*156 Decision will be entered for the respondent.
The petitioner, organized after December 31, 1939, was required to compute its excess profits credit based on invested capital. It now claims additional credits based on a constructive average base period net income, contending that it comes within the provisions of section 722(c)(1), 1939 Code. Held, petitioner has not shown that it qualifies for relief under section 722(c)(1).
*206 The sole question is whether a contract executed*157 on July 17, 1941, by petitioner and a competitor, Capper Publications, Inc., constituted an intangible asset of petitioner within the provisions of section 722(c)(1) of the 1939 Code so that petitioner is qualified for relief from excess profits tax for the taxable years 1944 and 1945 under the provisions of sections 722(a) and (c)(1).
FINDINGS OF FACT.
Petitioner has its place of business in Topeka, Kansas. It filed its returns for 1944 and 1945 with the collector of internal revenue for the district of Kansas.
Petitioner was incorporated and commenced business on February 1, 1940, and on the same date it purchased from a partnership an evening newspaper and all of the related assets of the business, subject to liabilities, The Topeka State Journal, hereinafter called The Journal. The Journal is an evening newspaper in Topeka which is published daily but not on Sunday. The Journal has been published since 1929. At the beginning of 1940 its circulation was about 17,000.
Before petitioner purchased The Journal, it was owned by a partnership in which Henry J. Allen, a former United States Senator, Arthur J. Carruth, Jr., and William Snyder were partners.
Oscar S. Stauffer, who has*158 been in the newspaper-publishing business since 1915, is president of Stauffer Publications, Inc., which owns and publishes newspapers in Nebraska, Oklahoma, Missouri, and Kansas.
Stauffer caused petitioner's organization; he is its president; he owns a majority of the stock of petitioner and his associates own the balance. None of the former partner-owners of The Journal became stockholders in the petitioner corporation.
The petitioner paid the partnership $ 600,000 for the business operated under the name of The Journal and all of the assets (subject to liabilities). The assets purchased from the partnership consisted of a building and land; printing presses and all of the operating equipment; and intangible assets which included the name of the paper, goodwill, circulation lists, and advertising contracts. Petitioner valued all of the intangible assets, including goodwill, on its books at $ 368,776.07. Petitioner's assets and liabilities on December 31, 1940, were as follows: *207
| Assets | |
| Cash | $ 5,848.40 |
| Accounts receivable | 20,333.14 |
| Depreciation assets | 185,789.95 |
| Land | 60,000.00 |
| Sinking fund | 2,530.00 |
| Goodwil | 368,776.07 |
| Inventories | 6,510.46 |
| Prepaid expenses | 1,314.90 |
| Total | $ 651,102.92 |
| Liabilities | |
| Accounts payable | $ 10,627.03 |
| Notes payable | 480,252.84 |
| Reserve, taxes | 6,187.92 |
| Accrued interest | 6,886.68 |
| Accrued salaries | 2,484.84 |
| Reserve for depreciation | 14,279.22 |
| Capital stock | 150,000.00 |
| Surplus | (19,615.61) |
| Total | $ 651,102.92 |
*159 At the time that petitioner purchased The Journal, no plan with the managers of any other newspaper had been adopted for any kind of joint operation of The Journal with any other newspaper and no commitment of any kind for a joint operations arrangement had been given to petitioner by any other corporation or concern.
Prior to 1938 an idea was developed in the general newspaper publishing business in the United States whereby two or more newspaper publishing concerns in a city might jointly conduct their printing, advertising, and circulation operations for the purpose of increasing profits. The idea became known as the Nashville Plan. It was adaptable to the operations of a morning and evening paper. By 1938 and 1939, such plans had been adopted by newspaper-publishing concerns in Madison, Wisconsin; Lincoln, Nebraska; Nashville, Tennessee; Albuquerque, El Paso, and some cities in the East.
Stauffer was acquainted with the Nashville and similar plans. In 1939, he became interested in promoting such plan and believed that such plan could be adopted in Topeka, Kansas, where there is both an evening paper, The Journal, and a morning paper, The Topeka Daily Capital, hereinafter called*160 The Capital.
Capper Publications, Inc., owns and publishes The Capital. The president and chief stockholder of Capper Publications, Inc., was Arthur Capper, formerly a United States Senator. Henry S. Blake was the general manager. The Capital is published daily, including Sunday. It has been published since 1929. At the beginning of 1940 its circulation was about 55,000.
In 1939, before the organization of petitioner and its purchase of The Journal, Stauffer talked to Blake about a Nashville Plan arrangement for carrying on jointly certain operations of The Journal and The Capital. This was only an exploratory conversation and in 1939 neither one of the respective concerns who then published these newspapers showed any interest and neither contemplated the adoption of such plan.
On February 1, 1940, Stauffer wrote a letter to Arthur Capper, then a United States Senator, in which he proposed that consideration should be given to coordinating certain functions of the petitioner *208 corporation and Capper Publications, Inc., in the publishing and circulating of The Journal and The Capital, and directed Capper's attention to joint operations plans which had been adopted in*161 several cities. He stated that he would be willing for Capper Publications to have a 60 per cent interest and for the petitioner corporation to have a 40 per cent interest in such plan. Capper wrote to his attorney in Topeka, James A. McClure, expressing his own reaction to the suggestion as "rather unfavorable," and he enclosed a copy of Stauffer's letter, but he also said he thought it was only fair to look into Stauffer's proposal carefully to find out whether the proposal "would really be of benefit to the Capital."
Between February 1, 1940, and July 17, 1941, Stauffer and Capper and their respective representatives studied and considered Stauffer's general proposal of some sort of joint operation of the two papers, including the tax aspects. Stauffer pointed out to Capper that he believed that annual savings in costs could be expected. Capper obtained advice from other newspaper publishers in 1941. An outline of the adaptation of the Nashville Plan to The Journal and The Capital was prepared in February 1941 for Stauffer by Ward C. Mayborn, a newspaper consultant.
In May 1941, Capper expressed the view that he would not consider anything like a joint ownership of the two*162 newspapers, but he thought there were possibilities in a working arrangement covering "only the operating activities." In June 1941, serious negotiations between Capper Publications, Inc., and petitioner were carried on which culminated in the execution on July 17, 1941, of a joint agency operating agreement for the joint operation of the mechanical and managerial operations of the two newspapers through a new corporation, Topeka Newspaper Printing Company, Inc., which was to be an agent, only, of Capper Publications, Inc., and the petitioner corporation.
The joint agency operating agreement, hereinafter called the agreement, was executed by Capper Publications, Inc., the first party, petitioner, the second party, and Topeka Newspaper Printing Company, Inc., hereinafter called TNPC, the third party (the agency corporation). TNPC was organized for the purpose of the agreement. The agreement is incorporated herein by this reference. Its effective date was August 1, 1941. The provisions of the agreement were carried out.
The stated purpose of the agreement is as follows:
The purpose of this agreement is to provide and put into effect a plan of common operation by one management corporation*163 (the third party as the agent of the first and second parties with limited authority as hereinafter set out) of the newspapers published by the first and second parties so as to afford the largest measure of economy, produce better newspapers for their readers, *209 improve reader acceptance for their advertisers, and serve public interest by maintaining the complete corporate identities, individuality and editorial freedom and integrity of each of said newspapers.
Petitioner and Capper Publications agreed to organize TNPC under the laws of Kansas, with 100 shares of common voting stock having a par value of $ 1 per share, as a nonprofit corporation, and it was agreed that TNPC would be the agent of both, and that no dividends would be declared at any time by TNPC. TNPC was organized. Capper Publications received two-thirds of its stock and the petitioner received one-third.
It is provided in the agreement that the ownership of stock in the agency corporation was "only for the purpose of dividing the control and responsibility of management, except as to the editorial departments, between" Capper Publications and petitioner; and that Capper Publications and petitioner agreed*164 with each other not to sell, transfer, pledge, mortgage, or otherwise dispose of their respective shares of stock in Topeka Newspaper Printing Company. It is provided, further, that:
It is the definite intention of the parties hereto that this agreement shall not create any partnership relation between the three parties hereto or any two of the parties hereof, and, further, it is not intended that the first and second parties shall be considered under this agreement or because of their operations hereunder as being engaged in a joint venture, nor that first and second parties, or either of them, is engaged in a joint venture with said third party. While the third party is a managing agent for each of the first and second parties in respect to the management, printing, circulation and distribution of their respective papers and in doing the matters herein contemplated, it is intended and agreed that in managing, printing, circulating and distributing The Topeka Daily Capital the third party acts only as agent for the first party and not as agent for the second party, and in managing, printing, circulating and distributing The Topeka State Journal, the third party acts only as the*165 agent for the second party and not as agent for the first party.
The agreement is to continue for 45 years, until July 17, 1986, unless terminated sooner, and it can be continued for an additional 50 years.
The taking effect of the agreement was made conditional upon obtaining a ruling from tax authorities that all excess receipts of the agency corporation over its expenses of operations would not constitute taxable income to TNPC. The agreement was to become binding when such tax ruling would be obtained. A ruling was obtained from the Internal Revenue Service that TNPC would not be liable for income tax on any income received from the operations which it conducted.
It was provided in the agreement that the agency corporation would not make profits or sustain losses on its own account but only on account of and as agent for petitioner and Capper Publications, respectively.
*210 Under the agreement Capper Publications and petitioner each, respectively, retained and continued to operate separately, as had been done before, its own editorial and newsgathering departments; each employed and paid the salaries of the employees of those departments; each continued to own the properties*166 and equipment which each individually owned at the time the agreement was executed; each agreed to use its best efforts to maintain and develop the newspaper which it owned and to cooperate to provide the best newspaper advertising media possible at the lowest rates consistent with good business policy; each retained exclusive control over its own news and editorial policies, its contracts, and the selection of its own editors, and news and editorial employees; each agreed to preserve and maintain the identity, independence, and integrity of its own newspaper. The expenses of the separate and independent editorial and newsgathering departments of each newspaper which were not paid by the agency corporation include salaries of correspondents, and the costs of features, feature services, wire services, telephone and telegraph services, comic mats, pictures and engravings, and the office supplies of the above-described departments.
The agency corporation cannot and does not own any property of its own and petitioner and Capper Publications retained title to property used by TNPC. Capper Publications made available to the agency corporation machinery, equipment, and tools used in printing*167 The Capital; and petitioner made available its machinery, equipment, and tools used in the printing of The Journal. Such equipment was loaned to TNPC. It was agreed that the agency corporation could replace and repair equipment and acquire new equipment, if needed, but that such new equipment would be owned by Capper and petitioner, respectively, and paid for by them in the same proportion as their respective holdings of stock in TNPC. It was agreed that for the use of additional or new equipment furnished to TNPC, TNPC would pay to Capper and petitioner, respectively, an amount each year equal to but not in excess of the amount of annual depreciation taken on such property.
The agency corporation agreed to manage and operate, as agent, for Capper Publications all of the departments of management, printing, circulation, and distribution of The Capital, and to do the same for petitioner pertaining to The Journal, and to integrate the operation of such departments as much as possible. However, Capper and petitioner, respectively, reserved the right to fix and prescribe its own advertising and subscription rates, provided such rates would not be fixed below the costs of production. *168 The agency corporation collects and receives all of the receipts and income arising from or pertaining to the publication and circulation of each *211 newspaper; it pays out of such receipts all of the operating expenses incident to the management, printing, circulation, and distribution of the two newspapers, and the salaries of its officers and employees. But the agency-corporation does not pay the salaries and expenses of the editorial and newsgathering departments of each newspaper.
The agency corporation distributes monthly to Capper Publications and to petitioner two-thirds and one-third, respectively, of the net receipts, retaining, however, before such distribution sufficient funds required for future operations. The agency corporation collects from each principal corporation, from time to time, necessary funds to make good any of its deficiencies in operating expenses, two-thirds from Capper and one-third from petitioner. The agency corporation accounts monthly to its principals for all receipts and expenditures.
Capper Publications and petitioner share both the profits and losses of their common agency corporation in the same proportion as their respective stockholdings.
*169 When the agreement was entered into in July 1941, working capital was advanced to the agency corporation; Capper Publications, Inc., advanced $ 30,000, and petitioner advanced $ 15,000, and it was agreed that additional working capital would be advanced by each in the future, when needed, in the same proportion.
The agency corporation carries on its operations in the building owned by Capper Publications, Inc. Petitioner moved its editorial and newsgathering departments into Capital's building and thereafter rented its own building to others.
The agency corporation operated four departments formerly operated by The Capital and by The Journal, respectively, namely, mechanical or printing, circulation, advertising sales, and the general office. The chief bookkeeper of The Journal became the chief bookkeeper of TNPC and after August 1, 1941, he installed a completely new accounting system with the help of an accounting firm. The Journal's employees in the above departments either became employees of TNPC, or were absorbed by other companies operated by Stauffer, or were dismissed, so that personnel of The Journal did not duplicate personnel of The Capital in the joint operations conducted*170 by the agency corporation.
When petitioner and Capper Publications, Inc., entered into the joint operating agency agreement, each retained the ownership of its advertising and circulation lists. Under the arrangements each received benefit from the other's lists.
After August 1, 1941, when the agreement went into effect there were several months of transition adjustments. Within about 2 years the anticipated benefits were realized. The joint agency agreement is still in effect.
*212 There was no commitment on the part of Capper Publications, Inc., to any arrangement with petitioner before petitioner was organized, or during 1940, or before June 16, 1941.
The net operating profits or loss of The Capital and The Journal, respectively, for the years 1936 through 1940, are set forth below. With the exception of 1940, the figures for The Journal cover the period when the paper was operated by the partnership:
| Year | Topeka Daily | Topeka State |
| Capital | Journal | |
| 1936 | ($ 42,564.19) | ($ 35,857.89) |
| 1937 | (47,075.14) | (48,759.51) |
| 1938 | (55,023.65) | (20,803.36) |
| 1939 | 21,194.06 | (8,870.70) |
| 1940 | 12,311.33 | 1 (21,265.61) |
The petitioner's net income*171 for the years 1942 through 1946 was as follows:
| 1942 | 1 $ 14,256.21 |
| 1943 | 69,990.24 |
| 1944 | 105,134.60 |
| 1945 | 96,467.69 |
| 1946 | 112,753.28 |
Petitioner's distributive share of income from the agency corporation, TNPC, for the years 1942 through 1946, was as follows:
| 1942 | $ 74,156.77 |
| 1943 | 121,120.17 |
| 1944 | 165,705.83 |
| 1945 | 180,340.79 |
| 1946 | 202,507.30 |
Petitioner's excess profits net income for each of the years 1944 and 1945, computed under the invested capital method (section 714) and the income credit method (section 713), was as follows:
| Year | Invested capital | Income credit |
| method | method | |
| 1944 | $ 113,563.06 | $ 106,427.96 |
| 1945 | 105,463.09 | 99,607.31 |
Since petitioner commenced business after December 31, 1939, it is required to compute its excess profits credit on the basis of invested capital. Petitioner's excess profits credits for the taxable years 1944 and 1945, computed by use of the invested capital method, amounted to $ 29,334.56, and $ 28,651.89, respectively, the computation is as follows: *213
| 1944 | 1945 | |
| Average equity invested capital | $ 188,604.32 | $ 212,004.03 |
| Plus: 50 per cent of average borrowed capital | 178,286.79 | 146,350.00 |
| Average invested capital | 366,891.11 | 358,354.03 |
| Less: Adjustment for inadmissible assets | 209.13 | 205.44 |
| Invested capital | 366,681.98 | 358,148.59 |
| Credit at 8 per cent | 29,334.56 | 28,651.89 |
*172 Petitioner's excess profits tax liability for 1944 and 1945 was $ 14,651.59 and $ 57,123.58 (after credit for post-war refund), respectively. Such liability was determined by the respondent without the granting of relief under section 722.
Petitioner filed applications for excess profits tax relief under section 722 for 1944 and 1945; it did not file applications for relief for 1940, 1941, 1942, and 1943. Petitioner's applications for relief for 1944 and 1945 were denied.
The nature and character of petitioner's business, the publishing and circulating of The Journal, were determined on February 1, 1940, when petitioner acquired The Journal's business and assets as an established business and then commenced the publication of that newspaper.
When petitioner commenced business on February 1, 1940, neither it nor Stauffer had any assurances that Arthur Capper could or would be persuaded to enter into an agreement for the joint operation of certain departments of the two newspapers.
The petitioner did not have any intangible assets which were not includible in invested capital at the time it commenced business and its character was determined.
The petitioner is not qualified for relief*173 from excess profits tax under the provisions of section 722(c)(1).
The stipulated facts are found as stipulated and are included herein by this reference.
OPINION.
Since petitioner came into existence after December 31, 1939, it was required under sections 712(a) 1*174 and 714 to base its computation of excess profits credits on invested capital. *214 It is now seeking a higher excess profits credit based on income, using a constructive average base period net income determined under the provisions of section 722(a), contending that its excess profits taxes for 1944 and 1945 are excessive and discriminatory within the meaning of section 722(a). Petitioner seeks relief under section 722(c), claiming that it qualifies for relief under subsection (1). 2
In order to qualify for relief under the provisions of section 722(c), a taxpayer must establish the existence of one or more of the qualifying conditions enumerated in that section and, in addition, *175 must show that its excess profits tax is excessive and discriminatory because of the existence of one or more such conditions for the reason that a qualifying condition may not result in the invested capital method's being an inadequate standard for the determination of the excess profits credit. The petitioner must, therefore, demonstrate the inadequacy of its excess profits credit based on invested capital by showing that the inadequacy results from one of the specified factors. Danco Co., 14 T.C. 276">14 T.C. 276, 282.
The taxpayer must also show, within the framework of section 722(a), a fair and just amount representing normal earnings to be used as a constructive average base period net income. This latter requirement, however, has been covered by a stipulation that if it is determined by this Court that petitioner is qualified for relief under section 722(c)(1), then it shall be entitled to a constructive average base period net income of $ 50,000 to be used in computing its excess profits tax credit for the years 1944 and 1945.
The issue for decision is, therefore, whether the petitioner has shown that it meets the qualifying condition set forth in section*176 722(c)(1). In short, to qualify for the relief claimed, petitioner must show that its business is of a class in which intangible assets not includible in invested capital under section 718 make important contributions to income, and that the existence of that qualifying factor results in an inadequate excess profits credit.
Petitioner contends that the agreement of July 17, 1941, pursuant to which the agency corporation, TNPC, was created, is an intangible asset which comes within the meaning of section 722(c)(1). *215 Petitioner contends that the agreement made important contributions to its income and that it is an "asset" not includible in invested capital.
It is the respondent's position that the joint agency operating agreement did not constitute an asset of the petitioner. He contends that neither of the principal parties to the agreement believed it was acquiring an asset, but that both expected that the agency corporation's operations would serve to reduce certain production costs from which each would benefit in about the same ratio as the value of the assets which each contributed to the new corporation for its use.
Respondent argues, also, that the agreement*177 effected a change in the nature and character of petitioner's operations after July 17, 1941; that the nature and character of petitioner and its business was determined for the purpose of the excess profits tax when it commenced business on February 1, 1940; and that it is the nature and character of a taxpayer's business at the time it commences business after December 31, 1939, that determines its eligibility for relief under section 722(c)(1). In this connection, he cites the Bulletin on Section 722, as amended by E.P.C. 35, 1 C.B. 134">1949-1 C.B. 134, 136, which revised Part VII (E) of the Bulletin as originally issued (G.P.O. printing pp. 136-141), which states in part, with reference to section 722(c), that "[the] nature of the taxpayer and the character of its business will be determined as of the date on which the taxpayer commenced business. In this situation the term 'commenced business' has the same significance as in section 722(b)(4)."
The respondent recognizes that petitioner's business is of a class which customarily has intangible assets, such as subscription lists and advertising contracts. It is well established that they are an intangible asset*178 of a newspaper. See Willcuts v. Minnesota Tribune Co., 103 F.2d 947">103 F. 2d 947, 950; and Perkins Bros. Co. v. Commissioner, 78 F.2d 152">78 F. 2d 152. However, he points out that those intangible assets were purchased by the petitioner and their value was included in petitioner's invested capital at the time petitioner commenced business, in the amount of $ 368,776.07.
We will consider first whether the agreement of July 17, 1941, is an intangible asset of the petitioner within the meaning of section 722(c)(1) which makes important contributions to income.
The Bulletin on Section 722, as amended by E.P.C. 35, supra, outlines some of the elements which are to be considered in cases where qualification is claimed under section 722(c)(1), and the following is stated:
The term "intangible assets" is used in section 722 in the sense in which it is ordinarily understood. While generally accepted legal and accounting definitions are valuable guides, they are not considered controlling for this purpose. Patents, copyrights, licenses, goodwill, franchises, contracts, secret *216 formulas, secret processes, trade-marks, brand*179 names, trade names, subscription lists, and similar assets are illustrative of such intangibles; but the foregoing list is not all-inclusive.
* * * *
The taxpayer's rights in the intangible asset, whether legal title, equitable title, license or privilege of use, or any other, must be such that the income contributed by the intangible is properly includible in the taxpayer's income. It is not sufficient if taxpayer is merely the assignee of the income of the intangible. The contribution of the intangible asset to income, while it may be direct or indirect, must be important in the sense that it is significant in relation to the taxpayer's total income.
For the purpose of section 722(c), an asset is includible in invested capital unless it has, in the hands of the taxpayer, (a) no unadjusted basis, (b) an unadjusted basis of zero, or (c) an unadjusted basis which is clearly a nominal amount.
The provision that taxpayer's business must be "of a class" does not imply that there be a division of businesses into trades or industries, or that any other separation into specified groups is required. Here, the word "class" is used in the sense of type, character, or nature, *180 rather than with any requirement that businesses must be segregated into classes. If the nature of the taxpayer's business function, the character of its organization, or the methods it employs in operation are such that intangible assets of the character in question make important contributions to income, it is considered that it falls within the purview of the statute.
Relying upon the cited illustration in the Bulletin, as amended, the petitioner contends that since the agreement of July 17, 1941, is a contract, that agreement is an intangible asset within the meaning of section 722(c)(1) which is not includible in invested capital.
Petitioner's view places chief reliance upon the fact that the creation and operations of the new agency corporation were brought about by the agreement of July 17, 1941, which petitioner observes was a contract. We think such view overlooks the basic fact that it was the joint agency corporation, in which petitioner acquired stock, which was expected to cut costs and thereby increase profits. The substance of the agreement was that it provided for the creation of the agency corporation which took over the operation of certain departments of the two*181 principals (petitioner and Capper Publications) for joint operation. The principal parties did not want to merge their respective corporate entities, or to conduct jointly the entire and complete business of each. They did not want to enter into a complete joint venture. The agreement was a particular and special type of agreement which basically had been devised for the use of a morning and an evening newspaper in the same city, the purpose of which was to cut costs, eliminate some competition, and (it was hoped) thereby increase the profits of the two newspapers. The structure of the arrangement adopted by petitioner and Capper Publications depended upon the creation of a new corporation (whose stock was owned by the principal parties to the arrangement) which *217 acted as an agent of its stockholders. The agency corporation was a bona fide corporation having directors, officers, working capital, and the use of operating equipment loaned by the stockholder corporations. The agency corporation, TNPC, was in a real sense a subsidiary of petitioner and Capper Publications, being, however, a nonprofit corporation.
The agreement of July 17, 1941, did all of these things: *182 It provided for the creation of a new corporation, TNPC; it specified what the respective stockholdings of petitioner and Capper Publications in the new corporation would be; it made provision for a small amount of working capital for TNPC; it made provision for TNPC's performing, as an agent, certain functions for both petitioner and Capper Publications which each had done previously itself, in independence and also in competition, "for better or worse," and it was hoped that when TNPC carried on such functions it would do so "for better," i.e., for more profit. The arrangement so contrived avoided the impact of certain taxes; it avoided the complications -- legal and otherwise -- of a merger of petitioner and Capper Publications; but it also had the advantage of being a "silent" arrangement, for the two newspaper-publishing corporations continued as separate corporate entities, ostensibly in full competition with each other, and each was free to continue its own particular editorial policy and style. From a realistic view, the arrangement by the device of using an agency, nonprofit corporation had many of the advantages of the merger of petitioner and Capper Publications but without*183 a de jure merger. The agreement of July 17, 1941, was not a mere contract; it was a great deal more. It was a plan, and a modus operandi, and it also effected a joint agency operating arrangement whereby there was a merger of certain operations of the two newspaper-publishing corporations. The arrangement, the agreement itself, represented a cost-cutting device. To the extent that it reduced costs, it could be expected to accomplish an increase in profits.
In this case, we believe that the critical point is whether the joint agency operating agreement represented an intangible "asset" of the petitioner within the meaning of section 722(c)(1). The term "intangible assets" is used in the statute in the sense in which it is ordinarily understood. It is our belief that the ordinary meaning of intangible assets does not include a cost-saving device such as an agency corporation designed to effect a reduction in costs pursuant to a joint agency operating agreement. Such device does not directly make important contributions to income as distinguished from possibly increasing profits by cutting costs. As is noted in E.P.C. 35, supra, the statute contemplates an intangible *184 asset which the taxpayer owns exclusively which in itself makes "important contributions *218 to income." We think that a joint operating agreement which may increase profits by reducing the respective and separate costs of the two competing business entities must be distinguished from an asset which directly produces income, such as an asset owned exclusively by the taxpayer such as a secret process, a brand name or a trademark, a license, copyright, or a patent. Such assets produce income, and are to be distinguished from a joint agency operating agreement whereby two heretofore separately operated businesses resort to the use of a common agent to carry on jointly certain departments and operations.
Certain mechanical operations of a newspaper, printing, and selling subscriptions and advertising, are essentially the same for all newspaper publishers. The hours of the day for the makeup and printing of a morning paper differ from the hours when the same operations are followed in getting out an evening paper. In carrying on the work of the mechanical, sales, distribution, and general management departments, the same types of personnel are employed. Therefore, in these operations*185 one publishing concern incurs expenses for functions which duplicate the same functions of its competitor. The arrangement adopted by petitioner and Capper Publications represented a merger of their respective mechanical operations by the device of using a joint agency corporation to which both transferred their respective departments which carried on those operations. But each newspaper retained and operated separately, as before, its own editorial and newsgathering departments. The arrangement was like a partial merger of the two principals (without tax consequences), except that the Topeka Newspaper Printing Company was an agent of each.
Although petitioner has not introduced into the record complete evidence relating to the basis for the agreement that the net receipts of TNPC would be distributed to Capper Publications and petitioner under a two-thirds and one-third allocation, respectively, it is quite likely that there was a valuation of the respective businesses during the negotiations, and that the principals concluded that the relative value of each business had the agreed proportion. The burden of proof of the petitioner included establishing the underlying facts. *186 Since petitioner has not introduced evidence to the contrary, we assume that the above analysis is a reasonable explanation of the proportion adopted. It follows that if each principal had continued to carry on all of its operations independently, petitioner's volume of business and earnings probably would have been in approximately the same proportion as the joint agency operating agreement adopted, even if the amounts of petitioner's total business and profits might have been less than were eventually realized under the joint operations arrangement.
*219 Both parties suggest that the joint operations agreement served to give petitioner a one-third interest in the sales of Capper Publications, and to allow Capper Publications a two-thirds interest in petitioner's sales. But the suggestion is argumentative and it involves a construction of the arrangement which we think is neither necessary, relevant, nor material. Furthermore, where there is a transaction involving the transfer of interests in a business, there is ordinarily the payment of some consideration for the acquisition of such interest or in earnings. Since neither principal here paid to the other any such consideration, *187 the argument finds no support in the facts before us and we consider it to be theoretical rather than real. From a practical standpoint, our conclusion is that each principal agreed that under the joint agency operation of certain departments, the true share of each, according to the size and extent of its circulation and general business at the time of entering into the agreement, was two-thirds and one-third, respectively. The agreement fixed those proportions for the future; each principal stood to gain or lose something, perhaps, but evidently each was willing to make the bargain because it believed that on the whole the joint operating arrangement would cut costs and in that way would be more profitable than the continuation by each of all operations separately. The general economies which were expected to result from reductions in costs, elimination of duplications of personnel and expenses, and the promotion of the business of each principal concern under joint management were undoubtedly regarded as sound justification for fixing the respective shares of each in future net earnings on the agreed basis of two-thirds and one-third.
The joint agency operating agreement was*188 exactly what it purported to be, namely, a management and operating agreement. Neither principal gave up any of its own property at the time of entering into the agreement in 1941. Each made available to its agent, TNPC, its subscription lists, advertising contracts, and records. Although the printing presses and other printing equipment of The Capital were used for the printing of both The Capital and The Journal, and petitioner moved its editorial, newsgathering offices, and wire services into Capital's building, there was no sale of any property or equipment to petitioner. Petitioner retained its own building but rented it to others. Petitioner acquired one-third of the stock of the new agency corporation which it carried as an asset at a value of $ 10 per share, or $ 333.33. TNPC's initial operating funds were advanced by petitioner and Capper Publications apparently as loans. If the joint operating agreement had been terminated under the termination clause after the first 5 years, petitioner and Capper Publications each would have resumed its separate *220 management, printing, and circulation and distribution of its own newspaper, and the agency corporation would*189 have been dissolved. Furthermore under the joint operating agreement, each principal did not acquire anything other than stock in the agency corporation, but that represented no more than a part of the corporate form adopted for having an agent to carry on certain operations jointly.
In Danco Co., 14 T.C. 276">14 T.C. 276, 285, Jackson-Raymond Co., 23 T.C. 826">23 T.C. 826, and Avildsen Tools & Machines, Inc., 26 T.C. 1127">26 T.C. 1127, 1139, this Court recognized that in conducting a customs service business the personal and technical reputations and the skills of the chief officers of a corporation may constitute important factors in the successful operation of the business and the production of income so as to qualify the corporation for relief under section 722(c)(1), because such officers' contacts and reputation may provide the taxpayer with the benefit of goodwill of considerable value even though such goodwill does not constitute an intangible asset includible in equity invested capital. In the cases cited above it was held that such factors constituted intangible assets.
On the other hand, we have held that the mere *190 successful operation of a business through efficient management and competent personnel does not establish the existence of a qualifying factor under subsection (c)(1). North Fort Worth State Bank, 22 T.C. 539">22 T.C. 539. Here, the petitioner made an arrangement under which its business could be operated more efficiently and at reduced costs. The arrangement served the same purposes for Capper Publications. The evidence shows that by 1941, such joint management and operating agreements were not uncommon.
To the extent that petitioner's profits increased (after the joint arrangements had become established) from reductions in costs, its increased earnings were due to a tangible factor, savings in costs. To the extent that petitioner's profits increased from enlarged circulation and more advertising contracts, such results were in part produced by more efficient management, but the goodwill which The Journal had already established, before Stauffer took over the newspaper and created the petitioner to continue publishing The Journal, continued to be a factor in producing earnings. There is no evidence that the public knew anything about the joint management and*191 operations agreement which obviously was an internal matter. And since petitioner continued to maintain its own, separate, independent editorial and newsgathering departments, it cannot be said that the increased circulation of The Journal was attributable solely to the joint management and operating arrangement. It must be assumed here that in the operation of a newspaper publication business the editorial policy and style of the newspaper and the extent and *221 manner of reporting news are among the most important factors in the success of the business. Petitioner's goodwill, subscription lists, and advertising contracts were its own property after as well as before the agreement of July 17, 1941. There is no evidence before us which provides any basis for determining how much of petitioner's income after July 17, 1941, and during the taxable years can be ascribed to its editorial and newsgathering departments, and how much can be ascribed to the circulation and advertising departments. At any rate, petitioner's goodwill, subscription lists, and advertising contracts were intangible assets which were included in its invested capital.
In Crestwood Publishing Co., 29 T.C. 789">29 T.C. 789, 793, 794,*192 a distribution contract of a publisher of magazines was claimed as an intangible asset under 722(c). It was held that a distribution contract which gives efficient distribution did not qualify; that it lacked the requisite characteristic of exclusiveness which is typical of such intangible assets as patents, secret formulas, franchises, trademarks, etc.
In North Fort Worth State Bank, supra at 548, we rejected a claim that a lease of property and fixtures at an advantageous rental constituted an intangible asset for the purpose of (c)(1). We regard these cases as authority for concluding here that a joint agency operating agreement, designed to give efficient operation, is not an intangible asset within the meaning of section 722(c). We think it is clear here that the joint agency operating agreement was but an arrangement for achieving more efficient operation at reduced costs of some of petitioner's departments. The arrangement was one in which Capper Publications also achieved reduced costs.
Petitioner relies upon Journal Tribune Publishing Co., 24 T.C. 1048">24 T.C. 1048. That case involved a new corporation formed by two competing*193 newspaper corporations which had published the Journal and the Tribune. The new corporation published the Journal-Tribune, one newspaper. The respondent conceded that petitioner qualified for relief under section 722(c) and made partial allowance of petitioner's claims. The only issue before this Court was the amount of the taxpayer's constructive average base period net income. The facts in the Journal-Tribune case were different from the facts here. The Journal-Tribune Company was organized with a paid-in capital of only $ 50,000, which was its working capital. All other assets, tangible and intangible, were leased to the new corporation by the respective corporations which organized the taxpayer. The leased properties included such intangible assets as subscription lists and goodwill. The value of those intangible assets was not carried on the new corporation's books and was not included in its invested capital. No goodwill or going-concern value was included in its invested capital. The Journal-Tribune case is not apposite.
*222 It is held, under the record presented, that the joint agency operation agreement under which some of petitioner's operations were*194 carried on by an agency corporation does not qualify as an intangible asset to the petitioner within the meaning of section 722(c)(1), and that the petitioner has failed to establish that it qualifies for excess profits tax relief under section 722(c)(1).
Reviewed by the Special Division.
Decision will be entered for the respondent.
Murdock and Raum, JJ., dissenting: The only question here is whether the petitioner qualifies for relief under section 722(c)(1). The statute provides that the tax computed without the benefit of section 722 shall be considered to be excessive and discriminatory in the case of a taxpayer like this one if the excess profits credit based on invested capital is an inadequate standard for determining excess profits because the business of the taxpayer is of a class in which intangible assets not includible in invested capital under section 718 make important contributions to income. The parties have stipulated that if the petitioner is qualified it shall be entitled to a constructive average base period net income of $ 50,000.
The only question in view of the stipulation would seem to be whether the contract of August 1, 1941, was an*195 intangible asset which made important contributions to income. No argument is made that it was includible in invested capital under section 718. The Bulletin and other administrative rulings and regulations are only binding to the extent that they are a reasonable and proper interpretation of the law, but even therein it is recognized that a "contract" can be regarded as an intangible asset. The evidence shows that this contract made important contributions to income of the petitioner. Not only did it reduce costs and expenses, thereby contributing substantially to net income, but the evidence indicates that it made some important contributions to gross income through the handling of classified advertisements. We think the petitioner has qualified under section 722(c)(1) and is entitled to the stipulated amount of relief.
Footnotes
1. Last 11 months.↩
1. Does not include net operating loss carryover of $ 118,364.83.↩
1. All references to sections are to sections of the Internal Revenue Code of 1939.
SEC. 712. EXCESS PROFITS CREDIT -- ALLOWANCE.
(a) Domestic Corporations. -- In the case of a domestic corporation which was in existence before January 1, 1940, the excess profits credit for any taxable year shall be an amount computed under section 713 or section 714, whichever amount results in the lesser tax under this subchapter for the taxable year for which the tax under this subchapter is being computed. In the case of all other domestic corporations the excess profits credit for any taxable year shall be an amount computed under section 714. For allowance of excess profits credit in case of certain reorganizations of corporations, see section 741.↩
2. SEC. 722. GENERAL RELIEF -- CONSTRUCTIVE AVERAGE BASE PERIOD NET INCOME.
(c) Invested Capital Corporations, Etc. -- 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, not entitled to use the excess profits credit based on income pursuant to section 713, if the excess profits credit based on invested capital is an inadequate standard for determining excess profits, because --
(1) the business of the taxpayer is of a class in which intangible assets not includible in invested capital under section 718 make important contributions to income.
* * * *↩
In such case for the purposes of this subchapter, such taxpayer shall be considered to be entitled to use the excess profits credit based on income, using the constructive average base period net income determined under subsection (a). * * *