Deferring the US Income Tax on Blocked Currency Income (1995)

(2) When, notwithstanding the existence of any laws or regulations forbidding the exchange of money or property into United States dollars, conversion is actually made into United States dollars or into other money or property which is readily convertible into United States dollars; or (3) When such income is used for nondeductible personal expenses, is disposed of by way of gift, bequest, devise, inheritance, or by dividend or other distribution, or, in the case of a resident alien, such alien terminates his residence in the United States.4 At the time that the deferred income ceases to be deferrable, it is required to be included in the taxable income of the taxpayer valued at the US dollar equivalent value at the time of its inclusion in income. This value may be readily determinable, as in the case of currencies that become readily convertible, or valuation could be an extremely difficult issue, as in the case of strict or dictatorially controlled currencies that are expended in the country of origin. The presence of wide variations between official exchange rates and multiple black market rates has generated significant controversy in court. The traditional position of the government with respect to the valuation issue appears to have been to use the official exchange rate to value the blocked currency income. Such rate was readily determinable and often significantly higher than more realistic black market or unofficial rates. With amazing uniformity, those courts that found blocked currency income to be taxable consistently found that unrealistic official exchange rates were not the appropriate valuation base for the blocked income. Expert testimony, comparable free market values where currencies were traded on some limited markets, and comparable price indices have served as the basis for determining the fair market values of these currencies in these situations.' Continued controversy over the difficult issue of valuation may be anticipated. Similarly, expenses and other deductions paid in US or other convertible currencies or paid in property with respect to earning deferrable income are required to be deferred and deducted only as deferrable income is recognized and taxed in the US. If only part of the gross income of a taxpayer ceases to be deferrable income for one of the reasons listed above, a prorata part of the deferred deductions may also be recognized, including depreciation and depletion measured in the foreign currency at converted values. Foreign tax credits are similarly deferred on deferrable income except to the extent attributed to income that is no longer deferrable. The ruling does provide that costs and expenses may be deducted in the year that related claims to income are deemed to be worthless. CONCLUSIONS AND CAUTIONS Revenue Ruing 74-351 provides an effective means of dealing with the otherwise harsh reality of worldwide taxation of blocked currency income, but only under the circumstances that the taxpayer is aware of its use and properly elects its benefits. In both Charles Alexander McKee, 50 TCM 1473, and Sanford A, Berman, 45 TCM 1357, taxpayers attempted to invoke the benefits of Rev. Rul. 74-351 at trial and were not permitted to defer the income for failure to properly elect in a timely fashion as prescribed in the ruling. …