Eder v. COMMISSIONER OF INTERNAL REVENUE
| Decision Date | 30 June 1942 |
| Docket Number | Docket No. 106016-106018. |
| Citation | 47 BTA 235 |
| Parties | PHANOR J. EDER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. VIOLET L. EDER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. JAMES P. EDER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
Richard W. Wilson, Esq., for the petitioners.
Loren P. Oakes, Esq., for the respondent.
These consolidated proceedings involve contested income tax deficiencies for the year 1938 as follows:
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Petitioner | Docket No. | Amount
-------------------------------------------------------|------------|-----------
Phanor J. Eder _______________________________________ | 106016 | $2,168.82
Violet L. Eder _______________________________________ | 106017 | 2,708.80
James P. Eder ________________________________________ | 106018 | 2,326.72
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The sole issue is whether certain foreign exchange restrictions in effect in Colombia, South America, during 1938, except petitioners, shareholders of a foreign personal holding company, organized and existing in Colombia, from the provisions of section 337 of the Revenue Act of 1938, requiring such shareholders to include in their gross income for Federal income tax purposes the undistributed supplement P net income of such a company.
FINDINGS OF FACT.
The petitioner, Phanor J. Eder, is a lawyer whose office address is 74 Trinity Place, New York, New York. The petitioners, Violet L. Eder and James P. Eder, are his wife and son, whose address is 29 Washington Square West, New York, New York. All of these petitioners filed their 1938 income tax returns with the collector of internal revenue for the second district of New York.
The Colombian Investment Company, S. A. (hereinafter called the Colombian Co.), was formed in 1936 under the laws of the Republic of Colombia, and was a successor to a Colombian holding company which had existed since 1926.
The Colombian Co. was a principal stockholder in a sugar company called "Ingenio Manuelita." It also had a stock interest in a brick company, some securities, and other minor interests.
Each of the above three petitioners owned 25 percent of the stock of the Colombian Co. The remaining 25 percent of the stock was owned by Linda Eder, a daughter of the above Phanor J. Eder.
Each of the above three petitioners attached to his 1938 income tax return a rider entitled "STATEMENT RE FOREIGN PERSONAL HOLDING COMPANY (FILED IN ACCORDANCE WITH SECTION 337 (d) OF REVENUE ACT OF 1938)."
On each of the above riders it was reported that "gross income, deductions and credits, * * * Supplement P net income and Undistributed Supplement P net income of said corporation for 1938" were as follows:
Gross income: Colombian pesos
Dividends ______________________________________________ 177,260.16
Interest _______________________________________________ 383.33
__________
177,643.49
Deductions
Salaries ___________________________________ 5,420.00
Taxes ______________________________________ 1,810.29
Interest paid ______________________________ 1,514.77
Traveling expenses _________________________ 887.30
Miscellaneous expenses _____________________ 106.15
Contributions ______________________________ 1,000.00
_________ 10,738.51
__________
Supplement P net income ____________________________________ 166,904.98
Less: Dividends paid credit ________________________________ 58,296.60
__________
Undistributed supplement P net income ________________ 108,608.38
The above deduction of 1,000 pesos for "contributions" was disallowed by the Commissioner, with the result that the above "Undistributed Supplement P net income" was increased from 108,608.38 pesos to 109,608.38 pesos, which adjustment, amounting to 1,000 pesos, has not been disputed by petitioners. After making the foregoing adjustment, the Commissioner, among other matters, made the following determination, which is set forth on page 2 of each explanatory statement attached to the deficiency notices herein:
In re: Phanor J. Eder
Docket No. 106016
et al
Total undistributed Supplement P net income of Colombian Investment
Company, S. A., in pesos ________________________________________ 109,608.38
Value of above in U. S. dollars at 57.06 per peso _________________ $62,542.54
Amount taxable to you (25% of $62,542.54) _________________________ $15,635.64
The Colombian Co. was a foreign personal holding company throughout the taxable year within the meaning of section 331 of the Revenue Act of 1938. Of the supplement P net income of the Colombian Co. for the year 1938, amounting to 167,904.98 pesos, the Colombian Co. distributed to its stockholders 58,296.60 pesos and claimed a "dividends paid credit", which the Commissioner allowed in determining undistributed supplement P net income of the Colombian Co. for 1938, which is the basis for the present contested deficiencies.
Remittances covering distributions from the Colombian Co. during the year 1938 to the United States stockholders were sent to the petitioner, Phanor J. Eder, who retained $2,400, his salary for services rendered the company during that year, and distributed the balance equally among the shareholders, including himself.
When these remittances from the Colombian Co. were made, there were Colombian taxes in the amount of 11 percent deductible therefrom on the transfer, in addition to small commissions and postage. No such taxes were paid upon the undistributed supplement P net income of the Colombian Co.
The net amount of these remittances, which excluded the above mentioned taxes, commissions, and postage, was reported proportionately by the three petitioners in their respective income tax returns for 1938 in terms of dollars and cents and the respondent has not questioned their action in excluding from income that portion of the distribution used in the payment of such taxes and expenses.
Each of the petitioners was on the cash basis during the taxable year.
For some time before and until March or April of 1938 no earnings, profits, or other moneys of the Colombian Co. could legally be transferred outside the boundaries of Colombia because of the prohibitions imposed by the exchange control laws and regulations of that country. In March or April of 1938, by virtue of a decree modifying the prior existing exchange control laws and regulations, the Colombian Co. could transfer abroad its funds in amounts not exceeding $1,000 per month. This decree was in force through the rest of the year 1938. Upon its promulgation, petitioner Phanor J. Eder's Colombian representative applied for and received the permit necessary under the decree to remit $1,000 per month from the Colombian Co. to its stockholders in the United States.
For the nine months of 1938 from April to December, inclusive, the Colombian Co. remitted to Phanor J. Eder, as above detailed, a net amount of $1,000 per month, the cost of which distribution to the company, including taxes, commissions, and postage as above set out, aggregated 17,833.67 pesos, which distribution was a part of the total distributions by the Colombian Co. to its stockholders in 1938 of 58,296.60 pesos.
In the computation of the contested deficiencies, respondent determined the undistributed supplement P net income of the Colombian Co. by converting pesos into United States dollars by using a ratio of 57.06 cents per peso, which petitioners concede was the proper exchange rate.
Phanor J. Eder is a member of the firm of Hardin, Hess & Eder and specializes in Latin American and early Colombian law. This firm has its principal office in New York, New York, with a branch office in Mexico City. Since 1910, about one-half of his time has been spent on Latin American affairs and about one-third on Colombian matters. During the year 1938 he was away from New York City about two months, most of that time in Colombia. In 1940 he spent about two and one-half months in Colombia, and in years prior thereto, about three weeks or a month out of each year in Colombia.
There was no law of the Republic of Colombia during 1938 forbidding the spending or investment of pesos within the boundary of that republic.
The petitioners attack the contested determination only on...
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