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Strong Pub. Co. v. Commissioner of Internal Revenue

March 9, 1932

STRONG PUB. CO.
v.
COMMISSIONER OF INTERNAL REVENUE



Petition for Review of Order of United States Board of Tax Appeals.

Author: Evans

Before EVANS and SPARKS, Circuit Judges, and BALTZELL, District Judge.

EVANS, Circuit Judge.

We are, in the instant case, called upon to review the action of the Board of Tax Appeals which assessed deficiency taxes against etitioner in the following amounts: 1919, $133,447.48; 1920, $41,664.97; 1921, $35,204.68. Differences exist between the parties over the amount of petitioner's "invested capital" for these three years. Respondent refused to include three items (the value of the Associated Press membership, the circulation of petitioner's newspaper, and its good will) as part of the taxpayer's "invested capital." Failure to persuade the Board of Tax Appeals of the correctness of its contention in this respect accounts for the assessment of the deficiency taxes and petitioner's appeal to this court for redress.

The Facts. -- The Chicago Daily News Company was incorporated in 1893 to succeed another company by the same name. It was engaged in the publishing of a daily newspaper in Chicago. Victor Lawson was its sole stockholder. In 1926, it secured an amendment to its charter with a resultant change in its name to Strong Publishing Company.

When incorporated in 1893, the capital stock was fixed at 1,500 shares with $100 par value. In 1917, the stock was increased to 18,000 shares, the additional stock going to Lawson in exchange for real estate and a note. The assets acquired in 1893 by the Chicago Daily News Company consisted of buildings and leaseholds, machinery and equipment, cash, accounts receivable, inventories, and deferred charges aggregating $1,081,304.88. Its outstanding liabilities were $666,792.88. It had a net book value of $414,512 or a surplus over par value of its capital stock of $264,512. The Commissioner included this latter amount in petitioner's "invested capital." Its listed assets did not mention good will, Associated Press membership, or circulation. Upon petitioner's incorporation, however, these items were all transferred to it.

petitioner's complaint is grounded upon the refusal of the respondent to include as "invested capital" the three items above mentioned, which concededly have a substantial value.

Authority for including or excluding an asset as a part of the "invested capital" must be found in the statutes. Likewise, we must look to the same source to ascertain the meaning of intangible assets.The applicable statutes are quoted below.*fn1

The controverted questions may be stated thus: (1) Is circulation of a newspaper intangible property within the definition of the statute? (2) Is intangible property to be included in "invested capital" by virtue of section 326(a)(3)?

petitioner contends that circulation is tangible property, but admits that good will and Associated Press membership are intangible property. It contends, however, that, even though intangible property, all three items should be included as a part of its "invested capital" because they come within the provision of section 326(a)(3). Respondent denies that circulation is tangible property, and denies that any intangible property should be included in "invested capital" under said subsection (3).

Circulation -- Whether Tangible or Intangible. -- The circulation of the paper was 192,495 in 1893, and petitioner claims that it was reasonably worth at least $1,759,000. It contends that circulation is an item distinct from good will (defined by the statute to be an intangible) and one which is salable per se (citing the instance of a sale of a single edition of a newspaper). In enumerating the characteristics of circulation, the petitioner states that it is a more permanent and substantial asset than physical property.

From these facts petitioner argues that, inasmuch as circulation is not like any of the items specifically denominated by the statute to be intangible, and since it also is not covered by the catch-all phrase "other like property," it must ex necessitate be included in the statutory definition of tangible property, which provides that tangible property shall include (after enumerating specific items) "other property other than intangible property."

Is circulation so akin to "patents, copyrights, secret processes and formulae, good will, trade-marks, trade-brands, franchises," as to fall within the residuary phrase "other like property"?

It may be conceded for the purpose of the argument that circulation is an item distinct from good will; yet it does not follow that they are not inherently alike in their essential aspects. Circulation grows as the good will of the paper increases. It is, generally speaking, a manifestation of the existence of good will. Without good will there would hardly be a well-sustained circulation. The value and extent of both circulation and good will are dependent upon the same factors -- service and the policy of the paper. If the service or policy of the paper varies, the circulation and good will vary accordingly. All the property characteristics ...


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