Meredith Corp. wants its money back.
The publisher of Better Homes & Gardens and Martha Stewart Living is suing the federal government for over $12 million, claiming the IRS erroneously overestimated the company’s taxable income from 2006 to 2012, according to court documents filed Monday in Iowa’s Southern District.
After auditing Meredith’s tax returns over the seven years in question, the complaint alleges, the IRS denied Meredith’s Section 199 deduction — a tax break meant to encourage domestic manufacturing — on the grounds that because it used a contract printer to produce its magazines, it was not entitled to the deduction because the business arrangement amounted to a transfer of ownership of the magazines from Meredith Corp. to the printer.
Meredith contends, in essence, that this is utter nonsense.
“Meredith’s printing agreements with the contract printers did not constitute, in substance or in form, a sale or other transfer of ownership of the magazines … to the contract printers,” the company argues, according to the filing. “While the contract printers had possession of the magazines … while they were being printed, Meredith always maintained substantive ownership … throughout the printing process.”
The complaint goes on to state that not only was Meredith the sole party responsible for creating all of the content in the magazines and selling all of the advertising pages, it purchased the ink and paper on which the magazines were printed, too.
“The paper remained Meredith’s property throughout the printing process. The contract printers were required to segregate Meredith-supplied paper from their own paper supplies, and were not permitted to count Meredith-supplied paper as part of their inventory. The contract printers could not use Meredith-supplied paper for any purpose other than to print Meredith’s magazines.”
After being notified by the IRS of the $9 million in allegedly unpaid taxes (plus about $3 million in interest), Meredith paid the full amount in September of 2016, the documents say, before filing claims for a refund on April 26 of this year. In the six months since, Meredith claims, the IRS has taken no subsequent action, adding that the IRS adjustments to Meredith’s taxable income over the audited years is “without factual basis and legally erroneous.”
Meredith did not immediately respond to a request for comment on the suit. The company is being represented by Washington, D.C.-based Steptoe & Johnson LLC. The IRS does not comment on individual cases.
The lawsuit comes a week after Meredith reported its First Quarter earnings (the company’s fiscal year runs from July to June), indicating about a 1.8 percent decline in overall company revenue year-over-year — to $392.8 million — and a 3.4 percent dip in revenue for its National Media Group, which is composed of its magazine and digital media businesses.
While circulation revenues held steady, advertising revenues within the National Media Group fell 4.2 percent to $120.1 million.
“We are experiencing some softness in National Media Group advertising, similar to what has been reported by the major ad agency holding companies and media peers,” said chairman and CEO Steve Lacy on an earnings call with investors. “We have experienced this kind of industry-wide advertising volatility in the past. And over time, the strength of our consumer brands and our rock solid connection with our core audience, American women ages 25 to 54, has served us well, allowing us to increase market share and outperform our competitors.”
Lacy, along with COO Tom Harty, credited Better Homes & Gardens, Martha Stewart Living, and the quarterly Magnolia Journal — which has already increased its rate base three times since launching a year ago — as primary growth vehicles for the National Media Group.
Lacy added that digital advertising revenue, which now accounts for about 30 percent of the National Media Group’s revenues, was “basically flat for the quarter.”
Asked about competitor Hearst’s recent acquisition of Rodale’s titles, Lacy seemed to imply that Rodale’s asking price was a bit too high for Meredith’s liking.
“We are pretty good at doing the numbers on all of these businesses. And we don’t overpay,” Lacy said. “We don’t know what arrangement may be in process between the Rodale family and Hearst. But in our opinion, the vast majority of the value was in [Men’s Health and Women’s Health] and that’s how we did our valuation. And we take a pretty hard-headed approach to these things. There isn’t any reason to overpay and set the operating group up for continued failure of inability to meet a ridiculous acquisition plan. So we put our numbers together, and we look at these businesses the way we look at our own. We look at the costs that we can take out. And we know how to do that because we have done it a lot of times. And then, we do a net present value of the future cash flows and decide what’s good for Meredith shareholders and there is no reason to overpay.”