry was caught in a declining spiral. As a result, a number of daily newspapers suspended operations, by merger or otherwise. The total number of publications decreased from 1,944 in 1929 to 1,888 in 1939, and a number of daily papers changed to weeklies.
The amount of newspaper advertising in different localities varies according to local advertising practices. It may vary greatly in cities of comparable size and with newspapers of comparable circulation. Local economic conditions in a particular trade area may also affect advertising in that area.
Petitioner's excess profits credits for the taxable years involved, computed under the invested capital method for 1940 and under the income method for 1941, 1942, and 1943, were: $91,295.22 for 1940, $106,789.22 for 1941, and $110,215.07 for each of the years 1942 and 1943.
OPINION.
ARUNDELL, Judge:
The petitioner applied to the respondent for relief from its excess profits taxes for the calendar years 1940, 1942, and 1943, and in its application and claims for refund in the total amount of $278,578.16, it urged that grounds for relief were present under subsections (b)(2), (4), and (5) of section 722 of the Internal Revenue Code of 1939. The respondent rejected the claims and denied the relief sought, and the case is now before the Tax Court for a review of respondent's action. In its petition filed with this Court, the petitioner relies on the same broad facts and the same subsections of the statute as it had when pursuing its claims before the respondent.
The design of the excess profits tax statute is to treat the earnings during the so-called base period of 1936 to 1939, inclusive, as normal earnings and a credit equal to 95 per cent of these average earnings is first deducted before subjecting the profits of the war years to the excess profits tax. Congress recognized that in some instances the actual base period income was not a fair and just measure of a corporation's normal earnings to be used in fixing the credit to be applied in excess profits tax cases and to that end enacted a series of provisions for making adjustments under specified circumstances. In section 722 of the Internal Revenue Code of 1939 it permitted a taxpayer who felt aggrieved to apply to the Commissioner of Internal Revenue for relief. The relief which is provided by this section, whether granted by the respondent or by this Court, is not based on broad, equitable principles, but can be granted only if certain conditions exist. Alexandria Amusement Corporation, 16 T.C. 446. Section 722 spells out in considerable detail the factors and circumstances necessary for a corporation to make itself eligible for the relief sought.
Petitioner had been publishing for many years a daily and Sunday newspaper in general circulation in the city of Atlanta, Georgia, in competition with two other newspapers of a general circulation published in the afternoon and on Sunday. It is petitioner's contention that the field could only reasonably support two newspapers and that with a third one in the field the competition was intense, particularly in the matter of securing advertising and circulation, with the result that its business became depressed and remained so until one of the newspapers, the Georgian, suspended publication in the latter part of 1939. Petitioner urges that the large increase in its earnings in the tax years resulted from the elimination of the Georgian as a competitor and that the added profits sought to be subjected to the excess profits tax did not result from the impact of the war economy, but from this lessened competition.
The problem we have is not made simpler by a recognition of the fact that the circulation of a newspaper depends on many factors, such as the nature of its news coverage, its editorial slant, the nature of its sports and financial pages, or even its comic section. It is not selling goods of a standard brand where a price tag is the main consideration of the purchaser, but a variety of reasons enter into the selection of the paper one subscribes for, or, indeed, the paper one advertises in.
It is petitioner's first contention that it is entitled to relief under section 722(b)(2).
As we have said previously, ‘The essential elements of this subsection * * * are: (1) the business of taxpayer * * * must be depressed, (2) the depression of business must be caused by temporary economic circumstances, and (3) such circumstances must be ‘unusual in the case of the taxpayer.‘‘ Kentucky Whip & Collar Co., 19 T.C. 743, 749.
Decision will be entered for the respondent. SEC. 722. GENERAL RELIEF— CONSTRUCTIVE AVERAGE BASE PERIOD NET INCOME.(b) TAXPAYERS USING AVERAGE EARNINGS METHOD.— The tax computed under this subchapter (without the benefit of this section) shall be considered to be excessive and discriminatory in the case of a taxpayer entitled to use the excess profits credit based on income pursuant to section 713. If its average base period net income is an inadequate standard of normal earnings because—(2) the business of the taxpayer was depressed in the base period because of temporary economic circumstances unusual in the case of such taxpayer or because of the fact that an industry of which such taxpayer was a member was depressed by reason of temporary economic events unusual in the case of such industry. 2. SEC. 722.— GENERAL RELIEF— CONSTRUCTIVE AVERAGE BASE PERIOD NET INCOME.(b) TAXPAYERS USING AVERAGE EARNINGS METHOD.— The tax computed under this subchapter (without the benefit of this section) shall be considered to be excessive and discriminatory in the case of a taxpayer entitled to use the excess profits credit based on income pursuant to section 713, if its average base period net income is an inadequate standard of normal earnings because(4) the taxpayer, either during or immediately prior to the base period, commenced business or changed the character of the business and the average base period net income does not reflect the normal operation for the entire base period of the business. If the business of the taxpayer did not reach, by the end of the base period, the earning level which it would have reached if the taxpayer had commenced business or made the change in the character of the business two years before it did so, it shall be deemed to have commenced the business or made the change at such earlier time. For the purpose of this subparagraph, the term ‘change in the character of the business' includes a change in the operation or management of the business, a difference in the products or services furnished, a difference in the capacity for production or operation, a difference in the ratio of non-borrowed capital to total capital, and the acquisition before January 1, 1940, of all or part of the assets of a competitor, with the result that the competition of such competitor was eliminated or diminished. Any change in the capacity for production or operation of the business consummated during any taxable year ending after December 31, 1939, as a result of a course of action to which the taxpayer was committed prior to January 1, 1940, or any acquisition before May 31, 1941, from a competitor engaged in the dissemination of information through the public press, of substantially all the assets of such competitor employed in such business with the result that competition between the taxpayer and the competitor existing before January 1, 1940, was eliminated, shall be deemed to be a change on December 31, 1939, in the character of the business, * * * -------- Notes:
The Journal figures are for fiscal years ending April 30.
We think the facts as we have found them disclose that during the base period years, petitioner's advertising revenue and income from circulation were gradually growing year-by-year and that its business was better in the base period than prior to the base period. Petitioner's average annual net advertising revenue during the base period exceeded the average annual income from this source during the period 1933 through 1935, and its average annual yield per line of advertising in the base period exceeded the average annual yield per line of advertising during the 1933-1935 period. Petitioner's average annual circulation, circulation revenue, and yield per unit of circulation were greater in the base period than for the years 1933 through 1935. Also, petitioner's average annual net income from the publication of the Constitution in the base period of $51,460 was substantially greater than the average annual net income of $37,184 realized from the newspaper during the 10-year period from 1926 through 1935.
On the basis of our findings, we cannot conclude that the petitioner's business was depressed during the base period. The business of the petitioner was growing, up to and through the base period, despite the concurrent existence of the very competition to which the petitioner points as the cause of the alleged base period depression. When all the facts have been analyzed, they show that the petitioner realized a substantial increase in its average annual net income in the base period over the average income in its prior history, despite the fact that during the base period the petitioner was encountering substantial increases in operating costs. It is quite obvious, for example, that there was an abrupt increase in the cost of petitioner's newsprint during the base period. There were also steady increases in the wages and salaries of operating personnel during the base period. We think that it was these and other increases in operating expenses which cut most into petitioner's earnings during the base period and that the comparatively smaller increases in rebates, allowances, and discounts, which may have been brought on by competition, did not significantly affect the petitioner's profits between 1936 and the end of 1939.
However, assuming that the foregoing summary establishes the contrary conclusion that the petitioner's business was depressed during the base period, the petitioner has failed to satisfy the remaining elements which must be proved to qualify for relief under section 722(b)(2). That is to say, the petitioner has failed to show that its business was depressed because of temporary economic circumstances unusual in its case. In this context, ‘temporary’ is a relative term. We have quoted with approval the respondent's Regulations 112, section 35.722-3(b), where it is said that ‘An economic circumstance is temporary depending upon the character and nature of such circumstances, rather than upon the mere length of time of its existence.’ Kentucky Whip & Collar Co., supra.
The petitioner contends that the competition it received from the Georgian was temporary because no third newspaper could expect long to survive in Atlanta and unusual because the Hearst interest were callous to the substantial losses experienced by the Georgian. However, we have said, ‘Competition is present in almost any business. Instead of it being something unusual, it is quite common. It is of the very essence of our capitalistic system.’ Lamar Creamery Co., 8 T.C. 928, 939. We think that this is particularly true of the newspaper publishing business.
Nor do we think that a competitive situation which existed at least 10 years before the base period can be considered temporary, particularly where the petitioner has indicated its ability to live with the competition it complains of and even increase its average annual net profits over the years. Cf. Winter Paper Stock Co., 14 T.C. 1312, 1320; Packer Publishing Co., 17 T.C. 882, 897, remanded for other reasons (C.A. 8, 1954) 211 F.2d 612.
Nor do we think that the petitioner qualifies for relief under section 722(b) (4).
There was no substantial change in the character of petitioner's business during the base period. Only the volume of business and , perhaps, the profit ration were affected by the removal of the competition. While petitioner did acquire some of the Georgian's assets and hire some of its employees, it is not shown that these were changes which substantially increased its capacity for production or affected the character of its business. See Stonhard Co., 13 T.C. 790; Wisconsin Farmer Co., 14 T.C. 1021. There was no evidence that petitioner ever suffered from any lack of capacity or facilities for carrying on its business.
The Georgian figures for 1939 are to December 17.
Petitioner argues that the change in the character of its business came about by its acquisition of assets of a competitor, with the result that competition between it and the competitor was eliminated. This position is untenable. It was not petitioner's acquisition of assets formerly owned by the Georgian or the hiring of a few of its former employees that resulted in the elimination of the Georgian from competition. It was the purchase of the Georgian and the Journal by the James M. Cox interests.
Unquestionably, there was a substantial change in petitioner's general economic situation which was brought about by the discontinuance of the Georgian; but that was not such a change as subsection (b)(4) was intended to cover. The plain requirement of the statute is that the improved condition must result ‘because the taxpayer * * * changed the character of the business * * * .’ This change in the economic picture was not a change resulting from any undertaking of the petitioner. Petitioner had no part in the purchase of the Georgian or the cessation of its publication. See Clermont Groves, Inc., 17 T.C. 1616.
Petitioner's claim for relief under subsection (b)(5) of section 722 is bottomed on two grounds. The first is that its earnings were depressed by reason of the so-called unfair competition of the Georgian during the base period, a point we have already considered and disposed of when advanced in support of relief under subsection (b)(2).
The second ground urged by petitioner is ‘that the discontinuance of the Georgian in December 1939, was a factor affecting its business which resulted in increased earnings, the effect of which was not adequately reflected in its average base period net income.’ There is no doubt that when the competition of the Georgian was removed and petitioner captured some of the former advertising and circulation, there was a resulting increase in petitioner's level of earnings but, in our opinion, this fortunate happening is not an event which also brings petitioner within the relief provisions of section 722. This latter argument is one which we also considered in disposing of petitioner's claim for relief under subsection (b)(4).
Having heretofore concluded that these factors, when considered in connection with claims for relief under subsections (b)(2) and (b)(4), were not in the circumstances here present sufficient to warrant relief, it would seem to us to be clearly inconsistent if these same factors were now sufficient to qualify for relief under subsection (b)(5). We again call attention to the express statutory provision in subsection (b)(5) providing that the application of this section must not be inconsistent with the principles underlying the provisions of this subsection and with the conditions and limitations enumerated therein. Clermont Groves, Inc., supra; George Kemp Real Estate Co., 12 T.C. 943; Granite Construction Co., 19 T.C. 163.
In our opinion the statute does not afford relief in circumstances such as existed in this case.
Reviewed by the Special Division.