Cont'l Illinois Corp. v. Comm'r of Internal Revenue

• Decision Date: 28 February 1990
• Docket Number: Docket No. 5931-83. (Iranian Loss Issue).
• Citation: 94 T.C. 165,94 T.C. No. 12
• Parties: CONTINENTAL ILLINOIS CORPORATION, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

94 T.C. 165

94 T.C. No. 12

CONTINENTAL ILLINOIS CORPORATION, Petitioner

v.COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 5931-83. (Iranian Loss Issue).

United States Tax Court

Filed February 28, 1990.

Petitioner, a calendar-year taxpayer, had property expropriated by the government of Iran in 1979. HELD, even though petitioner retained Iranian deposit accounts, it had no legal right to offset its expropriation claims against such accounts, any practical possibility of setoff was no more than a bargaining chip which did not give rise to a reasonable prospect of recovery as of Dec. 31, 1979, and this case is otherwise controlled by Halliburton Co. v. Commissioner, 93 T.C. 758 (1989), so that petitioner was entitled to a deduction for losses sustained during the taxable year. Edward C. Rustigan, Joel V. Williamson, Roger J. Jones, and Lloyd S. Fischer, for the petitioner.

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

TANNENWALD, JUDGE:

Respondent determined the following deficiencies in petitioner's Federal income taxes:

+--------------------+
                ¦Year  ¦Deficiency   ¦
                +------+-------------¦
                ¦1975  ¦$1,899,880   ¦
                +------+-------------¦
                ¦1976  ¦84,088       ¦
                +------+-------------¦
                ¦1977  ¦36,741,206   ¦
                +------+-------------¦
                ¦1978  ¦15,844,349   ¦
                +------+-------------¦
                ¦1979  ¦3,896,519    ¦
                +--------------------+
                

By order dated April 12, 1989, the ‘Iranian Loss‘ issue was severed from the other issues in the case and is the subject of this opinion. The issues for decision are whether petitioner is entitled to deduct losses in 1979 pursuant to section 165 ¹ for the expropriation of stock by the Iranian government in 1979, or alternatively as worthless securities under section 165(g), 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 in 1979, the parties agree that the losses should be characterized as section 1231 losses.

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.

FINDINGS OF FACT

Some of the facts are stipulated and are so found.

Petitioner is a Delaware corporation which had its corporate headquarters in Chicago, Illinois, at the time it filed its petition herein. Petitioner and its affiliated corporations maintained their books and records and filed their consolidated tax returns on a calendar year basis using the accrual method of accounting. Petitioner filed a timely consolidated Federal income tax return for the taxable year 1979 with the Internal Revenue Service Center, Kansas City, Missouri on September 5, 1980.

Petitioner's consolidated group included a wholly owned subsidiary, Continental Illinois National Bank and Trust Company (CINB), a federally chartered national banking association, which wholly owned Continental Illinois Finance Corporation (CIFC), a federally chartered international banking corporation. Through CIFC, petitioner owned stock in two privately owned Iranian banks, Bank Dariush and the Industrial and Mining Development Bank of Iran (IMDBI). It purchased stock in Bank Dariush in 1968 and in IMDBI in 1973. Jafar Akhavan was the principal shareholder and effectively controlled Bank Dariush. The Pahlavi Foundation, a foundation closely associated with the Shah Mohammad Reza Pahlavi (Shah), was the principal shareholder in IMDBI.

During 1978 and 1979, Ayatollah Ruhollah Khomeini (Khomeini) led an Islamic revolution in Iran ousting the 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. A few days later, 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. 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. Historically, U. S. banks held most of Iran's dollar deposits and were major lenders both individually and as members of syndicates to Iran. In addition to its investments in the two Iranian banks, petitioner and members of its consolidated group held Iranian dollar deposits in the United States and both dollar and nondollar deposits in overseas branches and had extended both syndicated and nonsyndicated loans to various Iranian entities. The Iranian revolution adversely affected Iranian banking operations, including those of Bank Dariush and IMDBI. Due to the revolution, Akhavan and most of the directors of Bank Dariush had fled Iran in 1978.

On June 7, 1979, the Government of Iran nationalized all banks in Iran, including Bank Dariush and IMDBI, pursuant to the Law for the Nationalization of Banks. Although the law did not provide for compensation of shareholders of the nationalized banks, petitioner attempted to secure compensation for its expropriation losses. On June 14, 1979, petitioner sent a letter to the Governor of Bank Markazi, the Central Bank of Iran, offering assistance in the transition of ownership of Bank Dariush and IMDBI. The offer was rejected. In August 1979, petitioner sent letters to various Iranian government and banking officials demanding compensation for the expropriation of its interests in the two banks, but received no response.

After the nationalization, the Iranian government made conflicting statements regarding whether it would compensate foreign shareholders for expropriations and whether it would honor its international debts. Iranian officials stated publicly during the summer of 1979 that the Iranian government intended to compensate Iranian and foreign investors in banks for the value of their nationalized investments, but made no definitive moves to do so. In November, the Iranian Foreign Minister announced that Iran would not honor foreign debt incurred during the Shah's regime. During 1979, Iran also nationalized foreign insurance companies and other foreign industries.

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 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 U.S. 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...