Appeal of Gardner Printing Co. , 4 B.T.A. 37 ( 1926 )

OPINION.

* Tkttssell:

Perhaps the most important asset of a news publishing business is its reading and advertising clientele. The advertising clientele is built up on the basis of an approved subscription list, and, therefore, in the parlance of the publishers’ business, this asset is known as the circulation structure. When a publishing-business is started a considerable portion of its capital goes into the development and upbuilding of this circulation structure, in much the same manner that a manufacturing business puts its capital into factory buildings and machinery which constitute its plant. So the circulation structure of a news publishing plant represents a considerable portion of the capital investment. This circulation structure is evidenced by subscription lists and book accounts which, in a well regulated publishing business, are periodically verified and audited in a manner not unlike the periodical inventorying of plant and equipment of other businesses. And to the same extent that an inventory of buildings and machinery represents capital for a manufacturing business, so a verified and audited circulation structure must represent capital of a publishing business.

In the instant case we are called upon to determine the cash or market value of a trade newspaper as of May 15, 1907, when the same was exchanged for stock of a corporation. More than 18 years have passed since the time when the facts and circumstances controlling the value of this property were matters of current interest. The bookkeeping and accounting of this business at that time were apparently crude; some of the records have been lost; and some of the actors who took part in building this newspaper are not now present to testify concerning the facts and things which enter into the computation of values.

In this situation the Commissioner disregards any evidence of value whatsoever, while the petitioner argues that we should accept its proposition that the value was equal to the par of the stock issued for the asset. Both of these positions seem to be equally untenable. The Board can not properly accept the fact that an exchange of- property for stock is proof of value, without other evidence; neither can it refuse to consider such evidence as has been produced in support of the values claimed.

An examination of the facts discloses that, during the two years of the operation of the Gardner Publishing Co., $32,933.45 of its cash capital had gone into the purchase and development of the “Pattern Maker,” later known as “ Woodcraft’’publication; that during -those two years some part of the $50,000 of operating expenses must be attributed to the work of procuring and building up subscription lists and advertising patronage, and at the end of that period there was an operating deficit of $4,822.87. Thus, it is apparent that on May 15, 1907, the “Woodcraft” publication and its circulation structure had cost its promoters a sum equal to the so-called investment account, plus the operating deficit and that unsegregated portion of the expenses which could be properly attributed to development cost. We are not impressed with the taxpayer’s argument that the value of a publication should be taken to be the amount which has actually been expended in developing it. A newspaper circulation structure is an asset which must be continually supported by such advertising and soliciting as will result in constantly bringing in new subscribers and new advertising patrons to take the place of those who, in the regular course of business, are constantly dropping off. In this situation, it appears that the best estimate of the value of this publication which can now be arrived at is the estimate which its owners and promoters placed upon it and at which they carried it upon their books of account on May 15, 1907, and that is the amount of $32,933.45.

We are, therefore, of the opinion, and so find, that in the computation of its invested capital for the year here under consideration the asset for which $59,000 of stock was issued should be treated as having a value on the date on which it was paid in in the sum of $32,933.45.

Moneys received from the sale of an asset, the cost of which had been charged to expense, are properly included in income, and amounts received from the sale of machines, the cost of which has been entirely recovered by depreciation, are held to be gains and income under the rule of the Appeal of Even Realty Co., 1 B. T. A. 355.

Order of redetermination will be entered on 15 days1 notice, under Rule 50.