Ederv.Commissioner of Internal Revenue

Circuit Court of Appeals, Second CircuitJul 1, 1943
138 F.2d 27 (2d Cir. 1943)

Nos. 244, 245, 246.

July 1, 1943.

Petition to Review a Decision of the Tax Court of the United States.

Petition by Phanor J. Eder and others, to review a decision of the Tax Court redetermining a deficiency in the tax imposed against petitioners by the Commissioner of Internal Revenue, 47 B.T.A. 235.

Case remanded to the Tax Court.

Phanor J. Eder, one of the taxpayers, is a lawyer practicing in New York City who specializes in Colombian law. During the year 1938 he spent the larger part of two months in Colombia. The other taxpayers, Violet L. Eder and James P. Eder, are his wife and son living in New York City. During the year 1938 each of the three taxpayers owned 25% of the stock of the Colombian Investment Company of South America, formed in 1936 under the laws of the Republic of Colombia, and a successor to a Colombia holding company which had existed since 1926. The remaining 25% of the stock was owned by another daughter of Phanor J. Eder. The Colombian company was the principal stockholder in a sugar company and also had a stock interest in a brick company, some securities and other minor interests.

It is conceded by the taxpayers that the Colombian Company was a foreign personal holding company throughout the taxable year 1938 within the meaning of § 331 of the Revenue Act of 1938, 26 U.S.C.A. Int. Rev.Code, § 331; and the question here is whether the taxpayers who filed returns on a cash basis, are taxable under § 337, 26 U.S.C.A. Int.Rev.Code, § 337, on the undistributed net income of that company in the light of the following facts: For some time before March or April of 1938, no profits or earnings of the Colombian Company could legally be transferred outside the boundaries of Colombia because of prohibitions imposed by the exchange control laws and regulations of that country. There was no law of the Republic of Colombia during 1938 forbidding the expending or investment of pesos within the boundary of that Republic. If articles were bought with pesos in Colombia and exported, there was an obligation, under the control provisions, to return to Colombia the sales proceeds obtained abroad. In March or April of 1938, under a Colombian decree modifying the previous controls, the company could transfer abroad its funds in amounts not exceeding $1,000 per month; this decree was in force throughout the balance of the year 1938. The Colombian Company received the permit necessary under the decree to remit $1,000 per month to its stockholders in the United States, and accordingly did transmit 58,296.60 pesos with respect to which it claimed, and was allowed by respondent, a "dividends paid credit" measured in United States dollars at the exchange rate, as to "free" pesos, of 57.06. The taxpayers, in their 1938 returns, reported "undistributed Supplement P net income" of the Colombian Company of 109,608.38 pesos which were "blocked"; none of them reported or paid a tax on their proportions thereof.

The Commissioner made a determination that the undistributed pesos had a value in United States dollars — at the exchange rate of 57.06 per peso for "free pesos — of $62,542.54, and computed and determined deficiencies, on that basis, of 25% or $15,635.64 as to each of the three taxpayers. These deficiencies were sustained by the Tax Court. The case is here on taxpayer's petition for review.

Edgar J. Goodrich and Walter J. Brobyn, both of Washington, D.C. (Guggenheimer, Untermyer Goodrich, of Washington, D.C., of counsel), for petitioners.

Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key, Helen R. Carloss, and Newton K. Fox, Sp. Assts. to Atty. Gen., for respondent.

Before L. HAND, AUGUSTUS N. HAND, and FRANK, Circuit Judges.

We agree with the taxpayers that the Commissioner and the Tax Court were in error in adopting as the value of "blocked" pesos the current rate of exchange for "free" pesos. It does not follow, however, that the taxpayers must win. The evidence does not make it clear whether or not owners of "blocked" pesos could have sold them for dollars to citizens of this country wishing to invest or spend the pesos in Colombia. But even if we assume that such a transaction was not lawfully possible under the laws of Colombia, or that there would have been an obligation to return to Colombia the dollars thus received, still there can be no denying that the taxpayers could have invested, or spent the "blocked" pesos in Colombia and, as a result, could there have received economic satisfaction. The taxpayer, Phanor J. Eder, must actually have needed to expend some pesos in Colombia during a portion of the taxable year.

There is nothing in the record to show how economic satisfaction in Colombia can be measured in American dollars. Perhaps it can be measured on the basis of the respective price indices in the United States and Colombia, restricting the commodities included in the indices to those which could readily be purchased in Colombia in the taxable year; perhaps there are other available legitimate bases. Absent any showing that there are no such bases, it might perhaps be said that the taxpayers must lose this appeal because they did not discharge their burden of proof. In the circumstances, we consider that such a ruling would be too severe. We therefore remand the case to the Tax Court for further consideration of the appropriate measure of valuation, with leave, of course, to any of the parties to introduce further evidence bearing on that particular subject.

We do not agree with taxpayers' argument that inability to expend income in the United States, or to use any portion of it in payment of income taxes, necessarily precludes taxability. In a variety of circumstances it has been held that the fact that the distribution of income is prevented by operation of law, or by agreement among private parties, is no bar to its taxability. See, e.g., Heiner v. Mellon, 304 U.S. 271, 281, 58 S.Ct. 926, 82 L.Ed. 1337; Helvering v. Enright's Estate, 312 U.S. 636, 641, 61 S.Ct. 777, 85 L.Ed. 1093; cf. Helvering v. Bruun, 309 U.S. 461, 60 S.Ct. 631, 84 L.Ed. 864. That the result under the statute here before us may be harsh is no answer to the government's position; the purpose of Congress was to deal harshly with "incorporated pocketbooks, and the motive of a particular taxpayer who has such a "pocketbook" we have held to be irrelevant. O'Sullivan Rubber Co. v. Commissioner, 2 Cir., 120 F.2d 845; In Porto Rico Coal Co. v. Commissioner, 2 Cir., 126 F.2d 212, 213, we said: "It is apparent that the decision of the Board has brought about a harsh result by imposing a surtax, to say nothing of the penalty for failure to file a return, upon a corporation which had no net income to distribute; but if it finds itself, because of the way it was organized and did its business, within the scope of a statute primarily designed to make the failure to distribute actual net income too expensive to be worthwhile and was, therefore, taxed when it did not in fact do what the statute was aimed to discourage, it must endure its misfortune as best it may."

Interpreting the statute to bring about such a consequence does not render the statute unconstitutional; the Congressional purpose was valid and the method of taxation was a reasonable means to achieve the desired ends.

O'Sullivan Rubber Co. v. Commissioner, supra.

Cf. Helvering v. National Grocery Co., 304 U.S. 282, 58 S.Ct. 932, 82 L. Ed. 1346; Heiner v. Mellon, 304 U.S. 271, 58 S.Ct. 926, 82 L.Ed. 1337; Burnet v. Leininger, 285 U.S. 136, 142, 52 S.Ct. 345, 76 L.Ed. 665; Corliss v. Bowers, 2 Cir., 34 F.2d 656, 658, affirmed 281 U.S. 376, 50 S.Ct. 336, 74 L.Ed. 916; Helvering v. Northwest Steel Rolling Mills, 311 U.S. 46, 61 S.Ct. 109, 85 L.Ed. 29.