Stern v. Commissioner

1926 BTA LEXIS 1997 | B.T.A. | 1926

Lead Opinion

OPINION.

Phillips:

At the time the United States entered the World War in 1917 the petitioners had certain bonds, stock and bank deposits in Germany, which were seized in 1918 by the German Alien Property Custodian. They seek to deduct as debts ascertained to be worthless and charged off in 1919, the March 1, 1913, value (which was less than cost) of the German Government, municipal and corporation bonds, and the cost to them of the bank deposit. The evidence establishes that such bonds are, under the German law as under our laws, evidences of indebtedness and therefore the subject of such a deduction under proper circumstances. As to the stocks in German companies, it is conceded that these do not constitute an indebtedness, and deduction for a loss is claimed in 1918, the year of the seizure.

The Revenue Act of 1918 provides for the deduction of both debts ascertained to be worthless and losses sustained. If a debt becomes worthless, it would seem that a loss has been sustained. Debts, however, are deductible in the year in which they are ascertained to be worthless and charged off, which may be other than the year in which they in fact became worthless. Since it can not be assumed that a double deduction was intended, it would appear that, if a debt became worthless in one year, but was not ascertained by the taxpayer to be worthless until the following year, deductions could not be taken for a loss in the first year and for a bad debt in the second. Furthermore, a loss may be sustained upon account of an indebtedness without any ascertainment of worthlessness, as, for example, the embezzlement of negotiable securities. In that case, a loss may be sustained in the year of the embezzlement, although there has been no ascertainment that the debt itself is worthless.

It becomes necessary, therefore, in every case to distinguish between a loss sustained and a debt ascertained to be worthless. In the present instance it appears to us that there has been no proof that any of the debts in controversy were worthless. The fact, so far as there is any proof, is that the debtors were solvent; indeed, some of the bonds were redeemed and the proceeds deposited in the seized account during 1918 and 1919. The claim for the deduction is based, not upon the worthlessness of the bonds or of the bank deposit, but rather upon the seizure thereof by the German Government. The fact is that, while uncollectible by taxpayers, the debts did have a value and were collectible by the new owner. It is our opinion that the seizure and continued holding of these bonds by authority of the enemy government does not constitute the basis for a deduction upon the ground that the debts were ascertained to be worthless, and that, if any deduction is allowable, it is upon the basis of a loss sustained by reason of the seizure.

We come then to consider whether any deductible loss was sustained in 1918, when the property was taken over by the German Alien Property Custodian by decree of the Imperial German Government. The undisputed evidence is to the effect that under such decree possession, title, and all interest in the seized property were taken from the taxpayers and vested in the Custodian, but that such decree did not provide what ultimate disposition should be made of the property. The Custodian, however, was an agent of the German Government which possessed the necessary power to enforce its decree. Since no provision was made for the ultimate return of the property or for compensation, the substance of the situation was that possession of and title to the property was taken from the taxpayers and vested in the German Government. All rights of the taxpayers in the property ceased, and it was only in the event that Germany should later, by treaty or otherwise, provide for its return or for compensation that any rights would arise in favor of the taxpayers.

Although the taxpayers no longer had any interest or title in the property, under principles of international law, which the German Government might or might not recognize, a claim arose against the German Government upon the part of the United States on behalf of the taxpayers, which the United States might or might not prosecute as it saw fit and by such means as were available.

One nation treats with the citizens of another only through their government. A sovereign cannot be sued in his own courts without his consent. His own dignity, as well as the dignity of the nation he represents, prevents his appearance to answer a suit against him in the courts of another sovereignty, except in performance of his obligations, by treaty or otherwise, voluntarily assumed. Hence, a citizen of one nation wronged by the conduct of another nation, must seek redress through his own government. His sovereign must assume the responsibility of presenting his claim, or it need not be considered. If this responsibility is assumed, the claim may be prosecuted as one nation proceeds against another, not by suit in the courts, as of right, but by diplomacy, or, if need be, by war. It rests with the sovereign against whom the demand is made to determine for himself what he will do in respect to it. He may pay or reject it; he may submit to arbitration, open his own courts to suit, or consent to be tried in the courts of another nation. All depends upon himself. (United States v. Diekelman, 92 U. S. 520).

Many instances of treaties in which, a government has surrendered the claims of its nationals might be cited, but two recent examples will suffice. In the treaty negotiated with Spain in, 1899, following the Spanish-American War, it was provided:

The United States and Spain mutually relinquish all claims for indemnity, national and individual, of every kind, of either Government, or of its citizens or subjects, against the other Government, that may have arisen since the beginning of the late insurrection in Cuba and prior to the exchange of ratifications of the present treaty, including all claims for indemnity for the cost of the war.

The United States will adjudicate and settle the claims of its citizens against Spain relinquished in this article. (Art. VII, 30 Stat. 1754.)

In the Treaty of Versailles, negotiated June 28,1919, which formed the basis of peace between Germany and the European Allies, it was provided in Part N, section IV, that the property of German nationals within the territory of the Allies should be retained and liquidated by such Allied power and that the proceeds might be charged with the amounts due the nationals of such Allied power arising out of their property in German territory or debts due them by German nationals. Sen. Doc. No. 49, 66th Cong., 1st Sess. Under the treaty of peace between the United States and Germany a similar-power with respect to the property of German nationals within the territory of the United States was reserved to this country.

It would accordingly appear that, after the property was taken by the Custodian, the taxpayers were entirely devested of their property. All that they had was the hope that the treaty of peace would provide for the return, of such property, or its value, or, if not, that the United States would compensate its nationals for seized property which Germany might be permitted to retain under such treaty. Any claim which existed, however, was a claim upon the United States, either to secure a return of the property by Germany or, if it allowed confiscation as part of the terms of the treaty, to compensate those whose propertf was lost.

We are accordingly of the opinion that the taxpayers sustained a loss in 1918 which they are entitled to deduct in their returns for that year.

Orders of redetermination will 5e entered accordingly on 15 days’ notice, v/nder Rule 50.

MaRquette did not participate.