*175 Decisions will be entered for the respondent.
Excess Profits Tax Relief Under Sec. 722 (b) (2) and (b) (5) -- Competition in the Newspaper Business. -- Petitioners, the publishers of daily newspapers at Davenport, Iowa, are not entitled to relief even if their base period earnings were less than they might have been but for the competition from a third daily paper which was published at Davenport during a portion of the base period, since such competition does not bring the case within section 722 (b) (2). Constitution Publishing Co., 23 T.C. 19">23 T. C. 19.
*378 The Commissioner has disallowed the petitioners' claims for excess profits tax relief for the *176 years 1943, 1944, and 1945. The questions in issue, which are the same in both proceedings, are whether the petitioners' base period net income was depressed by reason of competition from a third newspaper, Tri-City Star, which began publication in the Davenport area in 1935, and whether, if so, the petitioners are entitled to excess profits tax relief either under subsection (b) (2) or (b) (5) of section 722 of the Internal Revenue Code of 1939.
FINDINGS OF FACT.
The petitioners are Iowa corporations engaged in the newspaper-publishing business with their principal offices located at Davenport, Iowa. Their income and excess profits tax returns for the years involved were filed with the collector of internal revenue for the district of Iowa. The returns were made for a calendar year and on an accrual basis.
The Times Company publishes the "Times" and the Democrat Publishing Co., the "Democrat." The Times was published every evening, Monday through Saturday, and the Democrat every evening, Monday through Friday and on Sunday morning. These are presently the only daily newspapers published in Davenport, and have been since 1919, except for a period beginning in 1935 and ending in*177 1937, when there was a daily paper known as the Tri-City Star.
Tri-City Star was a morning paper published by the Beacon Publishing Company. That was a corporation organized, and largely financed, by Charles J. Hinkle, who previously had published a weekly paper known as the Beacon in Winfield, Iowa. The Tri-City Star was first published as a weekly but after a few months was changed to a daily. It had no Sunday edition.
Two other daily evening papers, the "Argus" and the "Dispatch," were published in the nearby cities of Rock Island and Moline, Illinois, located just across the Mississippi River from Davenport. The population of these cities, according to the 1940 census, was: Davenport, 66,039; Rock Island, 42,775; and Moline, 34,608. About 75 or 80 per cent of the petitioners' subscribers live in Iowa.
*379 The petitioners are both members of a group of 11 newspapers known as the Lee Syndicate. They were published and controlled by E. P. Adler, who was president of the Lee Syndicate.
The Times and Democrat professed different political faiths. The Times favored the Republican Party, editorially, while the Democrat supported the Democratic Party. Also, these papers *178 sold advertising on the combined rate basis. Local business interests who opposed these and other policies of the papers were instrumental in founding the Tri-City Star. These circumstances, and the fact that Adler was of the Jewish faith, were exploited by the Tri-City Star in its competitive fight against the Times and Democrat. The Tri-City Star made frequent personal attacks on Adler, both editorially and by cartoons.
The Tri-City Star conducted a series of circulation contests with prizes amounting to over $ 16,000, offered reduced subscription rates, and added special features to its paper to attract readers. A free distribution of 50,000 copies of the paper was made each Friday.
The Times and Democrat conducted subscription campaigns of their own to meet this competition and adopted various other competitive policies. They offered give-away prizes by issuing lottery chances on an automobile to their subscribers. The costs of the automobile prizes were: $ 9,506.84 in 1936 and $ 5,032.47 in 1937. Changes in the format of the papers and in the services to subscribers were made by both papers at considerable additional costs.
An independent audit report of the Tri-City Star's*179 circulation for the 6-month period ended September 30, 1936, the only such report ever made, shows a total average paid circulation of 8,640.
The average annual circulation of the Times and Democrat over the period 1928 through 1939 was as follows:
| Year | Times | Democrat, | Democrat, |
| evening | Sunday | ||
| 1928 | 26,002 | 13,449 | 16,223 |
| 1929 | 26,871 | 13,854 | 16,910 |
| 1930 | 27,010 | 13,108 | 16,359 |
| 1931 | 25,389 | 14,019 | 17,271 |
| 1932 | 23,798 | 13,936 | 17,211 |
| 1933 | 23,040 | 14,670 | 17,218 |
| 1934 | 23,937 | 13,684 | 16,815 |
| 1935 | 23,726 | 13,674 | 16,831 |
| 1936 | 23,974 | 14,438 | 17,623 |
| 1937 | 24,508 | 15,828 | 19,179 |
| 1938 | 22,889 | 14,168 | 17,635 |
| 1939 | 23,199 | 14,807 | 18,477 |
| Computed annual average: | |||
| 1928-1935 | 24,972 | 13,799 | 16,855 |
| 1928-1939 | 24,529 | 14,136 | 17,313 |
| 1936-1939 | 23,642 | 14,810 | 18,228 |
*380 The average daily paid circulation of the Times and Democrat combined for the years 1934 to 1939, inclusive, divided as between the city and areas outside of Davenport was as follows:
| Twelve-Month Periods Ended September 30 | ||||||
| 1934 | 1935 | 1936 | 1937 | 1938 | 1939 | |
| Davenport | 18,363 | 18,823 | 18,341 | 19,138 | 19,217 | 19,463 |
| Areas outside of | ||||||
| Davenport | 19,301 | 18,673 | 20,141 | 21,323 | 18,321 | 18,036 |
*180 Both the Times and Democrat increased their circulation rates in 1937. They had not previously cut their rates to meet the Star's competition.
The Times' and Democrat's advertising rate under the "combined space" advertising policy from 1935 through 1939 was $ 1.33 per inch. This was allocated 70 cents to the Times and 63 cents to the Democrat. The advertiser was billed separately by each paper for its share. The Tri-City Star had a minimum advertising rate of 42 cents per inch. It made no special drive for advertising business, such as it made for circulation.
The following table shows the gross revenue of the Times and Democrat, divided as between circulation, advertising, and miscellaneous, for the years 1933 through 1939:
| Times | |||
| Year | |||
| Advertising | Circulation | Miscellaneous | |
| 1933 | $ 298,152.31 | $ 103,992.10 | $ 384.37 |
| 1934 | 345,766.40 | 109,862.09 | 975.63 |
| 1935 | 334,312.15 | 111,495.00 | 1,093.65 |
| 1936 | 364,339.45 | 113,763.32 | 638.59 |
| 1937 | 410,329.71 | 129,305.70 | 841.98 |
| 1938 | 378,893.40 | 148,918.34 | 1,447.43 |
| 1939 | 389,470.28 | 161,975.72 | 821.28 |
| Democrat | |||
| Year | |||
| Advertising | Circulation | Miscellaneous | |
| 1933 | $ 230,325.48 | $ 64,701.48 | $ 9,087.99 |
| 1934 | 265,551.39 | 65,821.80 | 10,267.42 |
| 1935 | 268,889.86 | 69,307.96 | 14,964.80 |
| 1936 | 268,982.00 | 71,555.74 | 12,145.91 |
| 1937 | 319,328.52 | 82,690.45 | 12,472.24 |
| 1938 | 305,900.11 | 79,745.29 | 12,960.55 |
| 1939 | 313,693.21 | 92,573.86 | 9,663.28 |
*181 There are no available records to show the sources and amounts of revenue received by the Tri-City Star, but according to a survey made by the petitioners' accountants in preparation of their section 722 claims, based on an examination of each issue of that paper, its advertising revenue amounted to approximately $ 55,437 in 1935, $ 120,093 in 1936, and $ 20,012 in 1937. Most of these amounts were found to be for local display advertising.
The Tri-City Star was declared bankrupt and ceased publication in March 1937, and since that time the Times and Democrat have been the only daily newspapers published in Davenport.
The following table shows the gross operating income, operating expenses, and net operating profits of the Times and Democrat for the years 1928 through 1939: *381
| Times | |||
| Years | |||
| Gross operating | Operating | Operating | |
| income | expenses | net profit | |
| 1928 | $ 620,227.44 | $ 513,731.28 | $ 106,496.16 |
| 1929 | 651,941.01 | 525,038.38 | 126,902.63 |
| 1930 | 638,739.96 | 526,197.58 | 112,542.38 |
| 1931 | 573,188.42 | 489,604.05 | 83,584.37 |
| 1932 | 463,514.94 | 419,290.71 | 44,224.23 |
| 1933 | 402,528.78 | 368,262.70 | 34,266.08 |
| 1934 | 456,604.12 | 398,146.24 | 58,457.88 |
| 1935 | 446,900.80 | 408,367.49 | 38,533.31 |
| 1936 | 478,741.36 | 444,866.67 | 33,874.69 |
| 1937 | 540,477.39 | 470,382.73 | 70,094.66 |
| 1938 | 529,259.17 | 477,699.26 | 51,559.91 |
| 1939 | 552,267.28 | 495,499.13 | 56,768.15 |
| Democrat | |||
| Years | |||
| Gross operating | Operating | Operating | |
| income | expenses | net profit | |
| 1928 | $ 445,548.78 | $ 370,829.30 | $ 74,719.48 |
| 1929 | 468,227.75 | 394,137.15 | 74,090.60 |
| 1930 | 456,976.72 | 395,569.03 | 61,407.69 |
| 1931 | 405,236.18 | 368,971.46 | 36,264.72 |
| 1932 | 337,277.75 | 317,407.56 | 19,870.19 |
| 1933 | 304,114.95 | 276,884.56 | 27,230.39 |
| 1934 | 341,640.61 | 300,834.56 | 40,806.05 |
| 1935 | 353,162.62 | 319,892.74 | 33,269.88 |
| 1936 | 352,683.65 | 346,877.89 | 5,805.76 |
| 1937 | 414,491.21 | 367,355.50 | 47,135.71 |
| 1938 | 398,605.95 | 356,488.11 | 42,117.84 |
| 1939 | 415,930.35 | 385,018.13 | 30,912.22 |
The excess profits net income of the Times for the base period years was as follows:
| Year | Amount |
| 1936 | $ 35,185.34 |
| 1937 | 71,959.70 |
| 1938 | 53,219.60 |
| 1939 | 57,252.40 |
| Average | 54,404.26 |
The Commissioner determined that the Times was entitled for each taxable year to an excess profits credit of $ 54,159.41, which he determined under section 713 (e).
The net income of the Democrat for the base period years was as follows:
| Year | Amount |
| 1936 | $ 9,375.80 |
| 1937 | 49,359.20 |
| 1938 | 43,882.73 |
| 1939 | 34,125.99 |
| Average | 34,185.93 |
The Commissioner determined that the Democrat was entitled for each taxable*183 year to an excess profits credit of $ 41,631.65, which he determined under section 713 (f).
The excess profits net income and excess profits tax liability for the Times and Democrat for the years 1943, 1944, and 1945, as determined by the Commissioner, are as follows:
| Times | Democrat | |||
| Calendar year | ||||
| Excess profits | Excess profits | Excess profits | Excess profits | |
| net income | tax | net income | tax | |
| 1943 | $ 87,758.13 | 1 $ 25,738.51 | $ 50,411.72 | 1 $ 3,402.06 |
| 1944 | 118,452.24 | 2 46,313.44 | 93,540.26 | 2 35,831.86 |
| 1945 | 90,764.12 | 2 22,747.02 | 61,220.97 | 2 8,198.87 |
*382 The above-shown excess profits tax liabilities were paid by the petitioners and claims for refund for such taxes have been filed and disallowed by the Commissioner.
OPINION.
The contention of the petitioners is that the entry of the Tri-City Star in the daily newspaper field in the Davenport, Iowa, area in 1935, and its competition during 1936 and until it ceased publication in March 1937, depressed the base period earnings of the petitioner by obtaining some of their advertising and circulation, by causing an increase in their operating*184 expenses, and by preventing them from increasing their subscription rates at a time when otherwise they should and would have increased those rates. They further contend that the competition was unfair, unusual, and possibly unlawful, in view of the Tri-City Star's unethical and destructive policies.
The earnings of each corporation were better in 1937 than they were in 1938 and 1939 after the Tri-City Star ceased publication, and were also better than either paper had experienced during the preceding 5 years. The Court would be unable to hold, on the evidence presented, that the earnings for 1937, 1938, or 1939 were below normal because of competition from the Tri-City Star during the short period in 1937 that it was published. However, the latter newspaper was published during the entire year 1936 and the earnings of the Times during that year were somewhat lower than they had been in previous years and than they were in later years, and the earnings of the Democrat fell away off in 1936. The reason for the sharp variance between the decline in the Democrat's earnings as compared to the Times' earnings is not clear. The question of the extent to which the decline in earnings*185 of each newspaper in 1936 might be attributed fairly to the competition from the Tri-City Star need not be determined since neither petitioner would be entitled to any relief under section 722 (b) (2) in any event.
The situation here is similar to one involved in the case of Constitution Publishing Co., 23 T.C. 19">23 T. C. 19. The publisher of the Atlanta Constitution based a claim under section 722 (b) (2) on the intense competition between the three principal daily newspapers in Atlanta -- the Atlanta Constitution, the Atlanta Journal, and the Atlanta Georgian, a Hearst paper. The competition from the latter was alleged to have been unfair and destructive. The Court held that competition in the newspaper publishing business is not a temporary economic circumstance unusual in the case of such a taxpayer and depressed business from that source does not qualify for relief under section 722 (b) (2). It said in that connection:
*383 However, assuming that the foregoing summary establishes the contrary conclusion that the petitioner's business was depressed during the base period, the petitioner has failed to satisfy the remaining elements which must be proved*186 to qualify for relief under section 722 (b) (2). That is to say, the petitioner has failed to show that its business was depressed because of temporary economic circumstances unusual in its case. In this context, "temporary" is a relative term. We have quoted with approval the respondent's Regulations 112, section 35.722-3 (b), where it is said that "An economic circumstance is temporary depending upon the character and nature of such circumstances rather than upon the mere length of time of its existence." Kentucky Whip & Collar Co., supra.
The petitioner contends that the competition it received from the Georgian was temporary because no third newspaper could expect long to survive in Atlanta and unusual because the Hearst interests were callous to the substantial losses experienced by the Georgian. However, we have said, "Competition is present in almost any business. Instead of it being something unusual, it is quite common. It is of the very essence of our capitalistic system." Lamar Creamery Co., 8 T. C. 928, 939. We think that this is particularly true of the newspaper publishing business.
The competition which the petitioners *187 received from the Tri-City Star was of shorter duration than that involved in the Atlanta Constitution case, but it was of the same general character, and the conclusion here is the same as in that case, to wit, that the petitioners are not entitled to relief under section 722 (b) (2) because of the competition of the other paper.
The petitioners contend that the same circumstances entitle them to relief under section 722 (b) (5), but we are unable to find any merit in that contention. Cf. Constitution Publishing Co., supra.
Reviewed by the Special Division.
Decisions will be entered for the respondent.