
    BOOTH NEWSPAPERS, INC. v. THE UNITED STATES THE EVENING NEWS ASSOCIATION v. THE UNITED STATES
    No. 57-59
    No. 84-60
    [Decided June 6, 1962]
    
      
      N. Barr Miller for plaintiffs. J. Marvin Haynes, Joseph H. Sheppard, Arthur H. Adams and Haynes ds Miller were on the briefs.
    
      Gynthia Holcomb, with whom was Assistant Attorney General Louis F. Oberdórfer, for the defendant. Edward 8. Smith, Lyle M. Turner and Philip B. Miller were on the briefs.
   JoNES, Chief Judge,

delivered the opinion of the court:

Plaintiffs, Booth Newspapers, Inc. and The Evening News Association, bring these suits to recover alleged over-payments of corporate income taxes, plus deficiency interest, paid for the taxable year 1954. Since both suits involve many of the same material facts and present identical issues, they were consolidated for trial, argument and joint findings of fact. It is asserted in both suits that the Commissioner of Internal Eevenue erroneously determined that certain losses sustained by both plaintiffs in 1954 from the sale of the stock of a third corporation were capital losses and hence deductible only to the extent of capital gains for that year.

Both plaintiffs are Michigan corporations and both are engaged in the business of publishing newspapers in that state. Aside from their joint participation in the transaction hereinafter described, however, plaintiffs are not in any way connected.

Being in the business of publishing newspapers, an inventory of newsprint in sufficient quantity is essential to each plaintiff. Prior to 1947, both plaintiffs purchased their entire newsprint requirements from established manufacturers of that commodity under long-term contracts. The contract price for newsprint to each plaintiff was approximately $90 per ton in early 1947 and immediately prior thereto. Except during World War II, when newsprint was rationed by the War Production Board, plaintiffs’ contract suppliers were able to furnish them with adequate quantities of the product for their normal operations. Consequently, neither plaintiff had occasion to own or control any manufacturer or supplier of newsprint, or become involved in any way with the manufacture of that product. It was, in fact, the policy of both plaintiffs not to invest in the capital stock of other companies at all.

In 1946 and 1947, an unprecedented demand for newsprint developed in the United States and, when normal sources of supply were unable to cope with it, a severe shortage resulted throughout the publishing industry. Plaintiffs’ regular suppliers were unable to fulfill their contractual obligations, and plaintiffs were thus unable to obtain adequate supplies for the needs of their businesses. Moreover, plaintiffs could obtain no assurance from their suppliers that adequate quantities of newsprint would be available to them during the next 2 to 4 years.

As a result of this shortage of newsprint, both Booth and Evening News were compelled to reduce the normal size of their publications by curtailing news content and advertising. Booth found it necessary to discontinue all circulation promotional activities and, in February of 1947, Evening News was forced to the extreme of omitting all display and classified advertising for three successive days. This was particularly onerous to Evening News because competing newspapers, which were members of newspaper chains and thus able to divert newsprint from other areas to the Evening News competitive area, made extensive efforts to captui’e the advertising business of Evening News.

In order to circumvent the difficulties caused by the newsprint shortage, plaintiffs were compelled to resort to the so-called “spot” or “gray” market which had developed by mid-1947. This was the only available source of additional newsprint in the country, and consisted primarily of newsprint imported from European sources. Therefore, plaintiffs attempted, when possible, to meet their requirements by going into this market for special purchases at exorbitant prices. In 1947 alone, Evening News purchased some 4,618 tons of newsprint in the “spot” market at an average price of $200 per ton, and Booth purchased some 1,514 tons at an average price of $196.29 per ton. Similar purchases were made by Evening News during 1948 and 1949 at an average price of $175 per ton, while Booth was compelled to pay an average of $175 per ton for the purchases it made during 1948.

As both plaintiffs were simultaneously experiencing an unprecedented shortage of newsprint, they collaborated in extensive efforts to find additional newsprint to meet their needs. In March of 1947, they joined in engaging the services of a firm of consulting engineers to investigate possible sources of newsprint. This firm was a consultant to the Canadian pulp and paper industry and was familiar with the world newsprint markets. After the consulting engineers had explored the newsprint situation, including the foreign market, without success in locating sufficient additional supplies for plaintiffs, they recommended to plaintiffs the purchase of a small paper mill for the purpose of augmenting their supply of newsprint by manufacturing their own. This recommendation was initially rejected by plaintiffs on the grounds that they were adverse to entering the newsprint manufacturing business and preferred to retain their regular sources of supply to the fullest possible extent. Nonetheless, the newsprint shortage subsequently became so acute that plaintiffs reconsidered and decided to investigate the possibility of acquiring a small paper mill which could be suitably converted to the production of newsprint.

It became known to plaintiffs, through the consulting engineers, that the Michigan Paper Company of Plainwell, Michigan (hereinafter referred to as “Michigan”), could be purchased. This company was engaged in the operation of a paper mill for the manufacture and sale of fine quality writing paper and book paper. While it was not then manufacturing newsprint, plaintiffs were advised that a part of its equipment could be converted to the production of newsprint and thus provide a supplemental source of supply during the period of shortage.

No other solution to their problem being apparent and being unsuccessful in attempting to persuade the management of Michigan to manufacture newsprint for them, each plaintiff finally agreed to purchase one-half the available stock of the paper company. During the period from November 17 through December 1, 1947, they each acquired 45,000 shares of the 100,000 shares in Michigan outstanding. Since they deemed it necessary for business reasons to acquire all of the outstanding stock of Michigan, if possible, plaintiffs were required to pay $25 per share to the former stockholders. The remaining 10,000 shares were purchased by plaintiffs, at $25 per share, as they became available subsequently during the period 1948 through 1951. Thus, plaintiffs ultimately acquired all of the stock of Michigan, 50,000 shares each', for a total consideration of $2,500,000, one-half of which was paid by each plaintiff. In addition, each plaintiff incurred substantial expenses relative to the acquisition of this stock.

Thereafter, a part of Michigan’s production equipment was converted to the manufacture of newsprint and utilized as a supplemental source of that product to offset the short shipments plaintiffs were receiving from their contract suppliers. All of Michigan’s production facilities were not so converted, however, because the acquisition of Michigan was an expediency to relieve plaintiffs’ shortages of newsprint, and their ownership of the company was intended to continue only until an adequate supply could be assured by their regular suppliers. Consequently, during the period of plaintiffs’ ownership, Michigan continued the manufacture and sale of its regular products for the purpose of fulfilling existing contracts and retaining its competitive position in its regular market as much as possible so that plaintiffs could dispose of the company on attractive terms as soon as the newsprint shortage ended.

In this manner, then, plaintiffs were able to mitigate the difficulties caused by the severe national shortage of newsprint. Although the newsprint product turned out by Michigan was not of the quality of that furnished by plaintiffs5 regular suppliers, it was, apparently, adequate to meet their needs. Michigan was, however, able to turn out a highly satisfactory rotogravure paper, which was used by Evening News for its Sunday pictorial magazine. In any event, both plaintiffs purchased, at cost, substantial quantities of Michigan newsprint from late 1941 to early 1953, although there was a period of 13 continuous months when Evening News purchased no newsprint from Michigan and a period of 7 continuous months, when Booth also found it unnecessary to make any purchases. Both of these periods occurred, principally, during the year 1950.

By mid-1949 and 1950, Michigan commenced efforts to restore its position in the field of fine writing paper and book paper, replacing much of the effort that had been directed to the manufacturing of newsprint. This resulted from the fact that, insofar as plaintiffs were concerned, the newsprint shortage had eased and appeared to 'be pretty well over by that time. Nevertheless, plaintiffs still had no assurances from their regular suppliers that the shortage was definitely over then and, as a matter of fact, newsprint procurement did become more difficult with the outbreak of the Korean War. The record shows that plaintiffs considered the Michigan mill to be insurance for them during this period of time against the threatened recurrence of a newsprint shortage.

It was not until 1953 that supply and demand for newsprint in the United States were brought into balance for short periods of time. Even then, however, shortages recurred intermittently as demand increased; and individual publishers, generally, had no assurance of adequate newsprint supplies for the future. This situation continued until 1956, when additional permanent capacity for the production of newsprint finally relieved the threat of shortages.

During 1951, plaintiffs were able to execute new long-term contracts with one of their regular suppliers of newsprint, who was in the process of constructing a new manufacturing plant. The contracts provided for the delivery of 7,800 tons of newsprint per annum to Booth and 4,500 tons per annum to Evening News. However, the plant was not scheduled for completion until January 1, 1954, and deliveries were programmed to commence as shortly thereafter as possible. Commercial production actually started at the new paper mill in June of 1954 and, as a result, plaintiffs were no longer faced with threatened shortages by that time.

Thus having assured themselves of an adequate supply of newsprint commencing in the near future, plaintiffs decided, in July of 1958, to sell their Michigan stock. The same firm of consulting engineers referred to previously were retained for the purpose of locating a purchaser and negotiating a sale. Plaintiffs thereafter received various proposals from other paper companies contemplating mergers or exchanges of stock with Michigan. These offers were rejected, however, because plaintiffs were not interested in carrying on any mill operations and desired to confine their activities to the publication of newspapers.

On February 8,1954, plaintiffs finally sold the Michigan stock to a Pennsylvania corporation at a price of $13 per share, $12 per share less than what they had paid for the stock. Negotiations for this sale had commenced in the fall of 1953, after plaintiffs had unsuccessfully endeavored to obtain a higher price per share from other prospective purchasers. Booth and Evening News each received $650,000 from the proceeds of this sale, and incurred expenses in 1954 incident to the sale in the amounts of $20,675 and $19,625, respectively.

During the period in which plaintiffs owned Michigan, no dividends were paid by the latter to its stockholders although it had earned substantial net profits. Plaintiffs, being more interested in obtaining newsprint during the time of shortage, directed that the surplus earnings be used to replace Michigan’s old equipment and increase the efficiency of the company so that the mill would be more attractive to a potential purchaser when the newsprint shortage was alleviated. Also, some of the surplus earnings were devoted to rebuilding Michigan’s regular market, which had been destroyed somewhat when a part of its equipment was converted to the production of newsprint.

In their Federal income tax returns for the taxable year 1954, each plaintiff deducted from gross income the amount of loss suffered ($619,650.80 for Booth and $638,319.34 for Evening News) as a result of the sale of Michigan stock. The Commissioner disallowed these deductions, however, on the ground that the losses sustained were capital in nature and hence deductible only to the extent of capital gains for 1954. The resulting deficiencies, plus interest, were consequently assessed and paid by plaintiffs. Timely claims for refund were filed and, when the Commissioner took no action relative to them, these suits followed.

Plaintiffs say that the losses they sustained in procuring additional newsprint are fully deductible from gross income when incurred as either business expenses under section 162(a) of the Internal Bevenue Code of 1954, 26 U.S.C. (I.B.C. 1954) § 162(a) (1958 Ed.) or as ordinary losses not compensated for by insurance under section 165(a) of the 1954 Code, 26 U.S.C. (I.B.C. 1954) § 165(a) (1958 Ed.).

Defendant, on the other hand, argues that this case presents a classic example of a capital transaction, wherein plaintiffs purchased the entire capital stock of a going-concern oganization and thus acquired a manufacturing subsidiary which they held for some 6 years before selling out at a loss. Even going behind the purchase of capital stock fer se, continues defendant, the facts clearly demonstrate that plaintiffs purchased, in effect, nothing more than plant and equipment, as distinguished from inventory; items which traditionally have been considered capital in nature and which must, therefore, be accorded capital asset treatment.

The crucial issue, then, is one of determining whether the stock of Michigan, in the circumstances disclosed above, constituted a capital asset in the hands of these plaintiffs. Our initial point of inquiry is section 1221 of the 1954 Code, 26 U.S.C. (me. 1954) §1221 (1958 Ed.), the section which purports to define what is meant by the term “capital asset.” That section speaks in terms of “property” held by the taxpayer. It specifically excludes from the concept of “capital asset,” inter alia, such items of property as stock in trade, actual inventory, property held for sale to customers, and depreciable and real property used in the taxpayer’s trade or business. As a general proposition, of course, capital stock does constitute “property” and, aside from stock sold by dealers in the usual course of their business, does not fall within any of the express exclusions of section 1221. On the face of it, then, it would seem that the Michigan stock here involved is encompassed by the literal language of that section.

But the term “property” as used in section 1221 is an elastic concept and not all-inclusive. The Supreme Court has indicated as much in the well-known case of Corn Products Refining Co. v. Commissioner, 350 U.S. 46 (1955). The Court there held, where corn was an essential raw material in the taxpayer’s business and the taxpayer had entered into a program of buying and selling corn futures to protect itself against a rise in the price of corn, that the taxpayer’s transactions in the futures were an integral part of its business, designed to protect its manufacturing operations, and that any gain or loss realized by the taxpayer from these transactions would be ordinary, not capital, in nature.

This flexible approach to the concept of “capital asset” has been applied and developed in a number of subsequent cases. For example, in Electrical Fittings Corp., 33 T.C. 1026 (1960), the taxpayer bad participated witb two other companies in the formation of a corporation which was to manufacture ductile iron, an essential raw material in the taxpayer’s manufacturing operations which it had difficulty in obtaining from regular sources. The taxpayer acquired one-third the preferred and one-fourth the common stock in the newly-formed corporation. Subsequently, a more desirable raw material became available to the taxpayer and it sold its stock in the ductile iron company at a loss. The Tax Court held that the loss was not capital in nature but was fully deductible as an ordinary loss, citing Commissioner v. Bagley & Sewall Co., 221 F. 2d 944 (2d Cir. 1955); Tulane Hardwood Lumber Co., 24 T.C. 1146 (1955); and Smith & Welton, Inc. v. United States, 164 F. Supp. 605 (E.D.Va. 1958). The court stated, at page 1031:

The tax treatment of a loss on the sale of * * * stock depends on the purpose for which the petitioner acquired the stock. Stock purchased as an investment is a capital asset; when sold, it creates a capital gain or loss. But stock purchased in the ordinai’y course of business where the only purpose is to insure a vital source of inventory is not a capital asset, and the loss upon its sale is deductible from ordinary income.

Similarly, in Journal Co. v. United States, 195 F. Supp. 434 (E.D. Wis. 1961), the taxpayer, a newspaper publisher, purchased 200 of the 500 shares outstanding in a paper mill for the purpose of obtaining a newsprint inventory for its operations during a period of shortage. It resold the stock at a loss when the shortage was relieved. It was held that, as the taxpayer had purchased the stock for the purpose of obtaining newsprint for use in the normal conduct of its business and had no intention of making a capital investment, it was entitled to deduct the loss as an ordinary business expense.

To the same effect is Mansfield Journal Co. v. Commissioner, 274 F. 2d 284 (6th Cir. 1960), wherein the taxpayer, another newspaper publisher, had entered into a long-term contract for the delivery of newsprint in order to protect itself against shortages and erratic prices and later sold the contract, was held to have realized ordinary income and not capital gain with respect to the proceeds of the sale.

The cases we have cited and discussed above set forth the applicable law governing the case at bar. They stand for the proposition that, if securities are purchased by a taxpayer as an integral and necessary act in the conduct of his business, and continue to be so held until the time of their sale, any loss incurred as a result thereof may be fully deducted from gross income as a business expense or ordinary loss. If, on the other hand, an investment purpose be found to have motivated the purchase or holding of the securities, any loss realized upon their ultimate disposition must be treated in accord with the capital asset provisions of the Code.

Thus, the circumstances of the transaction (its factual background, the necessities of the particular business involved at the particular time involved, and the intentions of the taxpayer, both at the time the securities were originally purchased and at the time they were disposed of) are of crucial importance in the resolution of these cases. The fact that securities are “property,” in the broad sense of that term, is not conclusive.

The record before us amply demonstrates, we think, the business motivation of these plaintiffs at the time they 'undertook to acquire the Michigan stock. Given the conditions prevalent in the newsprint market at the time and the difficulties plaintiffs experienced with respect to the conduct of their normal business operations, the acquisition of Michigan was an eminently reasonable expedient for them to follow. The difficulty with defendant’s position is simply that the record will not support a conclusion that plaintiffs were investment-minded when they purchased the stock. Similarly, the acquisition was more than a mere purchase of plant and equipment. Plaintiffs needed additional newsprint at the time and their investigations indicated that the purchase of a paper mill was the only feasible solution to their problem. As it was, plaintiffs were able to obtain needed newsprint from Michigan during the same month they began purchasing its stock. Thus, rather than characterizing the ■transaction as a mere purchase of plant and equipment, it seems more accurate to characterize it as the acquisition of a vital source of inventory. In view of these circumstances, we conclude that plaintiffs were motivated to acquire Michigan solely as a temporary expedient to insure an adequate inventory of newsprint during the period of shortage. They did not intend their acquisition of Michigan to be an investment, nor did they intend to engage in the business of manufacturing fine quality writing paper and book paper, except insofar as Michigan’s continued activities in that regard were a reasonable part of the temporary means of acquiring additional newsprint.

Moreover, we believe the record shows that plaintiffs’ original business purpose motivation did not change prior to the time they disposed of the stock. Although there was a time around mid-1949-1950 when it appeared that the shortage was over as far as plaintiffs were concerned, they still had no assurances from their regular suppliers that this was the fact and, as we have indicated, shortages and the threat of shortages still persisted nationally. It was not until June of 1954, when plaintiffs began receiving shipments under their new long-term contracts, that the shortage ended definitely as to them. They had, by this time, long since disposed of their interest in Michigan. Thus, plaintiffs’ intention to insure an adequate inventory of newsprint from Michigan during the period of shortage and threatened shortage was fully supported by practical considerations. Moreover, their activities in locating a suitable offer for the Michigan stock and negotiating the sale covered a period of some 7 months after the decision to sell was made. Consequently, the case at bar is distinguishable from such cases as Gulftex Drug Co., 29 T.C. 118, affirmed, 261 F. 2d 238 (5th Cir. 1958) and Missisquoi Corp., supra, wherein it was found that the original business purpose of the taxpayer had changed to an investment purpose prior to the disposition of the securities there involved.

In view of the foregoing, and in the light of the decided cases and the facts of record, we hold that the Michigan stock was not a capital asset in the hands of these plaintiffs. Therefore, plaintiffs are entitled to deduct the losses they sustained from the sale of this stock from their respective gross incomes for 1954 as either business expenses or ordinary losses.

Judgment will be entered for the plaintiffs with the amounts of recovery to be determined pursuant to Buie 38 (c).

It is so ordered.

Davis, Judge; Durfee, Judge; LaeahoRe, Judge; and Whitaker, Judge, concur.

FINDINGS OF FACT

The court, having considered the evidence, the report of Trial Commissioner Boald A. Hogenson, and the briefs and argument of counsel, makes findings of fact as follows:

1. With the consent of the parties and at the direction of the trial commissioner, the above-entitled cases were consolidated for trial and for joint findings of fact. These cases involve many of the same material facts and present identical issues.

2. Booth Newspapers, Inc., plaintiff in No. 57-59 (hereinafter referred to as Booth), is and was a Michigan corporation, with its principal place of business in Detroit. During the years here involved, Booth was engaged in the business of publishing and distributing the following daily newspapers in the State of Michigan: The Grand Bapids Press, The Saginaw News, Jackson Citizen Patriot, The Muskegon Chronicle, The Flint Journal, Kalamazoo Gazette, The Bay City Times, and The Ann Arbor News.

3. The Evening News Association, plaintiff in No. 84 — 60, (hereinafter referred to as Evening News), is and was a Michigan corporation with its principal place of business in Detroit. During the years here involved, Evening News was engaged in the business of publishing The Detroit News, a daily and Sunday newspaper, and also operated a radio broadcasting station and a television station.

4. Each, of the plaintiffs maintains its books and files its income tax returns on a calendar year basis.

5. Both plaintiffs timely filed their Federal income tax returns for the calendar year 1954 and paid the tax reflected thereon. Booth paid this amount in two equal payments made on March 10 and June 13, 1955, and Evening News paid this amount in two equal payments made on March 15 and June 15,1955.

6. In its Federal income tax return for the calendar year 1954, Booth claimed as a deduction from gross income the sum of $619,650.86, which it stated to be the amount of a loss sustained in that year from the sale by it of certain shares of stock in The Michigan Paper Company of Plainwell, Michigan, (hereinafter referred to as Michigan), under circumstances hereinafter described.

7. In its Federal income tax return for the calendar year 1954, Evening News claimed as a deduction from gross income the sum of $638,379.34, which it stated to be the amount of a loss sustained in that year from the sale by it of certain shares of stock in Michigan under circumstances hereinafter described.

8. After examination and audit of the Federal income tax returns of Booth and Evening News for 1954, the Commissioner of Internal Eevenue disallowed the deductions described in findings 6 and 7, following his determination that any loss sustained by the taxpayers resulted from the sale of a capital asset and was allowable in 1954 only to the extent of long-term capital gains in that year. Booth had a long-term capital gain in 1954 in the amount of $26,364.61, and the Commissioner allowed Booth the loss on its sale of Michigan stock to that extent under the provisions of sections 1211 and 1212 of the Internal Eevenue Code of 1954. Evening News had no long-term capital gains in 1954 and no deduction was allowed by the Commissioner in that year on account of its loss on the sale of Michigan stock.

9. Following the audit of Booth’s return for 1954, during which certain other adjustments were made which are not in dispute, the Commissioner on March 21, 1958, assessed a deficiency in income tax in the amount of $319,453.11, plus interest in the amount of $55,409.80, for a total amount of $374,862.91. This deficiency was paid by Booth on February 5, 1958, and May 23, 1958, in the respective amounts of $373,265.64 and $1,597.27.

10. Following the audit of Evening News’ return for 1954, during which certain other adjustments were made which are not in dispute, the Commissioner on March 7, 1958, assessed a deficiency in income tax in the amount of $331,957.26, plus interest in the amount of $57,578.67, for a total amount of $389,535.93, which was paid by Evening News on February 28,1958.

11. Booth and Evening News filed timely claims for refund for the year 1954 in the respective amounts of $381,-524.41 and $389,535.93, alleging as grounds therefor the same contention relied upon herein for recovery. No action has been taken by the Commissioner of Internal Revenue with respect to these claims for refund.

12. Prior to 1947, both Booth and Evening News purchased their entire requirements of newsprint from manufacturers of that product under long-term contracts, and neither plaintiff owned or controlled any newsprint manufacturers or suppliers of that product. Except during World War II, when newsprint was rationed by the War Production Board, plaintiffs’ contract suppliers had furnished them with adequate quantities of newsprint for their normal operations.

13. After World War II, approximately 80 percent of the newsprint used in the United States was manufactured in Canada. This was due to the adequate timber and water supply and the low power and transportation costs prevailing in that country. In or about 1913, duty on newsprint from Canada was removed. Thereafter, the Canadian newsprint industry developed rapidly and newsprint mills, which had theretofore operated in the United States, established plants in Canada to take advantage of low production costs and, at the same time, to produce higher grades of tariff-protected paper.

In 1946 and 1947, after the end of World War II, there was an unprecedented demand for newsprint. Normal sources of supply were unable to meet this demand, and the only available source of additional newsprint was the “spot” or “gray” market which developed. Much of the newsprint sold in that market was imported from European sources and it was priced substantially higher than that produced by the normal American sources of supply.

14. In the year 1947, because of the unprecedented demand, a serious shortage of newsprint developed throughout the publishing industry in the United States. The regular suppliers of Booth and Evening News were unable to furnish adequate quantities of newsprint and plaintiffs’ normal newsprint inventories were reduced below reasonable levels. For that year, Booth had contracts with its regular suppliers calling for the delivery of 27,496 tons of newsprint but it actually received only 25,584 tons, while Evening News had contracts with its regular suppliers for 62,450 tons of newsprint and actually received only 58,232 tons. Plaintiffs could obtain no assurance from their suppliers that adequate quantities of newsprint for normal operations would be available during the next 2 to 4 years, and even spot purchases at excessive prices were not available in sufficient quantities.

The normal price of newsprint under plaintiffs’ contracts with their suppliers immediately prior to and during the first part of 1947 was approximately $90 per ton but, due to the shortage, exorbitant prices were charged in the “spot” market which developed in mid-1947. During that year, Evening News paid an average price of $200 per ton, plus freight, for purchases in the “spot” market and some purchases were made as high as $255 per ton, plus freight. Booth also made purchases in the “spot” market during 1947, at prices ranging from $175 to well over $200 per ton.

During the years 1947 through 1949, Evening News and Booth made the following purchases of newsprint in the “spot” market at the average prices indicated:

During the years 1947 through 1953, Evening News and Booth purchased the following quantities of newsprint from all sources at the average prices indicated:

15. The serious shortage of newsprint in 1947 required both Booth and Evening News to reduce the normal size of their publications by reducing news content and curtailing advertising space. All circulation promotional activities were discontinued by Booth. Evening News notified its subscribers of the necessity for the subnormal size of its papers by appropriate notices contained in certain issues of its newspaper.

In February 1947, Evening News’ inventory of newsprint was reduced to such a level that it was compelled to omit all display and classified advertising from its editions of February 24, 25 and 26, 1947, and to give advance notice thereof to its advertising customers. Competing daily newspapers in Detroit, who were members of newspaper chains and were thus able to divert newsprint to Detroit from less competitive areas, immediately took advantage of Evening-News’ shortage by headlining front page announcements in their newspapers of their ability and readiness to accept without limitation all proffered advertising. These competitors also personally contacted the larger advertisers of Evening News in an effort to obtain their advertising business and capitalize on the newsprint shortage.

16. As both plaintiffs were simultaneously experiencing an unprecedented shortage of newsprint, they collaborated in extensive efforts to find additional newsprint to meet their requirements. During 1946 and 1947, the question of the supply of newsprint was discussed at the meetings of the Board of Directors of each plaintiff in an effort to evolve a solution to the problem, but no solution was apparent. In an attempt to alleviate tbe threat to their normal operations, Booth and Evening News, on March 6, 1947, engaged the firm of Stadler, Hurter & Company of Montreal, Canada, consulting engineers, to investigate possible sources of newsprint. That firm was a consultant to the Canadian pulp and paper industry and was familiar with the world newsprint markets. After the consulting engineers had explored the newsprint situation, including the foreign market,, without success in locating sufficient additional supplies for the plaintiffs, they recommended to Booth and Evening News the purchase of a small paper mill for the purpose of augmenting their supply of newsprint by manufacturing their own. However, that recommendation was rejected by both plaintiffs because they were averse to entering the newsprint manufacturing field. They preferred to continue purchasing their newsprint requirements from their normal suppliers and to retain their regular sources of supply to the fullest possible extent. The newsprint shortage became so acute, however, that the managers of Booth and Evening News agreed that they must obtain additional newsprint from any available' source, and they finally decided to investigate the possibility of acquiring a small paper mill that could be converted to the production of newsprint.

In August 1947, Herbert Pouting, vice president of Evening News, estimated that, in the preceding 2 years, Evening News had expended nearly $700,000 more for newsprint than the same amount of tonnage would have cost at the current contract price, and during the year 1947 Evening News in fact paid $507,980 in excess of the current contract price for newsprint purchased in the “spot” market.

17. During the investigation of sources of additional newsprint by Stadler, Hurter & Company, it was learned that The Michigan Paper Company of Plainwell, Michigan, could be purchased. That company was a Michigan corporation engaged in the operation of a paper mill for the manufacture and sale of fine quality writing paper and book paper. While it was not manufacturing newsprint, the plaintiffs were advised by their consulting engineers that a part of Michigan’s equipment could be converted to the production of newsprint, and thus provide a supplemental source of supply during the period of shortage. Plaintiffs first proposed to Michigan that it manufacture newsprint and sell it to them, but that proposal was rejected by Michigan, whose officers stated that its mill could not operate profitably on that basis.

18. On October 27,1947, Booth and Evening News entered into an option agreement with the majority stockholders of Michigan whereby plaintiffs obtained the right to purchase, during the ensuing 3-week period, not less than 60 percent of the outstanding 100,000 shares of stock of Michigan at a price of $25 per share. Plaintiffs agreed to purchase, at the same price per share, all such stock deposited with the escrow agent if the option was exercised.

19. On November 15, 1947, Booth and Evening News elected to exercise the option provided in the agreement described in finding 18 and, by appropriate letters bearing that date, Michigan and the escrow agent were advised of such election. The communication to the escrow agent enclosed the payments required by the terms of the option agreement.

20. Booth and Evening News deemed it necessary to acquire all of Michigan’s outstanding stock, if possible, in order that they might have complete control of that company- and thus be free to effect any conversions in equipment necessary for the production of newsprint. In order to acquire all of such stock, plaintiffs were required to pay $25 per share although, during the month of October 1947, prior to the date of the option agreement, the quoted over-the-counter prices for shares of stock in Michigan varied from $13 to $14 per share. However, only a small number of the shares of Michigan were thus available for purchase.

These over-the-counter quotations were no indication whatsoever of the fair market value of the total stock of Michigan at the time in question, and larger blocks of stock than the small number of shares traded might have sold for appreciably greater or lesser amounts.

21. From November 17 through December 1, 1947, Booth and Evening News each acquired from the escrow agent 45,000 shares of the stock of Michigan; during 1948 each plaintiff similarly acquired 4,923 additional shares, leaving outstanding only 154 shares. These latter shares were purchased by plaintiffs on November 7,1949, and April 25,1951, in the respective amounts of 57 shares and 20 shares éach. The 40 shares acquired by plaintiffs in 1951 had been owned by a family then living in the Netherlands and that occasioned the delay in posting the stock with the escrow agent.

All of the above purchases were at $25 per share and each plaintiff paid the aggregate sum of $1,250,000 for the stock it acquired.

22. In connection with the aforementioned acquisition of Michigan’s stock, Booth incurred expenses of $2,165.48 in 1947, and $17,485.38 in 1948, for a total of $19,650.86, while Evening News incurred expenses of $18,739.72 in 1948 and $14.62 in 1951, for a total of $18,754.34. None-of these expenses has been allowed as deductions to Booth or Evening News for tax purposes in any year.

23. At the time the stock of Michigan was acquired by Booth and Evening News, it was understood and agreed that each of them would purchase 50 percent of all the shares offered for sale pursuant to the option agreement.

24. At the time Booth and Evening News acquired the Michigan stock, they anticipated that they would continue to hold the stock during the period of the general shortage of newsprint, then expected to last from 2 to 4 years, and knew that the necessity for its retention would not terminate in a matter of weeks or months.

25. After the acquisition of the stock of Michigan by Booth and Evening News, a part of the production equipment of Michigan was converted to the manufacture of newsprint and utilized qs a supplemental source of newsprint for plaintiffs to offset the short shipments they were receiving from their contract suppliers. All of the production facilities of Michigan were not so converted because the acquisition of Michigan was an expediency to relieve the shortage of newsprint, and ownership by Booth and Evening News was intended to continue only until an adequate supply could be assured by the plaintiffs’ regular suppliers. Thus, during the plaintiffs’ period of ownership of Michigan, that company continued the manufacture and sale of its regular products, i.e., fine quality writing paper and book paper, for the purpose of fulfilling existing contracts and retaining its position in that market as much as possible as an aid to disposing of the Michigan stock when the newsprint shortage was relieved.

During the years 1947 through 1953, Booth consumed quantities in tons per month of newsprint purchased from Michigan as follows:

Month 191,1 1948 1949 1950 1951 1952 ' 1955
January _ 405 540 75 393 129
February _ 281 432 '_ 170 42
March_ 288 358 292 — 6
April_ 168 452 369 9
May_ 279 462 _ 161 _' _
June _ 328 379 257 1
July_ 263 259 232
August _ 319 354 64 3
September _ 220 157 132 _ 5 —
October_ 514 171 172 91
November_ 125 389 30 203 13
December_ 137 422 28 454 75

During the years 1947 through 1953, Evening News purchased the following quantities in tons per month of products from Michigan:

Month 191,1 191,8 191,9 1950 1951 1952 1953
January _ 532 691 238 70
February_ 421 501 202
March_ 96 640 169 4
April_ 263 403 105
May_ 462 664 99
June _ 482 850 149
July_ 858 349 452 114
August _ 758 548 288
September _ 485 527 342
October_ 385 523 399
November_ 55 729 662
December 144 719 380 133

The newsprint produced by Michigan was manufactured by the so-called de-inking process, which was a method of subjecting old newspapers and magazines to treatment which reclaimed the paper for re-use. The newsprint product was a liard, glossy sheet, quite inferior to the newsprint produced by plaintiffs’ normal suppliers, who used virgin timber wood pulp in tbe manufacturing process. However, Michigan was a very satisfactory source of rotogravure paper, which was used by Evening News for its Sunday pictorial magazine. No evidence has been introduced as to the amount, if any, of Michigan rotogravure paper used by Booth during the years in question. Similarly, no evidence has been introduced as to the amount of Michigan rotogravure paper used by Evening News during the years in question as opposed to the amount of Michigan newsprint so used.

26. At the time Booth and Evening News originally acquired the Michigan stock, neither of them intended this acquisition to be a permanent investment but rather intended only to obtain a supplemental source of newsprint for their operations during the period of shortage, which they anticipated would continue for 2 to 4 years.

The acquisition and ownership of the Michigan stock during the years here in question was the first time either plaintiff had been directly involved in the business of manufacturing newsprint. It was the policy of both plaintiffs not to invest in the stock of other companies.

27. Both plaintiffs believed that a 30-day supply of newsprint was a satisfactory inventory, so long as there was assurance of regular deliveries of newsprint from a reliable source of supply. With respect to Booth its month-end inventory (in days of supply) from 1949 through 1953 was as follows:

Month. 1949 1950 1951 19 52 195S
January _ 41 S3 28 36 52
February _ 45 35 31 42 57
March_ 33 27 25 39 44
April _ 27 23 24 36 41
May_ 32 19 26 33 38
June _ 34 20 31 34 38
July_ 43 26 36 45 41
August _ 47 23 34 51 44
September _ 41 23 34 50 39
October _ 35 22 31 42 31
November_ 36 18 30 43 29
December_ 27 19 31 42 27

With respect to Evening News, its montb-end inventory (in days of supply) from 1949 through 1953 was as follows:

Month 191,9 1950 1951 1959 1953
January - 33 41 28 35 37
February _ 34 39 25 33 34
March_ 29 39 27 28 28
April_ 25 31 20 26 33
May_ 20 31 22 24 23
June _ 22 32 24 21 28
July_ 22 34 28 32 36
August _ 28 38 37 31 42
September _ 31 29 35 35 42
October_ 29 33 30 40 38
November_ 27 29 29 38 34
December_ 33 23 27 33 32

28. From 1947 to 1956, newsprint mills in general operated in excess of their rated productive capacities, except for a few months in the early part of 1953, in an effort to meet the increasing requirements of newspaper publishers. It was not until 1953 that supply and demand for newsprint in the United States were brought into balance for short periods of time. However, when demand increased, shortages recurred and individual publishers, generally, had no assurance of adequate newsprint supplies for the future. This situation continued until the year 1956, when additional permanent capacity for the manufacture of newsprint relieved the threat of shortages.

By mid-1949 and 1950, Michigan had commenced efforts to restore its position in the field of manufacturing and sale of fine quality writing paper and book paper, replacing much of the effort that had been directed to the manufacture of newsprint. In the latter part of 1950, plaintiffs’ difficulty in procuring newsprint from their regular sources of supply had eased and Evening News’ inventory of newsprint in 1949 was at the highest level it had been since 1940. There was a period of 7 months in 1950 when Booth did not have to resort to the use of Michigan newsprint and a period of about 13 months in 1950 and 1951 when Evening News did not have to resort to the use of Michigan products. The emergency with respect to the shortage of newsprint appeared to be pretty well over in the latter part of 1949 and the early part of 1950 as far as plaintiffs were concerned, and some inquiries were made to them in reference to the possibility of their selling the Michigan mill. However, plaintiffs had no assurances from their regular newsprint suppliers that the newsprint shortage was definitely over at that time. In fact, newsprint procurement became more difficult and uncertain with the outbreak of the Korean War in June of 1950. During this period of time, plaintiffs considered the Michigan mill to be insurance against the recurrence of a shortage in newsprint.

29. Both Booth and Evening News were subject to excess profits taxes during the years 1950-1953, pursuant to the Excess Profits Tax Act of 1950. In their returns for those years, both plaintiffs treated the stock of Michigan as an “inadmissible asset” as that term is defined in section 440 of the Internal Revenue Code of 1939.

30. The percentages of sales by Michigan of newsprint and other products to Evening News, Booth and other purchasers during the years 1947 through 1953, based upon dollar values, were as follows:

Evening Other sales Other Netos Booth newsprint sales Tear (percent) (percent) (percent) (percent)
1947 _ 0.65 0.65 0.00 98.70
1948 _ 19. 07 11. 86 18. 09 50.98
1949 _ 22.92 11.37 4.25 61.46
1950 _ 1.94 3.86 0.47 93.73
1951_ 5.28 6.69 0.00 88.03
1952 _ 0.56 0.00 0.00 99.44
1953 _ 0.63 0.04 0.00 99.33

31.In 1951, the plaintiffs executed new 15-year contracts with the Bowater Paper Company of New York, providing for the delivery of 7,800 tons of newsprint per annum to Booth and 4,500 tons of newsprint per annum to Evening News, beginning January 1, 1954. The contract with Evening News was later amended to provide for the purchase of 5,500 tons of newsprint for the year 1955, 7,000 tons for the year 1956 and 14,000 tons for the year 1957 and thereafter during the life of the contract. These contracts were contingent upon Bowater’s obtaining necessary output contracts and a Certificate of Necessity from the Defense Production Administration.

Bowater was one of plaintiffs’ regular suppliers of newsprint and was constructing a large new paper mill in Tennessee which was scheduled for completion by January 1, 1954. Deliveries to Booth and Evening News were to be made as shortly thereafter as possible.

On June 18, 1952, Bowater notified its customers, including the plaintiffs, that the new 15-year contracts for the delivery of newsprint were firm and that the newsprint contracted for would b8 supplied as soon as construction of the mill could be completed. Commercial production actually started at the new Bowater paper mill in June of 1954. As a result, there was no shortage of newsprint for plaintiffs by 1954.

32. In July 1953, the plaintiffs decided to sell their Michigan stock and retained the engineering firm of Stadler, Hurter & Company of Montreal, Canada, for the purpose of locating a purchaser and negotiating a sale. The decision to sell the Michigan stock at this time was partly based upon the fact that the plaintiffs believed they had assured themselves of an adequate supply of newsprint from a reliable source in view of the new 15-year contracts with Bowater. During the course of their efforts to dispose of the stock of Michigan, plaintiffs received various proposals from other paper companies contemplating mergers or exchanges of stock with Michigan, but such offers were rejected by the plaintiffs because they were not interested in carrying on any mill operations and desired to confine their business activities to the publication of newspapers.

33. After extensive negotiations with prospective purchasers, during which plaintiffs unsuccessfully endeavored to obtain a cash price of about $2,600,000 for the Michigan stock, Booth and Evening News finally sold this stock on February 3, 1954, to W. C. Hamilton & Sons of Miquon, Pennsylvania, at a price of $13 per share. Hamilton was in the same business, on a more extensive scale, as Michigan had been engaged in prior to its acquisition by plaintiffs, i.e., the manufacture and sale of fine quality writing paper and book paper. The negotiations with Hamilton for the sale of the Michigan stock had commenced in the fall of 1953 and were consummated on February 3,1954, at which time Michigan was no longer manufacturing newsprint but had reverted entirely to the manufacture of its normal products. Booth and Evening News each received $650,000. from the proceeds of the sale, and incurred expenses incident to the sale in 1954 in the amounts of $20,675 and $19,625 respectively.

34. During the period of ownership of the Michigan stock by Booth and Evening News, no dividends were paid by Michigan to its stockholders. The plaintiffs, as owners, were more interested in obtaining newsprint from the mill during the time of the shortage. They directed that any surplus earnings of Michigan be used to replace old equipment and increase the efficiency of the plant so as to put the mill in such condition as to be attractive to a prospective purchaser when the newsprint shortage was alleviated. Also, as the conversion of a part of the equipment to the production of newsprint had, to some extent, destroyed the market for Michigan’s normal products, some of its profits were devoted to the rebuilding of that market. Michigan had the following net profits, or losses, after the payment of Federal income and excess profits taxes, for the years 1948 through 1958:

1948_ 820,950
1949_ (24, 823)
1950_ 149, 812
1951_ 156, 879
1952_ 62,219
1953_ 135, 764

35. Neither Booth nor Evening News desired or intended their ownership of the stock of Michigan at any time to be anything other than a temporary means of obtaining an assured and adequate supply of newsprint during the period of shortage and threatened shortage when their regular suppliers were or would be unable to furnish such newsprint. At no time did plaintiffs have any desire or intention to invest in or engage in the business of manufacturing fine quality writing paper and book paper, which was the normal business of Michigan, except to the extent that Michigan’s continued activities in that respect were a reasonable part of the temporary expedient for the procurement by plaintiffs of an assured supply of newsprint.

At no time during the ownership of Michigan by plaintiffs was there any intention on the part of either plaintiff to retain the stock of Michigan as a permanent investment.

CONCLUSION OP LAW

Upon the foregoing findings of fact, which are made a part of the judgment herein, the court concludes as a matter of law that plaintiffs are entitled to recover and judgment will be entered to that effect. The amounts of recovery will be determined pursuant to Rule 38(c).

In accordance with the opinion of the court, and on a memorandum report of the commissioner as to the amounts due thereunder, it was ordered on August 3,1962, that judgment for the plaintiff in Case No. 51-59 be entered for $381,524.44, with interest thereon as provided by law, and for the plaintiff in Case No. 84-60 for $389,535.93, with interest thereon as provided by law. 
      
       Section 1221 provides in pertinent part:
      “§ 1221. Capital asset defined.
      “For tie purposes of this subtitle, the term 'capital asset’ means property held by the taxpayer (whether or not connected with his trade or business), but does not include—
      “(1) stock in trade of the taxpayer or other property of a kind -which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business;
      “(2) property, used in his trade or business, of a character which is subject to the allowance for depreciation provided in section 167, or real property used in his trade or business; * * *”
     
      
       The Tax Court has recently had occasion to consider the business purpose — investment purpose dichotomy we are exploring in Missisquoi Corp., 37 T.C. 791. There the court found that the original business purpose motivation in the purchase of debentures had changed to an investment purpose motivation before they were resold. The resulting loss was therefore held to be capital in nature.
     