De Reitzes-Marienwert v. Commissioner

Erwin de Reitzes-Marienwert, Petitioner, v. Commissioner of Internal Revenue, Respondent De Reitzes-Marienwert v. Commissioner Docket No. 34881 United States Tax Court 21 T.C. 846; 1954 U.S. Tax Ct. LEXIS 277; March 4, 1954, Promulgated *277 Decision will be entered under Rule 50. 1. Deductions -- Losses -- Secs. 23 (e) and 117 (j) (2), I. R. C. -- Petitioner since 1934 owned shares in a Czechoslovakian corporation. The Czechoslovakian Government "nationalized" the assets of the corporation by decree in 1945 and further implemented the decree in 1946. Petitioner claimed an ordinary loss in 1946 resulting from this action of the Czechoslovakian Government. Held, if petitioner suffered any loss it was a capital loss and was incurred in 1945 and not 1946. 2. Deductions -- "Interest." -- Petitioner entered a partnership in 1945. His mother was not a member thereof, but advanced to petitioner $ 25,000 to be used in the partnership under an agreement pursuant to which he was to pay his mother 40 per cent of his partnership profits. Held, the amount paid to his mother in 1946 was deductible by petitioner. Bernard E. Singer, Esq., and Herman R. Perper, Esq., for the petitioner. John J. O'Toole, Esq., for the respondent. Tietjens, Judge. TIETJENS *846 The respondent determined a deficiency in income tax of $ 10,208.95 and a penalty of $ 1,020.90 under section 294 (d) (1) (A) of the Internal Revenue Code, for the year 1946. The penalty issue has been conceded by the respondent. The issues for decision are (1) whether the petitioner*279 sustained a deductible loss resulting from nationalization by the Czechoslovakian Government of the assets of a Czechoslovakian corporation of which the petitioner was the principal stockholder and (2) whether the petitioner is entitled to deduct the sum of $ 4,602.31 which he paid to his mother from his share of profits in Cereal Products Company pursuant to an agreement under which his mother had advanced certain monies to him for use in the business. FINDINGS OF FACT. A stipulation of facts filed by the parties is hereby adopted as part of our findings. The petitioner is an individual residing in Elmhurst, New York. He became a naturalized citizen of the United States in September 1945. His income tax return for the calendar year 1946 was filed with the collector of internal revenue for the second district of New York. *847 Issue No. 1. Hospodaska ucastinna spolocnost pre priemysel cukorny v. Nitre (hereafter called Nitra) was a corporation organized about 1927 under the laws of Czechoslovakia by a group headed financially by the petitioner's father. Nitra built and operated a sugar factory in Czechoslovakia. Its properties emerged from World War II undamaged. Prior*280 to World War II the petitioner owned 5,458 shares out of 9,000 outstanding shares of Nitra. Of his shares, the petitioner inherited 2,952 shares from his father in 1935, 328 shares from his aunt in January 1940, and the balance by gift from his mother about February 1940. On October 24, 1945, the Government of Czechoslovakia promulgated and issued Decree No. 101 which had as its purpose the nationalization of certain enterprises in the food industry, among which were sugar factories and processing plants. Said decree provided as follows: 101. Decree of the President of the Republic of October 24, 1945, regarding nationalization of certain enterprises of the food industry. On motion of the Government and in agreement with the Slovak National Council, I order: Part I Extent of Nationalization. Sec. 1. /1/ As of the day of publication of this decree, there are nationalized: 1. Sugar processing plants and sugar refineries, * * * /4/ The Minister for Food, in Slovakia in agreement with the Commissioner for Food and Supply shall, with the effect of service by publication, announce in the Czech and Slovak Official Gazettes which enterprises have been nationalized under this Decree. *281 * * * * Sec. 4. /1/ By nationalization, the Czechoslovak State acquires the ownership of the nationalized enterprise to the extent as stated below. /2/ Nationalization shall affect all immovable property, buildings and installations serving for the operation of the nationalized enterprise, all appurtenances of the enterprise, including all rights/patent rights, trade and other licenses, trade marks, samples and the like/. Bills of Exchange, securities, Savings Bank books, cash and claims belonging to the enterprise, as well as all products whether completed or not completed, half-finished products, stocks and materials which belong to the enterprise on the day on *848 which this Decree becomes effective, Mineral deposits and other raw material resources as well as movable property and rights serving permanently for the operation of the enterprise shall be affected by nationalization even if they belong to a person other than the owner of the enterprises. * * * On January 9, 1946, the Government of Czechoslovakia by Decree No. 72 denominated the specific industries nationalized under Decree No. 101, among which enterprises was Nitra. Said Decree No. 72 provided as follows: *282 Decree 72 of the Ministry of Food dated January 9, 1946: About the nationalization of sugar factories and refineries of sugar in Slovakia. 1. In agreement with the Commissioner of Food and Supplies and according to the Section 1, Paragraph 4 of the Decree Number 101, 1945, collection of laws and decrees, regarding the nationalization of some enterprises of the food industry, I herewith announce that as of the service of this decree, that in the group of the sugar industry in Slovakia, the following were by the quoted decree nationalized: "Hospodaska ucastinna spolocnost pre priemysel cukorny v. NITRE." * * * * Paragraph 2. By this nationalization, the Czechoslovak State acquired the possession of the above mentioned enterprise to the extent stipulated by Section 4 of the Decree Number 101, 1945. At the time the above decrees were issued the shares in Nitra owned by the petitioner were held by Brown Bros., Harriman and Co., in New York City in a custody account standing in the name of the petitioner. In April 1946 the shares were, at the instruction of the petitioner, turned over to the Prague Credit Bank in New York and a receipt therefor was given by the Czechoslovakian consulate. *283 This was purportedly done pursuant to Czechoslovakian Decree No. 95 providing for the registration of securities. The petitioner, in a claim presented to the United States Department of State respecting indemnification for his alleged interest in Nitra, designated October 25, 1945, as the date of loss. The respondent has allowed the petitioner for 1946 the full capital loss deduction to which he is entitled. On his 1946 return the petitioner claimed a loss of $ 27,540 "from other casualty, or theft" based on nationalization of the sugar factory of Nitra by Czechoslovakia as of January 9, 1946. This was disallowed by the respondent. Issue No. 2. The petitioner was trained in the business of food chemistry and since 1934 has been associated with and headed several companies making synthetic food products. On occasion he asked his mother and others to invest in his businesses. On June 22, 1945, the petitioner formed a partnership with Adolph J. Mainzer called Cereal Products Company which required an immediate *849 advance of $ 10,000 and an eventual capital investment of $ 50,000 by the petitioner for a 50 per cent interest. The petitioner and Mainzer each had a 50 per*284 cent interest in the partnership. The petitioner's mother agreed to and did provide $ 25,000 or one-half of the petitioner's capital investment in the partnership. This money was provided in accordance with the following letter addressed to his mother by the petitioner under date of September 18, 1945: I am writing you this letter to confirm our oral understanding relative to the money which you have advanced to me and are going to advance to me in connection with my contribution to the partnership which is to do business under the name of Cereal Products Company. This partnership is composed of Adolph J. Mainzer and myself as general partners and each of us has a fifty per cent interest in the profits thereof. I have heretofore advised you that I intend to contribute approximately Fifty Thousand Dollars as my share of the capital of Cereal Products Company. You have agreed to advance to me the sum of Twenty Five Thousand Dollars in connection with my contribution to the partnership venture. You have already turned over to me Fifteen Thousand Dollars and you agree to advance me, in addition, up to Ten Thousand Dollars at such times and in such amounts as I may require. In consideration*285 of the advance made to me, I agree that I will pay to you for the duration of the above mentioned partnership 40% of all net profits from such partnership which I may realize. I agree to repay the full amount advanced to me within thirty days after the termination or liquidation of the partnership above mentioned. If in the course of the life of the partnership, I withdraw any of my capital therefrom, I agree that half of such capital withdrawals shall be paid to you in partial liquidation of my agreement to repay all advances to you. If this letter correctly reflects our understanding, please sign the enclosed copy of this letter and return to me. With love, /s/ Erwin This letter correctly reflects our understanding. /s/ Baroness Maria de Reitzes-Marienwert In 1946 the petitioner reported as his share of the income of Cereal Products Company the sum of $ 11,505.77 and pursuant to his agreement with his mother paid her 40 per cent thereof, or $ 4,602.31, which she reported as income on her return. On his own return for 1946 the petitioner claimed the sum of $ 4,602.31 as a deduction for interest on a loan from his mother. This was disallowed by the respondent. OPINION. Issue*286 No. 1. The petitioner's argument, in substance, is that the nationalization of Nitra's properties by the Czechoslovakian Government resulted in a loss to him in 1946 which is deductible in full *850 under the provisions of section 23(e), 1*287 or section 117 (j) (2), 2*288 or section 112 (f) 3 of the Internal Revenue Code. The pertinent provisions of these sections are set forth in the margin. The respondent*289 meets this argument as follows. First, he contends that, assuming a loss was suffered in 1946, the question is moot because the loss was a capital loss and thus limited by section 23 (g), 4 the full *851 amount of which as so limited has been allowed. Second, he contends that the record is devoid of evidence fixing the amount of the loss incurred, if any deductible loss was in fact incurred. And third, he argues that 1945 rather than 1946 was the year of loss. *290 We think the respondent's determination must be sustained. The property owned by the petitioner was stock in Nitra. So far as we can ascertain from the record this stock as such was never seized or nationalized or confiscated by Czechoslovakia. As we read and interpret the decrees of the Czechoslovakian Government on which the petitioner relies, these decrees nationalized the assets of Nitra and not the stock. Perhaps this had the effect of destroying the value of the corporate assets, but even this is not established by the evidence. The fact remains that the petitioner's stock itself was not seized or confiscated. We are not overlooking the fact that the petitioner's stock was in April of 1946 turned over to representatives of Czechoslovakia "purportedly" pursuant to Czechoslovakian Decree No. 95. Nevertheless, the record before us does not contain this decree, we are unable to determine its effect or purpose, and for all that appears, this transfer was made at the voluntary instruction of the petitioner and cannot be considered a seizure or confiscation. Presumably the nationalization of corporate assets had the effect of rendering the petitioner's stock worthless. Cf. *291 United States v. S. S. White Dental Mfg. Co., 274 U.S. 398; Emil Stern, et al., 5 B. T. A. 89. But losses from the worthlessness of stock are by section 23 (g) (2) "to be considered as a loss from the sale or exchange * * * of capital assets." Such a loss would avail the petitioner nothing in this proceeding since for 1946 he has already claimed and been allowed the full amount of capital losses permitted him by the statute. Accordingly, there might be some justification for not deciding the point at all. Cf. Corn Products Refining Co., 16 T. C. 395. Furthermore, we think the respondent's contention that the year of loss was 1945 instead of 1946 is correct. The fundamental nationalization Decree No. 101 was dated October 24, 1945. This decree nationalized "as of the date of [its] publication" sugar processing plants and sugar refineries. True, the "enterprises" so nationalized were to be subsequently "announced" and it was not until January 9, 1946, that it was so announced with respect to Nitra. Nevertheless the decree of January 9, 1946, states that Nitra was among those enterprises*292 which "were by [Decree No. 101] nationalized" and further *852 that by "this nationalization the Czechoslovak State acquired the possession" of Nitra. In the light of this language, which speaks of past action and is merely confirmatory of what had been done, we determine that the nationalization of Nitra took place in 1945 and that whatever loss the petitioner suffered because of the nationalization occurred in 1945 and not in 1946 as claimed by the petitioner. On the amount of the loss the evidence is very unsatisfactory, but in view of what we have said above it is unnecessary to discuss or attempt to make any finding in that respect. Neither do we think it necessary to discuss the possible application of section 127, "War Losses," to this situation. The respondent has stressed the possible application of this section on brief, but the petitioner has ignored it entirely and our disposition of the issue has been made without reference to it. Accordingly, nothing would be gained by further analysis of that section. Furthermore, since we are unable to determine that the petitioner's stock was seized or confiscated, the petitioner's contention that his property was "involuntarily*293 converted" by seizure by the Czechoslovakian Government is without merit and we do not see that section 117 (j) or 112 (f) is brought into play. Issue No. 2. On the issue involving deduction of the amount paid to the petitioner's mother, the respondent emphasizes that the arrangement between the petitioner and his mother is to be scrutinized with the care that interfamily arrangements resulting in the splitting of family income require. He further argues that the amount paid by the petitioner to his mother was not "interest" since the agreement between them did not contemplate interest. Also that since the mother was not a partner in Cereal Products Company she was not entitled to share in the partnership income. But even if we agree with these arguments it does not follow that the respondent's determination is correct that the petitioner cannot deduct the $ 4,602.31 paid to his mother. She furnished $ 25,000 (or one-half) of the capital which the petitioner put into Cereal Products Company. This was done pursuant to an agreement under which the petitioner bound himself to pay his mother 40 per cent of his 50 per cent share of the profits from the company. Repayment of the*294 cash thus advanced was to be made upon liquidation or termination of the partnership. Although the mother was not a partner we think the over-all fact of the arrangement was that the required payment by the petitioner could be treated either as a payment in the nature of interest for the use of the cash *853 advanced by his mother or that the arrangement amounted to a subventure between the two pursuant to which the petitioner's profits from the partnership were to be divided in the agreed ratio. Sommers v. Commissioner, (C. A. 2) 195 F. 2d 680; Dorzback v. Collison, (C. A. 3) 195 F. 2d 69. We decide against the respondent on this point. Decision will be entered under Rule 50. Footnotes 1. SEC. 23. DEDUCTIONS FROM GROSS INCOME. In computing net income there shall be allowed as deductions: * * * * (e) Losses by Individuals. -- In the case of an individual, losses sustained during the taxable year and not compensated for by insurance or otherwise -- (1) if incurred in trade or business; or (2) if incurred in any transaction entered into for profit, though not connected with the trade or business; or (3) of property not connected with the trade or business, if the loss arises from fires, storms, shipwreck, or other casualty, or from theft. No loss shall be allowed as a deduction under this paragraph if at the time of the filing of the return such loss has been claimed as a deduction for estate tax purposes in the estate tax return.↩ 2. SEC. 117. CAPITAL GAINS AND LOSSES. (j) Gains and Losses From Involuntary Conversion and From the Sale or Exchange of Certain Property Used in the Trade or Business. -- (2) General rule. -- If, during the taxable year, the recognized gains upon sales or exchanges of property used in the trade or business, plus the recognized gains from the compulsory or involuntary conversion (as a result of destruction in whole or in part, theft or seizure, or an exercise of the power of requisition or condemnation or the threat or imminence thereof) of property used in the trade or business and capital assets held for more than 6 months into other property or money, exceed the recognized losses from such sales, exchanges, and conversions, such gains and losses shall be considered as gains and losses from sales or exchanges of capital assets held for more than 6 months. If such gains do not exceed such losses, such gains and losses shall not be considered as gains and losses from sales or exchanges of capital assets. For the purposes of this paragraph: (A) In determining under this paragraph whether gains exceed losses, the gains described therein shall be included only if and to the extent taken into account in computing gross income and the losses described therein shall be included only if and to the extent taken into account in computing net income, except that subsection (d) shall not apply. (B) Losses upon the destruction, in whole or in part, theft or seizure, or requisition or condemnation of property used in the trade or business or capital assets held for more than 6 months shall be considered losses from a compulsory or involuntary conversion.↩ 3. SEC. 112. RECOGNITION OF GAIN OR LOSS. (f) Involuntary Conversions. -- If property (as a result of its destruction in whole or in part, theft or seizure, or an exercise of the power of requisition or condemnation, or the threat or imminence thereof) is compulsorily or involuntarily converted into property similar or related in service or use to the property so converted, or into money which is forthwith in good faith, under regulations prescribed by the Commissioner with the approval of the Secretary, expended in the acquisition of other property similar or related in service or use to the property so converted, or in the acquisition of control of a corporation owning such other property, or in the establishment of a replacement fund, no gain shall be recognized, but loss shall be recognized. If any part of the money is not so expended, the gain, if any, shall be recognized to the extent of the money which is not so expended (regardless of whether such money is received in one or more taxable years and regardless of whether or not the money which is not so expended constitutes gain).↩ 4. SEC. 23. DEDUCTIONS FROM GROSS INCOME. In computing net income there shall be allowed as deductions: * * * * (g) Capital Losses. -- (1) Limitation. -- Losses from sales or exchanges of capital assets shall be allowed only to the extent provided in section 117. (2) Securities becoming worthless. -- If any securities (as defined in paragraph (3) of this subsection) become worthless during the taxable year and are capital assets, the loss resulting therefrom shall, for the purposes of this chapter, be considered as a loss from the sale or exchange, on the last day of such taxable year, of capital assets. (3) Definition of securities. -- As used in this paragraph (2) of this subsection the term "securities" means (A) shares of stock in a corporation, and (B) rights to subscribe for or to receive such shares.↩