93 T.C. 758 (1989), 9797-86, Halliburton Co. v. C.I.R.

Docket Nº:9797-86.
Citation:93 T.C. 758
Attorney:David T. Harvin, Donald F. Wood, David Gerger, and George M. Gerachis, for the petitioner. Cynthia J. Mattson and Eli J. Dicker, for the respondent.
Case Date:December 26, 1989
Court:United States Tax Court

Page 758

93 T.C. 758 (1989)




No. 9797-86.

United States Tax Court

December 26, 1989

Petitioner, a calendar-year taxpayer, had property expropriated by the government of Iran in 1979. Held, since petitioner had no reasonable prospect of recovery as of Dec. 31, 1979, it was entitled to a deduction for losses sustained during the taxable year.

David T. Harvin, Donald F. Wood, David Gerger, and George M. Gerachis, for the petitioner.

Cynthia J. Mattson and Eli J. Dicker, for the respondent.


Respondent determined deficiencies in petitioner's Federal income taxes of $27,953, $11,126,409, and $20,907,748 for the taxable years 1977, 1978, and 1979, respectively. After concessions, the issues for decision are whether petitioner is entitled to deduct losses in 1979

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pursuant to section 165 [1] for the expropriation of stock and debt by the Iranian government in 1979, or alternatively as worthless securities and debt under sections 165(g) and 166(a), respectively, both of which issues turn essentially upon the existence of a reasonable prospect of recovery as of December 31, 1979. To the extent that we find such losses deductible, the parties agree that the loss in respect of the stock is a long-term capital loss and the loss in respect of the debt is an ordinary loss.

This case arises against the backdrop of the political, economic, religious, and cultural chaos stemming from the Iranian Revolution and the American hostage crisis that captured the attention of this country from November 4, 1979, to January 20, 1981. In this connection, we note that, if set forth in detail, the chronology of events affecting the issue of reasonable prospect of recovery in respect of the expropriation losses would be unduly lengthy. Such being the case and in view of the fact that there is no disagreement between the parties that the events occurred (as distinguished from the effect to be given to them), we have decided simply to set forth a chronology in terms sufficient to provide the necessary background to our decision. We also note that, in order to avoid repetition, we have reserved some of the facts for inclusion in our opinion.


Some of the facts are stipulated and are so found.

Petitioner is a publicly held oil field service corporation with its principal place of business in Dallas, Texas. It maintained its books and records and filed its tax returns on a calendar year basis using the accrual method of accounting. It filed a timely Federal income tax return for the taxable year 1979 with the Internal Revenue Service Center, Austin, Texas on July 21, 1980.

In April 1977, petitioner bought stock in Doreen/IMCO, an Iranian private joint stock company organized under the laws of Iran. From this time through April 1979, petitioner also made a series of loans to Doreen/IMCO. In May 1977, Doreen/IMCO began construction of a barite processing and

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grinding plant in Kashan, Iran. Barite is an ingredient of drilling mud used in drilling oil and gas wells. Doreen/IMCO completed construction and began operating the plant in June 1978.

During 1978 and 1979, Ayatollah Ruhollah Khomeini (Khomeini) led an Islamic revolution in Iran ousting Shah Mohammad Reza Pahlavi (Shah), who had ruled Iran as its monarch since 1953, from political power. The Shah fled Iran on January 16, 1979, and Khomeini returned to Iran from exile in France on January 31, 1979. After the new government of Prime Minister Shahpur Bakhtiar failed, Khomeini set up a provisional Islamic government on February 11, 1979, headed by Prime Minister Mehdi Bazargan. The Islamic Republic of Iran was proclaimed on April 1, 1979.

Khomeini's revolution espoused fundamental Islamic religious tenets, was violently anti-American, and attempted to rid Iran of Western influence by seizing control of American companies doing business in Iran. In the fall of 1978, revolutionary unrest and civil disturbances first began to affect the operation of the Doreen/IMCO mine. In November and December 1978, Doreen/IMCO's offices and plant were damaged during a series of attacks perpetrated by plant workers sympathetic to the revolution. Due to revolutionary activity, Doreen/IMCO's American manager fled Iran in November 1978 and operated from Bahrain until February 6, 1979, when he returned to the United States. Doreen/IMCO shut down its plant and laid off its workers on January 20, 1979, due to the loss of key management expertise, the lack of money and imported parts to repair damage caused by the attacks, and the collapse of the Iranian barite market caused by the revolution.

On February 14, 1979, Marxist guerrillas attacked the United States embassy in Tehran holding more than 100 hostages, including the American ambassador, for 2 hours until dispersed by Khomeini's forces. Thereafter, the embassy strongly recommended that all Americans leave the country. One week later, Doreen/IMCO's former Iranian employees rioted and took over the Kashan plant. The workers demanded that the plant be reopened and that they be paid back wages. In response to these employee demands, in

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April 1979, the government of Iran's Ministry of Industries and Mines, through its Committee of Industrial Protection and Prevention of Factories Stoppage in the Country, imposed liability for severance pay on Doreen/IMCO and borrowed approximately $570,000 from Bank Melli Iran to begin provisional administration of Doreen/IMCO. The Iranian government demanded that Doreen/IMCO meet two conditions for return of the plant: repay the Bank Melli loan plus 6-percent interest and establish that plant operations could be financially self-supporting. Doreen/IMCO was unable to meet those demands.

In May 1979, the Iranian government took official possession of Doreen/IMCO's Kashan facilities pursuant to the Law of Protection of Industries and Prevention of Stoppage of Factories. During 1979, Iran also nationalized foreign insurance companies, foreign banks, and other foreign industries. Although its facilities were nationalized, petitioner designated Iranian representatives to attend the Doreen/IMCO shareholders' and board of directors' meetings held in Tehran in September 1979. Petitioner's representatives also attended Doreen/IMCO's annual meetings in 1980 in London and in 1981 in California.

Despite the attack on the American embassy in February 1979 and the attacks on American business interests throughout Iran, the United States attempted to maintain diplomatic and economic relations with the revolutionary government in Iran. Such relations were, however, characterized by constant tension which increased dramatically after the Shah arrived in New York on October 22, 1979, from exile in Mexico to undergo medical treatment. His arrival in the United States provoked a harsh wave of anti-American demonstrations in Iran culminating in a group of militants, supported by Khomeini, seizing the United States embassy in Tehran on November 4, 1979, taking 65 American hostages, and demanding that the United States extradite the Shah. Thereafter, the United States State Department again advised all Americans in Iran to leave the country.

Subsequently, Iran refused to release the hostages until the United States: (1) returned the Shah's assets; (2) ceased interfering in Iranian affairs; and (3) apologized for past U.S. crimes against Iran. The United States responded to the demands crimes against Iran. The United States responded to

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the demands by letting Iran know that: (1) American courts were open to Iran to pursue the Shah's wealth; (2) the United States would not interfere internally in Iran; but (3) the United States would not apologize for its so-called crimes.

At the time of the hostage taking, the Iranian political leadership was in disarray. A political power struggle existed between the moderates and the radical clergy, with Khomeini calling for a purge of those not in the mainstream of the Islamic Revolution. A few days after the embassy was seized, Prime Minister Bazargan and his cabinet resigned, and Khomeini gave political power to the Revolutionary Council to manage a transition government until new elections could be held. At about the same time, Khomeini refused to allow American emissaries, former Attorney General Ramsey Clark and William Miller, former Staff Director of the Senate Committee on Intelligence, to enter Iran to discuss release of the hostages. On November 7, 1979, he also forbade Iranian officials to have discussions with any American representatives, a barrier to direct communications with Iran that was maintained throughout the crisis.

In an attempt to pressure the Iranian government to release the hostages, President Carter ordered a prohibition on oil imports from Iran on November 12, 1979. On November 14, 1979, when Iran indicated its intention to withdraw its deposits from United States financial institutions, President Carter, by executive order, froze all property and property interests of the Government of Iran, its instrumentalities and controlled entities, and the Central Bank of Iran in U.S. banks and their foreign branches. Iran closed its airspace to U.S. aircraft and the United States halted shipment of all military equipment to Iran and virtually ceased all trade with Iran on November 14, 1979. The executive order implementing the freeze provided:


Pursuant to the authority vested in me as President by the Constitution and laws of the United States including the International Emergency Economic Powers Act, 50 U.S.C.A. sec. 1701 et seq., the National Emergencies Act, 50 U.S.C. sec. 1601 et seq...

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