Decision will be entered for the respondent.
Petitioner purchased all the assets of a newspaper in 1940, including an Associated Press membership. The by-laws existing then imposed barriers to membership for applicants competing with old members, including what in effect amounted to a veto power by the competing member. In 1945, the Supreme Court held these by-laws to be illegal restraints of trade. Petitioner contends thereby it sustained a deductible loss under section 23 (f) of the Internal Revenue Code. The Associated Press after the Supreme Court decision amended its by-laws so as to remove the monopolistic features but leaving all other rights of membership unimpaired. The right declared illegal was only one of many A. P. membership rights. Petitioner continued its A. P. membership, making no sale or any other disposition. Held, petitioner has no realized loss which is deductible.
18 T.C. 86">*86 Respondent determined deficiencies in petitioner's income taxes of $ 5,683.78 and excess profits taxes of $ 3,570.07 for the fiscal year ended February 28, 1946. These deficiencies result 1952 U.S. Tax Ct. LEXIS 221">*222 from an adjustment to net income which is explained in the deficiency notice as follows:
| Adjustments to Net Income | |
| Taxable Year Ended February 28, 1946 | |
| Net income as disclosed by return | Loss $ (3,723.50) |
| Unallowable deductions and additional income: | |
| (a) Loss on Associated Press Franchise | 29,734.67 |
| Net income as adjusted | $ 26,011.17 |
Taxable Year Ended February 28, 1946
(a) It has been determined that you did not sustain a deductible loss in 1945, as a result of the decision of the United States Supreme Court in Associated Press, et al. v. United States, 326 U.S. 1">326 U.S. 1; 65 S. Ct. 1416">65 S. Ct. 1416. Accordingly, the deduction of $ 29,734.67 claimed in your income tax return for the fiscal year ended February 28, 1946, has been disallowed and taxable income adjusted correspondingly.
Petitioner contests the adjustment contending that the loss on the Associated Press membership should be increased to $ 79,734.67, as follows:
(b) In determining the taxable net income of the petitioner for the year ended February 28, 1946, the Commissioner has erroneously omitted as a deduction the sum of $ 79,734.67, a business loss sustained by the petitioner by reason of the ruling of the Supreme Court of 1952 U.S. Tax Ct. LEXIS 221">*223 the United States dated June 18, 1945 which in effect held that the membership of the petitioner in the Associated Press was worthless and valueless.
FINDINGS OF FACT.
The Reporter Publishing Company, Inc., hereinafter called the petitioner, is a Kansas corporation organized in 1940, with its principal place of business in Independence, Kansas. The tax returns for the year involved were filed with the collector for the district of Kansas.
During the period from March 1, 1940, to the present date, petitioner has been engaged in the business of publishing a daily newspaper in the city of Independence, Kansas. On March 1, 1940, the petitioner purchased the assets of the Independence Daily Reporter, a daily newspaper published in Independence, Kansas, for a total cost of $ 150,000. In order to finance the purchase it was necessary to obtain part of the purchase price through a bond issue. The bond issue was handled by Estes, Snyder & Co., a brokerage firm in Topeka, Kansas, which employed an engineer, John H. Ruckman, to place a valuation on the assets.
One of the assets acquired was membership in the Associated Press, hereinafter sometimes called A. P. Ruckman appraised the value of the 1952 U.S. Tax Ct. LEXIS 221">*224 circulation and the A. P. membership to be $ 70,735. The valuations of the various assets as recorded on petitioner's books of account as of March 1, 1940, were as follows:
| Inventory of ink, metal and job supplies | $ 3,265.33 |
| Associated Press franchise | 79,734.67 |
| Land | 8,000.00 |
| Building | 20,000.00 |
| Equipment | 39,000.00 |
| Total cost | $ 150,000.00 |
18 T.C. 86">*88 The Associated Press is a cooperative, nonprofit association incorporated in New York in 1900. Its business is the collection, assembly, exchange and distribution of news. In 1945, A. P. had assets of approximately $ 2,000,000. A. P. members are newspaper owners. All members are required to pay regular weekly assessments for the cost of collecting, exchanging, and transmitting the news service, as well as all other expenses.
In Associated Press v. United States, 326 U.S. 1">326 U.S. 1, June 18, 1945, the Supreme Court of the United States held that certain A. P. by-laws relating to the admission of new members, competing with old members, constituted unlawful restraints of trade under the Sherman Act. The importance and nature of the illegal by-laws was explained by the Court as follows:
[p. 8] These By-Laws, for a violation of which members may be thus fined, suspended, 1952 U.S. Tax Ct. LEXIS 221">*225 or expelled, require that each newspaper member publish the AP news regularly in whole or in part, and that each shall "promptly furnish to the corporation, through its agents or employees, all the news of such member's district, the area of which shall be determined by the Board of Directors." All members are prohibited from selling or furnishing their spontaneous news to any agency or publisher except to AP. Other By-Laws require each newspaper member to conduct his or its business in such manner that the news furnished by the corporation shall not be made available to any non-member in advance of publication. The joint effect of these By-laws is to block all newspaper non-members from any opportunity to buy news from AP or any of its publisher members. Admission to membership in AP thereby becomes a prerequisite to obtaining AP news or buying news from any one of its more than twelve hundred publishers. The erection of obstacles to the acquisition of membership consequently can make it difficult, if not impossible, for non-members to get any of the news furnished by AP or any of the individual members of this combination of American newspaper publishers.
[p. 10] * * * These By-Laws 1952 U.S. Tax Ct. LEXIS 221">*226 presently involved, leave the Board of Directors free to elect new members unless the applicant would compete with old members, and in that event the Board cannot act at all in the absence of consent by the applicant's member competitor. Should the old member object to admission of his competitor, the application must be referred to a regular or special meeting of the Association. As a prerequisite to election, he must (a) pay to the Association 10% of the total amount of the regular assessments received by it from old members in the same competitive field during the entire period from October 1, 1900 to the first day of the month preceding the date of the election of the applicant, (b) relinquish any exclusive rights the applicant may have to any news or news picture services and, when requested to do so by his member competitor in that field, must "require the said news or news picture services, or any of them, to be furnished to such member or members, upon the same terms as they are made available to the applicant," and (c) receive a majority vote of the regular members who vote in person or by proxy. These obstacles to membership, and to the purchase of AP news, only existed 1952 U.S. Tax Ct. LEXIS 221">*227 where there was a competing old member in the same field.
The Supreme Court affirmed the decree of the lower court as follows:
[p. 21] * * * It further provided that nothing in the decree should prevent the adoption by the Associated Press of new or amended By-Laws "which will restrict admission, providing that members in the same city and in the same 18 T.C. 86">*89 'field' (morning, evening or Sunday), as an applicant publishing a newspaper in the United States of America or its Territories, shall not have power to impose, or dispense with, any conditions upon his admission and that the By-Laws shall affirmatively declare that the effect of admission upon the ability of such applicant to compete with members in the same city and 'field' shall not be taken into consideration in passing upon his application." * * * Interpreting the decree to mean that AP news is to be furnished to competitors of old members without discrimination through By-Laws controlling membership, or otherwise, we approve it.
The effect of this decision was to prohibit any restrictions on new membership in A. P. based solely on whether or not the applicant was in competition with an existing member. Shortly after the foregoing 1952 U.S. Tax Ct. LEXIS 221">*228 Supreme Court decision of June 18, 1945, the A. P. amended its by-laws with respect to admission of new members by eliminating the restrictive provisions above and by providing: "In voting upon an applicant for membership, whether such voting be by the members or by the Board of Directors, no member or director shall take into consideration in passing upon such applicant the effect of his or its admission upon the ability of such applicant to compete with members in the same city and field." Membership in A. P. still remained assignable by a member to his successor after the Supreme Court decision as it was prior to the decision. Section 9 of the A. P. by-laws, 28th edition, published June 1, 1947, reads:
Sec. 9. The contract may be assigned by a member to his or its successor publisher in connection with the sale or transfer of the business of the member to which the contract relates, upon condition that such successor shall have agreed in writing to be bound by the terms and conditions thereof and shall have filed application for membership, and upon such assignment the successor shall become a member in the same class as its predecessor, provided the successor shall in all other 1952 U.S. Tax Ct. LEXIS 221">*229 respects be qualified.
Petitioner is now and has been since March 1, 1940, a member of the A. P. and has received A. P. news services each year during this period. Petitioner paid A. P. weekly assessments, totaling $ 3,622.27 during its fiscal year ended February 28, 1946, and about the same amount each year thereafter.
The population of Independence, Kansas, was approximately 11,346 in 1950, and in 1945 and 1946, the population of that city was a little less. The daily circulation of petitioner's newspaper during this period was approximately 5,000. From 1926 to the present date, only one daily newspaper was published in Independence, Kansas, though between 1900 and 1926, there were at least two other daily newspapers. Since the Associated Press case, supra, a second newspaper entered Independence, being circulated as a weekly. To the present date this weekly newspaper has never had A. P. membership.
Subsequent to the Supreme Court decision in the Associated Press case, petitioner's membership in A. P. continued to have value in the 18 T.C. 86">*90 operation of its business. Its monopolistic character prior to the Supreme Court decision was not the only thing which gave value to the contract. 1952 U.S. Tax Ct. LEXIS 221">*230 Petitioner did not sustain a deductible loss as a result of that decision.
OPINION.
The question presented here is whether petitioner sustained a deductible loss by reason of the Supreme Court decision in 326 U.S. 1">Associated Press v. United States, supra. Petitioner contends that when the Supreme Court took away the exclusive right to A. P. services in its community, its A. P. membership thereby became totally worthless; thus a completed transaction occurred which constitutes a loss under section 23 (f), I. R. C. Respondent contends although the A. P. franchise value might have been impaired, it did not become totally worthless and there is no provision in the Code whereby a partial loss could be deducted.
The applicable statute and regulations are printed in the margin. 11952 U.S. Tax Ct. LEXIS 221">*231
Petitioner retained and still retains its A. P. membership subsequent to the 1945 Supreme Court decision in the Associated Press case, supra. The use of the A. P. services included numerous benefits, primarily the collecting, exchanging, and transmitting of the news services. The only effect of the Supreme Court decision is to make it easier for a competing newspaper to obtain A. P. membership. In fact, petitioner still remains the only A. P. member in its community, and its business and use of A. P. services have not diminished since 1945.
The exclusivity of A. P. membership as originally provided in the by-laws is now illegal and no doubt its absence would reduce the membership sale value to a hypothetical buyer. After the Supreme Court decision came out in 1945, 1952 U.S. Tax Ct. LEXIS 221">*232 petitioner, on its books, reduced the book value of its A. P. franchise by $ 29,734.67, leaving it with a book value of $ 50,000. It is clear, of course, from decisions which we will presently cite that this mere diminution in value would not be the occasion for allowing petitioner any deductible loss. We could only allow petitioner a loss of its cost basis of its A. P. franchise by 18 T.C. 86">*91 holding that in the taxable year the franchise became entirely worthless. But petitioner's continued use of A. P. and its many other benefits negates any claim of its worthlessness. There has been no sale or any disposition of its A. P. membership. It still owns it and uses it in its newspaper business.
We find that petitioner has an unrealized partial loss which results from reduction in sales value.
Fluctuations in values of assets are ever present in our complex economic structure. That diminution in value as such is not deductible as a loss is almost axiomatic to the income tax law. J. C. Pugh, Sr., 17 B. T. A. 429, 434, affd. 49 F.2d 76, certiorari denied 284 U.S. 642">284 U.S. 642; White Star Line, 20 B. T. A. 111; Ewald Iron Co., 37 B. T. A. 798; and Gulf Power Co., 10 T.C. 852, 858.
In a case which we think 1952 U.S. Tax Ct. LEXIS 221">*233 is here relevant a motor transport company acquired at considerable cost a certificate of necessity under a state statute, which was a prerequisite for entering business and in effect conferred monopolistic rights. The legislature subsequently took away only the monopolistic aspect of the certificate rights. Since the monopolistic and operating aspects of the certificates were completely enmeshed and the taxpayer's right to stay in business continued, petitioner was not allowed any loss deduction. Consolidated Freight Lines, Inc., 37 B. T. A. 576, affd. 101 F.2d 813, certiorari denied 308 U.S. 562">308 U.S. 562.
We think that under the facts which we have here and the law which is applicable, petitioner cannot be allowed the loss which it claims to have suffered from the Supreme Court decision in 1945.
Decision will be entered for the respondent.
Footnotes
1. Internal Revenue Code.
SEC. 23. DEDUCTIONS FROM GROSS INCOME.
* * * *
(f) Losses by Corporations. -- In the case of a corporation, losses sustained during the taxable year and not compensated for by insurance or otherwise.
Treasury Regulations 111, section 29.23 (e) -- 1 (which is made applicable to corporations by Treasury Regulations 111, section 29.23 (f) -- 1) provides:
In general losses for which an amount may be deducted from gross income must be evidenced by closed and completed transactions, fixed by identifiable events, bona fide and actually sustained during the taxable period for which allowed. Substance and not mere form will govern in determining deductible losses. Full consideration must be given to any salvage value and to any insurance or other compensation received in determining the amount of losses actually sustained. * * *