Brush-Moore Newspapers, Inc. v. Commissioner

THE BRUSH-MOORE NEWSPAPERS, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Brush-Moore Newspapers, Inc. v. Commissioner Docket No. 73673. United States Board of Tax Appeals 33 B.T.A. 362; 1935 BTA LEXIS 760; November 1, 1935, Promulgated *760 1. Petitioner contracted for the purchase of certain stock of a corporation publishing a newspaper which contract also provided a salary to the seller payable whether he lived or died, and the seller died before rendering any services; a controversy as to payment of so much of the purchase price of the stock as was designated salary was compromised and paid. Held, payments made under the contract are not deductible as ordinary and necessary business expense. 2. Contributions, not for business reasons nor calculated to produce commensurate returns, made by a corporation publishing a newspaper to charitable organizations are not deductible as ordinary and necessary business expense. William H. Vodrey, Esq., and William H. Vodrey, Jr., Esq., for the petitioner. Dean P. Kimball, Esq., for the respondent. SEAWELL *362 This proceeding was brought to redetermine deficiencies in the income tax of the petitioner for the years 1930 and 1931 in the sums of $1,786.49 and $1,564.17, respectively. The petitioner alleges the following errors: (1) The failure of the respondent to allow as a deduction from gross income for the years 1930*761 and 1931, payments made to the estate of Warren G. Harding. *363 (2) The failure of the respondent to allow as such deductions for the same years payments made to charitable and related welfare agencies. (3) The disallowance as deductions of the payments made to the State of Ohio. The third issue was settled by stipulation, leaving only the first two in controversy. Certain facts were stipulated and oral evidence heard, from which we make the following findings of fact. FINDINGS OF FACT. 1. Payments to Warren G. Harding estate. - The Brush-Moore Newspapers, Inc., is an Ohio corporation, with its principal office in Canton, Ohio, and since early in 1930 has been the owner of all the shares of the following subsidiaries, which are also Ohio corporations: The Repository Printing Co. and the Daily News Printing Co., Canton, Ohio; the Herald Printing Co., Steubenville, Ohio; the Harding Publishing Co., Marion, Ohio; the East Liverpool Publishing Co., East Liverpool, Ohio; the Salem Publshing Co., Salem, Ohio; and the Times Publishing Co. and the Portsmouth Publishing Co., Portsmouth, Ohio. In 1923 Warren G. Harding, then President of the United States, was*762 and had been for a number of years the principal owner and officer of the Harding Publishing Co. On June 18, 1923, there were outstanding 800 common shares of the Harding Publishing Co., of which Warren G. Harding then owned 605 common shares. This corporation was the owner and publisher of the Marion Star, one of the two newspapers of Marion, Ohio, where the Harding home was located. Louis H. Brush then was a newspaper publisher, living in Salem, Ohio, and owning newspapers in Salem and East Liverpool, Ohio. Both Salem and East Liverpool, Ohio, are at a considerable distance from Marion, Ohio, and there was no business or social connection between Salem and East Liverpool, on the one hand, and Marion on the other hand. Roy D. Moore then was a newspaper man living in Columbus, Ohio, who had worked for various newspapers in the United States, but had no connection at all in Marion, Ohio. Brush and Moore began negotiations with President Harding for the purchase of the stock of the Harding Publishing Co. A price of $500 per share for the stock was suggested, but after conferring with the minority stockholders President Harding stated that he could not sell at that price. The*763 minority stockholders had been offered $600 per share for their stock. It was then suggested by President Harding that the minority stockholders should be given preference in the distribution of cash payments and that the purchasers "need not hurry the money along to" him. A further suggestion was made that President Harding continue his connection with the Marion *364 Star and after his retirement from the White House become a contributing editor, writing when and as he might wish articles for publication as he should choose to release them, as President Roosevelt had contributed articles to the Outlook after he left the White House. These negotiations resulted in contracts for the payment of $480,000 for the entire 800 shares of stock. The contract dealing with the 605 shares of stock owned by President Harding was entered into on June 18, 1923, by President Harding, Louis H. Brush, and Roy D. Moore, and is known as the Washington contract, copy of which is attached to the stipulation as Exhibit A. Under its terms the vendor (President Harding) agreed to sell and the purchasers (Brush and Moore) agreed to buy the 605 shares of the Harding Publishing Co. stock owned*764 by the vendor "for the consideration and in accordance with and subject to the terms and conditions of" the agreement. The consideration and conditions set out in the agreement and contract include: SECOND [in substance]. - (a) payment of $5,000 in cash; (b) payment of $45,000 when stock should be delivered to the bank; (c) payment of $113,000 and interest on or before December 18, 1923; (d) delivery to vendor on or before October 1, 1923, of 1,000 shares of preferred stock of the reorganized The Harding Publishing Company. * * * FIFTH. - On or before September 1, 1923, said The Harding Publishing Company and said Vendor [Warren G. Harding] will enter into an agreement employing said Vendor as associate Editor of The Marion Star for a term of Ten (10) years, beginning September 1, 1923, and ending August 31, 1933, at and for the salary consideration of Thirteen Thousand Three Hundred Dollars ($13,300.00) per annum payable monthly. (a). Said Purchasers [Louis H. Brush and Roy D. Moore] promise and agree that the payment of said Vendor's salary as Associate Editor for the first five (5) years under said employment contract will be guaranteed by The American Surety Company*765 of New York, or some other surety company of known financial responsibility. (b). Said employment contract will provide that at the expiration of said first five (5) years, said The Harding Publishing Company will then secure to said Vendor the payment of his salary as Associate Editor during the last five (5) years of the term of said contract, either by a suitable surety bond or by collateral security of an amount and value to the satisfaction and approval of said Vendor. (c). Said employment contract will also provide that if said Vendor should die during the term of said ten (10) year contract, the then unpaid part of said salary shall be paid monthly to Mrs. Warren G. Harding, if she survive said Vendor, and if both Mr. and Mrs. Warren G. Harding die during the term of said employment contract, then the unpaid part of said salary shall be paid monthly to the estate of Warren G. Harding. Brush and Moore purposed to secure $100,000 insurance on President Harding's life as protection against loss under article fifth, but it was never perfected. *365 Shortly after June 18, 1923, Brush and Moore purchased the 195 shares of common stock of the Harding Publishing*766 Co., owned by persons other than Warren G. Harding at $600 per share. Shortly after June 18, 1923, Brush and Moore purchased the other newspaper, known as the Marion Tribune, published in Marion, Ohio, and discontinued its publication. This left the Marion Star as the only newspaper in Marion, a city where there had been two newspapers for many years. Within a few days after the execution of the contract of June 18, 1923, President Harding left for an extended trip to Alaska. While returning from this trip he died in California on August 2, 1923. At his death no employment contract had been executed. President Harding was survived by Mrs. Harding, one brother, and three sisters, and he left a will which provided that his residuary estate should go to his brother and sisters. Under this will whatever rights there were to the payment under article fifth of the contract after the death of President and Mrs. Harding were a part of this residuary estate. Brush and Moore, under advice of counsel, contended that no further liability rested upon them to make the payments referred to in article fifth of the contract, since President Harding had died before the execution of any employment*767 contract; and the Harding Publishing Co. contended that there was no liability whatever upon its part in view of the same fact; and at the same time, Brush and Moore and the Harding Publishing Co. realized that the question of their liability was doubtful. The view of nonliability was not accepted by Mrs. Harding, the President's brother, and sisters, and Charles D. Schaffner, executor of the Harding estate, nor by Hoke Donithen and Rechard Crissinger, who were attorneys for the Harding family and estate. All the people mentioned were residents and prominent citizens of Marion, with the exception of the brother and two of the three sisters, who then had moved from Marion. All of the people interested in the Harding estate contended that Brush and Moore, as agents of the Harding Publishing Co., had, by the contract of June 18, 1923, bound the Harding Publishing Co. to make a payment of $13,300 per year during the 10-year period to Mrs. Harding during her life, and then to the President's brother and sisters, and to give the above mentioned guaranty therefor. When the parties failed to agree upon this matter, the Hardings threatened suit against the Harding Publishing Co. to*768 compel this payment of $13,300 per year and the guaranty therefor. The principal asset of the Harding Prblishing Co. at the time of said purchase was, and now is, its circulation and good will, which *366 it then valued at $290,000 out of total assets of about $520,000. This situation obtains for any newspaper; its principal asset is its good will and circulation. On December 8, 1923, the Harding Publishing Co. and Brush and Moore, on the one hand, and the Harding family, on the other hand, made a settlement of their dispute in a written contract, as follows: That said The (new) Harding Publishing Company as a further and additional part of the consideration of this agreement hereby assumes and agrees to perform all of the obligations imposed upon Louis H. Brush and Roy D. Moore by and growing out of Article Fifth of a certain agreement made and entered into at Washington, D.C., on the eighteenth day of June, A.D. 1923, by and between Warren G. Harding, therein known and designated as the VENDOR, and Louis H. Brush and Roy D. Moore, therein known and designated as the PURCHASERS, reference to said agreement being hereby made; and as a part of said obligations assumed, *769 said The (new) Harding Publishing Company hereby agrees to pay the sum of thirteen thousand three hundred ($13,300.00) dollars per annum, payable monthly, for the term of ten (10) years beginning as of September 1, 1923 and ending August 31, 1933, in accordance with the provisions of Article Fifth of said Washington agreement. As part of this settlement of December 8, 1923, the Harding family waived their claim that the annual payment be guaranteed by a surety bond or collateral security approved by them, and the Harding family then accepted a personal guaranty of Brush and Moore dated December 8, 1923, in a written contract, as follows: December Eight, 1923. To C. D. Schaffner, Executor of the Estate of Warren G. Harding, Deceased, and Florence Kling Harding: For value received, we, the undersigned, Louis H. Brush, and Roy D. Moore, for ourselves, our heirs, executors and administrators, do hereby jointly and severally guarantee the payment of the sum of thirteen thousand three hundred ($13,300.00) dollars per annum, payable monthly for the term of ten (10) years beginning as of September 1, 1923, and ending August 31, 1933, in accordance with the provision of Article Fifth*770 of a certain agreement made and entered into at Washington, D.C. on the eighteenth of June, A.D. 1923, by and between Warren G. Harding, therein known and designated as the vendor, and Louis H. Brush and Roy D. Moore, therein known and designated as the purchasers, reference to said agreement being hereby made, the same being part of the original purchase price of the six hundred and five (605) shares of stock in The Harding Publishing Company purchased under said agreement. The part of this contract at the end thereof, reading: "the same being part of the original purchase price of the * * * 605 shares of stock in The Harding Publishing Company purchased under said agreement", was added to the contract as originally drawn, by Hoke Donithen, attorney for the Harding family, prior to its signature by Brush and Moore. In making the settlement of December 8, 1923, the Harding Publishing Co. and Brush and Moore were motivated by two considerations: *367 (1) A doubt with respect to their liability to make the ten payments of $13,300; and (2) A desire to protect the good will and circulation of the corporation by eliminating the threatened suit and the consequences thereof, *771 which suit The Harding Publishing Company and Brush and Moore believed would seriously injure and perhaps destroy The Marion Star. Pursuant to the agreement the $13,300 per year was paid by the Harding Publishing Co. to Florence Kling Harding, the President's widow, until her death, November 21, 1924; and since that time, the payment has been made to Abigail Harding Lewis, one of the President's sisters, under power of attorney from the brother and two other sisters. In each of the years 1930 and 1931 the Harding Publishing Co. paid $13,299.96 to Mrs. Lewis. These sums were deducted by the taxpayer from the consolidated return of the affiliated companies in both 1930 and 1931, and the respondent has disallowed the said deductions. The Harding Publishing Co. made substantial profits during the years following its purchase by Brush and Moore. 2. Contributions to charitable organizations. - During 1930 the petitioner and its subsidiaries made contributions to charitable, educational, religious and related social welfare agencies in amounts aggregating $6,107.71 and during 1931 it made similar contributions totaling $8,545.98. The recipients of the contributions were community*772 funds, hospitals, Red Cross, churches, Boy Scouts, Y.M.C.A., American Legion, Salvation Army, etc. Such contributions were not deducted by the petitioner or any of its subsidiaries in their tax returns for 1930 and 1931, but are now claimed as deductions. The business of the petitioner and its subsidiary corporations is the publishing of newspapers in various cities in the State of Ohio. These papers are the only daily newspapers published in their respective fields. The principal revenue of the petitioner is derived from circulation and advertising in the cities and surrounding territory where the various newspapers are published. The advertising is the most important, but this in turn depends upon the circulation. OPINION. SEAWELL: We will consider the two questions presented in their order. 1. Payments to Warren G. Harding estate. - Petitioner contends that these payments are deductible as ordinary and necessary expense of the Harding Publishing Co., its wholly owned subsidiary, under section 23(a), Revenue Act of 1928. It is not claimed that they are deductible as salary paid to President Harding for personal *368 services actually rendered by him. *773 Fifteenth & Chestnut Realty Co.,29 B.T.A. 1030. The claim is that the contract under which the expenditures were made was entered into by way of compromise to buy the peace of the Harding Publishing Co. and to save it from threatened litigation which might have caused damage to or loss of good will and the circulation of its newspaper. The respondent contends that the payments were not ordinary and necessary business expense, that they were rather to be characterized as capital expenditures for the acquisition of the Harding Publishing Co. stock, or gratuities to enable Brush and Moore to obtain the stock; and, in any event, they are not deductible from gross income of petitioner in computing its income taxes. The fact that the payments were made by way of compromise of a supposed doubtful liability under the old contract is, we think, immaterial. It was said in Colony Coal & Coke Corporation v. Commissioner, 52 Fed.(2d) 923, that "The fact that a payment is made voluntarily or involuntarily, in the course of legal proceedings or as a result of a compromise settlement, does not change the nature of the transaction. The real test is the*774 character of the transaction that occasions the payment." The history of negotiations leading up to the old contract executed June 18, 1923, shows that the purchasers (Brush and Moore) offered to pay the vendor (President Harding) $500 per share for his 605 shares of stock of the Harding Publishing Co., but, as the minority stockholders had been offered $600 a share for their stock, President Harding required payment at the same rate for his. The agreement to pay $600 a share for the 605 shares was arrived at when Brush and Moore and President Harding conceived the plan for President Harding to become a contributing editor of the Marion Star when he should retire from the White House to his Ohio farm. This provision was in substance incorporated as article fifth of the contract. Subsection (c) in that article provides, in effect, that death of President Harding should not decrease the amount to be paid by the purchasers. President Harding died before any services as contributing editor were or could have been performed. Subsection (c) goes far to establish the contention of respondent that what the purchasers bought was not the contract for services as contributing editor to*775 the Marion Star, but the 605 shares of stock of the Harding Publishing Co. owned by President Harding. The fact that a separate contract for services had not been written as was provided for does not alter the situation, as all the terms of such contract were embodied in the main contract of June 18, 1923. President Harding's writings would doubtless have been very valuable to the purchasers of the newspaper property if he had lived. He himself expressed the desire to have the facility of the paper *369 for his own use in making public his views on matters of interest after he left the White House, but this matter was a mere incident in the transaction. The real transaction was the sale of the stock, the consideration for which included the payments under the so-called employment contract. The contract price for the full 800 shares of the stock was $480,000. The old contract, providing for the sale and purchase of the stock and the performance of service as contributing editor, was an indivisible contract. The further fact remains that if the ten yearly payments of $13,300 were not to be included in the price of the stock the average price for the Harding stock would*776 have amounted to less than $435 per share, or $65 less per share than the purchasers at first offered to pay and $165 less per share than Brush testified they were to pay for the stock under the contract. After the death of President Harding, and on December 8, 1923, Brush and Moore each signed a contract guaranteeing the payments of $13,300 per year for ten years in accordance with the provisions of article fifth of the contract of June 18, 1923 (the old contract), in which contract it is recited with reference to the said payments, "the same being part of the original purchase price of the said six hundred and five (605) shares of stock in the Harding Publishing Company purchased under said agreement" (of June 18, 1923, the old contract). If this statement is true the expenditures were for a capital asset and not deductible. Warren Steam Pump Co.,13 B.T.A. 721. But petitioner in its brief now says that these payments were not made "as part of the purchase price for the shares in The Harding Publishing Company owned by President Harding." It is admitted in the brief though that that statement and the statement in the contract of December 8, 1923, are inconsistent. *777 The fact that the words quoted from the contract were placed therein by the attorney for the Harding family, as contended, could not render them nugatory. Even though they do not now represent the views of Brush and Moore, as they testified, they can not be removed to accommodate their present views. No evidence was offered to show any undue influence, coercion, fraud, or incapacity of the makers of the contract or any wrongdoing in the inclusion of said words in the contract or any reason sufficient to remove or rescind them. They harmonize and accord with the whole evidence of the case. Greene & Greene,11 B.T.A. 643. The facts of this case differentiate it from the line of cases cited in petitioner's brief, all of which we have reviewed with care. Upon the conclusion we have reached, that the payments sought to be deducted were made as part purchase of the corporate stock owned by President Harding, it follows that they are not deductible *370 as ordinary and necessary expenses of the business of petitioner. The evidence offered fails to convince us that in any other way the payments are deductible. *778 Burnet v. Houston,283 U.S. 223. We sustain the Commissioner on this point. 2. Contributions to charitable organizations. - Petitioner claims that it and its subsidiaries made contributions to various charitable and related agencies and that its payments therefore are deductible, under section 23(a) of the Revenue Act of 1928, as ordinary and necessary expenses. It relies on the case of Evening Star Newspaper Co.,28 B.T.A. 762. The decision in the Evening Star case, however, was reversed on June 10, 1935 (after petitioner's brief was filed), by the United States Circuit Court of Appeals for the Fourth Circuit, 78 Fed.(2d) 604, and the court said: The taxpayer contends the contributions were a "consideration for a benefit flowing directly to the donor as an incident of its business." The manager and the associate editor in substance stated that they do not know whether the Star sold any more papers because of its support of the Community Chest; nor do they have definite information as to how much advertising resulted from the contribution; but, while they have no way of showing, they think definitely the result was*779 a larger sale of papers; the prestige of the paper was enhanced and, having urged others to give until it hurt, its prestige would have suffered if it had not contributed in a liberal manner. Whether the contributions resulted in an increase in the circulation or advertising of the Star, and, if any, to what extent, is of necessity, mere conjecture. The evidence falls far short of establishing either proposition. If any benefit, in either respect, did accrue, it is so indirect and remote that it can not rise to the dignity of being substantial, nor warrant a finding that the donations involved were, in a genuine sense, necessary and ordinary expenses within the meaning of section 23 of the Revenue Act of 1928, or of the Treasury Regulations 74. It is not enough that the expense be necessary; it must be ordinary and necessary. Welch v. Helvering [supra]. The facts in the case at bar are quite similar to those in the Evening Star case. Roy D. Moore, vice president and general manager of the petitioner, could not distinguish between contributions made "for charity's sake" and those made for the benefit of circulation and advertisement. The petitioner has failed*780 to show any specific benefit, actual or potential, arising from its contributions. We are unable to find that the donations made by the petitioner were made for business reasons and were calculated to produce a commensurate return. We sustain the Commissioner on this issue. Reviewed by the Board. Decision will be entered under Rule 50. VAN FOSSAN VAN FOSSAN, dissenting: I am obliged to dissent from the ruling of the majority. The facts of the case show clearly that the payment were not made under the provisions of the original contract, *371 but arose solely from the subsequent agreement. The record also proves beyond any doubt that the motivating cause which resulted in this contract - the cause, except for which the contract of December 8, 1923, would never have come into existence - was the threat of a lawsuit with possibly damaging consequences to the business of petitioner. The fallacy in the reasoning of the majority opinion is the assumption, for which I can find no foundation in fact, that the payments made under the second contract were in part payment for the stock. Petitioner's subsidiary received nothing in the way of a capital asset*781 as a result of the payments. It already had the stock. President Harding was dead and his services as an associate editor were not available. The only thing received, and it was the thing purchased, was the assurance that petitioner's subsidiary would not be injured in its business by a lawsuit. Had President Harding lived and the supplemental contract originally contemplated been executed, can it be doubted these annual payments would have constituted income to him, or, to state it conversely, in that event, could it successfully have been contended that such payments were in part payment for the stock? A reading of the contract entirely negatives such a suggestion. The original contract contemplated two things - the purchase of the stock and the acquisition of the services of President Harding as an associate editor, the latter to be the subject of a supplemental agreement. President Harding died and the supplemental contract for services became impossible of execution. Thus, the original contract became a contract for the purchase of the stock only. The majority opinion says this contract was indivisible. It was nevertheless complete, although by subsequent events it*782 became impossible of fulfillment in part. It seems to me to be pure fiction to say that the payments in question were part of the original purchase price of the stock. The record, when read in its entirety, effectively refutes and explains the implications of the clause added at the insistence of the attorney for the estate. The reason for such insistence on his part is obvious. By characterizing the payments as part of the purchase price of the stock, his client might avoid the income tax that would otherwise attach to the receipt of the payments. Tax liability should be determined by considering the entire record, not on the basis of the single fact just alluded to and thus readily explained. On the facts before us it is clear that the circumstance which compelled the petitioner's subsidiary and officers to agree to the terms imposed by the settlement of December 8 was the threat of an attack on its standing and reputation in the community of Marion. The *372 majority opinion rightly suggests that the successful operation of a newspaper is singularly dependent upon the good will and favor of its readers and of the community. Particularly is this true when it*783 is owned by nonresidents. We may well conclude that a suit brought by the widow of a President in his own home town, and the controversial issues raised thereby and exposed to public view for discussion and possible condemnation, might have injured severely the petitioner's reputation and might have had a disastrous effect on its business. Petitioner was fully justified in considering the execution of the settlement agreement compulsory and the payments made thereunder to be necessary. In Welch v. Helvering,290 U.S. 111, Justice Cardozo said: * * * Ordinary in this context does not mean that the payments must be habitual or normal in the sense that the same taxpayer will have to make them often. A lawsuit affecting the safety of a business may happen once in a lifetime. The counsel fees may be so heavy that repetition is unlikely. None the less, the expense is an ordinary one because we know from experience that payments for such a purpose, whether the amount is large or small, are the common and accepted means of defense against attack. Cf. *784 Kornhauser v. United States,276 U.S. 145, 72 L.ed. 505, 48 S.Ct. 219. * * * In Helvering v. Community Bond & Mortgage Corporation, 74 Fed.(2d) 272, affirming 27 B.T.A. 480, the situation was quite similar to that in the case at bar. There, an expenditure was made to cancel an agreement with an agent whose activities were causing damage to the taxpayer's reputation. In allowing the deduction the court said: * * * It is not an unusual occurrence of business for a business enterprise, burdened with an unprofitable contract, to secure its cancellation by payment of money, and it is difficult to see why an expense thus incurred is not an "ordinary and necessary expense according to the ways of conduct and forms of speech prevailing in the business world." Welch v. Helvering [supra]. * * * The money paid in the instant case was to save the reputation of the respondent, to make possible its future earnings. * * * In the instant case, the taxpayer's reputation was being injured by the conduct of its agent, and its primary motive in seeking the cancellation of the contract was to prevent the loss of earnings. Its contract*785 with the agency proved to be unprofitable. This we think was an expenditure ordinary and necessary in carrying on the business, and deductible from the respondent's gross income. I am of the opinion that the money expended to prevent an event which would impair, or might even destroy, the petitioner's most valuable asset, its reputation and standing in the community, is deductible as an ordinary and necessary expense. The Board has so held in numerous cases. See North American Investment Co.,24 B.T.A. 419; W. R. Hervey,25 B.T.A. 1282, and cases therein cited, See also Louisiana Jockey Club, Inc.,13 B.T.A. 752 TRAMMELL agrees with this dissent.