87 T.C. 679">*679 OPINION

This case is again before us on cross motions for summary judgment. The parties agree 87 T.C. 679">*680 (and we concur) that, in the present posture of the case, there are no genuine1986 U.S. Tax Ct. LEXIS 48">*49 issues of material fact involved; consequently, we may dispose of the case by decision as a matter of law. Rule 121, Tax Court Rules of Practice and Procedure.

The factual background, which provides the foundation for the motions herein, is largely set forth in our prior opinion, 86 T.C. 468">86 T.C. 468 (1986), and will not be repeated herein. Rather, we will set forth what has occurred since the memorandum sur order, which subsequently became the aforementioned published opinion, was issued on March 12, 1986.

Simultaneously with the issuance of the memorandum sur order, an order was entered. A copy of that order is set forth as Exhibit A to this opinion. Thereafter, the parties attempted to arrive at a mutually acceptable procedure pursuant to which respondent would be afforded the opportunity to examine the books and records of Universale Reinsurance Co., Ltd. (Universale). Their attempt failed for the reasons hereinafter set forth. As a consequence, the Court issued a further order, dated April 9, 1986, copy of which is set forth as Exhibit B to this opinion.

Upon the basis of the two above-mentioned orders of the Court and other material of record herein, 1986 U.S. Tax Ct. LEXIS 48">*50 respondent moved for summary judgment contending that, because of the preclusion of evidence provision of the Court's April 9, 1986, order, petitioner would, as a matter of law, be unable to meet its burden of proof and that consequently a decision should be entered for respondent. ¹

Petitioner countered respondent's motion for summary judgment with a cross motion for summary judgment. In support of its cross motion, petitioner argues that: (1) Respondent has ignored the economic reality of its relationship with Universale; (2) while the Court (incorrectly according to petitioner) rejected that argument in its prior opinion, the argument nevertheless supports the contention that respondent has acted arbitrarily1986 U.S. Tax Ct. LEXIS 48">*51 and unreasonably in issuing the deficiency notice herein, particularly in light of 87 T.C. 679">*681 respondent's prior acceptance of petitioner's method of reporting, for U.S. tax purposes, only the net income or loss revealed by the annual statements furnished it by Universale; (3) petitioner has made every effort to permit respondent to audit the books and records of Universale and the condition, insisted upon by respondent, that the audit first be approved by the Swiss Federal Government (see p. 682 infra), is unreasonable and was properly rejected by Universale and consequently by petitioner.

Petitioner's first two arguments have essentially been disposed of by our prior opinion. See 86 T.C. 468">86 T.C. 473-474. Petitioner's "economic reality" argument ignores the nature of the relationship between petitioner and Universale, namely agent (Universale) and principal (petitioner). See Colonial Surety Co. v. United States, 147 Ct. Cl. 643">147 Ct. Cl. 643, 178 F. Supp. 600">178 F. Supp. 600, 178 F. Supp. 600">602 (1959). If, in fact, Universale has ascribed to petitioner more than its proper share of losses and expenses, petitioner has not received the share of the net income1986 U.S. Tax Ct. LEXIS 48">*52 due it. It is well established that income received by an agent is taxable to a principal at the time of receipt by the agent, rather than at the time of payment by the agent to the principal. Maryland Casualty Co. v. United States, 251 U.S. 342">251 U.S. 342, 251 U.S. 342">347 (1920); Alsop v. Commissioner, 290 F.2d 726">290 F.2d 726, 290 F.2d 726">728 (2d Cir. 1961), affg. 34 T.C. 606">34 T.C. 606 (1960). See also McGahen v. Commissioner, 76 T.C. 468">76 T.C. 468, 76 T.C. 468">478 (1981), affd. without published opinion 720 F.2d 664">720 F.2d 664 (3d Cir. 1983).

Petitioner seeks to avoid the principal-agent characterization by contending that its arrangement with Universale was one of indemnity, as distinguished from assumption, reinsurance. See secs. 1.809-4(a)(1)(iii) and 1.809-5(a)(7)(ii), Income Tax Regs. Aside from the fact that we have serious doubts as to the validity of petitioner's position in light of the terms of the treaty between petitioner and Universale, and particularly article 4 thereof (see 86 T.C. 468">86 T.C. 469-470), we think any such distinction is irrelevant under the facts and circumstances herein. 1986 U.S. Tax Ct. LEXIS 48">*53 Cf. International Life Insurance Co. v. Commissioner, 51 T.C. 765">51 T.C. 765, 51 T.C. 765">772 (1969), affd. per curiam 427 F.2d 137">427 F.2d 137 (6th Cir. 1970). To permit any such distinction, in the context of the instant case, would preclude respondent from questioning the underpinnings of any indemnity arrangement in order to determine the proper tax consequences 87 T.C. 679">*682 flowing therefrom and to obtain the information necessary to make such questioning effective.

We are unable to perceive why, having refused to accept petitioner's "economic reality" argument as a matter of substantive law, we should nevertheless apply that argument in order to hold that respondent's determinations in the notice of deficiency were arbitrary. Nor are we persuaded that we should do so because respondent did not question petitioner's method of reporting its transactions with Universale over a period of 18 years and, in fact, accepted such method after examining petitioner's returns for the taxable years 1959, 1960, and 1961. It is well established that a taxpayer is not entitled to continue the treatment of an item of income or deduction simply because respondent either 1986 U.S. Tax Ct. LEXIS 48">*54 has not objected in the past or has approved like treatment of the item in an earlier year. Coors v. Commissioner, 60 T.C. 368">60 T.C. 368, 60 T.C. 368">406 (1973), affd. 519 F.2d 1280">519 F.2d 1280 (10th Cir. 1975); Union Equity Cooperative Exchange v. Commissioner, 58 T.C. 397">58 T.C. 397, 58 T.C. 397">408 (1972), affd. 481 F.2d 812">481 F.2d 812 (10th Cir. 1973).

We now turn to the third prong of petitioner's argument. See pp. 680-681, supra. Both prior and subsequent to the Court's order of March 12, 1986 (Exhibit A), discussions took place between petitioner (who consulted Universale) and respondent. As a result of those discussions, Universale, through petitioner, offered to have an American C.P.A. firm, with an office in Switzerland, selected and paid by respondent, audit the relevant books and records of Universale at Universale's office in Zurich, Switzerland, and transmit the results of that audit to respondent. Respondent, however, was concerned about the effect of article 271 of the Swiss Penal Code, ² and insisted that the Swiss Federal Government be informed of, and approve, the audit. Universale refused to accede to that1986 U.S. Tax Ct. LEXIS 48">*55 condition because it did not want "to engender Swiss governmental intrusion into a matter in which neither Universale nor the Swiss government are parties" and asked that the auditors "do the audit 87 T.C. 679">*683 on an invitation-type basis." See Petitioner's Memorandum in Support of its Cross-Motion for Summary Judgment, pp. 9-10. As a consequence of that refusal, respondent returned to his original position that Universale's books and records be produced in the United States for examination by respondent's agents, a situation described by petitioner as an "impractical and inequitable demand." Supra at p. 10.

1986 U.S. Tax Ct. LEXIS 48">*56 Petitioner vigorously asserts that respondent's insistence on approval of the audit in Switzerland by the Swiss Federal Government is unreasonable. We disagree.

In the first place, article 271 of the Swiss Penal Law clearly prohibits an examination in Switzerland by respondent's agents. See note 2 supra; United States v. Vetco, Inc., 691 F.2d 1281">691 F.2d 1281, 691 F.2d 1281">1290 (9th Cir. 1981). Clearly, we should not countenance action by agents of the United States Government which would cause a violation of the laws of a nation with whom we have friendly relations. See Application of Chase Manhattan Bank, 297 F.2d 611">297 F.2d 611, 297 F.2d 611">613 (2d Cir. 1962). ³ Nothing in article 271 suggests that an "invitation-type" audit, i.e., an audit with Universale's consent, would remove respondent's agents from the sanctions of article 271. In the second place, even if the use of an "invitation-type" audit might arguably avoid the need for the approval of the Swiss Federal Government, we do not think it is within our province to second-guess respondent on this issue. It is common knowledge that the efforts of the United States to obtain the cooperation of the Swiss1986 U.S. Tax Ct. LEXIS 48">*57 Federal Government in facilitating the enforcement of our tax laws have involved delicate and sometimes difficult negotiations. "[The] courts must take care not to impinge upon the prerogatives and responsibilities of the political branches of the government in the extremely sensitive and delicate area of foreign affairs." See United States v. First National City Bank, 396 F.2d 897">396 F.2d 897, 396 F.2d 897">901 (2d Cir. 1968). See also United States v. Davis, 767 F.2d 1025">767 F.2d 1025, 767 F.2d 1025">1035 (2d Cir. 1985). The fact that the alternative of producing the books and records of Universale in the United States may be 87 T.C. 679">*684 expensive or cumbersome and therefore impose some hardship on petitioner and Universale does not make respondent's position unreasonable. See 691 F.2d 1281">United States v. Vetco, Inc., supra at 1289, 1291. We hold that respondent's condition that the approval of the audit by the Swiss Federal Government should be obtained is not unreasonable.

1986 U.S. Tax Ct. LEXIS 48">*58 At one point in these proceedings, petitioner suggested that disclosure of its books and records by Universale to respondent's agents might violate article 273 of the Swiss Penal Law dealing with disclosure by any person of a "business secret * * * to a foreign authority." ⁴ Petitioner has not, however, pursued this line of argument and, in any event, we are of the view that article 273 should not relieve petitioner of its obligation to cause the books and records to be produced. 691 F.2d 1281">United States v. Vetco, Inc., supra at 1289-1291; Fontaine v. Securities and Exchange Commission, 259 F. Supp. 880">259 F. Supp. 880, 259 F. Supp. 880">887-889 (D. Puerto Rico 1966); cf. 396 F.2d 897">United States v. First National City Bank, supra.See also 691 F.2d 1281">United States v. Vetco, Inc., supra at 1288 n. 8. Similarly, petitioner's passing reference to the possible use of letters rogatory by respondent (a line of argument also not pursued) is without merit. See 691 F.2d 1281">United States v. Vetco, Inc., supra at 1290.

1986 U.S. Tax Ct. LEXIS 48">*59 In sum, we see no reason to modify our prior orders of March 12, 1986, and April 9, 1986 (Exhibits A and B). Accordingly, petitioner's cross-motion for summary judgment is denied. ⁵

1986 U.S. Tax Ct. LEXIS 48">*60 87 T.C. 679">*685 We now turn to respondent's motion for summary judgment. There appears to be no possibility, given the preclusion of evidence provision of our order of April 9, 1986, that petitioner can carry its burden of proof. We are therefore satisfied that respondent's motion should be granted. We observe that, although this action appears to amount to the sanction of dismissal of the proceeding -- a sanction which the Supreme Court admonished should be applied with extreme care in Societe Internationale, Etc. v. Rogers, 357 U.S. 197">357 U.S. 197 (1958) -- the fact of the matter is that we take this action only after having given petitioner (and Universale) an opportunity to produce material which we considered essential to enable respondent adequately to defend against the evidence which petitioner proposed to present in order to sustain its position that respondent's notice of deficiency was erroneous. Cf. 259 F. Supp. 880">Fontaine v. Securities and Exchange Commission, supra at 885. Our reasoning with respect to the appropriateness of using the authority of the Court to make this material available to respondent and the considerations which lead1986 U.S. Tax Ct. LEXIS 48">*61 us to believe that we have stayed within the parameters outlined by the Supreme Court are set forth in our prior opinion, and we see no purpose to be served by repeating them here. See also 691 F.2d 1281">United States v. Vetco, Inc., supra at 1287-1288. Given the deemed relationship between petitioner, Universale, and Robert Gerling described in that opinion, we are satisfied that we have appropriately balanced the interests of the parties, Universale and the Swiss Federal Government herein (see 691 F.2d 1281">United States v. Vetco, Inc., supra at 1288-1291; United States v. Chase Manhattan Bank, N.A., 584 F. Supp. 1080">584 F. Supp. 1080, 584 F. Supp. 1080">1083-1087 and 590 F. Supp. 1160">590 F. Supp. 1160 (S.D. N.Y. 1984); see also 86 T.C. 468">Gerling International Insurance Co. v. Commissioner, supra at 476.) ⁶ and that our disposition of this proceeding in respondent's favor is merited even though it will result in a substantial liability on the part of petitioner -- a liability much greater than that 87 T.C. 679">*686 which may well have existed if Universale's books and records had been made available.

1986 U.S. Tax Ct. LEXIS 48">*62 An appropriate order will be entered.

EXHIBIT A

UNITED STATES TAX COURT

Washington, D.C. 20217

GERLING INTERNATIONAL INSURANCE CO. Petitioner, V. COMMISSIONER OF INTERNAL REVENUE, Respondent.

Docket No. 26765-83

Respondent having, on February 11, 1985 filed a Motion for Order Compelling Petitioner to Answer Respondent's Interrogatories or to Impose Sanctions; a hearing having been held thereon on April 22, 1985; the Court having, on April 29, 1985, issued an order directing petitioner to respond to certain of said interrogatories and having indicated in said order the likely consequence of petitioner failing satisfactorily to do so; petitioner having submitted to respondent responses to said interrogatories; further hearing having been held on respondent's motion on November 20, 1985; respondent having, on December 30, 1985, filed a Motion for an Order Compelling Petitioner to Comply with Respondent's Response for Production of Documents or to Impose Sanctions; a hearing on both of respondent's said motions having been held on January 14, 1986, and the Court having, in a telephone conference held on March 3, 1986 informed the parties of its intention to issue this 1986 U.S. Tax Ct. LEXIS 48">*63 order and set the above-docketed case for trial on April 16, 1986, pursuant to the accompanying memorandum sur order, it is

ORDERED: that such part of respondent's motion as requests sanctions for petitioner's failure to respond satisfactorily to interrogatories 87 T.C. 679">*687 Nos. 45 and 81 is granted in that the following items are conclusively presumed to be true solely for the purposes of the above docketed case:

(1) At least from January 1, 1976 to the present and continuing, Robert Gerling owned substantially all the stock of Universale Reinsurance Company, Ltd, Zurich, Switzerland (hereinafter Universale);

(2) At least from January 1, 1976 to the present and continuing, by virtue of his position as Chairman of the Board of Directors and the owner of substantially all the stock of Universale, Robert Gerling was, and is, in a position to help make arrangements so as to enable petitioner to comply with respondent's request that there be made available to respondent any and all books and records which reflect the premiums, losses, expenses and other items subject to the reinsurance treaty between petitioner and Universale.

(3) Petitioner shall, on or before April 2, 1986, cause1986 U.S. Tax Ct. LEXIS 48">*64 the aforesaid books and records of Universale to be produced or made available to respondent at the office of respondent's counsel or at such other location as may be mutually satisfactory. It is further