Dow Jones & Co. v. Commissioner

Dow Jones and Company, Inc. (Delaware) (Successor to Financial Press Companies of America and Its United States Subsidiaries), Petitioner, v. Commissioner of Internal Revenue, Respondent

Dow Jones & Co. v. Commissioner

Docket No. 56344

United States Tax Court

41 T.C. 102; 1963 U.S. Tax Ct. LEXIS 29;

October 29, 1963, Filed

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Decision will be entered for the respondent.

Sec. 722, I.R.C. 1939. -- Where the taxpayer enjoyed a period of abnormally high earnings and then suffered a depressed level of earnings which began at a time several years prior to and thus remotely related to the base period and such condition continued on during that period because of a chain of events and circumstances which were of prolonged duration throughout the 1930's and not of a temporary nature, held, that the business of the taxpayer was not depressed in the base period because of temporary economic circumstances unusual in the case of such taxpayer, within the meaning of subsection (b)(2). Petitioner's claims for relief, denied.

J. Marvin Haynes, N. Barr Miller, and Arthur H. Adams, for the petitioner.

S. Allen Winborne, for the respondent.

Hoyt, Judge.

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HOYT

The petitioner seeks redetermination of the respondent's disallowance, in full, of timely filed applications for relief from alleged excessive and discriminatory excess profits taxes for the calendar years 1944 and 1945, under section 722 (b)(2), (b)(3), and (b)(5) of the Internal Revenue Code of 1939. ¹ Each of such applications made claim for unused carryovers and carrybacks provided by law. The excess profits taxes paid and the refunds claimed are in the amounts of $ 29,166.94 for 1944 and $ 303,126.19 for 1945. At the trial petitioner abandoned the claims for relief under section 722(b)(3) and (b)(5).

The issues presented are (1) whether the taxpayer is qualified for relief in that its average base period net income is an inadequate standard of normal earnings because "the business of the taxpayer was depressed in the base period because of temporary economic circumstances unusual in the case of such taxpayer," within the meaning of section 722(b)(2); ² and, if so, (2) whether petitioner has established "what would be a fair and just amount representing normal earnings to be used as a constructive average base period net income for the purposes of an excess profits tax," as required by section 722(a).

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. The stipulations and exhibits attached thereto are incorporated herein by reference.

Petitioner, Dow Jones & Co., Inc., is a corporation organized under the laws of the State of Delaware on November 23, 1949. Its principal office is at 44 Broad Street, New York, N.Y. By reason of a nontaxable reorganization consummated on December 31, 1949, the petitioner succeeded to all of the assets and liabilities, including claims for refund of Federal taxes, of Financial Press Companies of America, a Massachusetts trust organized on December 30, 1930 (hereinafter referred to as Financial), and its 11 wholly owned U.S. subsidiaries, as to each of which the name, date, and place of incorporation, and the nature of the business are set forth in the stipulation.

For the calendar years 1942 to 1945, inclusive, Financial kept its books and filed consolidated excess profits tax returns for itself and its 11 subsidiaries on the calendar year accrual basis of accounting with the then collector of internal revenue for the southern district of New York.

Financial's excess profits net income under the income credit method for the taxable years 1942 to 1945, inclusive, as finally determined, was as follows:

1942	$ 78,442.62
1943	1 75,163.34
1944	718,601.30
1945	649,824.04

Financial's actual average base period net income applicable to the years 1942, 1944, and 1945 was $ 230,354.90, and for the year 1943 was $ 200,500.48, computed as follows:

	For years	For year
Base period year	1942, 1944, 1945	1943
1936	$ 411,859.10	$ 411,859.10
1937	413,780.29	413,780.29
1938	(39,559.05)	(39,559.05)
1939	135,339.28	15,921.56
Average	230,354.90	200,500.48

() indicating loss.

Financial's average base period net income used in computing its excess profits tax credit for 1942, 1944, and 1945 was determined to be $ 300,305.83 computed under the income credit provisions of section 713(e). ³ Its excess profits tax credit for 1943 was determined to be $ 269,440.24 computed under the invested capital credit provisions of section 714.

Over a long period of years, petitioner and its predecessors have been continuously engaged in the business of gathering and disseminating financial, business, and economic news through a daily newspaper named the Wall Street Journal and other publications, and also through the Dow Jones News Service (known as the Ticker), a news service by wire and teletype to subscribers. Mainly because of the character of the news disseminated, the business has been at all times closely associated with the financial community embracing brokers, bankers, underwriters, traders, investors, and others interested in the securities markets, finance, and the overall activity of business. The revenues of the business have been derived primarily from the circulation of and advertising in the various publications and from subscription charges for the Ticker news service.

The business of petitioner and its predecessors had its origin in New York City in the 1880's when Messrs. Dow and Jones began a bulletin service of news gathered in the financial district and later in 1889 began publication of the Wall Street Journal, a newspaper published 6 days a week and encompassing primarily financial and business news. In 1897 the Dow Jones News Service (Ticker) was commenced in the New York area. In 1902 Clarence Barron bought the Wall Street Journal and its allied news Ticker and bulletin service. Barron had commenced publication of the Boston News Bureau in 1887, embracing financial and business news primarily of interest in the Boston area, and that publication was continued throughout the years until April 1947. Publication of the Philadelphia News Bureau was commenced in 1921, embracing financial and business news primarily of interest in the Philadelphia area, and that publication was continued throughout the years until June 1940. Publication of Barron's National Business and Financial Weekly (Barron's Weekly) was commenced in 1921, and at all times has been edited primarily to provide both institutional and individual investors with a weekly review of financial and business news, financial analyses of corporations, and other similar information for investors.

The Ticker news service, since its inception in 1897, has been operated for rapid transmission of financial and business news to brokers, bankers, and other subscribers, by wire and electric teletype machines. It has carried a limited number of quotations on securities and commodities but has not been a stock quotation service. At various times prior to and during the 1920's the Ticker service was extended to other areas of the country, such as Chicago, St. Louis, and Cincinnati.

The Wall Street Journal daily newspaper has been at all times the principal publishing and advertising media of petitioner and its predecessors since the inception of the New York edition in 1889. The Pacific Coast edition was commenced in 1929 to provide quicker delivery to the then subscribers of the New York edition and also to develop larger subscription circulation in the West Coast area. Publication of Southwest and Midwest editions were commenced after the taxable years involved. Because of both its name and authoritative specialized news content, the Wall Street Journal has been generally regarded as the newspaper of the financial community. It has always carried in great detail items of news and information of interest to the financial community, such as stock and bond quotations from both the organized exchanges and over-the-counter markets, corporate reports, new security offerings, and other financial and corporate information. In addition, and from time to time in varying amounts, it has carried information and news of general interest to the business community as a whole.

Prior to and during the base period years 1936-39 the Wall Street Journal's major class of advertising was the so-called financial advertising placed by the financial community. During those years, its various other classes of advertising (hereinafter set out in detail) were directed mainly to persons and concerns in the category of Journal subscribers and thus more limited in scope than the general types of advertising carried in the usual daily newspapers for the general public. During the 1930's the Wall Street Journal suffered a substantial decline in advertising linage and revenue, especially in the category of financial advertising due to certain adverse conditions affecting the business activities of the financial community, as more particularly hereinafter set forth. During the last half of the 1930's the Journal instituted a program to expand its coverage of national and business news to obtain broader reader appeal and increased subscription circulation among businessmen and others as a basis for securing increased linage in its national, institutional, and other classes of advertising in addition to its then major class of financial advertising and, also, to replace any of the latter that may have been permanently lost. Such program did not change the essential character of the Wall Street Journal as a financial newspaper or its continuing close association with the affairs of the financial community.

Stated in broad general terms, the business activities of the financial community are dependent, inter alia, upon the activity and volume of transactions in stocks and bonds listed on the securities exchanges; the market prices of securities traded; the issuance of new securities (both stocks and bonds) and refunding securities; the condition of business in general; and the mood of institutional and individual investors. Those and other related factors determined the earnings and prosperity, or lack thereof, of the investment bankers, underwriters, brokers, dealers, traders, and others engaged in the business of the financial community. During the 1920's and beginning in 1922 there was a general annual upward trend in the number of individual issues, the annual volume of trading, and the January 1 market value of stocks and bonds listed on the New York Stock Exchange. During 1927, 1928, and 1929, speculation brought about an increasingly exaggerated volume of trading and market values of stocks which reached their peak in the summer and fall of 1929. In September 1929, the Dow Jones average of prices on industrial stocks reached a then alltime high of 381.2. The violent stock market crash occurred in October 1929, and by November the Dow Jones average of industrial stocks had fallen to 198.7, a decline of approximately 48 percent from the September high. Thereafter the Dow Jones industrial average showed a successively new low for each of the years 1930-32, reaching (for the 1900's) an alltime low of 41.2 in July 1932, when the Nation was in the midst of a severe depression.

The annual volume of stock trading reached a high of 1,125 million shares in 1929 and thereafter showed a sharp declining trend during the years 1930-1932, and irregular up-and-down trends during the remainder of the 1930's. New and refunding capital issues reached a high of $ 11,592 million in 1929, thereafter showed a steep declining trend during the years 1930-33, and irregular up-and-down trends during the remainder of the 1930's. With respect to market prices of stocks, the trends are reflected in the Dow Jones industrial high and low average for each of the years 1929 and 1930-39, inclusive, including the base period years involved herein, as follows:

Year	Average
1929	High	381.2
	Low	198.7
1930	High	294.1
	Low	157.5
1931	High	194.4
	Low	73.8
1932	High	88.8
	Low	41.2
1933	High	108.7
	Low	50.2
1934	High	110.7
	Low	85.5
1935	High	148.4
	Low	96.7
1936	High	184.9
	Low	143.1
1937	High	194.4
	Low	113.6
1938	High	158.4
	Low	99.0
1939	High	155.9
	Low	121.4

The following schedule combines the data for the indicated years as shown on several stipulated joint exhibits: (1) The number of individual issues listed; (2) the annual volume of trading; and (3) the market value on January 1 of each year, of stocks and bonds listed on the New York Stock Exchange.

New York Stock Exchange
	(1)	(2)	(3)
	Number of individual	Annual volume of	Market value on Jan. 1
	issues listed	trading
Year
				Stocks	Bonds (par	Stocks	Bonds
	Stocks	Bonds	Total	(millions	value in	(millions	(millions
				of shares)	millions of	of dollars)	of dollars)
					dollars)
1920	691	1,114	1,805	227	$ 3,977
1921	756	1,115	1,871	173	3,324
1922	792	1,156	1,948	259	4,370
1923	778	1,234	2,012	236	2,790
1924	889	1,262	2,151	282	3,804
1925	927	1,332	2,259	454	3,384	$ 27,072	$ 33,612
1926	1,043	1,367	2,410	451	2,987	34,489	35,509
1927	1,081	1,420	2,501	577	3,269	38,376	37,168
1928	1,097	1,491	2,588	920	2,903	49,736	36,875
1929	1,176	1,534	2,710	1,125	2,982	67,478	47,379
1930	1,293	1,543	2,836	810	2,764	64,708	46,892
1931	1,308	1,607	2,915	577	3,051	49,020	47,385
1932	1,278	1,601	2,879	425	2,967	26,694	37,848
1933	1,237	1,549	2,786	655	3,369	22,768	31,918
1934	1,209	1,568	2,777	324	3,726	33,095	34,861
1935	1,187	1,540	2,727	382	3,339	33,934	40,660
1936	1,185	1,463	2,648	496	3,576	46,946	39,399
1937	1,212	1,409	2,621	409	2,793	59,878	45,054
1938	1,259	1,376	2,635	297	1,860	38,869	42,782
1939	1,237	1,393	2,630	262	2,046	47,491	47,053
1940	1,233	1,395	2,628	208	1,669	46,468	49,920
1941	1,230	1,295	2,525	171	2,112	41,891	50,831
1942	1,232	1,173	2,405	126	2,311	35,786	55,034
1943	1,238	1,136	2,374	279	3,255	38,812	70,584
1944	1,237	1,096	2,333	263	2,695	47,607	90,274
1945	1,259	1,063	2,322	378	2,262	55,512	112,621

The following schedule shows the new and refunding capital issues in the United States, as per Joint Exhibit 12-L, for the years 1920-45.

[In millions of dollars]
Year	Total	New	Refunding
	issues	capital	capital
1920	$ 4,010.0	$ 3,634.8	$ 375.2
1921	4,203.8	3,576.7	627.1
1922	5,235.9	4,304.4	931.5
1923	4,989.7	4,304.4	685.3
1924	6,352.5	5,593.2	759.3
1925	7,126.0	6,220.2	905.9
1926	7,430.3	6,344.1	1,086.1
1927	9,933.7	7,791.1	2,142.6
1928	9,991.8	8,114.4	1,877.5
1929	11,592.2	10,182.8	1,409.4
1930	7,677.0	7,023.4	653.7
1931	4,022.9	3,115.5	907.4
1932	1,730.3	1,192.2	538.0
1933	$ 1,053.7	$ 709.5	$ 344.2
1934	2,212.3	1,386.3	825.9
1935	4,752.3	1,412.1	3,340.2
1936	6,254.3	1,973.3	4,281.0
1937	4,001.3	2,100.7	1,900.6
1938	4,459.2	2,355.0	2,104.1
1939	5,853.1	2,298.4	3,554.7
1940	4,805.9	1,950.5	2,855.4
1941	5,545.9	2,853.9	2,692.0
1942	2,114.5	1,075.1	1,039.4
1943	2,228.2	643.5	1,584.7
1944	4,295.9	936.4	3,359.5
1945	8,046.2	1,774.7	6,271.5

The following schedule shows the annual sales of stocks and bonds on all registered U.S. exchanges and on the New York Stock Exchange, as per Joint Exhibit 16-P, for the years 1934-45.

[In millions of dollars]
	All registered exchanges,	New York Stock Exchange,
	market value	market value
Year
	All sales	Stocks	Bonds	All sales	Stocks	Bonds
1934	$ 12,211	$ 8,820	$ 3,391	$ 10,483	$ 7,740	$ 2,743
1935	19,111	15,372	3,739	16,133	13,333	2,800
1936	27,277	23,616	3,661	23,327	20,390	2,937
1937	23,709	21,010	2,699	20,769	18,468	2,301
1938	13,926	12,337	1,589	12,306	11,016	1,290
1939	13,347	11,426	1,921	11,488	9,970	1,518
1940	9,726	8,412	1,314	8,223	7,171	1,053
1941	7,603	6,240	1,363	6,408	5,257	1,151
1942	5,570	4,309	1,261	4,796	3,674	1,122
1943	10,986	9,024	1,962	9,457	7,672	1,785
1944	11,780	9,799	1,981	10,089	8,255	1,834
1945	18,112	16,270	1,842	15,190	13,474	1,716

The initial margin requirements established by the Federal Reserve Board pursuant to section 7 of the Securities Exchange Act of 1934 for the purpose of regulating the extension of credit by brokers and banks for the purchase of securities, as per Joint Exhibit 23-W, for the period from October 1, 1934, to July 5, 1945, were as follows:

	Initial
Effective	margin
date	requirement
Oct. 1, 1934	25 to 45
Feb. 1, 1936	25 to 55
Apr. 1, 1936	55
Nov. 1, 1937	40
Feb. 5, 1945	50
July 5, 1945	75

The following schedule (1) shows the average of purchase prices paid for New York Stock Exchange memberships for the years 1922-45 and the ratio to the 1922-39 average, as per Joint Exhibit 13-M; and, also, the following schedule (2) shows the number of member organizations and number of member organization offices at the end of the indicated years, as per Joint Exhibit 41-OO:

Schedule (1)
New York Stock Exchange membership
	Average	Ratio to
Year	purchase	1922-39
	price	average
		Percent
1922	$ 93,000	53.69
1923	88,000	50.80
1924	88,500	51.09
1925	124,500	71.87
1926	154,000	88.90
1927	187,500	108.24
1928	442,500	255.45
1929	487,500	281.43
1930	342,500	197.22
1931	223,500	129.03
1932	126,500	73.03
1933	170,000	98.14
1934	130,000	75.05
1935	102,500	59.17
1936	$ 131,500	75.91
1937	97,500	56.29
1938	68,000	39.26
1939	60,500	34.93
	3,118,000
(Average, 1922-39)	173,222	100.00
1940	46,500	26.84
1941	27,000	15.59
1942	23,500	13.57
1943	37,500	21.65
1944	57,500	33.19
1945	72,000	41.57

Schedule (2)
Number of member organizations and offices
	Number of	Number of
End of year	member	member
	organizations	organization
		offices
1899	521	697
1909	581	1,136
1919	563	1,225
1929	665	2,323
1930	649	2,141
1931	621	1,968
1932	610	1,781
1933	621	1,836
1934	621	1,714
1935	644	1,736
1936	647	1,829
1937	652	1,837
1938	627	1,707
1939	603	1,660
1940	591	1,569
1941	557	1,425
1942	537	1,282
1943	540	1,313
1944	562	1,359
1945	586	1,427

Stipulated Exhibit 43 shows the consolidated profit (or loss), before Federal income taxes, of the New York Stock Exchange and its affiliated companies, New York Stock Exchange Building Co., New York Quotation Co., Stock Clearing Corp., New York Stock Exchange Safe Deposit Co. (dissolved in 1942), and 39 Broad Street Corp. (dissolved in 1941), for the years 1933-45, was as follows:

Year ended	Profit
Dec. 31	(or loss)
1933	($ 199,121)
1934	(1,060,890)
1935	(209,325)
1936	172,768
1937	(140,377)
1938	(1,548,417)
1939	(1,149,373)
1940	($ 981,348)
1941	(2,229,561)
1942	(815,972)
1943	676,509
1944	776,478
1945	1,486,047

As reported in Statistics of Income, U.S. Treasury Department, 1946, pages 356-361, the compiled net profit (or loss) (1) as reported, (2) less tax-exempt income, and (3) less tax-exempt income plus interest paid, of all corporations filing tax returns during the years 1920 through 1945, as per Joint Exhibit 9-I, was as follows:

Compiled net profit (or loss)
[In $ 1,000,000]
			Less
		Less	tax-exempt
Year	As	tax-exempt	income
	reported	income	plus
			interest
			paid
1920	$ 6,625	$ 5,611	$ 8,446
1921	1,156	255	3,396
1922	5,967	4,770	7,839
1923	7,634	6,308	9,586
1924	6,795	5,363	8,808
1925	9,316	7,621	11,238
1926	9,510	7,504	11,493
1927	8,669	6,510	10,885
1928	10,667	8,227	12,808
1929	11,870	8,740	13,665
1930	4,649	1,552	6,413
1931	(777)	(3,288)	1,204
1932	(3,829)	(5,643)	(1,600)
1933	($ 930)	($ 2,548)	$ 963
1934	2,970	94	3,516
1935	5,423	1,695	4,956
1936	7,771	4,369	7,450
1937	7,830	4,407	7,410
1938	4,131	1,608	4,479
1939	7,178	4,509	7,306
1940	9,348	6,543	9,244
1941	16,675	13,593	16,217
1942	23,389	21,120	23,579
1943	28,126	25,468	27,799
1944	26,547	23,425	25,713
1945	21,345	17,911	20,219

As shown by Joint Exhibit 29-CC, the Federal Reserve Index of Industrial Production, October 1943; June 1954, for the years 1920-45 based on the 1935-39 average = 100, is as follows:

Year	Index
1920	75
1921	58
1922	73
1923	88
1924	82
1925	90
1926	96
1927	95
1928	99
1929	110
1930	91
1931	75
1932	58
1933	69
1934	75
1935	87
1936	103
1937	113
1938	89
1939	109
1940	125
1941	162
1942	199
1943	239
1944	235
1945	203

As an aftermath of the above-mentioned excessive speculation in securities and the stock market crash of 1929, a series of congressional investigations and hearings were had, beginning in 1932 and continuing into 1933 and 1934, in regard to the operations of securities exchanges and over-the-counter markets and also the practices employed in offerings of new corporate securities, with a view to the necessity for legislation requiring appropriate regulation thereof for the protection of the investing public. The hearings called forth a parade of witnesses including prominent persons in the financial community. Widespread publicity was given to the hearings and the witnesses; to the laxities in the rules governing the operations of the securities exchanges; to the revelations of instances of manipulations of securities prices through various techniques of pools, wash sales, matched orders, and so-called "insider" dealings in securities and, also, to the revelations of instances of the offerings of new issues of securities without full and honest disclosure of the financial condition of the issuing corporations. The publicity given those hearings and revelations had an unfavorable and depressing effect upon the confidence of the investing public in the securities markets and in the financial community generally.

As a result of investigations and hearings, Congress enacted certain regulatory legislation, namely, the Securities Act of 1933 to regulate registration of securities in interstate and foreign commerce and through the mails and to prevent fraud in the sale thereof; the Securities Exchange Act of 1934 to regulate national securities exchanges and over-the-counter markets operating in interstate and foreign commerce and through the mails and to prevent inequitable and unfair practices on such exchanges and markets; and the Public Utility Holding Company Act of 1935 to regulate and in many instances eliminate certain holding company structures of the public utility industry.

The Securities Act of 1933 provided, inter alia, in the case of all new security issues, that there be filed with the Federal Trade Commission a registration statement setting forth detailed information about the security and the issuing corporation. The Commission had authority to examine the statement, require amendments thereto, hold hearings thereon, and to permit or refuse to permit the registration to become effective. Also, the prospectus used in connection with the sale was required to carry certain detailed information. Further, civil liabilities were provided for false statements or the omission of material facts.

The Securities Exchange Act of 1934, inter alia, established the Securities and Exchange Commission with broad regulatory powers; provided for registration with that Commission of any exchange as a national securities exchange; empowered the Federal Reserve Board to prescribe rules and regulations with respect to credit extended and margin requirements on any security registered on a national securities exchange; provided for restrictions on borrowing by members of national securities exchanges and brokers and dealers; provided for prohibition against manipulation of security prices and the use of certain deceptive devices and practices; provided for segregation and limitations of the functions of members of national securities exchanges and brokers and dealers; and provided for prohibition against any transaction in any security on a national securities exchange unless effectively registered with such exchange upon the issuer filing an application setting forth detailed information as prescribed by the act and rules and regulations of the Commission, with duplicate originals of such applications, annual reports, etc., of the issuer filed with the Commission. Further, certain civil liabilities were provided for false and misleading statements with respect to any material fact made in any application, report, or document filed pursuant to the act or regulations thereunder. That act also made certain amendments to the Securities Act of 1933.

The enactment of the Securities Act of 1933 and the Securities Exchange Act of 1934, the regulatory mechanisms and prohibitions provided thereunder, and the civil liabilities imposed thereby, had a far-reaching permanent impact upon the methods of issuing new securities and upon transactions in all securities registered and listed on national securities exchanges and, also, upon the over-the-counter markets. There was a concomitant impact upon the business of the financial community. A combination of factors including the stock market crash of 1929, the general business depression of the early 1930's, the congressional hearings and publicity of devious and dishonest practices in the securities markets, and the 1933 and 1934 securities regulatory legislation, altogether had a depressing effect upon the activity of the business of the financial community which continued in varying degrees throughout the 1930's including the base period years involved herein, as evidenced by the statistical data hereinabove set out.

The above-mentioned regulatory legislation was designed to protect the investing public and to promote honesty and integrity in the marketing of corporate securities through the long-established facilities and services of the financial community embracing stock exchanges, over-the-counter markets, brokers, dealers, investment bankers, etc. Upon enactment of the legislation the members of the financial community were confronted with necessary accommodations to regulations never before experienced, which initially affected their business because of a slowdown on the issuance of new securities and also a decline in the volume of trading during 1934 and 1935. Further, the business of the financial community was adversely affected over a period of years extending into 1938 by a bitter controversy within the New York Stock Exchange organization and more particularly between the leaders of the exchange and the Securities and Exchange Commission with regard to the latter's desired changes in the organization, management, and rules of the exchange. The controversy waxed hot in the fall of 1937 with attendant wide publicity and a coincidental sharp decline in market prices of stocks during the period from September to December 1937. Late in 1937 the Chairman of the Securities and Exchange Commission publicly threatened to reorganize the exchange and provide it with rules written by the Commission. In March 1938 the exchange announced the suspension of Richard Whitney & Co. from all trading on the floor of the exchange because of misappropriation of customers' securities and Whitney was expelled as a member of the exchange and later sent to jail, which events were given wide publicity. In March 1938, the governing body of the exchange adopted the reorganization, rules, and regulations insisted upon by the Securities and Exchange Commission. The controversy ended, but its adverse effects upon the business of the financial community lingered on for some months. Also, during 1938, the business of the financial community was affected by the general business recession which occurred during that year.

A large portion of the capital funds put into the securities market comes from the investing public. The occurrence of events which shake the public confidence in the securities market at any given time, has a direct bearing upon the issuance of new and refunding securities and upon the volume of trading and market prices of securities. The exaggerated volume of 1,125 million shares of stocks traded in 1929 was partly accounted for by security holders' liquidations following the 1929 stock market crash and the successive declining volume for each year down to 425 million shares for 1932 also embraced continued liquidations by security holders. The sharp decline in new and refunding capital issues during the years 1930-33 showed a lack of new capital investment. The irregular trends in the securities market during the remainder of the 1930's reflect the economic conditions and events occurring during those years. The volume of new security issues, the volume of trading, and market prices of securities are factors having a direct bearing upon underwriting fees and commissions on sales and purchases of securities which constitute principal sources of earnings of investment bankers, security brokers and dealers, and others engaged in the business of the financial community. During the 1930's some investment bankers and brokers suffered losses or had meager earnings, some large brokerage firms closed branch offices, and some small brokerage firms merged in order to reduce operating expenses. The various depressing events and economic conditions affecting the financial community in varying degrees throughout the period of the 1930's resulted in a substantial curtailment in the total volume of financial advertising linage during those years. The New York edition of the Wall Street Journal, which was generally regarded as the newspaper of the financial community and was the principal publishing and advertising media of petitioner's predecessor affiliated companies, suffered a substantial decline in financial advertising linage and revenues therefrom during the 1930's, including the base period years involved herein.

The following schedule sets forth the consolidated net income of petitioner's predecessor affiliated companies for the years 1922-45, inclusive, adjusted for excess profits tax purposes and, also, for the years 1922-39 the net income index with average for 1922 - 39 = 100 as per Joint Exhibit 18-R, together with totals and averages for certain periods. The base period 1936-39 average earnings were depressed as compared with the long-term 1922-39 average earnings, the former amounting to approximately 38.75 percent of the latter.

			Net income index
			average for 1922-
		Consolidated	39 = 100,
Year	net income	percent
1922		$ 576,753.14	97.0
1923		320,544.50	53.9
1924		375,548.21	63.2
1925		502,548.48	84.3
1926		687,053.69	115.6
1927		839,309.67	141.2
1928		1,147,445.19	193.0
1929		1,915,994.25	322.3
1930		1,473,070.17	247.8
1931		667,674.30	112.3
1932		273,646.67	46.0
1933		402,092.98	67.6
1934		386,049.19	64.9
1935		209,447.87	36.2
1936		411,859.10	69.3
1937		413,780.29	69.6
1938		(39,559.05)	(6.6)
1939		135,339.28	22.8
	Total 1922-39	10,698,597.93
1940		244,252.30
1941		125,173.38
1942		78,442.65
1943		1 75,163.00
1944		718,601.00
1945		649,824.00
	Total 1940-45	1,891,456.33
	Total 1936-39	921,419.62
	Average 1922-39	594,366.55
	Average 1936-39	230,354.90
	Average 1940-45	315,242.72

The following schedule sets forth the net incomes for the indicated years (before taxes per revenue agent's reports) of the subsidiaries which published the New York edition and the Pacific Coast edition, respectively, of the Wall Street Journal which, as above mentioned, was the principal publishing and advertising media of petitioner and its predecessors:

	Dow Jones &	Dow Jones &
Year	Co., Inc.,	Co., Ltd.,
	New York	Pacific Coast
	edition	edition
1922	$ 549,763
1923	306,838
1924	364,739
1925	517,971
1926	814,592
1927	816,381
1928	1,195,893
1929	1,878,117	($ 1,075)
1930	1,557,254	15,166
1931	279,314	(45,008)
1932	138,727	(30,608)
1933	85,308	2,462
1934	$ 171,659	($ 8,444)
1935	100,548	(7,748)
1936	250,701	4,554
1937	202,897	6,386
1938	(26,766)	(30,248)
1939	125,360	(19,294)
1940	181,046	(16,488)
1941	73,890	(12,367)
1942	77,400	(19,897)
1943	447,082	45,557
1944	356,070	102,224
1945	274,679	115,276

The following schedule sets forth on a consolidated basis a summary of operating revenues from advertising, circulation, ticker and bulletin, and miscellaneous sources; total operating revenue; operating expenses; and net operating profit of petitioner's affiliated predecessor companies for the years 1922-45, inclusive, as per Joint Exhibit 4-D, together with totals and averages for certain periods. With respect to the base period 1936-39 averages as compared with the long-term 1922-39 averages the most significant changes indicated are a substantial decrease in both advertising revenue and total operating revenue, a moderate increase in operating expenses, and a substantial decrease in net operating profit:

Summary of consolidated operating revenue, expenses,
and net operating profit
		Advertising	Circulation	Ticker and	Miscellaneous
Year	revenue	revenue	bulletin	revenue
				revenue
1922	$ 683,295	$ 593,411	$ 1,009,983	$ 28,067
1923	649,392	602,457	1,000,654	11,045
1924	749,840	636,030	1,010,304	13,061
1925	1,021,871	790,570	1,086,884	22,737
1926	1,131,653	825,613	1,212,413	28,118
1927	1,283,390	903,355	1,359,176	49,589
1928	1,623,668	1,061,421	1,776,952	28,758
1929	2,504,975	1,339,808	2,583,129	45,597
1930	2,197,571	1,243,506	2,939,271	47,827
1931	1,550,900	1,020,700	2,347,375	41,739
1932	948,277	811,167	1,684,207	31,284
1933	757,070	729,937	1,719,808	32,833
1934	781,767	705,919	1,715,415	30,273
1935	826,677	686,553	1,463,202	22,101
1936	986,853	827,274	1,693,384	38,841
1937	1,025,976	888,742	1,808,934	35,834
1938	729,017	885,797	1,477,739	35,111
1939	769,037	833,070	1,459,996	39,781
	Total 1922-39	20,221,229	15,385,330	29,348,826	582,596
1940	821,403	795,255	1,435,507	38,067
1941	848,159	781,723	1,217,926	34,751
1942	820,025	888,718	1,051,024	29,088
1943	1,258,804	1,105,605	1,019,581	29,278
1944	1,621,652	1,177,582	1,086,856	31,004
1945	1,716,793	1,349,962	1,227,114	23,780
	Total 1940-45	7,086,836	6,098,845	7,038,008	185,968
	Total 1936-39	3,510,883	3,434,883	6,440,053	149,567
	Average
	1922-39	1,123,402	854,740	1,630,490	32,366
	Average
	1936-39	877,721	858,721	1,610,013	37,392
	Average
	1940-45	1,181,139	1,016,474	1,173,001	30,995

Summary of consolidated operating revenue, expenses,
and net operating profit
		Total	Operating	Net
Year	revenue	expenses	operating
				profit
1922	$ 2,314,756	$ 1,816,924	$ 497,832
1923	2,263,548	2,027,082	236,466
1924	2,409,235	2,115,237	293,998
1925	2,922,062	2,501,601	420,461
1926	3,197,797	2,629,543	568,254
1927	3,595,510	2,806,179	789,331
1928	4,490,799	3,413,203	1,077,596
1929	6,473,509	4,649,877	1,823,632
1930	6,428,175	5,256,160	1,172,015
1931	4,960,714	4,262,182	698,532
1932	3,474,935	3,129,875	345,060
1933	3,239,648	2,791,912	447,736
1934	3,233,374	2,844,661	388,713
1935	2,998,533	2,793,643	204,890
1936	3,546,352	3,155,997	390,355
1937	3,759,486	3,378,340	381,146
1938	3,127,664	3,187,878	(60,214)
1939	3,101,884	2,970,090	131,794
	Total 1922-39	65,537,981	55,730,384	9,807,597
1940	3,090,234	2,840,986	249,248
1941	2,882,562	2,756,530	126,031
1942	2,788,858	2,725,912	62,945
1943	3,413,270	2,756,784	656,486
1944	3,917,096	3,067,427	849,668
1945	4,317,651	3,648,519	669,131
	Total 1940-45	20,409,671	17,796,158	2,613,509
	Total 1936-39	13,535,386	12,692,305	843,081
	Average
	1922-39	3,640,998	3,096,132	544,866
	Average
	1936-39	3,383,847	3,173,076	210,771
	Average
	1940-45	3,401,612	2,966,026	435,585

The following schedule sets forth the total advertising revenue and advertising linage of petitioner's affiliated predecessor companies for each of the years 1922-45, and also the advertising revenue and linage for the Wall Street Journal, New York edition; Barron's Weekly; Boston News Bureau; and the Wall Street Journal, Pacific Coast edition (but omitting the comparatively small amounts of advertising revenue from other publications), as per Joint Exhibit 6-F. The principal one of those publications in the amounts of advertising linage and advertising revenue was the Wall Street Journal, New York edition, and its advertising linage and revenue for 1938 were the lowest for any of those years since 1923:

Advertising revenue and linage
			Wall Street Journal,
	Totals	New York edition	Barron's Weekly
Year
	Revenue	Linage	Revenue	Linage	Revenue	Linage
1922	$ 683,295	2,338,958	$ 505,671	1,679,971	$ 15,915	105,186
1923	649,392	2,225,366	484,725	1,606,925	17,332	114,556
1924	749,840	2,640,189	569,272	1,929,790	19,778	130,725
1925	1,021,871	3,178,436	784,810	2,288,516	29,159	192,681
1926	1,131,653	3,352,855	868,893	2,443,334	44,022	225,375
1927	1,283,390	3,312,577	980,727	2,491,639	67,642	166,141
1928	1,623,668	4,028,817	1,309,756	3,173,236	67,378	167,205
1929	2,504,975	5,734,417	2,059,506	4,501,888	100,016	252,432
1930	2,197,571	4,950,819	1,595,053	3,362,141	107,450	241,301
1931	1,550,900	3,580,453	1,139,313	2,424,545	83,072	186,097
1932	948,277	2,221,511	705,446	1,491,580	43,843	104,540
1933	757,070	1,920,425	538,632	1,215,914	52,012	121,505
1934	781,767	1,993,461	570,947	1,260,440	45,882	117,920
1935	826,677	2,079,695	600,210	1,331,206	43,160	105,405
1936	986,853	2,464,261	709,903	1,533,481	62,026	131,842
1937	1,025,976	2,340,258	731,559	1,440,284	54,640	116,492
1938	729,017	1,731,353	507,586	1,045,844	53,824	103,348
1939	769,037	1,797,891	545,404	1,098,303	50,780	108,179
1940	821,403	1,886,950	588,344	1,160,409	61,093	114,451
1941	848,160	1,993,676	598,502	1,197,582	61,346	117,454
1942	820,026	1,896,199	578,430	1,142,105	59,663	106,323
1943	1,258,804	3,128,862	874,935	1,744,928	91,979	174,993
1944	1,621,652	4,018,309	1,119,980	2,230,993	124,375	233,607
1945	1,716,793	4,318,010	1,167,267	2,353,897	145,990	272,895

Advertising revenue and linage
	(C. W. Barron)	Wall Street
	Boston News	Journal, Pacific
Year	Bureau	Coast edition
	Revenue	Linage	Revenue	Linage
1922	$ 161,709	553,801
1923	147,335	503,885
1924	160,790	579,674
1925	207,902	697,239
1926	218,738	684,146
1927	235,021	654,797
1928	246,534	688,376
1929	300,556	836,003	$ 28,642	144,094
1930	263,364	703,111	217,756	644,266
1931	176,863	495,755	135,934	474,056
1932	115,111	302,920	73,938	322,471
1933	90,677	256,526	69,521	326,480
1934	84,998	247,174	73,936	367,927
1935	95,307	263,973	82,243	379,111
1936	100,983	282,960	111,135	515,978
1937	113,232	270,302	123,623	513,180
1938	73,527	191,216	91,432	390,945
1939	67,698	178,411	102,394	412,998
1940	70,607	185,131	99,746	426,959
1941	80,901	208,957	107,411	469,683
1942	88,808	221,310	93,125	426,461
1943	115,625	297,545	176,265	911,396
1944	139,057	355,860	238,240	1,197,849
1945	147,049	449,975	256,487	1,241,243

Prior to and during the base period years 1936-39, the principal class of advertising carried by the Wall Street Journal, New York edition, was the financial advertising linage consisting of advertisements by brokers, investment bankers, over-the-counter dealers, commercial and savings banks, trust companies, and corporations. It also included corporate security offerings, the announcement of private placement of new security issues, dividend notices, redemptions, annual corporate reports, notices of corporate meetings, and a variety of announcements by brokerage firms. The second largest class of advertising carried by the New York edition of the Journal prior to and during the base period years 1936-39 was the national advertising consisting of corporate and institutional type of advertising of products and/or services without regard to particular geographical areas. The following schedule sets forth the annual linage of the several classes of advertising appearing in the Wall Street Journal, New York edition, for the years 1927-45:

Wall Street Journal, New York edition, advertising linage by
classes
Year	Total	Financial	Autos	Amusements	Legal
1927	2,491,619	1,457,543	228,373	50,511
1928	3,173,236	1,858,823	233,884	44,513	8,258
1929	4,501,888	2,569,352	225,364	64,969	135,060
1930	3,362,141	1,713,276	151,986	60,177	135,118
1931	2,424,545	993,289	153,415	43,422	163,423
1932	1,491,580	490,045	113,103	37,037	204,140
1933	1,215,928	398,221	114,021	17,888	155,124
1934	1,260,440	413,920	124,139	16,311	116,292
1935	1,331,206	468,975	145,565	24,561	120,472
1936	1,533,481	587,208	135,898	32,257	79,753
1937	1,440,284	538,951	126,676	38,323	45,489
1938	1,045,844	379,642	65,765	32,092	69,314
1939	1,098,303	416,557	69,119	20,239	85,191
1940	1,160,409	440,914	77,910	24,674	82,651
1941	1,197,582	444,584	74,560	27,317	81,441
1942	1,142,105	384,342	21,551	25,116	90,445
1943	1,744,928	473,500	53,356	30,624	80,553
1944	2,230,993	640,266	39,793	37,453	58,869
1945	2,353,897	825,380	21,995	69,312	55,542

Wall Street Journal, New York edition, advertising linage
by classes
		Local			Public
Year	Classified	retail	Local	National	utilities
		stores
1927	84,900	186,938	70,479	412,875
1928	91,247	281,885	179,418	419,586	55,622
1929	163,463	436,299	167,050	578,740	161,591
1930	85,657	383,334	132,074	557,869	142,650
1931	48,256	259,880	108,605	540,791	113,464
1932	22,638	183,897	65,421	316,183	59,116
1933	17,310	103,824	70,714	296,471	42,355
1934	13,043	105,355	57,631	387,468	26,281
1935	10,886	98,412	68,774	366,709	26,852
1936	22,464	181,091	60,177	428,909	5,724
1937	26,034	227,312	61,179	369,626	6,694
1938	17,088	136,744	43,830	293,556	7,813
1939	14,456	96,395	41,262	343,527	11,557
1940	11,499	73,393	37,283	391,478	20,607
1941	8,998	83,226	26,206	432,746	18,504
1942	10,881	82,532	40,264	471,696	15,278
1943	18,568	97,318	54,482	920,701	15,826
1944	26,068	169,300	60,358	1,172,971	25,915
1945	13,359	194,895	53,287	1,091,491	28,636

While the financial and national advertising linages reached their lowest levels in 1938, 1936 and 1937 were both fairly good years when compared with other years in the decade.

As demonstrated by the schedule, for the period 1927-35, the Wall Street Journal, New York edition, carried an average of 1,151,494 lines of financial advertising, which represented 49 percent of its total advertising linage. If, however, the abnormally active financial years 1927-29 are eliminated from the computation, the average linage for financial advertising in the New York edition of the Journal for the 6-year period 1930-35 was 746,287, which was 40 percent of its total advertising linage for that period. If 1930 is also disregarded because it, too, was an abnormally high year, the average linage of financial advertising for the 5-year period 1931-35 was 552,890, 36 percent of the total for the period. During the base period years 1936-39, the Journal's financial advertising linage dropped to an average of 480,589 lines but it represented 38 percent of the Journal's total advertising linage for those years. For the 6-year period immediately following the base period years the financial advertising average linage increased to 534,831 lines, but the percentage of that class to its total advertising for those years dropped to 33 percent.

The following schedule sets forth the total annual advertising linage and also the annual linage for only two classes of advertising, namely, financial and general (the latter including national advertising), for representative daily newspapers published in 52 cities for the years 1928-45 as reported in statistics compiled by Media Records, Inc., showing newspaper advertising trends. During the period 1928-35, the financial linage amounted to only 3 percent of the total advertising linage carried by such papers:

[000 omitted]
Year	Total	Financial	General
	advertising	advertising	advertising
1928	1,802,482	66,005	289,779
1929	1,897,213	74,177	338,875
1930	1,654,246	59,255	303,051
1931	1,464,868	40,984	261,817
1932	1,164,770	23,680	201,830
1933	1,065,515	20,179	188,045
1934	1,178,880	19,128	211,384
1935	1,246,942	21,309	216,976
1936	1,380,121	25,025	251,510
1937	1,409,666	22,480	247,155
1938	1,225,166	19,170	191,948
1939	1,243,550	20,308	191,859
1940	1,268,632	19,424	188,629
1941	1,313,233	20,478	194,053
1942	1,241,672	17,623	196,653
1943	1,396,418	17,758	247,424
1944	1,361,244	18,365	250,926
1945	1,391,629	22,090	246,052

The following schedule sets forth the total annual circulation revenue of the several publications of petitioner's predecessor affiliated companies for each of the years 1922-45 (omitting certain minor debit and credit adjustments to the total revenue column as shown on Joint Exhibit 8-H) and, also, the annual average circulation revenue and circulation units of each of those publications for the indicated years. With reference to the Wall Street Journal, New York edition, circulation and circulation revenue increased substantially for the 4-year period 1928-31 over prior years; decreased substantially and continuously during the next 4-year period 1932-35; increased materially in both 1936 and 1937 as compared to 1935; but again decreased materially in both 1938 and 1939 as compared to 1937. Barron's Weekly showed a somewhat similar pattern except for the years 1938 and 1939. Boston News Bureau showed a continuous decline after 1930 and throughout the base period:

Circulation revenue and circulation units
		The Wall Street Journal
		New York edition	Pacific-coast
	Total				edition
	revenue
		Revenue	Circulation	Revenue	Circulation
			units		units 1
1922	$ 593,412	$ 353,185	1
1923	602,457	335,707	21,051
1924	636,031	376,708	22,760
1925	790,570	475,966	28,231
1926	825,614	499,502	30,225
1927	903,355	555,708	32,045
1928	1,061,421	681,228	39,562
1929	1,339,809	843,589	49,396		$ 28,940
1930	1,243,506	708,877	53,198		49,682
1931	1,020,700	576,396	41,619		47,998
1932	811,167	462,148	31,195		37,392
1933	729,937	448,397	28,696		36,843
1934	705,919	446,786	28,214		37,940
1935	686,554	424,208	26,041		40,905
1936	827,274	513,909	31,762	2 29,678	52,030
1937	888,742	525,884	35,551	2 33,238	57,451
1938	885,798	473,462	32,400	2 30,682	57,999	3,792
1939	833,070	450,003	29,742	2 28,270	57,312	3,708
1940	795,255	447,679	29,223	2 27,985	59,988	3,521
1941	781,723	474,153	30,004	2 28,886	56,002	3,306
1942	888,719	573,943	33,651	2 32,559	57,616	3,392
1943	1,105,606	746,753		2 40,415	86,079
1944	1,177,582	781,490		2 45,668	110,595
1945	1,349,963	858,360		2 52,096	164,346

Circulation revenue and circulation units
	Barron's	Boston News	Other
	Weekly	Bureau	publications
	Revenue	Circulation	Revenue	Circulation	Revenue	Circulation
		units 1		units 1		units 1
1922	$ 73,611		$ 166,616
1923	106,473	17,907	160,277	10,375		177
1924	99,378	15,704	159,945	10,017		174
1925	141,912	21,078	172,692	10,620		184
1926	158,464	22,356	167,648	11,195		260
1927	175,202	26,356	172,445	11,193		465
1928	193,263	26,558	186,930	11,795		508
1929	273,475	36,328	193,805	12,854		868
1930	303,394	40,937	181,553	11,657		650
1931	255,726	33,424	136,007	9,694	$ 4,573	414
1932	201,285	23,303	107,263	6,764	3,079	317
1933	157,368	18,903	84,943	5,471	2,386	245
1934	143,062	17,258	76,003	4,804	2,128	219
1935	152,363	19,046	69,078	4,251		267
1936	194,625	24,704	69,160	4,423	1,863	258
1937	235,164	30,328	68,458	4,847	1,767	254
1938	290,217	37,633	62,444	4,011	1,674	224
1939	274,690	32,727	49,515	3,473	1,550	205
1940	241,673	28,588	45,134	3,232		215
1941	210,181	25,461	41,387	2,874
1942	216,747	26,551	40,413	2,912
1943	221,818		50,856
1944	229,509		55,988
1945	255,992		71,265

Joint Exhibit 5-E, which is too voluminous to set forth and is included herein by reference, shows a detailed breakdown of major operating expenses of petitioner's predecessor affiliated companies.

With respect to the New York edition of the Wall Street Journal we have heretofore set forth schedules showing statistical data on units of circulation and total circulation revenue and, also, advertising linage and total advertising revenue. The following schedule as a matter of convenience embraces several items of related data with respect to the Journal's circulation expense, advertising revenue and expense, and cost of newsprint for the years 1927-45. The first two columns pertain to circulation mechanical expense and show the total amount and the portion thereof constituting wages for each of those years. The next two columns pertain to advertising revenue and expense and show the average gross revenue (in cents) per line and total advertising expense per each of those years. The revenue per line as shown was less than the flat rates of 60 cents a line for financial and 50 cents a line for other advertising during 1927 and 1928, and 75 cents a line for all classes of advertising for the years 1929-45 because the rates actually charged varied with the amount of linage contracted for by advertisers in the course of a year. The total advertising expense as shown was for the advertising department embracing the major items of salaries, commissions, and wages, plus various other items of promotion and production expenses, etc. The last three columns pertain to the number of issues, the average number of pages per issue, and the annual cost of newsprint for each of those years. For the years material herein 1 page of the Journal carried 6 columns with each column providing space for 296 lines of advertising, so that a single page could accommodate a total of 1,776 lines of advertising and, further, it would have required about 2 additional pages in each of 300 issues, on the average, to carry 1 million lines of advertising per year, in addition to what was actually carried.

Wall Street Journal, New York edition
	Circulation	Advertising revenue	Number of issues, pages per
	mechanical expense	and expense	issue, and annual cost of
					newsprint
Year
			Average	Total	Number	Average	Annual
	Total	Wages	revenue	advertising	of	number	cost of
			per line	expense	issues	of pages	newsprint
						per issue
			Cents
1927	$ 380,905	$ 163,539	39.36	$ 92,075	301	16.54	$ 140,157
1928	446,322	196,112	41.28	200,188	301	18.48	174,183
1929	548,105	236,009	45.75	349,047	301	20.68	223,080
1930	548,962	242,369	47.44	309,649	301	18.90	212,563
1931	477,995	222,669	46.99	249,887	301	16.41	158,697
1932	311,278	193,180	42.30	163,663	303	14.43	80,447
1933	252,843	174,544	44.30	157,154	300	14.34	54,260
1934	266,495	181,777	45.30	161,136	301	16.05	59,005
1935	256,248	174,059	45.09	158,324	302	16.16	52,456
1936	283,545	190,197	46.30	201,342	302	17.16	69,460
1937	309,949	192,104	50.79	231,727	301	17.23	89,693
1938	269,384	173,896	48.53	147,639	301	15.71	72,895
1939	269,424	169,653	49.66	143,243	300	15.82	77,833
1940	269,933	175,856	50.70	139,395	304	15.49	68,627
1941	276,086	176,686	49.97	140,558	306	15.86	73,960
1942	281,337	169,929	50.65	136,280	306	15.08	86,556
1943	299,174	196,533	50.14	132,740	305	14.21	86,089
1944	306,208	209,244	50.20	181,344	302	12.7	81,083
1945	367,830	237,513	49.58	230,613	304	12.7	93,442
1936-39
average	283,075	181,462	48.73	180,988	301	16.48	77,470

The company which published the New York edition of the Wall Street Journal retained the services of a number of longtime employees although not needed during the first half of the 1930's, with the expectation of an early recovery from depressed conditions, and thus during the base period years 1936-39 that company was in a position to handle substantial increases in circulation and advertising linage with very little additional manpower.

The average daily circulation of daily newspapers in the United States for the years 1920-45, as per Joint Exhibit 21-U, was as follows:

Year	Circulation 1
1920	27,790,656
1921	28,423,740
1922	29,780,328
1923	31,453,683
1924	32,999,437
1925	33,739,369
1926	36,001,803
1927	37,966,656
1928	37,972,488
1929	39,425,615
1930	39,589,172
1931	38,761,187
1932	36,407,689
1933	35,175,238
1934	36,709,010
1935	38,155,540
1936	40,292,266
1937	41,418,730
1938	39,571,839
1939	39,670,682
1940	41,131,611
1941	42,080,391
1942	43,374,850
1943	44,392,829
1944	45,954,838
1945	48,384,188

While the average daily circulation of all daily newspapers showed a material increase for each of the base period years 1936-39 over their average circulation for the period 1923-35, the New York edition of the Wall Street Journal circulation was below its 1923-35 average in every base period year except 1937. The following schedule shows the annual circulation of the Journal and of all daily newspapers for each of the base period years together with an index of such circulation based on the average annual circulation for the period 1923-35=100:

	Wall Street Journal, New	All daily newspapers
	York edition (average	(average annual circulation
	annual circulation 1923-35	1923-35 of 36,488,991=
Year	of 33,249=100)	100)
	Annual	Index	Annual	Index
	circulation		circulation
1936	31,762	95.53	40,292,266	110.42
1937	35,551	106.92	41,418,730	113.51
1938	32,400	97.45	39,571,839	108.44
1939	29,742	89.45	39,670,682	108.72

The officers of the company which published the Wall Street Journal, New York edition, regarded the depressed condition of the financial community and the Journal's declining revenues especially from financial advertising, during the 1930's, as temporary conditions from which there would be a recovery. However, sometime prior to 1934, the Journal's management began studying ways and means to increase total advertising linage and, also, to replace any financial advertising linage which had been permanently lost. It was decided that the Journal's news coverage should be broadened in scope for greater reader appeal in order to build up circulation, especially in the general business community, as a basis for attracting an increased volume of national or general advertising. Studies and efforts for increased circulation and advertising were continued throughout the 1930's and thereafter. The first step was the introduction of a front-page "What's News" column to provide highlights of both business and general news of the day. In 1936 the Journal joined the Audit Bureau of Circulations to provide verification of circulation figures to prospective advertisers, and in 1937 it contracted for Associated Press news service for broader general news coverage. During each of the years 1936-39, respectively, the Journal received various research reports, some from outside concerns and some by its own promotion personnel, concerning subscriber reading and buying habits, the income brackets of readers of various publications including the Journal, and data on comparative advertising rates of other publications. Such reports were used in selling advertising in the Journal. Also, during the period 1937-39 the Journal developed special news columns such as the "Washington Wire," the "Business Bulletin," the "Tax Report," and the "Commodity Letter," to attract the interest of a wider circle of readers. Such innovations did not change the essential character of the Journal as a financial newspaper, but only broadened the scope of its coverage of business and general news as a necessary adjunct to the creation of a larger market for increased sales of subscriptions and of advertising linage. Those various efforts and changes took time to jell, and did not produce effective results until about 1943.

We have hereinabove found that the base period 1936-39 consolidated average net income of petitioner's predecessor affiliated companies, was severely depressed as compared with the taxpayer's long-term 1922-39 consolidated average net income. However, we conclude and find also that said long term included several years, 1927-30, of exceptional and abnormally high earnings, not usual in the business or experience of the taxpayer, and that therefore long-term average earnings, standing alone, are not a fair and reasonable test of an adequate standard of normal earnings during the base period. Further, we conclude and find as ultimate facts that while the business of the taxpayer was depressed during the base period, it was also depressed for several years prior thereto, and that such extended depressed condition was caused by the occurrence throughout the 1930's of prolonged rather than temporary economic circumstances and events.

The average base period net income of petitioner was an adequate standard of normal earnings and petitioner's business was not depressed in the base period because of temporary economic circumstances unusual in the case of the taxpayer.

Petitioner's excess profits tax for each of the years involved was not excessive and discriminatory and petitioner is therefore not entitled to relief pursuant to section 722 of the Code for any of the years involved.

OPINION

Section 722 of the Internal Revenue Code of 1939, ⁴ as amended, provides under subsection (a) the general rule that in any case in which a taxpayer establishes that its excess profits tax (computed without the benefit of that section) is excessive and discriminatory and further establishes what would be a fair and just amount representing normal earnings to be used as a constructive average base period net income for the purposes of an excess profits tax, the tax shall be determined by using such CABPNI in lieu of the average base period net income otherwise determined. Section 722 further provides. under subsection (b)(2), that the excess profits tax shall be considered to be excessive and discriminatory if the taxpayer's average base period net income is an inadequate standard of normal earnings because "the business of the taxpayer was depressed in the base period because of temporary economic circumstances unusual in the case of such taxpayer."

The claims involved herein for relief from excess profits taxes for the years 1944 and 1945 are predicated upon alleged qualifying factors within the ambit of only that portion of subsection (b)(2) of section 722 pertaining to a base period depression of taxpayer's business. No issue is presented herein as to the alternative portion of that subsection pertaining to a depression of the industry of which the taxpayer was a member.

Contrary to the respondent's argument on brief, the petitioner does not take the position that the taxpayer was a member of a depressed financial community or industry and patently it was not a member of such industry. ⁵ The record clearly shows that the taxpayer was basically a member of the newspaper publishing industry and that its principal news and advertising medium was the Wall Street Journal, a financial newspaper, which was closely associated with the financial community as a principal source of news, advertising, and subscriber circulation. The taxpayer's Ticker Service was an allied news service furnished by wire and teletype. The petitioner takes the position that certain events caused a temporary and unusual depression of the financial community with the direct result that the taxpayer thereby suffered a temporary and unusual loss of advertising customers of the Wall Street Journal (as distinguished from any cause attributable to ordinary business hazards) which constituted temporary economic circumstances causing a base period depression of the taxpayer's business.

The taxpayer contends that its excess profits taxes are excessive and discriminatory in that its average base period net income is an inadequate standard of normal earnings because of the following alleged qualifying factors:

(1) That the taxpayer's business was severely depressed during the base period as evidenced by its low average base period earnings of $ 230,354 as compared to its long-term 1922-39 average earnings of $ 594,366.

(2) That those base period depressed earnings were caused by the economic circumstance of the loss of a substantial part of the Wall Street Journal's financial advertising linage and revenue and by depression of its circulation.

(3) That such economic circumstance resulted from the repercussion of an acute depression in the financial community caused by the convergence, prior to and during the base period, of a series of events which were both unusual in nature and temporary in their effect upon the financial community.

(4) That the economic circumstance affecting the taxpayer was unusual in that no such loss of advertising and depressed circulation, comparable in cause and effect, has ever occurred previously in the Journal's history.

(5) That the economic circumstance affecting the taxpayer was temporary as evidenced by the facts that by 1943 the Journal had recaptured or replaced its lost advertising customers and circulation showed a substantial increase, and, also, that by 1943 the taxpayer had regained a level of earnings (before an ordinary loss deduction of $ 598,293 on sale of property used in the business) approximating its long-term average earnings.

The petitioner relies upon the comparison of base period averages with long-term averages in regard to various aspects of the taxpayer's business to establish that it was depressed in the base period because of the alleged temporary economic circumstance of the Wall Street Journal's substantial loss of advertising customers and revenues and, also, depressed subscriber circulation. The petitioner relies upon the facts of record in regard to various events adversely affecting the closely associated financial community to establish the external cause of the taxpayer's alleged temporary and unusual loss of a principal group of customers subsequently replaced with new customers. The petitioner cites Southern California Edison Co., 19 T.C. 935">19 T.C. 935 (1953); Ainsworth Manufacturing Corporation, 23 T.C. 372">23 T.C. 372 (1954); and Boonton Molding Co., 24 T.C. 1065 (1955), as authority for the granting of relief in the instant case.

In considering the petitioner's contention that the business of the taxpayer was "depressed in the base period," we must look beyond a mere comparison of low average base period earnings to long-term average earnings, for, as we said in Harlan Bourbon & Wine Co., 14 T.C. 97">14 T.C. 97, 104 (1950), "a mere failure to maintain a given level of earnings does not establish a depression of earnings within the meaning of section 722." Also, as we recently pointed out again in Orangeburg Manufacturing Co., 37 T.C. 251">37 T.C. 251 (1961), the term "depressed" involves comparison with that which is standard and normal. Petitioner here places too much reliance on the abnormal earnings it enjoyed during the late twenties when the financial community, its customers, enjoyed an unparalleled and extraordinary prosperity. Those levels of business and earnings were admittedly not normal in the experience of petitioner or its customers, and cannot, therefore, control our determination here. If the years 1927-30 are eliminated as abnormal ones, the revenues, advertising, circulation, and earnings of the base period years all appear to be within normal limits in the light of the circumstances which prevailed throughout the rest of the thirties.

A study of the whole record convinces us that a comparison of base period averages to long-term averages is not all that is required to resolve the questions presented here. Accordingly, we have made rather extensive and detailed findings of fact in order to present the full picture of the condition of the taxpayer's business and the activities and financial situation of its customers during many years prior to, during, and after the base period. In our view, the taxpayer suffered a comparatively low level of earnings not only during the base period, but over an extended period of time, which embraced several years prior to the base period and continued uninterruptedly during that 4-year 1936-39 period and even thereafter until about 1943. It is apparent that the taxpayer lost a substantial group of subscribers, circulation revenue, advertising customers, and advertising revenue long prior to the base period and that the cause thereof may not be characterized as temporary.

This is dramatically illustrated by the following figures showing the Wall Street Journal's financial advertising linage for the base period and other years indicated:

1931	993,289
1932	490,245
1933	398,221
1934	413,920
1935	468,975
1936	587,208
1937	538,951
1938	379,642
1939	416,557
1940	440,914
1941	444,584
1942	384,342

The same is true of circulation, the evidence being as follows:

1931	41,619
1932	31,195
1933	28,696
1934	28,214
1935	26,041
1936	31,762
1937	35,551
1938	32,400
1939	29,742
1940	29,223
1941	30,004
1942	33,651

Petitioner's principal argument that its base period income was depressed and does not accurately reflect normal earnings because of temporary economic circumstances -- to wit: The loss of revenue from circulation and financial advertising because of the unusual situation in the financial community -- does not stand up. In two of the base period years, 1936 and 1937, the financial advertising linage in the New York edition of the Wall Street Journal was substantially greater than it was in the immediately preceding 3 years or in the immediately succeeding 5 years. In 1938 there was a general business recession which adversely affected the business of the petitioner and all of its customers. In the last year of the 4-year base period, 1939, the said linage was greater than in 2 of the 3 years immediately preceding the base period, greater than 1 of the 3 years immediately succeeding it, and approximately equal to the average financial linage for the last-mentioned 3-year period. The average financial advertising linage for the 4 base period years was approximately 480,000 as compared to only 425,000 for the other 6 years of the decade from 1933 to 1943. Financial advertising in the base period years was therefore approximately normal for the petitioner when compared to the rest of the decade, and not substantially less than the average of 520,000 for the 9 years 1931-39, the period immediately following the abnormally high linage of the late 1920's and 1930. The same conclusions are justified with respect to circulation of the Journal. The base period average of 32,000 units is slightly more than the average for the period 1931-39 of 31,000. Any deficiency in earnings during the base period was therefore not due to temporary economic circumstances unusual in the case of the taxpayer during the base period, but rather to the extended and long-lasting recovery of the financial community from the palmy days of the late twenties, the 1929 market crash, and the acceptance of the newly enacted SEC legislation.

The circumstances involved herein clearly distinguish the instant case from Southern California Edison Co., supra;Ainsworth Manufacturing Corporation, supra; and Boonton Molding Co., supra, wherein customers were lost only in the base period because of events which occurred suddenly and unexpectedly.

The record shows that due to speculation there was an abnormally high degree of activity in the various aspects of the securities markets during the late 1920's which was reflected in greatly increased business of the financial community. Also, during the late twenties the taxpayer experienced an abnormally increased amount of financial advertising linage and revenue as compared to earlier years. The business of the financial community continued to be depressed after the market crash by the general depression of the early thirties and thereafter from about 1934 to 1939 was more or less continuously and adversely affected by the resultant effects of investigations, adverse publicity, and the innovation of governmental regulation with regard to the issuance and marketing of securities. The lack of public confidence in the financial community prolonged the entire recovery process. The earnings of the members of the financial community (which are affected, inter alia, by volume of trading, number of new issues of securities, and market prices) were generally depressed during the entire decade. We need not speculate on the degree of such depression in any particular year or years since it is clear that the financial community curtailed its financial advertising linage for many years after 1930, and in turn the taxpayer sustained a loss of financial advertising customers and revenues throughout the thirties and into the early forties.

The crucial facts in this case are that, as compared to a very high level of earnings during the late twenties, the taxpayer sustained varying degrees of depressed levels of earnings beginning in 1931 (a year remotely related to the base period) and continuing throughout the thirties because of a series of circumstances and events which were of prolonged duration throughout the thirties and not of a temporary nature in the base period years. As we have already pointed out, the record shows clearly that financial advertising linage in the base period was not substantially less than for the immediately preceding 5-year period 1931-35, or the immediately following 3-year period 1940-42. This demonstrates that as compared to the several abnormally high years prior to 1931, the amount of the Journal's financial advertising and revenue had reached a lower level which continued for over a decade under all of the circumstances then obtaining. The tremendous popularity of financial advertising of the late twenties just did not survive the twenty-nine crash or revive during the following decade.

In numerous prior cases in which there was a showing of low base period earnings or even losses, this Court has denied relief where there was a failure to establish that the business of the taxpayer was depressed in the base period because of temporary and unusual economic circumstances within the meaning of section 722(b)(2). See Monarch Cap Screw & Manufacturing Co., 5 T.C. 1220">5 T.C. 1220 (1945);El Campo Rice Milling Co., 13 T.C. 775">13 T.C. 775 (1949); Harlan Bourbon & Wine Co., supra;Toledo Stove & Range Co., 1125">16 T.C. 1125 (1951); Dr. P. Phillips Canning Co., 1222">17 T.C. 1222 (1952); Kentucky Whip & Collar Co., 19 T.C. 743">19 T.C. 743 (1953); Mitchell & Co., 20 T.C. 110">20 T.C. 110 (1953); Seeck & Kade, Inc., 28 T.C. 971 (1957); and Emporium World Millinery Co., 32 T.C. 292 (1959).

In one of our most recent decisions, A. Finkl & Sons Co., 38 T.C. 886 (1962), denying 722(b)(2) relief, we reviewed the authorities and discussed the applicable principles, concluding as follows:

In any event, where taxpayers seek to prevail under 722(b)(2) they must identify the alleged "temporary economic circumstance" and demonstrate its causal connection with the depression in base period earnings. Trunz, Inc., 15 T.C. 99">15 T.C. 99, 103 (1950); George Moser Leather Co., supra at 840; Miami Valley Coated Paper Co., 28 T.C. 492">28 T.C. 492, 498 (1957).The event usually relied upon is the loss of one or more members of a small group of major customers. Southern California Edison Co., supra;Ainsworth Manufacturing Corporation, supra;Boonton Molding Co., supra;Empire Construction Co., 31 T.C. 857 (1959). See S. N. Wolbach Sons, Inc., 22 T.C. 152">22 T.C. 152 (1954), for other possible (b)(2) events. Under all these cases it is clear that the reason for such loss must be some unusual, drastic, nonrecurring event and not simply the operation of normal competitive forces. For example, in Ainsworth Manufacturing Corporation, supra, the majority of the taxpayer's business was derived from the sale of brakeshafts to Ford and adjustable windshields to Ford and Chrysler. Both were excellent customers. With little advance warning both customers discontinued use of these products. The taxpayer's plant had been built especially to mass-produce these articles. We granted relief with the observation (23 T.C. at 375):

The evidence indicates rather clearly that the earnings of the petitioner, in all probability, would have fluctuated during the base period about in proportion to the average earnings of the industry of which it was a part if the discontinuance of the use of the brakeshafts and adjustable windshields by Ford and Chrysler had not occurred during that period; the earnings of the petitioner fell off to a much greater extent during 1938 and 1939 than they otherwise would have; the unusual falling off of those earnings was due primarily to the loss of the brakeshaft and adjustable windshield business formerly received from Ford and Chrysler; that falling off was temporary and peculiar to the petitioner and perhaps one or two other manufacturers subjected to the same blow; and it was unusual in that nothing even closely comparable in cause, magnitude, and effect had ever occurred in the petitioner's history. * * *

If the taxpayer can show only a general depression and is unable to isolate the particular causative external economic event the inference to be drawn is that the decline is due to normal competitive or cyclical factors and therefore relief will be denied. Miami Valley Coated Paper Co., supra; see also Overland Corporation, 34 T.C. 1001">34 T.C. 1001, 1048 (1960) where we said:

Not every external cause of depressed earnings is a ground for relief under section 722. The existence of a general business recession in 1938 is not sufficient to justify excess profits tax relief under section 722(b)(2). Brown Paper Mill Co., 23 T.C. 47">23 T.C. 47; Industrial Yarn Corporation, 16 T.C. 681">16 T.C. 681; Bulletin on Section 722, p. 17.

Petitioner served a diversified group of customers, there being no one or few customers upon whom it was especially dependent. Thus it is highly dubious that the loss of any particular customer due to unusual factors cognizable under (b)(2) would have had any serious repercussions upon the overall profitability of petitioner's business. On this point, cases such as Southern California Edison Co., Ainsworth Manufacturing Corporation, and Boonton Molding Co., all supra, are distinguishable. Moreover, petitioner has not produced the slightest evidence that any customers were lost due to unusual events nor has there been demonstrated, of record, any other factor apart from the operation of the normal rules of supply and demand and the usual fluctuations in the business cycle which could have caused a temporary depression in 1936-1939 earnings and thus lead us to conclude that petitioner's base period earnings were an inadequate standard of normal earnings.

Petitioner's situation seems indistinguishable here. The financial community suffered a prolonged decline in its business activities throughout the thirties and with it the petitioner's business inevitably suffered, too. No showing of particular, external economic events has been made from which we might conclude that petitioner's base period earnings are an inadequate yardstick of its normal earnings. As our findings clearly indicate the loss of earnings suffered by petitioner because of a decline in circulation and financial advertising in the base period years was merely the inevitable consequence of a prolonged period of doldrums in the business of the whole financial community. Petitioner has not shown a loss of one or more members of a small group of important customers, and it disavows any claim that it belonged to a depressed industry. All of its customers, being affected by the long-term financial sluggishness of the thirties, cut down on their advertising, services, subscriptions, and other business done with petitioner. As we study the record presented here, this was long standing, protracted, and general rather than unusual, temporary, nonrecurring, or peculiar to the base period years of this petitioner.

The reliance of petitioner on our decision in Dyer Engineers, Inc., 10 T.C. 1265">10 T.C. 1265 (1948), is misplaced. That case is readily distinguishable on the facts. There, we recognized a distinction between changes in conditions brought about by legislation, which we have long held do not give rise to relief under section 722, and changes brought about by temporary reactions to legislation which depress a taxpayer's earnings. In Dyer the taxpayer proved that labor was vigorously antagonistic to its business operations and opposed the introduction and use of the Dyer systems in plants of its employers. It was this direct reaction of labor, following enactment of the Wagner Act, against the taxpayer's business that was held to be a temporary economic circumstance that depressed the base period business of the petitioner there. Such temporary reactions following legislative action are distinguishable from the situation disclosed by the record here. Cf. Orangeburg Manufacturing Co., supra;Kentucky Whip & Collar Co., supra.

Upon a consideration of the whole record in the instant case, we conclude that the business of the taxpayer was not "depressed in the base period because of temporary economic circumstances unusual in the case of such taxpayer" (emphasis supplied) within the meaning of subsection (b)(2) of section 722. The taxpayer has been allowed the relief provided for under section 713(e)(1) whereby the actual average base period net income was increased by substituting for the 1938 deficit an amount equal to 75 percent of the average for the other base period years.

Since we have concluded that the taxpayer has failed to qualify for relief, there is no need to discuss the petitioner's proposed constructive average base period net income.

The respondent's determination of disallowance, in full, of petitioner's claims for section 722 relief and for refund of excess profits taxes for the years 1944 and 1945, is sustained.

Reviewed by the Special Division.

Decision will be entered for the respondent.

---

Footnotes

• 1. Unless otherwise noted, all Code references are to the Internal Revenue Code of 1939, as amended.↩

• 2. Petitioner specifically disavows on brief any claim to relief on the ground that it was a member of a depressed industry, i.e., the financial community or industry.↩

• 1. After deduction of an ordinary loss of $ 598,293 on sale of property used in trade or business.↩

• 3. Under sec. 713(e)(1)↩ the actual ABPNI was increased by substituting for the 1938 deficit, an amount equal to 75 percent of the average for the other years.

• 1. After deduction of an ordinary loss of $ 598,293 on sale of property used in trade or business.↩

• 1. Calendar year averages as of end of year per audit reports of Clifford Yewdall, petitioner's certified public accountant. Reports not made after 1942.↩

• 2. Average of 4 quarters of each calendar year as audited by Audit Bureau of Circulations.↩

• 1. Figures as of Oct. 1 of each year.

  Sources: Historical Statistics of the United States, Colonial Times to 1957, p. 500, Series R 169-172.↩

• 4. SEC. 722. GENERAL RELIEF -- CONSTRUCTIVE AVERAGE BASE PERIOD NET INCOME.

  (a) General Rule. -- In any case in which the taxpayer establishes that the tax computed under this subchapter (without the benefit of this section) results in an excessive and discriminatory tax and establishes what would be a fair and just amount representing normal earnings to be used as a constructive average base period net income for the purposes of an excess profits tax based upon comparison of normal earnings and earnings during an excess profits tax period, the tax shall be determined by using such constructive average base period net income in lieu of the average base period net income otherwise determined under this subchapter. In determining such constructive average base period net income, no regard shall be had to events or conditions affecting the taxpayer, the industry of which it is a member, or taxpayer generally occurring or existing after December 31, 1939, * * *.

  (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.↩

• 5. Regulations 112, sec. 35.722-2(b)(8), after stating that no exclusive definition of the concept "industry" can be constructed, provides in part:

  In general an industry may be said to include a group of enterprises engaged in producing or marketing the same or similar products or services under analogous conditions which are essentially different from those encountered by other enterprises. * * *

  Also, see Crane Co. of Minnesota, 25 T.C. 727">25 T.C. 727, 760, and Pabst Air Conditioning Corporation, 14 T.C. 427">14 T.C. 427, 428↩.