WASHINGTON -- The Supreme Court agreed yesterday to decide a tax dispute that is likely to affect every business that has customers who keep coming back.
The question in a case taken to the court by a Newark, N.J., newspaper is whether a business can claim a federal tax write-off for the value of a list of continuing customers -- in that case, a list of subscribers.
A federal appeals court in Philadelphia ruled in September that federal tax law does not allow a depreciation deduction for the value of customer lists, since the lists represent nothing more than business "goodwill," and "goodwill" cannot be depreciated on federal tax returns.
Federal tax law does permit a depreciation deduction for an "intangible asset" that is considered to be "wasting" -- that is, will cease to exist at some point.
The Newark Morning Ledger Co., in its appeal, said the outcome of the case will affect businesses that have subscription lists, such as newspapers and magazines, and banks with depositors, insurance companies with policyholders, and countless other businesses that deal repeatedly with the same customers.
The newspaper company, publisher of the Newark Star-Ledger, was denied a write-off of $67.8 million -- the value experts had calculated for subscriber lists of eight Michigan newspapers it .. had acquired.
That figure represented the profits that the company expected to make from subscribers who were likely to stay with the paper for a number of years. But those subscribers ultimately would move away, die or simply stop subscribing.
The Internal Revenue Service concluded that continuing relations with subscribers were simply a "goodwill" factor in a newspaper's business.
In the Newark Morning Ledger case, the tax impact was about $10 million.
Nationwide, however, about $4 billion in federal tax revenues might be at stake, the appeal said.
IRS joined the New Jersey newspaper in urging the Supreme Court to settle the issue in the case of Newark Morning Ledger vs. U.S. (No. 91-1135). A final ruling is expected next year.