Opinion ID: 569102
Heading Depth: 2
Heading Rank: 2

Heading: The Newspaper Subscriber List Cases

Text: 24 In furtherance of their respective arguments, the parties call our attention principally to two cases that have considered the depreciability of acquired subscriber lists in the context of a newspaper acquisition. Because these two cases present a useful vehicle for framing the instant dispute, we will consider each in some detail. 25 The Service places substantial emphasis on the Fifth Circuit's decision in Houston Chronicle Publishing Co. v. United States, 481 F.2d 1240 (5th Cir.1973), cert. denied, 414 U.S. 1129, 94 S.Ct. 867, 38 L.Ed.2d 754 (1974), as an example of the correct application of § 1.167(a)-3 to determine the tax consequences of an acquisition such as the one before us. That case arose from a transaction in which the plaintiff, the publisher of the Houston Chronicle, paid $4.5 million for various assets, including a list of 89,000 subscribers, of its former competitor, the Houston Press, upon cessation of the latter's activities as a going concern. After the purchase, the Chronicle estimated that it would be able to use the list to contact and solicit new subscriptions from 35,600 former Press subscribers. Estimating further that previously it had spent roughly $2 to identify and solicit each new subscriber, the Chronicle assigned a value to the list of $71,200 and claimed depreciation deductions against this amount under § 167(a). 26 The Service disallowed the deduction on the ground that the customer list was nondepreciable under the so-called mass asset rule, a now outdated, but then prevalent, doctrine which requires brief explanation. Until 1973, the Service successfully had persuaded the courts that documentary evidence of customer structure, such as a customer list, was generally sufficiently intertwined with goodwill, if not goodwill itself, so as to render depreciation inappropriate as a rule-of-thumb. There emerged, in support of this result, the mass asset or indivisible asset doctrine, a sort of legal fiction that customer lists, and other documentary evidence of customer structure, are presumed like goodwill to be self-regenerating and per se nondepreciable. 7 27 The Houston Chronicle filed a refund suit, contesting the Service's determination in federal district court. A jury trial was held, the Chronicle prevailed, and the Service appealed. The Fifth Circuit affirmed. Specifically, after reviewing many of the prior cases and reaffirming the definition of goodwill as the expectancy that the old customers will resort to the old place, and the expectancy of continued patronage, for whatever reason, see supra at 560, the court concluded, essentially rejecting the mass asset rule, that the government was incorrect in asserting that the subscription lists [were] non-amortizable as a matter of law. Id. at 1248. In the passage that has become the standard for all subsequent related cases, the court went on to state: 28 Without compiling the myriad cases that discuss the mass asset rule, we are satisfied that the rule does not establish a per se rule of non-amortizability in every case involving both goodwill and other intangible assets. In the light of § 167(a) of the Code and Regulation § 1.167(a)-3, we are convinced that the mass asset rule does not prevent taking an amortization deduction if the taxpayer properly carries his dual burden of proving that the intangible asset involved (1) has an ascertainable value separate and distinct from goodwill, and (2) has a limited useful life, the duration of which can be ascertained with reasonable accuracy. 29 Id. at 1249-50. 30 It is clear from this passage, the Service contends, that the two-pronged test articulated by Houston Chronicle was intended to inter the notion that some intangible assets, although not necessarily goodwill, were nonetheless so intertwined with goodwill as to be nondepreciable as a matter of law in all cases--i.e., the mass asset rule. The Service adds, however, that there is no indication in Houston Chronicle that the court intended to hold that goodwill itself was depreciable or to replace what it had confirmed to be the traditional definition of goodwill with the residual definition such as is urged by Morning Ledger in the instant dispute. Rather, the Service contends, the court merely held that in those cases where a taxpayer could demonstrate, as a factual matter, that an intangible asset such as a subscriber list was separate and distinct from the legal concept of goodwill--i.e., the expectancy that old customers will resort to the old place, it ought to be permitted to do so. 31 As a factual matter, the Service adds, the circumstances supporting the finding that the taxpayer in Houston Chronicle had demonstrated that the subscriber list was separate and distinct from goodwill are clearly distinguishable from the instant dispute. The Houston Chronicle did not purchase an ongoing business or even a tradename as did Morning Ledger, but rather the idle assets of the defunct Houston Press. Hence, there was no expectancy that old customers would resort to the old place because the old place no longer existed. The value of the customer list to the Houston Chronicle therefore lay solely in its potential use as a marketing tool to solicit new customers to a new business. As such, the asset was appropriately valued at the cost of generating a comparable list of potential subscribers, not, as Morning Ledger has attempted, as the entire net stream of income such subscribers would generate if obtained. In short, the Service argues that, unlike the present dispute, there was no goodwill transferred in the acquisition of the assets of the Houston Press and thus no risk that goodwill would be bound up and depreciated along with the subscriber list. 32 In sum, contends the Service, Houston Chronicle presented the paradigmatic circumstances under which a taxpayer could demonstrate that a subscriber list is separate and distinct from goodwill. The Service argues that the instant dispute, by contrast, presents a clear case wherein it is virtually impossible for the taxpayer to disentangle the potentially depreciable value of the list from the value of the nondepreciable goodwill transferred. In any event, on the record as it stands, and particularly in light of Morning Ledger's insistence on employing the income method of valuation, the Service argues that Morning Ledger clearly has not demonstrated that the $67,773,000 value it assigned to the list is separate and distinct from goodwill. 33 Morning Ledger advances as its strongest authority the Eighth Circuit's decision in Donrey, Inc. v. United States, 809 F.2d 534 (8th Cir.1987). Although a much smaller transaction in absolute dollar terms than the acquisition of Booth by Morning Ledger, the case is undeniably similar to the instant dispute in terms of the material aspects of the transaction. Specifically, in Donrey the taxpayer purchased a small Indiana newspaper with roughly 11,000 at-will subscribers for $1,335,804 and as a going concern. The taxpayer assigned $559,406 to the newspaper's customer list/customer structure and attempted to depreciate that amount over 23 years. Although the case is not explicit on this point, it is reasonable to assume, given the amount allocated to the customer list relative to the total purchase price, that this amount was calculated under the income, rather than cost method, of valuation. 34 When the Service denied the depreciation deductions on the theory that the taxpayer was seeking to depreciate goodwill, the taxpayer sued for a refund in district court and demanded a jury trial. The case was submitted to the jury on special interrogatories tracking the standards of Houston Chronicle, and the taxpayer prevailed. A divided Eighth Circuit panel rejected the government's appeal. 35 The Eighth Circuit majority's reasoning is somewhat cursory, and is largely premised on the substantial deference due the jury's determination that the taxpayer had proved a value separate and distinct from goodwill. Donrey, 809 F.2d at 536-37. Morning Ledger argues convincingly, however, that the majority's reasoning implicitly adopted the residual definition of goodwill urged by Morning Ledger here. Indeed, this reading of the case is confirmed by Judge Bright's eloquent dissent, which takes the majority to task for ignoring the traditional definition of goodwill, and in so doing, for concluding wrongly that the taxpayer had demonstrated that the value of the customer structure was separate and distinct from goodwill. Id. at 537-39 (Bright, J., dissenting).