Court Opinion

ID: 4485002
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:17:06.627991+00
Date Added: 2024-06-11T14:53:45.956265
License: Public Domain

Tannenwald, Chief Judge, dissenting: I disagree with the majority’s conclusion that there was no sale or exchange of the francs and that therefore petitioner’s losses were ordinary rather than capital losses. Before proceeding to articulate the reasons for my disagreement, I believe it would be useful to outline the parameters within which I make my analysis. First, the parties agree that the borrowing and repayment of foreign currency, on the one hand, and the investment in and sale of the FAN International stock, on the other, are to be treated as separate transactions in the sense that each transaction produces separate tax consequences. See America-Southeast Asia Co. v. Commissioner, 26 T.C. 198 (1956); Church’s English Shoes, Ltd. v. Commissioner, 24 T.C. 56 (1955), affd. per curiam 229 F.2d 957 (2d Cir. 1956); Willard Helburn, Inc. v. Commissioner, 20 T.C. 740 (1953), affd. 214 F.2d 815 (1st Cir. 1954). Second, it is also agreed that petitioner suffered losses of $1,152,500 and $597,000 in its taxable years ending September 30,1974, and September 30,1975, as a result of the repayment of the loans. Third, I agree with the majority that the francs1 constituted capital assets in the hands of petitioner and that such characterization, at least in this case, stems from the nature of the asset acquired by petitioner with the borrowed francs. Francs were property held by petitioner (Willard Helburn, Inc. v. Commissioner, supra; Joyce-Koebel Co. v. Commissioner, 6 B.T.A. 403 (1927)) and do not fall within the exceptions of section 1221 or the doctrine of Corn Products Refining Co. v. Commissioner, 350 U.S. 46 (1955). "The touchstone of the Corn Products doctrine is that seemingly capital transactions are entitled to ordinary treatment only when the transactions are an integral part of the taxpayer’s day-to-day business operations or are necessary to protect or generate ordinary operating income.” Hoover Co. v. Commissioner, 72 T.C. 206, 237 (1979). Petitioner’s use of the francs to invest in FAN International simply does not fit within the exception carved out by Corn Products. See Hoover Co. v. Commissioner, supra at 236 et seq. See also W. W. Windle Co. v. Commissioner, 65 T.C. 694 (1976), appeal dismissed for lack of jurisdiction 550 F.2d 43 (1st Cir. 1977); Rev. Rul. 78-396, 1978-2 C.B. 114. Fourth, when property is used to satisfy an obligation, the courts have consistently held that such property has been sold or exchanged. See, e.g., United States v. Davis, 370 U.S. 65 (1962); Freeland v. Commissioner, 74 T.C. 970 (1980); Danenberg v. Commissioner, 73 T.C. 370, 380-381 (1979), and cases cited thereat. Against the foregoing background, I turn to my analysis of why I disagree with the majority’s conclusion that petitioner’s transfers of francs to Caisse and Societe Generale did not constitute sales or exchanges. In so concluding, the majority, mistakenly, I believe, deals with the issue in the context of the cases involving the discharge of an indebtedness and, so it seems to me, falls into a trap by treating the francs as money akin to dollars despite its recognition that francs are property. In my opinion, the appropriate way to deal with the issue is by way of analogy to a short sale.2 When petitioner originally borrowed the francs, it in effect sold those francs short, i.e., it agreed to deliver the amount of francs borrowed at a future date. When it acquired francs and used them to repay the loan, it closed the "short sale.” At that time, it realized and was entitled to recognize its losses. The measure of its losses is the difference between the value of those francs at the time of the original borrowing and the value of the francs used for repayment at the time they were acquired, i.e., their cost, and its holding period is determined by the period of time the francs acquired in repayment were held — in this case, less than 1 day. Thus, petitioner in effect bought and sold francs and, in this frame of reference, there was clearly a sale or exchange. To be sure, the situation herein is the reverse of the usual situation, where the acquisition of the asset used precedes, rather than follows, the sale or exchange, but that fact does not require a different conclusion. Cf. sec. 1233(a). See Bingham v. Commissioner, 27 B.T.A. 186, 189 (1932). See also Provost v. United States, 269 U.S. 443 (1926). At this point, I observe that the value of the franc at the time of repayment of the loan is irrelevant, as is the case with any short sale.3 Thus, for example, if a taxpayer sells one share of stock short on February 1, when the value of that share is $100, purchases a share of stock on March 1 for $50, and closes the short sale on June 1, when a share of such stock is worth $110, his gain is $50 ($100 - $50), and the $110 value is irrelevant. The taxpayer’s holding period for the stock would be from March 2 through June 1, inclusive. I would apply the same analysis to a borrowing and repayment of foreign currency. In making the foregoing analysis, I am not unaware of the fact that certain cases have held that a borrowing and repayment in the same foreign currency and in the same amount does not give rise to taxable gain or loss. Bowers v. Kerbaugh-Empire Co., 271 U.S. 170, 175 (1926); B. F. Goodrich Co. v. Commissioner, 1 T.C. 1098, 1102-1103 (1943); Coverdale v. Commissioner, a Memorandum Opinion of this Court dated June 28, 1945. But these holdings have been severely criticized and are now considered to have lost their vitality so that there can be no doubt that the majority is correct in concluding that tax consequences attach to such borrowings and repayments. See Gillin v. United States, 191 Ct. Cl. 172, 178-179, 423 F.2d 309, 312 (1970); Willard Helburn, Inc. v. Commissioner, 214 F.2d 815, 819 (1st Cir. 1954), affg. 20 T.C. 815 (1st Cir. 1954); Fifth Ave.-Fourteenth St. Corp. v. Commissioner, 147 F.2d 453, 457 (2d Cir. 1945), revg. 2 T.C. 516 (1943); D. Ravenscroft, Taxation and Foreign Currency 219-221 (1973); Newman, "Tax Consequences of Foreign Currency Transactions: A Look at Current Law and an Analysis of the Treasury Department Discussion Draft,” 36 Tax Law. 223, 229 (1983); Miller, "Foreign Currency Transactions: A Review of Some Recent Developments,” 33 Tax Law. 825, 828 (1980); Roberts, "Borrowings in Foreign Currencies,” 26 Taxes 1033 (1948).4 See also Committee on Foreign Activities of U.S. Taxpayers, Section of Taxation, American Bar Association; Report on U.S. Treasury Department Discussion Draft on Foreign Exchange Gains and Losses, 36 Tax L. Rev. 425, 427 (1981). Similarly, I am not unaware of the fact that the short-sale analogy has been advocated and rejected. See Bowers v. Kerbaugh-Empire Co., supra. But this rejection has been criticized (see Roberts, supra) and, in view of the criticism of the case itself, seems to have been sapped of its vitality. In this connection, I note that in America-Southeast Asia Co. v. Commissioner, supra, this Court observed that there is a marked similarity between transactions in foreign currencies and short sales (see 26 T.C. at 200) but rested its decision on another basis, and in Gillin v. United States, supra, the Court of Claims did not reject the short-sale analogy but also rested its decision on another basis. See 423 F.2d at 313 n. 9. Cf. Hoover Co. v. Commissioner, 72 T.C. 206 (1979). In short, I think that, given the economic equivalence between a short sale and a borrowing and repayment in foreign currency, the time has come to apply the short-sale analogy in the instant case. Under these circumstances, it can be forcefully argued that this case could be disposed of under the provisions of section 1233(a) (cf. Hoover Co. v. Commissioner, supra), although I recognize that we have articulated a restrictive view with respect to extending section 1233 by analogy. See Carborundum Co. v. Commissioner, 74 T.C. 730, 738 (1980). See also Vickers v. Commissioner, 80 T.C. 407 n. 14 (1983). I agree with the majority that respondent’s reliance on Kenan v. Commissioner, 114 F.2d 217 (2d Cir. 1940), is misplaced, but I disagree that the rationale of that case requires the conclusion that petitioner herein realized no loss. Reasoning from this conclusion, the majority further concludes that, absent an appreciation or depreciation in the value of the property used to repay a debt, there is no sale or exchange. In reaching this further conclusion, the majority fails to recognize that in Kenan the obligation was at all times a dollar obligation, the value of which remained constant for tax purposes. See Hellerman v. Commissioner, 77 T.C. 1361 (1981). In such a situation, the amount of the gain or loss is clearly the difference between the dollar amount of the obligation and the cost of the property used to make payment. Thus, Kenan did not deal with the issue involved herein, and the quantum leap which the majority takes in applying its rationale misses the mark. The inescapable element in Kenan, namely its holding that there was a sale or exchange, clearly supports my position herein. Nor does Kentucky & Indiana Terminal Railroad Co. v. United States, 330 F.2d 520 (6th Cir. 1964), require a different result. In that case, the Sixth Circuit Court of Appeals merely addressed the question of whether gain from the use of foreign currency could be excluded from income under section 22(b)(9) of the Internal Revenue Code of 1939 (now section 108 of the Code); the Circuit Court had no occasion to consider the character of the gain because of the broad language of the applicable statute, i.e., "the amount of any income of the taxpayer attributable to the discharge * * * of any indebtedness.” (Emphasis added.) The majority relies on Fairbanks v. United States, 306 U.S. 436 (1939), and Gillin v. United States, 191 Ct. Cl. 172, 423 F.2d 309 (1970), as authority for its holding that "satisfaction of an indebtedness alone does not constitute a sale or exchange.”5 Fairbanks, however, involved a taxpayer who received U.S. dollars in retirement of a corporate bond. I know of no cases (other than Gillin), nor has my research located any, where Fairbanks has been extended to the transfer of property rather than dollars in satisfaction of a debt. In my opinion, Gillin was wrongly decided. I believe that, subject to the qualification noted in note 3 supra, Judge Skelton’s concurring opinion in Gillin is correct in concluding that a sale or exchange occurred and produced a short-term capital gain. Nor do I believe, as does the majority, that Rev. Rul. 78-281, 1978-2 C.B. 204, supports petitioner’s position. In Hoover Co. v. Commissioner, 72 T.C. 206, 247 (1979), we noted that the key to that revenue ruling is that "The financing transaction was incident to the taxpayer’s business of leasing equipment — which generates ordinary income — and therefore the currency fluctuations gave rise to ordinary income or expense.” (Emphasis added.) In other words, the foreign currency was not a capital asset under the Com Products doctrine.6 Thus, Rev. Rul. 78-281 provides no guidance as to whether a sale or exchange took place. In this case, the foreign currency borrowings were not incident to the business of petitioner which produced its ordinary income, i.e., the sale of metal products and machinery, and Rev. Rul. 78-281 is inapposite. I would hold that petitioner’s losses were short-term capital losses and not ordinary losses. Simpson, Sterrett, Parker, Kórner, Shields, and Cohen, JJ., agree with this dissenting opinion.  No attempt is made in this opinion, and none appears necessary, to distinguish between the Luxembourg franc and the Belgian franc, because at all pertinent times they had an equal dollar value.   I recognize that the short-sale ground was not argued by the parties. But we are nevertheless entitled to decide a case for respondent on any appropriate legal theory. See Smith v. Commissioner, 56 T.C. 263, 291 n. 17 (1971).   Although the articulation in the decided cases seems to consider the value of the foreign currency at the time of repayment as one of the two prongs of measurement, the issue of the relevancy of that standard of measurement has, as far as I can determine, never been directly considered. See Gillin v. United States, 191 Ct. Cl. 172, 423 F.2d 309 (1970); KVP Sutherland Paper Co. v. United States, 170 Ct. Cl. 215, 344 F.2d 377 (1965); Bennett’s Travel Bureau, Inc. v. Commissioner, 29 T.C. 350 (1957); America-Southeast Asia Co. v. Commissioner, 26 T.C. 198 (1956); Church’s English Shoes Ltd. v. Commissioner, 24 T.C. 56 (1955); Willard Helburn, Inc. v. Commissioner, 20 T.C. 740 (1953), affd. 214 F.2d 815 (1st Cir. 1954); Foundation Co. v. Commissioner, 14 T.C. 1333 (1950). Cf. Seaboard Finance Co. v. Commissioner, 20 T.C. 405, 417 (1953), revd. on other grounds 225 F.2d 808 (9th Cir. 1955). But see Samuels, "Federal Income Tax Consequences of Back-to-Back Loans and Currency Exchanges,” 33 Tax Law. 847, 864 n. 55 (1980). In his concurring opinion in Gillin v. United States, supra, Judge Skelton discusses the holding period issue in terms (which I believe to be incorrect) of the period during which the dollars used to acquire the foreign currency were held. It appears that Judge Skelton’s analysis may have been influenced by the parties’ agreement that the payment of the debt did not create the income.   Of course, if a taxpayer borrowed foreign currency, continued to hold it, and used it to make repayment, there would be no gain or loss, because the value at the time of borrowing and the cost of acquisition would be the same. See Roberts, "Borrowings in Foreign Currencies,” 26 Taxes 1033, 1034 (1948).   It is unclear to me the extent to which the majority adopts the reasoning of the Court of Claims. Compare pp. 562, 563, 564 with note 11.   Indeed, we went even further and announced that to the extent that our view in Hoover was inconsistent with the rationale we had applied in International Flavor & Fragrances, Inc. v. Commissioner, 62 T.C. 232 (1974), revd. on other grounds 624 F.2d 357 (2d Cir. 1975), which involved an investment in a foreign subsidiary; we would no longer adhere to that rationale. See 72 T.C. at 237.