1955 U.S. Tax Ct. LEXIS 205">*205
Realization of Income -- Foreign Funds. -- In 1935, petitioner imported merchandise from England from its parent corporation. It did not pay for the merchandise. It did not borrow any pounds sterling to pay for the merchandise. It bought the merchandise entirely on credit. It computed the cost of the merchandise in 1935 at the then current rate of exchange of pounds sterling for dollars, $ 4.86 per pound sterling, and carried $ 12,063.30 on its books as an account payable. The amount remained on its books as an account payable until 1947, when it made payment. In 1947, the rate of exchange was $ 4.02 7/8 for a pound sterling, and petitioner used $ 10,000 to discharge the debt. The difference between the debt in dollars and the dollars used in payment was $ 2,063.30.
24 T.C. 56">*56 OPINION.
The Commissioner determined a deficiency in1955 U.S. Tax Ct. LEXIS 205">*206 income tax of $ 577.72 for the fiscal year ended June 30, 1947. The only 24 T.C. 56">*57 issue to be decided is whether the petitioner realized ordinary gain in the amount of $ 2,063.30 in connection with the discharge of an indebtedness to Church & Company, Ltd., of England under the facts set forth hereinafter. The sum of $ 2,063.30 is the difference between the dollar amount of a debt payable in pounds sterling, computed at the rate of exchange at the time the debt was incurred (1935), and the amount of dollars expended in 1947 to purchase pounds sterling to pay the debt. The facts have been presented by a stipulation which is adopted as our findings of fact.
The petitioner, a domestic corporation, filed its corporate income tax return for its fiscal year ended June 30, 1947, with the collector of internal revenue for the third district of New York. It maintained its books and records and reported its income on an accrual method of accounting. It is engaged in the business of selling imported shoes at retail. It carries on its business in New York City. It is a wholly owned subsidiary of a wholly owned subsidiary of Church & Co., Ltd., a foreign corporation having its principal1955 U.S. Tax Ct. LEXIS 205">*207 office in England.
In the calendar year 1935, during the fiscal year ended June 30, 1936, the petitioner purchased shoes, on credit, from Church & Co., Ltd. The invoice cost of the shoes in pounds sterling was 2,482-3-2. The rate of exchange on the dates of the purchases of shoes in 1935 was $ 4.86 per pound sterling. Accordingly, the cost of the merchandise converted into dollars was $ 12,063.30. Petitioner was allowed credit for the purchases by the seller who extended the credit from year to year until petitioner paid the debt in 1947.
Petitioner took the merchandise into its inventory and cost of goods sold at cost of $ 12,063.30. The merchandise was entirely sold, in the usual course of petitioner's business, no later than June 30, 1937. Petitioner operated its business at a loss in its fiscal years ending on June 30 of 1936 and 1937, the operating losses amounting to $ 21,319.49 and $ 18,915.96, respectively. Petitioner sustained losses from its operations in each year thereafter until the taxable year. As of June 30, 1946, its accumulated losses from operations amounted to $ 242,531.13.
In 1947 the rate of exchange was $ 4.02 7/8 per pound sterling. In 1947, for the1955 U.S. Tax Ct. LEXIS 205">*208 sum of $ 10,000, petitioner acquired 2,482-3-2 pounds sterling which it transferred to Church & Co., Ltd., in satisfaction of the indebtedness which was incurred in 1935.
The difference between the dollar amount of the indebtedness incurred in 1935, payable in pounds sterling, and the amount of dollars expended in 1947 to pay the indebtedness in pounds sterling is $ 2,063.30.
24 T.C. 56">*58 The petitioner contends that no
The petitioner contends that the question is controlled by
In
In
In this case, petitioner has not shown that the merchandise which it purchased in 1935 was sold at a loss, if 1955 U.S. Tax Ct. LEXIS 205">*210 it was. Petitioner only shows that there was an operating loss sustained for all of its business for each fiscal year ending on June 30, 1936 and 1937. Such net operating losses may have been the result of unprofitable transactions other than sales of the goods bought in 1935, in question. In
The petitioner realized gain in its fiscal year ending on June 30, 1947, on a transaction in 1947 involving the purchase of foreign exchange, 24 T.C. 56">*59 and the proper method of accounting is to account for any profit or loss in the payment for foreign exchange in and as a transaction which is separate from the purchase and sale of the shoes.
Petitioner makes an alternative contention that the gain in question should be taxed as capital gain. There is no basis for this contention; there was no sale or exchange of a 1955 U.S. Tax Ct. LEXIS 205">*212 capital asset involved. The dealing in foreign exchange did not involve any purchase or borrowing of foreign exchange in 1935 when the shoes were purchased. Cf.