Opinion
Docket No. 2318.
1946-06-4
MORRIS MARKS LANDAU, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Raymond C. Sandler, Esq., and Nathan Schwartz, Esq., for the petitioner. B. H. Neblett, Esq., for the respondent.
In 1941 petitioner, a resident alien, was a creditor of a South African firm. The Emergency Finance Regulations imposed by the Union of South Africa in 1939 prevented petitioner from withdrawing funds against this indebtedness. In May 1941 petitioner executed a power of attorney, pursuant to which his attorney in Johannesburg, South Africa, on December 22, 1941, transferred 27,500 pounds of the indebtedness in trust for the benefit of petitioner's children and grandchildren. Petitioner valued the gift for tax purposes at $2 per pound. Respondent valued the gift at $3.98 per pound, the official rate of exchange in this country for free pounds. Held, petitioner properly valued the gift in this country, taking into consideration the governmental restrictions imposed upon foreign exchange by the Union of South Africa. Raymond C. Sandler, Esq., and Nathan Schwartz, Esq., for the petitioner. B. H. Neblett, Esq., for the respondent.
Respondent determined a gift tax deficiency of $4,070.55 for 1941. The sole issue is the value of the property that was the subject matter of the gift. Petitioner claims he overpaid the gift tax for the taxable year.
FINDINGS OF FACT.
Petitioner, a citizen of Great Britain, resided in Holmby Hills, Los Angeles, California. He filed a gift tax return for the taxable year with the collector for the sixth district of California. This return showed total gifts of $55,000, claimed a specific exemption of $40,000, net gifts of $15,000, and a gift tax liability of $330. The return reported a gift of 27,500 South African pounds in trust to petitioner's children and grandchildren. Seven of the named beneficiaries resided in England; one resided in Johannesburg, South Africa. The gift tax return carried the following explanation: ‘The above gifts were made in trust in South Africa. The gift was made in South African pounds which had no market value in the United States and which is here estimated as having a value of $2,00 per pound.‘
Respondent increased the value of the gift in trust from $55,000 to $109,450. He explained the adjustment as follows:
The values of gifts of South African pounds to an irrevocable trust created by you in 1941 have been determined on the basis of an exchange rate of $3.98 per South African pound as published by the Federal Reserve Bank of New York.
The trust instrument was executed for petitioner on December 22, 1941, in Johannesburg, South Africa, by Herbert Cranko, acting under and pursuant to a power of attorney executed by petitioner on May 26, 1941. The property conveyed in trust was ‘a portion of the debt owing by Landau Bros. Limited of Bulawayo Southern Rhodesia, to the Donor, which portion when collected and converted into money will amount to pounds 37,500 (Twenty-seven thousand, five hundred pounds) * * * .‘
Prior to September 1939, when England became involved in World War II, petitioner withdrew funds from South Africa against this indebtedness as he needed them for the purpose of investing them in the United States. No withdrawals were made after September 1939.
On September 9, 1939, the Governor General of the Union of South Africa issued certain ‘Emergency Finance Regulations‘ under section 9 of the Currency and Exchanges Act, 1933, which restricted the purchase, sale, and loans of foreign currency and gold, and the export of currency, gold, and securities.
The pertinent portions of these regulations are as follows:
3. (1) Subject to any exemption which may be granted by the Treasury, no person shall, except with permission granted by the Treasury . . .
(a) take or send out of the Union any bank notes, gold securities or foreign currency, or transfer any securities from the Union elsewhere; or
(b) draw or negotiate any bill of exchange or promissory note, transfer any security or acknowledge any debt, so that a right (whether actual or contingent) to receive a payment in the Union is created or transferred as consideration . . .
(i) for receiving a payment, or acquiring property, outside the Union, or
(ii) for a right (whether actual or contingent) to receive a payment, or acquire property, outside the Union,
or make any payment as such consideration.
(2) Paragraph (1) of this regulation shall not prohibit the doing of anything, within the scope of his authority, be a person authorized by the Treasury to deal in foreign exchange, and shall not prohibit the doing of anything which is certified by the Treasury to be necessary for the purpose . . .
(a) of meeting the reasonable requirements of a trade or business carried on in the Union; or
(b) of performing a contract made before the sixth day of September, 1939; or
(c) of defraying reasonable travelling or other personal expenses.
The Emergency Finance Regulations provided that Standard Bank of South Africa, Ltd., was appointed as an authorized dealer under the regulations. This bank advised petitioner in 1941 that he could not draw on his funds in South Africa and that an indebtedness of $14,250 to the bank would have to be paid by petitioner in American dollars.
Petitioner's brothers in South Africa advised him that they could not send him the money they owed him. Inquiries at various California banks revealed that the banks were not buying any South African pounds. Petitioner received no income from his South African funds, as they were not invested in any enterprise, nor could they be used as collateral for loans. He decided that, as the funds were not doing him any good, he might as well give a part thereof to his children and grandchildren. The gift involved no transfer of currency out of or into the Union of South Africa.
The official rate of exchange, as published by the Federal Reserve Bank of New York, applies only to so-called ‘free pounds,‘ i.e., pounds that can be used for regular trading transactions by virtue of a permit from the Bank of England or the Central Bank of South Africa. The official rate of exchange does not apply to ‘blocked pounds,‘ i.e., pounds subject to the restrictions imposed by the Emergency Finance Regulations.
The fair market value of the gift was $55,000.
OPINION.
ARNOLD, Judge:
The parties are agreed that petitioner made a taxable gift; the dispute between them is over the amount of the gift. Section 1005 of the Internal Revenue Code provides that ‘If the gift is made in property, the value thereof at the date of the gift shall be considered the amount of the gift.‘ The subject matter of the gift here was blocked South African pounds in South Africa. The petitioner valued the pounds at $2 per pound, due to the governmental restrictions placed on South African currency. The respondent valued the pounds at the official rate of exchange, $3.98 per free pound. The question that we must decide, while essentially one of fact, namely, the value of the gift subject to tax, is complicated by the legal question of whether value shall be determined at the residence of the donor or at the situs of the property transferred.
We have found as a fact that petitioner made a gift during the taxable year of $55,000. This finding is based largely upon the uncontradicted testimony that ‘blocked‘ South African pounds in the United States had a fair market value in December 1941 of $1.75 to $2.25 per pound, and $2 per pound; that such pounds had no collateral value whatever; that the official rate of exchange applied to ‘free‘ pounds as distinguished from blocked pounds; that it was practically impossible to free any South African pounds from exchange control restrictions; and that the value fixed for these South African pounds must take into consideration the fact that they can not be transferred from the Union of South Africa.
Respondent contends that, since the beneficiaries resided in England and South Africa, there is no occasion to transfer the pounds to the United States or to fix a value based upon the restricted market existing in this country. He insists that the donor derived and the donees received complete economic satisfaction from the gift, which should be measured at the official rate of exchange. Respondent cites and relies upon I.T. 3568, C.B. 1942-2, page 112,
as being a controlling force. We can find no support for respondent in this ruling. On the contrary, we understand it to mean that, despite disturbed conditions and the control of trading and exchange by foreign countries, conversion rates lower than the official or controlled rates were in some cases available on December 31, 1941, and that the rates of exchange as of that date, certified by the Federal Reserve Bank of New York for customs purposes, are not to be considered as definitely reflecting the rates acceptable for Federal income and excess profits tax purposes.
Advice is requested whether the foreign exchange rates as of December 31, 1941, certified by the Federal Reserve Bank of New York for customs purposes, will be accepted by the Bureau of Internal Revenue for Federal income and excess profits tax purposes.Notwithstanding present conditions of disturbance and the control of trading and exchange by foreign countries, free or open market rates lower than either official or controlled rates were in certain cases realizable on December 31, 1941, dependent upon the regulations of the particular foreign country and the degree of control which was exercised. In any case in which conversion rates as of that date are to be used, such rates shall be those giving a result most clearly reflecting the proper amounts of the items to which they relate as affected by the conditions and available means and rates of conversion as of that date. The rates of exchange used will be subject to verification and check upon the examination of the taxpayer's books and records by internal revenue agents.In view of the foregoing, the rates of exchange as of December 31, 1941, certified by the Federal Reserve Bank of New York for customs purposes, or adopted by any other agency, are not to be considered as definitely reflecting the rates which will be accepted by the Bureau of Internal Revenue for Federal income and excess profits tax purposes.
Neither party has directed our attention to a gift tax case involving foreign currency. Petitioner relies upon two income tax cases, International Mortgage & Investment Corporation, 36 B.T.A. 187, and Eder v. Commissioner, 138 Fed.(2d) 27, modifying 47 B.T.A. 235, which involved blocked foreign currencies. In the International case we held that no gain was realized on blocked German marks, but that gain was realized on German marks which were unrestricted at the time of receipt, but were later blocked by law before their removal from Germany.
In the Eder case the taxpayers were shareholders in a foreign personal holding company organized under the laws of Colombia. The laws of that country prohibited the transfer of pesos outside the country in excess of 1,000 pesos per month. The Circuit Court remanded the case to this Court to determine the fair market value of the blocked pesos in terms of American dollars, holding that this Court and the Commissioner had committed error in valuing the pesos at the exchange rate applicable to free pesos. Thus it is apparent that the Circuit Court did not consider the current rates of exchange acceptable conversion rates for valuing blocked pesos, and on remand this Court fixed the value on a basis of blocked pesos. Credit & Investment Corporation, 47 B.T.A. 673, is to the same effect with respect to blocked German marks.
It seems clear from the gift tax regulations, Regulations 108, section 86.18, that intangible personal property situated abroad, ‘constitutes property within the United States if consisting of a property right issuing from or enforceable against a resident of the United States * * * .‘ Cf. Burnet v. Brooks, 288 U.S. 378. The right to transfer and to give possession of the South African pounds to another or others was a property right issuing from a resident of the United States. Both parties have treated the value of this property as equivalent to the value of the 27,500 pounds. South African pounds were subject to control restrictions imposed upon South African currency by the Union of South Africa. These exchange restrictions reduced the value of petitioner's property right. Neither he nor the trustee could remove the pounds from South Africa. Under such circumstances we think the value of the property should be determined by taking into account the governmental restrictions.
In addition to his own testimony, petitioner offered the testimony of the manager of the international banking department of the Bank of America. The witness had dealt continuously in foreign exchange and foreign currency since about 1923. He had had four years of banking experience in Germany, two and one-half years in Holland, five years in New York, and thirteen years with the Bank of America. He was familiar with the restrictions and regulations issued by the Union of South Africa and the United Kingdom with respect to the exchange, withdrawal, and use of currency. He stated unqualifiedly that the governmental restrictions imposed by the Union of South Africa affected the value of South African pounds in the United States, and expressed the opinion that the value thereof was anywhere between $1.75 and $2.25 per pound. He testified that the Bank of America bought and sold them at that price and, when pressed on cross-examination as to whether the value in December 1941 was $2.25 or $1.75, he fixed the value at $2 per pound. The witness testified to the extreme difficulty of securing a permit from London or South Africa to free the pounds of either for use and, in the light of his own experience, he states that it would have been impossible for this petitioner to have secured any exemption under the Emergency Finance Regulations in order to bring South African pounds to the United States for investment purposes. In view of this testimony and all the other facts and circumstances of record, we are of the opinion that the value of petitioner's gift was $55,000, and a finding to that effect has been made.
Petitioner's claim that he overpaid his gift tax liability for 1941 is unsupported by the record.
Reviewed by the Court.
Decision will be entered for the petitioner.