Opinion
Docket No. 3533-62.
1968-09-17
LOUISA B. GUNTHER FARCASANU, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
Bartholomew B. Coyne, for the petitioner. Charles F. T. Carroll, for the respondent.
Bartholomew B. Coyne, for the petitioner. Charles F. T. Carroll, for the respondent.
Petitioner, the widow of the American Minister to Rumania who died in Bucharest a few days after Rumania declared war on the United States in December 1941, was forced to leave valuable furnishings and art objects in Rumania when she was evacuated in January 1942. Sometime after 1946 but before 1952 this property was seized or confiscated by agents of the Communist regime in control of the Rumanian Government acting under the color of various government decrees. In 1956 petitioner filed her claim in the amount of $295,716 with the Foreign Claims Settlement Commission on account of the confiscation of this property and in 1959 was awarded $103,445 thereon, of which aware she received the net amount of $23,386.45. In her return for 1959 petitioner claimed a deduction on account of the loss of this property which she now contends should be allowed as a ‘theft’ loss. Respondent disallowed the deduction and also determined that the net amount of her recovery on the claim filed with the Foreign Claims Settlement Commission was includable in petitioner's taxable income for that year as capital gain since he contended that she had not shown any basis in the confiscated property.
Held, confiscations under color of law of petitioner's property by agents of the Communist government of Rumania, even though arbitrary and despotic, do not give rise to theft losses deductible under sec. 165(c)(3), I.R.C. 1954. Held, further, petitioner's basis in the confiscated property was an amount at least equal to the amount of her net recovery on her claim.
Respondent determined a deficiency in petitioner's income tax for the calendar year 1959 in the amount of $47,992.08. Two related questions are presented herein. The first is whether petitioner is entitled to a deduction for ‘theft’ in the amount of $192,271.50 or any other amount on account of the seizure or confiscation of certain of her property in Rumania after a Communist regime assumed control in that country in 1945, and, if so, whether such deduction was properly claimed in 1959. The second is whether petitioner realized long-term capital gain in 1959, on account of and in the amount of the net proceeds of a payment made in that year to petitioner by the Foreign Claims Settlement Commission in the net amount of $23,386.45 as partial compensation for her property loss in Rumania.
FINDINGS OF FACT
Some of the facts have been stipulated and they are so found.
The petitioner, Louisa B. Gunther Farcasanu, resided in Washington, D.C., during the calendar year 1959 and at the time of the filing of the petition herein. Her Federal income tax return for 1959 was filed with the district director of internal revenue at Baltimore, Md.
Petitioner married Franklin M. Gunther, then a United States foreign service officer, in England in 1918.
After serving in the foreign service in various capacities and in various countries Franklin Gunther resigned from the foreign service in 1930 or 1931. Although between 1931 and 1937 he was associated in some way with an investment firm, he devoted most of his time, talents, and money to other interests, among which was his collection of Persian and oriental art objects, a lifetime interest of his which was shared by petitioner.
Petitioner married Mihail Farcasanu sometime after the filing of her petition in this case, over 20 years after the death of Franklin Gunther. At the time Franklin Gunther became American Minister to Rumania, Mihail Farcasanu was a prominent lawyer, journalist, and political figure in Rumania. He escaped from Rumania in 1946 and is now a resident of Georgetown, Washington, D.C.
Franklin Gunther was appointed United States Minister Plenipotentiary to Rumania in 1937. Petitioner and her husband moved to Bucharest, Rumania, in that year, taking with them not only their collections of rare and valuable art objects, but also furniture, paintings, oriental rugs, glassware, china, silverware, and other personal property sufficient to appropriately and elegantly furnish the residence formerly occupied by the United States Minister to Rumania who had preceded Franklin Gunther in office, and later, a large residence which Gunther himself leased. This personal property, most of which belong to Franklin Gunther, was shipped to Rumania at the expense of the United States State Department in two steel vans from Washington, D.C. In addition to the property shipped from this country to Rumania, petitioner purchased curtains, linens, and other household effects while in England and Italy, en route to Bucharest.
Franklin Gunther was stricken by leukemia in the fall of 1941 and died on December 22, 1941. Just prior to his death, on December 11, 1941, Rumania declared war on the United States. It then became necessary for the American Legation to be closed and for the American officials connected with the Legation to withdraw from Rumania. For this purpose the Rumanian Government arranged a special train to transport American officials and their families out of the country in January of 1942. It was not possible for petitioner to remove the body of her husband from the country, nor did the circumstances of her departure allow her to take any more of the Gunther property located in Rumania than she could carry with her. Before leaving Bucharest petitioner packed most of the belongings owned by her and her husband and placed them in an air raid shelter of the United States chancellery building, which was to be supervised by the Swiss Legation. Other parts of the property were placed by petitioner with friends in Rumania. In addition, a few paintings by Rumanian artists which were owned by the Gunthers were left in the Toma Setlian Museum in Bucharest. Petitioner arrived in the United States early in 1942.
All of the property in Rumania owned by Franklin Gunther at the time of his death was bequeathed to petitioner by his will, which was admitted by probate in the Court of the County Judge, Leon County, Fla.
An armistice was signed between Rumania and the Allies (the Soviet Union, Great Britain, and the United States) on September 12, 1944, under which Rumania withdrew from the war as an ally of Germany and agreed to enter on the side of the Allied Powers against Germany. Under the armistice the Allied High Command, which was controlled by the Soviet Union and purportedly acted on behalf of all of the Allied Nations, was given extensive powers over, inter alia, ‘the printing, importation and distribution in Rumania of periodical and nonperiodical literature, the presentation of theatrical performances and films, the work of wireless stations, post, telegraph and telephone,‘ as well as control over the Rumanian civil administration ‘for the purpose of securing the execution of (the) armistice terms.’ By March of 1945 the Soviet Union, the only Allied Power with troops in Rumania, in collaboration with Rumanian Communists had succeeded, by a show of force, in establishing a political regime in control of the Government of Rumania which was dominated by Communists and which operated without regard to constitutional safeguards even though the Constitution of Rumania which had been in existence since 1923 had not formally been abrogated and even though Rumania's King Michael remained the nominal head of the government.
During and after 1945 this regime dominated by Russian and Rumanian Communists issued numerous edicts, decrees, or proclamations, dealing with such matters as confiscation of private property under certain circumstances and restrictions relative to the renting of private housing accommodations. For example, a decree was issued on April 24, 1945, providing for the confiscation of property of political enemies of the Rumanian Government. During 1945 and 1946 there was widespread taking of property, arrests, and other intimidating and repressive acts on the part of the Communists in Rumania affecting ‘unfriendly’ Rumanians.
In 1946 the United States and Great Britain formally recognized the Communist regime in Rumania in the hope or expectation that free elections would be held. The repressive tactics of the Communists subsided after this recognition. In the fall of 1947 elections were held in Rumania and the Communist candidates were announced as victors despite the strong protests of the United States and Great Britain that the results had been falsified. In December of 1947 Communist troops surrounded the Rumanian royal palace and King Michael was forced to abdicate. In 1948 the Rumanian Constitution of 1923 was replaced by the Constitution of the Rumanian People's Republic.
Petitioner returned to Bucharest in November of 1945. Shortly after her arrival she ascertained to her satisfaction that the property she had left in the United States chancellery building, with friends, and at the museum was intact, although she did not unpack the crated goods to examine them.
An administrative officer of the American Mission
In Bucharest informed petitioner early in 1946 that her property stored in the air raid shelter of the chancellery building, authority over which had been reassumed by the United States from the Swiss, would have to be moved in order that the shelter could again be used by the American diplomats in the conduct of their official duties. Thereupon, petitioner arranged for these belongings to be moved into the residences of three or four friends in Bucharest. Either the same or another official of the American Mission attempted to determine from petitioner whether or not she wanted her property and the body of her husband returned to the United States, but no definite decision was made by her at that time. Petitioner was advised by one friend who retained a position of nominal prominence in the Rumanian Ministry of Foreign Affairs that because of the political instability and disorders then existing in Rumania she should not attempt to remove her property from the country, at least until the signing of a formal peace treaty. During 1946, affairs in Rumania were in chaos with armed bands attacking houses, stopping trains, and perpetrating many robberies. Petitioner was advised by the head of the American Diplomatic Mission in Bucharest, who later became Minister to Rumania after the signing of a treaty of peace between Rumania and the United States, that she should not attempt to remove her property from Rumania at that time. Petitioner wished to leave Rumania in 1946, but was persuaded by the head of the American Mission to stay on because of her close friendship with the mother of the King of Rumania and her connections with the royal family which made it possible for her to obtain information from the palace which was of value to the American Mission. Petitioner remained in Rumania until early in 1947, at which time she hurriedly returned to the United States after being informed that her mother had suffered a stroke in the United States. Her mother died later in the year. Petitioner took with her only such of her personal property as could be taken with her on her airplane flight. Petitioner never returned to Rumania after 1947, and never saw any of the property she had left there after that time.
Apparently the United States was represented in Rumania by the United States Mission in Bucharest from 1944 until after 1947, at which time a minister was appointed and the mission resumed the status of a Legation.
At sometime in 1947 a member of the American Diplomatic Mission was able to arrange for the shipment of a ‘lift van’ of his own household furnishings with Rumania to the United States without damage. At or about the same time personal property of another American official which had been packed and left in Rumania in 1942 was shipped out of Rumania and was damaged in transit.
After returning from Rumania to the United States early in 1947, petitioner was advised by her brother-in-law, Ray Atherton, a distinguished American diplomatist who had served as Minister to Bulgaria when Franklin Gunther was Minister to Rumania, that a peace treaty between Rumania and the Allies would soon be consummated, that this would facilitate the recovery of her property, and that if her property were not returned to her, provision would be made under the treaty for compensation for individuals in her situation out of blocked Rumanian funds held by the United States since 1940 in the amount of some $22 million, which would be used to satisfy claimants against Rumania. The treaty of peace with Rumania, which became effective on September 15, 1947, contained provision for the compensation of United States nationals for property loss or damage suffered at the hands of the Rumanian Government between September 1, 1939, and the effective date of the treaty.
On October 8, 1948, the following telegram was sent by an American official in Bucharest to the State Department:
Informed that Rumanian Government has requisitioned house containing certain property said to belong to Mrs. Franklin Mott Gunther, 2812 N Street NW Washington, widow of former U.S. Minister Bucharest.
Department may wish ascertain owners wishes concerning disposition this property. If desired, Legation will endeavor afford protection and assist in any other way possible.
Following correspondence between State Department officials and petitioner and between the State Department and its representatives in Bucharest, Francis Flaherty, then acting as Assistant Chief of the Division of Protective Services of the Department of State, sent the following communication to the Officer in Charge of the American Mission, Bucharest, on January 19, 1949:
The names of the people referred to who remained in Rumania had been deleted from the various State Department documents introduced in evidence.
The Secretary of State refers to the Legation's Despatch No. 751 concerning the property at Bucharest of Mrs. Franklin Mott Gunther.
Mrs. Gunther called at the Department on January 13, 1949 and requested that the Legation be assured of her confidence in Madame N. and of her wish that property in Madame N.‘s custody remain there, without any effort to inspect or inventory it, or anything else being done which might result in complications for Madame N. with the local authorities.
With respect to furniture and furnishings in the R. house, Mrs. Gunther is satisfied to have the articles remain where they are, for use by the two British ladies who occupy the quarters. She is in concurrence with the suggestion that an inventory of these items be attached to the lease, if this can be accomplished without any risk of adverse results to the individuals concerned. Mrs. Gunther suggested that Madame N.‘s opinion might be sought on this point. If such an inventory is made, a copy would be sent to the Department for transmission to Mrs. Gunther.
The house referred to in the last paragraph of the above-quoted letter had been requisitioned by the Rumanian authorities prior to October 7, 1948, but the British had succeeded in having this procedure rescinded sometime before December 9, 1948, which rescission was to be effective for the period in which the British inhabitants referred to continued to occupy the house.
In a communication from Daniel Page, Administrative Officer of the American Mission at Bucharest, to the State Department, dated December 9, 1948, it was stated, inter alia, that ‘Under present customs laws and controls it is uncertain as to whether or not the Rumanian authorities would grant the necessary approvals to ship Mrs. Gunther's effects to the United States.’
A press release from the State Department dated March 17, 1949, read in part as follows:
In response to a note from the Rumanian Foreign Office requesting the Department to inform American nationals affected by the Rumanian nationalization law of June 11, 1948, that they should apply for compensation in accordance with certain procedures established by the Rumanian Government, the American Legation in Bucharest informed the Rumanian authorities that the compensation provisions envisaged by the Rumanian Government could not be considered to provide prompt, adequate or effective compensation and that therefore the United States Government did not intend to advise American nationals to conform with Rumanian procedures.
After petitioner's contact with the State Department on January 13, 1949, referred to in the above-quoted letter from a State Department official to the Officer in Charge of the United States Mission in Bucharest, she took no other steps to recover her property or to obtain compensation for its loss until she received a communication from the State Department in 1956, advising her to present a claim to the Foreign Claims Settlement Commission. On September 27, 1956, petitioner filed her claim in the amount of $255,716.66. Subsequently, petitioner's claim was amended to include additional items and to readjust the value of other items previously claimed so that the claim as finally submitted amounted to $295,716.50. In an exhibit attached to her claim petitioner included a statement of the conditions and circumstances under which her property was lost. Although this exhibit contained no declaration concerning the taking of her property specifically, it cited eight decrees or regulations enacted by the Communist government in Rumania between April 24, 1945, and July 27, 1951, all providing for the confiscation of private property of certain classes of people; e.g., political enemies (Apr. 24, 1945), Rumanians who had lost citizenship (July 7, 1948), and persons convicted of certain political crimes (Aug. 12, 1950). The exhibit refers particularly to decree No. III, dated July 27, 1951, ‘regarding the regulation of goods of all kinds to be confiscated, or already confiscated, without inheritors or ‘without a master,’ as well as goods which no longer serve government agencies' which stated in part:
Sec. 1. The goods which are under the provisions of this decree are the following:
d) Goods ‘without a master’ as well as those considered abandoned by the effect of certain laws or decrees.
Considered as goods ‘without a master’ are goods of all kinds abandoned for one year by their owners— known or unknown— as well as goods found and remitted to the Militia units, which have not been claimed by their owner in three months' time from the remittance.
Petitioner's statement then characterizes the basis of her claim as follows:
It is therefore quite apparent that the applicant's property, as enumerated herein, has been confiscated by the Rumanian government. Certainly, the so-called ‘legal basis' for such a confiscation existed in any of the innumerable decrees conveniently dictated by the Rumanian government to suit its needs at any given instance. * * *
The final decision of the Foreign Claims Settlement Commission dated June 8, 1959, stated in pertinent part as follows:
ORDERED * * * The Commission finds that claimant owned certain personal property which was taken without compensation by the Government of Rumania during 1947. The Commission further finds that the value of the property taken was $103,445.00 and concludes that claimant is entitled to an award under Section 303(2) of the Act.
AWARD
Pursuant to the provisions of the International Claims Settlement Act of 1949, as amended, an award is hereby made to LOUISA BRONSON GUNTHER in the amount of One Hundred Three Thousand Four Hundred Forty-Five Dollars ($103,445.00) plus interest thereon at the rate of 6% per annum from July 1, 1947 to August 9, 1955, the effective date of the Act, in the amount of Fifty Thousand Three Hundred Eight Dollars and Seventy-Four Cents ($50,308.74).
Payment of any part of this award shall not be construed to have divested the claimant herein, or the Government of the United States on her behalf, of any rights against the Government of Rumania for the unpaid balance of the claim, if any.
Pursuant to this award petitioner received in 1959 a payment of $33,782.40 of which $10,395.95 was paid out by petitioner as attorney's fees and other expenses with respect to the claim.
The entire $33,782.40 represented payment of principal of the award, and no part of it represented accrued interest.
The fund from which this payment was made was the same $22 million of Rumanian assets which had been held by the United States for the satisfaction of such claims. The Rumanian funds were not sufficient to satisfy in full the claims for which awards were made.
Late in 1959 it was anticipated that the Rumanian government would agree to augment this fund by $2,500,000, which it agreed to do on March 30, 1960, in five installments to be paid between July 1, 1960, and July 1, 1964. In 1959 it did not appear likely that petitioner's award would be satisfied in full by later payments, or even that she would receive further payments in any substantial amount. In 1960 petitioner received an additional payment of $870.78 as a further payment under the award, and received no further payment in that year or any subsequent year.
All of the property owned by petitioner in Rumania was confiscated by Communist officials in that country proceeding under color of law after the year 1946 and before the year 1952.
Petitioner's basis in the property confiscated in Rumania
was at least equal to the amount of her partial recovery from the Foreign Claims Settlement Commission, which was $23,386.45 net of petitioner's expenses in prosecuting the claim.
Petitioner's basis in this property is its cost in the case of items originally purchased by her and fair market value at the time of the death of petitioner's husband in the case of items purchased by her husband which passed to petitioner under her husband's will. Secs. 1012, 1014, I.R.C. 1954.
On her tax return for 1959 petitioner claimed as a loss the difference between the $295,716.50 stated in her claim filed with the Foreign Claims Settlement Commission and the award thereunder of $103,445 or an amount of $192,271.50. The respondent in his notice of deficiency dated June 12, 1962, determined that the deduction for the claimed loss of $192,271.50 was ‘not allowable under any section of the Internal Revenue Code,‘ and further that petitioner failed to report as long-term capital gain her net award from the Foreign Claims Settlement Commission of $23,386.45 received in 1959.
OPINION
KERN, Judge:
It is the position of the petitioner herein that certain of her property was left in Rumania in 1947 with friends who were opposed to the Communist regime in that country, that this property was thereafter confiscated by agents of the Communist regime, and that such seizure was in violation of Rumanian law and thus constituted a ‘theft’ deductible under section 165(c)(3) of the Internal Revenue Code.
Petitioner further contends that from 1947 until 1959 she had a reasonable expectation of either recovering her property or receiving compensation therefor out of the proceeds of some $22 million of Rumanian assets held by the United States in 1947 and that her loss did not become certain until 1959, in which year petitioner was ‘awarded’ by the Foreign Claims Settlement Commission the principal sum of $103,445 plus interest as compensation for the loss of this property, upon which she actually received a payment of only $33,782.40. Of this, $10,395.95 was paid by petitioner for legal and other expenses related to the claim.
All Code references are to the Internal Revenue Code of 1954, unless otherwise indicated.SEC. 165(c). LIMITATION ON LOSSES OF INDIVIDUALS.— In the case of an individual, the deduction under subsection (a) shall be limited to—(3) losses of property not connected with a trade or business, if such losses arise from fire, storm, shipwreck, or other casualty, or from theft. A loss described in this paragraph shall be allowed only to the extent that the amount of loss to such individual arising from each casualty, or from each theft, exceeds $100. For purposes of the $100 limitation of the preceding sentence, a husband and wife making a joint return under section 6013 for the taxable year in which the loss is allowed as a deduction shall be treated as one individual. No loss described in this paragraph shall be allowed if, at the time of filing the return, such loss has been claimed for estate tax purposes in the estate tax return.
Petitioner deducted in her return for 1959 as a loss the difference between the claim of $295,716.50 and the ‘award’ of $103,445.00, or $192,271.50, and made the same claim in her petition. Petitioner on brief claims that the amount of the deduction should be the difference between $295,716.50 and the net amount received, $23,386.45, or $272,330.05, although she failed to amend her petition to reflect this increased claim.
The testimony of petitioner and her witnesses, who were former Rumanian nationals and who had suffered persecution by the Communist regime in that country, was highly charged with emotion. While we sympathize with the indignation which they so eloquently and, at times, vociferously expressed, their testimony has not been so clear that we can feel certain as to who did what, and when, to petitioner's property in Rumania after 1945. However, on the whole record, we have concluded that all of the property left in Rumania by petitioner was seized or confiscated by agents of the Communist-controlled Government of Rumania between 1947 and 1951, and that such seizures or confiscations were under color of decrees issued by that Government. Of one thing we are certain, and that is that petitioner has not proved the contrary.
Accordingly, our opinion in William J. Powers, 36 T.C. 1191, is controlling and on its authority we conclude that petitioner has failed to prove that respondent erred in his determination that petitioner was not entitled to the claimed deduction.
We point out that our decision in William J. Powers, supra, is in all ways consistent with the ‘Act of State’ doctrine exemplified by Underhill v. Hernandez, 168 U.S. 250; Oetjen v. Central Leather Co., 246 U.S. 297; and Banco Nacional de Cuba v. Sabbatino, 376 U.S. 398, which would appear to preclude us from deciding that an act of a foreign government or of a revolutionary regime later recognized as a foreign government was a ‘theft’ regardless of how despotic or arbitrary such an act might be.
The close relationship between these ‘Act of State’ cases and the Powers case was recognized by petitioner's counsel in the first of many motions for continuance filed by him in which he stated as his ground for continuance that the case of Banco Nacional de Cuba v. Sabbatino then pending before the Supreme Court was ‘controlling on the issue of whether ‘nationalization’ if a ‘theft“ for the purpose of a deduction for theft loss, and that the District Court decision therein, affirmed by the circuit court ‘supersedes the holding of such cases as (Powers).’ The Supreme Court reversed. Banco Nacional de Cuba v. Sabbatino, supra, reversing 307 F.2d 845.
If there could have been any doubt that Congress did not intend by section 165(c)(3), supra, to allow a theft deduction to taxpayers on account of a loss of personal property confiscated under color of law by a foreign government ‘arbitrary and despotic as it may have been,‘ we think that doubt was removed in 1964 when Congress found it necessary to enact special legislation adding section 165(i) to the Internal Revenue Code in order that certain expropriation by the Cuban Government might be deemed casualties or thefts and thus deductible for tax purposes.
SEC. 165(i). CERTAIN PROPERTY CONFISCATED BY THE GOVERNMENT OF CUBA.—(1) TREATMENT AS SUBSECTION (c)(3) LOSS.— For purposes of this chapter, in the case of an individual who was a citizen of the United States, or a resident alien, on December 31, 1958, any loss of property which—(A) was sustained by reason of the expropriation, intervention, seizure, or similar taking of the property, before January 1, 1964, by the government of Cuba, any political subdivision thereof, or any agency or instrumentality of the foregoing, and(B) was not a loss described in paragraph (1) or (2) of subsection (c),shall be treated as a loss to which paragraph (3) of subsection (c) applies. * * *
In view of our conclusions expressed above, we need not discuss the alternative arguments of the respondent supporting his disallowance of the deduction claimed.
In addition to the disallowance of the deduction the respondent also determined that the net proceeds received by petitioner from the Foreign Claims Settlement Commission ($23,386.45) were taxable to petitioner as long-term capital gains because, he contends, her basis in the property lost was zero. Respondent's argument is to the effect that most or all of the property lost was originally owned by Franklin Gunther and passed to petitioner under his will, that no evidence was adduced herein relative to the fair market value of his property at the time of his death, December 22, 1941, and that therefore the basis of the property in petitioner's hands must be zero. However, on the entire record, we have no difficulty in finding that petitioner's basis in the property lost was at least equal to the net amount of her recovery. Accordingly, we decide this issue for the petitioner.
Decision will be entered under Rule 50.