The following article is adapted from reprinted from the M&A Tax Report, Vol. 7, No. 9, April 1999, Panel Publishers, New York, NY.


By Robert W. Wood, San Francisco

As we have pointed out in these pages before, thanks to the tenacity of Tax Analysts (based in Arlington, Virginia), Field Service Advices are still being released, in some cases many years after the actual advice (internal advice within the IRS) was given. A recently released 1992 Field Service Advice (FSA 1999-740, Tax Analysts Doc. No. 1999-2858, March 8, 1999), deals with settlement payments and attorneys' fees that a newspaper publisher incurred during a lawsuit with independent carriers. The newspaper had deducted the payments and attorneys fees as circulation expenses.

As is often the case with newspapers, the publisher distributed its papers through independent carriers, who purchased the newspapers at wholesale, and then resold and delivered them to subscribers. In order to increase circulation, the publisher replaced these independent carriers with its own agents, who sold and delivered papers directly to subscribers. The carriers sued, and the publisher settled the case, paying the carriers to terminate their contracts. The company deducted the payments, as well as related attorneys' fees, as "circulation expenses."

In the Field Service Advice, the IRS concluded that these payments were capital outlays, not circulation expenses. The Service's reasoning was that the payments were made to acquire a distinct asset (the business advantage of dealing directly with its subscribers). As an alternative argument, the IRS invoked the INDOPCO case, stating that the payments resulted in a long-term benefit that had to be capitalized. According to the FSA, the attorneys' fees also had to be capitalized, because they were incurred with respect to the acquisition of a capital asset or an indefinite future business advantage.

Once more, we see the INDOPCO case (pervasive as cancer) being invoked. But for the biggest and most important use of INDOPCO this month, see "Preacquisition Salaries Nondeductible under INDOPCO," below.

Newspaper Publisher Required to Capitalize Expenses of Carrier Settlement, Vol. 7, No. 9, The M&A Tax Report (April 1999), p. 8.