OCTOBER TERM, 1992
Syllabus
NEWARK MORNING LEDGER CO., AS SUCCESSOR TO THE HERALD CO.
v. UNITED STATES
CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE THIRD
CIRCUIT
No. 91-1135. Argued November 10, 1992-Decided April 20, 1993
Petitioner newspaper publisher is the successor to The Herald
Company.
When, in 1976, Herald purchased substantially all the
outstanding shares of Booth Newspapers, Inc., it allocated its
adjusted income tax basis in the Booth shares among the assets it
acquired in its merger with Booth. Among other things, it allocated
$67.8 million to an intangible asset denominated "paid
subscribers," a figure that was petitioner's estimate of future
profits to be derived from identified subscribers to Booth's eight
newspapers on the date of merger. On its federal income tax returns
for 1977-1980, Herald claimed depreciation deductions for the $67.8
million, which were disallowed by the Internal Revenue Service
(IRS) on the ground that the concept of "paid subscribers" was
indistinguishable from goodwill and, therefore, was nondepreciable.
Herald paid the taxes, and petitioner filed refund claims and
ultimately brought suit in the District Court to recover taxes and
interest paid. At trial, the Government did not contest
petitioner's expert evidence on the methodology used to calculate
its figure and stipulated to the useful life of "paid subscribers"
for each newspaper. Instead, it estimated the asset's value at $3
million, the cost of generating new subscriptions, and its
principal argument remained that the asset was indistinguishable
from goodwill. The court ruled in petitioner's favor, finding that
the asset was not self-regenerating-i.
e., it had a limited
useful life, the duration of which could be calculated with
reasonable accuracy-that petitioner properly calculated its value,
and that it was separate and distinct from goodwill. The Court of
Appeals reversed, holding that even though the asset may have a
limited useful life that can be ascertained with reasonable
accuracy, its value is not separate and distinct from goodwill.
Held:
1. A taxpayer able to prove that a particular asset can be
valued and that it has a limited useful life may depreciate its
value over its useful life regardless of how much the asset appears
to reflect the expectancy of continued patronage. Pp. 553-566.
547
(a) While the depreciation allowance of § 167(a) of the Internal
Revenue Code applies to intangible assets, the IRS has consistently
taken the position that goodwill is nondepreciable. Since the value
of customer-based intangibles, such as customer and subscriber
lists, obviously depends on continued and voluntary customer
patronage, the question has been whether these intangibles can be
depreciated notwithstanding their relationship to such patronage.
The "mass asset" rule that courts often resort to in considering
this question prohibits depreciation when the assets constitute
self-regenerating assets that may change but never waste. Pp.
553-560.
(b) Whether or not taxpayers have been successful in separating
depreciable intangible assets from goodwill in any particular case
is a question of fact. The question is not whether an asset falls
within the core of the concept of goodwill, but whether it is
capable of being valued and whether that value diminishes over
time. Pp. 560-566.
2. Petitioner has borne successfully its substantial burden of
proving that "paid subscribers" constitutes an intangible asset
with an ascertainable value and a limited useful life, the duration
of which can be ascertained with reasonable accuracy. It has proved
that the asset is not self-regenerating but rather wastes as a
finite number of component subscriptions are canceled over a
reasonably predictable period of time. The Government presented no
evidence to refute the methodology petitioner used to estimate the
asset's fair market value, and the uncontroverted evidence
presented at trial revealed that "paid subscribers" had substantial
value over and above that of a mere list of customers, as it was
mistakenly characterized by the Government. pp. 566-570.
945 F.2d
555, reversed and remanded.
BLACKMUN, J., delivered the opinion of the Court, in which
STEVENS, O'CONNOR, KENNEDY, and THOMAS, JJ., joined. SOUTER, J.,
filed a dissenting opinion, in which REHNQUIST, C. J., and WHITE
and SCALIA, JJ., joined,
post, p. 571.
Robert H. Bork argued the cause for petitioner. With him on the
briefs were Bernard J. Long, Jr., Albert H. Turkus, Linda A.
Fritts, Judith A. Mather, Corinne M. Antley, Peter C. Gould, and
Steven Alan Reiss.
Deputy Solicitor General Wallace argued the cause for the United
States. With him on the brief were Solicitor General Starr, Acting
Assistant Attorney General Bruton,
548
548 NEWARK MORNING LEDGER CO.
v. UNITED STATES
Kent L. Jones, Robert S. Pomerance, Francis M. Allegra, and
Steven W Parks. *
JUSTICE BLACKMUN delivered the OpInIOn of the Court. This case
presents the issue whether, under § 167 of the Internal Revenue
Code, 26 U. S. C. § 167, the Internal Revenue Service (IRS) may
treat as nondepreciable an intangible asset proved to have an
ascertainable value and a limited useful life, the duration of
which can be ascertained with reasonable accuracy, solely because
the IRS considers the asset to be goodwill as a matter of law.1
*Briefs of
amici curiae urging reversal were filed for
Black & Decker Corp. et al. by
Mark I. Levy, Arthur I.
Gould, Roger J.
Jones, and
Andrew L. Frey; for
Charles Schwab Corp. by
Glenn A. Smith, Robert C.
Alexander, and
Teresa A. Maloney; for Donrey, Inc.,
by
Lester G.
Fant III, Daniel M. Davidson, Rex E.
Lee, and
Carter G.
Phillips; for the Independent
Insurance Agents of America et al. by
Kenneth J.
Kies; for Magazine Publishers of America, Inc., by
James
L. Malone III and
George W Benson; for the New England
Fuel Institute et al. by
Gary J.
Klein, Bernhardt K.
Wruble, and
John S.
Moot; for the Tax Executives
Institute, Inc., by
Timothy J.
McCormally and
Mary
L. Fahey; and for Worrell Enterprises, Inc., by
Malcolm L.
Stein and
Stanley E. Preiser.
Briefs of amici curiae were filed for the American Bankers
Association by John J. Gill III, Michael F. Crotty, Joanne Ames,
Philip C. Cook, Terence J. Greene, and Timothy J. Peaden; for the
American Business Press by Robert A. Saltzstein, Stephen M.
Feldman, and David R. Straus; for Colorado National Bankshares,
Inc., et al. by James E. Bye and Richard G. Wilkins; for Coopers
& Lybrand by David L. McLean; for the Investment Counsel
Association of America, Inc., by Kenneth W Gideon; for the
Newspaper Association of America by George L. Middleton, Jr., and
Corrine M. Yu; for Philip Morris Companies Inc. by Jerome B. Libin
and Padric K. J. O'Brien; and for Frederic W Hickman et al., pro
se.
1 Section 167 states: "(a) General rule
"There shall be allowed as a depreciation deduction a reasonable
allowance for the exhaustion, wear and tear (including a reasonable
allowance for obsolescence)-
"(1) of property used in the trade or business, or
549
I
Petitioner Newark Morning Ledger Co., a New Jersey corporation,
is a newspaper publisher. It is the successor to The Herald Company
with which it merged in 1987. Eleven years earlier, in 1976, Herald
had purchased substantially all the outstanding shares of Booth
Newspapers, Inc., the publisher of daily and Sunday newspapers in
eight Michigan communities.2 Herald and Booth merged on May 31,
1977, and Herald continued to publish the eight papers under their
old names. Tax code provisions in effect in 1977 required that
Herald allocate its adjusted income tax basis in the Booth shares
among the assets acquired in proportion to their respective fair
market values at the time of the merger. See 26 U. S. C. §§ 332 and
334(b)(2) (1976 ed.).3
Prior to the merger, Herald's adjusted basis in the Booth shares
was approximately $328 million. Herald allocated $234 million of
this to various financial assets (cash, securities, accounts and
notes receivable, the shares of its wholly owned subsidiary that
published Parade Magazine, etc.) and tangible assets (land,
buildings, inventories, production
"(2) of property held for the production of income."
Treasury Regulations § 1.167(a)-(3) interprets § 167(a) and
states:
"If an intangible asset is known from experience or other
factors to be of use in the business or in the production of income
for only a limited period, the length of which can be estimated
with reasonable accuracy, such an intangible asset may be the
subject of a depreciation allowance. Examples are patents and
copyrights. An intangible asset, the useful life of which is not
limited, is not subject to the allowance for depreciation. No
allowance will be permitted merely because, in the unsupported
opinion of the taxpayer, the intangible asset has a limited useful
life. No deduction for depreciation is allowable with respect to
goodwill." 26 CFR § 1.167(a)-3 (1992).
2The eight Michigan papers were The Ann Arbor News, The Bay City
Times, The Flint Journal, The Grand Rapids Press, The Jackson
Citizen Patriot, Kalamazoo Gazette, The Muskegon Chronicle, and The
Saginaw News.
3 Section 334(b)(2) was repealed in 1982 and replaced by the
somewhat different provisions of the present § 338 of the Code.
550
550 NEWARK MORNING LEDGER CO.
v. UNITED STATES
equipment, computer hardware, etc.). Herald also allocated $67.8
million to an intangible asset denominated "paid subscribers."4
This consisted of 460,000 identified subscribers to the eight Booth
newspapers as of May 31, 1977, the date of merger. These
subscribers were customers each of whom had requested that the
paper be delivered regularly to a specified address in return for
payment of the subscription price. The $67.8 million figure was
petitioner's estimate of future profits to be derived from these
at-will subscribers, all or most of whom were expected to continue
to subscribe after the Herald acquisition. The number of "paid
subscribers" was apparently an important factor in Herald's
decision to purchase Booth and in its determination of the
appropriate purchase price for the Booth shares. See Brief for
Petitioner 4-5. After these allocations, the approximately $26.2
million remaining was allocated to going-concern value and
goodwill.
On its federal income tax returns for the calendar years
1977-1980, inclusive, Herald claimed depreciation deductions on a
straight-line basis for the $67.8 million allocated to "paid
subscribers." The IRS disallowed these deductions on the ground
that the concept of "paid subscribers" was indistinguishable from
goodwill and, therefore, was nondepreciable under the applicable
regulations. Herald paid the resulting additional taxes. After the
1987 merger, petitioner filed timely claims for refund. The IRS
took no action on the claims, and, upon the expiration of the
prescribed 6-month period, see 26 U. S. C. § 6532(a)(1), petitioner
brought suit in
4 According to petitioner, the term" 'paid subscribers' is
intended to reflect the fact that the customers in question paid
for their newspapers, rather than receiving them for free, and that
they subscribed to the newspaper, requesting regular delivery,
rather than purchasing it on a single copy basis." Brief for
Petitioner 4, n. 5. The term does not connote subscription payments
in advance; indeed, the customer relationship was terminable at
will.
551
the District of New Jersey to recover taxes and interest that it
claimed had been assessed and collected erroneously.
The case was tried to the court. Petitioner presented financial
and statistical experts who testified that, using generally
accepted statistical techniques, they were able to estimate how
long the average at-will subscriber of each Booth newspaper as of
May 31, 1977, would continue to subscribe. The estimates ranged
from 14.7 years for a daily subscriber to The Ann Arbor News to
23.4 years for a subscriber to the Sunday edition of The Bay City
Times. This was so despite the fact that the total number of
subscribers remained almost constant during the tax years in
question. The experts based their estimates on actuarial factors
such as death, relocation, changing tastes, and competition from
other media. The experts also testified that the value of "paid
subscribers" was appropriately calculated using the "income
approach." Under this, petitioner's experts first calculated the
present value of the gross-revenue stream that would be generated
by these subscriptions over their estimated useful lives. From that
amount they subtracted projected costs of collecting the
subscription revenue. Petitioner contended that the resulting
estimated net-revenue stream-calculated as $67,773,000 by one of
its experts-was a reasonable estimate of the value of "paid
subscribers."
The Government did not contest petitioner's expert evidence at
all. In fact, it stipulated to the estimates of the useful life of
"paid subscribers" for each newspaper. Also, on valuation, the
Government presented little or no evidence challenging petitioner's
calculations. Instead, it argued that the only value attributable
to the asset in question was the cost of generating 460,000 new
subscribers through a subscription drive. Under this "cost
approach," the Government estimated the value of the asset to be
approximately $3 million.
The Government's principal argument throughout the litigation
has been that "paid subscribers" represents an asset
552
552 NEWARK MORNING LEDGER CO.
v. UNITED STATES
indistinguishable from the goodwill of the Booth newspapers.
According to the Government, the future stream of revenue expected
to be generated by the 460,000 "paid subscribers" represented the
very essence of the goodwill value of the newspapers. It argued
that because goodwill is nondepreciable, the value of "paid
subscribers" cannot be depreciated but must be added to basis so
that, when the business is disposed of, the cost of the asset will
be deducted from the proceeds in computing capital gain or
loss.
The District Court (Judge H. Lee Sarokin) ruled in petitioner's
favor. 734 F. Supp. 176 (NJ 1990). It found as a fact that the
"paid subscribers" asset was not selfregenerating-it had a limited
useful life the duration of which could be calculated with
reasonable accuracy.
Id., at 180. The court further found
that the value of "paid subscribers" was properly calculated using
the "income approach" and that the asset itself was separate and
distinct from goodwill. "[O]ne must distinguish between a galaxy of
customers who mayor may not return, whose frequency is unknown, and
whose quantity and future purchases cannot be predicted, against
subscribers who can be predicted to purchase the same item, for the
same price on a daily basis."
Id., at 176-177.
The Court of Appeals for the Third Circuit reversed.
945 F.2d
555 (1991). It concluded that the District Court had erred in
defining goodwill as that which remains after all assets with
determinable useful lives and ascertainable values have been
accounted for.
Id., at 568. The court concluded that
goodwill has a substantive meaning-the expectancy that "'old
customers will resort to the old place' of business," id., at
567-and that "paid subscribers" is the essence of goodwill. Even
though the "paid subscribers" asset may have a limited useful life
that can be ascertained with reasonable accuracy, the court held
that its value is not separate and distinct from goodwill.
Id., at 568.
The Court of Appeals denied petitioner's suggestion for
rehearing in banc, with two judges dissenting. See App. to
553
Pet. for Cert. 52a. In order to resolve an issue of substantial
importance under the Internal Revenue Code and to settle a
perceived conflict,5 we granted certiorari, 503 U. S. 970
(1992).
II
Section 167(a) of the Code allows as a deduction for
depreciation a reasonable allowance for the exhaustion and wear and
tear, including obsolescence, of property used in a trade or
business or of property held for the production of income. See n.
1,
supra. This Court has held that "the primary purpose" of
an annual depreciation deduction is "to further the integrity of
periodic income statements by making a meaningful allocation of the
cost entailed in the use (excluding maintenance expense) of the
asset to the periods to which it contributes."
Massey Motors,
Inc. v.
United States, 364 U. S. 92, 104 (1960). The
depreciation deduction has been a part of the federal tax system at
least since 1909, when Congress recognized that a corporation
should calculate its annual net income by deducting from gross
income "all losses actually sustained within the year and not
compensated by insurance or otherwise, including a reasonable
allowance for depreciation of property, if any." Tariff of 1909, §
38 Second, 36 Stat. 113. Nothing in the text of the 1909 statute or
in the implementing Treasury Decision precluded a depreciation
allowance for intangible property.6 This changed in
5 Compare the Third Circuit's ruling in the present case with
Donrey, Inc. v.
United States, 809
F.2d 534 (CA8 1987). See also
Citizens &
Southern Corp. v.
Commissioner, 91 T. C. 463 (1988),
aff'd,
919 F.2d
1492 (CAll 1990).
6 According to the Treasury Department, the depreciation
deduction "should be the estimated amount of the loss, accrued
during the year to which the return relates, in the value of the
property in respect of which such deduction is claimed that arises
from exhaustion, wear and tear, or obsolescence out of the uses to
which the property is put .... This estimate should be formed upon
the assumed life of the property, its cost value, and its use."
Treas. Regs. 31, Art. 4, p. 11 (1909).
554
554 NEWARK MORNING LEDGER CO.
v. UNITED STATES
1914 with the promulgation of Treas. Regs. 33 (1914) issued
under the 1913 Income Tax Law.7
The Revenue Act of 1918, § 234(a)(7), authorized a "reasonable
allowance for the exhaustion, wear and tear of property used in the
trade or business, including a reasonable allowance for
obsolescence." 40 Stat. 1078 (1919). Treasury Regs. 45 (1919),
promulgated under the 1918 Act, explicitly recognized that
intangible assets "may be the subject of a depreciation allowance."
Art. 163. Thereafter, the regulations governing the depreciation of
intangible assets have remained essentially unchanged. The current
version is set forth in n. 1,
supra.
Since 1927, the IRS consistently has taken the position that
"goodwill" is nondepreciable.8 One court has said specifically:
"Indeed, this proposition is so well settled that the only question
litigated in recent years regarding this area of the law is whether
a particular asset is 'goodwill.'"
Hous-
7 Treasury Regs. 33 provided explicitly that the depreciation
deduction should be "estimated on the cost of the
physical
property with respect to which such deduction is claimed, which
loss results from wear and tear due to the use to which the
property is put" (emphasis added). Art. 159. Furthermore, "[aJssets
of any character whatever which are not affected by use, wear and
tear (except patents, copyrights, etc.) are not subject to the
depreciation allowance authorized by this act." Art. 162.
8Between 1919 and 1927, the IRS recognized that the goodwill of
distillers and dealers might be depreciable as a result of the
passage of the Eighteenth Amendment prohibiting the manufacture,
sale, or transportation of intoxicating liquors. See T. B. R. 44, 1
Cum. Bull. 133 (1919). But in 1926, the Eighth Circuit, in
Red
Wing Malting Co. v.
Willcuts, 15 F.2d 626, cert. denied,
273 U. S. 763 (1927), ruled that, under the plain language of the
Revenue Act of 1918, goodwill could not be depreciated, for the
depreciation provision "limits the allowance for obsolescence to
such property as is susceptible to exhaustion, wear, and tear by
use in the business, and good will is not such property." 15 F. 2d,
at 633. Following
Red Wing Malting, the Treasury Department
amended its regulations to provide: "No deduction for depreciation,
including obsolescence, is allowable in respect of good wilL" T. D.
4055, VI-2 Cum. Bull. 63 (1927). That has been the position of the
IRS ever since.
555
ton Chronicle Publishing Co. v.
United States,
481 F.2d
1240, 1247 (CA5 1973), cert. denied, 414 U. S. 1129 (1974).
III A
"Goodwill" is not defined in the Code or in any Treasury
Department Regulations. There have been attempts, however, to
devise workable definitions of the term. In
Metropolitan
Bank v.
St. Louis Dispatch Co., 149 U. S. 436 (1893), for
example, this Court considered whether a newspaper's goodwill
survived after it was purchased and ceased publishing under its old
name. It ruled that the goodwill did not survive, relying on
Justice Story's notable description of "goodwill" as
"'the advantage or benefit, which is acquired by an
establishment, beyond the mere value of the capital, stock, funds,
or property employed therein, in consequence of the general public
patronage and encouragement which it receives from constant or
habitual customers, on account of its local position, or common
celebrity, or reputation for skill or affluence, or punctuality, or
from other accidental circumstances or necessity, or even from
ancient partialities or prejudices.''' Id., at 446, quoting
J. Story, Partnerships § 99 (1841).
In
Des Moines Gas Co. v.
Des Moines, 238 U. S. 153 (1915), the
Court described goodwill as "that element of value which inheres in
the fixed and favorable consideration of customers, arising from an
established and well-known and wellconducted business."
Id.,
at 165. See also
Los Angeles Gas &
Electric Corp.
v.
Railroad Comm'n of California, 289 U. S. 287, 313 (1933)
(distinguishing "going concern" from "good will" when fixing rates
for public utilities).
Although the definition of goodwill has taken different forms
over the years, the shorthand description of goodwill as "the
expectancy of continued patronage,"
Boe v.
Commis-
556
556 NEWARK MORNING LEDGER CO.
v. UNITED STATES
sioner, 307 F.2d
339,343 (CA9 1962), provides a useful label with which to
identify the total of all the imponderable qualities that attract
customers to the business. See
Houston Chronicle Publishing
Co. v.
United States, 481 F. 2d, at 1248, n. 5. This
definition, however, is of little assistance to a taxpayer trying
to evaluate which of its intangible assets is subject to a
depreciation allowance. The value of every intangible asset is
related, to a greater or lesser degree, to the expectation that
customers will continue their patronage.9 But since 1918, at least
some intangible assets have been depreciable. Because intangible
assets do not exhaust or waste away in the same manner as tangible
assets, taxpayers must establish that public taste or other
socioeconomic forces will cause the intangible asset to be retired
from service, and they must estimate a reasonable date by which
this event will occur. See B. Bittker & M. McMahon, Federal
Income Taxation of Individuals n2.4, p. 12-10 (1988). Intangibles
such as patents and copyrights are depreciable over their "legal
lives," which are specified by statute. Covenants not to compete,
leaseholds, and life estates, for example, are depreciable over
their useful lives that are expressly limited by contract.
9We emphasize that while the "expectancy of continued patronage"
is a serviceable description of what we generally mean when we
describe an intangible asset that has no useful life and no
ascertainable value, this shibboleth tells us nothing about whether
the asset in question is depreciable. The dissent concedes that
"the law concerning the depreciation of intangible assets related
to goodwill has developed on a case-by-case basis,"
post, at
576, n. 4, yet, inexplicably, it suggests that "[s]uch matters are
not at issue in this case, however, because the asset that Ledger
seeks to depreciate is indistinguishable from goodwill," ibid. As
we demonstrate below, an intangible asset with an ascertainable
value and a limited useful life, the duration of which can be
ascertained with reasonable accuracy, is depreciable under § 167 of
the Code. The fact that it may also be described as the "expectancy
of continued patronage" is entirely beside the point.
557
The category of intangibles that has given the IRS and the
courts difficulty is that group of assets sometimes denominated
"customer-based intangibles." This group includes customer lists,
insurance expirations, subscriber lists, bank deposits,
cleaning-service accounts, drugstore-prescription files, and any
other identifiable asset the value of which obviously depends on
the continued and voluntary patronage of customers. The question
has been whether these intangibles can be depreciated
notwithstanding their relationship to "the expectancy of continued
patronage."
B
When considering whether a particular customer-based intangible
asset may be depreciated, courts often have turned to a "mass
asset" or "indivisible asset" rule. The rule provides that certain
kinds of intangible assets are properly grouped and considered as a
single entity; even though the individual components of the asset
may expire or terminate over time, they are replaced by new
components, thereby causing only minimal fluctuations and no
measurable loss in the value of the whole. The following is the
usually accepted description of a mass asset:
"[A] purchased terminable-at-will type of customer list is an
indivisible business property with an indefinite, nondepreciable
life, indistinguishable from-and the principal element of-goodwill,
whose ultimate value lies in the expectancy of continued patronage
through public acceptance. It is subject to temporary attrition as
well as expansion through departure of some customers, acquisition
of others, and increase or decrease in the requirements of
individual customers. A normal turnover of customers represents
merely the ebb and flow of a continuing property status in this
species, and does not within ordinary limits give rise to the right
to deduct for tax purposes the loss of individual customers. The
whole is equal to the sum of its fluctuating parts at any
558
558 NEWARK MORNING LEDGER CO.
v. UNITED STATES
given time, but each individual part enjoys no separate capital
standing independent of the whole, for its disappearance affects
but does not interrupt or destroy the continued existence of the
whole." Golden State Towel & Linen Service, Ltd.
v. United States, 179 Ct. Cl. 300, 310, 373 F.2d
938, 944 (1967).
The mass-asset rule prohibits the depreciation of certain
customer-based intangibles because they constitute selfregenerating
assets that may change but never waste. Although there may have
been some doubt prior to 1973 as to whether the mass-asset rule
required that any asset related to the expectancy of continued
patronage always be treated as nondepreciable goodwill as a matter
of law, that doubt was put to rest by the Fifth Circuit in the
Houston Chronicle case. The court there considered whether
subscription lists, acquired as part of the taxpayer's purchase of
The Houston Press, were depreciable. The taxpayer had no intention
of continuing publication of the purchased paper, so there was no
question of the lists' being self-regenerating; they had value only
to the extent that they furnished names and addresses of
prospective subscribers to the taxpayer's newspaper. After
reviewing the history of the mass-asset rule, the court concluded
that there was no
per se rule that an intangible asset is
nondepreciable whenever it is related to goodwill. On the contrary,
the rule does not prevent taking a depreciation allowance "if the
taxpayer properly carries his dual burden of proving that the
intangible asset involved (1) has an ascertainable value separate
and distinct from goodwill, and (2) has a limited useful life, the
duration of which can be ascertained with reasonable accuracy."
Houston Chronicle, 481 F. 2d, at 1250.
Following the decision in
Houston Chronicle, the IRS
issued a new ruling, modifying prior rulings "to remove any
implication that customer and subscription lists, location
contracts, insurance expirations, etc., are, as a matter of law,
indistinguishable from goodwill possessing no determinable
559
useful life." Rev. Rul. 74-456, 1974-2 Cum. Bull. 65, 66. The
IRS continued to claim that customer-based intangibles generally
are in the nature of goodwill, representing "the customer structure
of a business, their value lasting until an indeterminate time in
the future." Nonetheless, it acknowledged that, "in an unusual
case," the taxpayer may prove that the "asset or a portion thereof
does not possess the characteristics of goodwill, is susceptible of
valuation, and is of use to the taxpayer in its trade or business
for only a limited period of time."
Ibid. Under these
circumstances, the IRS recognized the possibility that the
customer-based intangible asset could be depreciated over its
useful life.
Despite the suggestion by the Court of Appeals in this case that
the mass-asset rule is "now outdated," 945 F. 2d, at 561, it
continues to guide the decisions of the Tax Court with respect to
certain intangible assets. In
Ithaca Industries, Inc. v.
Commissioner, 97 T. C. 253 (1991), for example, the Tax
Court recently considered whether a taxpayer could depreciate the
value allocated to the trained work force of a purchased going
concern over the length of time each employee remained with the
purchasing company. The court acknowledged that "whether the
assembled work force is an intangible asset with an ascertainable
value and a limited useful life separate from goodwill or
going-concern value is a question of fact."
Id., at 263-264.
After reviewing the record, it concluded that the mass-asset rule
applied to prohibit the depreciation of the cost of acquiring the
assembled work force:
"Although the assembled work force is used to produce income,
this record fails to show that its value diminishes as a result of
the passing of time or through use. As an employee terminated his
or her employment, another would be hired and trained to take his
or her place. While the assembled work force might be subject to
temporary attrition as well as expansion through departure of some
employees and the hiring of others, it
560
560 NEWARK MORNING LEDGER CO.
v. UNITED STATES
would not be depleted due to the passage of time or as a result
of use. The turnover rate of employees represents merely the ebb
and flow of a continuing work force. An employee's leaving does not
interrupt or destroy the continued existence of the whole."
Id., at 267.
As a factual matter, the Tax Court found that the taxpayer hired
a new worker only so it could replace a worker "who resigned,
retired, or was fired."
Id., at 268. The court found that
the "assembled work force" was a nondiminishing asset; new
employees were trained in order to keep the "assembled work force"
unchanged, and the cost of the training was a deductible expense.
Id., at 271.
IV
Since 1973, when
Houston Chronicle clarified that the
availability of the depreciation allowance was primarily a question
of fact, taxpayers have sought to depreciate a wide variety of
customer-based intangibles. The courts that have found these assets
depreciable have based their conclusions on carefully developed
factual records. In
Richard S.
Miller &
Sons,
Inc. v.
United States, 210 Ct. Cl. 431,
537 F.2d
446 (1976), for example, the court considered whether a
taxpayer was entitled to a depreciation deduction for 1,383
insurance expirations that it had purchased from another insurer.
10 The court concluded that the taxpayer had carried its heavy
burden of proving that the expirations had an ascertainable value
separate and distinct from goodwill and had a limited useful life,
the duration of which could be ascertained with reasonable
accuracy. The court acknowledged
10 An "expiration" is a copy of the face of an insurance policy
made when the policy is issued. It shows the name of the insured,
the type of insurance, the premium, the covered property, and the
expiration date. "Its principal value in the insurance business is
its indication of the most advantageous time to solicit a renewal."
Richard S.
Miller &
Sons, Inc. v.
United States, 210 Ct. Cl., at 436, 537 F. 2d, at 450.
561
that the insurance expirations constituted a "mass asset" the
useful life of which had to be "determined from facts relative to
the whole, and not from experience with any particular policy or
account involved."
Id., at 443, 537 F. 2d, at 454. The court
also noted, however, that the mass-asset rule does not prevent a
depreciation deduction "where the expirations as a single asset can
be valued separately and the requisite showing made that the useful
life of the information contained in the intangible asset as a
whole is of limited duration."
Id., at 439, 537 F. 2d, at
452. All the policies were scheduled to expire within three years,
but their continuing value lay in their being renewable. Based on
statistics gathered over a 5-year period, the taxpayer was able to
estimate that the mass asset had a useful life of not more than 10
years from the date of purchase. Any renewals after that time would
be attributable to the skill, integrity, and reputation of the
taxpayer rather than to the value of the original expirations. "The
package of expirations demonstrably was a wasting asset."
Id., at 444, 537 F. 2d, at 455. The court ruled that the
taxpayer could depreciate the cost of the collection of insurance
expirations over the useful life of the mass asset.
In
Citizens &
Southern Corp. v.
Commissioner, 91 T. C. 463 (1988), aff'd,
919 F.2d
1492 (CAll 1990), the taxpayer argued that it was entitled to
depreciate the bank-deposit base acquired in the purchase of nine
separate banks.11 The taxpayer sought to depreciate the present
value of the income it expected to derive from the use of the
balances of deposit accounts existing at the time of the bank
purchases.
11 The term "deposit base" describes "the intangible asset that
arises in a purchase transaction representing the present value of
the future stream of income to be derived from employing the
purchased core deposits of a bank."
Citizens &
Southern Corp. v.
Commissioner, 91 T.
C., at
465. The value of the deposit base rests upon the "ascertainable
probability that inertia will cause depositors to leave their funds
on deposit for predictable periods of time."
Id., at
500.
562
562 NEWARK MORNING LEDGER CO.
v. UNITED STATES
The Commissioner argued that the value of the core deposits was
inextricably related to the value of the overall customer
relationship, that is, to goodwill. The Commissioner also argued
that the deposit base consisted of purchased, terminable-at-will
customer relationships that are equivalent to goodwill as a matter
of law. The Tax Court rejected the Commissioner's position,
concluding that the taxpayer had demonstrated with sufficient
evidence that the economic value attributable to the opportunity to
invest the core deposits could be (and, indeed, was) valued and
that the fact that new accounts were opened as old accounts closed
did not make the original purchased deposit base selfregenerating.
91 T. C., at 499.
The court also concluded that, based on "lifing studies"
estimating the percentage of accounts that would close over a given
period of time, the taxpayer established that the deposit base had
a limited useful life, the duration of which could be ascertained
with reasonable accuracy. The taxpayer had established the value of
the intangible asset using the cost-savings method, entitling it to
depreciate that portion of the purchase price attributable to the
present value of the difference between the ongoing costs
associated with maintaining the core deposits and the cost of the
market alternative for funding its loans and other investments.
Id., at 510.
The Tax Court reached the same result in
Colorado National
Bankshares, Inc. v.
Commissioner, 60 TCM 771 (1990), ,
90,495 P-H Memo TC, aff'd,
984 F.2d
383 (CAlO 1993). The Tax Court concluded that
"the value of the deposit base does not depend upon a vague hope
that customers will patronize the bank for some unspecified length
of time in the future. The value of the deposit base rests upon the
ascertainable probability that inertia will cause depositors to
leave their funds on deposit for predictable periods of time."
563
Colorado National Bankshares, 60 TCM, at 789, , 90,495
P-H Memo TC, at 2,396.
The court specifically found that the deposit accounts could be
identified; that they had limited lives that could be estimated
with reasonable accuracy; and that they could be valued with a fair
degree of accuracy. They were also not self-regenerating. "It is
these characteristics which separate them from general goodwill and
permits separate valuation."
Ibid. See also
IT&S of
Iowa, Inc. v.
Commissioner, 97 T. C. 496, 509 (1991);
Northern Natural Gas Co. v.
O'Malley, 277 F.2d
128, 139 (CA8 1960) (concurring opinion).
The Eighth Circuit has considered a factual situation nearly
identical to the case now before us. In
Donrey, Inc. v.
United States, 809 F.2d
534 (1987), the taxpayer sought to depreciate the subscription
list of a newspaper it had purchased as a going concern. The
taxpayer asserted that the subscription list was not simply a list
of customers but "a machine to generate advertising revenue."
Id., at 536. There was expert testimony that the value of
the subscription list was "the present value of the difference in
advertising revenues generated by the subscription list as compared
to the revenues of an equivalent paper without a subscription
list."
Ibid. A jury found that the list had a limited useful
life, the duration of which could be ascertained with reasonable
accuracy; that the useful life was 23 years; and that it had an
ascertainable value of $559,406 separate and distinct from
goodwill. The District Court denied a motion for judgment
notwithstanding the verdict after concluding that, although
reasonable minds could have differed as to the correct result,
there was evidence from which the jury could properly find for the
taxpayer. The Court of Appeals implicitly rejected the Government's
argument that the subscription list was necessarily inseparable
from the value of goodwill when it deferred to the jury's finding
that the subscription list was depreciable because it had a
determinable useful life and an ascertainable value.
564
564 NEWARK MORNING LEDGER CO.
v. UNITED STATES
V A
Although acknowledging the "analytic force" of cases such as
those discussed above, the Court of Appeals in the present case
characterized them as "no more than a minority strand amid the
phalanx of cases" that have adopted the Government's position on
the meaning of goodwill. 945 F. 2d, at 565.12 "In any case,
consistent with the prevailing case law, we believe that the [IRS]
is correct in asserting that, for tax purposes, there are some
intangible assets which, notwithstanding that they have wasting
lives that can be estimated with reasonable accuracy and
ascertainable values, are nonetheless goodwill and nondepreciable."
Id., at 568. The Court of Appeals concluded further that in
"the context of the sale of a going concern, it is simply often too
difficult for the taxpayer and the court to separate the value of
the list qua list from the goodwill value of the customer
relationships/structure."
Ibid. We agree with that general
observation. It is often too difficult for taxpayers to separate
depreciable intangible assets from goodwill. But sometimes they
manage to do it. And whether or not they have been successful in
any particular case is a question of fact.
The Government concedes: "The premise of the regulatory
prohibition against the depreciation of goodwill is that, like
stock in a corporation, a work of art, or raw land, good-
12 At least one commentator has taken issue with the Court of
Appeals' characterization of the recent cases as nothing but a
"minority strand." See Avi-Yonah, Newark Morning Ledger: A Threat
to the Amortizability of Acquired Intangibles, 55 Tax Notes 981,
984 (1992) (of the 14 cases cited by the Third Circuit that were
decided after
Houston Chronicle in 1973, the IRS has
prevailed in only 6 of them; "hardly an 'overwhelming weight of
authority' in the IRS' favor, especially given that two of the IRS
victories, but none of the taxpayers,' were only at the district
court level"). Regardless of whether the cases discussed in Part
IV,
supra, are characterized as a "minority strand" or as a
"modern trend," we find their reasoning and approach
persuasive.
565
will has no determinate useful life of specific duration." Brief
for United States 13. See also
Richard S.
Miller
&
Sons, Inc. v.
United States, 210 Ct. Cl., at
437, 537 F. 2d, at 450 ("Goodwill is a concept that embraces many
intangible elements and is presumed to have a useful life of
indefinite duration"). The entire justification for refusing to
permit the depreciation of goodwill evaporates, however, when the
taxpayer demonstrates that the asset in question wastes over an
ascertainable period of time. It is more faithful to the purposes
of the Code to allow the depreciation deduction under these
circumstances, for "the Code endeavors to match expenses with the
revenues of the taxable period to which they are properly
attributable, thereby resulting in a more accurate calculation of
net income for tax purposes,"
INDOPCO, Inc. v.
Commissioner, 503 U. S. 79, 84
(1992).13
In the case that first established the principle that goodwill
was not depreciable, the Eighth Circuit recognized that the reason
for treating goodwill differently was simple and direct: "'As good
will does not suffer wear and tear, does not become obsolescent, is
not used up in the operation of the business, depreciation, as
such, cannot be charged against it.'''
Red Wing Malting Co.
v.
Willcuts, 15 F.2d 626, 633 (1926), cert. denied, 273 U.
S. 763 (1927). See also 5 J. Mer-
13 The dissent suggests that we are usurping the proper role of
Congress by seeking to "modify the
per se ban on
depreciating goodwill,"
post, at 582, n. 10. But we are
doing nothing of the kind. We simply have determined that, in light
of the factual record in this case, the "paid subscribers" asset is
depreciable. The dissent's mistake is to assume that because the
"paid subscribers" asset looks and smells like the "expectancy of
continued patronage," it is,
ipso facto, nondepreciable. In
our view, however, whether or not an asset is depreciable is not a
question to be settled by definition. "Goodwill" remains
nondepreciable under applicable regulations, and we do not purport
to change that fact. In interpreting those regulations, however, we
have concluded that because the "paid subscribers" is an asset
found to have a limited useful life and an ascertainable value
which may be determined with reasonable accuracy, it is
depreciable. By definition, therefore, it is not "goodwill."
566
566 NEWARK MORNING LEDGER CO.
v. UNITED STATES
tens, Law of Federal Income Taxation § 23A.01, p. 7 (1990)
("Goodwill is not amortizable intangible property
because
its useful life cannot be ascertained with reasonable accuracy"
(emphasis added)). It must follow that if a taxpayer can prove with
reasonable accuracy that an asset used in the trade or business or
held for the production of income has a value that wastes over an
ascertainable period of time, that asset is depreciable under §
167, regardless of the fact that its value is related to the
expectancy of continued patronage. The significant question for
purposes of depreciation is not whether the asset falls "within the
core of the concept of goodwill," Brief for United States 19, but
whether the asset is capable of being valued and whether that value
diminishes over time. In a different context, the IRS itself
succinctly articulated the relevant principle: "Whether or not an
intangible asset, or a tangible asset, is depreciable for Federal
income tax purposes depends upon the determination that the asset
is actually exhausting, and that such exhaustion is susceptible of
measurement." Rev. Rul. 68-483, 1968-2 Cum. Bull. 91-92.
B
Although we now hold that a taxpayer able to prove that a
particular asset can be valued and that it has a limited useful
life may depreciate its value over its useful life regardless of
how much the asset appears to reflect the expectancy of continued
patronage, we do not mean to imply that the taxpayer's burden of
proof is insignificant. On the contrary, that burden often will
prove too great to bear. See,
e. g., Brief for Coopers &
Lybrand as
Amicus Curiae 11 ("For example, customer
relationships arising from newsstand sales
cannot be
specifically identified. In [our] experience, customers were
identified but their purchases were too sporadic and unpredictable
to reasonably ascertain either the
567
duration of the relationships or the value of the relationships
(based on their net income stream)" (emphasis in original)).
Petitioner's burden in this case was made significantly
lighter by virtue of the Government's litigation strategy:
"[B]ecause of the stipulation reached by the parties, Morning
Ledger need not prove either the specific usefullives of the paid
subscribers of the Booth newspapers as of May 31, 1977, or that Dr.
Glasser [its statistical expert] has correctly estimated those
lives. In light of the stipulation, [the Government's] argument
with regard to Dr. Glasser's estimation of the specific useful
lives of the Booth subscribers is wholly irrelevant. Instead, Dr.
Glasser's testimony establishes that qualified experts could
estimate with reasonable accuracy the remaining useful lives of the
paid subscribers of the Booth newspapers as of May 31, 1977." 734
F. Supp., at 181.
Petitioner also proved to the satisfaction of the District Court
that the "paid subscribers" asset was not selfregenerating, thereby
distinguishing it for purposes of applying the mass-asset rule:
"[T]here is no automatic replacement for a subscriber who
terminates his or her subscription. Although the total number of
subscribers may have or has remained relatively constant, the
individual subscribers will not and have not remained the same, and
those that mayor have discontinued their subscriptions can be or
have been replaced only through the substantial efforts of the
Booth newspapers." Id., at 180.
The 460,000 "paid subscribers" constituted a finite set of
subscriptions, existing on a particular date-May 31, 1977. The
asset was not composed of constantly fluctuating components;
rather, it consisted of identifiable subscriptions each
568
568 NEWARK MORNING LEDGER CO.
v. UNITED STATES
of which had a limited useful life that could be estimated with
reasonable accuracy according to generally accepted statistical
principles. Petitioner proved as a matter of fact that the value of
the "paid subscribers" diminished over an ascertainable period of
time.14
C
Petitioner estimated the fair market value of the "paid
subscribers" at approximately $67.8 million. This figure was found
by computing the present value of the after-tax subscription
revenues to be derived from the "paid subscribers," less the cost
of collecting those revenues, and adding the present value of the
tax savings resulting from the depreciation of the "paid
subscribers." As the District Court explained, the taxpayer's
experts "utilized this method because they each independently
concluded that this method best determined the additional value of
the Booth newspapers attributable to the existence of the paid
subscribers as of May 31, 1977, and, thus, the fair market value of
those subscribers."
Id., at 183. The Government presented no
evidence challenging the accuracy of this methodology. It
14 The dissent spends a substantial amount of time worrying
about the sufficiency of petitioner's evidence. See
post, at
576-582. The problem with petitioner's expert, according to the
dissent, is that he predicted only how long a subscriber is likely
to subscribe, and this "tells us nothing about how long
date-of-sale subscriber habit or inertia will remain a cause of
predicted subscriber faithfulness."
Post, at 581. The
dissent concludes that "Ledger's expert on his own terms has not
even claimed to make the showing of definite duration necessary to
depreciate an asset under § 167(a)."
Post, at 582. We have
little doubt that had the Government presented credible evidence
challenging the relevance of this testimony, the District Court
would have had a more difficult time deciding this case. As it
happened, however, petitioner's evidence of the useful life of the
"paid subscribers" was the only evidence the District Court had
before it. The dissent skillfully demonstrates certain
vulnerabilities in petitioner's proof, but the Government chose,
rather, to rest its entire case on a legal argument that we now
reject. This case was lost at trial.
569
took the view that the only value attributable to the "paid
subscribers" was equivalent to the cost of generating a similar
list of new subscribers, and it estimated that cost to be
approximately $3 million. The Court of Appeals agreed with the
Government that this "cost approach" was the only appropriate
method for valuing the list of subscribers. "The fact is that, when
employed in the context of the sale of an ongoing concern, the
income approach to valuing a list of customers inherently includes
much or all of the value of the expectancy that those customers
will continue their patronage-i. e., the goodwill of the acquired
concern." 945 F. 2d, at 568.
Both the Government and the Court of Appeals mischaracterized
the asset at issue as a mere list of names and addresses. The
uncontroverted evidence presented at trial revealed that the "paid
subscribers" had substantial value over and above that of a mere
list of customers. App. 67 (Price Waterhouse's Fair Market Value
Study of Paid Newspaper Subscribers to Booth Newspapers as of May
31, 1977); id., at 108-111 (testimony of Roger J. Grabowski,
Principal and National Director, Price Waterhouse Valuation
Services). These subscribers were "seasoned"; they had subscribed
to the paper for lengthy periods of time and represented a reliable
and measurable source of revenue. In contrast to new subscribers,
who have no subscription history and who might not last beyond the
expiration of some promotional incentive, the "paid subscribers" at
issue here provided a regular and predictable source of income over
an estimable period of time. The cost of generating a list of
new subscribers is irrelevant, for it represents the value
of an entirely different asset. We agree with the District Court
when it concluded:
"Although it was possible to estimate the direct cost of
soliciting additional subscribers to the Booth newspapers, those
subscribers if obtained were not and would not have been
comparable, in terms of life characteris-
570
570 NEWARK MORNING LEDGER CO.
v. UNITED STATES
tics or value, to the paid subscribers of the Booth newspapers
as of May 31, 1977 .... The cost of generating such marginal
subscribers would not reflect the fair market value of the existing
subscribers of the Booth newspapers as of May 31, 1977." 734 F.
Supp., at 181.
Because it continued to insist that petitioner had used the
wrong valuation methodology, the Government failed to offer any
evidence to challenge the accuracy of petitioner's application of
the "income approach." The District Court found that the aggregate
fair market value of the "paid subscribers" of the Booth newspapers
as of May 31, 1977-i.
e., "the price at which the asset
would change hands between a hypothetical willing buyer and willing
seller, neither being under any compulsion to buy or sell, both
parties having reasonable knowledge of relevant facts," id., at
185-was $67,773,000, with a corresponding adjusted income tax basis
of $71,201,395. Petitioner was entitled to depreciate this adjusted
basis using a straight-line method over the stipulated useful
lives.
VI
Petitioner has borne successfully its substantial burden of
proving that "paid subscribers" constitutes an intangible asset
with an ascertainable value and a limited useful life, the duration
of which can be ascertained with reasonable accuracy. It has proved
that the asset is not self-regenerating but rather wastes as the
finite number of component subscriptions are canceled over a
reasonably predictable period of time. The relationship this asset
may have to the expectancy of continued patronage is irrelevant,
for it satisfies all the necessary conditions to qualify for the
depreciation allowance under § 167 of the Code.
The judgment of the Court of Appeals is reversed, and the case
is remanded for further proceedings consistent with this
opinion.
It is so ordered.
571
JUSTICE SOUTER, with whom THE CHIEF JUSTICE, JusTICE WHITE, and
JUSTICE SCALIA join, dissenting.
Newark Morning Ledger seeks a depreciation 1 deduction under 26
U. S. C. § 167(a) for an intangible asset it variously refers to as
"paid subscribers," see Brief for Petitioner 4-5, or "subscriber
relationships," see Tr. of Oral Arg. 3. The Court of Appeals
rejected Ledger's claim on the authority of a Treasury regulation
providing (a) that an intangible asset may be depreciated only if
it has a limited useful life "the length of which can be estimated
with reasonable accuracy," and (b) that "[n]o deduction for
depreciation is allowable with respect to goodwill." 26 CFR §
1.167(a)-3 (1992); see
945 F.2d
555, 558, 567-569 (CA3 1991). Ledger claims the regulation
raises no bar to a deduction, arguing that (1) the asset is not
goodwill, because (2) it has a limited useful life actually
estimated with reasonable accuracy. Ledger is wrong on both counts.
Ledger's asset is unmistakably a direct measurement of goodwill,
and Ledger's expert testimony failed to show any particular
lifespan for the goodwill Ledger acquired.
I
When The Herald Company (now merged with Newark Morning Ledger)
bought and liquidated the stock of Booth Newspapers, Inc., it
allocated $67.8 million of the stock's adjusted basis to an asset
called "paid subscribers." Although, as will appear, this label is
misdescriptive, it need not confuse anyone about the true nature of
the asset, since Ledger has explained clearly how it determined the
asset's value. Ledger got to the $67.8 million figure by predicting
the fu-
1 Black's Law Dictionary tells us that intangible assets are
amortized, while tangible assets are depreciated. Black's Law
Dictionary 83, 441 (6th ed. 1990); see also Gregorcich,
Amortization of Intangibles: A Reassessment of the Tax Treatment of
Purchased Goodwill, 28 Tax Law. 251, 253 (1975) ("Amortization is
the commonly accepted way of referring to depreciation of
intangible property"). The statute and the regulations, however,
use only the term depreciation.
572
572 NEWARK MORNING LEDGER CO.
v. UNITED STATES
SOUTER, J., dissenting
ture net revenues to be generated by the 460,000 people who
subscribed to the eight Booth newspapers as of the date of sale,
May 31, 1977. Because these customers had neither paid in advance
nor agreed to subscribe for any set term, see Brief for Petitioner
4, n. 5;
ante, at 550, n. 4, they were merely at-will
subscribers; the value of their expected future custom was
capitalized as the asset Ledger seeks to depreciate.
However much Ledger claims this asset to be something different
from "goodwill," the settled meaning of the term is flatly at odds
with Ledger's contention. Since the days of Justice Story, we have
understood the concept of "goodwill" to be anchored in the
patronage a business receives from "constant or habitual"
customers. See,
e. g., Metropolitan Bank v.
St. Louis
Dispatch Co., 149
U. S. 436, 446 (1893);
Des Moines Gas Co. v.
Des
Moines, 238 U. S.
153 (1915); see also
Cruttwell v.
Lye, 17 Yes.
Jr. 335, 346, 34 Eng. Rep. 129, 134 (Ch. 1810) (opinion of Lord
Eldon) (goodwill is "nothing more than the probability, that the
old customers will resort to the old place"). Although this Court
has not had occasion to provide a precise definition of the term as
it appears in the depreciation regulation, the Courts of Appeals
have consistently held that "goodwill," in this context, refers to
"the expectancy of continued patronage" from existing customers or,
alternatively, to the prospect that "the old customers will resort
to the old place." See,
e. g., Winn-Dixie Montgomery, Inc.
v.
United States, 444 F.2d
677, 681 (CA5 1971);
Commissioner v.
Seaboard Finance
Co., 367 F.2d
646, 649 (CA9 1966);
Boe v.
Commissioner,
307 F.2d
339, 343 (CA9
1962); Dodge Brothers, Inc. v.
United
States, 118 F.2d 95, 101 (CA4 1941); see also
Golden State
Towel &
Linen Service, Ltd. v.
United States,
179 Ct. Cl. 300, 305-309,
373 F.2d
938, 941-943 (1967);
Karan v.
Commissioner,
319 F.2d
303, 306 (CA7 1963) (goodwill denotes an expectancy that a
customer relationship will continue "without contractual
compulsion"). Thus, the Government justifiably concludes that
573
"goodwill," as used in its own regulation, refers to the
expectation of continued patronage by existing customers. See Brief
for United States 16-19.
Under this accepted definition of "goodwill," there can be no
doubt that the asset Ledger calls "paid subscribers" or "subscriber
relationships" is simply the goodwill associated with those
subscribers. Once this is clear, it becomes equally clear that
Ledger should lose, since the intangible asset regulation expressly
and categorically bars depreciation of goodwill, and courts have
uniformly relied on that regulation's plain language to conclude
that goodwill is nondepreciable as a matter of law. See
Houston
Chronicle Publishing Co. v.
United States, 481 F.2d
1240, 1247 (CA5 1973) (the proposition that goodwill is
nondepreciable as a matter of law "is so well settled that the only
question litigated in recent years regarding this area of the law
is whether a particular asset is 'goodwill' "), cert. denied, 414
U. S. 1129 (1974); see also
Donrey, Inc. v.
United
States, 809 F. 2d 534, 536 (CA8 1987) (goodwill "is ineligible
per se for the depreciation deduction");
Richard S.
Miller &
Sons, Inc. v.
United States, 210
Ct. Cl. 431, 437,
537 F.2d
446, 450 (1976) ("the presumption that [goodwill] is a
nondepreciable capital asset is conclusive");
Boe v.
Commissioner, supra, at 343 ("good will is not a depreciable
asset").
II
Ledger tries to slip out of this predicament by two separate
steps. It argues first that the Court ought to adopt a new
definition of "goodwill" that would not cover any expectation of
future custom with a lifespan subject to definite advance estimate;
then it claims that the asset here falls outside the new definition
because Ledger's expert has predicted the length of the asset's
wasting life with reasonable accuracy. See Brief for Petitioner
12-13. The Court makes a serious mistake in taking the first step;
Ledger should lose
574
574 NEWARK MORNING LEDGER CO.
v. UNITED STATES
SOUTER, J., dissenting
in any event, however, since its expert has failed to furnish
the basis for taking the second.
A
Ledger would have us scrap the accepted and substantive
definition of "goodwill" as an expectation of continued patronage,
in favor of a concept of goodwill as a residual asset of ineffable
quality, whose existence and value would be represented by any
portion of a business's purchase price not attributable to
identifiable assets with determinate lives. Goodwill would shrink
to an accounting leftover. See id., at 19, 29-30 (relying on
accounting standards).
In accommodating Ledger on this point, see
ante, at 565,
n. 13, the Court abandons the settled construction of a regulation
more than 65 years old,2 see T. D. 4055, VI-2 Cum.
2 The current intangible asset regulation can be traced back to
Treasury Regulation 45, issued in 1919, which provided that there
could be no deduction "in respect of good will" under the general
depreciation provision of the Revenue Act of 1918 because goodwill
was an example of an asset that did not have a useful life
"definitely limited in duration." T. D. 2831, 21 Treas. Dec. 214,
Art. 163. The Commissioner dropped the reference to goodwill for a
few years, in response to attempts by distillers and brewers to
depreciate goodwill made obsolete by the adoption of the Eighteenth
Amendment. See T. D. 2929, 1 Cum. Bull. 133 (1919); see also T. D.
3146,23 Treas. Dec. 402, Art. 163 (1920) (reflecting this change).
The first Court of Appeals to address the subject, however, held
that goodwill could not be depreciated under the Revenue Act of
1918 because it was not susceptible to exhaustion or wear and tear,
as required by the statute.
Red Wing Malting Co. v.
Willcuts, 15 F.2d 626
(CA8 1926), cert. denied, 273
U. S. 763 (1927). Shortly after that decision, the Commissioner
amended the intangible asset regulation by adding the following
prohibition: "No deduction for depreciation, including
obsolescence, is allowable in respect of good will." T. D. 4055,
VI-2 Cum. Bull. 63 (1927). It has remained there ever since. See,
e. g., Treas. Regs. 77, Art. 203 (Revenue Act of 1932);
Treas. Regs. 86, Art. 23(l)-3 (Revenue Act of 1934); Treas. Regs.
94, Art. 23(l)-3 (Revenue Act of 1936); Treas. Regs. 103, §
19.23(l)-3 (Internal Revenue Code of 1939); 26 CFR § 1.167(a)-3
(1961) (Internal Revenue Code of 1954).
Although
Red Wing Malting provoked a Circuit split, this
Court resolved the conflict a few years later by deciding, in line
with the Commis-
575
Bull. 63 (1927), and repudiates the equally settled
interpretation of the corresponding section of the tax code itself.
We are, after all, dealing with a statute reenacted without
substantial change not less than six times since 1919, see Revenue
Act of 1918, § 234(a)(7), 40 Stat. 1078 (1919); Revenue Act of
1932, §23(k), 47 Stat. 181; Revenue Act of 1934,
§23(l), 48
Stat. 689; Revenue Act of 1936, §
23(l), 49 Stat. 1660;
Revenue Act of 1938, §
23(l), 52 Stat. 462; Internal Revenue
Code of 1939, §
23(l), 53 Stat. 14; Internal Revenue Code of
1954, § 167(a), 68A Stat. 51, and we may presume that Congress has
accepted the understanding set out in the cognate intangible asset
regulation and in the judicial decisions that have clarified that
regulation's terms.3
Lorillard v.
Pons, 434 U. S.
575, 580 (1978);
United States v.
Correll, 389 U. S. 299, 305-306
(1967);
Helvering v.
Winmill, 305 U. S. 79, 83 (1938).
The consequences, therefore, of acceding to Ledger's argument are
at once a rejection of statutory interpretation settled by Congress
itself through reenactment of the tax code and a further invasion
of the political domain to rewrite a Treasury regulation.4 See
Correll, supra, at 307 (this Court
sioner's amended regulation, that a brewery could not deduct for
the "exhaustion" or "obsolescence" of goodwill as a result of
Prohibition. See
Clarke v.
Haberle Crystal Springs
Brewing Co., 280
U. S. 384 (1930);
Renziehausen v.
Lucas, 280 U. S. 387 (1930); see
also
V. Loewers Gambrinus Brewery Co. v.
Anderson,
282 U. S. 638
(1931) (distinguishing
Haberle Springs and allowing a
brewery to claim a depreciation deduction for buildings made
obsolete by Prohibition).
3 Legislative materials indicate that Congress is, in fact,
aware of the accepted definition of "goodwill." See,
e. g.,
H. R. Conf. Rep. No. 100-495, p. 937 (1987) ("Goodwill has been
defined as the expectancy of continued patronage, for whatever
reason, or as the probability that old customers will resort to the
old place").
4 The majority discounts these consequences by claiming that the
utility of the accepted definition of "goodwill" is limited because
"[t]he value of every intangible asset is related, to a greater or
lesser degree, to the expectation that customers will continue
their patronage."
Ante, at 556. But the regulation does not
provide that every intangible asset related to goodwill is
nondepreciable; rather, it simply states that goodwill itself
is
576
576 NEWARK MORNING LEDGER CO.
v. UNITED STATES
SOUTER, J., dissenting
will defer to a tax regulation so long as it "implement[s] the
congressional mandate in some reasonable manner");
National
Muffler Dealers Assn., Inc. v.
United States, 440 U. S. 472,
477 (1979) (listing historical considerations that may give a
regulation "particular force"); see also
Chevron U. S.
A.
Inc. v.
Natural Resources Defense Council, Inc., 467 U.
S. 837, 843-845 (1984) (reasonable agency interpretations of
statutory provisions will be upheld).
I cannot deny, however, that the regulation would suffer real
internal tension between its specific, categorical treatment of
goodwill and its general analytical test (turning on the existence
of a limited life of ascertainable duration), if modern accounting
techniques were to develop a subtlety sufficient to make an
accurate estimate of goodwill's useful life. Fortunately or not,
however, the record in this case raises no such tension.
B
Even under Ledger's revision of the regulation, a depreciation
deduction would depend on showing the Booth newspapers' goodwill to
have a useful life both limited and measurable with some reasonable
degree of certainty. The further step needed for victory is thus
evidentiary in nature, and
nondepreciable. Subject to this prohibition, the law concerning
the depreciation of intangible assets related to goodwill has
developed on a caseby-case basis, and the Government has accepted
some of the distinctions that courts have drawn, including the
principle that customer lists sold separately from a going business
may be depreciable. See Brief for United States 36, n. 34; Rev.
Rul. 74-456, 1974-2 Cum. Bull. 65, 66 (modifying earlier rulings
"to remove any implication that customer and subscription lists,
location contracts, insurance expirations, etc., are, as a matter
of law, indistinguishable from goodwill"). Such matters are not at
issue in this case, however, because the asset that Ledger seeks to
depreciate is indistinguishable from goodwill. See
945 F.2d
555, 568 (CA3 1991) (Newark Morning Ledger did not attempt, in
this case, to claim a separate depreciation allowance for the
subscriber lists it acquired).
577
Ledger's success or failure is solely a function of the
evidentiary record. Ledger has failed.
Here, it is helpful to recall one defining characteristic of the
only kind of asset Ledger claims to be entitled to depreciate: it
must be an asset acquired from Booth Newspapers, Inc., upon the
sale of its stock to Ledger's predecessor, Herald. If the goodwill
is to be depreciated at all, in other words, it must be goodwill
purchased, not goodwill attributable to anything occurring after
the purchase date. It must be an expectation of continued patronage
as it existed when the old Booth newspapers changed hands.
Assuming that there is a variety of goodwill that may be
separately identified as an asset on the date of sale, some
limitation on its useful life may be presumed. Whatever may be the
force of habit, or inertia, that is valued as goodwill attributable
to events occurring before the date of sale, the influence of those
events wanes over time, and so must the habit or inertia by which
that influence is made manifest and valued as goodwill. On the
outside, the economically inert subscribers will prove to be
physically mortal.5
5 While some courts have viewed goodwill as having an indefinite
useful life, others have concluded that although goodwill does
waste, its useful life cannot be determined with reasonable
accuracy. Compare,
e. g., Red Wing Malting, 15 F. 2d, at 633
(goodwill is not depreciable because it "does not suffer wear and
tear, does not become obsolescent, [and] is not used up in the
operation of the business");
Patterson v.
Commissioner, 810 F.2d
562, 569
(CA6 1987) (goodwill "does not waste");
Houston Chronicle Publishing Co. v.
United States,
481 F.2d
1240, 1248
(CA5 1973) (goodwill is "an ongoing asset
that fluctuates but does not necessarily diminish");
Landsberger v.
McLaughlin, 26 F.2d 77, 78
(CA9
1928) (goodwill is not subject to exhaustion, wear or tear), with,
e. g., Dodge Brothers, Inc. v.
United States, 118
F.2d 95, 100
(CA4 1941) (goodwill is not depreciable because
of "manifest difficulties" inherent in estimating its life span);
Illinois Cereal Mills, Inc. v.
Commissioner, 46 TCM
1001, 1023 (1983), , 83,469 P-H Memo TC (goodwill is not subject to
depreciation "because [its] useful life is not susceptible of
reasonable estimation").
578
578 NEWARK MORNING LEDGER CO.
v. UNITED STATES
SOUTER, J., dissenting
What the Government does not concede,6 however, and what Ledger
has not proven, is the duration of that date-ofsale influence and
consequent goodwill. Ledger, indeed, has not even purported to show
that. Instead, its expert has estimated the quite different periods
over which subscribers on the date of sale will continue to
subscribe to the various papers.7 In the District Court, Ledger
offered a single witness for its claim to have estimated the useful
life of each newspaper's "subscriber relationships" with reasonable
accuracy. Herald had originally hired that witness, Dr. Gerald
Glasser, to predict the average remaining lives of existing
subscriptions to the eight Booth newspapers. See App. in
6 In an effort to insulate the case from review, Ledger asserts
a concession by the Government below that the asset Ledger wants to
depreciate did have a limited useful life that was estimated with
reasonable accuracy. Brief for Petitioner 17, and n. 18. The
majority does not go quite so far when it observes that
"[p]etitioner's burden in this case was made significantly lighter
by virtue of the Government's litigation strategy."
Ante, at
567. In any event, the District Court's description of the
Government's strategy makes it clear that the Government has not
conceded this case away:
"The parties have agreed that, if the Court determines that the
paid subscribers constitute assets which were separate and apart
from goodwill and which can be valued separate and apart from
goodwill, and if the Court determines that the paid subscribers had
useful lives which can be estimated with reasonable accuracy, then
the paid subscribers of the Booth newspapers can be depreciated on
a straight-line basis over the ... useful lives [shown in the
accompanying chart]." 734 F. Supp. 176, 180 (NJ 1990). Thus, the
factual concession by the Government came into play only after the
District Court rejected two crucial legal arguments: (1) the "paid
subscribers" asset is not an asset separate and distinct from
goodwill, and (2) the asset did not have a useful life that could
be estimated with reasonable accuracy. I find, for the reasons set
out in the text, that the District Court erred in rejecting each
argument. I also note that a similar litigating strategy did not
prevent the Government from prevailing in
Haberle Springs.
See 280 U. S., at 386 ("The amount of the deduction to be made is
agreed upon if any deduction is to be allowed").
7 The estimates vary from paper to paper, but I refer to them in
the singular, consistently with Ledger's claim to a singular
"asset."
579
No. 90-5637 (CA3), p. 1010. Dr. Glasser testified that he first
compiled statistics on the length of time existing subscribers had
received each newspaper, by directing a survey that asked a
selection of those subscribers one central question: "For how long
has the [newspaper] been delivered to your present address?"
Id., at 157, 166, 182-183, 1012. He then made a crucial
assumption, that the total number of subscriptions to each
newspaper would remain stable over time.
Id., at 170-172,
187, 194-195. Finally, by subjecting the survey results to
techniques of statistical analysis based on this crucial
assumption, Dr. Glasser produced a series of figures that, he said,
represented the average remaining life of existing subscriptions to
each newspaper. Solely on the basis of Dr. Glasser's testimony, the
District Court held that "the remaining useful lives of the paid
subscribers of the Booth newspapers as of May 31, 1977, could be
estimated with reasonable accuracy." 734 F. Supp. 176, 181 (NJ
1990).
Dr. Glasser's assumption is the key not only to the results he
derived, but to the irrelevance of those results to the predictable
life on the date of sale of the goodwill (or "paid subscribers")
actually purchased from Booth. The key, in turn, to that
irrelevance lies not in Dr. Glasser's explicit statement of his
assumption, but in what the assumption itself presupposes. Since
the District Court was not concerned with predicting the value that
any given Booth newspaper might have in the future (as distinct
from predicting the useful life of pre-existing subscriber
goodwill), an assumption that the level of a paper's subscriptions
would remain constant was useful only insofar as it had a bearing
on predicting the behavior of the old subscribers. For this
purpose, assuming a constant subscription level was a way of
supposing that a given newspaper would remain as attractive to
subscribers in the future as it had been during the period prior to
the newspaper's sale. The assumption was thus a surrogate for the
supposition that the new owners would not rock the boat and would
succeed in acting intelligently to keep the paper,
580
580 NEWARK MORNING LEDGER CO.
v. UNITED STATES
SOUTER, J., dissenting
if not exactly as it had always been, at least as relatively
attractive as it had been in relation to its various competitors on
the date of sale.
What is significant about this assumption for present purposes
is not its doubtful validity,S but the very fact of its being an
assumption about the behavior of the paper's man-
8No matter how much presale satisfaction subscribers have, it
seems intuitively obvious that a high enough level of postsale
dissatisfaction with a paper would drive subscribers away, as might
other postsale events, such as successful competition and
demographic changes. The District Court, relying on Ledger's own
witnesses, noted several of the many possible reasons that lead
subscribers to cancel their subscriptions:
"Subscribers are lost because of death, relocation, lack of
reader time or interest, changing lifestyles, and other factors
that are beyond the control of the newspapers. Also, subscribers
are lost due to dissatisfaction with the product or service and for
various other reasons, including competition from other media
sources, such as radio, television, magazines and other
paid-circulation and/or free-distribution newspapers." 734 F.
Supp., at 180.
Ledger's statistician, in effect, made an assumption regarding
Ledger's ability to manage the innumerable factors that keep
current customers coming back for more, as well as its ability to
attract new customers as the old ones leave. Such discretionary
decisions may turn out to be foolish or wise: if foolish, the
subscriber base as of the date of sale could be destroyed rapidly;
if wise, it would be maintained. The simple recognition that some
papers increase their subscriber base over time, while others lose
it (and some actually fold), underscores the arbitrariness of the
assumption made by Ledger's expert witness. In any event, Ledger
has provided no evidence to support this assumption.
I do not, of course, suggest that a buyer's treatment of a
depreciable asset does not affect the asset's actual useful life. A
machine's less durable parts must be replaced; it must be oiled,
kept from the weather, given fuel, and so on. But there is an
identifiable object that endures through time and does not just
disappear from inadequate maintenance. Goodwill, on the other hand,
can be destroyed rapidly by everything from the nasty personality
of a new proprietor to distaste for his publishing policies.
Prediction of goodwill's endurance must always be fraught with a
relatively high degree of chance, for discretionary decisions,
rather than just ministerial acts (like oiling the gears), must be
taken into account.
581
agement after the date of sale. And since this assumption is the
basis for a prediction about the life of subscriptions existing on
the date of sale, that prediction is by definition not simply about
the duration of subscriber goodwill (or habit or inertia) as it
existed on the date the paper changed hands. On the contrary, it is
a prediction about the combined effect of presale goodwill and
postsale satisfaction with the paper as Ledger presumably continues
to produce it. Nowhere in Dr. Glasser's testimony do we find an
opinion that the presale goodwill has a life coextensive with the
predicted life of the subscriptions, and nowhere do we find an
opinion about the point at which the old goodwill finally peters
out as a measurable, and hence valuable, influence on the old
subscribers' behavior. It is not, of course, important for present
purposes whether such an opinion would be possible, though I am
skeptical that it would be.9 But it is important that no such
evidence exists in this case. In place of evidence showing the
depreciable lifespan of date-of-sale goodwill with a reasonable
degree of accuracy, Ledger has presented evidence of how long an
old subscriber will remain one, on the assumption that the
subscriber's prior satisfaction is confirmed, and (for all we know)
replaced, with satisfaction resulting from Ledger's publishing
performance over the years following its acquisition of a given
newspaper.
This, of course, misses the point entirely. In telling us merely
how long a subscriber is likely to subscribe, Ledger tells us
nothing about how long date-of-sale subscriber habit or inertia
will remain a cause of predicted subscriber faithfulness. Since,
however, only the date-of-sale probability of faithfulness could be
entitled to depreciation as a pur-
9 Goodwill results from such a mix of influences over time that
it seems unlikely that the skein of them all could be untangled to
identify the degree to which even present custom results from the
goodwill purchased, as distinct from goodwill subsequently
cultivated. Ledger has not even attempted such a
disentanglement.
582
582 NEWARK MORNING LEDGER CO.
v. UNITED STATES
SOUTER, J., dissenting
chased asset, Ledger's expert on his own terms has not even
claimed to make the showing of definite duration necessary to
depreciate an asset under § 167(a). Indeed, once duration of
subscriptions and purchased goodwill are seen to be conceptually
different, Ledger's claim to have satisfied the requirements for
depreciating an intangible asset simply vanishes. Ledger's entire
case thus rests on the confusion of subscription duration with
goodwill on the date of sale, and only that confusion could suggest
that Ledger has shouldered its burden of estimating the lifespan of
the asset purchased from Booth. It is not surprising, then, that
the Commissioner has stood by her categorical judgment that
goodwill is not depreciable, that Congress has not disturbed this
judgment,lO and that lower courts have consistently agreed that
goodwill is nondepreciable as a matter of law.
III
Because the Court of Appeals correctly reversed on the basis
that Newark Morning Ledger failed to demonstrate that the asset it
sought to depreciate was not goodwill, which
10 The majority claims its approach to be "more faithful to the
purposes of the Code," in allowing taxpayers to make a better match
of expenses with revenues.
Ante, at 565 (citing
INDOPCO,
Inc. v.
Commissioner, 503 U. S. 79 (1992)). Such policy
initiatives are properly left to Congress, which can modify the
per se ban on depreciating goodwill at any time. Despite
several recent opportunities to do so, Congress has so far refused
to alter the tax treatment of goodwill and other intangibles. See,
e. g., H. R. 11, 102d Cong., 2d Sess., § 4501 (1992) (as
returned from conference, Oct. 5, 1992) (proposing amortization of
purchased goodwill and certain other intangible assets over a
14-year period); H. R. 4210, 102d Cong., 2d Sess., §4501 (1992) (as
returned from conference, Mar. 20, 1992) (same); H. R. 3040, 102d
Cong., 2d Sess., § 302 (1992) (as returned from the Committee on
Finance, June 19, 1992) (16-year period); H. R. 3035, 102d Cong.,
1st Sess., § 1 (1991) (as introduced, July 25, 1991) (14-year
period); see also H. Res. 292, 102d Cong., 1st Sess. (1991)
(adopted Nov. 26, 1991, 137 Congo Rec. H11317-H11318) (concerning
the effective date of "any legislation enacted with respect to
amortization of goodwill").
583
is nondepreciable as a matter of law, see 945 F. 2d, at 568, I
would affirm the judgment below. From the Court's holding to the
contrary, I respectfully dissent.
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