Writer’s Publishing Co. v. Commissioner, 46 B.T.A. 1067 (1942)

Expenditures to maintain an existing magazine circulation are deductible as ordinary business expenses, while expenditures to build or increase circulation are capital expenditures that must be amortized over the useful life of the asset.

Summary

Writer’s Publishing Co. sought to deduct the entire amount of its circulation and promotion expenses as an ordinary business expense. The Commissioner argued that a portion of these expenses constituted a capital expenditure. The Board of Tax Appeals held that expenses incurred to maintain existing circulation are deductible, but expenses incurred to increase circulation are capital expenditures. Since the company significantly increased its circulation, a portion of its expenditures were deemed capital in nature.

Facts

Writer’s Publishing Co. published a magazine and claimed a deduction for circulation and promotion expenses. In 1939, the company had approximately 31,800 subscribers and spent $13,124.22 on circulation. By September 1939, subscriptions dropped to 18,901. Through intensified efforts, they restored subscriptions to 29,421 by May 1940, spending $13,322.22. The expenses then rose to $17,904.45, while circulation increased significantly from 29,421 to 46,726. The Commissioner determined that a portion of these expenses were capital expenditures because they led to a substantial increase in the magazine’s circulation.

Procedural History

Writer’s Publishing Co. sought to deduct the full amount of circulation expenses on its tax return. The Commissioner disallowed a portion of the deduction, claiming it was a capital expenditure. The case was brought before the Board of Tax Appeals.

Issue(s)

Whether the expenses incurred by Writer’s Publishing Co. for circulation and promotion are fully deductible as ordinary and necessary business expenses, or whether a portion of these expenses must be treated as a capital expenditure due to a substantial increase in circulation.

Holding

No, because expenditures to maintain circulation are deductible, but those to build or increase it are capital expenditures. The company’s significant increase in circulation meant that some expenses had to be capitalized.

Court’s Reasoning

The Board of Tax Appeals distinguished between expenses for maintaining circulation and those for building it. Citing precedent, they noted, “the cost of so supporting the circulation is an ordinary and necessary business expense, but the cost of building up or establishing a circulation structure is a capital expenditure.” The Board found that the company’s circulation increased by 58% while its expenses rose by 34%. The court reasoned that because the petitioner acquired a large and valuable increase in its capital assets, and that its earning power was thereby increased. It followed that at least a part of this expenditure was made for the purpose of so increasing the circulation structure. The court also referenced Successful Farming Publishing Co., indicating cost of securing new subscriptions should be allocated between expense and capital according to the number of subscriptions required to replace those lost during the year and the number by which the circulation structure was increased.

Practical Implications

This case clarifies the distinction between deductible expenses and capital expenditures for businesses with subscription-based revenue models, such as magazines and newspapers. Legal professionals should advise clients to maintain clear records differentiating between costs associated with maintaining existing subscriptions and those aimed at increasing their subscriber base. This distinction impacts tax planning and compliance. When a business experiences significant growth in subscribers, it must recognize that a portion of its promotional expenses may be capitalized and amortized rather than immediately deducted. This holding affects how publishers account for subscriber acquisition costs and impacts profitability calculations. Later cases have applied this principle to other industries where building a customer base is a primary business goal.