A Billion-Dollar Story: The Trial of Donald and Si Newhouse

Article excerpt

The U.S. Tax Court is only a short cab ride from the Washington bureau of Newhouse Newspapers, but the dedicated news hounds there employed somehow have managed to miss the compelling tale just concluded in the courtroom. This demonstrates puzzling news judgment, for the several million readers of the chain's twentysix newspapers doubtless would find instructive an exploration of the government's accusation that the Newhouse family has dodged more than $1 billion in taxes.

Normally, so many allegedly delinquent digits trailing behind such high rollers would bring reporters running like lottery winners, but the rest of the press also has studiously ignored or played down the Newhouse trial. Thus, a wide public has been deprived of many useful revelations, among them Samuel Newhouse Jr.'s insistence that it is difficult to explain how the family made business decisions because "a little bit like trying to describe love." In fact, a certain amorousness does surface in the court papers from time to time, notably when they record intrafamily largesse: One year, for example, Donald Newhouse received a salary of $397,839, plus dividends totaling more than $650,000, an amount he regards as "nominal."

The unpleasantness between the Newhouse family and the Internal Revenue Service may constitute the biggest estate tax case ever to come before the court. Even so, I probably would never have noticed it had I not been sensitized over the years by a press ever alert to the tax problems of certain headline-worthy politicians. Indeed, the Newhouse papers themselves have displayed admirable vigilance in pursuit of such corner cutters like Lee Alexander, the former Mayor of Syracuse, New York. The chain's Post-Standard and Herald-Journal, good watchdogs that they are, barked noisily for months before Alexander ultimately was found guilty on tax evasion and other charges last year. In fact, no sooner was the Federal indictment handed down in 1987 than the Herald-Journal editorialized that "the case looks solid," adding that if Alexander was found guilty "we will have precious little sympathy" for him.

The government's case against the Newhouse family may be solid, too, but I resist any rush to judgment, for such haste is not the American Way. Suffice it to say that the trial deserves a bit more attention than it has got, even though it is complex and the arithmetic involved requires a certain concentration. I urge readers to press on, if only to put their own tax problems into perspective as April 15 looms. After all, if two brothers who control a fortune estimated at $5.2 billion may lose a fifth of it to the government, how bad off can the rest of us be?

Our story begins in 1979, when Samuel Irving Newhouse died. He was 84 years old and had pursued a sufficiently full life to leave behind the largest privately held media empire in the United States. Besides the newspapers, which also included the Newark Star-Ledger, the Cleveland Plain Dealer and the New Orleans Times-Picayune, he owned some cable television operations and Conde Nast magazines, Mademoiselle and Vogue among them. The magazines he bought in 1959 as-he liked to say-a surprise present for his wife, Mitzi, on their thirty-fifth wedding anniversary.

Six months after "S.I." died, his two sons, the aforementioned Samuel Jr. (Si) and Donald, together with the family's fiduciaries, valued his gross adjusted estate at nearly $181.9 million and filed a return listing the net tax due as just shy of $48.7 million. After some scrutiny, the I.R.S. in 1983 advised the brothers that the estate was worth an estimated $1.2 billion, and thus the tax as computed was deficient by more than $609 million. Moreover, the government tacked on a 50 percent penalty ($304 milion and change) for civil fraud.

This is big money even for rich folks, and the brothers Newhouse took considerable offense, calling the fraud charge "preposterous" and accusing the I. …