*99 Decision will be entered under Rule 50.
Respondent concedes that petitioner qualifies for excess profits tax relief under section 722 (c) of the Internal Revenue Code (1939). Petitioner's average base period net income reconstructed for the years ending October 31, 1943 (after application of the variable credit rule), 1944, and 1945. For carry-over purposes, petitioner's constructive average base period net income determined, after application of the variable credit rule, for the 11-month period ending October 31, 1942.
*1048 This proceeding involves claims for relief under section 722 (c), Internal Revenue Code of 1939, for the taxable years *100 1943, 1944, and *1049 1945. Claims for refund for those years were filed by the petitioner in the respective amounts of $ 176,889.29, $ 248,827.70, and $ 246,981.50. Thereafter respondent made additional assessments of $ 6,373.77 for 1944 and $ 3,633.31 for 1945 which petitioner has paid, after a postwar credit of $ 637.37 for 1944. Petitioner has filed additional refund claims for those amounts.
Respondent made a partial allowance for petitioner's claims for relief for 1943, 1944, and 1945 in the respective amounts of $ 68,156.10, $ 49,731.38, and $ 37,210.53. Respondent also allowed in full a claim for refund which petitioner had filed for the 11-month period ending October 31, 1942. That year is now before us only for the purpose of a claimed unused excess profits tax credit carry-over.
Respondent's partial allowance of petitioner's claims was based on a constructive average base period net income of $ 104,134 for the years 1943, 1944, and 1945, and of $ 34,711 for 1942, after application of the variable credit rule.
By amended answer, respondent alleges that petitioner's constructive average base period net income is not in excess of $ 66,000 for 1944 and 1945, and $ *101 28,000 for the 11-month period ended October 31, 1942; that the variable credit rule should be applied to 1943, as well as 1942, thereby reducing the constructive average base period net income for that year to $ 65,000; and that there are overpayments of excess profits tax not in excess of $ 34,696.53 for 1943, $ 23,574.60 for 1944, and $ 18,762.21 for 1945.
FINDINGS OF FACT.
The petitioner is a corporation organized under the laws of the State of Iowa, November 28, 1941. Its principal office is located at Sioux City, Iowa. Its returns for the taxable years involved, the fiscal period ended October 31, 1942, 1 and the fiscal years ended October 31, 1943, 1944, and 1945, were filed with the collector of internal revenue at Des Moines, Iowa. The returns were made and books kept on an accrual basis.
The petitioner was organized under an agreement entered into on November 26, 1941, by the publishers of two Sioux City daily newspapers*102 -- the Sioux City Journal and the Sioux City Tribune -- for the purpose of consolidating their newspaper publishing business. The Journal was published by Perkins Bros. Company, and the Tribune by the Tribune Company. These newspapers will be referred to sometimes hereinafter as the Journal and the Tribune or petitioner's predecessors. The Journal and the Tribune both kept their books and made their returns on an accrual basis and for a calendar year.
The Journal was first published as a weekly in 1864. It was acquired by the Perkins interests in 1869 and has been published as a daily by *1050 Perkins Bros. Company since 1886. It had both morning and evening editions after 1892. The Tribune was founded as a weekly by the Kelly interests in 1880. It was published as a daily after 1887. It was acquired by the Tribune Company upon its organization in 1900. The Journal also published a Sunday edition. The Tribune was an evening paper. It had no Sunday edition but its Saturday paper carried colored comics and some other Sunday features.
Prior to their consolidation there was keen competition between the Journal and Tribune, especially in the fields of circulation and advertising. *103 The purpose of the consolidation agreement was to combine the newspaper publishing business of both companies and thus eliminate the competition and at the same time reduce expenses.
Both the Perkins Bros. Company and the Tribune Company had other departments which were not affected by the consolidation agreement. Perkins Bros. Company had a radio station, Job Printing Department, Bookbinding Department, Lithographing Department, and a retail stationery and office supply store, all of which it continued to operate after the consolidation. The Tribune Company also had a radio station.
Under the consolidation agreement, a new corporation, the petitioner, was organized with a paid-in capital of $ 50,000. Its stock was subscribed for 60 per cent by the Perkins interests and 40 per cent by the Kelly interests. Perkins Bros. Company and the Tribune Company leased to petitioner for a period of 99 years substantially all of their newspaper publishing business and assets, except realty and accounts receivable, at annual rentals of $ 30,000 and $ 20,000, respectively, payable, after the first year, only out of the profits of the business. Petitioner was to have the option of purchasing*104 the leased properties at their fair market value at the end of the lease period.
The properties leased to petitioner included the publishing and engraving equipment, machinery, franchises, contracts, subscription lists, goodwill, and other tangible and intangible properties used in the publishing of both newspapers.
It was further provided in the consolidation agreement that for a period of 5 years petitioner would pay executives' salaries of $ 30,000 per year to the Perkins interests and $ 20,000 per year to the Kelly interests. These amounts were subject to adjustment in the event of death or voluntary termination of services. The agreement contemplated that petitioner would continue publishing the Journal and the Tribune. Both papers were to be published at the Journal's plant. About 25 per cent of the Tribune's newspaper publishing equipment was moved to that location; the balance was later sold or scrapped. Petitioner was to pay the Perkins Bros. Company a rental for the use of the premises in an amount to be fixed annually by its board of directors. *1051 A rental of $ 9,000 per year was fixed by an outside appraiser and was paid up to and during the taxable years.
*105 Petitioner began the publication of its papers December 29, 1941. Since that time it has published a morning paper, the Sioux City Journal, and an afternoon paper, the Sioux City Journal-Tribune, and a Sunday paper. Most of the organizational and operational changes incident to the consolidation were completed during the first year of operation. The consolidation had become fully effective and petitioner's operations had leveled off by early January 1943.
The books and records of the petitioner and its predecessors showed their newspaper publishing revenues divided into three general classes, circulation, advertising, and other income. The circulation and advertising income were further divided into city and country circulation and local, national, and classified advertising. The expenses were similarly classified, but in considerably more detail. (Tabulations of gross income, expenses, and profits and losses of the petitioner and its predecessors for the base period and prior years are shown below.)
Petitioner's "trading area" as it was first fixed by the Audit Bureau of Circulation 2 in 1928, and as it has existed at all times here material, extended from 110 to 130 miles*106 north, 200 miles west, 85 miles south, and 75 miles east of Sioux City, Iowa. It included parts of western Iowa, southwestern Minnesota, southeastern South Dakota, and northeastern Nebraska. It was divided into a City Zone and a Country Zone. The City Zone included Sioux City, Iowa, South Sioux City, Nebraska, and North Sioux City, South Dakota. This area had a population in 1940 of about 725,000. The population of Sioux City, Iowa, was about 82,300.
The combined daily circulation of the Journal and the Tribune was approximately 115,600 in 1936, but declined throughout the base period to approximately 87,800 in 1941. Petitioner's circulation, after the consolidation, was 84,712 in 1942, 78,033 in 1943, 77,946 in 1944, and 79,379 in 1945. The combined Sunday circulation increased steadily from 45,051*107 in 1936 to 63,674 in 1945. (The circulation records of petitioner and its predecessors are set forth in detail below.)
A postal card survey made by the Tribune in 1940 revealed that there was a duplication in subscriptions for the Tribune and the Journal of about 6 per cent. Only a few of the subscribers for the morning edition of the Journal took the afternoon Journal. After the consolidation most of the former Journal and Tribune subscribers continued their subscriptions for the papers published by petitioner. A large number of former Tribune subscribers took the Sunday Journal after *1052 the consolidation. A combination rate for the daily and Sunday Journal was offered in the City Zone. Most of the adjustments in circulation were completed within a few weeks after the consolidation.
Within the City Zone, up to July 1, 1939, the Journal and Tribune both made deliveries by carriers employed on a salary basis. Their salaries ranged from $ 1.50 to $ 5 per week. Both papers also employed district managers on a salary basis for the City Zone. They were continued on a salary basis after the consolidation.
Beginning about July 1, 1939, the Journal and Tribune both placed*108 their carriers in the City Zone on what is known as the "Little Merchant" plan. Under this plan the papers were delivered to the carrier at a fixed price per copy, and the carrier retained the difference between the retail price and what he paid for the papers. The charge to the carrier was 2 cents for each of the daily papers and 3 cents for the Sunday paper. The charge for the daily papers was raised to 2 1/2 cents on September 1, 1942. The street sales before and after consolidation amounted to about 2,000 daily and 2,500 Sunday copies. They were handled by circulators, supervisors, and street sales boys. The circulators and supervisors were on either a salary or a commission basis.
The Country Zone's circulation of both the Journal and Tribune, and of the petitioner, was divided into territories with a district manager for each territory. There were 13 district managers before and 12 after consolidation. The deliveries were made either by mail or carrier. Before consolidation the district managers were paid a salary plus expenses; thereafter they were placed on what is known as the "Senior Merchant" plan. Under that plan they were charged a fixed price per copy and were*109 permitted to keep the difference between that price and the price at which they sold the papers to the little merchant. The Country Zone carriers, before and after consolidation, operated on the little merchant plan. After consolidation they purchased their papers from the senior merchants.
In the Country Zone, before consolidation, the little merchants were charged 1 1/2 cents for the morning and evening Journals and 3 cents for the Sunday paper. The Tribune charged 2 cents for its evening paper. After consolidation, the charges to the senior merchants in the Country Zone were fixed at 1 1/2 cents per copy for the daily papers and 2 cents for the Sunday paper. Those charges were increased to 1 2/3 cents per copy for the daily papers and 3 cents for the Sunday paper in September 1942.
The following table shows the subscription prices for carrier and mail deliveries of the Tribune and Journal from January 1, 1936, up to the consolidation, and of the Journal-Tribune thereafter through 1945: *1053
| Carrier | ||||||
| Effective dates | ||||||
| Daily | Daily | Sunday | Daily | Daily | Sunday | |
| (M or E) | and Sun. | only | (M or E) | and Sun. | only | |
| per week | per week | per week | per year | per year | per year | |
| Tribune | ||||||
| 1/1/36-5/9/37 | $ 0.12 1/2 | $ 5 | ||||
| 5/10/37-7/2/39 | .17 1/2 | 5 | ||||
| 7/3/39-3/24/40 | .15 | 5 | ||||
| 3/25/40-12/31/41 | .18 | 5 | ||||
| Journal | ||||||
| 1/1/36-5/9/37 | $ 0.12 1/2 | $ 0.15 | $ 0.05 | $ 5 | $ 6 | $ 2 |
| 5/10/37-12/31/41 | .17 1/2 | .20 | .05 | 5 | 6 | 2 |
| Journal-Tribune | ||||||
| 1/1/42-9/5/42 | $ 0.18 | $ 0.20 | $ 0.05 | $ 6 | $ 7 | $ 3 |
| 9/6/42-12/31/43 | .20 | .25 | .05 | 6 | 8 | 3 |
| 1/1/44-4/14/45 | .20 | .27 | .07 | 7 | 9 | 4 |
| 4/15/45-12/31/45 | .20 | .30 | .10 | 7 | 10 | 4 |
*110 The total average paid circulation of the Journal and Tribune for the period 1936-1941 and of the Journal-Tribune for the period 1942-1945, divided as between City and Country Zones and also as between carrier and street sales and mail deliveries, was as follows:
| DAILY | |||||
| City | Country | ||||
| Year ended March 31 | |||||
| Carriers | Carriers | Total | |||
| and street | and street | ||||
| sales | sales | ||||
| 1936 | |||||
| Journal | 15,415 | 159 | 21,671 | 21,426 | 58,671 |
| Tribune | 13,969 | 22,523 | 20,431 | 56,923 | |
| 29,384 | 159 | 44,194 | 41,857 | 115,594 | |
| 1937 | |||||
| Journal | 16,726 | 163 | 19,770 | 20,762 | 57,421 |
| Tribune | 14,015 | 20,568 | 19,492 | 54,075 | |
| 30,741 | 163 | 40,338 | 40,254 | 111,496 | |
| 1938 | |||||
| Journal | 15,137 | 93 | 16,144 | 20,153 | 51,527 |
| Tribune | 12,566 | 43 | 15,257 | 18,165 | 46,031 |
| 27,703 | 136 | 31,401 | 38,318 | 97,558 | |
| 1939 | |||||
| Journal | 14,904 | 58 | 14,710 | 20,629 | 50,301 |
| Tribune | 12,418 | 32 | 15,415 | 18,958 | 46,823 |
| 27,322 | 90 | 30,125 | 39,587 | 97,124 | |
| 1940 | |||||
| Journal | 14,616 | 133 | 14,286 | 21,755 | 50,790 |
| Tribune | 12,277 | 13 | 11,433 | 18,880 | 42,603 |
| 26,893 | 146 | 25,719 | 40,635 | 93,393 | |
| 1941 | |||||
| Journal | 15,751 | 133 | 13,846 | 22,098 | 51,828 |
| Tribune | 11,257 | 13 | 9,832 | 17,541 | 38,643 |
| 27,008 | 146 | 23,678 | 39,639 | 90,471 | |
| November 1941 | |||||
| Journal | 16,384 | 133 | 14,053 | 22,429 | 52,999 |
| Tribune | 10,632 | 13 | 9,118 | 15,021 | 34,784 |
| 27,016 | 146 | 23,171 | 37,450 | 87,783 | |
| March 31 | 25,502 | 145 | 20,480 | 38,585 | 84,712 |
| 1942 1 | 23,866 | 146 | 18,073 | 35,948 | 78,033 |
| 1943 1 | 23,738 | 146 | 16,949 | 37,113 | 77,946 |
| 1944 1 | 24,730 | 146 | 16,680 | 37,823 | 79,379 |
| 1945 1 | |||||
| SUNDAY JOURNAL | |||||
| March 31 | |||||
| 1936 | 16,747 | 41 | 18,918 | 9,345 | 45,051 |
| 1937 | 18,076 | 42 | 17,872 | 9,478 | 45,468 |
| 1938 | 16,585 | 36 | 16,335 | 9,681 | 42,637 |
| 1939 | 16,471 | 14 | 15,904 | 10,075 | 42,464 |
| 1940 | 17,096 | 52 | 16,117 | 11,030 | 44,295 |
| 1941 | 18,912 | 52 | 16,015 | 11,471 | 46,450 |
| November 1941 | 19,588 | 52 | 16,949 | 12,084 | 48,673 |
| March 31 | |||||
| 1942 | 23,199 | 52 | 19,855 | 13,399 | 56,505 |
| 1943 | 22,724 | 52 | 20,165 | 13,164 | 56,105 |
| 1944 | 23,279 | 52 | 21,852 | 15,232 | 60,415 |
| 1945 | 24,231 | 52 | 22,642 | 16,749 | 63,674 |
*1054 In the advertising field, prior to consolidation, there was keen competition between the Journal and Tribune. These papers also had advertising, as well as circulation, competition from several other newspapers published in nearby cities and distributed in the same trade area. As between the Journal and Tribune, the published advertising rates were often cut or special concessions were given large advertisers to secure advertising contracts. This was particularly true of the local advertising, which accounted for the larger portion of advertising revenue. The following table shows the advertising linage, news linage, pages published, and tons of newsprint used by the Journal and Tribune and by the Journal-Tribune for the years 1941 to 1945, inclusive:
| Inches | Pages published | ||||||
| Percent of | Tons | ||||||
| Year | adv. | Daily | newsprint | ||||
| Adv. | News | Sunday | used | ||||
| Morning | Evening | ||||||
| 1941 | * 546,020 | * 1,496,860 | 26.73 | 1* 4700 | 1* 4718 | * 2556 | 4553 |
| 2* 4886 | |||||||
| 1942 | * 359,833 | * 1,040,615 | 25.69 | * 4860 | * 5460 | * 2876 | 4260 |
| 1943 | 397,066 | 1,025,222 | 27.92 | 5214 | 5254 | 3212 | 3957 |
| 1944 | 441,536 | 873,232 | 33.58 | 4968 | 4944 | 2882 | 3949 |
| 1945 | 456,134 | 814,954 | 35.89 | 4684 | 4764 | 2802 | 3545 |
*1055 A shortage of newsprint developed in 1942 and as a result petitioner, along with other newspapers, was placed under an industry rationing system. Petitioner's quota was based on the combined quota of its predecessors. In January 1943, the War Production Board placed a restriction on newsprint for all newspapers. Some of the national advertisers began voluntarily to curtail their advertising and during 1944 and 1945 petitioner rationed its advertising space. The combined Journal and Tribune purchases of newsprint and ink decreased at the rate of approximately $ 8,000 per year from a total of $ 285,195.61 in 1936 to $ 246,929.95 in 1940. Newsprint prices increased from $ 41 a ton at January 1, 1936, to $ 56 a ton at March 1, 1943. Petitioner's average annual newsprint consumption during 1943, 1944, and 1945 was approximately 76.85 per cent of the combined consumption of the Journal and Tribune in 1941. Over the same period, the average consumption of all publishers in the United States was approximately 85.14 per cent of their 1941 consumption. Under normal conditions less newsprint would have been required for petitioner*113 than for the combined predecessor companies.
The income attributable to newspaper operations of petitioner and its predecessors from sources other than circulation and advertising was derived from sales of photo-engravings, art work, stereotypes, books and maps, waste paper, and a small amount of newspaper job work. There was no substantial change in these departments by reason of the consolidation.
The following table shows the gross income from newspaper publishing business of petitioner and its predecessors, divided as between advertising, circulation, and other income for the years 1928 to 1945, inclusive:
| Year | Advertising | Circulation | Other income | Total |
| 1928 | ||||
| Journal | $ 717,652.43 | $ 334,403.72 | $ 12,071.66 | $ 1,064,127.81 |
| Tribune | 538,106.90 | 265,901.96 | 6,235.17 | 810,244.03 |
| 1929 | ||||
| Journal | 777,743.59 | 345,339.67 | 10,301.98 | 1,133,385.24 |
| Tribune | 576,018.07 | 276,554.95 | 7,138.86 | 859,711.88 |
| 1930 | ||||
| Journal | 721,281.66 | 374,645.71 | 11,645.38 | 1,107,572.75 |
| Tribune | 536,375.29 | 284,596.10 | 5,928.19 | 826,899.58 |
| 1931 | ||||
| Journal | 617,519.43 | 354,692.13 | 8,703.26 | 980,914.82 |
| Tribune | 467,068.16 | 271,057.77 | 3,765.69 | 741,891.62 |
| 1932 | ||||
| Journal | 428,478.23 | 305,577.13 | 4,771.47 | 738,826.83 |
| Tribune | 326,434.32 | 232,230.88 | 1,373.87 | 560,039.07 |
| 1933 | ||||
| Journal | 365,044.68 | 280,880.05 | 4,537.36 | 650,462.09 |
| Tribune | 331,554.83 | 224,290.50 | (954.95) | 554,890.38 |
| 1934 | ||||
| Journal | 419,537.41 | 292,692.73 | 7,139.31 | 719,369.45 |
| Tribune | 388,845.19 | 241,572.43 | 1,175.64 | 631,593.26 |
| 1935 | ||||
| Journal | 458,344.66 | 303,745.37 | 7,085.34 | 769,175.37 |
| Tribune | 426,774.31 | 246,787.84 | 348.11 | 673,910.26 |
| 1936 | ||||
| Journal | $ 489,230.65 | $ 309,666.16 | $ 12,238.34 | $ 811,135.15 |
| Tribune | 357,534.59 | 246,930.36 | 15,063.01 | 619,527.96 |
| 1937 | ||||
| Journal | 473,880.89 | 326,870.66 | 9,079.55 | 809,831.10 |
| Tribune | 331,808.11 | 239,118.61 | 23,137.30 | 594,064.02 |
| 1938 | ||||
| Journal | 446,246.62 | 338,426.38 | 9,166.77 | 793,839.77 |
| Tribune | 284,626.67 | 253,536.58 | 21,601.11 | 559,764.36 |
| 1939 | ||||
| Journal | 459,695.50 | 321,354.55 | 11,811.21 | 792,861.26 |
| Tribune | 281,872.47 | 206,711.03 | 3,808.94 | 492,392.44 |
| 1940 | ||||
| Journal | 473,437.52 | 283,698.33 | 12,165.45 | 769,301.30 |
| Tribune | 297,369.74 | 211,533.26 | 10,893.32 | 519,796.32 |
| 1941 1 | ||||
| Journal | 461,942.55 | 289,180.43 | 18,921.99 | 770,044.97 |
| Tribune | 261,811.26 | 184,025.98 | 8,135.74 | 453,972.98 |
| Journal-Tribune | ||||
| 1942 2 | 661,138.12 | 503,486.32 | 20,203.08 | 1,184,827.52 |
| 1943 | 782,001.61 | 560,553.83 | 23,556.73 | 1,366,112.17 |
| 1944 | 903,155.48 | 625,979.94 | 30,076.25 | 1,559,211.67 |
| 1945 | 928,998.79 | 675,917.73 | 35,086.85 | 1,640,003.37 |
*1056 For 1939, the Journal's city circulation revenue was $ 127,031 and country circulation $ 194,324. The Tribune's revenue from city circulation was $ 84,768 and from country circulation $ 121,943 in 1939. The advertising revenue as divided between the local, national, and classified was, roughly, 60 per cent local, 30 per cent national, and 10 per cent classified.
The consolidation of the Journal and Tribune resulted in a substantial reduction in some of the expenses of operation, while in others there were slight increases or no substantial change. The following table shows the combined expenses of each department of the Journal and Tribune for the years 1936 to 1940 and the first 11 months ending November 30, 1941, inclusive, and of the Journal-Tribune for the years 1942 to 1945, inclusive:
| Expenses by Departments, Journal and Tribune Combined | |||
| 1936 | 1937 | 1938 | |
| Editorial | $ 192,512.64 | $ 197,269.75 | $ 189,792.85 |
| Art department | 3,054.61 | 3,048.10 | 2,911.97 |
| Photo-engraving | 8,720.35 | 8,796.88 | 9,103.44 |
| Local advertising | 51,355.90 | 40,200.55 | 40,693.47 |
| National advertising | 48,227.15 | 49,160.59 | 40,426.38 |
| Classified advertising | 17,354.10 | 16,836.94 | 15,353.00 |
| City circulation | 94,284.35 | 96,038.38 | 91,634.08 |
| Country circulation | 137,014.38 | 140,836.34 | 138,581.13 |
| Mailing and delivery | 187,135.19 | 178,554.53 | 159,547.92 |
| Composing room | 159,034.21 | 156,709.55 | 146,092.12 |
| Stereotyping | 42,016.48 | 42,528.50 | 35,368.35 |
| Press room | 50,791.46 | 48,428.22 | 44,515.53 |
| Paper and ink | 285,195.61 | 265,700.78 | 257,052.52 |
| Building operations | 24,263.18 | 28,061.38 | 31,003.50 |
| Administrative | 33,321.88 | 31,524.07 | 30,501.11 |
| General overhead | 93,981.03 | 108,122.20 | 101,014.49 |
| Total | $ 1,428,262.52 | $ 1,411,816.76 | $ 1,333,591.86 |
| Expenses by Departments, Journal and Tribune Combined | |||
| 1939 | 1940 | 1941 | |
| Editorial | $ 193,000.02 | $ 188,384.18 | $ 178,473.30 |
| Art department | 3,733.80 | 3,300.93 | 3,113.70 |
| Photo-engraving | 11,886.91 | 10,649.72 | 10,918.15 |
| Local advertising | 44,931.51 | 47,924.77 | 46,007.38 |
| National advertising | 41,719.86 | 39,344.06 | 37,425.69 |
| Classified advertising | 18,409.63 | 20,100.49 | 18,616.67 |
| City circulation | 77,906.74 | 65,120.49 | 64,704.75 |
| Country circulation | 125,153.43 | 106,029.94 | 90,972.29 |
| Mailing and delivery | 160,916.22 | 162,313.22 | 151,419.35 |
| Composing room | 149,324.16 | 162,627.81 | 150,009.76 |
| Stereotyping | 34,885.21 | 37,517.16 | 35,793.79 |
| Press room | 42,978.96 | 45,497.75 | 43,193.08 |
| Paper and ink | 251,462.65 | 246,929.95 | 247,638.22 |
| Building operations | 26,692.88 | 25,299.66 | 25,075.35 |
| Administrative | 32,464.98 | 32,621.17 | 29,877.71 |
| General overhead | 100,915.37 | 105,798.61 | 106,930.76 |
| Total | $ 1,316,382.33 | $ 1,299,459.91 | $ 1,240,169.95 |
| Expenses by Departments, Journal-Tribune | ||
| 1942 | 1943 | |
| Editorial | $ 128,350.05 | $ 147,489.04 |
| Art department | 4,430.69 | 1,059.12 |
| Photo-engraving | 19,422.16 | 17,305.32 |
| Local advertising | 26,253.48 | 30,020.67 |
| National advertising | 23,989.66 | 29,862.11 |
| Classified advertising | 14,043.35 | 14,884.44 |
| City circulation | 21,863.17 | 26,036.81 |
| Country circulation | 69,270.83 | 86,795.84 |
| Mailing and delivery | 143,325.88 | 155,360.88 |
| Composing room | 121,530.49 | 142,315.02 |
| Stereotyping | 27,216.18 | 34,693.78 |
| Press room | 34,386.96 | 38,954.19 |
| Paper and ink | 217,336.15 | 226,366.69 |
| Building operations | 12,247.48 | 18,166.96 |
| Administrative | 15,829.64 | 19,488.22 |
| General overhead | 81,992.30 | 90,030.33 |
| Rent of plant, equipment and | ||
| intangibles | 45,833.26 | 50,000.00 |
| Rent of building | 8,250.00 | 9,000.00 |
| Color comics | ||
| Wartime promotion and special | ||
| expense | ||
| Total | $ 1,015,571.73 | $ 1,137,829.42 |
| Expenses by Departments, Journal-Tribune | ||
| 1944 | 1945 | |
| Editorial | $ 160,467.37 | $ 154,854.28 |
| Art department | 1,005.19 | 913.50 |
| Photo-engraving | 18,875.77 | 19,549.54 |
| Local advertising | 32,710.82 | 35,648.30 |
| National advertising | 38,183.53 | 39,236.12 |
| Classified advertising | 18,294.45 | 18,775.52 |
| City circulation | 24,513.15 | 22,175.94 |
| Country circulation | 96,624.07 | 103,671.60 |
| Mailing and delivery | 163,265.19 | 170,833.13 |
| Composing room | 140,641.37 | 145,359.26 |
| Stereotyping | 36,445.99 | 35,944.97 |
| Press room | 39,320.15 | 36,892.11 |
| Paper and ink | 239,036.29 | 229,653.49 |
| Building operations | 18,575.39 | 20,789.75 |
| Administrative | 20,683.30 | 19,271.77 |
| General overhead | 100,485.43 | 83,728.80 |
| Rent of plant, equipment and | ||
| intangibles | 50,000.00 | 50,000.00 |
| Rent of building | 9,000.00 | 9,120.00 |
| Color comics | 23,287.33 | 36,376.28 |
| Wartime promotion and special | ||
| expense | 6,134.45 | 52,977.67 |
| Total | $ 1,237,549.24 | $ 1,285,772.03 |
The totals of the combined gross income, expenses, and net profits or losses of petitioner and its predecessors from the publication of their newspapers for the years 1936 to 1945, inclusive, were as follows:
| Year | Gross income | Expenses | Net profits |
| (or losses) | |||
| 1936 | $ 1,430,663.11 | $ 1,428,262.52 | $ 2,400.59 |
| 1937 | 1,403,895.12 | 1,411,816.76 | (7,921.64) |
| 1938 | 1,353,604.13 | 1,333,591.86 | 20,012.27 |
| 1939 | 1,285,253.70 | 1,316,382.33 | (31,128.63) |
| 1940 | 1,289,097.62 | 1,299,459.91 | (10,362.29) |
| 1941 | 1,224,017.95 | 1,240,169.95 | (16,152.00) |
| 1942 1 | 1,184,827.52 | 1,015,571.73 | 169,255.79 |
| 1943 | 1,366,112.17 | 1,137,829.42 | 228,282.75 |
| 1944 | 1,559,211.67 | 1,237,549.24 | 321,662.43 |
| 1945 | 1,640,003.37 | 1,285,772.03 | 354,231.34 |
The chief functions of the editorial department, under the classification shown above, were the gathering, writing, and editing of news, the writing of editorials, and the preparation of other features of the editorial page. In the week ending January 9, 1943, petitioner had 34 employees in its editorial department, including a managing editor and 6 other editors, a features writer, 3 editorial writers, 19 reporters and desk men, a photographer, cartoonist, librarian, and an Associated Press machine boy. A farm editor was later added to the staff. The principal items of editorial expenses were salaries, wages, wire services, features and comics, and news correspondents.
In the art department one artist was the only employee.
The photo-engraving department employed a foreman and*118 several engravers whose salaries accounted for most of the expenses of the department.
*1058 The expenses of the advertising department consisted of salaries and wages of the solicitors and clerks, and the commissions paid the solicitors. There were lesser items of printing and supplies and various service charges.
In the circulation department the expenses were divided into three classes -- city, country, and mailing and delivery. In the city class the chief items of expense were salaries, mailing and delivery, printing, stationery, and sundry supplies. Salaries accounted for most of the expenses of the country class, with lesser amounts charged to solicitors' expenses, postage, printing, etc. The principal items in the mailing and delivery class, in the order of their importance, were bus and truck deliveries, postage, express, salary and wages, and sundry supplies.
The same general pattern prevailed, with salary and wages the principal expense items, in the composing room, stereotyping, and press rooms.
Building operation expenses included such items as salaries, wages, lights, fuel, repairs, etc.
The principal administrative expenses were salaries and wages of the business*119 office, dues and subscriptions, telephone and telegraph, printing and stationery, and miscellaneous items.
Of the overhead expenses, the compensation of executives accounted for about half; taxes, including local property, state income, capital stock, and Social Security from one-fourth to one-third of the total. Other items were interest, donations, legal fees, etc.
The evidence of record contains voluminous statistical data, most of which was offered in support of the proposed reconstructions of base period income. The following exhibits containing such data, some of which, in summary form, have been set out above, are incorporated in this report by reference:
Exhibit 15. Adjusted, Consolidated Profit and Loss Statement of petitioner and its predecessors from 1936 to 1945, inclusive, showing detailed items of income and expenses by departments.
Exhibit 52. Circulation records of daily and Sunday editions of the Journal and Tribune for the years 1936 to 1941, inclusive, and of the Journal-Tribune from 1942 to 1945, inclusive.
Exhibit 29. Statement of gross income, by departments, of the Journal and Tribune for the years 1928 to 1935, inclusive.
Exhibit I. Statistics*120 and indices relating to Retail Sales Trends, 1935-1944, published by Dun and Bradstreet.
Exhibit J. Study prepared by petitioner's expert witness containing data with respect to fifteen non-metropolitan newspapers in non-competitive fields.
*1059 Exhibit M. Index of Department Store Sales of the Chicago Federal Reserve District and of the entire United States for 1921-1944, reported in Federal Reserve Bulletin for June 1944.
Exhibit S. Tabulations of published figures taken from all returns filed by newspaper corporations in the United States for the years 1938-1944.
Exhibit T. Statistics relating to circulation of six groups of newspapers for the years 1936-1944.
Exhibit U. Statistics relating to Circulation of the Sioux Falls, South Dakota, Argus-Leader, 1936-1944.
Exhibit V. Statistics relating to Circulation of Des Moines, Iowa, Register and Tribune, 1936-1944.
Exhibit W. Statistics relating to Circulation of Omaha, Nebraska, World-Herald and Bee-News, 1936-1944.
Exhibit X. Statistics relating to Circulation of Sioux City, Iowa, Journal, Tribune, and Journal-Tribune, 1936-1944.
Exhibit AA. Table of comparative figures prepared *121 from other exhibits by member of Commissioner's staff, showing total revenue, operating expenses (exclusive of depreciation) and operating profits of petitioner and five newspaper publishing corporations, 1936-1944.
Exhibit BB. Table showing net income (before Federal income taxes) of 6 newspaper corporations and the petitioner.
Exhibit CC. Statistical table using a different base year to present certain data contained in Exhibit J.
For most of the period 1936-1939, a severe drought prevailed over a large portion of petitioner's trading area. The areas most affected were southeastern South Dakota and northeastern Nebraska. The less affected areas were in Iowa and southwestern Minnesota.
The drought caused a shortage of farm crops and a decline in farm income. The average receipts from farm marketing, including Government payments, in Nebraska, South Dakota, Iowa and Minnesota, for the period 1936-1939, bore the following relationship to the 1924-1930 average: Nebraska 58.2 per cent, South Dakota 52.5 per cent, Iowa 84.7 per cent, and Minnesota 88 per cent.
Practically all types of merchandising in the drought area were adversely affected, during petitioner's base period, *122 by the reduction of farm income. This, in turn, had a depressing effect on newspaper circulation and advertising, particularly local advertising which depended to a large extent on the volume of local trade. Both the circulation and advertising income of the Journal and Tribune, over the years 1936-1939, were below what they would have been except for the drought.
Petitioner's excess profits net income and excess profits credit, computed on the invested capital basis, for the taxable years ended October 31, 1942, 1943, 1944, and 1945, were as follows: *1060
| Excess profits net | Excess profits | |
| Year | income | credit |
| 1942 (11 months) | $ 36,088.38 | $ 6,000.00 |
| 1943 | 226,391.53 | 8,791.86 |
| 1944 | 327,727.54 | 12,877.82 |
| 1945 | 360,077.22 | 18,277.60 |
Petitioner filed excess profits tax returns for each of the taxable years, 1942 to 1945, inclusive, and paid the taxes shown to be due thereon, plus additional assessments for some of the years. Thereafter it timely filed claims for relief under section 722 for each of such years. The excess profits taxes so paid and the amounts claimed as refunds are as follows:
| Excess profits tax | Refund | |
| Year | paid | claimed |
| 1942 | $ 14,008.29 | $ 14,008.29 |
| 1943 | 1 177,220.19 | 176,889.05 |
| 1944 | 2 224,153.97 | 248,827.70 |
| 1945 | 247,882.90 | 246,981.50 |
There were additional assessments of $ 6,373.77 for 1944 and $ 3,633.31 for 1945 which petitioner paid with interest in 1948, after postwar credit of $ 637.37 in 1944. Claims for refund of these payments were timely filed and were related to petitioner's previously filed applications for relief under section 722.
The respondent made a partial allowance of petitioner's claims for refund, based on a CABPNI of $ 34,711 for 1942, for carry-over purposes, and $ 104,134 for each of the taxable years 1943, 1944, and 1945. By an amended answer filed in these proceedings, respondent alleges that petitioner is entitled to a CABPNI of not more than $ 66,000 for 1944 and 1945, $ 65,000 for 1943, and $ 28,000 for 1942.
A fair and just amount representing normal earnings to be used as a constructive average base period net income for the 11-month period ended October 31, 1942, for carry-over purposes, after application of the variable credit rule (with reduction for conceded abnormal expense deductions) is $ 35,000; for the year ended October 31, 1943, after application of the variable*124 credit rule, $ 170,000; and for the years ended October 31, 1944, and October 31, 1945, $ 174,000 each.
OPINION.
The respondent concedes that petitioner qualifies for excess profits tax relief under section 722 (c) of the Internal Revenue Code (1939) and has made a partial allowance of the claims filed by petitioner, as set out in our findings of fact. The parties have stipulated that petitioner's excess profits credit based on invested capital is an inadequate standard for determining excess profits for the fiscal years ended October 31, 1942 to 1945, inclusive, because the business of *1061 petitioner was of a class in which intangible assets not includible in invested capital under section 718 of the Internal Revenue Code, made important contributions to income, and, further, because invested capital was abnormally low. Petitioner's complaint is that the relief allowed by respondent is inadequate and does not reflect the use of a fair and just amount representing its constructive average base period earnings.
The application of section 722 (c) requires the determination of a constructive average base period net income under section 722 (a). The reconstruction procedure *125 is substantially the same as in section 722 (b) (4) involving a change in the character of the business. See Regs. 112, sec. 35.722-4 (c) and the Bulletin on Section 722, p. 136. The fundamental problem before us involves the determination of what petitioner's base period net earnings would have been if the merger of the Journal and Tribune had taken place and petitioner had begun operations two years before December 31, 1939, the end of the statutory base period.
In approaching the problem, we have before us detailed information concerning petitioner's predecessor papers, the Journal and the Tribune, for each of the base period years. We likewise have detailed information establishing the nature and character of petitioner's business from December 29, 1941 (the date on which it began publication of its papers as a consolidated organization), through so much of the post-1939 period as is here material. We have found that its operations reached the level of normalcy about January 1, 1943. While the foregoing, and some of the data, information, and statistics with which the record abounds, are helpful in the solution of the issue, we cannot accept the views urged by either of the*126 parties as determinative, and we must undertake the task of weighing the imponderables inherent in a problem the answer to which depends largely on inference, opinion, and judgment.
Following the merger of the Journal and the Tribune into the Journal-Tribune, there was a shrinkage in circulation, and increase in subscription and advertising rates, and a decrease in expenses. The actual shrinkage in circulation of the daily edition amounted to about 11.66 per cent in the city and 22 per cent in the country. At the same time, there was an increase in the circulation of petitioner's Sunday paper over the circulation of the Sunday Journal. The Tribune did not publish a Sunday edition. The loss in circulation was offset in part by the increase in subscription rates which were put into effect soon after the merger.
Before the merger, the weekly subscription rates for carrier delivery of the dailies were 17 1/2 cents for the Journal and 18 cents for the Tribune. The Journal-Tribune rate at the start was 18 cents but it was raised to 20 cents in September 1942. The combined daily and *1062 Sunday rate of the Journal-Tribune started at 20 cents per week, the same as for the Journal, *127 but was increased to 25 cents in September 1942. The rate for the single Sunday paper remained at 5 cents per copy. These rates are set out in tabular form in our findings as is also a table showing the gross income divided between circulation, advertising, and other income of the Journal, the Tribune, and the Journal-Tribune, for each of the years 1928 to 1945, inclusive. The circulation gross income of the Journal and Tribune combined was $ 495,231.59 in 1940 and $ 805,689 in 1941, while for the Journal-Tribune it was $ 503,486.32 in 1942 and $ 560,553.83 in 1943.
From the standpoint of advertising, the consolidation was followed by an increase in advertising rates, but a decrease in the amount of linage. The combined gross advertising income of the predecessor companies was $ 770,800 in 1940 and $ 723,750 for the 11-month period ended November 30, 1941, while petitioner's gross advertising income was $ 661,138 for the 11-month period ended October 31, 1942, and $ 782,000 for the year 1943.
The factor of "other income" was not substantially affected by the consolidation.
Petitioner's greatest benefits, financially, lay in the savings in operating expenses brought about by the*128 consolidation. Indicative of this, for example, is the fact that in 1941 there was a combined gross income from the publication of the Journal and Tribune of $ 1,224,017.95, expenses of $ 1,240,169.95, and a net loss of $ 16,152, while in 1943 petitioner had a gross income of $ 1,366,112.17 and expenses of $ 1,137,829.42, allowing a net profit of $ 228,282.75.
An analysis and comparison of the expense accounts, as set out above, show that while there were increases in operating expenses in some of the departments after the consolidation, they amounted to considerably less than the savings in other departments. The over-all expenses of the Journal and Tribune combined were approximately $ 1,299,460 in 1940 and $ 1,240,170 in 1941, while for the Journal-Tribune they were approximately $ 1,015,572 for 11 months ended October 31, 1942, and $ 1,137,829 for the fiscal year ended October 31, 1943.
Both parties have submitted reconstructions of base period income purporting to reflect the earnings that petitioner would have had if it had been operating under the consolidated agreement during the base period. These reconstructions differ widely both as to the methods of computation used*129 and the results. A constructive average base period net income of $ 65,798.34 is computed by respondent while petitioner's reconstruction gives a constructive average base period net income of $ 364,062.49. In his partial disallowance of petitioner's claims, the respondent had allowed a constructive average base period net income of $ 104,134.
*1063 Respondent's approach is to reconstruct 1939 net income by taking petitioner's 1943 experience and applying thereto certain percentage methods based on selected statistics. The statistics on circulation revenue are based on the experience of a selected group of newspapers said to be comparable to the Journal-Tribune. In his computation, respondent uses the 1939 circulation rates established by petitioner's predecessors. For reconstructing advertising revenue, a discount factor based on indices derived from the volume of retail trade statistics in the Chicago Federal Reserve District is applied to 1943 and 1944 advertising income.
In adjusting "other income" the respondent has taken the approximate average of the actual 1939-1940 experience of petitioner's predecessors. Respondent's reconstructed gross income is circulation $ *130 404,722, advertising $ 520,000, and other income $ 20,000, making a total gross income of $ 944,722.
To arrive at net earnings, respondent has applied to gross income a percentage figure based on petitioner's 1943-1944 operating profits, after certain adjustments said to be required to bring petitioner's operation in line, profitwise, with that of other newspaper publishing companies. The percentage figure finally arrived at is 16 per cent, which when applied to the gross income figure $ 944,722 gives a 1939 operating profit of $ 151,156. This "operating profit" is then reduced to a "net profit" of $ 62,156 by the addition of items such as rent, interest, donations, and a portion of the executive salaries which petitioner was obligated to pay under the consolidation agreement.
Applying to the 1939 constructive earnings an index figure of $ 105.86 respondent determines a constructive average base period net income of $ 65,798.34 which, in his amended answer and brief, is rounded off to $ 66,000.
The reconstruction submitted by petitioner is in much more detail. As the starting point, petitioner takes the actual base period experience of the Journal and Tribune year by year and makes*131 adjustments for the changes brought about by the consolidation. There is a complete reconstruction of both the gross income and expenses of each separate department of the business for each of the base period years. Circulation is broken down into daily and Sunday editions, and, further, into carrier and street sales and mail subscriptions. Allowance is made for the shrinkage in daily circulation as well as the increase in Sunday circulation.
Advertising income is reconstructed at the level of the actual advertising revenue of the Journal and Tribune, combined, in each of the base period years, on the theory that any loss of advertising linage due to the consolidation was more than offset by the increase in advertising rates.
*1064 "Other income" is reconstructed at the average of petitioner's income for the years 1942, 1943, and 1944, which is below the average of the Journal and Tribune, combined, for the base period years.
In reconstructing expenses, petitioner takes up separately each departmental division of the business and undertakes to reconstruct the base period experience of the predecessors to reflect the changes brought about by the consolidation. The several *132 general departments are editorial, art, photo-engraving, advertising, circulation, mailing and delivery, mechanical (consisting of composing room, stereotyping, and press room), newsprint and ink, building operation, administrative, rentals, and general overhead.
We have reviewed the methods used and the detailed steps taken by each of the parties in arriving at their respective ultimate proposed reconstructions. We find that the comparisons used and the assumptions relied upon are in material respects either inapplicable or inconclusive. No doubt the task of each contending party bordered on the impossible, if precision is the test, because of the complexity of the problem and the broad range in which opinion and judgment may well have varied. Perhaps all that we can offer in our own efforts to reconcile their views is the benefit of a detached approach.
In Danco Co., 17 T. C. 1493 (1952), we said, in part (p. 1498):
No reconstruction for a concern that was not in operation in the base period years can be absolute. The statute does not contemplate the determination of a figure that can be supported with mathematical exactness. All that it requires*133 is the determination of a fair and just amount to be used as a constructive average base period net income by taxpayers who qualify for relief under the provisions of section 722. The statutory direction is that in determining such an amount regard shall be had to the nature of the taxpayer and the character of its business. This we have done * * *
We think there can be no doubt upon the record that respondent's reconstruction is too low and petitioner's too high for either to be deemed to be a "fair and just amount of normal earnings" within the meaning of section 722.
Upon the basis of our study of the evidence, the proposed reconstructions, and the arguments presented, we have used our judgment in reconciling and integrating the elements material to an ultimate finding and have determined a constructive average base period net income of $ 35,000 for the 11-month period ended October 31, 1942, for carry-over purposes, after application of the variable credit rule (reduced by conceded deductions of abnormal expenses to avoid duplication of credit and deduction); $ 170,000 for the year ended October 31, 1943, after application of the variable credit rule; and $ 174,000 each for *134 the years ended October 31, 1944, and October 31, 1945.
Reviewed by the Special Division.
Decision will be entered under Rule 50.
Footnotes
1. The taxable period for 1942 is the period December 1, 1941, to October 31, 1942.↩
2. The Audit Bureau of Circulation is an association of advertisers and publishers with headquarters in Chicago. It was organized to audit the circulation of its member newspapers and establish their trade areas.↩
1. Combined Daily.↩
*. 11 months.↩
1. Journal.↩
2. Tribune.↩
1. Eleven months ended Nov. 30, 1941.↩
2. Eleven months ended Oct. 31, 1942.↩
1. The figures shown for 1942 are not the actual figures for that year but are the actual figures adjusted by the petitioner for certain abnormalities attributed to the consolidation. The amounts shown in petitioner's books and its returns are: Gross income $ 1,113,036.37, expenses $ 1,079,059.36, and net profit $ 33,977,01. The gross income item includes dividends and "other income" of $ 3,860.25.↩
1. $ 331.14 of this amount was later refunded.↩
2. This amount was after a postwar credit of $ 24,906.↩