*1831 In 1917, the former counsel of petitioner in Austria, without authority from petitioner and under threat of sequestration by the Austrian Government of petitioner's assets in Austria, agreed to exchange certain Gold Rentes which petitioner had deposited with an Austrian Government depository as security for the payment of claims of petitioner's Austrian insurance policyholders, for Austrian War Loan bonds. In that year the Austrian Government caused the petitioner's Gold Rentes to be sold and the proceeds from the sale to be used in purchasing Austrian War Loan bonds. The petitioner did not learn of the exchange until 1919 and in 1920 the Austrian Government, after demand therefor by petitioner, definitely informed petitioner that restitution of the Gold Rentes would not be made. Thereupon petitioner, in 1920, charged off the entire cost of the Gold Rentes as a loss on its books. Held, that petitioner is entitled to a deduction from gross income for the year 1920, as a debt ascertained to be worthless and charged off in that year, of the amount of the cost of the Gold Rentes purchased subsequent to March 1, 1913, plus the March 1, 1913, value of those purchased prior to that*1832 date, reduced, however, by the value in 1920 of the War Loan bonds, at the disposal of the petitioner.
*749 This is a proceeding for the redetermination of the income and profits-tax liability of the petitioner for the calendar year 1920, for which year the respondent has determined a deficiency in the amount of $1,147,077.09. There were a number of errors alleged in the petition, all but one of which have been either settled by stipulation or withdrawn by the petitioner, as set forth in our findings of fact.
The only error in controversy is that the respondent has refused to allow the petitioner as a deduction from its gross income for the taxable year the amount of loss sustained by petitioner in said year by reason of the taking down and/or disposition by the Austrian Government in the year 1917 of certain Austrian Gold Rentes belonging to petitioner on deposit with an Austrian Governmental depository as security for the petitioner's Austrian policyholders and the substitution therefor of certain treasury notes*1833 of the VII Austrian War Loan, the amount of the claimed loss being $4,786,947.09.
The parties have filed a stipulation and agreement of fact and upon this stipulation we base our findings of fact.
*750 FINDINGS OF FACT.
Petitioner is a purely mutual, level premium life insurance company organized and existing under an act of the Legislature of the State of New York passed April 12, 1842, and acts amendatory thereof and supplementary thereto.
On the 15th day of March, 1921, petitioner, in good faith, duly made and filed with the collector of internal revenue for the second internal revenue district of the State of New York, its complete Federal income-tax return for the calendar year ended December 31, 1920.
The respondent determined that there was due from this petitioner a deficiency for 1920 in the amount of $1,147,077.09, which determination was communicated to the petitioner by letter dated October 9, 1925.
Since the filing of the petition herein, the Supreme Court of the United States rendered its decision in *1834 , and the respondent, at petitioner's request, has assessed a tax of $227,792.27 as the result of the inclusion in taxpayer's gross income of an item of deferred dividends totaling $2,561,964.80, which petitioner had excluded from gross income and which item was the basis of a portion of the deficiency in tax in question herein. By reason of the overpayment by the petitioner of Federal taxes for years other than 1920, the collector of internal revenue for the second district of New York, on or about October 15, 1929, applied $227,792.27 as a credit against said assessment.
In the deficiency letter dated October 9, 1925, the respondent disallowed as a deduction for 1920 an item of $57,388.70 on account of expenditures in the reconstruction of a private restaurant maintained by the petitioner. The respondent concedes that of such expenditures, amounts totaling $10,864.62 constitute repair items and that said $10,864.62 is deductible as a business expense in computing petitioner's net income for 1920.
On the 1st of December, 1917, the petitioner had, on deposit with the Austrian Government, Austrian*1835 Government Four Percent Perpetual Gold Rentes of the par value of $4,871,030.50 (Fls. 10,095,400., Crs. 24,228,960) in the purchase of which petitioner had expended the sum of $4,786,947.09. These securities were on deposit with the Postal Savings Bank in Vienna, a governmental depository, and had been deposited with the Austrian Government as a condition of petitioner being permitted to conduct its life insurance business in Austria and as guaranty for the fulfillment of its obligations to its Austrian policyholders. The said Gold Rentes were perpetual coupon *751 bonds (having no due date), payable in gold, in denominations of Fls. 1000 and Fls. 200, and were a prewar unsecured indebtedness of the former Austrian Empire. In the year 1890 petitioner had been granted a concession to conduct its business in Austria, but had ceased writing new business in Austria at the close of the year 1913, and in 1917 was in Austria solely for the purpose of liquidating its Austrian business. The Austrian policies were payable in Austrian crowns.
The following is a translation of extracts from the Austrian Imperial Ordinance of November 29, 1865, and the Austrian law of March 29, 1873:
*1836 Article IV. The Company is bound to appoint for all their business-management together, a Representative-Office consisting of one or several persons, the which has to be advised to Government-Administration in Austria, and to be published by the newspapers, the members of such office having their permanent domicile in the place of the Company's inland Head-settlement or are bound to take up their domicile there.
The Company's inland Representative-Office has to act by it with unlimited authority judicially and extra-judicially not only versus Government Administration but also versus third persons in Austria, in all matters arising from out the management of business in Austria. * * *
The total cost of the Austrian Gold Rentes of the par value of Fls. 10,095,400, as entered on petitioner's books, was $4,786,947.09.
The fair market value on March 1, 1913, of the Gold Rentes of a par value of Fls. 9,127,000, acquired prior to that date, was $3,983,479.15. The cost of the remaining Gold Rentes of a par value of Fls. 968,400, acquired subsequent to March 1, 1913, was $414,772.26. The cost of the Gold Rentes purchased prior to March 1, 1913, was $4,372,174.83.
Under an*1837 agreement becoming effective January 1, 1917, Arthur Schade was appointed petitioner's agent or manager for Austria for the year 1917, with an office in Vienna. The power of attorney given by petitioner to Schade, dated November 13, 1916, effective for the calendar year 1917, provides that the agent is authorized:
I. TO COLLECT PREMIUMS on the Company's policies in exchange for official receipts of the Company as the same may be sent to him by the Company. II. TO APPOINT (Subject to the approval of the Company,) on good references collecting agents. III. TO GIVE, on his own discretion and responsibility to such collecting agents power to collect premiums on the Company's policies in exchange for official receipts of the Company, placed in their hands for collection, making prompt report thereon, as they may be directed. IV. TO ACKNOWLEDGE receipt on the Company's usual forms, of notices of assignments of policies issued in the Territory of the Agent. V. TO RENT, on behalf of and as may be directed by the company, proper offices for the transaction of its business.*752 VI. TO MAKE SUCH REPORTS to the proper Government authorities concerning the business*1838 of the Company, transacted under the management of the Agent as may from time to time be required by law.
VII. TO PAY DEATH CLAIMS under policies on the lives of residents of the Territory, PROVIDED ALWAYS that such claims shall have been approved and ordered to be paid by the Company. VIII. TO PAY matured endowments, surrender values, annuity installments and dividends when such payments shall have been previously authorized by the Company. IX. TO MAKE LOANS upon the pledge to the Company of its policies in conformity with such instructions as may be given to him from time to time.X. TO CANCEL ANY AGREEMENT, power of attorney, or bond or contract made by or with or concerning any of his collecting agents or other persons provided always that no bond shall be cancelled or given up while such collecting agent or other person is in receipt of moneys belonging to the Company, or is in debt to the Company or to the Agent for any sum of money, or while the Company or the Agent shall continue to have any claim for any sum of money whatsoever against such collecting agent or other person. Should any default, miscarriage, misfeasance or malfeasance of any of such collecting*1839 agents or other persons occur, then and in every case so occurring, the Agent agrees by the acceptance of this appointment that he will be, and continue to be, liable to the Company therefor, and this clause (X) shall be construed and said liability determined according to the principles of law and equity of the State of New York.
XI. TO ACCEPT SERVICE of any legal process in any action which may be brought against the Company in any court in the Territory, and proper persons learned in the law to employ to defend such actions; and also to maintain, institute and carry on any suit or action which may be necessary to protect the rights of the Company in and about any business transacted through the agency of the Agent or his predecessors within the Territory, and proper persons learned in the law to employ for the prosecution of such suits to final judgment; but no suit shall be instituted by or in the name of the Company otherwise than in pursuance of the direction of its General Solicitor, PROVIDED ALWAYS that the Agent shall immediately report to the Company at its Home Office in the City of New York all suits or actions which have been commenced against the Company by the services*1840 of process upon the Agent and all such suits, actions and proceedings as he may have caused to be commenced, in the name of the Company, within the Territory.
On April 27, 1917, the Imperial and Royal Minister of Interior of Austria, purporting to act under authority of section 39 of an Austrian ministerial decree of March 5, 1896 (Official Gazette 31), appointed one Joseph Dorn Imperial and Royal Inspector to make an investigation of claimant's business in Austria, and thereupon through the said Dorn assumed direction and control of petitioner's agency in Vienna, in the manner outlined in "Protocol" dated April 28, 1917, which control was continuously exercised until March 14, 1919. In this "Protocol," which was signed by A. Schade, Schade made the following statements:
Questioned by I. R. Inspector Josef Dorn, who has been ordered by the I. R. Ministry of Interior by its decree dated April 27, 1917, No. 19, 175, to investigate gate the business administration of the Austrian Agency of The Mutual Life *753 Insurance Company of New York, in Vienna, I stated that the assets of the Company at the disposal of the Vienna Agency are today as follows:
* * *
I further declare*1841 that I take notice of the instruction that I have to submit to the Investigation Committee during all the time that the investigation is taking place, before acting thereon, all papers relating to disbursements - excepting payments of death claims and matured endowments, surrenders, loans, dividends and current administration expenses - also all papers or correspondence relating to foreign intercourse, and any payment order to the Postal Savingsbank or the other banks.
I further take cognizance that during the investigation period all incoming money not spent for insurance claims, or policy obligations, or business expenses has to be turned over to the Postal Savingsbank for the sole disposition of the Austrian Agency.
And I further declare to have taken notice that I received instruction from the Investigation Committee to satisfy in the same manner as before, in a correct business way, notwithstanding to the contrary order of the Home Office which I have shown to said Committee, and which order said Committee declared to be illegal and therefore void, and to continue the matured payments of death claims, endowments or any other valid policy claims which the Mutual Life Insurance*1842 Company of New York or its Austrian General Agency in Vienna by virtue of the policy has taken upon itself to pay.
Following the formal declaration of war between the United States and Austria on December 7, 1917, Inspector Dorn on December 10, 1917, sent a communication in writing, of which the following is a copy, to petitioner's Vienna manager:
VIENNA, Decbr. 10, 1917.
GENERAL AGENCY OF THE MUTUAL LIFE INS. CO. OF N.Y., VIENNA.
The submitted annual statement for the year 1916 shows a deficiency of Crs. 365,624.78, and that your claim on the Home Office amounts to Crs. 3,113,054.91. On account of the political situation it will require a long time that you may be able to collect this money from The Home Office. For the protection of the Austrian insured you ought to be solicitious how the fund of the Company here could be invested to such advantage, that said claim, not collectible at present, should be replaced to some extent by an increase of your revenues. Inasmuch as the investment of the premium reserve in 5 1/2% tax exempt Austrian Treasury Notes of the VII Emission of 1917, redeemable in 9 years, are yielding - as ascertained by calculation - an annual gain*1843 of interest pr. Crs. 285,000. - over the coupon revenue of the Goldrente, and in consideration that the security of the Treasury Notes, according to the statements rendered by the competent official authorities, is fully equal to that of the Goldrente, therefore it is urgently suggested to the General Representation of The Mutual that it may make a motion for exchange of the Goldrente, kept by the Postal Savings Bank as security deposit, against VII Emission Treasury Notes, for the purpose that thereby a further increase of the deficiency of the Premium Reserve security fund may be averted.
For the Investigation Commission
JOSEPH DORN
Chief Inspector.
On December 14, 1917, the Minister of the Interior of Austria delivered the following written communication to petitioner's Vienna agency:
*754 VIENNA, Decbr. 14, 1917.
Office of the Ministry of Interior No. 77624.
GENERAL AGENCY FOR AUSTRIA OF THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK, VIENNA
The Ministry of Interior acting upon your application of December 12, 1917, consents that the deposit of nominal value Florins Gold 10,095,400. - held by the Postal Savings Bank in Vienna as security shall be*1844 withdrawn and substituted by nominal value Crown 23,396,000 - Treasury Notes of the VII Austrian War Loan.
Concurrent with this the Postal Savings Bank is ordered to entrust the K.K. priv. Credit Anstalt (Institute or Bank) for Commerce and Trade in Vienna with the sale of aforesaid Goldrente with coupons at the price of Crs. 107. - for Florin 50. - and to get from said bank in lieu thereof Nominal Value Crs. 23,396,000. - Treasury Notes of the VII War loan which said bank has bought in anticipation of the subscription to this loan by the General Representative for Austria, Mr. Arthur Schade, General Manager, respectively to get the temporary certificates of said Treasury Notes and to place same to the security deposit of The Mutual Life Insurance Company of New York in substitution of the released Goldrente.
For the Minister of Interior.
[Signature]
As a result of the aforesaid order of December 14, 1917, petitioner's Austrian Government Four Percent. Gold Rentes of the par value of Fls. 10,095,400, which were held by the Governmental depository, the Postal Savings Bank, were on December 15, 1917, disposed of through the Credit Anstalt (Bank of Commerce and Trade) in*1845 Vienna to persons unknown to petitioner and Treasury Notes of the VII Austrian War Loan of the par value of Crs. 23,396,000 substituted therefor.
The disposal of petitioner's Gold Rentes and the substitution therefor of the bonds of the VII Austrian War Loan of the par value of Crs. 23,396,000 was without the knowledge or consent of petitioner and without any authority from it (other than such knowledge, if any, attributable to petitioner, as was then in possession of its Austrian manager, Arthur Schade, or such authority, if any, as was vested in said Arthur Schade by reason of the Austrian laws or by his power of attorney from petitioner dated November 13, 1916), and petitioner contends that the Austrian Government was responsible therefor.
The first intimation petitioner had at its home office of the taking of its Gold Rentes and the substitution therefor of the Austrian war bonds was through a letter from Schade addressed to petitioner's treasurer and dated Vienna, June 11, 1918. This letter was received by petitioner in New York on February 26, 1919, and bears the following endorsement by rubber stamp, "E.T.L. 1588." That letter is as follows:
The investigation Committee*1846 has required from us the change of the Gold Bonds deposited with the Government in Austrian Treasure Bonds.
*755 I have handed the matter over to the counsel, which at the end after understanding with the Ministery of Interior has arranged the change with the Postal Savings Bank, so that our deposits of Gold Bonds per Fl. 10.095.400 are now changed into Crs. 23.396.000. - Austrian Treasure Bonds. These Treasure Bonds bearing interest of 5 1/2% payable semi-annually on February 1st and August 1st.
I on my part having been unable to avoid this change have however insisted upon taking only short limited Bonds, so that nominal Crs. 23.396.000 will be payable in cash at the par value on August 1st, bearing interest of Crs. 643.390. - due on 1st of February and 1st of August, whilst the further deposit of Crs. 855.000. - Austrian Treasure Bonds is payable in cash at the par value on May 1st, 1927, bearing interest of Crs. 23.512.50 due on 1st of May and 1st of November.
From this action you will understand that the Company is not bound forever on these Treasure Bonds but that they must be paid at par value like mentioned above and then the Company will be in the position*1847 to make such investments as will be deemed advisable.
In general I must say that by this way a certain risk has been excluded for the Company as the Gold Bonds which had already fallen under par could only be sold on the public market whilst Treasure Bonds are guaranteed and must be paid at par value on a fixed day.
As the Treasure Bonds have been issued under par the gain in value together with a gain in interest shows that by this change the Gold Bonds have reached a rate of about 126 to 127, which is much more than they are quoted.
An interremistical certificate of deposit of the Post Savings Bank is included, the original will be issued after the return of same certificate for Gold Bonds, which I request to kindly send us for change.
Kindly approve this action which had to be arranged under the situation in question without possibility to put it first before the Company and thereby oblige.
Page 10 of the printed schedules forming part of the annual statement of petitioner to the Superintendent of Insurance of the State of New York for the year 1919 contains the following entries in connection with petitioner's deposit with the Austrian Government.
| SPECIAL DEPOSIT SCHEDULE | |||
| Showing all deposits or investments not held for the protection of all the policyholders of the company. | |||
| (1) | (2) | (3) | |
| State or Country | Description of deposit | Par Value | Asset Value |
| Austria | § Austrian Government 4% Rentes (Fls. 10,095,400 at .48-1/4 | $4,871,030.50 | $4,786,947.09 |
*1848 * * *
§ Austrian Rentes are listed as of the date of declaration war existed between the United States of America and Austria. It is reported the Austrian Government subsequently claimed the right to substitute Austrian 5-1/2% War Loan Treasury Certificates for these 4% Gold Rentes, but such claim is not recognized by the Company.
*756 In July, 1919, Henry E. Duncan, an American citizen, the superintendent of petitioner's foreign department, was in London, England, and endeavored without success to secure passports for entry into Germany, Austria, and Hungary, and advised petitioner by letter dated July 30, 1919, that he was going on to Holland and endeavor to secure a passport from there to Berlin, but that it would be more difficult to secure a passport to Vienna as the peace treaty with Austria had not then been signed (the treaty of St. Germain-en-Laye was signed on September 10, 1919). Duncan having been unable to secure a passport into Austria, petitioner, when arrangements could be perfected, sent its auditor of foreign accounts, F. C. Denning, a British subject, to make a personal audit of its foreign agencies, including those at Berlin and Vienna, to ascertain*1849 the exact condition of affairs and audit all transactions which had taken place during the war, and report to petitioner.
F. C. Denning left New York November 12, 1919, and was in Vienna from December 24, 1919, to January 15, 1920, and again from April 1, 1920, to September 2, 1920, and reported fully on the condition of the Vienna office and the disposition made of petitioner's Gold Rentes and the substitution therefor of the treasury notes of the VII Austrian War Loan, in a letter dated Vienna, January 13, 1920.
Following receipt at the home office of petitioner of the report made by F. C. Denning, petitioner's treasurer, on March 18, 1920, made formal and urgent demand on the Austrian Government for the return of its Austrian Government Four Percent Perpetual Gold Rentes of the par value of Fls. 10,095,400, refusing to recognize the substitution of the treasury notes of the VII Austrian War Loan of the par value of Crs. 23,396,000 for its Gold Rentes. The Secretary of Interior of Austria, on April 12, 1920, replied to petitioner's letter of March 18, 1920, and denied liability for the transaction which resulted in the disposal of petitioner's Gold Rentes and the substitution*1850 therefor of war bonds, and refused to restore petitioner's Gold Rentes to petitioner's premium reserve security deposit.
Petitioner continued to make demands by correspondence on the Austrian Government for restitution of its Gold Rentes, such correspondence continuing throughout the remainder of the year 1920 and into 1921. To some of petitioner's letters replies were made by the Austrian Government, others remained unanswered, and petitioner continued to make similar demands for restitution of such Gold Rentes and restitution thereof has been at all times denied and refused by the Austrian Government.
Petitioner also placed the facts before the Department of State of the United States at Washington, by a petition verified by its then Treasurer, Charles H. Warren, December 8, 1921.
*757 On November 29, 1920, the finance committee of petitioner's board of trustees at a regular meeting adopted the following preambles and resolution:
The President presented a letter, dated November 12th, 1920, from the Treasurer to him concerning the seizure and sale of Austrian Gold Rentes by the direction of the Austrian Ministry of the Interior and, after discussion, the following*1851 preambles and resolution were, on motion, adopted:
WHEREAS under the requirement of the Austrian Law this Company deposited with the Austrian Government Austrian Gold Rentes par amount Fl. 10,095,400, which cost $4,786,947.09 and represented a market value equal to the reserve on Austrian policies, and
WHEREAS during the World War, namely - on December 14, 1917, the Imperial and Royal Ministry of Interior by letter No. 77,624, made the following decree with respect to our bonds so deposited -
The Postal Savings Bank is hereby ordered to sell said Gold Bonds with coupons thereon through the Credit Bank for Commerce and Trade in Vienna at Crs. 107 for each Fl. 50 bond, and to use the amount obtained by this sale for payment of the subscription to Crs. 23,396,000 nominal value Treasury Certificates of the Seventh Austrian War Loan;
and
WHEREAS said seizure and sale was consummated without the authority, consent and approval of The Mutual Life Insurance Company of New York and has thereby removed from the ownership of the Company said Gold Rentes;
and
WHEREAS it is unknown what value can be recovered from the Austrian Government in settlement of the Company's claim for the*1852 Gold Rentes seized and sold by direction of said Government;
THEREFORE BE IT RESOLVED, that the officers of the Company be and are hereby authorized and directed to charge to profit and loss the cost or book value of the Gold Rentes deposited with the Austrian Government together with any interest thereon accrued and unpaid.
In accordance with the foregoing resolution petitioner, on December 31, 1920, made an entry on its books of account charging off to profit and loss the sum of $4,786,947.09, the cost of its Austrian Government Four Percent Perpetual Gold Rentes. The said sum of $4,786,947.09 so charged off appears in petitioner's annual statement to the Superintendent of Insurance of the State of New York for the year 1920 (copy of which accompanied its income and excess-profits-tax returns as filed for said year) as an item of disbursements on page 3 as follows:
47. Gross loss on sale or maturity of ledger assets, viz: * * *
(b) Bonds, per schedule D* 4,813,257.09.
* Includes $4,786,947.09 Austrian Gold Rentes seized by the Austrian Government.
In Schedule D, Part 4, referred to at page 32, appears the following explanation: "Austrian Government Gold Rentes, 4%*1853 Perpetual - Taken by the Austrian Government."
Under Schedule X - Unlisted Assets, page 69, of the printed schedules, referred to in taxpayer's said annual statement for 1920, *758 appears the following entry: "Claim on account of Florins 10,095,400. Austrian Gold Rentes seized by the Austrian Government."
Petitioner has at all times refused to recognize the act of the Austrian Government in disposing of its Austrian Government Four Per Cent Perpetual Gold Rentes acquired by petitioner at a cost of $4,786,947.09, and the substitution therefor of treasury notes of the VII Austrian War Loan of the par value of Crs. 23,396,000, and has at all times refused to ratify and confirm the transaction or to exercise ownership or control over the treasury notes of the VII Austrian War Loan.
War was declared between the United States and the Austro-Hungarian Government by joint resolution of Congress approved December 7, 1917. After the armistice entered into between the United States and Austro-Hungary on November 3, 1918, a technical state of war continued between the United States and Austria until war was terminated by joint resolution of Congress on July 2, 1921. A treaty*1854 of peace between the United States and Austria was ratified on November 8, 1921, and the President of the United States issued a proclamation on November 17, 1921, declaring said state of war as terminated on July 2, 1921.
Petitioner on December 22, 1925, filed claims against the Austrian Government, including a glaim for $4,786,947.09 for the loss of its Austrian Government Four Percent Perpetual Gold Rentes with the Tripartite Claims Commission, United States, austria and Hungary, constituted under an agreement ratified December 12, 1925, providing for the organization of a commission for the settlement of claims of United States nationals against these countries, which claim is entitled "The Mutual Life Insurance Company of New York against Austria, List No. 516."
Acting upon the agreed Statement and Joint Stipulation, the Tripartite Claims Commission, on or about April 1, 1927, granted an award in the amount of $100,000, together with interest thereon from January 1, 1921. The date January 1, 1921, from which interest was to be computed was fixed arbitrarily. Petitioner, by letter dated June 21, 1927, advised the American agent, Tripartite Claims Commission, that it made*1855 no claim to title to the aforesaid VII Austrian War Loan bonds of the nominal amount of Crs. 23,396,000 and that the bonds were, so far as petitioner was concerned, at the disposal of the Austrian agent. On or about January 2, 1929, the petitioner received payment of the award through the Triparties Claims Commission as follows:
| Amount of award | $100,000.00 | |
| Interest at 5% from Jan. 1, 1921, to Jan. 2, 1929 | 40,013.70 | |
| $140,013.70 | ||
| Less 1/2 of 1% under War Claims Act of 1928 | 700.07 | |
| Net amount received | 139,313.63 |
*759 The above-mentioned award also included a settlement of petitioner's claim against Austria for the forced investment on May 12, 1917, in VII Austrian War Loan bonds of Crs. 855,000, being the amount standing on that date to petitioner's credit in the banking house of Rothschild in Vienna. By apportioning the $100,000 award ratably, $96,500 thereof would be applicable to the Gold Rentes.
The following is a translation of an affidavit sworn to by Dr. Fritz Foregger at Vienna, Austria, June 28, 1926, before an American vice consul, together with a translation of a letter dated December 13, 1917, referred to in said affidavit and*1856 attached thereto, sent by Dr. Foregger to petitioner's then Austrian manager, Arthur Schade:
On or about the 16th of May, 1917, I was appointed by The Mutual Life Insurance Company of New York as its counsel in Austria. This appointment was on the express understanding that my compensation should not be on a salary basis but that I should be paid reasonable fees for services I was actually called upon to perform; I was not retained for any definite period, the Company having reserved the right in its discretion to terminate the appointment without any obligation whatsoever to me; this relationship continued up to the declaration of war between the United States of America and Austria-Hungary on the 7th day of December, 1917, and thereafter I did, on behalf of the said company and without direct authorization of the Home Office, render certain services during the cessation of commercial communications between the two countries, as will more fully hereinafter appear. During the period hereinbefore mentioned I understood Arthur Schade to be the General Manager of The Mutual Life Insurance Company of New York in Austria in charge of its Vienna agency.
On April 27, 1917, the Austrian*1857 agency of said company was notified by the Minister of Interior that he had decided to make an official investigation of the business administration of said Company's Austrian agency and that Mr. Joseph Dorn had been delegated as Inspector and Mr. Rudolf Matjasic Deputy Inspector to make said investigation. That from said 27th day of April, 1917, to March 14, 1919, the said Ministry of Interior, acting through its said Inspector and Deputy Inspector, exercised supervision of all the affairs of said agency and assumed general control thereof.
During the investigation period aforesaid the Inspector ordered that all incoming money not spent for insurance claims or policy obligations or business expenses should be turned over to the Postal Savings Bank for the disposition of the Austrian agency, and the investigation Committee further ordered that said agency was to satisfy in the same manner as before said period of investigation, endowments or any other valid policy claims, which The Mutual Life Insurance Company of New York or its Austrian general agency in Vienna, by virtue of policies had taken upon itself to pay, notwithstanding any order of the Home Office to the contrary.
*1858 In or about December, 1917, all communications between the Vienna agency of the said Company and its Home Office in the United States had been cut off as the result of the war. The Supervising Commission (appointed as aforesaid) advised Manager Schade on December 10, 1917, as follows:
GENERAL AGENCY OF THE MUTUAL LIFE INS. CO. OF N.Y. VIENNA
The submitted annual statement for the year 1916 shows a deficiency of Crs. 365,624.78, and that your claim on the Home Office amounts to Crs. 3,113,054.91. On account of the political situation it will require a *760 long time that you may be able to collect this money from the Home Office. For the protection of the Austrian insured you ought to be solicitous how the funds of the Company here could be invested to such advantage, that said claim, not collectible at present, should be replaced to some extent by an increase of your revenues. Inasmuch as the investment of the premium reserve in 5 1/2% tax exempted Austrian Treasury Notes of the VII Emission of 1917, redeemable in 9 years, are yielding - as ascertained by calculation - an annual gain of interest pr Crs. 285,000 - over the coupon revenue of the Gold rente, and in consideration*1859 that the security of the Treasury Notes, according to the statements rendered by the competent official authorities, is fully equal to that of the Goldrente, therefore it is urgently suggested to the General Representation of The Mutual that it may make a motion for exchange of the Goldrente, kept by the Postal Savings Bank as security deposit, against VII Emission Treasury Notes, for the purpose that thereby a further increase of the deficiency of the Premium Reserve security fund may be averted.
For the Investigation Commission
JOSEPH DORN,
Chief Inspector.
At that time I was informed by the Ministry of the Interior that this exchange of the premium reserve was absolutely unavoidable and, after conferences had by me with the Ministry of Interior, I was convinced that the sequestration of the Company was contemplated at once if it did not fully comply with the wishes of the Austrian Government and effect an exchange of the securities deposited with the Austrian Government as reserve for Company's Austrian policy holders. I had several conferences with said Arthur Schade but he was reluctant at the beginning to carry out this transaction without the authorization of the*1860 Company's Home Office, although the said Arthur Schade, as Manager of said Company was, under strict recommendation ("strikte Empfehlung") from the Commissioner of the Insurance Department, to request the Postal Savings Bank to make the exchange of said securities without any further delay, to prevent thereby in the interests of the insured a further increase of the deficiency, as described by the Chief Inspector of the Investigation Commission. At last Schade was satisfied in the principle with the exchange. Pursuant to the urgent command of the Insurance Department, without waiting for the authorization of the said Arthur Schade, or of the Home Office of the Company, I submitted to the Austrian Government an application for the exchange of the Gold Rentes of par value Fls. 10,095,400 for Crs. 23,396,000 face value of 5 1/2% Treasury Notes of the VII Austrian War Loan. On December 13, 1917, I wrote to the said Arthur Schade a letter (copy of which is attached) advising him of the action I had taken. I took this action personally and with dispatch because I apprehended that the Company's assets would be forthwith sequestered unless such exchange were made at once. As the result*1861 of this application the Ministry of the Interior effected the aforesaid exchange of the Gold Rentes for the Treasury Notes of the VII Austrian War Loan.
VIENNA, Decbr. 13, 1917.
DEAR MR. GENERAL MANAGER:
I am very sorry that the inclemency of the weather and the stoppage of the street car traffic has made it impossible for us to meet to-day and to come to a definite understanding in regard of the transaction to exchange the company's Goldrente for Treasury Notes.
*761 You were still reluctant yesterday to assist me with the necessary formalities in this transaction without authorization of the Home Office, although that there we have the strict recommendation from the Commission of the Insurance Department to ask the Postal Savings Bank to make the exchange of said securities without any further delay to prevent thereby in the interests of the insured a further increase of the deficiency. I was told in the Ministry of Interior that this exchange is absolutely unavoidable and I have the impression that it conveyed even a hint that a sequestration of the Company is contemplated at once if we would not fully comply with the wishes of the Government. It is my firm*1862 resolution however, to avoid under all circumstances the sequestration of the Company (Administration by force as per Decree of July 29, 1916) inasmuch as this event would render the financial conditions of the Company here much worse as they are now, since the scared policyholders would make a run on the Agency for cash surrenders of their policies. Now, inasmuch as the term to make the formal application for this exchange transaction is expiring to-day, and whereas the chance to make this transaction will be missed thereby for quite a considerable time, I, after much deliberation, have made up my mind to make personally, without having your authorization, to submit to the Government the application for the exchange.
* * *
I trust, Dear Sir, that you will take it in good grace that driven by existing conditions, without having your explicit authorization, I have filed with the Insurance Department upon its urgent demand my formal application for the exchange of the securities. Further explanations I am going to give you verbally at our next meeting.
The following is a translation of the application for the exchange of the Gold Rentes referred to in the foregoing affidavit*1863 of Dr. Foregger, a copy of which application was enclosed in letter dated April 12, 1920, from the Austrian Government to petitioner's home office:
To the MINISTRY OF THE INTERIOR.
Petition of the General Agency of Vienna of the Mutual Life Insurance Company of New York, through its Counsel Dr. Fritz von Foregger, in regard to subscription to War Loan.
In the annual statement for the business year 1916, recently submitted to you, the showing of a big deficiency was avoided by entering as asset an item of Crs. 3,113,054.91 due from the Home Office to the Vienna Agency.
* * *
The supervising commission appointed upon Art. 39 of the Insurance Regulation Law, noticing this predicament, has urgently asked us to prevent the further increase of the deficiency (asset item "due from Home Office") by using the securities of the premium reserve for investments yielding higher interest income. We have, in fact, the apprehension that the Agency's increased running expenses will make this deficiency larger, and that a further loan taken on these securities as collateral will seriously impede the interests of the Company.
The Gold Rente security of Florins 10,095,400 yields per coupon*1864 of a Florin 50. bonds Crs. 4.96. We have ascertained that this security, if exchanged, for Treasury Notes of the Seventh War Loan, would give an interest increase of Crs. 286,000 per year as stated later on. Having discussed this matter with *762 competent authorities, especially the highest of them, the Ministry of Finance, the declaration received from there leave no doubt of the beliefs that said Treasury Notes, redeemable after 9 years, are of highest security and that their interest rate will not be lowered. This means for the Company on annual profit through higher interest rate of Crs. 286,000; furthermore the certainty that the Company will get after 9 years the full amount for the matured Treasury Notes, which can be invested then conveniently, or even used to repurchase the Gold Rente.
It cannot be denied that this transaction of exchange is just as well for the interests of the insured as for the Company, and is warmly endorsed by the supervising commission. We have the assurance that the Postal Savings Bank respectively the Credit Institute for Commerce and Industry is ready to give Crs. 107. for a Florin 50. Gold Rente Bond. We have also secured all the*1865 necessary data to show the result of this transaction.
* * *
Acting upon the hint we received from the Supervising commission, delegated upon Art. 39 of Insurance Law to examine our business, we pray herewith the Ministry of Interior to give its consent that the present securities of the Premium reserve Fl. 10,095,400 Austrian Gold Rente shall be exchanged into Treasury Notes of the 7th War Loan and that we shall be authorized to subscribe for said Treasury Notes; furthermore, to order the Postal Savings Bank to sell said Gold Rentes at Crs. 107. per Fl. 50. bond, with the coupons thereon, respectively, to entrust with this sale the Credit Institute for Commerce and Industry and to but for the amount so realized Crs. 23,396,000. nominal value Treasury Notes of the 7th War Loan, or rather to subscribe for the Company that amount of Treasury Notes by the banks own signature or with the co-signature of our General Manager Arthur Schade, and to accept the temporary certificates until they can be exchanged for the original, and to keep them as security deposit of the premium reserve of The Mutual Life Insurance Company of New York.
VIENNA AGENCY OF THE MUTUAL.
The translation*1866 of an affidavit sworn to by Arthur Schade at Vienna, Austria, July 6, 1926, before an American vice consul, is to the following effect:
I, Arthur Schade, residing at Vienna, Hotel Erzherzog Karl, hereby make the following statement:
During the year 1917 I was the General Manager of The Mutual Life Insurance Company of New York and in charge of its Vienna agency under a power of attorney dated November 13, 1916, which, by its terms, expired on the 31st of December, 1917.
During 1917 and also the years 1918 and 1919 I continued to render the services outlined in said power of attorney, although I was without any power of attorney until my re-appointment under power of attorney dated October 15, 1919. By the latter power of attorney I was appointed for the term of another year as Chief Agent in the German-Austrian Republic. On April 27, 1917, the Imperial and Royal Ministry of the Interior advised me by letter that said Ministry had under paragraph 39 of the Ministerial Decree of March 5, 1896, Official Gazette 31, decided to make an official investigation of the business administration of my agency of The Mutual Life Insurance Company of New York and had accordingly delegated*1867 the officials of the Ministry, Mr. Joseph Dorn, Inspector, and Mr. Rudolf Matjasic, Deputy Inspector to make this investigation.
*763 The following day (April 28th) a protocol was signed in the presence of Inspector Dorn, Deputy Inspector Matjasic and myself, in which I was instructed, among other things, that I was to submit to the Investigation Committee during all the time that the investigation was taking place; that during said investigation period all incoming money not spent for insurance claims, policy obligations or business expenses was to be turned over to the Postal Savings Bank and that I was to satisfy in the same manner as before in a correct business way all matured payments of death claims, endowments or any other valid claims which The Mutual Life Insurance Company of New York or its Austrian General Agency in Vienna, had taken upon itself to satisfy, notwithstanding any contrary order of the Home Office of The Mutual Life Insurance Company of New York.
The aforesaid investigation officials of the Imperial and Royal Ministry of Interior were in charge of my aforesaid Vienna agency from April 28, 1917, to March 14, 1919, at which time I was notified by*1868 the Minister of the Interior that the cessation of investigation of The Mutual Life Insurance Company of New York was ordered.
On or about December 14, 1917, I received from Dr. Fritz Foregger, the Vienna attorney of said The Mutual Life Insurance Company of New York, a letter (copy of which is attached to this statement) advising that an exchange of said Mutual Life Insurance Company's security deposit with the Austrian Government of Fl. 10,095,400. Goldrentes into Crs. 23,396,000; nominal value Treasury Notes of the VII Austrian War Loan, was "Absolutely unavoidable", and that said Dr. Foregger had filed with the Austrian Insurance Department, upon its urgent command, his formal application for the aforesaid exchange of the securities.
On December 13, 1917, a petition for said exchange of securities was filed through said Dr. Foregger with the Ministry of the Interior. I did not sign the orders for the exchange through a sale of said Goldrentes.
Any action I made was under the direction of the aforesaid officials of the Ministry of the Interior and under the approval of our counsel, and I thereafter looked to the Home Office Manager of the Foreign Department of The Mutual*1869 Life Insurance Company of New York for approval of such action already made, but no such approval of such action was ever received.
A statement of account dated January 20, 1918, was rendered by Dr. Foregger to petitioner's Vienna agency, setting forth the details of the disposition of petitioner's Gold Rentes and the substitution therefor of treasury notes of the VII Austrian War Loan.
The value in dollars of the Austrian Government Four Percent Perpetual Gold Rentes of the par value of Fls. 10,095,400 on December 31, 1917, and also December 15, 1917, by agreement, was $2,560,388.88 and on December 31, 1920, $58,177.79, and the value in dollars of the treasury notes of the VII Austrian War Loan of the par value of Crs. 23,396,000 on December 31, 1917, and also December 15, 1917, by agreement, was $2,560,388.88 and December 31, 1920, $28,028.58.
The value in American dollars of the Austrian crown (Krone) was, on December 31, 1917, $.0156 and on December 31, 1920, was $.0024.
The petitioner, in its return for the year 1920, deducted the amount of $4,786,947.09 as a loss sustained and not compensated for by insurance *764 or otherwise as a result of the "seizure" by*1870 the Austrian Government of its Gold Rentes. The Commissioner, in his deficiency letter, disallowed this deduction.
As to all other facts we find them to be as set forth in the stipulation, which is on file in this proceeding, and is incorporated herein by reference as if set forth fully.
Petitioner, in its petition herein, assigns as error the action of the Commissioner of Internal Revenue in refusing to allow a deduction of $194,841.22, representing uncollected accrued interest taken by petitioner in making its income-tax return for the taxable year 1920. Petitioner, however, abandoned this assignment of error.
OPINION.
MCMAHON: The parties have stipulated that on account of the decision of the Supreme Court in the case of , invested capital shown in the notice of deficiency should be increased to such an extent that the excess-profits credit will be greater than the net income subject to excess-profits tax, that there is accordingly no excess-profits tax due and that the amount of $542,383.30 shown in the notice of deficiency should be eliminated both as an excess-profitstax item*1871 and as a credit in arriving at the amount subject to income tax. The stipulation disposes of all the other assignments of error except the one relating to the alleged loss upon the Austrian Gold Rentes. Adjustment will be made accordingly, under Rule 50, as to all those assignments of error disposed of by the stipulation.
We turn now to a consideration of the issue relating to the Gold Rentes. The evidence discloses that the petitioner, an insurance company, had on deposit, in 1917, with an Austrian Governmental depository in Vienna certain Austrian Gold Rentes, which were perpetual coupon bonds, as guaranty for the fulfillment of its obligations to its Austrian policyholders. In that year, under threat of sequestration of petitioner's assets in Austria, Dr. Fritz von Foregger, who had, prior to the advent of the war, been petitioner's counsel in Austria, made application to the Minister of Interior of Austria, to exchange the Gold Rentes for bonds of the VII Austrian War Loan of the same value. This application was without the authorization or consent of Arthur Schade, petitioner's agent in Austria. Pursuant to this application, the Ministry of the Interior of Austria effected*1872 the sale of the Gold Rentes, and the purchase of bonds of the VII Austrian War Loan of the same value. This value was $2,560,388.88. Petitioner's home office first learned of this exchange in 1919, and, in 1920, after communication with the Austrian Government, was informed that the Government would not *765 restore the Gold Rentes. As a result of this action, petitioner charged off to profit and loss in 1920 an amount of $4,786,947.09, representing the cost of all the Gold Rentes. The petitioner has never made any claim to the war loan bonds exchanged for the Gold Rentes in 1917. On the contrary, it appears that petitioner has at all times denied ownership of the war loan bonds and has consistently attempted to obtain restitution of the Gold Rentes. In its income-tax return for the year 1920, the petitioner claimed as a deduction, on account of loss sustained and not compensated for by insurance or otherwise, the amount of $4,786,947.09. This claimed deduction was disallowed by the respondent.
The Revenue Act of 1918 provides in part:
SEC. 234. (a) That in computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed*1873 as deductions:
* * *
(5) Debts ascertained to be worthless and charged off within the taxable year.
The Board has held that bonds are debts within the meaning of the revenue acts and that if a taxpayer meets the requirements of the "bad debts" provisions of the revenue acts it is entitled to a deduction. . We will, therefore, consider whether, in the instant proceeding, the petitioner is entitled to any deduction in the year 1920 under the provisions of section 234(a)(5) of the Revenue Act of 1918.
The petitioner now claims in its brief a deduction of $4,398,251.41, which represents the total of the cost of the Gold Rentes purchased subsequent to March 1, 1913, and the value at March 1, 1913, of the Gold Rentes purchased prior to that date. The cost of the Gold Rentes purchased prior to March 1, 1913, was greater than their value at March 1, 1913. No greater deduction than $4,398,251.41 is possibly allowable under section 234(a)(5) of the Revenue Act of 1918. ; *1874 ; ; ; and ; affirmed in .
In determining whether or not a debt is worthless we must, of course, determine whether the creditor can collect upon the debt. An examination of the evidence discloses that the net result of the action taken by the Austrian Government in 1917 was to deprive the petitioner of the Gold Rentes which were evidences of indebtedness of the Austrian Government to the petitioner. In view of the fact that the Austrian Government was at that time at war with the United States, the petitioner would not have been justified in entertaining hope of the restoration of the Gold Rentes or their payment *766 by the Austrian Government to petitioner. It is our opinion that the taking of the Gold Rentes and their sale by the Austrian Government to persons unknown to the petitioner rendered the debt of the Austrian Government to the petitioner uncollectible. We have here "the occurrence of such events as prevent*1875 their collection." See , in which the Supreme Court stated:
* * * The Statute obviously does not contemplate and the regulations (article 144) forbid the deduction of losses resulting from the mere fluctuation in value of property owned by the taxpayer. , cf. . But with equal certainty they do contemplate the deduction from gross income of losses, which are fixed by identifiable events, such as the sale of property (article 141, 144), or caused by its destruction or physical injury (article 141, 142, 143), or, in the case of debts, by the occurrence of such events as prevent their collection (article 151). [Italics ours.]
* * *
The substitution by the Austrian Government of the War Loan bonds for the Gold Rentes with the Austrian Government depository did not amount to a substitution of evidence of indebtedness, since petitioner did not accept the War Loan bonds. For the same reason it can not be said that petitioner*1876 received payment in whole or in part for the Gold Rentes in 1917 when the War Loan bonds were thus substituted therefor. In 48 C.J. 595, it is stated:
In the absence of an agreement otherwise, providing, or the consent of the creditor to receive some other medium, payment may be made only in money * * *.
See also ; ; ; and .
In 1920 the petitioner definitely learned that the Austrian Government would not make restitution of the Gold Rentes and in that year petitioner charged off the full cost thereof. Thus the petitioner has met the requirements of the statute as to ascertainment of worthlessness and charging off of the debt, and is entitled to a deduction in the year 1920 of the cost of the Gold Rentes purchased subsequent to March 1, 1913, plus the March 1, 1913, value of those purchased prior to that date, which was less than their cost, less, however, $28,028.58, the value of the War Loan bonds which the Austrian Government had placed*1877 at petitioner's disposal with the government depository. While it is true that petitioner did not accept these bonds, the fact remains that they were at its disposal, and in determining the loss which petitioner sustained we must take into account that it lay within petitioner's power in 1920 to reduce its loss by the amount of the market value of the War Loan bonds.
*767 The fact that petitioner, in 1929, received from the Austrian Government an amount of $96,300, principal, and in addition interest thereon from January 1, 1921, as an award for the disposition of the Gold Rentes by the Austrian Government, does not affect the question of whether petitioner is entitled to the claimed deduction in the year 1920. See ; and .
Reviewed by the Board.
Judgment will be entered under Rule 50.