
    ACHILLE F. FORD v. THE UNITED STATES JEANNE F. HARLOW v. THE UNITED STATES
    [No. 623-53]
    |[No. 624-53]
    [Decided April 6, 1960]
    
      
      Mr. I. Herman Sher for the plaintiffs.
    
      Mr. Eugene Emerson, with wliom was Mr. Assistant Attorney General Charles K. Bice, for tbs defendant. Messrs. Lyle M. Turner and James P. Garland were on the brief.
   MaddeN, Judge,

delivered the opinion of the court:

These two cases involve similar facts and identical legal questions, and this opinion will dispose of both cases.

The plaintiffs are brother and sister. They severally sue to recover the amounts of alleged overpayments that were made by them in connection with their respective income taxes for the year 1947. At issue is the basis that should be used in computing the amount of the gain, if any, that was realized from the sale on July 15, 1947 of 1,530 shares of stock owned by each plaintiff in a Brazilian corporation that was engaged in the coffee trade. (As this corporation was located at Santos in the State of Sao Paulo, Brazil, it will usually be referred to hereafter in the opinion as “the Santos Company.”) Each plaintiff received for his or her shares of stock in the Santos Company $129,474.10 in United States money and 2,425,050 Brazilian cruzeiros.

The 1,530 shares of stock in the Santos Company which each plaintiff sold on July 15, 1947 consisted of 255 shares of stock which the particular plaintiff had inherited from Achille Francis Israel, father of the plaintiffs, at the time of his death on January 18, 1939, and of 1,275 additional shares which each plaintiff received after January 18, 1939 by way of stock dividends on the 255 shares that had been inherited.

The statutory provision applicable to these cases as of July 15,1947 was the portion of Section 113 (a) of the Internal Revenue Code of 1939 (26 U.S.C., 1946 ed., 113(a)) which provided as follows:

The basis of property shall be the cost of such property ; except that—
*í» ^ V
(5) Property transmitted at death.
If the property was acquired by bequest, devise, or inheritance, * * * the basis shall be the fair market value of such property at the time of such acquisition. * * *

Achille Francis Israel was a citizen of the United States. He died on January 18, 1939 in the State of Sao Paulo, Brazil.

When their father died, the plaintiff Achille F. Ford was 15 years of age and the plaintiff Jeanne F. Harlow was 12 years of age. They resided at that time in the County of Santos, State of Sao Paulo, Brazil, with their mother, Lillian Nor ah Ford Israel.

At the time of his death, Achille Francis Israel owned (among other property) 510 shares of stock in the Santos Company. This stock had a par value of 1 conto (1,000 milreis) per share.

By operation of Brazilian law, the plaintiffs, as the only children of Achille Francis Israel, inherited from their father 255 shares of stock each in the Santos Company on January 18, 1939, the date of their father’s death.

Tax on the inheritance by the plaintiffs from their father of the stock in the Santos Company was imposed by the State of Sao Paulo. Pursuant to the law of that State, the Second Civil Court of Santos appointed two officials to appraise the stock. In October 1939, these officials retroactively appraised the stock as of January 18, 1939 at its par value of 1 conto (1,000 milreis) per share.

Although the devolution of the 510 shares of stock in the Santos Company owned by Achille Francis Israel at the time of his death was governed by Brazilian law, he disposed of other property by means of a will. This will, after providing for the payment of all just debts and funeral expenses, and giving the testator’s personal and household effects to his widow, Lillian Norah Ford Israel, provided that all the rest and residue of the testator’s estate should be placed in trust for the benefit of his widow and the plaintiffs. The City Bank Farmers Trust Company, a New York corporation, and Leon Israel, brother of the testator and uncle of the plaintiffs, were named in the will as the executors of and trustees under the will.

On April 17, 1940, Leon Israel and the City Bank Farmers Trust Company filed the Federal estate tax return of the estate of Achille Francis Israel with the Collector of Internal Revenue at Newark, New Jersey. In the return, the 510 shares of stock in the Santos Company which had been owned by Achille Francis Israel were included at a value of $11,857.50. This amount was declared under oath to have been the fair market value of such stock on the date of Achille Francis Israel’s death. It represented, for each share of stock, the par value of 1 conto (1,000 milreis), converted to United States money at the rate of $23.25 per conto. or 2.325 cents per milreis. The return indicated that the Federal estate tax payable on the estate of Achille Francis Israel amounted to $439.61.

Under the date of April 6, 1943, the Commissioner of Internal Revenue sent a 90-day deficiency letter to the executors of the estate of Achille Francis Israel. This letter stated (among other thing's) that :

You are advised that determination of the estate tax liability of the above-named estate discloses a deficiency of $52,221.61, as shown in the statement attached.
% * * # *
Within 90 days * * * you may file a petition with The Tax Court of the United States * * * for a rede-termination of the deficiency or deficiencies.

The statement accompanying this letter indicated that the deficiency was based in part upon an adjustment upward of the value of the stock in the Santos Company from $11,857.50 to $23,715. In this connection, the statement declared that:

The values in Brazilian currency reported for these securities have been accepted; however, they have been converted into U.S. currency at a rate of $46.50 per Conto in lieu of $23.25 as used in the return.

Within the 90-day period allowed for that purpose, a petition was filed with the Tax Court on behalf of the executors of the estate of Achille Francis Israel for a redetermination of the deficiency previously determined by the Commissioner of Internal Revenue. The only alleged error mentioned in the petition related to the inclusion by the Commissioner in the gross estate of a large sum of money representing the proceeds of certain life insurance policies. In the proceedings before the Tax Court, the executors did not complain at any time about the portion of the deficiency that resulted from the action of the Commissioner of Internal Revenue in adjusting upward the value of the stock in the Santos Company from $11,857.50 to $23,715. On the contrary, the executors expressly stated in a brief that was filed with the Tax Court that they did not question any of the valuation adjustments that had been made by the Commissioner.

The Tax Court held in favor of the executors of the estate of Achille Francis Israel with respect to the error complained of by them. As a result, the deficiency in the Federal estate tax was redetermined by the Tax Court to be $949.31, rather than $52,221.61, as previously determined by the Commissioner of Internal Revenue.

The deficiency of $949.31, as redetermined by the Tax Court, reflected (among other things) the action of the Commissioner of Internal Revenue in increasing the value of the 510 shares of stock in the Santos Company owned by Achille Francis Israel at the time of his death from $11,857.50, as declared by the executors, to $23,715.

As previously indicated, the 255 shares of stock in the Santos Company originally inherited by each of the plaintiffs on January 18, 1939 were increased by way of stock dividends to a total of 1,530 shares of stock during the period between January 18, 1939 and July 15, 1947. On the latter date, each plaintiff sold the 1,530 shares of stock owned by him or her for $129,474.10 in United States money and 2,425,050 Brazilian cruzeiros.

On or about March 15, 1948, each of the plaintiffs filed with the Collector of Internal Revenue at Hartford, Connecticut, a Federal income tax return for the calendar year 1947. There was included in each return, among the taxable income, the amount of $122,569.59 as a long-term capital gain by reason of the sale on July 15, 1947 of 1,530 shares of stock in the Santos Company. The amount of the long-term capital gain was computed by each plaintiff in the income tax return as follows:

Gross sales price_$258, 948.20
Cost or other basis_ 13,809.02
Gain - 245,139.18
Gain taken into account_ 122, 569. 59

On June 24, 1949, the plaintiffs separately filed with the Collector of Internal Revenue at Hartford, Connecticut, claims for refunds of amounts previously paid as income taxes for the year 1947. Each claim was based in part upon the contention that, in computing the amount of the gain realized from the sale of the stock in the Santos Company on July 15, 1947: (a) the claimant had erroneously included in the gross price of $258,948.20 the 2,425,050 Brazilian cruzeiros that the claimant had received as partial compensation for the stock, converted to United States money at the official exchange rate of 18.73 cruzeiros to the dollar, whereas the Brazilian funds were blocked and had no fair market value in 1947; and (b) the claimant had erroneously stated the basis of the stock to be $13,809.02, whereas the 255 shares of stock which the claimant had inherited on January 18, 1939 had a fair market value on that date of not less than $165,709.20, and the basis of all the shares sold by the claimant on July 15,1947 was not less than that amount.

The actions of the Internal Eevenue Service on the claims mentioned in the preceding paragraph were partially favorable. In connection with each claim, the Internal Eevenue Service agreed to eliminate from the claimant’s 1947 income the dollar value, as originally reported in the claimant’s income tax return for 1947, of the blocked Brazilian currency which the claimant had received as partial compensation for the sale of the shares of stock in the Santos Company. However, the Internal Eevenue Service rejected the portion of each claim which was based upon the contention that the basis of the shares of stock in the Santos Company sold by the claimant was in excess of the amount which the claimant received in United States money for such stock. On the contrary, the Internal Eevenue Service held that the basis of such stock was actually $11,857.50 (or one-half of the amount which the Commissioner of Internal Eevenue in 1943 had found to be the value, for Federal estate tax purposes, of the total of 510 shares of stock in the Santos Company which Achille Francis Israel had owned at the time of his death).

Pursuant to the determinations mentioned in the preceding paragraph, the Internal Eevenue Service separately notified the plaintiffs that it proposed to determine that over-assessments amounting to $37,883.71 in the case of Achille F. Ford and $37,363.07 in the case of Jeanne F. Harlow had been made in connection with their respective income tax liabilities for 1947. The proposed overassessment in the case of Achille F. Ford was accepted by him on December 27, 1950; and the proposed overassessment in the case of Jeanne F. Harlow was accepted by her on January 8, 1951. Subsequently, the overassessment in the case of Achille F. Ford was increased by the Internal Eevenue Service to $39,633.71, and the overassessment in the case of Jeanne F. Harlow was increased by the Internal Eevenue Service to $38,613.07, and these amounts were refunded to the respective plaintiffs.

Thereafter, the present suits were filed in this court. In the litigation, the plaintiffs have presented evidence tending to show that the actual fair market value of the 255 shares of stock in the Santos Company which each plaintiff inherited from Achille Francis Israel on January 18, 1939, was greater than $129,474.10 on that date. They contend, therefore, that the basis of the shares of stock which each of them sold on July 15, 1947 was greater than the amount which he or she received on that date in United States money from the sale of such stock, so that no taxable gain was realized from the sale.

The Government has introduced no evidence directly contradictory of the plaintiffs’ evidence of the value of the stock at the time they inherited it from their father. It urges first that application of doctrines of estoppel, release, waiver or res judicata make the plaintiffs’ evidence of actual value at the time in question irrelevant. It also urges, not very vigorously, that the plaintiffs’ evidence is at least rendered doubtful by the fact that local appraisers in Brazil, at the time of the decedent’s death, appraised the stock at only $23.25 per share; that the American executors used that figure in making the estate tax return; that the Santos Company was a closely held corporation, and the market value of a minority of the stock, such as the plaintiffs received, would or might have been uncertain.

Commissioner White of this court did not make a finding as to the value of the stock at the date of the decedent’s death. He did not find it necessary to do so in order to decide the case, since he adopted, on the whole, the Government’s contention that the value used in determining the amount of the estate tax was conclusive, and the actual value was irrelevant.

We are of the opinion that the plaintiffs have proved, by a preponderance of the evidence, the actual value of the stock at the time in question. As will appear, hereinafter, we regard that actual value as relevant, and do not accept the Government’s argument that it is made irrelevant by one or another of the suggested doctrines of estoppel, waiver, etc.

As we have seen, the pertinent statute says that if property is received by inheritance, the fair market value of the property at the time of the inheritance is the basis from which gain or loss, for income tax purposes, is to be computed when the property is later sold by the heir. Applying this statutory provision to the fact that the stock was worth more at the time the plaintiffs inherited it than it was when they sold it, they owed no tax on the sale, and should receive the refund which they claim.

The Government, insisting that the naked language of the statute does not foreclose the question, urges not only the doctrines of estoppel, waiver, etc., but points to section 29.113(a) (5)-l(c) of Treasury Regulations 111 which says that in a situation such as the instant one,

the value of property as of the date of the death of the decedent as appraised for the purpose of the Federal estate tax * * * shall be deemed to be its fair market value at the time of acquisition.

We think that the quoted regulation cannot have been intended to do more than to make the appraised value prima facie evidence of actual value. We feel sure that the Government would not be willing to lose a substantial amount of income taxes due it under the statute, just because, some years before, an excessively high appraisal for estate tax purposes had been made. We think the application of the regulation, as well as the application of the doctrine of estoppel and related doctrines with an equitable flavor, must be proceeded with cautiously, and with a careful regard to the circumstances of the case.

The Commissioner of this court, in his recommended opinion denying recovery to the plaintiffs, and the Government in its brief and argument, rely heavily upon the case of Alamo National Bank v. Commissioner, 95 F. 2d 622 (C.C.A. 5), cert. denied, 304 U.S. 577. In that case the taxpayers, husband and wife, in 1921 received an asset, an exclusive franchise to bottle and distribute Coca Cola in a specified territory, in the liquidation of a corporation. In their income tax return for that year they did not attribute any value to the franchise. Ten years later they sold the business, including the franchise, for a large sum. In computing, for 1931 income tax purposes, their gain on the sale, they attributed a value of $216,560 to the franchise as of the date they acquired it in 1921, and added that sum to the cost basis of the business, thereby reducing their 1931 gain by that amount. The Board of Tax Appeals and the Circuit Court of Appeals held that they were bound by the value which they had placed upon the franchise in their 1921 return. The Circuit Court of Appeals said that honesty, good faith and consistency were required of taxpayers, and that those elements were lacking in the claim of the taxpayers in that case.

In the instant case the plaintiffs were, respectively, 15 and 12 years of age at the time of their father’s death. They resided in Brazil and of course had no knowledge of what was being written in their father’s estate tax return in the United States. It may further be noted that while the subject of the estate tax of the plaintiffs’ father was under consideration in the Newark Division of the Internal Revenue Service, the executors of the estate furnished to that office a consolidated balance sheet of the Santos Company showing that its stock, as of December 31, 1938, had a net value of $536.64 per share. We are not advised as to why the Internal Revenue Service took no notice of that important information. The fact that it did not do so did not relieve the executors of the estate of the responsibility of taking notice of it, and correcting the valuation stated in the return which they had filed before that time.

We do not find, in the facts of the instant case, the necessary basis for an estoppel which would prevent the plaintiffs from claiming what the tax statutes say they are entitled to, viz, to use the value as of the date of their father’s death in computing their gain on the later sale of the inherited stock.

Although the parties have not asked us to do so, we have considered whether the doctrine of recoupment should be applied in this case. The undervaluation of the shares in the inheritance tax situation saved the estate $88,730.03. The amount of refund to which the plaintiffs are entitled on their income tax here in stiit is $56,893.35. If the doctrine of re-coupment were applied, the underpayment in estate tax would be set off against the overpayment in income tax, and the plaintiffs could recover only the difference.

In the cases of Bull v. United States, 295 U.S. 247, and Stone v. White, 301 U.S. 532, recoupment was permitted. In the Bull case the estate of a deceased partner received a share of the income from the partnership business for the balance of the year in which he died. The estate was assessed, and it paid, estate tax upon that money. In due course the Eevenue Service decided that the money was taxable income to the estate and so assessed it. By that time the statute of limitations had run against a refund of the estate tax. The estate paid the income tax and sued for its refund, or, in the alternative, the recoupment of the estate tax which it had paid on the same money. The Supreme Court held that the money was income and had been properly assessed as such, but that the plaintiff was entitled to recoup the estate tax erroneously assessed and paid, although its recovery would otherwise have been barred by the statute of limitations.

In Stone v. White, supra, the sole income beneficiary of a testamentary trust did not include in her return the income which she received from the trust. The tax was assessed to the trustees, and was paid by them from the trust estate. After the statute of limitations had run against the collection of the tax from the beneficiary, the trustees sued to recover the tax paid by them. It was held that the tax was erroneously collected from the trustees, but that they could not recover it because the Government could recoup against it the tax which the beneficiary should have paid but did not pay, and which could not now be recovered from her because recovery was barred by the statute of limitations.

There was language in the Bull and Stone decisions which indicated that the doctrine of recoupment might have a broad scope. Such an evolution did not, however, occur. In Rothensies v. Electric Storage Battery Company, 329 U.S. 296, the Court, at page 300, said of the Bull and Stone cases;

In both, the single transaction or taxable event had been subjected to two taxes on inconsistent legal theories, and what was mistakenly paid was recouped against what was correctly due. In Bull v. United States, the one taxable event was receipt by executors of a sum of money. An effort was made to tax it twice — once under the Income Tax Act as income to the estate after decedent’s death and once under the Estate Tax Act as part of decedent’s gross estate. This Court held that the amount of the tax collected on a wrong theory should be allowed in recoupment against an assessment under the correct theory. In Stone v. White, likewise, both the claim and recoupment involved a single taxable event, which was receipt by an estate of income for a period. The trustees had paid the income tax on it but this Court held it was taxable to the beneficiary. Assessment against the beneficiary had meanwhile become barred. Then the trustees sued for a refund, which would inure to the beneficiary. The Court treated the transaction as a whole and allowed recoupment of the tax which the beneficiary should have paid against the tax the Government should not have collected from the trustees. Whatever may have been said indicating a broader scope to the doctrine of recoupment, these facts are the only ones in which it has been applied by this Court in tax cases.

The Court further stressed, at page 301, the requirement that the two taxes in question be based upon the same transaction because otherwise there would be

* * * an income tax system under which there never would come a day of final settlement and which required both the taxpayer and the Government to stand ready forever and a day * * *.

The instant case comes fairly close to satisfying the recoupment standards of the Supreme Court. The value of the shares at the death of the plaintiffs’ father was the basis of the estate tax. The shares were undervalued and too little estate tax was paid. The value of the shares at the time of the father’s death was the factor, so far as this litigation is concerned, which determined the amount of the plaintiffs’ taxable gain, and the amount of their tax. If the doctrine of recoupment were a flexible one, susceptible of expansion, it might well be applied in the instant case. But the teaching of Bothensies is that it is not a flexible doctrine, but a doctrine strictly limited, and limited for good reason.

Each of the plaintiffs is entitled to a judgment for $28,446.67, and interest as provided by law.

It is so ordered.

Laramore, Judge, and Whitaker, Judge, concur.

Jones, Chief Judge,

concurring in part and dissenting in part:

I agree that plaintiffs are entitled to recover, but since the estate, of which the plaintiffs were the sole beneficiaries, received the benefit of the lower estate taxes, the defendant should in simple justice be allowed to recoup and offset against any recovery the amount by which the estate benefited taxwise by the earlier valuation of the estate below its actual value.

The correction is being made at the instance of plaintiffs. It seems fair that as a condition to the change in valuation, they should be willing to surrender the advantage which had come to them by reason of the undervaluation they are seeking to change.

Littleton, Judge (Ret.),

dissenting:

I am of the opinion from all the facts and circumstances of these cases that plaintiffs should be held bound by the valuation of the stock in question placed thereon by the executors of the estate of A. F. Israel at the time of his death for estate tax purposes, in determining the profit upon a subsequent sale thereof by the residuary legatees of said estate. I think the plaintiffs should be held to be estopped to ignore such valuation which inured materially to their benefit and seek a higher valuation upon a subsequent sale thereof by them. It is true that they were minors at the time of the original valuation in the making of the estate tax return but the executors were acting for and on their behalf. I therefore agree with the opinion of Commissioner White of this court and adopt the same as a part of this dissenting opinion as follows:

I believe that the correct principles governing the disposition of these cases were stated in Alamo Nat. Bank v. Commissioner of Internal Revenue, 95 F. 2d 622 (C. A. 5, 1938), cert. denied 304 U.S. 577. In that case, a company that was wholly owned by Lewis W. Alexander and his wife acquired prior to March 1, 1913 an exclusive franchise to bottle and distribute Coca Cola in certain Texas counties. In 1921, the company was dissolved and the assets were all taken over by the Alexanders. Income in the amount of $17,035.40 as a liquidating dividend from the transaction was returned by them in 1921 for Federal income tax purposes, and taxes were paid and accepted on that basis. No value was assigned to the franchise in the computation with respect to the gain in the amount of $17,035.40. The business was continued by the Alexanders, under the same franchise previously mentioned, until September 1931, when the business was sold for $775,000. In computing, for 1931 Federal income tax purposes, the amount of the gain realized by them from the sale of the business, the Alexanders took the position that there should be included in the cost basis the amount of $216,560 as representing the true value of the franchise in 1921. The Board of Tax Appeals held that the Alexanders were estopped to assert the higher valuation, and the Board’s decision was subsequently reviewed by the United States Circuit Court of Appeals for the Fifth Circuit. In affirming the decision of the Board of Tax Appeals, the court said (at p. 623) :

* * * [BQonesty, good faith, and consistency are due in tax accounting. The right and wrong of things and equitable principles have a place in tax matters. * * * In income taxation what is done in one tax year is sometimes projected into another where the same fact must govern. There being continuity, there ought to be consistency in treatment. * * * So if a taxpayer who acquired gain in an exchange of property sets up as its measure a value of what he received in which the Commissioner acquiesces, that value is the basis to be taken in measuring a further gain on a sale of the property in a later year. The taxpayer cannot say: “I was mistaken. The value was many times what I said it was. I therefore realized less gain on the last sale,” without doing justice all around in correcting his mistake. The reverse principle is also true if the Commissioner, in reviewing the return, should correct the first valuation and the taxpayer should acquiesce. The Commissioner could not repudiate his action when that value again became a determining factor. * * * It is no more right to allow a party to blow hot and cold as suits his interests in tax matters than in other relationships. Whether it be called estoppel, or a duty of consistency, or the fixing of a fact by agreement, the fact fixed for one year ought to remain fixed in all its consequences, unless a more just general settlement is proposed and can be effected. The law requires restoration as a condition of rescission, just as equity declares that one asking equitable aid must give effect to the equities of his opponent. When this taxpayer, who best knew what he received in 1921 and its value and for this reason was required to declare it under oath, fixed the value so as to show a present gain of only $17,035.40, and the Commissioner acquiesced, that value must stand as the correct basis when the same property was sold at a further gain in 1931. If there was a mistake in the first instance it ought not to be corrected unless corrected in all its bearings, and that is not offered by the taxpayer.

In the proceedings before the Commissioner of Internal Revenue with respect to the Federal estate tax on the estate of Achille Francis Israel, the Commissioner accepted the valuation in Brazilian money (1,000 milreis per share) that was reported by the executors under oath as the fair market value of the stock in the Santos Company owned by the decedent. While it is true that the Commissioner determined that the exchange rate of 4.65 cents per milreis should be used in computing the United States dollar value of the stock, rather than the exchange rate of 2.325 cents per mil-reis used by the executors in their estate tax return, this adjustment was not objected to by the executors either before the Commissioner or before the Tax Court, when the executors sought a review by the Tax Court of another action taken by the Commissioner. The decision of the Tax Court respecting the amount of the estate tax liability reflected the valuation placed by the executors on the stock in the Santos Company owned by the decedent, as adjusted by the Commissioner of Internal Revenue with regard to the exchange rate.

The executors of the estate of Achille Francis Israel should have been, and presumably were, the persons best qualified to know the fair market value of the shares of stock in the Santos Company that were included in the estate. Since their representations under oath on this point were accepted by the United States in determining the amount of the Federal estate tax, it is my opinion that the valuation of the stock fixed in the estate tax proceedings should be regarded as the proper basis of the stock for the purposes of the present litigation, particularly since the amount of the Federal estate tax cannot now be adjusted upward if the executors undervalued the stock for estate tax purposes.

It is true that the plaintiffs were minors at the time and did not take any part in the representations that were made by the executors of their father’s estate respecting the value of the stock in the Santos Company. However, the plaintiffs, as residuary legatees under their father’s will, directly benefited from the action of the executors if — as the plaintiffs now contend — the executors undervalued the stock in the Santos Company for estate tax purposes; and I believe, therefore, that the plaintiffs are bound by the executors’ action in this respect.

For the reasons stated above, it is my opinion that the plaintiffs are not entitled to recover, and that their petitions should be dismissed.

In any event, even if the plaintiffs are not bound by the valuation of the stock by the executors as of the date of the death of A. F. Israel, I am of the opinion that in justice, equity and fair dealing the Government should recoup from the recovery allowed these plaintiffs the amount of the estate tax underpaid by reason of the action of the executors in very materially undervaluing this stock as of the date of the death of A. F. Israel for whose estate they were charged with making a correct valuation and return under oath of the property of said estate, and on this point I therefore concur in the opinion of Chief Judge Jones.

FINDINGS OE FACT

The court, having considered the evidence, the report of Trial Commissioner Mastin G. White, and the briefs and argument of counsel, makes findings of fact as follows:

1. The plaintiffs, Achille F. Ford and Jeanne F. Harlow, are citizens of the United States. They are brother and sister, and they were the only children of Achille Francis Israel, now deceased.

2. Achille Francis Israel was a citizen of the United States. He died on January 18, 1939 in the State of Sao Paulo, Brazil.

3. On January 18, 1939, when their father died, the plaintiff Achille F. Ford was 15 years of age and the plaintiff Jeanne F. Harlow was 12 years of age. They resided at that time in the County of Santos, State of Sao Paulo, Brazil, with their mother, Lillian Norah Ford Israel.

4. The plaintiffs’ mother, Lillian Norah Ford Israel, was appointed administratrix of the estate of Achille Francis Israel in Brazil.

5. At the time of his death, Achille Francis Israel owned 510 shares of stock in S. A. Leon Israel Cia (later known as Leon Agricoles e Exportadora S. A.), a corporation organized and doing business under the laws of Brazil and located at Santos, State of Sao Paulo, Brazil. (This company will usually be referred to hereafter in the findings as “the Santos Company.”) There were 3,600 shares of the capital stock of the Santos Company outstanding at the time of Achille Francis Israel’s death; and they were held as follows: 2,550 shares by Leon Israel & Brothers, Inc. (see findings 6 and 7), 540 shares by Guy Snyder, and 510 shares by Achille Francis Israel. This capital stock had a par value of 1 conto (1,000 milreis) per share.

6. The Santos Company was organized about 1920, as successor to a partnership. Since then, it has been primarily an exporter of coffee from Brazil to the world. It sells such coffee in the United States to customers generally, including Leon Israel & Brothers, Inc., which has also acted as agent for the Santos Company in sales by the latter to others in the United States. Approximately 60 to 70 percent of the coffee sold by the Santos Company in the United States has gone through Leon Israel & Brothers, Inc.

7. Leon Israel & Brothers, Inc., is a corporation organized and existing under the laws of the State of Delaware. It is a dealer in green coffee, and a coffee importer and jobber. It imports some of its coffee from Brazil. The corporation has been in business since 1919, when it was organized as successor to a partnership, which had been in business since 1900.

8. Achille Francis Israel, Leon Israel, Leon Israel, Jr., Guy Snyder, James E. Montgomery, and Jules Kahn were the officers and directors of the Santos Company during the period 1937-1940 (except that Achille Francis Israel died on January 18, 1939). Leon Israel had been in the coffee business for many years; his reputation as a coffee merchant was very good; and he was financially very successful. Leon Israel, Jr., who had learned the coffee business from his father, Leon Israel, also had a good reputation as a coffee merchant. Messrs. Snyder and Montgomery were considered to be among the best coffee operators in Brazil.

9. (a) The reputation in the coffee market of the Santos Company as a coffee merchant, and of its officers as capable and successful, has been good. There have been from 40 to 60 coffee exporters from Brazil, and among them the Santos Company has been one of the five leading coffee exporters.

(b) The business of the Santos Company has always been profitable, except for the year 1926. Although the period 1936-1938 was one of economic depression in Brazil, the business of the Santos Company during that period was profitable. In view of the situation prevailing in 1936-1938, the earnings of the Santos Company during that period appeared to be rather conservative for the company, in relation to future prospects.

(c) The Santos Company paid cash dividends before and after 1938. In 1938-1939, it paid cash dividends in United States dollars to the stockholders residing in the United States, and in Brazilian currency to the stockholders residing in Brazil.

(d) The capital stock of the Santos Company was not traded on any public exchange during the period 1936-1939, it had no official or exchange quotation, and there was no comparable company the capital stock of which was traded or quoted on any Brazilian or American exchange.

10. Coffee bas been Brazil’s principal export trade, and the Brazilian coffee exporters have brought greatly needed hard currency, including United States dollars, into Brazil. Accordingly, as a practical matter, Brazilian exporters of coffee have been able, if they so desired, to accumulate United States dollar assets in the United States.

11. The operations of coffee exporters and dealers in Brazil have had an unusually stable character, and this was true during the years 1936-1940. The Brazilian coffee merchant is like any merchant in the United States who deals in a stable commodity, where purchases and sales are made almost simultaneously and the profit is the difference between the purchase price and the sale price. Coffee has always had a big demand in the United States, producing dollars and profits for Brazilian coffee exporters.

12. In 1937, Brazil experienced a definite improvement in economic conditions generally, and such conditions continued to improve for the next several years. Inflation did not commence in Brazil until the early part of World War II.

13. (a) In 1938 and 1939, the Brazilian currency exchange regulations required exchange transactions to be approved by the Bank of Brazil; but, with that approval, there was no prohibition against such transactions.

(b) The United States Treasury has accepted “as the current or market rates of exchange prevailing as of December 31” for Brazilian milreis the following United States dollar equivalents with respect to the years 1936-1939:

Tear Rate
1936_$0.059562
1937_ .052277
1938_ .058600
1939_ .060580

14.(a) Under the constitution of Brazil in effect in 1939, the inheritance of property situated in that country but owned by foreigners married to Brazilians was to be regulated under national law in favor of the Brazilian spouse and the children of the marriage.

(b) The constitution of Brazil further provided that the Brazilian States should have exclusive jurisdiction to impose taxes on the transfer of property by death.

15. By virtue of the constitutional provision referred to in finding 14(a), the plaintiffs inherited from their father 255 shares of stock each in the Santos Company by operation of Brazilian law on January 18, 1939.

16. The 510 shares of stock in the Santos Company inherited by the plaintiffs on January 18, 1939 could have been sold by them at some price then and thereafter.

17. (a) Tax on the inheritance by the plaintiffs from their father of the stock in the Santos Company was imposed by the State of Sao Paulo (see finding 14 (b)) under its then applicable laws. Those laws provided that stock publicly traded in and having an official quotation should be valued, for tax purposes, at the average quotation on the date of the death of the decedent owner if the stock was traded on that date, or, if it was not traded on that date, then on the day or week nearest to that date when the stock was traded. The laws of the State of Sao Paulo further provided that, in the case of stock such as that of the Santos Company involved in this case, which had no official or exchange quotation, such stock should be valued by appraisal.

(b) Pursuant to the provisions of state law referred to in paragraph (a,) of this finding, the Second Civil Court of Santos, State of Sao Paulo, appointed two Official Brokers of Public Funds to appraise the 510 shares of stock in the Santos Company that were inherited by the plaintiffs from their father. In October 1939, these brokers retroactively appraised the shares as of January 18, 1939 at their par value of 1 conto (1,000 milreis) each.

18. (a) Although the devolution of the 510 shares of stock in the Santos Company owned by Achille Francis Israel at the time of his death was governed by the Brazilian constitution (see findings 14(a) and 15), Achille Francis Israel left a will, which had been executed on September 15, 1932.

(b) Among other things, tire will of Achille Francis Israel provided for the payment of all just debts and funeral expenses of the testator; it left all of the testator’s personal and household effects to his widow, Lillian Nor ah Ford Israel; and it provided that all the rest and residue of the testator’s estate should be placed in trust for the benefit of his widow and the plaintiffs. The City Bank Farmers Trust Company, a corporation organized and existing under the laws of the State of New York, and Leon Israel, brother of the testator and uncle of the plaintiffs, were named in the will as the executors of and trustees under the will.

(c) The will of Achille Francis Israel was probated by the executors in the State of New York. On December 26,1941, the Surrogate’s Court of the County of New York, State of New York, which judicially settled the account of the executors, entered the following decree:

Ordered, adjudged and decreed, that the said Leon Israel and City Bank Farmers Trust Company as such Executors 'be and they hereby are discharged of any liability or responsibility in respect to the assets of the estate, both real and personal, situated in the United States of Brazil, and which have been the subject of administration by the appropriate Court of that country * * *.

(d) Among the assets of the estate of Achille Francis Israel which were situated in Brazil, and which had been the subject of administration by the appropriate court of that country, were the 510 shares of stock in the Santos Company referred to in previous findings.

19. (a) On April 17,1940, Leon Israel and the City Bank Farmers Trust Company, executors in the United States of the estate of Achille Francis Israel, deceased, filed the Federal estate tax return of the estate with the Collector of Internal Bevenue at Newark, New Jersey. In the return, the 510 shares of stock in the Santos Company which had been owned by Achille Francis Israel were included at a value of $11,857.50. This amount was declared under oath to have been the fair market value of such stock on the date of Achille Francis Israel’s death. It represented, for each share of stock, the par value of 1 conto (1,000 milreis), converted to United States money 'at the rate of $23.25 per conto, or 2.325 cents per milreis.

(b) The return mentioned in paragraph (a) of this finding indicated that the Federal estate tax payable on the estate of Achille Francis Israel, deceased, amounted to $439.61.

20. In 1942, Leon Israel & Brothers, Inc., tried to buy from the plaintiffs the shares of stock in the Santos Company owned by them.

21. (a) The Federal estate tax return on the estate of Achille Francis Israel was the subject of an examination by the Newark Division of the Internal Revenue Service. On August 19, 1942, a law firm representing the executors of the estate submitted to the Newark Division, in connection with the examination, a consolidated balance sheet of the Santos Company as of December 31, 1938. The consolidated balance sheet showed the net worth of the Santos Company as of December 31, 1938, with 3,600 shares of capital stock then outstanding, to have been 41,546,435 milreis and 349 reis. That balance sheet showed, therefore, that the 3,600 shares of capital stock were worth $536.64 per share, and that the 510 shares in question in this litigation were worth $273,686.40.

(b) A report of the examination referred to in paragraph (a) of this finding was prepared, and a copy of the report was transmitted by the Newark Division of the Internal Revenue Service to the executors of the estate of Achille Francis Israel, with a covering letter dated February 8, 1943. The report indicated that the Federal estate tax on the estate of Achille Francis Israel should be adjusted upward to $59,419 from the amount of $439.61 shown on the executors’ return. Hence, the report showed a deficiency of $58,979.39. The proposed adjustment upward was based in part upon an increase in the valuation of the 510 shares of stock in the Santos Company from $11,857.50, as declared by the executors in the return, to $23,715.

(c) The covering letter of February 8, 1943 mentioned in paragraph (b) of this finding informed the executors that if they did not agree to the proposed adjustment, they might file a protest with the Newark Division within 15 days from the date of the letter, “stating the grounds for your exceptions.”

(d) A protest dated February 25, 1943 against the proposed adjustment mentioned in paragraph (b) of this finding was filed with the Newark Division of the Internal Revenue Service on behalf of the executors of the estate of Achille Francis Israel, deceased. However, no exception was taken by the executors in the protest to the portion of the report indicating that the value of the 510 shares of stock in the Santos Company should be increased from $11,857.50 to $23,715.

22. (a) Under the date of April 6,1943, the Commissioner of Internal Revenue sent a 90-day deficiency letter to the executors of the estate of Achille Francis Israel. This letter stated ( among other things) that:

You are advised that determination of the estate tax liability of the above-named estate discloses a deficiency of $52,221.61, as shown in the statement attached.
Hi * ❖ * *
Within 90 days * * * you may file a petition with The Tax Court of the United States * * * for a rede-termination of the deficiency or deficiencies.

(b) The statement accompanying the letter mentioned in paragraph (a) of this finding indicated that the deficiency was based in part upon an adjustment upward of the value of the stock in the Santos Company from $11,857.50 to $23,715. In this connection, the statement declared that:

The values in Brazilian currency reported for these securities have been accepted; however, they have been converted into U.S. currency at a rate of $46.50 per Conto in lieu of $23.25 as used in the return.

23. (a) Under the date of May 18, 1943, a petition was filed with the Tax Court on behalf of the executors of the estate of Achille Francis Israel for a redetermination of the deficiency mentioned in finding 22. The only alleged error complained of by the executors was described in the petition as follows:

(a) Respondent has erroneously included in the gross estate the sum of $297,944.56 representing the proceeds of certain policies of insurance on the life of the decedent received by Leon Israel and City Bank Farmers Trust Company as Trustees under an agreement between said decedent and City Bank Farmers Trust Company dated September 15, 1932, as modified by instrument executed by the decedent under date of December 31, 1935.

(b) In the proceedings before the Tax Court, the executors did not complain at any time about the portion of the deficiency that resulted from the action of the Commissioner of Internal Eevenue in adjusting upward the value of the stock in the Santos Company from $11,857.50 to $23,715. On the contrary, the executors expressly stated as follows in a brief that was filed with the Tax Court:

* * * The petitioners do not now question the valuation adjustments and confine their prayer for redetermination to so much of the deficiency as arises by reason of the inclusion in the gross estate of the policies of insurance so transferred.

24. A memorandum opinion, together with findings of fact, on the petition mentioned in finding 23 was entered by the Tax Court on December 13, 1944. The Tax Court held in favor of the executors of the estate of Achille Francis Israel with respect to the error complained of by them. As a result, the deficiency in the Federal estate tax on the estate of Achille Francis Israel was redetermined by the Tax Court to be $949.31, rather than $52,221.61, as previously determined by the Commissioner of Internal Eev-enue. The deficiency of $949.31, as redetermined by the Tax Court, reflected (among other things) the action of the Commissioner of Internal Eevenue in increasing the value of the 510 shares of stock in the Santos Company owned by Achille Francis Israel at the time of his death from $11,857.50, as declared by the executors, to $23,715.

25. (a) As of July 15, 1947, each of the plaintiffs owned 1,530 shares of the issued and then outstanding capital stock of the Santos Company. These 1,530 shares consisted of the 255 shares inherited by each of the plaintiffs on January 18, 1939 from Achille Francis Israel, and of 1,275 shares which each of the plaintiffs received after January 18, 1939 by way of stock dividends on the 255 shares that had been inherited.

(b) The shares of stock in the Santos Company owned by the plaintiffs on July 15, 1947 had a par value of 1,000 cruzeiros each.

26. On July 15, 1947, each of tbe plaintiffs sold the 1,530 shares of stock in the Santos Company then owned by him or her. Each plaintiff received for such shares of stock $129,474.10 in United States money and 2,425,050 Brazilian cruzeiros.

27. The capital stock of the Santos Company which the plaintiffs sold in 1947 was redeemed and retired by the Santos Company.

28. (a) On or about March 15, 1948, each of the plaintiffs filed with the Collector of Internal Revenue at Hartford, Connecticut, a Federal income tax return for the calendar year 1947. There was included in each return, among the taxable income, the amount of $122,569.59 as a long-term capital gain by reason of the sale on July 15, 1947 of the 1,530 shares of the capital stock of the Santos Company mentioned in finding 26. The amount of the long-term capital gain was computed by each plaintiff in the income tax return as follows:

Gross sales price_$258, 948.20
Cost or other basis_ 13, 809. 02
Gain _ 245,139.18
Gain taken into account_ 122, 569.59

(b) The 1947 Federal income tax return of the plaintiff Achille F. Ford showed an income tax of $71,099.25. On or before March 15, 1948, the plaintiff Ford paid to the Internal Revenue Service a total of $72,849.25 in connection with his income tax liability for 1947.

(c) The 1947 Federal income tax return of the plaintiff Jeanne F. Harlow showed an income tax of $69,129.64. On or before March 15, 1948, the plaintiff Harlow paid to the Internal Revenue Service a total of $70,379.64 in connection with her income tax liability for 1947.

29.The 540 shares of the capital stock of the Santos Company which Guy Snyder owned on January 18, 1939 (see finding 5), together with the stock dividends thereon, were sold by him in 1949 to Messrs. Montgomery, Brunssen, and Ritchie, who had been officers and directors of the Santos Company and were employees thereof in 1949, and who then resided in Brazil.

30. On June 24, 1949, the plaintiff Achille F. Ford filed with the Collector of Internal Eevenue at Hartford, Connecticut, a claim asking that $70,735.84 of the amount previously paid as income tax for 1947 be refunded. As grounds for the claim, it was stated in part as follows:

* * * Prior to July 15, 1947, he [the plaintiff Ford] was the owner of 1530 shares of the capital stock of * * * [the Santos Company]. 510 of said shares were acquired by bequest from the taxpayer’s father * * * . The balance of the shares owned by the taxpayer were acquired as non-taxable stock dividends on the original shares inherited. The fair market value of the inherited shares on the date of death of the taxpayer’s father was not less than $165,709.20 and, on July 15, 1947, the basis of all of the taxpayer’s shares was not less than that amount.
On July 15, 1947, the taxpayer sold said 1530 shares of stock for an aggregate consideration of $129,474.10 in TJ.S. currency and Cr.$2,425.050,000 in Brazilian currency.
During the year 1947, the taxpayer received dividends on shares of stock owned by him in various Brazilian corporations in the aggregate amount of Cr.$487.200,-000 Brazilian currency.
All of the foregoing amounts of Brazilian funds have since their receipt by the taxpayer, been blocked under the laws of Brazil and have remained frozen in accounts maintained by the taxpayer in banks in Brazil. * * *
* * * * *
For the reasons stated, the Brazilian funds described above had no fair market value in 1947.
In his federal income tax return for 1947, the taxpayer erroneously reported, as proceeds from the sale of a capital asset, the amount of $129,474.10, being the blocked Brazilian funds of Cr.$2,425.050,000 received on the sale of his stock, as aforesaid, converted into TJ.S. funds at the official exchange rate of 18.73 cruzeiros to the dollar; that his basis for the aforesaid shares amounted to only $13,809.02, instead of $165,709.20 as set forth above; and that he had received dividends in the amount of $26,011.73, being the dividends in the amount of Cr.$487.200,000 received in blocked Brazilian funds, as aforesaid, converted at the official rate. By reason of the erroneous inclusion of the foregoing amounts of Brazilian funds, converted at the official rate, in his gross income, and the erroneous statement of bis basis for the shares sold as aforesaid, the taxpayer overpaid income tax for 1947 in the amount of $70,-735.84, refund of which, with interest, is hereby requested.

31. On June 24,1949, the plaintiff Jeanne F. Harlow filed with the Collector of Internal Kevenue at Hartford, Connecticut, a claim asking that $69,129.64 of the amount previously paid as income tax for 1947 be refunded. As grounds for the claim, it was stated in part as follows:

* * * Prior to July 15,1947, she [the plaintiff Harlow] was the owner of 1530 shares of the capital stock of * * * [the Santos Company]. 510 of said shares were acquired by bequest from the taxpayer’s father * * *. The balance of the shares owned by the taxpayer were acquired as non-taxable stock dividends on the original shares inherited. The fair market value of the inheiited shares on the date of death of the taxpayer’s father was not less than $165,709.20 and, on July 15,1947, the basis of all of the taxpayer’s shares was not less than that amount.
On July 15, 1947, the taxpayer sold said 1530 shares of stock for an aggregate consideration of $129,474.10 in U.S. currency and Cr. $2,425.050,000 in Brazilian currency.
During the year 1947, the taxpayer received dividends on shares of stock owned by her in various Brazilian corporations in the aggregate amount of Cr. $487.920,000 Brazilian currency.
All of the foregoing amounts of Brazilian funds have, since their receipt by the taxpayer, been blocked under the laws of Brazil and have remained frozen in accounts maintained by the taxpayer in banks in Brazil. * * *
* $ $ $ $
For the reasons stated, the Brazilian funds described above had no fair market value in 1947.
In her federal income tax return for 1947, the taxpayer erroneously reported, as proceeds from the sale of a capital asset, the amount of $129,474.10, being the blocked Brazilian funds of Cr. $2,425.050,000 received on the sale of her stock, as aforesaid, converted into U.S. funds at the official exchange rate of 18.73 cruzeiros to the dollar; that her basis for the aforesaid shares amounted to only $13,809.02, instead of $165,709.20 as set forth above; and that she had received dividends in the amount of $26,050.53, being the dividends in the amount of Cr. $487.920,000 received in blocked Brazilian funds, as aforesaid, converted at the official rate. By reason of the erroneous inclusion of the foregoing amounts of Brazilian funds, converted at the official rate, in her gross income, and the erroneous statement of her basis for the shares sold as aforesaid the taxpayer overpaid income tax for 1947 in the amount of $69,129.64, refund of which, with interest, is hereby requested.

32. (a) Pursuant to the claim mentioned in finding 30, the Internal Revenue Service notified the plaintiff Achille F. Ford that it proposed to determine that an overassessment amounting to $37,883.71 had been made in connection with his income tax liability for 1947. The following explanation of such proposed action was given:

(a) Dividends received in various Brazilian corporations in the aggregate amount of Cr. $487,920,000 [sic] Brazilian currency, which was blocked by the Brazilian Government, and which the taxpayer elected to report as “Deferable Income” in accordance with Mim. 6475 (as amended by Mim. 6494, March 27,1950), to be eliminated from income in 1947 in the amount of $26,011.73.
(b) Capital gain from sale of 1,530 shares of stock of * * * [the Santos Company] was recomputed in accordance with Mim. 6475 (as amended by Mim. 6494, March 27,1950), as follows:
Sales price $258,948.20
Amount received in U.S. currency % of $258,948.20= $129,474.10
Less: Expense of sale — Paid in Dollars- $12, 704.62
Less: Paid in Brazilian currency- 8,874.72 3, 829.90
125,644.20
Cost or basis per BAB- 11,857.50
Gain to be reported in current year- 113,886.70
Taken into account at 50%- 56,943.35
Amount as corrected in BAB- 117,193.04
Beduetion in capital gain- 60,249.69

(b) The proposed overa,ssessment mentioned in paragraph (a) of this finding was accepted by the plaintiff Achille F. Ford on December 27, 1950.

(c) The overassessment mentioned in paragraph (a) of this finding was subsequently increased by the Internal Revenue Service to $39,633.71, and this amount was refunded to the plaintiff Achille F. Ford.

33. (a) Pursuant to the claim mentioned in finding 31, the Internal Revenue Service notified the plaintiff Jeanne F. Harlow that it proposed to determine that an overassessment in the amount of $37,363.07 had been made in connection with her income tax liability for 1947. The following explanation of such proposed action was given:

(a) Dividends received in various Brazilian corporations in the aggregate amount of Cr. $487,920,000 [sic] Brazilian currency, which was blocked by the Brazilian Government, and which the taxpayer elected to report as “Deferable Income” in accordance with Mim. 6475 (as amended by Mim. 6494, March 27,1950), to be eliminated from income in 1947 in the amount of $26,011.73.
(b) Capital gain from sale of 1,530 shares of stock of * * * [the Santos Company] was recomputed in accordance with Mim. 6475 (as amended by Mim. 6494, March 27,1950), as follows:
Sales price $258,948.20
Amount received in U.S. currency % of $258,948.20= $129,474.10
Less: Expense of sale — Paid in Dollars. $12, 704. 62
Less: Paid in Brazilian currency_ 8, 874. 72 3, 829.90
125 644.20
Cost or basis per RAR_ 11,857. 50
Gain to be reported in current year_ 113,886.70
Taken into account at 50%_ 56,943.35
Amount as corrected in RAR_ 117,193.04
Reduction in capital gain_ 60,249. 69

(b) The proposed overassessment referred to in paragraph (a) of this finding was accepted by the plaintiff Jeanne F. Harlow on January 8, 1951.

(c) The overassessment mentioned in paragraph (a) of this finding was subsequently increased by the Internal Revenue Service to $38,613.07, and this amount was refunded to the plaintiff Jeanne F. Harlow.

34. With respect to the Federal income tax which was paid by the plaintiffs for the year 1947 and was not refunded to them, there was paid by each of them, on account of the sale in 1947 of the 1,530 shares of the capital stock of the Santos Company, income tax in the amount of $28,446.67, arrived at as follows:

Proceeds received in U.S. money from sale of stock_$129,474.10
Less expenses of sale allocable to U.S. money re-ceived_ 3, 829.90
Net proceeds in U.S. money_ 125,644.20
Less basis of stock_ 11,857. 50
Capital gain_ 113,786.70
Long-term capital gain_ 56, 893.35
Income tax paid on long-term capital gain (50% of $56,893.35)_ 28,446.67

35. The plaintiffs have presented in this litigation evidence tending to show that the actual fair market value of the 255 shares of stock in the Santos Company which each plaintiff inherited from Achilla Francis Israel on January 18,1939 was greater than $129,474.10 on that date.

CONCLUSION OE LAW

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 plaintiffs are entitled to recover and it is therefore adjudged and ordered that the plaintiff Achille F. Ford (No. 623-58) recover of and from the United States the sum of twenty-eight thousand four hundred forty-six dollars and sixty-seven cents ($28,446.67), with interest thereon as provided by law and that the plaintiff Jeanne F. Harlow (No. 624-53) recover of and from the United States the sum of twenty-eight thousand four hundred forty-six dollars and sixty-seven cents ($28,446.67), with interest thereon as provided by law. 
      
       The cruzeiro had replaced the milreis as a basic unit of Brazilian currency prior to July 15,1947.
     