IRS stirs dust on publishers' shelves in bid for back taxes

After years of litigation, the enforcement of what up to now has been a largely ignored federal tax regulation is sending shock waves through portions of the US publishing industry.

Some of these publishers warn that adherence to the rule threatens the financial health of the publishing business and threatens to stifle the generation of new ideas in the literary marketplace.

But what emerges from many interviews is the fact that much of the industry can cope with the tax decision without going out of business or getting a special exemption, as is about to be proposed in Congress. Some even feel the decision may be good for the industry in the long run.

Basically, the Interal Revenue Service rule says that a publishing firm -- or any other business for that matter -- cannot "write down" or depreciate inventories to obtain a federal income tax deduction and then subsequently sell those books at market value.

Although this requirement was published in the Federal Register almost 22 years ago, it has been a generally accepted practice throughout the business community to depreciate inventories and later sell items in those inventories without reducing prices to reflect their "depreciated" value.

After a series of court battles, the US Supreme Court ruled in Thor Power Tool v. Commissioner of Interal Revenue in January 1979, that inventories must be taxed at full sale price. In February of this year, the IRS ruled that business inventory tax procedure for 1979 tax returns would have to comply with the high court's decision.

The high court's ruling affects all business. But, to date, the publishing industry has reacted the most because the rule's enforcement comes at a time when many firms in the industry have begun to suffer from recession and profit-cutting overexpansion.

Henry Kaufman, vice-president and general counsel of the Association of American Publishers, and as such a chief spokesman for book publishers, says, "Certainly 'Thor' is not the sole thing wrong with the publishing industry," but "more than half of the publishers we have surveyed said there would be a dollar impact [in] adjusting to the regulations."

This impact "may be in the hundreds of millions of dollars," says Jay Brause, a partner in the accounting firm of Touche Ross & Co.

One publisher of scientific and research books said his company, with annual sales of $22 million, already has had to pay $1.8 million in additional taxes as a result of the "Thor" decision. In addition, he said that unless the ruling was somehow overturned, he would have to destroy, or "chop up" 300,000 books in inventory in order to take a tax write-off and be in compliance with the ruling. "If I wasn't being kind [to authors and the public], I would have to shred 700, 000 books," he said.

And the concern does not stop with money. "I'm talking about the impact on people's thinking," says Aaron Asher, editor in cheif of Farrar Straus & Giroux.

Many publishers says the IRS rul is, aside from the immediate necessity to pay any back taxes owed the government: (1) reducing the number of new books published; (2) reducing the size of press runs, with a view to making sure inventories are kept to a minimum; (3) keeping more so-called "new" authors from the marketplace because publishing their work is largely a risk.

In sum, Mr. Asher says, "fresh ideas" in the form of books will be less available to the public. At the same time, he acknowledged that some publishers will now be forced to employ better judgment, and, for time being at least, he didn't feel that Farrar Straus & Giroux would penalize new promising authors. But he also feels publishing requires "a certain kind of inefficiency," because in his view, most books are untested products.

He and other editors and publishers argue, too, that some works make a genuine if modest contribution to literature, science, or history but have no mass appeal. As a result, they sell in spurts over a period of years. Such book soften will have to be sold for scrap. Or, in some caes, new editors will have to be printed to meet spurts in demand, at considerably more expense to the publishers than if they could hold copies in inventory for long periods of time.

Others in the industry are not nearly as worried about the Thor decision, although generally speaking these are companies that have complied with the law for years or arelarge enough to live with Thor without substantial alterations to existing operations or their financial picture.

The McGraw-Hill Book Company is one of these companies. Producing more than 20,000 textbooks, pamphlets, and educational textbooks a year, the firm has had accounting procedures in line with the Thor ruling for about 10 years.

A company spokesman is sympathetic with the concern of many in the publishing business but admonishes privately, "You can't have an inventory and take a tax write-off and turn around and sell it for the retail price. . . . It's against the law."

On the other hand, this same source added that "the publishers are building up such a head of steam over this issue they may carve out some exemption for the industry."

Officially, McGraw-Hill attributes its ability to cope with the depreciation ruling to aggressive marketing strategies that have helped the company forecast with improved accuracy sales for a given book. However, the company's so-called "trade list" is not nearly as extensive as many other publishers because much of their material is education in nature. A trade list consists of book titles, fiction or nonfiction, that ar earmaked for a general audience, and as such, considered by many in the business to be more of a gamble.

Steve Bair, general counsel for Time-Life Books Inc., says that although "we're not happy" with the thur ruling, "I would hate to think all of the publishing judgments would be changed because of a ruling on tax write-offs."

Momentum is building in Congress for publishers to get some kind of exemption from the depreciation ruling, although it doesn't appear that such legislation will be passed this session or even next session.

Sen. Gaylord Nelson (D) of Wisconsin earlier this year introduced legislation ruling out "retroactive" application of the Thor depriation rule for calendar year 1979, because the IRS ruling clarification came in February of this year. But the US Treasury Department has vigorously opposed this measure. It states that the law has been on the books prior to 1979 and the companies are still not paying their fair share -- all companies, not only publishers.

Sen. Daniel P. Moynihan (D) of New York says he will introduce legislation early next year to exempt publishers alone. But this will not address the question of so-called retroactive taxes, and it is likely to face overwhelming opposition from other industries.