*2059 1. A foreign corporation was engaged in borrowing money abroad and lending it, through a branch office in the United States, on farm land mortgages, the average term of which was five years. During the taxable year 1920 the proceeds of loans maturing in that year were converted into foreign currency for transmission to the home office, and, by reason of decline in the value of the unit of foreign currency, the proceeds purchased a substantially larger number of units than the number originally required to purchase New York exchange abroad in 1915 when a like amount was originally transmitted to the United States to be loaned on farm land security. Held that the measure of income is the United States dollar and not the foreign money which at a given time it may be used to buy; that the original loans and the amounts repaid were the same, in United States dollars, and, to that extent, there was neither gain nor loss; and that it was error to include in taxable income the United States equivalent of the excess number of foreign monetary units returned to the home office.
2. The difference between the face value of debenture notes originally issued by a corporation at par and*2060 the lower prices paid by it in their repurchase in the taxable year is not income in that year. National Sugar Mfg. Co.,7 B.T.A. 577">7 B.T.A. 577, followed.
*419 The respondent determined a deficiency in income and profits taxes for 1920 of $14,428.99. The facts were stipulated.
FINDINGS OF FACT.
1. The petitioner is a foreign corporation, organized and existing under and by virtue of the laws of Holland, having an office and agency at Bozeman, Mont., from which office it carried on, in the United States, the business of lending money on farm land secured by first mortgages. Said petitioner is and has been since January, 1914, authorized and qualified to carry on its business in the United States.
2. Between the dates of January, 1914, and May, 1919, the petitioner transmitted to the United States $3,294,560 to be lent on farm land, which loans were secured by first mortgages. The standard of money in Holland is the guilder, which contains 9.33 grains of fine gold, and the normal rate of exchange*2061 between Holland and the United States is 2.48 guilders to one dollar, the American standard of money. This rate of exchange is fixed upon the basis that the guilder is the equivalent of 40.2 cents in American money.
3. At all times material hereto the petitioner kept its books and accounted for income on the accrual basis. Its books of account were kept in Holland, in the Dutch language, and on the monetary basis of the Dutch guilder. It had an authorized capital equivalent to $1,000,000 American money, of which at the beginning of and during the year 1920 there had been paid in the equivalent of $70,800. The money transmitted to the United States was in large part obtained by borrowing guilders in Holland, either on the open market or by the petitioner's issuing its debenture notes and disposing of the same to the general public in Holland. The average rate of interest on money thus borrowed was 5 per cent. The mortgage loans in the United States were made on the basis of an average interest rate of 7.8 per cent. The differential of 2.8 per cent was the principal source of the petitioner's net profits and income.
4. The petitioner, in transmitting said money to the*2062 United States between 1914 and 1919, did so by using Dutch guilders to obtain American dollars, through the medium of New York exchange purchased in Holland. On its books it maintained an account for its *420 United States office and agency. It also maintained an account called "Profit on Exchange." When purchasing New York exchange cash was credited (in guilders) with the amount expended; the American office account was charged (in guilders) with the number of dollars transmitted, converted at the arbitrary rate of 2.50; and the difference, if any, was charged or credited (in guilders) to "Profit on Exchange." At the various times from 1914 to 1919 when said money was transmitted to the United States the actual rate of exchange was less than 2.50 guilders to the dollar.
5. The principal part of the expenses of the petitioner in producing its income in the United States was paid and incurred in Holland, and the principal part of these expenses was paid and incurred as interest on money, borrowed in Holland at the average rate of 5 per cent interest. The income accrued by the petitioner during the year 1920 as interest received from loans made in the United States was*2063 $248,513.20, and the expense incurred by the petitioner during the year 1920 as interest charged on funds borrowed in Holland was $181,326.06.
6. The total expenses of the petitioner for the year 1920 were as follows:
| (a) Foreign expenses | $218,047.78 |
| (b) Expenses in the United States | 28,876.80 |
| (c) Bonus salaries in the United States | 270.14 |
| (d) Taxes | 464.62 |
| (e) Excess amount paid on Subscription call | 540.00 |
| (f) Bonus salaries in Holland | 1,179.93 |
| Total | 249,379.27 |
7. The gross income included in the return of the petitioner for the year 1920 as having been received from sources within the United States, and which was in fact so received, was as follows:
| (a) Interest on loans | $248,513.20 |
| (b) Interest on bank balances | 1,275.36 |
| (c) Commissions on loans closed | 5,154.50 |
| (d) Interest on real estate sales | 421.48 |
| (e) Rents | 102.00 |
| Total | 255,466.54 |
8. The gross income included in the return of the petitioner for the year 1920 as having been received from sources within Holland, and which was in fact so received, was as follows:
| (a) Interest on loans | $39.22 |
| (b) Interest on reserve fund | 213.96 |
| (c) Interest on bank balance | 1,986.94 |
| (d) Commission on loans closed | 637.50 |
| (e) From rent of office space | 400.00 |
| (f) Debenture coupons | 16.00 |
| Total | 3,293.62 |
*2064 *421 9. In the determination of the deficiency the Commissioner determined gross income from sources within the United States to be as follows:
| (a) Interest on loans | $248,513.20 |
| (b) Interest on bank balances | 1,275.36 |
| (c) Commissions on loans closed | 5,154.50 |
| (d) Interest on real estate sales | 421.48 |
| Total | 255,364.54 |
10. In the determination of the deficiency of the Commissioner determined gross income from all sources to be as follows:
| (a) Interest on loans | $39.22 |
| (b) Interest on reserve fund | 213.96 |
| (c) Interest on bank balance | 1,986.94 |
| (d) Commission on loans closed | 637.50 |
| (e) From rent of office space | 400.00 |
| (f) Debenture coupons | 16.00 |
| (g) Profit on debenture notes | 10,317.00 |
| (h) Profit on exchange | 102,019.52 |
| (i) From United States sources | 255,364.54 |
| Total | 370,994.68 |
11. During the year 1920 the petitioner repurchased in the market certain of its debentures at a price less than that for which they had been issued and disposed of. On its books of account the petitioner regularly and consistently accrued as profit or loss, as the case might be, the difference between the face value of its debenture notes and*2065 the prices at which said notes might be disposed of or repurchased. In the year 1920 the amount of profit so accrued on the books was the equivalent of $10,317. The parties agree that said amount is correct, but do not agree that it constitutes income.
12. Prior to the year 1920 the petitioner had accrued on its books as expenses certain interest coupons on its debenture notes, which were not collected by the owners thereof. In the year 1920 said debenture coupons became outlawed and uncollectible under the laws of Holland. Thereupon the petitioner, in accordance with its regular and consistent bookkeeping practice, credited the amount thereof on its books of account; and reported the same as income from sources within Holland. The parties are agreed that the amount thereof was the equivalent of $16, but the petitioner contends that the item does not constitute income.
13. The average term of the loans made by the petitioner in the United States was five years, and during the year 1920 the petitioner collected from loans maturing $445,000, which it returned to its Holland office through the medium of Amsterdam Exchange purchased in New York City. During the year 1920*2066 the guilder had *422 shrunk to .3146 cents as against 40.2 cents in 1915, and when the said amount of $445,000 was converted into guilders during 1920 for the purpose of transmission to Holland it purchased approximately 255,048.82 more guilders than were required to purchase New York Exchange in Amsterdam when like amount was sent to the United States to be lent on farm land security. The amount of 255,048.82 guilders when reduced to dollars at .3145 cents to the guilder equals approximately $102,019.52.
When said money was returned to the Holland office, the petitioner credited the American office account with the number of dollars returned, converted at said arbitrary rate of 2.50; charged cash (in guilders) with the number of guilders so purchased; and credited the difference (in guilders) to "Profit on Exchange." On the books of account the amounts so credited to "Profit on Exchange" were reflected in profit and loss for the year 1920. The parties are in agreement that the amount of said alleged profit was $102,019.52 American money; but they are not in agreement as to whether said amount constitutes income.
In computing petitioner's taxable income for 1920 the*2067 Commissioner allowed as deductions from gross income 68.83 per cent of the item of $218,047.78 described as foreign expense, and of the item of $1,178.93 described as bonus salaries in Holland.
OPINION.
STERNHAGEN: It is not clear from the original and amended pleadings or from the petitioner's brief just what the issues are as finally submitted for decision. We have interpreted them to be the following and dispose of them accordingly.
1. The respondent has added to petitioner's gross income an item of $102,019.52 designated in the notice of deficiency as "Profit on Exchange." This is the amount described in section 13 of the stipulation of facts. It results from converting the proceeds in dollars of matured loans into guilders, subtracting therefrom the number of guilders originally represented by the loan, converting the remaining guilders into dollars and treating the amount as gain. This was in our opinion error. The original loans amounted to $445,000 and this was the amount repaid. To this extent there was neither gain nor loss. Dollars were loaned and dollars were repaid and at that time the gain or loss appeared. It will not do to whipsaw the taxpayer by computing*2068 the original loan in dollars when guilders were high and then using the depreciated guilder at the time of repayment to find a gain. The fact that when repaid the *423 $445,000 could buy more guilders in 1920 than in the earlier years of loan is no more significant than if more commodities could be bought with it. The measure of income is the United States dollar and not the foreign money which at a given time it may be used to buy.
2. The respondent added to petitioner's income $10,317, designated as "Profit on debenture notes." This is the item covered by section 11 of the stipulation. Although the facts are not complete or the meaning of the stipulated section entirely clear, it appears from the briefs that the issue is whether the difference of $10,317 between the face value of debentures originally issued by petitioner at par and the lower prices paid by petitioner in their repurchase in 1920 is income in 1920.
Following , the Board holds that the amount is not income and that respondent erred in treating it as if it were.
3. From the foregoing it appears that instead of gross income of $370,994.68, *2069 as determined by respondent, the gross income from all sources is $258,658.16, of which $255,364.54 was from sources within the United States and $3,293.62 was from sources without the United States. (In the state of the record, we will not undertake to account for inconsequential discrepancies appearing in the stipulation.)
In accordance with Revenue Act of 1918, section 234(b), petitioner is entitled to deductions "to the extent that they are connected with income arising from a source within the United States; and the proper apportionment and allocation of the deductions with respect to sources of income within and without the United States shall be determined under rules and regulations prescribed by the Commissioner with the approval of the Secretary." The respondent, purporting to act under this section, prorated the expenses shown by section 6 of the stipulation on a percentage basis, treating the foregoing two items of $102,019.52 and $10,317 as foreign income. Since by our decision these items are eliminated from the gross income, it would appear that satisfactory adjustment can be made by the parties of the deductions, and we therefore omit this from present consideration.
*2070 The question of special assessment has been expressly reserved under Rule 62 for further hearing. In the event further hearing in necessary the proceeding will be placed on the day calendar upon motion.