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154 Ct. Cl. Findings of Fact tion of its liabilities, the reserve for bad debts (Federal Insurance Reserve) of the taxpayer lost its purpose and, therefore, it should have been closed by a journal entry which would have closed to profit and loss that portion of the reserve ($133,361.17 during the years 1952–1955) which gave

) a tax benefit, and the balance, i.e., the difference between $216,715.93 and $133,361.17 or $83,354.76, which gave no tax benefit, should be restored to surplus. The Agent's determination, together with five other minor adjustments, resulted in the determination by the Commissioner of a deficiency of $63,754.80 for 1955 which, together with interest thereon, was thereafter assessed against plaintiff as transferee of Berea, and duly paid by plaintiff.

14. In two unpublished Revenue Rulings dated August 24, 1955 and April 11, 1958, respectively, issued by the Director of the Tax Rulings Division, Office of the Commissioner of Internal Revenue, Treasury Department, (neither of which involved the instant acquisition of Berea) it was ruled that, where substantially all the assets of an Ohio savings an loan company are transferred in a tax-free reorganization, "no gain or loss will be recognized to" such company "upon the exchange of its assets (including mortgage loans and the related reserve for bad debts) * * *."

15. On March 20, 1958, plaintiff, as transferee of Berea, filed with the District Director of Internal Revenue, Cleveland, Ohio, a timely claim for refund in the amount of $70,308.44, “plus interest or such other amount as is legally refundable.” In the claim, plaintiff stated :

Citizens contends that the Commissioner erred in treating the amount of $133,361.17 as additional income to Berea in 1955, and hence that Citizens is entitled to a refund of the tax and deficiency interest paid by it as transferee, resulting from such inclusion, together with interest thereon as allowed by law, because: 1. No part of the amount of $133,361.17 is income

for 1955 or any other year. 2. No gain or loss is recognized in connection with

the transfer of Berea's property to Citizens. 3. Alternatively, if the amount of $133,361.17 was

properly determined to be income in 1955, it should have been taxed either


A. as capital gain, or,
B. by way of equitable recoupment, at the tax

rates which would have been applicable if
such amount had been included in income
for the respective years in which it was

deducted. Said claim has been neither allowed nor rejected. On November 12, 1958, plaintiff timely filed its petition herein.

16. Pursuant to Rule 38 (c), the parties, with the approval of the commissioner, agreed that there should be a separate determination of the right of plaintiff to recover, reserving the determination of the amount of recovery, if any, for further proceedings.


Upon the foregoing findings of fact, which are made a part of the judgment herein, the court concludes as a matter of law that the plaintiff is not entitled to recover, and its petition is therefore dismissed.



[No. 544–58. Decided June 7, 1961]


Taxes, income; credits; western hemisphere trade corporation.—In

an action by plaintiff to recover income taxes alleged to have been illegally assessed and collected for the year 1952 on the ground that plaintiff should have been allowed tax credit under section 26 of the Internal Revenue Code of 1939 as a western hemisphere trade corporation within the meaning of section 109 of the Code, the Government contended that 95 percent of plaintiff's gross income was not derived from sources outside the United States because certain interest payments were received by plaintiff from the Export-Import Bank in Washington, D.C. It is held that although plaintiff's contracts with its South American buyers were financed under an agreement between the plaintiff and the Export-Import Bank in Washington, requiring that interest payments on notes issued by the South Americans to the plaintiff were to be paid to the bank, with any excess interest paid by the bank to plaintiff, the excess interest was actually collected by the bank on behalf of the plaintiff from its foreign purchasers and the mere fact that the

154 Ct. CI. Opinion of the Court interest was distributed to plaintiff by the Washington bank does not shift the actual source of the payments from South

America to Washington. Plaintiff is entitled to recover. Taxes, income; credits; western hemisphere trade corporation;

source of income distributed by domestic bank.—The purpose of section 109 of the Internal Revenue Code of 1939 was to encourage domestic corporations to engage in foreign commerce by granting tax credits to our domestic corporations when 95 percent or more of the company's gross income for the three-year period immediately preceding the close of the taxable year was derived from sources other than the United States. The fact that a domestic firm's contracts with South American purchasers were financed by the Export-Import Bank in Washington, D.C., and that the bank collected and distributed the money due under the contracts to the domestic corporation, does not shift the

source of the income from South America to Washington. Internal Revenue 752

John P. Lipscomb, Jr., for the plaintiff. Floyd F. Toomey, C. Rudolf Peterson, Bruce Duncan, and James McCarthy were on the briefs.

Eugene Emerson, with whom was Assistant Attorney General Louis F. Oberdorfer, for the defendant. Lyle M. Turner and Rufus E. Stetson, Jr., were on the briefs.

JONES, Chief Judge, delivered the opinion of the court:

This case concerns $ 109 of the Internal Revenue Code of 1939. The plaintiff, Electrical Export Corporation, is a Delaware corporation with its office and principal place of business located in New York City. The plaintiff says that for the year 1952 it qualified as a Western Hemisphere Trade Corporation under $ 109. If the plaintiff qualifies under $ 109, it is then entitled to the credit provided for by $ 26(i) (2) of the Internal Revenue Code of 1939.

Section 109(a) of the Code, 56 Stat. 798, 838, 26 U.S.C. § 109 (1952 Ed.) provides as follows:


For the purposes of this chapter the term "western hemisphere trade corporation” means a domestic corporation all of whose business is done in any country or countries in North, Central, or South America, or in the West Indies, or in Newfoundland and which satisfies the following conditions:


Opinion of the Court

(a) If 95 per centum or more of the gross income of such domestic corporation for the three-year period immediately preceding the close of the taxable year (or for such part of such period during which the corporation was in existence) was derived from sources other than

sources within the United States; * * * Section 26 of the Code, 53 Stat. 18, 26 U.S.C. & 26 (1952 Ed.) provides credits for corporations as follows:

In the case of a corporation the following credits shall be allowed to the extent provided in the various sections imposing tax

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(i) * * * In the case of a western hemisphere trade corporation (as defined in section 109)-[As added 64 Stat. 906, 920, as amended 65 Stat. 452, 470.]

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(2) * * * In the case of a taxable year beginning after March 31, 1951, and before April 1, 1954, an amount equal to 27 per centum of its normal-tax net income computed without regard to the credit provided in this

subsection. The Commissioner of Internal Revenue determined that the plaintiff did not qualify for the year 1952 as a Western Hemisphere Trade Corporation under $ 109 and was therefore not entitled to the credit provided for by $ 26(i)(2). On August 12, 1957, the plaintiff filed timely claim for refund for the year 1952 with the District Director. On October 16, 1958, this claim was disallowed. On December 12, 1958, plaintiff filed suit in this court for the refund of $31,943.48 of its 1952 income taxes, together with applicable deficiency interest paid thereto, together with statutory interest on both amounts as provided by law.

The resolution of this lawsuit is dependent on determining the nature of certain interest income received by plaintiff in the 3-year period 1950 through 1952. The interest at issue arises out of four contracts between the plaintiff and Latin-American purchasers who were supplied by the plaintiff with electric locomotives and related equipment. Three of these purchasers were located in Brazil and one in Chile. In payment of goods purchased, the Brazilian buyers issued a series of notes to plaintiff's order calling for semiannual

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154 Ct. CI.

Opinion of the Court

payments of level amounts of principal and interest. The notes of the Chilean purchaser provided for payment of semiannual principal amounts with interest at 4 percent per


These contracts were financed under an agreement between the plaintiff and the Export-Import Bank of Washington whereby the bank agreed to finance a part of each transaction up to 70 percent of the value of the equipment sold. Under this agreement, the bank required that if the local interest payments in each note when paid were not sufficient to cover the bank's interest calculated on the outstanding principal balances, then plaintiff would pay to the bank the difference. When the level interest payments by the foreign purchasers exceeded the bank's requirements, the excess interest was paid by the bank to the plaintiff.

It is our task to identify the sources of this interest income received by plaintiff. If it was from sources in Brazil and Chile, clearly the plaintiff qualifies as a Western Hemisphere trade corporation. If the source of this interest originates in the United States, then of course the plaintiff does not qualify because, under $ 109, 95 percent of the corporation's gross income must have been derived from sources outside the United States.

The trial commissioner has found that more than 95 percent of plaintiff's gross income from the 3-year period ended December 31, 1952, was derived from sources in Brazil and Chile. The defendant takes exception to this finding. The defendant contends that the payments in question were not made pursuant to the promissory notes but that they were made under a separate and distinct agreement between the bank and the taxpayer. Defendant says that the payments to the taxpayer came not from the foreign purchasers in Brazil and Chile but from a source within the United States, the Export-Import Bank of Washington. Furthermore, the defendant declares that the payments did not involve the foreign purchasers but arose out of a financing arrangement entered into and performed solely within the

1 Finding 31.

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