Supreme Court decision has publishers' goodwill - tax-law decision

Folio: The Magazine for Magazine Management, June 1, 1993 by Lorne Manly

In a landmark tax-law decision that will save publishers billions of dollars, the United States Supreme Court has ruled that businesses are allowed to depreciate intangible assets, such as subscriber lists, when they acquire magazines.

On April 20, the Court ruled 5-to-4 in Newark Morning Ledger v. U.S. that if companies can prove that intangible assets obtained in acquisitions have a dollar value and a limited useful life, businesses can gain tax deductions based on the depreciation of such assets.

"I'm just delighted," says Michael Haugh, senior vice president of finance and administration at Times Mirror Magazines. "We'll now have fewer problems with the IRS." Previously, when publishing companies would try to amortize subscriber lists of magazines they had bought, the Internal Revenue Service would argue that customer lists are a form of goodwill, and therefore not depreciable. If the cases didn't go to court, the two sides would settle--and publishers would often have to depreciate the asset over a longer period of time. "There was a lot of money and time wasted over those efforts," says George Gross, executive vice president for government affairs at Magazine Publishers of America.

But publishing executives and tax analysts caution that companies should not expect an automatic windfall. The IRS will continue to challenge aggressively depreciation claims on subscriber lists obtained in acquisitions. "The IRS is still not naked out there; it just can't use that trump card anymore," says Paul Scherer, managing partner of Scherer & Company, the accounting firm that represents the Newhouse family, which brought the suit.

The Supreme Court decision is likely to spur Congress to pass legislation that will fix the depreciation period for intangible assets and goodwill at 14 years. (Similar legislation was passed last year by the Senate and House of Representatives, but was vetoed by President Bush in a skirmish over a larger tax bill.) The decision, which will reduce government tax revenues, blunts accusations that such a bill would add to the deficit. "Now that the Supreme Court has ruled in our favor, the bill will be revenue neutral," says Scherer.

The case grew out the 1976 purchase of a Michigan newspaper-publishing firm by the Newhouse family's Herald Company, the predecessor to the Newark Morning Ledger Co. On its federal income tax returns for 1977 through 1980, the Herald claimed deductions for $67.8 million, the amount of future profits it estimated the chain's paid subscribers would provide. The IRS disallowed the claim, the Herald paid the taxes, filed refund claims, and then launched a lawsuit. A federal judge ruled in the Newhouses' favor, but that decision was reversed by the federal appeals court in Philadelphia.

The Newhouse family, which spent more than $1 million on legal fees, could reap tax savings of more than $100 million from other cases it has pending with the IRS. The same statistical analysis used in the Morning Ledger case was used in justifying tax deductions for acquisitions between 1976 and 1990, says Scherer.