*2506 1. An amount of $70,000 paid by the petitioner to a competitor under a contract whereby competition by such competitor was eliminated for five years held not to be deductible as expense, but should be prorated over the life of the contract.
2. Basis of exhaustion of such contract determined.
*1212 This proceeding is for the redetermination of deficiencies in income tax of $10,971.16 and $3,430.48 for the years 1923 and 1924, respectively. The matters in controversy are the action of the respondent (1) in disallowing as a deduction for 1923 the amount of $70,000 paid by the petitioner in that year to a competitor to abstain from competition against the petitioner for a period of not more than five years, and (2) if the entire amount was not allowable, the failure to allow as a deduction for 1923 and 1924 an aliquot portion of the amount computed on the basis of the contract having a life of five years.
FINDINGS OF FACT.
The petitioner is a Virginia corporation with its principal office at Richmond. During the*2507 calendar year 1923 the newspaper field in Richmond was occupied by the petitioner and the Times-Dispatch. The Times-Dispatch was publishing a morning edition on week days and on Sundays and an afternoon edition, called "The evening Dispatch," on week days only. The petitioner was also publishing an afternoon paper on week days only.
Richmond has been for many years a highly competitive field from a newspaper standpoint. The owners of the Times-Dispatch having become wearied with their venture, sold it in the summer of 1923 to one Slover of Norfolk, who was a successful circulation *1213 manager and publisher. Slover on visiting the petitioner's building and finding that the petitioner had provided space for the installation of additional presses for the purpose of issuing a Sunday morning paper, suggested that he and the petitioner enter into some kind of an agreement to stop "cut-throat" competition. After a series of conferences extending over many weeks, at which various plans were considered, an oral contract was entered into by the parties. The contract became effective on November 9, 1923, and provided that the Evening Dispatch was to be discontinued on that day*2508 and that no afternoon paper was to be published by the Times-Dispatch for a term of five years unless in its opinion it was gravely threatened by outside competition. The contract also provided that the petitioner was not to enter the Sunday field for a like term of five years unless in its opinion it was similarly threatened by outside competition. The contract further provided that neither paper during the term of five years would permit its plant to be used for the publication of any daily or Sunday paper, other than its own editions, in competition with the other paper. The consideration for the agreement was $70,000 which was paid by the petitioner in cash on November 9, 1923. The terms of the contract were carried out and the petitioner has not published a Sunday paper nor has the Times-Dispatch resumed the publication of an afternoon paper.
During the negotiations preceding the making of the contract it was proposed on behalf of the petitioner that the contract be for a period of only one year. This, however, was not satisfactory and when the contract was made it was specifically understood and made a part of it that its maximum life would not exceed five years. Six*2509 months before the contract expired on November 9, 1928, Slover sought to have it renewed but the petitioner was unwilling to do so. Every right, title, obligation or interest in and under the contract expired with its termination.
Since the expiration of the contract the petitioner may enter the Sunday field at its pleasure and so may the Times-Dispatch enter the afternoon field. The petitioner since the expiration of the contract has made extensive and elaborate surveys to determine whether it is desirable or proper from a business standpoint to enter the Sunday morning field. The president and publisher of the Times-Dispatch has notified the petitioner that as soon as the petitioner enters the Sunday field the Times-Dispatch will reenter the afternoon field.
Under the contract the petitioner did not acquire any subscription lists, advertising contracts, good will, press franchises, leases, machinery or other physical properties nor any benefits of any sort other than those arising from the elimination of competition in the *1214 evening field by the Times-Dispatch discontinuing its afternoon edition. The Times-Dispatch continued to publish its morning edition on*2510 week days and Sundays, and took care of unexpired subscriptions to its afternoon paper by furnishing its morning edition for a period of time equal to that of the unexpired subscriptions to the afternoon edition.
At the time of its discontinuance in November, 1923, the Evening Dispatch had a circulation of about 17,000 or 18,000. During the fourth quarter of 1923, the quarter in which the contract was made, the circulation of the petitioner's paper was approximately 52,000. During the following year the circulation increased by about 8,000, which was about 5,000 more than the normal increase. The petitioner made no change in the price of its paper. However, advertising rates have since been changed as the circulation increased.
In its return for 1923 the petitioner took as a deduction the amount of $70,000 representing the payment made in connection with the contract. The deduction was disallowed by the respondent.
OPINION
TRAMMELL: The petitioner contends that the amount of $70,000 paid by it in 1923 in connection with the contract is allowable as a business expense for the year in which paid. It also contends that, in the event the entire amount of $70,000 is held*2511 not to be deductible in 1923, it be allowed as a deduction for 1923 and 1924 an aliquot portion of the amount computed on the basis of the contract having a life of five years.
So far as the publication of an afternoon paper was concerned, the contract had the effect of eliminating the Times-Dispatch as a competitor of the petitioner for a period of five years. That this was a valuable asset which extended beyond the year acquired is indicated by the fact that during the following year the petitioner's circulation showed an increase of approximately 166 per cent over the normal growth in circulation. The expenditure being for an asset whose life extended beyond the year in which acquired, we think that the respondent properly disallowed a deduction on account thereof in the year when made as an ordinary and necessary expense. It was of a capital nature.
Inasmuch as the contract by its own terms was limited to a period not to exceed five years, we think the petitioner is entitled to have the contract exhausted ratably over its life from November 9, 1923, and to a deduction each year of the portion of the $70,000 applicable to such year. *2512 ; .
Judgment will be entered under Rule 50.