Auditing the Grand Acquisitor

By John Greenwald

A $914 million tax suit sheds new light on the Newhouse empire

No American newspaper publisher was more acquisitive, or more secretive about his business affairs, than Samuel Irving Newhouse. By the time of his death in 1979, at the age of 84, Newhouse had amassed a nationwide communications empire that included not only newspapers but magazines, radio and television stations, printing companies and delivery services. His 31 daily newspapers had a total readership of more than 3 million, making them the third largest U.S. chain after Gannett and Knight-Ridder. But the value of those immense holdings remained a well-kept family secret that outsiders could only guess at.

Now, however, the Internal Revenue Service is shining a spotlight on the inner workings of the Newhouse empire. In what is by far the largest U.S. action of its kind, the IRS is charging that Newhouse's heirs and advisers grossly undervalued his estate at the time of his death. As a result, says the IRS, the Newhouse family owes the Government a staggering $914 million in taxes and penalties. That sum is more than 20% greater than the $750 million that the IRS collected from all estate tax cases in 1982.

To buttress its case, the agency has placed in evidence voluminous documents that spell out details of the family business never before made public. They indicate that the holdings acquired by Newhouse, the son of poor Jewish immigrants from Eastern Europe, have grown into America's biggest family-owned media conglomerate. After two years spent interviewing Newhouse executives and studying financial records, IRS Appraiser Joseph Baniewicz put a value of $1.23 billion on the estate at the time of the publisher's death. Sons Donald, 53, and Samuel I. Newhouse Jr., 55, who seem to have inherited their father's workaholic habits and zeal for expansion, have since added enterprises like Random House and a string of cable-television companies, while selling off radio and TV stations.

Such moves, together with the growing value of many Newhouse newspapers and magazines, have led some analysts to estimate that the family holdings may now be worth more than twice what they were in 1979, or some $3 billion. By comparison, Hearst Newspapers, the next largest family-held concern, has an estimated total value of some $1.3 billion.

The IRS evaluation of the Newhouse estate was wildly at odds with the family's appraisal. That assessment, made by Chemical Bank and the Wall Street firm Goldman, Sachs & Co., put the estate's taxable value at $90.9 million and calculated the taxes owed at $48.7 million. The IRS, on the other hand, said that according to its evaluation of the estate, the heirs owed taxes of $609 million. The Government added $305 million to that tab in the form of fraud penalties for willful undervaluation of Newhouse's holdings.

The gap between the IRS and the Newhouse appraisals stunned veteran estate planners. While assessments of properties left at death are frequently disputed, experts could not recall a chasm nearly as wide. "I have never seen such a large disparity," said one leading adviser. The unusual battle centers on the value of just ten shares of common stock that Newhouse owned. Although tiny in number, they were the only shares that carried the right to vote for directors of Advance Publications, the company that ran the newspapers and magazines. Ownership of the stock thus gave Newhouse total control of the publishing operations.

In view of that control, the IRS assigned each share a value of $42 million, for a total of $420 million. The Newhouse estate, however, declared that the shares were worth just $859,500 apiece, or $8.6 million. The agency also held that 990 shares of nonvoting common stock that Newhouse owned totaled $811.8 million in value. The 3,500 shares of preferred stock owned by other members of the Newhouse family, including his sons and his wife Mitzi, now 78, had little worth, according to the IRS. It contended that the $601 million value that the Newhouse appraisers assigned to the preferred stock amounted to an effort to avoid taxes.

The agency action, first brought last May, documented the highlights of Newhouse's rise. He began by purchasing the Staten Island Advance while still in his 20s, and then used the profits to acquire increasingly larger properties. Throughout his career, the IRS said, Newhouse shunned big dividends in order to pump corporate earnings into new acquisitions. His purchases of dailies like the New Orleans Times-Picayune and its sister, the States-Item (for $42 million in 1962), set records for the amount spent on newspapers. In 1976, Newhouse outbid Times Mirror for the Booth Newspapers of Michigan, whose holdings included the Sunday magazine supplement Parade. The purchase price of $304.5 million remains the highest ever paid in a U.S. newspaper transaction.

The IRS estate action arose largely because of the family-owned nature of the Newhouse enterprises. The value of the shares of such closely held companies is determined by appraisals rather than by public trading, and is therefore open to dispute. The price of stock that is bought and sold on exchanges, on the other hand, is established each day by the market. The shares of most major newspaper firms are now publicly traded.

Surprisingly, Newhouse hung on to his common shares. Owners of family held businesses frequently transfer their common stock to heirs to minimize estate taxes. But Newhouse apparently preferred to keep the wealth the common stock represented, together with control of his operations, until the time of his death. Such desire for dominance was typical of the diminutive (5-ft. 3-in.) Newhouse, who ran his empire without a headquarters, as if it were a family store. He once told an inter viewer that he had neither a desk nor files. And while Newhouse allowed his papers editorial freedom, he made virtually all key corporate decisions himself.

The IRS brought its suit shortly before the expiration of the three-year period in which the agency can challenge an estate filing. Charles Sabin, a Newhouse attorney who had been negotiating with the agency, termed the fraud charge "shocking and uncalled for" and "an obvious, crude tactic to force a settlement, on patently unfair terms, by intimidation."

The estate tried unsuccessfully to keep records of the case from public view. Law yers argued in court documents that Newhouse's companies were often able to outbid rivals for newspapers because competitors did not know how much the Newhouse firms could spend. "Obviously, the edge that they have over their competitors in the acquisition of additional companies would be lost if their financial information were made public," insisted the attorneys.

Sources familiar with estate taxes say the Newhouse case is likely to drag on for years. Some past large actions have been settled when an estate agreed to pay half of the taxes demanded. That would still be a vast sum in the Newhouse case, but one that the family may be able to afford without selling any properties. The value of the Newhouse holdings is so large, experts say, that the heirs might be able to meet the taxman's demands out of their corporate earnings.

With reporting by David Beck, Frederick Ungeheuer This file is automatically generated by a robot program, so viewer discretion is required.