Amicus Curiae Brief — Newark Morning Ledger Co. v. United States

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No. 91-1135

IN THE

Supreme Court of the United Stat

October Term, 1991

NEWARK MORNING LEDGER CO.,

as successor (o the Herald Company,

Petitioner,

UNITED STATES OF AMERICA,

Respondent.

On Petition For A Wri: Of Certiorari To The United States

Court of Appeals for the Third Circuit

JOINT BRIEF OF AMICI CLURJAE PENNSYLVANIA PETROLEUM

ASSOCIATION AND FUEL MERCHANTS ASSOCIATION OF NEW

JERSEY IN SUPPORT OF PETITION

SAMUEL H. BORENKIND*

MORRIS A. MONDSCHEIN

BORENKIND & MONDSCHEIN

69 East 42nd Street

New York, NY 10165

(212) 697-1787

*Counsel of Record

February 6, 1992

Dick Bailey Appellate P- r-«r > Tel.: 1-800-564-4918 <

(212) 608-7666 — (71§ +~-S358 — (516) 222-2470 — (914) 682-0848

Fes Namber: (718) 273-8031

TABLE OF CONTENTS

I oc cssocenncee 2

Argument

I—The Third Circuit’s Decision Disregards Almost

Twenty Years Of Judicial Precedent As Well As The

Internal Revenue Service’s Own Interpretation Regar-

ding Depreciation Of Intangible Assets And Requires

a eoneieddeunenanences 3

II—Unless Remedied By This Court, The Third Cir-

cuit’s Decision Will Have A Significant Adverse Ef-

fect On The Value Of A Fuel Oil Customer List ............ 8

I1I—The Third Circuit’s Decision Is In Conflict With

Other Circuits, Undermining The Uniform And Fair

Administration Of Federal Taxation .................sssc00- 12

EESTI AES Yager ari traer vss toe aE 14

TABLE OF AUTHORITIES

Cases Pages

ABCO Oil Corp. v. Commissioner, 46 T.C.M.

STII sisi i uiasinineuanienagtaniibennesinnnsesenessess 10

Anchor Cleaning Service, Inc. v. Commissioner, 22

Se IT i initidecncsiiauiiiidiesaneiniinnademeneneTerneees 5

Citizens and Southern Corporation and Subsidiaries

v. Commissioner, 91 T.C. 463 (1988), aff'd per

curiam, 900 F.2d 266 (11th Cir. 1990)................c cece eee 8

Commissioner v. Seaboard Finance Co., 367 F.2d 646

(Stta Cir. 19GB) ...0ccccccescectcesceccsscsscnsnuanenennnnnnennannn 4

Donrey, Inc. v. United States, 809 F.2d 534 (8th Cir.

Holden Fuel Oil Co. v. Commissioner, 479 F.2d 613

(Gthe Cir. 1G78)..0000ccccccsecccecceccnsnuenuennnnnnnannn 6,9,13

Houston Chronicle Publishing Co. v. U.S., 481 F2d

1240 (Sth Cir. 1973), cert. denied, 414 U.S. 1129

(1974). ..000ccccccsceccssceccccecensneennennnnnnnnnnnnnnnnnEEE 3,4,13

Klein v. Commissioner, 372 F2d 161 (2d Cir. 1966)...... 4,5

L.A. Central Animal Hospital, Inc. v. Commis-

sioner, GB T.C. BED (IGT 7). .ccccccccccecsescsccuneueneeeeeeea 8

Manhattan Company of Virginia, 50 T.C.78 (1968) ....... 4

McCarthy v. United States, 807 F.2d 1306 (6th Cir.

1906) . ..0000000000000008000000ee000000nennnennnnnnnnnnnnnnnnnnnnnnEE 8

Panichi v. United States, 834 F2d 300 (2nd Cir. 1987).....8

Ralph W. Fullerton Co. v. United States, 550 F.2d

$48 (Sth Cie. 1977)....0cccccccccccscocesscsssnnneenennennnnnnnnnnn 8

Richard S. Miller & Sons, Inc. v. U.S., 557 F.2d 446

eme Swen cccccceccesesenesnesngeennnnnnnnnn 8

Thrifticheck Service Corporation v. Commissioner,

287 F.2d 1 (2d Cie. 1DGE) ..0cccccccocccuscoosnuneunnneeeenne 4,5

STATUTES AND REGULATIONS

ii iciccetcccccescncccoseceoocecececcocs 7

ici ccnccnccsccceecesesecsocceceocococs 3

ST) 8

Rev. Rul. 74-456, 1974-2 C.B. 65 ...........cccccceeeeees 6,8,13

EES OD 7

EE 7

IN THE

Supreme Court of the United States

October Term, 1991

NEWARK MORNING LEDGER CO.,

as successor to the Herald Company,

Petitioner,

Vv.

UNITED STATES OF AMERICA,

Respondent.

On Petition For A Writ Of Certiorari To The United States

Court of Appeals for the Third Circuit

JOINT BRIEF OF AMICI CURIAE PENNSYLVANIA

PETROLEUM ASSOCIATION AND FUEL

MERCHANTS ASSOCIATION OF NEW

JERSEY IN SUPPORT OF PETITION

This brief is submitted in support of Appellant

Newark Morning Ledger Co’s. Petition for a Writ of Cer-

tiorari to review the Third Circuit Court of Appeals deci-

sion (945 F.2d 555 (3rd Cir. 1991)) reversing the decision

of the United States District Court for the District of New

Jersey (734 F.Supp. 176 (D.N.J. 1990)) in favor of Ap-

pellant.

INTERESTS OF AMICI CURIAE*

The opinion of the Third Circuit Court of Appeals

presents issues of major significance to petroleum jobbers

and dealers within the jurisdiction of the Third Circuit.

The Pennsylvania Petroleum Association (‘‘PPA’’)

and the Fuel Merchants Association of New Jersey

(‘“‘“FMANJ’’) are both regional trade associations whose

active members are not producers, refiners or manufac-

turers of petroleum products, but independent business

entities each employing an average of more than 10 per-

sons. PPA has 580 active members and 333 associate

members and FMANJ has 480 active members. All of the

members of FMANJ and most of the active members of

PPA are engaged in the sale of home heating oil to

residential consumers.

In almost every case the Customer List of a retail fuel

oil dealer is its single most valuable asset. For the past

twenty years it has been universally recognized that the

purchaser of such a Customer List could amortize its value

over its useful life - the issues of value and useful life being

factual issues dependent on the particular facts and cir-

cumstances of each transaction. The decision of the Third

Circuit in the instant case disregards almost twenty years

of judicial precedent as well as the stated position of the

Internal Revenue Service as set forth in Rev. Rule 74-456.

The Circuit Court’s decision raises the spectre that

depreciation deductions heretofore allowed for two

decades to purchasers of retail fuel oil customer lists and

similar intangible assets acquired in the purchase of a go-

ing concern may be denied as a matter of law thus

eliminating the facts and circumstances test established by

both judicial precedent and the Internal Revenue Service’s

*Written consents as required by Rule 37 of the Supreme Court Rules

for the filing of this brief were obtained and are on file in the Clerk's

office. The decision below is reported at 945 F.2d 555.

own regulations and rulings. The effect will be devastating

to the petroleum dealers represented by PPA and FMANJ

as it will result in a-substantial decrease in the value of

each member’s Customer List by reason of the fact that a

purchaser may no longer be permitted to deduct the cost

of acquiring the same. The tax Reform Act of 1986 has

already dealt a servere blow to sellers of a retail fuel oil

business (as well as other small businesses) by eliminating

the ‘‘General Utilities’? doctrine formerly embodied in

I.R.C. §337 thus subjecting them to a double tax - at both

the corporate and shareholder levels whereas the former

tax could previously have been provided by compliance

with I.R.C. §337.

If this decision is permitted to stand, the small

businesses which comprise the active membership of PPA

and FMANJ may be rendered virtually unsaleable with the

result that the substantial tax revenues currently generated

by such transactions may evaporate.

ARGUMENT

THE THIRD CIRCUIT’S DECISION DISREGARDS

ALMOST TWENTY YEARS OF JUDICIAL PRECE-

DENT AS WELL AS THE INTERNAL REVENUE SER-

VICE’S OWN INTERPRETATION REGARDING

DEPRECIATION OF INTANGIBLE ASSSETS AND

REQUIRES REVIEW BY THIS COURT.

In addition to those reasons for granting ceriorari set

forth in Newark Morning Ledger Co’s. Petition, which are

hereby adopted, the Third Circuit’s opinion is, as a prac-

tical matter, a reincarnation of the ‘‘Mass Asset’’ rule

which was interred in Houston Chronicle Publishing Co.

v. U.S., 481 F.2d 1240 (Sth Cir. 1973), cert. denied, 414

U.S. 1129 (1974).

Prior to 1974 the Internal Revenue Service took the

position that intangible assets in the nature of customer

lists were not depreciable and the majority of the court

decisions prior to 1970 favored the government, although

the courts generally characterized the issue as factual, not

legal. Thrifticheck Service Corporation v. Commissioner,

287 F.2d 1 (2d Cir. 1961); Klein v. Commissioner, 372 F.

2d 161 (2d Cir. 1966).

However, starting with the decision of the Ninth Cir-

cuit Court of Appeals in Commissioner v. Seaboard

Finance Co. , 367 F.2d 646 (9th Cir. 1966), the courts, and

later the Internal Revenue Service, began to recognize that

in the context of modern business ‘‘...when lists are

bartered and sold as discrete vendible assets’’,' amor-

tizability of intangible assets is a factual question to be

determined in each case and further liberalized the eviden-

tiary burden on the taxpayers required to sustain the

deduction. See also Manahattan Company of Virginia, 50

T.C.78 (1968); Gov’t’s appeal to CA-4 dismissed (nolle

pros.), 12/9/68; Gov’t’s appeal to CA-DC dismissed

(nolle pros.) 1/27/69.

Houston Chronicle Publishing Co. v. U.S., 481 F.2d

1240 (Sth Cir. 1973), cert. denied, 414 U.S. 1129 (1974) in-

volved newspaper subscription lists purchased by Houston

Chronicle from a competitor which was ceasing business.

No allocation of the total purchase price was made prior

to the closing of the transaction which also involved the

acquisition of the printing plant, equipment, inve...ory

and other tangible assets of the competitor as well as a 10

year covenant not to compete. After the sale, the taxpayer

engaged an appraiser to evalute the acquired assets and the

subscription list was valued at $71,200.

The Court upheld the deduction emphasizing that the

1. Houston Chronicle Publishing Co. v. U.S., 485 F2d 1240 (Sth Cir.

1973), cert. denied, 414 U.S. 1129 (1974).

question of amoritizability is exclusively an issue of fact,

Stating as follows:

‘* Judicial tolerance compels us to say that many

jurists and scholars could diagnose tax non-

depreciability in the muscles and tendons of list tran-

sactions. We reject, however, the establishment of a

per se rule and a monolithic ‘‘mass asset’’ theory that

would amalgamate all subscriptions lists with good-

will.

‘*Our view -- that amortizability for tax purposes

must turn on factual bases -- is more in accord with

the realities of modern business technology in a day

when lists are bartered and sold as discrete vendible

assets. Extreme exactitude in ascertaining the dura-

tion of an asset is a paradigm that the law does not de-

mand. All that the law and regulations require is

reasonable accuracy in forecasiing the asset’s useful

life.’ (481 F.2d at pp 1253-4)

In arriving at its conclusion, the Court’s opinion

distinguishes the earlier ‘‘goodwill’’ and ‘‘mass asset’’

cases (including Klein, supra; Thrifticheck Service Cor-

poration v. Commissioner, supra; and Anchor Cleaning

Service, Inc. v. Commissioner, 22 T.C. 1029 (1954) as in-

volving evidentiary failure on the part of the taxpayer.

The opinion acknowledges that no depreciation

deduction is allowable with respect to an intangible asset

such as goodwill which does not have a limited useful life

and further recognizes that the ‘‘only question litigated in

recent years ... is whether a particular asset is ‘goodwill’ ’’.

The Court then reviewed the definition of ‘‘goodwill’’ for

tax purposes as follows:

** “T)he nature of goodwill...is the expectancy

that ‘the old customers will resort to the old place.’...

‘** *This Court has held that...goodwill is ac-

quired by the purchaser of a going concern where the

‘transfer enables the purchaser to step into the shoes

of the seller.” We have also said that goodwill is

transferred where, as here, the buyer continues the

seller’s business uninterrupted, using primarily the

seller’s employees, and utilizing the seller’s name.’’

[citations omitted] (Emphasis supplied) (481 F.2d at

p. 1247).

The Court also recognized that the threshold question

in determining the amortizability of a customer list (or any

intangible asset) is whether that asset can be shown to have

a limited useful life in the purchaser’s business. If a limited

useful life is established, then the asset cannot be goodwill

which, by definition, continues indefinitely.

In 1974, in response to the taxpayer victories in the

foregoing cases and others (including Holden Fuel Oil Co.

v. Commissioner, 479 F.2d 613 (6th Cir. 1973), discussed

infra) the Internal Revenue Service conceded in Rev. Rul.

74-456, 1974-2 C.B. 65, that customer lists, insurance ex-

pirations and similar intangible assets are not, as a matter

of law, indistinguishable from goodwill; rather the ques-

tion of amortizability is recognized to be a factual ques-

tion. Rev. Rul. 74-456 reads in part:

**Generally, customer and subscription lists,

location contracts, insurance expirations, etc., repre-

sent the customer structure of a business, their value

lasting until an indeterminate time in the future.

These lists, contracts, insurance expirations, etc., are

in the nature of goodwill or otherwise, have indeter-

minable lives and, therefore, are not subject to

depreciation. [citations omitted]

**However, if in an unusual case 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, a depreciation deduction is allowable.

See Manhattan Company of Virginia, 50 T.C. 78

(1968) acq., page 3, in which the court determined

that the trial record contained sufficient facts to per-

mit an allocation of the purchase price of customer

lists between depreciable and nondepreciable por-

tions.

**Rev. Rul. 65-175 and Rev. Rul. 65-180 are

modified to remove any implication that customer

and subscription lists, location contracts, insurance

expirations, etc., are, as a matter of law, in-

distinguishable from goodwill possessing no deter-

minable useful life. The depreciability of assets of this

nature is a factual question, the determination of

which rests on whether the taxpayer establishes that

the assets (1) have an ascertainable value separate and

distinct from goodwill, and {2) have a limited useful

life, the duration of which can be ascertained with

reasonable accuracy. No deduction is allowable mere-

ly because a basis has been estimated and the asset has

a limited useful life in the unsupported view of the

taxpayer. See Houston Chronicle Publishing Co. v.

United States, 73-2 U.S.T.C. 81,697 (Sth Cir. 1973);

Skilken v. Commissioner, 420 F.2d 266 (6th Cir.

1969) (Emphasis supplied)

Since 1974 and until the Third Circuit decision in this case

the Courts have been surprisingly consistent in upholding

amortization deductions under I.R.C. § 167(a) for intangi-

ble assets in the nature of customer lists. See Richard S.

Miller & Sons, Inc. v. U.S., 557 F.2d 446 (Ct. Cls. 1976);

L.A. Central Animal Hospital, Inc. v. Commissioner, 68

T.C. 269 (1977) (upholding amortization of Customer List

despite (i) purchase of business as a ‘‘going concern’’; (ii)

continued use of Seller’s name; and (iii) continued use of

Seller’s business location); Panichi v. United States, 834

F.2d 300 (2nd Cir. 1987); Donrey, Inc. v. United States,

809 F.2d 534 (8th Cir. 1987); McCarthy v. United States,

807 F.2d 1306 (6th Cir. 1986); Ralph W. Fullerton Co. v.

United States, 550 F.2d 548 (9th Cir. 1977); Citizens and

Southern Corporation and Subsidiaries v. Commissioner,

91 T.C. 463 (1988), aff'd per curiam, 900 F.2d 266 (11th

Cir. 1990).

From an examination of these cases, Rev. Rul 74-456

and Regs. § 1.167(a)-3, it is clear that (i) a Customer List is

not, as a matter of law, indistinguishable from goodwill;

(ii) the question of amortizability is a factual issue; and

(iii) a Customer List may be amortized if the taxpayer

establishes that the asset has (a) a limited useful life, the

duration of which can be ascertained with reasonable ac-

curacy, and (b) an ascertainable value separate and apart

from goodwill. Once it has been established that such an

asset has a limited useful life, it cannot be equated with

goodwill which, by definition, continues indefinitely.

UNLESS REMEDIED BY THIS COURT, THE THIRD

CIRCUIT’S DECISION WILL HAVE A SIGNIFICANT

ADVERSE EFFECT ON THE VALUE OF A FUEL OIL

CUSTOMER LIST.

As stated above, the single most valuable asset of a

retail fuel oil dealer is its Customer List which the decided

cases have consistentiy held to be depreciable wasting

assets.

In Holden Fuel Oil Company v. Commissioner, 479

F. 2d 613 (6th Cir. 1973), the Court of Appeals upheld the

amortizability of a retail fuel oil Customer List. After

stating the obvious - that the cost of an intangible asset

may be amortized if it can be established ‘‘that the asset is

of use in a business for only a limited period of time which

can be estimated with reasonable accuracy,’’ the Court

firmly rejected the government’s contention that the lists

were intangible assets in the nature of goodwill.

‘*The appellant’s first contention is that the lists

are not amortizable because they are intangible assets

in the nature of goodwill, and have no reasonably

ascertainable useful lives. The appellant argues that

the purchaser obtains not only a list of names, but

also obtains an established clientele and an ongoing

business relationship, the value of which fluctuates as

customers are dropped or acquired, and that

therefore, the lists have a business usefulness of a

limited time which is not reasonably ascertainable.

‘*‘We disagree. The appellee’s only guaranteed

acquisition from this contractual arrangement was

the list of names. Although Gulf did send a form let-

ter to all of the customers on the list informing them

that the appellee was now distributing Gulf Oil in the

area and solicited their business, these customers were

not obligated to purchase fuel oil from the appellee

because there had been no contract between Gulf and

its customers. The list contained over 5,000 potential

customers, but only 3,007 accounts were sold fuel oil

by the appellee during the fiscal year ended May 3',

1962. On May 31, 1968, only 1,577 customers were

still purchasing oil from the appellee. ~

**Since the appellee initially acquired a list of

5,199 names, and was supplying only 1,577 of them

with oil as of May 31, 1968, the lists were

demonstrably wasting assets. Furthermore, evidence

was introduced to show that the appellee would lose

approximately 10% of its customers each year. Trade

indicators calculated the life of a fuel oil account to

be from 8 to 10 years. Furthermore, the parties

stipulated that the appellee lost approximately 50%

of its total fuel oil deliveries initially acquired from

the list in a six year period following May 31, 1962,

the year that the contract price was determined. Upon

this evidence, the Tax Court determined that the list

acquired by the appellee had a limited life and that

life was reasonably ascertainable. This was in accor-

dance with the regulations which provide that an in-

tangible asset may be the subject of a depreciation

allowance if it is known from experience or other fac-

tors to be of use in the business for only a limited

period, the length of which can be estimated with

reasonable accuracy. Treas. Reg.§ 1.167(a)-3’’ (Em-

phasis supplied).

The recent case of ABCO Oil Corp. v. Commissioner,

46 T.C.M. (CCH) 343 (1990) involved the issue of whether

the purchaser of two retail fuel oil operations in Penn-

sylvania could depreciate the costs attributable to the

Customer Lists acquired together with other assets, in-

cluding ‘‘Goodwill.’’ -In upholding the depreciation

deduction, the Court stated that:

**A customer list is an intangible asset which may

be amortized if it has a useful business life of limited

duration, the length of which can be estimated with

reasonable accuracy. Goodwill, on the other hand,

does not have a limited useful business life and thus is

not amortizable. § 1.167(a)-3, Income Tax Regs....

‘*The determination as to whether a customer list

has value independent of good will and if so, the

amount of that value, is a question of fact. The

record herein clearly supports a finding, and we so

find, that both the Panczak and Flad customer lists

have independent value. Indeed, respondent’s expert

conceded such on the stand....

‘* [W]e believe petitioner, to a limited extent,

desired to preserve Panczak and Flad customer con-

tinuity. It would be naive for us to believe that peti-

tioner did not attempt to preserve the patronage of

the former customers of Panczak and Flad when it

notified the former customers of Panczak and Flad

that it had acquired the latter’s businesses and when it

kept the Panczak and Flad phone numbers and listed

them in the phone book. These actions obviously

were taken to maintain for petitioner the patronage of

the Panczak and Flad customers - and continued

customer patronage is the essence of goodwill. Accor-

dingly, we believe a portion of the amounts putatively

paid for the customer lists must be allocated to good-

will.

‘*Although a specific allocation in the purchase

agreement, or in the negotiations leading thereto,

may be the best evidence in determining the cost basis

of an asset, if such evidence is not available, then we

‘ must make such an allocation on other available

evidence. As is frequently the case, here the record is

less than desirable. Nonetheless, we are satisfied that

we can make an allocation between the customer lists

and goodwill. Based on the record before us, we con-

clude that 25 percent of the stated amount for the

customer lists is properly allocable to goodwill and

the remaining 75 percent of the stated amount is pro-

perly allocable to the customer lists....

‘*Having ascertained the cost bases for the

customer lists, we now turn to whether such lists have

a limited business life. We find that they do.

**In determining whether an intangible, such as a

customer list, has a limited business life, we consider

a number of factors, including: testimony of expert

witnesses, experience in the industry, testimony of of-

ficers, relationship of geographic area and the

customers involved, turnover of customers (both

before and after the acquisition of the list), and other

pertinent factors...

**...Accordingly, we find the the Panczak and

Flad customer lists each had a limited useful life of

five years.’’ [Citations omitted]

If the Third Circuit’s decision in the instant case is

permitted to stand, the value of-all businesses having

significant customer based intangible assets, including the

members of PPA. and FMANJ, will suffer a significant

decrease. Furthermore, as a result of conflict among the

Circuits, the value of such businesses located within the

jurisdiction of the Third Circuit may suffer such a loss

while similar businesses elsewhere remain unaffected.

THE THIRD CIRCUIT’S DECISION IS IN CONFLICT

WITH OTHER CIRCUITS, UNDERMINING THE

UNIFORM AND FAIR ADMINISTRATION OF

FEDERAL TAXATION

The Third Circuit’s opinion that a customer based in-

tangible asset acquired in conjunction with an underlying

business as a going concern is not depreciable as a matter

of law is a clear departure from prior case law and

disregards both the governing statute and regulations and

the Internal Revenue Service’s own interpretation as ex-

pressed in Rev. Rul. 74-456. As indicated above, since the

decision in Houston Chronicle, supra, the issue of

depreciability has uniformly been held to be a question of

fact determined by reference to whether the particular in-

tangible asset is shown to have (i) an ascertainable value

separate and apart from goodwill and (ii) a limited useful

life, the duration of which can be ascertained with

reasonable accuracy. Accordingly, all customer based in-

tangible assets shown to have a limited life and ascer-

tainable value have been held depreciable.

The Third Circuit has ignored this precedent and is in

direct conflict with decisions by the Fifth, Sixth, Seventh,

Eighth, Ninth and Eleventh Federal Circuits as well as the

U.S. Tax Court. (See petitioner’s petition, pp. 14-15;

Houston Chronicle, supra (Sth Cir.); Holden Fuel, supra,

(6th Cir.)). The Third Circuit decision thus creates an ir-

reconcilable conflict among the circuits.

It should also be noted that the Third Circuit drew a

distinction between contractually based and terminable-at-

will customer relationships holding that if the customers

were contractually obligated for a period of time, the pur-

chaser could depreciate the value of the list over that time

period. In the petroleum industry, many customers have

service contracts which usually are for a term of one year.

In the case of publication subscription lists, customers

often contractually subscribe for a fixed period. One can

only imagine the reaction of the Internal Revenue Service

to any attempt by a purchaser of contractually bound

customer based intangibles to depreciate the value of that

asset over the term of the contract (a much shorter period

than that currently required).

CONCLUSION

For the reasons set forth above, the Pennsylvania

Petroleum Association and the Fuel Merchants Association

of New Jersey respectfully request that Newark Morning

Ledger Co.’s Petition for a Writ of Certiorari be granted.

Respectfully submitted,