SCOTUS Reports

Tag: foreign government confiscation

  • Gunther v. Commissioner, 43 T.C. 303 (1964): When Foreign Government Confiscation Does Not Constitute Theft for Tax Deduction Purposes

    Gunther v. Commissioner, 43 T. C. 303 (1964)

    Confiscation of property by a foreign government under color of law does not constitute “theft” deductible under Internal Revenue Code section 165(c)(3).

    Summary

    In Gunther v. Commissioner, the Tax Court ruled that property confiscated by the Communist government of Rumania did not qualify as a theft loss deductible under IRC section 165(c)(3). The petitioner, Gunther, left property in Rumania in 1947, which was later seized by the Communist regime. She sought a deduction for this loss in 1959 after receiving partial compensation. The court, relying on the ‘Act of State’ doctrine and precedent from William J. Powers, held that such confiscation did not constitute theft. However, the court allowed Gunther to offset her basis in the lost property against the compensation received, treating the net amount as a capital gain rather than income.

    Facts

    Gunther left property in Rumania in 1947, entrusting it to friends opposed to the Communist regime. Between 1947 and 1951, this property was seized by agents of the Communist government under decrees. Gunther claimed a theft loss deduction in 1959, the year she was awarded compensation by the Foreign Claims Settlement Commission. She received $33,782. 40 but spent $10,395. 95 on related expenses, leaving her with a net of $23,386. 45.

    Procedural History

    Gunther filed a tax return claiming a deduction for the loss of her property in Rumania. The Commissioner disallowed this deduction, leading Gunther to petition the Tax Court. The court, following precedent set in William J. Powers, upheld the Commissioner’s decision regarding the theft loss deduction but ruled in favor of Gunther on the issue of her basis in the property.

    Issue(s)

    1. Whether the confiscation of Gunther’s property by the Rumanian government constitutes a “theft” deductible under IRC section 165(c)(3)?
    2. Whether the net proceeds Gunther received from the Foreign Claims Settlement Commission should be taxed as long-term capital gains?

    Holding

    1. No, because the confiscation was under color of law by a foreign government, and thus not considered a theft under the ‘Act of State’ doctrine.
    2. No, because Gunther’s basis in the property was at least equal to the net amount of her recovery, allowing her to offset this against the compensation received, resulting in no taxable gain.

    Court’s Reasoning

    The court relied heavily on the ‘Act of State’ doctrine, which precludes U. S. courts from judging the validity of acts by foreign governments. The court cited William J. Powers, which held that confiscations by foreign governments under color of law do not constitute theft. The court also noted that Congress had to pass special legislation in 1964 (IRC section 165(i)) to allow deductions for Cuban expropriations, indicating that without such specific legislation, confiscations by foreign governments were not deductible as thefts. The court rejected Gunther’s argument that the confiscation was a theft, stating, “We think that doubt was removed in 1964 when Congress found it necessary to enact special legislation. . . in order that certain expropriation by the Cuban Government might be deemed casualties or thefts. ” On the second issue, the court determined that Gunther’s basis in the property was at least equal to her net recovery, allowing her to offset this against the compensation received.

    Practical Implications

    This decision clarifies that confiscations by foreign governments under color of law are not deductible as theft losses under IRC section 165(c)(3) unless specifically allowed by Congress. Tax practitioners must be aware that only specific legislation, like IRC section 165(i) for Cuban expropriations, can provide such deductions. The ruling also demonstrates the importance of establishing a basis in property for tax purposes, as Gunther was able to offset her recovery against her basis, avoiding a taxable gain. This case has been influential in subsequent cases dealing with foreign confiscations and tax deductions, reinforcing the ‘Act of State’ doctrine’s application in tax law.

  • Farcasanu v. Commissioner, 50 T.C. 881 (1968): Confiscation by Foreign Government Not Considered Theft for Tax Deduction Purposes

    Farcasanu v. Commissioner, 50 T. C. 881 (1968)

    Confiscation of property by a foreign government, even if arbitrary and despotic, does not constitute a theft loss deductible under Section 165(c)(3) of the Internal Revenue Code.

    Summary

    Louisa B. Gunther Farcasanu sought a tax deduction for a ‘theft’ loss after her property in Romania was confiscated by the Communist regime between 1947 and 1951. The U. S. Tax Court ruled that such confiscation, despite being under color of law, did not qualify as a theft under IRC Section 165(c)(3). However, the court recognized her basis in the confiscated property as at least equal to the amount she recovered from the Foreign Claims Settlement Commission, thus allowing her to offset any capital gains from this recovery.

    Facts

    Louisa B. Gunther Farcasanu’s husband, Franklin M. Gunther, an American diplomat, died in Romania in 1941. After his death, Farcasanu left most of their valuable personal property in Romania when she evacuated in 1942 due to Romania’s declaration of war on the U. S. She returned to Romania in 1945 and again in 1947, leaving her property with friends, but was unable to retrieve it due to the political instability. Between 1947 and 1951, her property was confiscated by the Communist regime under various decrees. In 1959, Farcasanu filed a claim with the Foreign Claims Settlement Commission and was awarded $103,445, receiving a net payment of $23,386. 45. She sought to deduct the difference between her claim and the award as a theft loss on her 1959 tax return.

    Procedural History

    Farcasanu filed her 1959 tax return claiming a theft loss deduction of $192,271. 50. The IRS disallowed the deduction and determined that the net recovery from the Foreign Claims Settlement Commission should be taxed as capital gain. Farcasanu petitioned the U. S. Tax Court, which upheld the IRS’s disallowance of the theft loss deduction but allowed her to offset the capital gain by recognizing her basis in the property as at least equal to her net recovery.

    Issue(s)

    1. Whether the confiscation of Farcasanu’s property by the Communist regime in Romania constituted a theft loss deductible under IRC Section 165(c)(3).

    2. Whether Farcasanu’s net recovery from the Foreign Claims Settlement Commission should be taxed as capital gain and, if so, what her basis in the confiscated property was.

    Holding

    1. No, because the confiscation was under color of law by a recognized foreign government, it did not constitute a theft as defined by IRC Section 165(c)(3).

    2. Yes, the net recovery was taxable as capital gain, but Farcasanu’s basis in the property was at least equal to her net recovery, allowing her to offset the gain.

    Court’s Reasoning

    The court relied on the precedent set in William J. Powers, which held that confiscation by a foreign government, even if despotic, does not qualify as a theft under IRC Section 165(c)(3). The court emphasized the ‘Act of State’ doctrine, which precludes judicial determination that acts of a recognized foreign government constitute theft. The court noted that Congress’s subsequent enactment of IRC Section 165(i) to allow deductions for specific Cuban expropriations further supported their interpretation that confiscation by a foreign government is not generally deductible as theft. Regarding the basis in the property, the court found that Farcasanu’s basis was at least equal to her net recovery, allowing her to offset any capital gain from the award.

    Practical Implications

    This decision clarifies that property confiscation by a foreign government, even if under despotic regimes, is not deductible as a theft loss under IRC Section 165(c)(3). Taxpayers facing similar situations must look to specific legislation, such as IRC Section 165(i) for Cuban expropriations, for potential deductions. The ruling also underscores the importance of establishing a basis in confiscated property to offset any capital gains from recovery awards. Subsequent cases involving property seized by foreign governments will likely reference this decision to determine the deductibility of losses and the taxation of recoveries.