Court Opinion

ID: 4607717
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:41:14.501837+00
Date Added: 2024-06-11T07:53:34.693441
License: Public Domain

TROY RECORD CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Troy Record Co. v. CommissionerDocket No. 9202.United States Board of Tax Appeals11 B.T.A. 298; 1928 BTA LEXIS 3830; March 29, 1928, Promulgated *3830  1.  Commissioner's determination that petitioner's profits tax as computed under section 301 of the Revenue Act of 1918 was not in excess of the average profits tax computed with reference to representative corporations, as specified in section 328, is, in the absence of evidence as to representative corporations, approved.  2.  During the years 1896 to 1905, inclusive, petitioner's expenses were in excess of revenue and in order to meet the deficit thus incurred, the amount thereof was borrowed from stockholders who were repaid in 1908 from the proceeds of a bond issue.  On the facts herein, it is held that the excess of expenditures over operating income constituted an operating deficit and may not be capitalized.  3.  Commissioner's action in reducing petitioner's invested capital by the amount of dividends paid in the years 1916, 1917, 1918 and 1919, is, in view of the fact that an operating deficit existed, approved.  Lawrence A. Baker, Esq., for the petitioner.  Thomas M. Wilkins, Esq., for the respondent.  LOVE *298  This proceeding is for the redetermination of a deficiency in income and profits taxes for the calendar year 1919, *3831  in the amount of $103.29.  The petitioner alleges that, in determining the deficiency, the Commissioner erred in the following particulars: 1.  In determining that its profits tax was not in excess of the average profits tax computed with reference to comparable corporations, such determination resulting from the selection of improper comparatives.  2.  In failing to include in its invested capital the amount in excess of gross income which it borrowed and expended during the years 1896 to 1905, inclusive, for current operating expenses and advertising campaigns which amount, it is alleged, represents the cost of its circulation structure.  3.  In reducing its invested capital by the amount of $22,745.20, representing dividends paid in 1916, 1917, 1918 and 1919.  The parties hereto have agreed that, in the event that the Board should hold that such expenditures should be capitalized, the Commissioner may determine the amount expended during the years 1896 to 1905, inclusive, in excess of operating expenses, the amount so determined will be accepted as correct.  FINDINGS OF FACT.  The petitioner is a corporation which was organized and began operation in the year 1896.  Its*3832  publication, The Troy Record, was at that time a small, unknown newspaper and was not self-supporting.  *299  The purpose of petitioner's officials was to build up its circulation, develop its property and to put it on a self-sustaining and profitable basis.  As expected, the early operations of the company resulted in an excess of expenses over revenue and as the paid-in capital amounted to only $100,000, it soon became necessary to obtain additional funds with which to operate.  Consequently, each year from 1896 to 1905, inclusive, petitioner borrowed, for the purpose of paying current operating expenses and of conducting advertising campaigns, the amount by which its expenses exceeded its operating income.  The amount (which, it is agreed, the Commissioner may determine) so borrowed and expended was obtained principally from its stockholders.  Shortly after its organization, petitioner's directors reached the conclusion that the "prime necessity was to increase the circulation to at least 15,000 or 17,000 and to secure the advertising which such circulation would bring." There were other newspapers in Troy having a circulation of approximately 17,000 and if it were to*3833  reach a paying basis, petitioner found it necessary to obtain a circulation comparable to the other papers.  Continuous progress was made from year to year in the development of the company during the entire period from 1896 to 1905, inclusive, in the last year of which the average daily circulation was in excess of 17,000.  During the year 1906, the paper for the first time reached a self-sustaining basis, the gross income equaling or exceeding the cost.  By reason of the increased circulation the petitioner was able to increase its charge for advertising from four to six cents per line, which increase put it on a self-sustaining basis.  The amount borrowed during the years 1896 to 1905, and expended, in addition to the gross income, for current operating expenses and advertising campaigns, was charged on the books to expense.  In 1908 bonds were issued and the proceeds thereof were expended in erecting a building and in reimbursing the stockholders for the money borrowed.  In the years 1916, 1917, 1918 and 1919, petitioner paid dividends which, including the 1919 dividend prorated, the Commissioner determined to amount to $22,745.20.  Upon audit of the return for 1919, the*3834  Commissioner determined that the expenditures made during 1896 to 1905, in excess of operating income, constituted an operating deficit which he further determined to exist at the time when dividends amounting to $22,745.20 were paid.  Accordingly, in computing invested capital for 1919, the Commissioner reduced the paid-in invested capital of $100,000 by the amount of the dividends paid.  The Commissioner also determined that, although there was an abnormality with respect to petitioner's capital, its profits tax was *300  not in excess of the average profits tax computed with reference to comparable corporations.  OPINION.  LOVE: The petitioner's first contention to the effect that the Commissioner erred in determining that its profits tax was not in excess of the profits tax computed with reference to representative corporations, is not sustained by proof.  No evidence whatever was offered with respect to representative corporations or to the profits tax computed with reference thereto.  The Commissioner was not required by subpoena to furnish the comparatives used in reaching the determination with respect to petitioner's profits tax.  Consequently, on the record, *3835  we must approve the Commissioner's action in regard thereto.  The next contention advanced by the petitioner is that the Commissioner erred in failing to include in invested capital the amount in excess of gross income which it borrowed and expended during the years 1896 to 1905, inclusive, for current operating expenses and advertising campaigns.  In support of this contention the petitioner takes the position that the amount in question was expended in the acquisition of a valuable asset, namely, a going and profitable newspaper.  Hence, it is argued, the amount should be capitalized and included in invested capital rather than be treated as an operating deficit.  This contention the Commissioner controverts.  At the outset it may be stated that, even if we should hold that petitioner acquired an asset equal in value to the amount expended in excess of operating income, it does not follow that the value thereof could be included in invested capital.  It is not disputed that the amount in question was borrowed, and as such it can not be included in invested capital for the obvious reason that borrowed capital is specifically excluded therefrom.  However, if the amount in question*3836  were capitalized, although as such specifically excluded from invested capital, it seems clear that petitioner's invested capital would be indirectly affected in that the operating deficit would be extinguished, and to the extent that it might exist, earned surplus would be reflected in invested capital.  The question before us, therefore, is whether by the expenditure of the amount in excess of operating income petitioner acquired a valuable asset and if so, the cost thereof, that is, the amount of the expenditure properly allocable thereto.  The circulation structure of a newspaper is a valuable asset.  . There is no doubt that petitioner during the years 1896 to 1905, inclusive, was acquiring and did acquire a valuable asset in the form of a representative circulation structure.  We are unable to say, however, that the excess of expenditures over operating income during those years represents the cost *301  thereof.  It seems that in acquiring this asset, petitioner did so as the result of a gradual process and not as the result of transactions that can be connected with definite expenditures therefor.  Petitioner made*3837  no attempt to allocate the amount expended over and above operating income to circulation structure on the one side and to operating expense on the other.  Admittedly, the amount went for employees' salaries, paper, ink, and other current operating expenses as well as for advertising campaigns, and it was entered on the books as an operating expense.  We are unable, therefore, to determine what portion of the total amount so expended should be allocated to the acquisition of circulation structure, that is, to the purchase of that asset in a bona fide transaction as distinguished from the gradual appreciation in value of the asset, which came into existence with the first few issues of the paper, as a result of continued publication of the paper.  On the record, therefore, we must hold that the Commissioner's action in refusing to capitalize the amount expended in excess of operating income during the years 1896 to 1905, inclusive, will not be disturbed.  The petitioner's last contention is that the Commissioner erred in reducing its paid-in invested capital by the amount of $22,745.20, representing dividends paid in 1916, 1917, 1918, and 1919.  *3838  The record discloses that the Commissioner determined that the operating deficit incurred prior to 1906, which was in 1908 converted into a bonded indebtedness, existed at the time the dividends were paid.  In the absence of evidence showing that the indebtedness has been paid in full or in part, the Commissioner's determination in this respect must be approved.  Consequently, since the operating deficit existed at the time the dividends were paid, the Commissioner's action in reducing paid-in capital by the amount thereof must be sustained.  . Judgment will be entered for the respondent.