1929 BTA LEXIS 2184">*2184 1. A corporation as to which no deficiency has been determined and to which no notice has been sent has no right to proceed before the Board and the Board is without jurisdiction as to it.
2. Circulation, Associated Press membership, and good will are not tangible property and may not be classified as paid-in surplus under section 326, Revenue Act of 1918.
3. Where there is enough in the record to indicate special assessment under section 327, even though that issue has been reserved under Rule 62 for further hearing, the Board will not decide the facts or law upon mesne questions of invested capital which will in all probability disappear through special assessment.
17 B.T.A. 1092">*1092 This proceeding involves income and profits taxes for the calendar years 1919, 1920, and 1921 in the sums of $136,467.50, $44,653.38, and $39,685.90, respectively. Petitioner claims that value of Associated 17 B.T.A. 1092">*1093 Press membership, good will, and circulation was improperly excluded from its invested capital, and that improper depreciation on a building and lease1929 BTA LEXIS 2184">*2185 was used to reduce invested capital. The respondent confessed error on certain other issues. The right to special assessment was pleaded as alternative relief.
FINDINGS OF FACT.
The Strong Publishing Co. is an Illinois corporation with principal office at 15 North Wells Street, Chicago, Ill. By amendment to its charter, the name of the corporation was, on January 30, 1926, changed from "The Chicago Daily News Company" to "Strong Publishing Company" and its capital stock decreased. The Chicago Daily News, Inc., is an Illinois corporation, with principal office at 15 North Wells Street, Chicago, Ill., and is the transferee by conveyance dated January 20, 1926, of all the assets of the Chicago Daily News Co. except a nominal amount of cash retained in the treasury of the transferor company, now the Strong Publishing Co.
The notice of deficiency was addressed to the Chicago Daily News Co.
The Chicago Daily News Co. was organized as an Illinois corporation February 14, 1893, and soon after its organization engaged in publishing the Chicago Daily News, a daily newspaper which had been established in 1875, in Chicago, Ill., and continued to be so engaged continuously through1929 BTA LEXIS 2184">*2186 the years in question.
The Chicago Daily News Co. of 1893 was successor to an Illinois corporation of the same name organized in 1887, which in turn was successor to an earlier Illinois corporation of the same name organized in 1882.
The first stock issued by the corporation of 1893 was of the par value of $150,000 and that continued to be the entire outstanding stock until 1917. That stock was owned in its entirety by Victor F. Lawson at all times, including the taxable years in question, and said Lawson continued to be the owner of all the stock of said corporation throughout his lifetime, until 1925. There were transferred to the said corporation, and it became the owner of, a leasehold, buildings, machinery, money, receivables, and other physical property used in connection with the publication of said newspaper and connected with the business of publishing the same.
On December 28, 1917, pursuant to the action of the stockholders, the capital stock of the Chicago Daily News Co. was increased from 1,500 shares of the aggregate par value of $150,000 to 18,000 shares of the aggregate par value of $1,800,000, and the additional 16,500 shares were acquired by Victor F. Lawson1929 BTA LEXIS 2184">*2187 in exchange for real property and his promissory note for $112,500.
17 B.T.A. 1092">*1094 At the date of petitioner's corporate organization in 1893 the books of the predecessor, the Chicago Daily News Co., were not closed but continued. An entry of February 28, 1893, appearing in the books is as follows:
| Assets: | |
| Buildings and Leaseholds | $371,234.36 |
| Machinery, Equipment, etc. | 329,992.77 |
| Cash | 67,724.30 |
| Accounts Receivable | 280,418.30 |
| Inventories, etc. | 2,832.13 |
| Deferred Charges | 29,103.02 |
| Victor F. Lawson | 332,947.81 |
| $1,414,252.69 | |
| The Chicago Record | 1,230,574.10 |
| $2,644,826.79 | |
| Liabilities: | |
| Accounts Payable | $116,456.83 |
| Notes Payable | 545,941.27 |
| Special Funds | 334.94 |
| Unearned Advertising, etc. | 4,059.84 |
| $666,792.88 | |
| Surplus | 1,978,033.91 |
| $2,644,826.79 |
In the foregoing schedule the items of $332,947.81 and $1,230,574.10 represent money withdrawn from the business by Lawson and are not assets acquired. The books contain no entry of circulation, good will, or Associated Press membership as assets of the corporation. Nor is there any record either on the books of the corporation or elsewhere stating in terms the property for which the $150,0001929 BTA LEXIS 2184">*2188 capital stock of the Chicago Daily News Co. was issued.
The taxpayer corporation made no payment for the property other than that it delivered the stock to Victor F. Lawson and issued the same at his request. At the organization of the taxpayer corporation there were also transferred, turned over to and received by it, and there have ever since been held by it, the circulation, good will and Associated Press membership of the Chicago Daily News.
The average daily circulation for the first two months of 1893, which was turned over to and received by the taxpayer, was 175,918. This circulation of the Chicago Daily News showed a steady increase from 128,676 in 1888 to 401,698 in 1921. It was the largest 17 B.T.A. 1092">*1095 circulation in Chicago. Seventy per cent of the papers were delivered at homes, and this fact was well known among newspaper men and recognized as an advantage.
The Associated Press membership gave rights to the Associated Press service for an evening paper in Chicago, exclusive of all other evening papers, except a limited number which could not under ordinary circumstances be increased without the consent of the taxpayer corporation.
The circulation, Associated1929 BTA LEXIS 2184">*2189 Press membership and good will were inseparable assets of the going business, and, at the time of their acquisition in 1893 by petitioner, had together a substantial value in the business.
The following schedule shows the net profit of the Chicago Daily News for the years indicated:
| Year ended December 31 - | |
| 1888 | $166,055.23 |
| 1889 | 193,722.99 |
| 1890 | 221,685.11 |
| 1891 | 256,496.79 |
| 1892 | 304,989.76 |
| 1893 | 318,679.92 |
| 1894 | 453,580.97 |
Among the assets transferred to the Chicago Daily News Co. at its incorporation in 1893 was a four-story mill construction building known as the "rear building," which was erected in 1891 and cost $33,000. Petitioner has used and occupied this building since its acquisition and has kept it in a good state of repair. Improvements on the structure, which were never added to capital account but were deducted as running expenses, include a sprinkler system installed about 1897 at a cost of $17,000. No depreciation of it was written off the books between 1893 and March 1, 1913. Beginning with the latter date, petitioner has taken depreciation on this building at the rate of 3 per cent per annum, computed on its cost of $33,000.
Among1929 BTA LEXIS 2184">*2190 the assets transferred to the Chicago Daily News Co. at incorporation was a lease, which by its terms ran until 1985, and upon which petitioner made no deduction for exhaustion prior to January 1, 1918, either on its books or tax returns. Petitioner as transferee became the direct lessee and not a sublessee under this lease. The property covered by the lease contains a building known as the Wadsworth Building and the "rear building," heretofore mentioned, and has been constantly occupied by petitioner since 1893.
In 1895 by agreement of petitioner and the Board of Education of the City of Chicago, lessor, the terms of the lease were modified: an 17 B.T.A. 1092">*1096 annual rental of $13,200 was agreed upon for the five years beginning May 8, 1895, and of $14,400 for the remaining 85 years. A ten-year revaluation clause contained in a supplement to the original lease dated June 15, 1888, as the basis upon which rents should be computed, was expressly waived.
OPINION.
STERNHAGEN: The deficiency was determined in respect of the Chicago Daily News Co., and notice under the statute was mailed to that corporation. It is still in existence, having changed its name to the Strong Publishing1929 BTA LEXIS 2184">*2191 Co., and there is no doubt of its right to proceed here. But no determination has been made in respect of the Chicago Daily News, Inc., which is a separate corporation, and therefore it has no right to proceed before the Board and the Board is without jurisdiction as to it. In respect of the Chicago Daily News, Inc., the proceeding is dismissed. ; .
The principal issue urged by petitioner is that for the purpose of determining its profits taxes its invested capital as defined by section 326, Revenue Act of 1918, has been inadequately determined by reason of the omission of the value at the time of acquisition in 1893 of circulation, good will, and Associated Press membership. Petitioner contends that these items were donated by Lawson, its principal stockholder, and thereafter are a paid-in surplus within section 326(3); that, as such, the value attributable to them is within statutory invested capital, even if they be intangible property; that circulation is tangible property under the statute, and, hence, that any restriction upon paid-in surplus as excluding intangible1929 BTA LEXIS 2184">*2192 property is not applicable to circulation. Upon these propositions of law, petitioner predicated its introduction of evidence to prove the actual value represented by these items.
The evidence does not support the assertion that petitioner acquired these three alleged factors of value separately by way of gift from Lawson after its incorporation and acquisition of the alleged net tangibles as shown by a balance sheet. An auditor who recently examined the old books testified that they impressed him as being the books of a sole proprietorship. But, on the contrary, the exhibits contain formal statements made at the time of its incorporation that the petitioner succeeded to a preexisting corporation, and it is apparent that the News had been published by this corporation with all the assets and incidents of the business.
This aggregate was acquired for $150,000 par value of capital stock issued to Lawson, and it is to this transaction that the statute must be applied. In other words, there was paid in to the corporation for 17 B.T.A. 1092">*1097 stock or shares at the time of its organization property consisting of the cash and tangible property shown by the balance sheet (the actual1929 BTA LEXIS 2184">*2193 value of which is not really shown by the evidence) and such intangible assets as the business had. If the balance sheet fairly indicates the value of the net tangibles, there was an asset value of $414,512 received, together with intangibles, for $150,000 of stock - an excess of $264,502. This has apparently been included by respondent in invested capital, and there is no room for such an apportionment as was applied in ; ; , to arrive at a paid-in surplus of tangibles. These items of circulation, press membership, and good will were not tangibles, and hence may not be classified under the statute as paid-in surplus, ; ; Daily Pantagraph, Inc. v.United States, Court of Claims decided June 10, 1929. Since this is so as a matter of law, it matters not that there was, as we are convinced, above the net tangibles, a large and substantial value in the business which may be attributed to its growing circulation, its established1929 BTA LEXIS 2184">*2194 good will and its Associated Press membership. The respondent was clearly right in treating this value as intangible and excluding it from invested capital.
But there is enough already in the record to indicate that the situation is within section 327, requiring the special method of assessment provided in section 328. This issue has, however, been expressly reserved for further hearing under Rule 62, and the parties are therefore entitled to be heard upon it. We do not, however, regard Rule 62 as justifying a separation of issues so as to require findings of fact or discussion of law upon mesne questions which will in all probability disappear through special assessment. Here the mixed aggregate of tangibles and intangibles can not, we think, be satisfactorily segregated, and the apparently large intangible value resulting in income largely in excess of reasonable earnings on tangibles, apparently brings the case within the scope of subsections (c) and (d) of section 327, unless the contrary for other reasons appears at the further trial.
It may not be amiss, however, to express the view that the evidence is, in our opinion, not convincing that the values to be attributed1929 BTA LEXIS 2184">*2195 to circulation, good will, and press membership are as large as claimed. While it is reasonable to believe with the several witnesses that these factors of value exist, it seems to us highly artificial to treat them each as separate from the others and susceptible of separate and independent valuations, the total of which is to be computed mathematically by adding them together. Several of the witnesses who 17 B.T.A. 1092">*1098 had long been in the newspaper-publishing business indicated that the recognition of these items was simply as factors in the apparaisement of the business as a whole, and this seems to us to be the sound view. Furthermore, the earnings of the business up to the time of this incorporation in 1893 do not in our opinion sustain a valuation of the business as a whole sufficient to assign to these three factors the values claimed.
All of the remaining issues raised by the pleadings affect invested capital, i.e., taxes of prior years, building depreciation of earlier years, and leasehold exhaustion of earlier years. Since the determination of invested capital is entirely obviated in cases involving special assessment, these issues are not necessary for decision.
1929 BTA LEXIS 2184">*2196 The proceeding will be restored to the calendar for further action by the parties under Rule 62.