California Fed. Life Ins. Co. v. Comm'r of Internal Revenue

• Decision Date: 21 January 1981
• Docket Number: Docket No. 6753-79.
• Citation: 76 T.C. 107
• Parties: CALIFORNIA FEDERAL LIFE INSURANCE COMPANY, PETITIONER v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

76 T.C. 107

CALIFORNIA FEDERAL LIFE INSURANCE COMPANY, PETITIONER

v.COMMISSIONER of INTERNAL REVENUE, RESPONDENT

Docket No. 6753-79.

United States Tax Court

Filed January 21, 1981.

On Mar. 31, 1975, petitioner exchanged Swiss francs for 175 U.S. Double Eagle gold coins. Held the U.S. Double Eagle gold coins constitute “property (other than money)” within the meaning of sec. 1001(b), I.R.C. 1954, and therefore are valued at their fair market value on the transaction date. Held, further the exchange of the Swiss francs for the U.S. Double Eagle gold coins is not a “like-kind” exchange under the provisions of sec. 1031(a). Thomas R. Sheppard Robert Joe Hull and Michael D. Fernhoff for the petitioner.

David P. Fuller for the respondent.

OPINION

Scott, Judge:

Respondent determined a deficiency in the Federal income tax of the California Federal Life Insurance Co. for calendar year 1975 in the amount of $2,480.27.

The issues for decision are: (1) Whether U.S. Double Eagle gold coins are considered “money” to be valued at their face amount or “property” to be valued at their fair market value for purposes of determing the amount realized under section 1001(b), I.R.C. 1954,¹ when petitioner exchanged 110,079.90 Swiss francs for 175 U.S. Double Eagle gold coins on March 31, 1975; and (2) if the U.S. Double Eagle gold coins are “property” within the meaning of section 1001(b), whether the exchange of Swiss francs for the U.S. Double Eagle gold coins constitutes a nontaxable like-kind exchange under section 1031(a).

All of the facts have been stipulated and are found accordingly.

California Federal Life Insurance Co. (petitioner) is a corporation organized under the laws of the State of Arizona and has its principal office in Phoenix, Ariz. An income tax return (Form 1120-L), signed by petitioner's president, Warren C. Cordner, was timely filed with the Internal Revenue Service Center, Ogden, Utah.

Petitioner is solely owned by a grantor trust entitled “E.B.O., W.C. and E.C. Cordner.” The trustee of this trust is the Bank of America NTSA.

Although petitioner has never conducted business in Switzerland, in March 1974, it purchased 110,079.90 Swiss francs for $35,158.97. Petitioner held these Swiss francs as an investment until March 31, 1975. On that date, petitioner exchanged the 110,079.90 Swiss francs for 175 U.S. Double Eagle gold coins. No other property or money was involved in this transaction.

On April 1, 1975, the Wall Street Journal reported that the March 31, 1975, exchange rate for Swiss francs was 1 Swiss franc for 0.3945 U.S. dollars. Accordingly, the 110,079.90 Swiss francs exchanged by petitioner on March 31, 1975, had a current dollar value of $43,426.52. At the same time, each of the 175 U.S. Double Eagle gold coins had a face value of $20, for an aggregate face value of $3,500. As a result of the bullion content and numismatic worth of U.S. Double Eagle gold coins, their fair market value exceeds their face value. The numismatic component of their value depends upon the number of coins minted, their date, their particular type, and their condition. The bullion component of their value varies with the changes in the price of gold in the world market. As indicated in Coin World magazine, a coin collectors' reference publication, U.S. Double Eagle gold coins other than those labeled “very rare” had fair market values from $275 to $2,900 during the week ending March 19, 1975, and very rare Double Eagle gold coins were valued as high as $18,000. The Coin Dealer newsletter, another reference publication, indicated that for the week ending April 4, 1975, the most common U.S. Double Eagle gold coins had a fair market value ranging between $225 and $2,650, while very rare Double Eagle gold coins were valued as high as $15,500.

On April 3, 1975, petitioner declared a 14-cent dividend on each of the 25,000 shares of its outstanding common stock owned by its sole shareholder. Thereafter, petitioner paid the declared dividend in the Double Eagle gold coins which it had acquired in the March 31, 1975, transaction. Petitioner issued to its sole shareholder a “Form 1099-Div.” which showed a dividend distribution of $3,500 for 1975. Petitioner's earnings and profits were reduced by this same amount.

On its income tax return for calendar year 1975, petitioner reported a capital loss in the amount of $31,658.97 with respect to the March 31, 1975, transaction, of which $29,906.34 was reported as a long-term capital loss, and $1,752.63 was reported as a short-term capital loss. In his notice of deficiency, respondent disallowed the claimed capital losses and stated that:

(a) It is determined that you realized a long-term capital gain of $8,267.55 for the calendar year 1975 when you exchanged 110,079.90 Swiss Francs for 175 United States $20.00 Double Eagle Gold Coins.

Section 1001 controls the treatment of recognition of gain or loss upon the disposition of property.² Section 1001(b) provides that the amount realized from the sale or other disposition of property, including money, is the amount of money received plus the fair market value of the property, other than money, received. Therefore, section 1001(b) requires that money shall be valued at its face value while assets other than money shall be valued at their fair market value at the time of sale or disposition.

Relying upon numerous cases and statutory law,³ petitioner takes the position that the term “money” as found within section 1001(b) is equivalent to any form of legal tender, that U.S. Double Eagle gold coins are legal tender, and that therefore the Double Eagle gold coins must be considered “money” within the meaning of section 1001(b). On the other hand, citing many of the same cases and statutory law, respondent takes the position that Congress intended the term “money” in section 1001(b) to apply to currently circulating mediums of exchange. Respondent does not dispute that the U.S. Double Eagle gold coins when issued were considered money, but he asserts that the 1934 withdrawal of these gold coins from circulation and their collector item characteristics thrust the Double Eagle gold coins into the section 1001(b) category of “property (other than money).”

We are in agreement with respondent. Since our conclusion is not based on a determination of whether technically U.S. Double Eagle gold coins are legal tender, we will limit our discussion of the statutory law cited by petitioner to that necessary to an understanding of the conclusion we reach. By Executive Order 6260 (Aug. 28, 1933), President Franklin D. Roosevelt ordered, pursuant to the Emergency Banking Relief Act of 1933, 48 Stat. 1, that all persons holding gold coins, bullion, and certificates file returns and submit the gold to the Secretary of the Treasury. The Executive order provided several exceptions to this sweeping rule, amongst which was possessors of “Gold coin having a recognized special value to collectors of rare and unusual coin.” Exec. Order 6260, secs. 3(b) and 5 (Aug. 28, 1933).

Thereafter, pursuant to the Gold Reserve Act of 1934, 48 Stat. 337, partially codified in 31 U.S.C. sec. 315(b),⁴ Congress discontinued all gold coinage and withdrew from circulation the existing gold coins. The basis of this action was that American citizens should not be able to make a “profit on gold holdings as the direct result of Government depreciation in the gold content of the dollar.” H. Rept. 292, 73d Cong., 2d Sess. 2 (1934). Section 2 of the Gold Reserve Act of 1934, supra provided that “any and all gold coins and gold bullion shall pass to and are hereby vested in the United States.” Thus, on orders of the Secretary of the Treasury, gold which remained in private hands in 1934 was to be delivered to the Government. The Government would pay the private owner in dollars in amounts equal to the face value of the gold delivered. See Nortz v. United States 294 U.S. 317 (1935); Perry v. United States 294 U.S. 330 (1935). However, as with the Emergency Banking Relief Act of 1933, supra rare and unusual gold coins could be acquired and held by private individuals. U.S. Treasury Department provisional regulations issued under the Gold Reserve Act of 1934, sec. 20 (Jan. 30 and 31, 1934).

We are of the opinion that the “rare and unusual gold coin” exception applied to coins that would be traded in the marketplace for values far in excess of their face amounts. It was recognized that coins which were permitted to be held under the Gold Reserve Act of 1934 would have characteristics dissimilar to gold coins circulating as legal tender prior to Executive Order 6260, supra and the Gold Reserve Act of 1934, supra

As stipulated by the parties, the U.S. Double Eagle gold coins involved in the March 31, 1975, exchange had numismatic worth in excess of their face value. They are unusual and rare coins within the exception provided by the provisional Treasury regulations, and therefore, they fall outside the scope of the Gold Reserve Act of 1934, supra Accordingly, regardless of whether technically the Double Eagle gold coins might be legal tender, they are not circulating legal tender, or “money,” within the meaning of section 1001(b). Rather, these gold coins are “property (other than money)” to be valued at their fair market value on March 31, 1975.

This conclusion is supported by a number of other factors.⁵ First, the March 31 and April 3, 1975, transactions, whereby the Swiss francs were exchanged for the U.S. Double Eagle gold coins and subsequently a dividend was paid in Double Eagle gold coins to the corporation's sole shareholder, a grantor trust entitled “E.B.O., W.C. & E.C. Cordner,” were in substance an acquisition of property, valuable coins, by petitioner, which property petitioner thereafter transmitted to its shareholder. The tax result of the transaction should be in keeping with its substance.

Furthermore, this case is similar to that of Cordner v. United States an...