*3054 Disallowance of deduction for loss on subscription list approved.
*1379 This is a proceeding for the redetermination of deficiencies in income and profits taxes for the calendar years 1920 and 1921 in *1380 the amounts of $2,725.08 and $2,733.85. The errors alleged in the petition were that the respondent disallowed a deduction from the income of each of the years 1920 and 1921 of $7,875 on account of losses sustained by a portion of subscription lists acquired in 1915, and in deducting from invested capital for 1920 and 1921 the respective amounts of $2,003.75 and $1,779.02 as a "prior year adjustment." By stipulation the parties agreed that judgment might be entered for the respondent as to the year 1920 and that, as to the year 1921, the sole issue contested is whether the petitioner was entitled to deduct $6,862.74 from its 1921 income representing the cost of a rural subscription list. The facts were stipulated.
FINDINGS OF FACT.
The petitioner is a*3055 Michigan corporation with its principal place of business in Battle Creek, and is engaged in publishing a daily afternoon newspaper.
Prior to June 7, 1915, the Battle Creek Daily Journal was published as a daily newspaper in Battle Creek, Mich. On that date, petitioner purchased for $10,500 cash from the Battle Creek Journal its entire subscription list, consisting of 3,825 paid-up subscribers, of which 2,500 were rural subscribers. Of these some were paid up in advance for five years. The cash cost of the rural subscribers was $6,862.74.
The petitioner's newspaper has always been an afternoon paper. Its chief competitor since 1915 has been the Enquirer-News of Battle Creek, a paper resulting from a consolidation (prior to 1915) of the Enquirer and Evening News, two other Battle Creek newspapers. These papers were owned by the Postum Cereal Co., as was also the consolidated Enquirer-News. At all times since 1915, the Enquirer-News has published a morning newspaper which supplies a 10-hour quicker news service to mail subscribers (including all rural subscribers) than is supplied by the petitioner's afternoon paper. Moreover, the Enquirer-News at all times since 1915 has*3056 published a Sunday edition, whereas petitioner issues no Sunday edition. In 1920 and 1921, the petitioner made vigorous efforts to meet the competition of the Enquirer-News in the rural districts, but it became apparent that an afternoon newspaper could not meet the competition of a morning newspaper with a Sunday edition, so far as rural subscribers were concerned. It was found that the expenditure of funds in personal solicitation of rural subscriptions and in advertising for rural subscriptions produced practically no results. It became clear in 1920 and 1921 that the rural field would have to be relinquished to the Enquirer-News and that the petitioner would have to confine itself to city subscribers.
*1381 The subscription list acquired by the petitioner in 1915 was largely acquired by the seller in 1914 as the result of a prize contest. The 2,500 rural subscriptions contained in the total subscription list of 3,825 contained about 1,500 five-year subscriptions paid in advance acquired as the result of the prize contest. No other assets than the subscription list were acquired.
The following table shows the gross receipts from mail circulation of the Moon-Journal*3057 after September 18, 1916, down to January 1, 1926. Figures before September 18, 1916, are not available as the books have been destroyed or lost. Set opposite the amount of gross receipts is the approximate number of subscriptions represented by the receipts reckoned at the rate of $4 per subscription per annum.
| Period | Gross receipts from rural subscriptions at $4 each Sept. 18, 1916, to Jan. 1, 1926 | Approximate number of subscribers |
| Sept. 18, 1916, to Jan. 1, 1917 | $822.45 | 205 |
| 1917 to 1918 | 1,600.62 | 400 |
| 1918 to 1919 | 1,377.14 | 344 |
| 1919 to 1920 | 812.75 | 203 |
| 1920 to 1921 | 1,136.15 | 284 |
| 1921 to 1922 | $1,404.69 | 351 |
| 1922 to 1923 | 1,758.04 | 439 |
| 1923 to 1924 | 754.97 | 188 |
| 1924 to 1925 | 1,500.43 | 375 |
| 1925 to 1926 | 1,895.62 | 473 |
The taxpayer in 1920 and 1921 found it inadvisable and poor business to attempt to continue the mail subscribers at $4 a year when the taxpayer was advised by the G. H. Mead Co., who was under contract to supply paper to the taxpayer, that print paper in 1921 would be 6 1/2 to 7 1/2 cents a pound. For that reason the mail list was cut down to the minimum or approximately 500 in the years 1920 and 1921, and consequently taxpayer*3058 took the deduction for loss on subscriptions in that year. Some attempts from 1915 to 1926 to expand the mail circulation were made. They largely resulted in a proof that it would be a poorly paying proposition and therefore the attempts were discontinued. One solicitor, and occasionally two during subscription campaigns, was employed to cover the rural districts. Their compensation was usually fixed by commission of one-half the subscription price. It is impossible to analyze the circulation expense account appearing on the profit and loss statements for 1919, 1920, and 1921, since the items comprised therein are not listed in the ledger, while the books of original entry being the cash book and journals for those years have been destroyed and lost.
The mail circulation of the petitioner between 1922 and 1926 was as follows: 1922 - 144; 1923 - 168; 1924 - 228; 1925 - 667; 1926 - 1,281.
*1382 The petitioner, in its income-tax return for 1921, deducted $7,875 on account of depreciation of its subscription list. The respondent, in determining the deficiency for 1921, disallowed such deduction.
OPINION.
SIEFKIN: The parties have stipulated that the sole issue*3059 in this proceeding -
is whether, under Section 234(a)(4) of the Revenue Act of 1921, and the regulations promulgated thereunder, the petitioner is entitled to deduct from gross income on its 1921 income tax return the sum of $6,862.74 representing the cost of the rural subscription list.
Section 234(a)(4) of the Revenue Act of 1921 is as follows:
(4) Losses sustained during the taxable year and not compensated for by insurance or otherwise; unless, in order to clearly reflect the income, the loss should in the opinion of the Commissioner be accounted for as of a different period. No deduction shall be allowed for any loss claimed to have been sustained in any sale or other disposition of shares of stock or securities made after the passage of this Act where it appears that within thirty days before or after the date of such sale or other disposition the taxpayer has acquired (otherwise than by bequest or inheritance) substantially identical property, and the property so acquired is held by the taxpayer for any period after such sale or other disposition, unless such claim is made by a dealer in stock or securities and with respect to a transaction made in the ordinary course*3060 of its business. If such acquisition is to the extent of part only of substantially identical property, then only a proportionate part of the loss shall be disallowed. In case of losses arising from destruction of or damage to property, where the property so destroyed or damaged was acquired before March 1, 1913, the deduction shall be computed upon the basis of its fair market price or value as of March 1, 1913.
We consider that the evidence is incomplete to show either a closed transaction or a definite abandonment in 1921. The petitioner, as late as 1926, had a considerable number of rural (mail) subscribers. We are not satisfied either that the asset acquired by the petitioner lost its value in 1921 because of competition and because of expiration of five-year subscriptions, or that the petitioner abandoned the asset in 1921. See . It can be fairly said that the evidence points to the fact that the five-year subscriptions obtained as the result of the prize contest expired in 1919 or 1920 and that, though the petitioner considered the rural subscriptions of little value, it obviously did not refuse these that voluntarily*3061 renewed. It may be true that efforts to increase the rural list slackened or ceased, but such fact does not evidence a loss of value, or an abandonment.
Judgment will be entered for the respondent