Rev. Rul. 68-112

Advice has been requested whether a taxpayer is entitled to a deduction under section 162 of the Internal Revenue Code of 1954 for an amount paid to a purchaser of its newspaper business for the assumption of the liability for its unearned subscriptions under the circumstances described below.

The taxpayer, a corporation, owned a newspaper business, one of the various activities in the communication field in which it was engaged. In a prior taxable year the taxpayer elected to report prepaid subscription income of the newspaper business ratably under section 455 of the Code. It entered into an agreement to sell the newspaper. Under the terms of that agreement, the taxpayer received 5 x dollars which was reported as the sales price. Under the terms of the same agreement, the taxpayer paid to the purchaser 1 x dollars, a sum equal to the amount of prepaid subscriptions existing at the time of the sale, to compensate the purchaser for taking over the taxpayer's liability on these subscriptions. The sales price of 5 x dollars did not take into account the taxpayer's liability for these newspaper subscriptions. In the year of the sale the taxpayer has, as required under section 1.455-4 of Income Tax Regulations, included in its gross income the prepaid subscription income not previously included in its gross income pursuant to its election under section 455 of the Code.

Section 1.162-1 of the regulations provides in pertinent part that business expenses deductible from gross income include ordinary and necessary expenditures directly connected with or pertaining to the taxpayer's trade or business, except items which are used as the basis for a deduction or a credit under provisions of the Code other than section 162.

Thus, as to the treatment of 1 x dollars, if the taxpayer in this case had used the same amount of its funds to extinguish the liability by refunding the prepaid subscriptions, the refund would have been deductible under section 162 of the Code. See Boston Consolidated Gas Co. v. Commissioner , 128 F.2d 473 (1942). A different result does not occur when the payment is made to the buyer of the newspaper to assume the taxpayer's primary responsibility for filling the subscriptions.

Accordingly, under the circumstances described above, the amount paid by the taxpayer to the purchaser of the newspaper for its assumption of the liability for the unearned subscriptions is deductible under section 162 of the Code.