Nat'l-Standard Co. v. Comm'r of Internal Revenue
| Decision Date | 21 March 1983 |
| Docket Number | Docket No. 8574-80. |
| Citation | 80 T.C. 551 |
| Parties | NATIONAL-STANDARD COMPANY, PETITIONER v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Petitioner borrowed Luxembourg francs from a Luxembourg bank to acquire a 50-percent interest in a Luxembourg corporation. When the first payment on the principal of the loan became due, petitioner borrowed Belgian francs (equal in dollar value to the Luxembourg francs) from a Belgian bank to refinance the loan. Later, after petitioner had sold the stock in the Luxembourg corporation, petitioner acquired Belgian francs from a Chicago bank to pay off the loan from the Belgian bank. Each time petitioner borrowed francs to pay off a bank loan, the value of the francs in U.S. dollars had increased, so petitioner was required to pay more dollars to acquire the francs required to pay the loans than the francs were worth in U.S. dollars at the time the loans were made. Held, the foreign currency transactions must be considered separate and apart from the underlying stock transaction and petitioner had losses on the foreign currency transactions for tax purposes. Held, further, the foreign currencies were capital assets in petitioner's hands. Held, further, there was no sale or exchange of the foreign currencies so petitioner incurred ordinary losses in the foreign currency transactions. Warren C. Seieroe, for the petitioner.
Thomas E. Ritter, for the respondent.
Respondent determined deficiencies in petitioner's Federal income tax for its taxable years ending September 30, 1974, and September 30, 1975, in the amounts of $179,971 and $149,350, respectively. Due to concessions by respondent, the only issue for decision is whether foreign currency exchange losses incurred by petitioner in each of the years in issue are deductible as ordinary losses, or instead, as capital losses.
The facts of this case were fully stipulated pursuant to Rule 122, Tax Court Rules of Practice and Procedure. The stipulated facts and exhibits attached thereto are incorporated herein by this reference.
National-Standard Co. (petitioner) is a corporation with its principal office and place of business in Niles, Mich. For its fiscal years ending September 30, 1974 and 1975, petitioner filed its consolidated Federal corporate income tax return with the Internal Revenue Service, Cincinnati, Ohio. Petitioner kept its books and reported its income on the accrual method of accounting.
Petitioner is a publicly held corporation whose shares are traded on the New York Stock Exchange and the Midwest Stock Exchange. Petitioner is a diversified manufacturer of wire and other metal products, and of machinery. Most of petitioner's products are raw materials used for fabrication or incorporation into another product, or are components to be used in a larger product. During the taxable years in question, petitioner operated 23 facilities in the United States, 4 facilities in the United Kingdom, and 1 facility each in Canada, France, and South Africa. In addition, petitioner had 4 controlled foreign corporations.
Prior to 1970, petitioner owned a 40-percent interest in a German and a Luxembourg corporation which operated manufacturing facilities in Germany, Luxembourg, and Belgium; the remaining 60 percent was owned by Accerces Ruenies de Burback-Eich-Dudelange S.A. (hereinafter ARBED) or its subsidiary (hereinafter sometimes collectively referred to as the ARBED group). As a result of a series of negotiations which commenced in 1970, petitioner and the ARBED group agreed to establish a new corporation known as FAN International, a Luxembourg corporation, to be owned 50 percent by petitioner and 50 percent by the ARBED group. This corporation was to construct a new manufacturing facility in Luxembourg. Each owner agreed to contribute $5 million to the equity of FAN International.
Due to restrictions imposed by the U.S. Government as to the amount which a domestic corporation could invest abroad, petitioner had to borrow from a foreign source to meet its equity contribution requirements for FAN International. In addition, petitioner had to give assurances to the U.S. Government that no part of these funds would be repaid from domestic sources for a minimum of 7 years.
On September 17, 1970, petitioner entered into an agreement with Caisse D'Espargne De L'Etat (hereinafter Caisse), a Luxembourg bank, to borrow 250 million Luxembourg francs (hereinafter LF), then having an equivalent U.S. dollar value of $5 million. The interest rate charged on the loan was 8 percent. The agreement expressly provided that the proceeds of the loan were to be used solely for satisfying petitioner's equity contribution obligation in FAN International.
Thereafter, petitioner drew down on the Caisse loan commitment as follows:
+---------------------------+
¦Date ¦Amount ¦
+-------------+-------------¦
¦ ¦ ¦
+-------------+-------------¦
¦Dec. 31, 1970¦LF50 million ¦
+-------------+-------------¦
¦June 1, 1971 ¦LF50 million ¦
+-------------+-------------¦
¦Oct. 19, 1971¦LF50 million ¦
+-------------+-------------¦
¦Dec. 20, 1971¦LF100 million¦
+-------------+-------------¦
¦Total ¦LF250 million¦
+---------------------------+
These funds were immediately invested in the stock of FAN International.
In the fall of 1973, petitioner considered either delaying repayment of or refinancing the Caisse loan because, as the time for the first payment thereon approached, petitioner was experiencing certain cash flow difficulties due to expansion. Because of favorable European interest rates and in anticipation of a rise in the dollar's market exchange rate with European currency, petitioner concluded that it would refinance the Caisse loan through Caisse or some other foreign source.
Also during the fall of 1973, petitioner began to reassess its investment in the three FAN entities and began negotiations with ARBED to sell its interests therein. On January 2, 1974, petitioner sold its interest in FAN International and certain other foreign corporations in which ARBED also had an interest, to ARBED for $8,684,875. Petitioner reported a gain on the sale of its FAN International stock on its fiscal 1974 income tax return as long-term capital gain.
Since petitioner was liquidating its Luxembourg investment, Caisse could not, pursuant to its bylaws, refinance its loan to petitioner. Subsequently, petitioner entered into an agreement with Societe Generale Alsacienne De Banque (hereinafter Societe Generale), a Belgian bank, to borrow 250 million Belgian francs (hereinafter BF), the proceeds of which were to be used to pay off its Caisse loan.1 On February 28, 1974, pursuant to petitioner's instructions, Societe Generale paid BF250 million to Caisse in repayment of the Caisse loan.
On December 26, 1974, petitioner purchased BF266,944,444 from the First National Bank of Chicago. On the same date, these funds were used to pay off the Societe Generale loan of BF250 million plus accrued interest of BF16, 944,444. These francs cost petitioner $7,207,499.99.
The exchange rates existing between either the Luxembourg franc or the Belgian franc, on one hand, and the dollar, on the other hand, at the respective relevant dates were as follows:
+---------------------------------------+
¦ ¦ ¦U.S. dollar equivalent ¦
+-----+--------+------------------------¦
¦ ¦ ¦of 1 Luxembourg ¦
+--------------+------------------------¦
¦Date ¦or Belgian franc ¦
+--------------+------------------------¦
¦ ¦ ¦ ¦
+-----+--------+------------------------¦
¦Sept.¦17, 1970¦$0.02 ¦
+-----+--------+------------------------¦
¦Dec. ¦31, 1970¦0.0201 ¦
+-----+--------+------------------------¦
¦June ¦1, 1971 ¦0.0201 ¦
+-----+--------+------------------------¦
¦Oct. ¦19, 1971¦0.0214 ¦
+-----+--------+------------------------¦
¦Dec. ¦20, 1971¦0.0220 ¦
+-----+--------+------------------------¦
¦Feb. ¦28, 1974¦0.02461 ¦
+-----+--------+------------------------¦
¦Dec. ¦26, 1974¦0.0270 ¦
+---------------------------------------+
For its fiscal year ending September 30, 1974, petitioner claimed an ordinary loss of $1,162,500 as a result of the fluctuation in the exchange rates between the time it agreed to borrow LF250 million from Caisse, and the time it borrowed BF250 million from Societe Generale to repay the Caisse loan.2 For the fiscal year ending September 30, 1975, petitioner claimed an ordinary loss of $587,500 as a result of the fluctuation in the exchange rate between the time it borrowed BF250 million from Societe Generale and the time it purchased Belgian francs to pay off that loan.3
The transactions here involved all resulted from petitioner's decision in 1970 to acquire a 50-percent stock interest in a Luxembourg corporation, using Luxembourg francs to pay for the investment. The stock acquired was undoubtedly a capital asset in petitioner's hands. Hoover Co. v. Commissioner, 72 T.C. 206, 237 (1979). When petitioner sold the stock in January of 1974, the simplistic approach to the taxability of the transaction would have been to determine how much petitioner had actually invested in the stock and to deduct that investment from the amount, in U.S. dollars, it received from the sale of the stock, and tax the difference as a long-term capital gain or loss. Petitioner's actual investment in the stock would have been computed by determining the cost to petitioner in U.S. dollars, as of the date of liquidation of the investment, of the number of francs put into the investment.
But when foreign currency, which fluctuates in value with the U.S. dollar, is involved in such a transaction, the simplistic, direct approach to the tax results cannot be, or has not been, applied. The law seems to be (...
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