10 T.C. 208">*208 Respondent determined a deficiency in income tax for 1941 in the amount of $ 12,662.23. Petitioner makes no objection to the adjustments made by respondent in determining the deficiency. He alleges that he is entitled to a deduction of more than $ 100,000 for war losses under sections 127, 117, and 23, Internal Revenue Code. No deduction 1948 U.S. Tax Ct. LEXIS 272">*275 for war losses was claimed by petitioner on his 1941 tax returns, and no deduction therefor has been allowed by the respondent. Petitioner, 10 T.C. 208">*209 by appropriate pleadings, claims an overpayment of income taxes for 1941 in the amount of $ 44,709.33.

FINDINGS OF FACT.

For the taxable year 1941 petitioner filed two income tax returns with the collector of internal revenue for the third district of New York. One was a nonresident alien income tax return on Form 1040 NB-a, which reported his income and deductions for the first four and a half months of 1941; the other was a Form 1040 individual return, which reported his income and deductions for the remaining months of 1941. The total tax liability shown on the two returns and paid by the petitioner was $ 44,709.33, of which $ 7,256.99 was paid at the source. None of the deductions on either return was for war losses.

Prior to 1934 petitioner was a citizen of Germany. In 1934 he became a citizen of Spain. He remained a citizen of Spain until he became a naturalized citizen of the United States in November 1946.

From 1934 to August 1939 the petitioner, although a citizen of Spain, resided in France. He entered the United States1948 U.S. Tax Ct. LEXIS 272">*276 in or about August 1939 on a Spanish passport as a visitor. He remained in the United States until on or about May 16, 1941, when he went to Tia Juana, Mexico, and returned the next day as a quota immigrant.

The petitioner is engaged in the tobacco business in this country and in Europe. Corporations in which he was interested had cigarette factories in Holland, Switzerland, and Palestine. He was also interested in tobacco businesses in Greece and Bulgaria.

During the taxable year 1941 petitioner owned certain German municipal and corporate bonds which had been purchased for him by Van Marken & Middendorp, stockbrokers located in Amsterdam, Holland, during the period April 1927 to December 1931. The bonds were in the custody of Van Marken & Middendorp prior to, during, and after the taxable year. The German bonds held for petitioner by his stockbrokers had a cost basis (exclusive of accrued interest) as follows:

1. $ 4,000 face value, 6 1/2%, Berlin Electric Elevated & Underground Railways Co., purchased April 20, 1927, for 9,800 guilders, or $ 3,919.02.

2. $ 4,000 face value, 6 1/2%, City of Berlin, purchased April 20, 1927, for 10,087.50 guilders, or $ 4,033.99.

3. $ 4,0001948 U.S. Tax Ct. LEXIS 272">*277 face value, 6 1/2%, City of Cologne, purchased April 20, 1927, for 10,050 guilders, or $ 4,019.00.

4. 10,000 guilders face value, 7%, Peters Union, purchased April 20, 1927, for 9,825 guilders, or $ 3,929.02.

5. $ 4,000 face value, 6 1/2%, Berlin City Electric Co., purchased April 20, 1927, for 9,831.25 guilders, or $ 3,931.52.

6. 10,000 guilders face value, 7%, Stolberger Zinc Mining Co., purchased April 24, 1928, for 9,725 guilders, or $ 3,921.12.

7. $ 10,000 face value, 7%, Rheinelbe Union, purchased April 24, 1928, for 25,187.50 guilders, or $ 10,155.60.

10 T.C. 208">*210 8. $ 6,000 face value, 6 1/2%, Berlin Electric Elevated Underground Railways Co., purchased April 24, 1928, for 14,587.50 guilders, or $ 5,881.68.

9. 2,000 pounds face value, 7%, Potash Syndicate of Germany, purchased April 24, 1928, for 25,410 guilders, or $ 10,245.31.

10. $ 1,000 face value, 6 1/2%, Berlin Electric Elevated & Underground Railways Co., purchased December 3, 1929, for 2,125 guilders, or $ 857.86.

11. 2,500 pounds face value, 7%, Potash Syndicate of Germany, purchased July 10, 1931, for 29,850 guilders, or $ 12,020.60.

12. $ 5,000 face value, 6%, Harper Mining Co., purchased July 10, 1931, for 9,125 guilders, 1948 U.S. Tax Ct. LEXIS 272">*278 or $ 3,674.64.

13. $ 5,000 face value, 6 1/2%, Berlin Electric Elevated & Underground Railways Co., purchased July 7, 1931, for 9,031.25 guilders, or $ 3,636.88.

14. $ 1,000 face value, 6 1/2%, Berlin Electric Elevated & Underground Railways Co., purchased September 7, 1931, for 1,150 guilders, or $ 463.34.

15. $ 1,000 face value, 6 1/2%, Berlin Electric Elevated & Underground Railways Co., purchased September 8, 1931, for 1,200 guilders, or $ 483.72.

16. $ 1,000 face value, 6 1/2%, Berlin Electric Elevated & Underground Railways Co., purchased September 9, 1931, for 1,225 guilders, or $ 494.04.

17. $ 1,000 face value, 6 1/2%, Berlin Electric Elevated & Underground Railways Co., purchased September 10, 1931, for 1,200 guilders, or $ 484.08.

18. $ 2,000 face value, 6 1/2%, Berlin Electric Elevated & Underground Railways Co., purchased September 11, 1931, for 2,262.50 guilders, or $ 912.92.

19. $ 1,000 face value, 6 1/2%, Berlin Electric Elevated & Underground Railways Co., purchased September 12, 1931, for 1,157.25 guilders, or $ 466.95.

20. $ 2,000 face value, 6 1/2%, Berlin Electric Elevated & Underground Railways Co., purchased September 14, 1931, for 2,262.50 guilders, or $ 912.92.

1948 U.S. Tax Ct. LEXIS 272">*279 21. $ 1,000 face value, 6 1/2%, Berlin Electric Elevated & Underground Railways Co., purchased September 15, 1931, for 1,062.50 guilders, or $ 428.83.

22. $ 1,000 face value, 6 1/2%, Berlin Electric Elevated & Underground Railways Co., purchased December 18, 1931, for 537.50 guilders, or $ 216.02.

23. $ 10,000 face value, 6%, Rhine Westphalia Electric Power Corporation, purchased December 18, 1931, for 7,250 guilders, or $ 2,913.78.

24. $ 5,000 face value, 6%, Harpen Mining Co., purchased December 18, 1931, for 3,187.50 guilders, or $ 1,281.06.

25. $ 10,000 face value, 6 1/2%, United Steel Works Corporation, purchased December 18, 1931, for 4,875 guilders, or $ 1,959.26.

26. $ 1,000 face value, 6%, Harpen Mining Co., purchased December 22, 1931, for 650 guilders, or $ 261.50.

27. $ 4,000 face value, 6%, Harpen Mining Co., purchased December 23, 1931, for 2,562.50 guilders, or $ 1,029.36.

The above enumerated German bonds were bearer bonds which had value throughout the year 1941 and in January 1942. All of the bonds were retained by petitioner throughout 1941 except the following bonds, being a portion of items 4, 7, and 11, supra, which bonds were disposed of prior to the taxable1948 U.S. Tax Ct. LEXIS 272">*280 year:

10 T.C. 208">*211 The total cost of the German bonds retained by petitioner throughout 1941 was $ 76,317.36, based upon converting Dutch guilders into dollars at the rate of exchange on the respective dates of purchase.

During the years 1936 to 1940 petitioner acquired certain 3 per cent funding bonds from the Conversion Office for German Foreign Debts. The latter was a public law corporation created by the German Law of June 9, 1933. Under this law the debtor was required to make payment in reichsmarks to the Conversion Office of interest, dividends, etc., on the contractual due date to the credit of the foreign creditor. To the extent that the debtor made payment of interest, etc., to the Conversion Office he was freed from his obligation. The Conversion Office credited the amounts paid in to the foreign creditors, but the German Reichsbank determined the time when payments were to be made out of the accounts. The 3 per cent funding bonds were issued1948 U.S. Tax Ct. LEXIS 272">*281 to petitioner in lieu of cash in payment of interest due on other German bonds and in payment of mortgage interest. In connection with the issuance of the funding bonds the German Gold Discount Bank, a state institution connected with the German Reichsbank, offered to purchase the funding bonds in Berlin for 75 per cent of their face value, payable in reichsmarks. This offer was outstanding until Holland was invaded. Thereafter, and when financial transactions between Holland and Germany were renewed, the offer was again available and was outstanding in July, August, and October of 1941. As the result of interest payments by the Conversion Office in 3 per cent funding bonds, petitioner owned the following 3 per cent bonds prior to, during, and after the taxable year:

1. $ 18,587.50 face value, payable in U. S. dollars, due January 1, 1946, acquired in 1937.

2. $ 16,895 face value, payable in U. S. dollars, new issue dated June 1, 1937, acquired in 1938, 1939, and 1940.

3. 3,990 guilders face value, payable in Dutch guilders, dated March 1, 1937, acquired 1937 to 1940, inclusive.

4. 35,200 German reichsmarks, face value, payable in reichsmarks, bond issues as follows:

12,0001948 U.S. Tax Ct. LEXIS 272">*282 series A, due January 1, 1945, acquired 1936 and 1937.

22,000 series B, due January 1, 1946, acquired 1936 and 1937.

1,200 new issue, dated March 1937, with no fixed date of maturity, acquired 1937.

The 3 per cent funding bonds had value when acquired in December 1941, and in January 1942. The issue due January 1, 1946, was listed on the New York Stock Exchange; $ 21,316,200 of this issue was outstanding in the United States; trading in this issue was suspended by the Exchange on December 12, 1941.

In a routine report made in the autumn of 1941 Van Marken & Middendorp advised the German Enemy Property Control officials of petitioner's ownership of the aforementioned bonds. No demand was ever made on petitioner's stockbrokers to deliver any of the bonds 10 T.C. 208">*212 to any German authority. Van Marken & Middendorp continued in business without interference from the Germans, without examination of its affairs, and without questions as to its customers.

None of the assets and no right to the assets of any corporation obligated on the above bonds were ever received by petitioner or his agents, Van Marken & Middendorp. The obligor corporations were themselves buying the bonds in 1941 1948 U.S. Tax Ct. LEXIS 272">*283 after the exchange barrier between Holland and Germany was lifted.

The petitioner has never been compensated for his German bonds by insurance, by the discharge or satisfaction of his obligations and liabilities, or otherwise.

The United States of America declared war on Germany on December 11, 1941.

During December 1941 petitioner owned three pieces of real property located in the German-occupied zone of France. One piece, a farm and country estate at Elbeuf-en-Bray in Normandy, was purchased on or about February 14, 1935, for 1,150,000 French francs in cash. On or about April 15, 1935, petitioner purchased an adjoining piece of real property, for which he paid 151,000 French francs in cash. Petitioner made extensive improvements on his country estate at a minimum cost of 2,000,000 francs. On or about July 9, 1935, petitioner purchased a town house in Paris at Boulogne-sur-Seine for 940,000 francs in cash. Petitioner used the latter property as his home when in Paris and used his country estate as a summer home and farm.

The value of the French franc in terms of United States dollars, when the aforementioned pieces of real property were purchased, based upon the monthly averages1948 U.S. Tax Ct. LEXIS 272">*284 of daily rates, was as follows: For the month of February 1935, 6.5936 cents per franc; for the month of April 1935, 6.5970 cents per franc; for the month of July 1935, 6.6242 cents per franc. During the period between the time petitioner purchased the estate and the end of 1939, during August of which year petitioner left France for the United States, the lowest monthly average value of the French franc in terms of United States dollars was 2.2246 cents per franc, in November 1939. The cost of the three pieces of property and the improvements to petitioner in United States dollars, based upon the above values of the French franc, was:

Upon the purchase of the country estate and the town house petitioner employed caretakers for each property. The caretakers have since remained on the properties. The real properties were never taken away from the caretakers nor confiscated by the Germans. None of 10 T.C. 208">*213 the real estate was sold by petitioner. All of the above real estate was owned by the petitioner on December 11, 1941, free and clear of any mortgages or encumbrances. 1948 U.S. Tax Ct. LEXIS 272">*285 The trend of real property values generally in France was upward from 1935 through 1941.

The petitioner has never been compensated for his real properties by insurance, by the discharge or satisfaction of his obligations and liabilities, or otherwise.

Prior to and after his departure from Germany petitioner dealt with the Reichskreditgesellschaft, one of the leading banks in Berlin. After his departure petitioner's affairs in Berlin were handled by a Dr. Brandt, who held a power of attorney from petitioner. While petitioner lived in France Brandt came to see him at different times. During the taxable year petitioner had funds on deposit with the Reichskreditgesellschaft. The amount of the deposit, if any, on December 11, 1941, is undisclosed.

On December 11, 1941, petitioner owned valuable property in Holland and in the occupied zone of France, the adjusted cost basis of which on that date was in excess of $ 100,000. Petitioner sustained a war loss in 1941 under section 127 of the Internal Revenue Code of at least $ 100,000.

On December 28, 1943, petitioner filed a claim for the refund of income tax for 1941 in the amount of $ 37,452.34 with the collector of internal revenue1948 U.S. Tax Ct. LEXIS 272">*286 for the third district of New York. On March 8, 1945, he filed an amendment thereto, increasing the refund claim to $ 44,709.33. A second amended claim for the refund of $ 44,709.33 was filed by petitioner in December 1945. The refund claims were based upon petitioner's alleged right to deduct war losses.

OPINION.

The issue presented is whether petitioner, a resident alien, had war losses deductible under section 127, Internal Revenue Code, the pertinent portions of which are set forth in the margin. ¹10 T.C. 208">*214 Respondent's contentions, stated in reverse order, are: First, that a resident alien who is a citizen of a neutral country is not entitled to the benefit of section 127, Internal Revenue Code; second, that, if entitled to the benefit of section 127, he has failed to sustain his burden of proof; and finally, that petitioner has failed to meet the requirements of section 127 to establish the losses claimed.

1948 U.S. Tax Ct. LEXIS 272">*287 Respondent's first contention rests upon the argument that Congress, in enacting section 127, did not intend to extend the deduction to one who was a citizen of a neutral country; that as a Spanish citizen petitioner had no property in "an enemy country" within the meaning of section 127; that the declaration of war in no way changed petitioner's status or affected his properties in France and Holland; that so far as the enemies of this country were concerned he would still be regarded as a citizen of a neutral country; that it was extremely unlikely that an enemy country would know of his residence in the United States; that the statute can not be said, therefore, to apply to a resident alien who is a citizen of Spain, a neutral country; and that, even though the alien is taxed as a citizen is taxed, it was not the intent of Congress to give resident alien taxpayers the benefit of section 127.

We can not agree with this interpretation of the taxing statute. The code imposes a tax upon the net income of "every individual"; it makes no distinction between a citizen and a resident alien. Secs. 11 and 12, I. R. C. The respondent's regulations are to the same effect. They state that1948 U.S. Tax Ct. LEXIS 272">*288 citizens, "wherever resident, are liable to the tax," and that "Every resident alien individual is liable to the tax, even though his income is wholly from sources outside the United States. As to nonresident alien individuals, see sections 211 to 219, inclusive." Section 19.11-2, Regulations 103. Section 19.211-1 of Regulations 103 specifically states that "Resident aliens are in general taxable the same as citizens of the United States, that is, a resident alien is taxable on income derived from all sources, including sources without the United States." Supplement H of the code, sections 211 et seq., treats nonresident aliens as a separate class of taxpayers, thereby indicating the fact that under the code citizens and resident alien taxpayers are to be treated the same for income tax purposes. Section 19.211-2 of respondent's Regulations 103, in distinguishing between resident alien and nonresident alien taxpayers, states: "An alien actually present in the United States who is not a mere transient or sojourner is a resident of the United States for purposes of the income tax." Section 19.211-2 10 T.C. 208">*215 also provides that, if an alien makes an extended stay to accomplish1948 U.S. Tax Ct. LEXIS 272">*289 his purpose in coming to the United States and to that end makes his home temporarily in this country, he becomes a resident, even though he intends at all times to return to his domicile when his mission is accomplished.

Section 127 was a new provision written into the code by the Congress when it passed the Revenue Act of 1942. By this amendment to the code the Congress provided "practical rules for the treatment of property destroyed or seized in the course of military or naval operations during the war, and of property located in enemy countries or in areas which come under the control of the enemy." Senate Finance Committee Report on The Revenue Bill of 1942, being Senate Report No. 1631, 77th Cong., 2d sess., sec. 158 War Losses. The section, as enacted into the code (section 156), and the committee report speak of the "taxpayer" without distinguishing between a citizen and a resident alien taxpayer. The petitioner is a taxpayer. He has actually resided in this country since 1939. In May of the taxable year he reentered this country from Mexico as a quota immigrant, and subsequently became a naturalized citizen. We can see no basis under these facts for treating this taxpayer1948 U.S. Tax Ct. LEXIS 272">*290 differently for tax purposes from a citizen of this country.

In Eric H. Heckett, 8 T.C. 841, we had a very similar situation. Heckett, a citizen of the Netherlands, came to this country in February 1939, and has since resided here. He became a naturalized citizen in June 1945. During the taxable year 1941 Heckett, like this taxpayer, was a resident alien. Unlike petitioner, Heckett was a citizen of a country invaded by Germany and not a citizen of a neutral country. Each had personal property in an area overrun by the Germans. Each was a resident alien taxpayer of this country in 1941. The Germans did not seize, destroy, or interfere with the property of either prior to the declaration of war on Germany. We held in the Heckett case that the taxpayer sustained a war loss under section 127. Can it be said that Schnur should be treated differently from Heckett solely upon the grounds of citizenship? We think not. The citizenship of a resident alien is, in our opinion, immaterial. The controlling factors are whether the individual is a taxpayer, and whether he in fact sustained war losses within the meaning of section 127, Internal Revenue1948 U.S. Tax Ct. LEXIS 272">*291 Code.

The immateriality of a citizenship test for the application of section 127 is further demonstrated by our decision in Eugene Houdry, 7 T.C. 666. Houdry was a resident alien residing at Ardmore, Pennsylvania. Prior to May 1941 he was a citizen of France. In that month his citizenship was abrogated by the Vichy Government. Nevertheless, we held he was entitled to a loss deduction either pursuant to section 127 or to United States v. White Dental Mfg. Co., 274 U.S. 398">274 U.S. 398, and 10 T.C. 208">*216 we pointed out in our opinion, p. 669, that "There is no suggestion that petitioner's status as a resident alien grants or subjects him to different treatment from that of a citizen." See also, Ernest Adler, 8 T.C. 726, whose German citizenship was revoked in 1938 and who had no citizenship when he came to the United States in January 1941.

It should also be noted that section 23 (e), Internal Revenue Code, which grants casualty loss deductions to individuals, makes no distinction between citizen taxpayers and resident alien taxpayers, whereas section 213 (b) (2) limits casualty loss deductions of 1948 U.S. Tax Ct. LEXIS 272">*292 nonresident aliens to property within the United States.

Respondent's second contention raises the question of the sufficiency of petitioner's proof. For petitioner to prevail his proof must show: (1) That the property was in existence and owned by him on the date war was declared; (2) the cost of such property, properly adjusted for depreciation to the basis date. Benjamin Abraham, 9 T.C. 222, 225; Ernest Adler, supra;Eric H. Heckett, supra.

Our findings show that on December 11, 1941, petitioner owned certain German bonds and certain real property. Prior and subsequent to December 11, 1941, the German bonds were in the office of petitioner's stockbroker in Amsterdam, Holland. The bonds were not seized, confiscated, or destroyed by the Germans before or after December 11, 1941, but remained and continued to remain in the custody of the stockbrokers up to the date of the hearing in this case in April 1947. So far as this personal property is concerned, it was never out of the possession of petitioner's stockbroker from the dates of purchase until the hearing in this case. The existence 1948 U.S. Tax Ct. LEXIS 272">*293 of the bonds can not therefore be doubted, nor can their ownership, for petitioner's stockbroker personally testified to his ownership of said bonds.

With respect to the real property, our findings show the cost and dates of acquisition, and that extensive improvements were made to the country estate following its acquisition. In fixing the dollar cost of the improvements we have used the lowest value of the French franc in terms of the United States dollar for the period between acquisition and the end of the year in which petitioner left France for the United States. It is reasonable to believe that the improvements cost more than the amount we have found, since such improvements were undoubtedly completed prior to the petitioner's departure for the United States. Our findings further show that the real properties were in the hands of caretakers placed there by petitioner, and were still in their hands in 1946. Such proof was held sufficient to establish the existence and ownership of real property when war was declared, in Benjamin Abraham, supra, and is equally sufficient here.

In the latter case we approximated Abraham's war loss because the 1948 U.S. Tax Ct. LEXIS 272">*294 evidence did not give the dates of the improvements or any other data by which we could determine with any degree of accuracy the depreciation 10 T.C. 208">*217 that took place up to December 11, 1941. If we used the same figure of 50 per cent there used, petitioner's war loss here would be in excess of $ 96,000 on his real properties.

We have found as a fact that on December 11, 1941, petitioner owned German bonds that had cost him in excess of $ 76,000. In addition, he owned 3 per cent funding bonds issued by the Conversion Office for German Foreign Debts, which the amended petition alleged had a value at December 11, 1941, in excess of $ 57,000. The funding bonds were issued to petitioner in lieu of cash for interest due him on his German bonds and mortgage. The cost of the funding bonds to petitioner, therefore, was their value when paid to him in lieu of interest due. We have found the face value of the funding bonds in United States dollars, Dutch guilders, and German reichsmarks. We have made no finding as to the value of the funding bonds in terms of United States dollars when the bonds were acquired, but we have found as a fact that they had value when acquired, at the time 1948 U.S. Tax Ct. LEXIS 272">*295 war was declared on Germany, and in January 1942. Even though petitioner has established that the funding bonds, like his other German bonds and his real property, had value at December 11, 1941, we deem it unnecessary for the purposes of this case to determine petitioner's cost basis or the exact value of the funding bonds at December 11, 1941, since in any event the loss sustained on his other German bonds and his real property is sufficient to establish the war loss deduction of $ 100,000 alleged in his amended petition.

Respondent argues on this point that petitioner offered no evidence in respect of the underlying assets of the German corporations issuing the securities except testimony that they were bonds of German municipalities and German industrial corporations. It is suggested that the Germans may well have seized the underlying assets as early as the fall of 1939, and that, as to the German industrial corporations, such corporations may well have owned assets in neutral countries, so that no loss would be allowable under section 127. This argument appears to be contra to respondent's own regulations. Petitioner claims a deductible loss under section 127 (a) (2), 1948 U.S. Tax Ct. LEXIS 272">*296 which relates to property within any country at war with the United States or within an area under the control of any such country. The German bonds were intangible property within an area under the control of Germany at the time war was declared. The intangible property in question existed by reason of the law and authority of Germany, and respondent's regulations state that section 127 (a) (2) applies where this situation exists. As an example of intangible property to which section 127 (a) (2) applies, his Regulations 103, as added by T. D. 5258, C. B. 1943, p. 415, give the following examples:

For example, all public bonds of a country at war with the United States are considered to be within the provisions of section 127 (a) (2); * * * Any 10 T.C. 208">*218 interest in a corporation chartered by a country at war with the United States will be considered intangible property located in the enemy country unless the taxpayer has any rights to assets of such corporation not treated as destroyed or seized under section 127, * * * [Emphasis supplied.]

See also Robert E. Ford, 6 T.C. 499, 503.

Respondent's contention that petitioner1948 U.S. Tax Ct. LEXIS 272">*297 has failed to meet the requirements of section 127 is addressed primarily to the proof offered with respect to petitioner's alleged deposit with the Reichskreditgesellschaft in Berlin. Our findings show that petitioner had sums on deposit with this bank during the taxable year. The petitioner's testimony indicates that the deposit was substantial in amount during the first part of the taxable year, but the amount on deposit, if any, at the date war was declared on Germany was not established. We were unable, therefore, to make any finding of the amount of petitioner's alleged deposit on December 11, 1941. On this question we agree with respondent that petitioner has failed to meet the requirements of section 127, Internal Revenue Code.

In view of our determination that petitioner sustained war losses with respect to certain personal and real property aggregating at least $ 100,000, as alleged in his amended petition, petitioner is entitled to a refund of a portion or all of the income taxes paid for 1941. In this connection it should be remembered that when petitioner filed his 1941 tax returns he had no statutory right to a war loss deduction. This deduction was provided1948 U.S. Tax Ct. LEXIS 272">*298 for by section 156 (a), Revenue Act of 1942, enacted in October 1942 and made retroactive to taxable years beginning after December 31, 1940, by section 156 (b), Revenue Act of 1942. Claim for refund having been made by petitioner, the amount of his overpayment will be determined under Rule 50 in accordance herewith.

Decision will be entered under Rule 50.