Meredith Corp. & Subs. v. Commissioner, 112 T. C. 482 (1999)

Contingent acquisition costs incurred after an asset’s useful life are deductible as ordinary expenses in the year they become fixed.

Summary

In Meredith Corp. & Subs. v. Commissioner, the Tax Court addressed whether contingent acquisition costs for subscriber relationships could be deducted after the asset’s 42-month useful life had expired. Meredith Corp. had assumed contingent obligations when purchasing Ladies’ Home Journal, which included editorial costs. The Court held that these costs, becoming fixed after the asset’s amortization, should be treated as ordinary deductions in the year incurred. The decision clarified that such costs should not be allocated to non-amortizable assets like goodwill but should increase the basis of the subscriber relationships asset, allowing for deductions despite the asset’s full amortization. This ruling reinforced the principle that contingent costs can be deducted as incurred, impacting how businesses account for such expenses in tax planning.

Facts

Meredith Corp. purchased Ladies’ Home Journal (LHJ) on January 3, 1986, assuming contingent obligations related to subscriber relationships, including editorial costs for existing subscriptions. The parties stipulated a 42-month useful life for these relationships. Meredith incurred editorial costs through its taxable year ending (TYE) June 30, 1991. The issue arose when Meredith claimed a deduction for costs incurred in its TYE 1990, after the useful life of the subscriber relationships had expired. The IRS disallowed this deduction, arguing that costs post-amortization should be allocated to non-amortizable goodwill or going-concern value.

Procedural History

The case originated from Meredith’s motion for partial summary judgment and the IRS’s cross-motion. Prior related cases, Meredith I and Meredith II, addressed similar issues for earlier years, with Meredith I establishing the methodology for amortizing the subscriber relationships. The Tax Court in this case granted Meredith’s motion, allowing the deduction of post-amortization costs.

Issue(s)

1. Whether contingent acquisition costs incurred after the expiration of an asset’s useful life can be deducted as ordinary expenses in the year they become fixed.
2. Whether such costs should increase the basis of the subscriber relationships asset or be allocated to non-amortizable goodwill or going-concern value.

Holding

1. Yes, because contingent acquisition costs, even after an asset’s useful life has expired, are deductible as ordinary expenses in the year they become fixed, consistent with general tax principles.
2. Yes, because such costs should increase the basis of the subscriber relationships asset, not be allocated to non-amortizable assets, as per the ruling in Meredith I.

Court’s Reasoning

The Court’s decision rested on the principle established in Meredith I that contingent editorial costs should increase the basis of the subscriber relationships when incurred. The Court rejected the IRS’s argument that these costs should be allocated to goodwill, emphasizing that the subscriber relationships were valued separately and had a limited useful life. The Court applied general tax principles from regulations and case law, such as section 1. 338(b)-3T and Arrowsmith v. Commissioner, which allow for the deduction of contingent costs as incurred after an asset’s disposition or full amortization. The Court noted that Meredith I did not preclude deductions for costs incurred post-1987, and the expiration of the asset’s useful life did not bar such deductions. The Court also dismissed the IRS’s contention that allowing these deductions would lead to excessive cost recovery, as the initial basis was calculated considering the contingency of the costs.

Practical Implications

This ruling provides clarity on the treatment of contingent acquisition costs post-amortization, allowing businesses to deduct such costs as ordinary expenses in the year they become fixed. It impacts tax planning by affirming that these costs should increase the basis of the related asset rather than being allocated to non-amortizable goodwill. Practitioners should consider this decision when advising clients on asset acquisitions with contingent liabilities, ensuring proper accounting for tax deductions. The case also reinforces the importance of understanding the full scope of an asset’s useful life and the treatment of related costs in tax law. Subsequent cases may reference this decision when addressing similar issues of contingent costs and asset amortization.