*1365 1. CAPITAL EXPENDITURES. The costs of building up and establishing the circulation of a national advertising directory, and enterprise which petitioner entered upon in 1916 and published the first edition thereof in 1918, were capital expenditures and petitioner was entitled to set up such items as were properly allocable thereto as capital assets on its books, and deduct same as a loss in the year when such enterprise was finally and definitely abandoned. Successful Farming Publishing Co.,23 B.T.A. 150">23 B.T.A. 150, followed.
2. ABANDONMENT OF A BUSINESS ENTERPRISE - DETERMINATION OF YEAR IN WHICH LOSS TAKES PLACE. - Whether or not there has been an abandonment of a business enterprise in a particular year depends on the intention of the owner, coupled with the act of abandonment, both to be ascertained and determined from all the facts and circumstances. Belridge Oil Co.,11 B.T.A. 127">11 B.T.A. 127, followed.
3. LOSSES - TAXPAYER HAS NO RIGHT OF ELECTION AS TO YEARS IN WHICH HE WILL TAKE THEM. - The fact that petitioner entered certain capital assets on its books as "National Investment, December 31, 1918, second issue $101,655.99, third issue $101,656" does*1366 not bind petitioner to an election to take these amounts as deductions in 1919, when the second issue of the directory was published and in 1920 when the third edition was published. A taxpayer has no right to elect the year in which he will take a loss on capital assets. His right to take such loss depends upon certain identifiable events which he must establish in fixing the loss in the year when he seeks to take it as a deduction. Danville Press, Inc.,1 B.T.A. 1171">1 B.T.A. 1171; Frischkorn Real Estate Co.,21 B.T.A. 965">21 B.T.A. 965, followed.
*108 This proceeding involves a deficiency in income and profits taxes for the year 1921 in the sum of $98,826.13, resulting from the disallowance by the respondent of an alleged loss of $203,311.99, which petitioner alleges occurred at the time of the discontinuance in that year of the publication of a "National Classified Directory." The respondent disallowed the entire loss claimed for 1921, but allowed $177,947.69 thereof for 1920, his action resulting in an overassessment for 1920 of $9,269.63*1367 and a deficiency for 1921 of $98,826.13. Petitioner appealed from the determination of respondent as to both years.
Petitioner does not contest the disallowance of $25,364.30 of said amount called "development losses," but alleges that the respondent erred in not allowing the remaining $177,947.69 as a loss for 1921 instead of 1920.
Petitioner also claims that it is entitled to special assessment for 1921 under sections 327 and 328 of the Revenue Act of 1921, but by an order of the Board, the hearing in the first instance was limited to issues which do not involve the question of special assessment.
FINDINGS OF FACT.
The petitioner is a corporation, organized under the laws of the State of Illinois, with its principal office and place of business in *109 Chicago, Illinois. It is engaged in the business of publishing local classified business telephone directories in a number of cities throughout the country. These advertising directories are published under agreements with the various telephone companies and are distributed to telephone subscribers free of charge to either the telephone company or subscribers. Petitioner's revenue and profit, if any, is derived*1368 from the sale of space in the directories for advertising or listing purposes.
The business was started and created by Reuben H. Donnelley in person in 1894. It prospered and in 1917 was incorporated under the laws of New York, and was reincorporated under Illinois laws on January 2, 1920, at which time the Illinois corporation (petitioner) took over all the assets and assumed all the liabilities of the New York corporation.
About 1916, while the business was still being conducted by Mr. Donnelley as an individual, he conceived the idea of establishing and publishing a national classified telephone directory, which will be referred to herein as the National Directory, and at once preparations were begun to establish it. The original plan was to publish it semi-annually, with a guaranteed circulation of 100,000 copies. The object of the directory was to furnish a concise and convenient medium for bringing prospective purchasers of goods and services into contact with reliable merchants, manufacturing, and other industries. The book was to be distributed free of charge to public libraries, commercial bodies, hotels, Pullman cars, business houses, and other places accessible*1369 to buyers. Revenue or profit therefrom was to be derived solely from the sale of advertising and listing space. Three editions of the National Directory were published and distributed, viz., one in February, 1918, one in March, 1919, and the last in January, 1920, after which further publication was discontinued. Large losses resulted from each of the editions. These general losses are not in issue in this proceeding, except as they may be related to the items which go to make up the $177,947.69, which petitioner claims as an investment loss and which it claims it is entitled to take as a deduction upon the abandonment of the enterprise in 1921.
In preparation for the publication and establishment of the National Directory as an advertising medium, additional branch offices were opened in a number of cities, additional expert help was employed, a dummy directory was prepared, and an active campaign was instituted to acquaint advertisers and buyers with its objects and use, to solicit advertising and listings, and to create a favorable sentiment and good will for the publication and its reception among prospective distributees and users.
The receipts from the first edition*1370 published in 1918 lacked $304,967.88 of equaling the amount expended by petitioner on the directory *110 up to that time. One-third of this amount was charged against income for 1918 as ordinary and necessary business expenses and the other two-thirds, amounting to $203,311.99, was set up on petitioner's books as a capital assets. The entry on petitioner's books was headed as follows: "National investment, December 31, 1918, second issue $101,655.99; third issue $101,656." These later amounts, however, were not taken as deductions for 1919 and 1920, when the second and third editions of the directory were published, but were carried on the books as an asset resulting from capital expenditures until charged off in 1921, as will hereinafter appear.
The items which petitioner claims were capital expenditures made in the launching of its National Directory, and which make up the total of the $177,947.69, which it claims as a loss in 1921, are as follows: (1). Expense of assembling material and preparing lists, $8,449.39. These were lists of prospective advertisers to be solicited for advertising in the directory and circulation lists. The work represented by these expenses*1371 was preliminary work in connection with the launching of the publication and lists were of a more or less permanent character.
(2). Publishing and shipping a sample or dummy directory, $13,347.97. This was a sample illustrating the proposed form of the directory and copies of it were used by petitioner's salesmen in soliciting advertising for the directory. There were no paid advertisements in it. The expense connected with the publication of this dummy directory was preliminary to the establishing of the business and was for the general promotion of the directory.
(3). Expenses of organizing and establishing the sales force of the National Directory, $8,959.15. This includes renting and equipping offices, hiring employees, training salesmen and other details preliminary to the opening of the business. This work was of a more or less permanent nature.
(4). Expenses in connection with services performed by solicitors preliminary to the issuance of the National Directory, $76,149.98. This work was performed by solicitors in gathering information with respect to the proposed canvass and the proposed circulation, doing preliminary research work in the field, establishing*1372 the directories in libraries, Pullman cars and on steamships, and getting recipients to accept the directories and use them intelligently. This work was preliminary to the establishing of the business and was necessary to the sale of advertising and space in subsequent editions of the directory as well as to the first edition.
(5). Advertising expense, $29,260.44. This relates to the expenses of advertising directed partly to prospective advertisers in the directory, but primarily to prospective recipients of the directory to explain its purposes and induce them to keep and use it, and also the *111 expenses of establishing various files for a buyers' service, and subscriptions to and insertions in directories. The advertising was preliminary to the establishing of the business.
(6). Represents an allocation, to the capital expenditures of the directory, of a part of the general overhead expenses of petitioner's business during 1916, 1917 and 1918, $37,371.37.
(7). Cost of permanent file, $3,770.24. This represents an allocation to the capital expenditures of the directory of two-thirds of the cost of the original compilation ($5,655.35) as the expenses of the*1373 permanent compilation file, a file of information to be contained in the first directory which, with some changes, was used from issue to issue. There was a 33 1/3 per cent change in the matter printed in the directory from one issue to another at 33 1/3 per cent of the original cost of composition, and two-thirds was taken as the proportion of the file which represented a permanent asset. After its original compilation, it was kept up to date each year and the cost of doing this was charged to expense.
(8). Represents the cost of equipment furnished salesmen engaged in work on the directory during 1917 and 1918, $642.15.
The foregoing amounts total $177,950.69, which is $3 more than petitioner is claiming as its loss in 1921.
The stock in the petitioner was closely held and during the time in question all but a few qualifying shares were owned by Reuben H. Donnelley. Meetings of directors and stockholders were informally held and no extended minutes of the proceedings were kept. The only minutes that were ever recorded were such as were required by banks with which petitioner transacted business, authorizing signatures or something of like character.
When the enterprise*1374 of the National Directory was launched, the price of paper of the kind on which it was printed was about 3 cents a pound and by 1920 had risen to between 14 and 17 cents a pound and was hard to obtain at any price. Petitioner had no contract to protect it from the advance of the prices of paper used in the publication of this National Directory. Other costs had also advanced.
The third edition of the directory was published about January, 1920. In May, 1920, at a meeting of the directors of the corporation, at which all directors were present, the directors unanimously decided to suspend publication of the 1921 edition and, so far as possible, to get rid of all expenses which would not add to the good will in the resumption of publication.
Prior to this directors' meeting the corporation had commenced preparation for the 1921 edition of the directory. Arrangements had been made with an advertising company for an advertising campaign to increase the circulation of the directory, and some preliminary work for the campaign had been done. Work had been *112 done preparatory to the canvass for the 1921 issue, including the preparation of a standard sales folio for use*1375 by the salesmen. From twenty to fifty salesmen had commenced soliciting advertising for the 1921 edition and had obtained a number of contracts for advertising in which the corporation agreed to spend a minimum of $150,000 during the year following the publication of such edition, which year would commence about March or April, 1921, to promote the use of the directory by purchasers. A substantial sum, estimated by one of the directors at about $50,000, was spent in preparation for the 1921 edition. This amount, however, is not in controversy in this proceeding.
At this meeting in 1920, the directors did not determine to abandon the publication of the directory, but only to suspend the publication of the 1921 edition. It was the intention at that time to resume its publication when the costs of print paper and other costs of printing had reached a more normal level.
It was expected that this would be within a period of not more than 12 to 18 months. Subsequent to the meeting in 1920 there was considerable discussion and argument among the directors as to whether the directory should be continued or permanently abandoned. Finally, the directors held a meeting in the fall*1376 of 1921, attended by all of them, and unanimously decided to abandon the directory. After this decision of the directors in the fall of 1921 to permanently abandon publication of the National Directory, R. R. Donnelley and Sons Company, who were printers of it for petitioner, "killed" the plates and electrotype of the directory which, since the decision to suspend publication of the 1920 edition, had been kept standing at a considerable inconvenience and expense to the printers, in anticipation of future use.
Pursuant to the decision to abandon the directory, the directors decided to write off the amount which petitioner had been carrying on its books as a capital asset in connection with this directory, and it was written off December 31, 1921. There was no insurance against the loss of this asset nor any salvage with respect to it.
A deduction of the amount written off the books, no part of which had been claimed previously, was claimed for the year 1921. A revenue agent's report covering an investigation of the years 1920 and 1921 shows that the deduction was claimed on the ground that the abandonment of the National Directory resulted in a loss in 1921 of the amount of*1377 $203,311.99 written off the books. The thirty-day letter, which adopts the revenue agent's report as a basis, disallows an item of $25,364.30 called "development losses" and allows the balance of the deduction, amounting to $177,947.69, for the year 1920. Petitioner acquiesced in this disallowance of $25,364.30, called "development losses" and in its protest as to the balance claimed *113 that the $177,947.69 should be allowed as a loss in 1921, instead of 1920.
The deficiency notice is dated September 16, 1926, and the statement accompanying it contains the following paragraph:
Relative to your contention that the loss on the National Investment amounting to $177,947.69, should be allowed as a deduction from income for the year 1921, you are advised that the evidence in the case indicates conclusively that the item in question is not a proper deduction for 1921, but is an allowable deduction for 1920. Your contention, therefore, is denied.
OPINION.
BLACK: Respondent determined an overassessment for 1920. Consequently, we have no jurisdiction of that year. Cf. *1378 . Accordingly, as to the year 1920, the appeal is dismissed.
As to the year 1921, the deficiency determined by the Commissioner is based solely upon the disallowance of the claimed loss stated in our findings of fact. Because of the fact that respondent stated in his deficiency notice that he was allowing $177,947.69 of the claimed loss, but placing it in the year 1920, petitioner contends that the fact that it suffered such a loss is not in issue at all, but that the only thing which is in issue is whether petitioner suffered such loss in 1921, as it claims, or whether it took place in 1920, as respondent claims. Respondent in his answer denied that petitioner had suffered any loss at all in 1921 and his counsel at the hearing and in his brief contends that the burden of proof is on petitioner to show two things - (1) that the items making up the loss which petitioner claims were capital expenditures and therefore properly capitalized on its books, and were in the amounts which petitioner claims; (2) that the abandonment of the publication of the National Directory took place in 1921, as contended by petitioner, and not in 1920, *1379 as determined by the respondent. We agree with respondent that in view of the pleadings, the burden of proof is on petitioner to prove both these things before it can prevail. Respondent in his answer is not limited by the grounds stated in the deficiency notice. Cf. ; ; affd., ; certiorari refused, .
We will first take up the question whether the $177,947.69 loss claimed by petitioner was made up of items which were really capital expenditures. A taxpayer has no right of election to treat items which are properly expense items as capital expenditures, and, vice versa, he has no right of election to treat capital expenditures as expense items. The nature of the expenditures must be determined upon the facts in each case. .
*114 If all or any of the items which go to make up petitioner's claimed loss were items which should have been charged to expense when made, then petitioner is not entitled to prevail as to such items, even though it is held that abandonment of the National*1380 Directory did take place in 1921, as contended by petitioner, for items which are properly classified as ordinary and necessary business expenses must be taken as deductions in the year when paid or incurred and not later. Revenue Acts of 1918 and 1921, section 234(a)(1).
Were these expenditures (enumerated in detail in our findings of fact) capital expenditures such as petitioner was entitled to capitalize on its books and carry as an asset until 1921, when the publication of the National Directory was definitely and finally abandoned? In , we held that the cost of building up a magazine circulation structure is a capital expenditure, while the cost of maintaining a circulation structure, once established, is an ordinary and necessary business expense. Cf. also . We think the situation we have before us in the instant case is similar in many ways to the one in The expenditures incurred by petitioner connected with the launching of the publication of the National Directory and building up its advertising*1381 patronage were capital expenditures in the years preceding and including the year of its first publication, 1916, 1917 and 1918, and, wherever it was possible to segregate them from the ordinary and necessary expenses of petitioner's business, it was proper to capitalize them on the books.
The expenses of "maintaining its circulation in later years" were, as we said in , ordinary and necessary business expenses. Such were the kind of petitioner's expenses in 1919 and 1920, in connection with the publication of the directory for those years. These expenses for those years were much greater than the receipts, but petitioner makes no contention that it is entitled to capitalize them, and has not done so. It concedes that all such losses incurred in the publication of the 1919 and 1920 directories must fall in 1919 and 1920, when such expenses were paid and incurred. But it does contend that the items capitalized and detailed in our findings of fact, representing expenditures in 1916, 1917 and 1918 in connection with the launching and establishing of the National Directory, were properly capital items. We agree with this*1382 contention except as to item (6) shown in our findings of fact, amounting to $37,371.37. Petitioner, by a careful and exhaustive analysis of its books of account, made by a reputable certified public accountant, and offered in evidence, and by other evidence offered at the hearing from the mouths of several witnesses, has, we think, *115 sufficiently identified and established these items, with the exception stated, to meet the burden of proof that they were capital expenditures, and we so hold.
As to item (6), an expert accountant, who testified for petitioner on this item, said that overhead charges can not be specifically assigned to either capital or operating expense and must be apportioned on some equitable basis and that his allocation for petitioner of a proportion of the overhead expense to capital expenditures was in accordance with the usual accounting practice. We do not consider however that we have sufficient evidence in the record to enable us to accept this allocation and to hold that $37,371.37 of petitioner's overhead expense in 1916, 1917 and 1918 was a proper capital item in connection with the launching of the publication of the National Directory. *1383 The segregation is not sufficiently supported by the facts. We do not feel that petitioner has sustained the burden of proof as to this item, and to the extent of the amount thereof, respondent's disallowance is approved.
The next issue which we must decide is whether petitioner abandoned the enterprise of publishing the National Directory in 1921, as it contends, or whether such abandonment took place in 1920, as respondent determined in his deficiency notice. In , we said: "Whether or not there has been an abandonment * * * depends on the intention of the owner, coupled with the act of abandonment, both to be ascertained and determined from all the facts and surrounding circumstances." To the same effect is ; cf. ; ; .
All of those who were directors of petitioner in 1920 and 1921, except Reuben H. Donnelley, who is now deceased, were witnesses at the hearing and all testified that, when it was decided in May, *1384 1920, to suspend the publication of the 1921 edition of the directory, there was no decision to permanently abandon the publication of the directory, but that, on the contrary, it was the intention to resume its publication when the cost of print paper and other costs which entered into its publication had reached more normal levels. Thomas E. Donnelley, president of R. R. Donnelley and Sons Company, printers of the directory, testified that the plates, electrotypes, etc., used in publication of the 1920 directory were not melted up following the May, 1920, meeting of the directors of petitioner, at which time it was decided to suspend publication of the 1921 edition, but that, on the contrary, this material was kept stored in cabinets for future use and that this was done at considerable expense to R. R. Donnelley and Sons Company.
*116 The directors all testified, with the exception of Reuben H. Donnelley, deceased, that at a meeting of the directors in the fall of 1921 it was definitely and finally decided to permanently abandon the publication of the National Directory. Thereafter the accountants of petitioner were instructed to charge off the books the $203,311.99*1385 which had been carried as an asset and R. R. Donnelley and Sons Company, printers, were ordered to "kill" the type, and plates and electrotype of the National Directory, which had been stored for future use.
We believe that these facts are sufficient to establish that petitioner abandoned publication of the National Directory in 1921, and that it is entitled to take in 1921 its loss to the extent we have stated.
Respondent contends that because petitioner entered this capital item on its books: "National Investment December 31, 1918, second issue $101,655.99; third issue $101,656," it thereby evidenced an intent to take all this deduction in two years, 1919 and 1920, and that it should be held to that election.
We think a sufficient answer to this contention of respondent is the fact that petitioner did not make any such charge-off in 1919 and 1920 on its books, and made no attempt to take any such deductions in its income-tax returns for those years. But, even if it had made such attempt, it is doubtful if it could have succeeded, because a taxpayer is not permitted arbitrarily to write off capital assets as losses and take deductions therefor from his gross income. *1386 ;. Such losses can only by taken when there is some event to identify them, such for example as actual and permanent abandonment.
Reviewed by the Board.
Further proceedings will be had under Rule 62, or, in the absence of such proceedings, judgment will be entered under Rule 50.
STERNHAGEN dissents.