Good News From the Supreme Court   

Newspapers win fight over taxes and circulation lists.

The U.S. Supreme Court has finally put to rest the notion that the federal government should treat newspapers differently than other businesses when levying taxes.

The court recently ruled in Newark Morning Ledger Co. vs. the United States that a company buying a newspaper may over time deduct the value of its subscription list, assuming certain conditions are met. It's an important decision because it speaks to the fundamental value of newspapers – and will reduce some newspaper companies' tax burdens.

Whether a subscription list is a depreciable asset may seem an arcane subject to those who labor in the news, advertising and production departments, but this is an issue that goes to the heart of newspaper economics.

It has always been an irony that companies acquiring newspapers have not received the full benefit of what they paid for. When a steel manufacturer buys another steel maker, for example, the buyer has the right to write off from its taxes the anticipated cost of replacing the acquired assets. A steel furnace wears out over time, and the depreciation of its value is considered a legitimate expense by the Internal Revenue Service.

Newspapers, however, have not been allowed to write off the cost of acquiring a subscription list, even though circulation represents the major part of a newpaper's value and is its primary productive asset. The IRS has always insisted that circulation is part of "goodwill" – a self-regenerating, intangible asset that is not depreciable under the nation's tax laws.

Newspaper companies have gone to court to challenge the IRS position in the past, arguing that an acquired subscription list has a limited life – subscribers die or move away – that can be determined with reasonable certainty and that the list has a value that can be measured. These are the requirements that tax laws impose to permit depreciation of intangible assets – assets that are not physical, like a steel furnace or a printing press, but that nevertheless exist.

Donrey Media won a case against the IRS at the District and Court of Appeals levels in 1987, but the case brought by Newark Morning Ledger, which is owned by Newhouse Newspapers, is the first one to reach the Supreme Court. In 1976 Newhouse had allocated $67.8 million of its $305 million investment to acquire Booth Newspapers (through Newhouse's Morning Ledger Co.) as the value of the Booth papers' subscriber lists and attempted to deduct that amount over time from its tax returns. The IRS rejected the deduction, and Newhouse took the issue to court.

Unfortunately, in determining the depreciable value of the Booth subscribers, the Newhouse experts ignored the fundamental worth of paid circulation – that circulation, at bottom, is the vehicle used by newspapers to garner the advertising revenues from which all profit is derived. Instead, Newhouse based its claim solely on the circulation revenue that would flow from the acquired subscribers.

Donrey Media had based its case not only on circulation revenue but also on the fact that paid circulation generates more advertising revenue than does the circulation of a free shopper or weekly. The Donrey approach – by including both circulation and advertising revenue – would tend to produce a higher depreciable value than the Newhouse approach. (For the record, I helped Donrey devise its method and testified about it at the District Court trial.)

Still, Newhouse strategists may have wanted to keep their argument simple, making it easier to convince the high court of the central issue – that a subscriber list is an asset with a limited life that can be measured and valued. It worked. The court came back with a 5-4 decision in Newhouse's favor.

Justice Harry A. Blackmun cited the Donrey case in his majority decision, noting that Donrey described its subscription list as not merely a list of customers but "a machine to generate advertising revenue."

The Newhouse decision could have a significantly favorable impact on newspaper companies that have been active in acquisitions. The decision will also affect other industries with customer lists, such as insurance companies; the total tax revenues that could be affected have been estimated at $10 billion to $15 billion.

The most immediate effect may be a greater willingness at the IRS to settle cases to avoid litigation. Newspaper companies may be able to recalculate the last three years of their taxes to reflect subscriber depreciation from past acquisitions, assuming the companies can present convincing evidence of the value and life of the subscription list. This is a task that likely would be difficult for acquisitions made many years ago.

Finally, the decision could make independentnewspapers more valuable than before, no doubt a welcome development for owners who have seen newspaper values sag during the recession. The added tax benefits for buyers should increase the prices that they are willing to pay. l