1. Under § 234 of the Revenue Act of 1918, which authorizes the
deduction from gross income in the computation of income taxes of
"[l]osses sustained during the taxable year not compensated by
insurance or otherwise," and Treasury regulations providing that
losses deducted "must usually be evidenced by closed or completed
transactions," but specifically authorizing deduction of worthless
debts and corporate stock, the American creditor, and owner of the
stock, of a corporation in Germany was entitled to deduct the
entire amount of such investment from gross income when the assets
and business of the corporation were sequestered by the German
government during the war. P. 274 U. S.
2. Such sequestration of enemy property was within the rights of
the German government as a belligerent power, and, when effected,
left the corporation without right to demand its release or
compensation for its seizure, at least until the declaration of
peace. P. 274 U. S.
3. The transaction -- the sequestration -- causing the loss was
"closed and completed " when the seizure was made, and the loss was
then deductible, although later the German government bound itself
to repay and an award was made by the Mixed Claims Commission which
may result in recovery. P. 274
U. S. 403
61 Ct.Cls. 143 affirmed.
Certiorari (271 U.S. 651) to a judgment of the Court of Claims
allowing a recovery of income taxes paid for the year 1918.
Page 274 U. S. 399
MR. JUSTICE STONE delivered the opinion of the Court.
This case comes here on writ of certiorari to the Court of
Claims, Act Feb. 13, 1925, 43 Stat. 939, § 3(b), as amended, to
review a judgment of that court allowing recovery by respondent of
income taxes paid for the year 1918. The sole question presented is
the right of the respondent, upheld below, to deduct from its gross
income for 1918 the amount of its investment in a subsidiary German
corporation whose entire property was seized in that year by the
German government as enemy property.
Respondent is a Pennsylvania corporation engaged in the
manufacture and sale of dental supplies. Before 1918, it had
organized controlled, by ownership of all the capital stock, the
S.S. White Dental Manufacturing Company, m.b.h., of Berlin,
Germany, a German corporation. Its investment in the German
corporation in 1918, as carried on its books, aggregated more than
The agreed statement of facts adopted as findings by the court
below are so vague as to leave it uncertain whether this investment
was represented on the books of respondent by the capital stock
alone, or in part by the capital stock and in part by an open
account between it and the German corporation. The case was argued
on the assumption, which we make, that the investment was
represented by both the capital stock and an open account, due to
respondent from the German company. The total is conceded to be no
more than the fair value of the net assets of the German
In March, 1918, the sequestrator appointed by the German
government took over the property of the German corporation and the
management of its business. It is inferable from the findings, as
the government concedes, that the sequestration was similar in
purpose and legal effect to that authorized under the Trading with
the Enemy Act of the United States Oct. 6, 1917, c. 106,
Page 274 U. S. 400
40 Stat. 411, Act March 28, 1918, c. 28, 40 Stat. 459, Act July
11, 1919, c. 6, 41 Stat. 35, Act June 5, 1920, c. 241, 41 Stat.
977, Act March 4, 1923, c. 285, 42 Stat. 1511, Act May 7, 1926, c.
252, 44 Stat. 406, and we shall deal with the case on that
In March, 1920, the possession of the seized assets and business
was relinquished to the German corporation by the sequestrator. As
a result of the mismanagement of its affairs while in his custody,
and investments of its funds by him in German war loans, the value
of its assets was seriously impaired. In 1922, its tangible assets
and its lease were sold for $6,000. This sum was included in
respondent's income tax return for that year. Later, respondent
filed a claim with the Mixed Claims Commission which was allowed in
1924 to the extent of $70,000. What if anything may ultimately be
realized from this award remains uncertain.
In 1918, the respondent charged off as a loss the entire amount
of its investment in the German corporation as shown by its books,
and in July of that year passed a resolution authorizing the
establishment of a reserve against this loss at the rate of $15,000
quarterly, beginning March, 1918. In making its income tax return
for 1918, respondent deducted from gross income the amount of its
investment in the German corporation. The deduction was disallowed
by the Commissioner of Internal Revenue on the sole ground that the
loss was not evidenced by a closed and completed transaction in the
year for which it was deducted. The tax so assessed was paid under
protest, and this suit followed.
Section 234 of the Revenue Act of 1918, c. 18, 40 Stat. 1057,
1077, 1078, authorizes the deduction in the computation of income
taxes of "losses sustained during the taxable year and not
compensated for by insurance or otherwise." In explaining this
section, Article 141 of Treasury Regulations 45, provides that
losses incurred in
Page 274 U. S. 401
the taxpayer's trade or business or in any transaction entered
into for profit may be deducted, but such losses "must usually be
evidenced by closed and completed transactions." Article 151
provides in part:
"Where all the surrounding and attendant circumstances indicate
that a debt is worthless and uncollectible and that legal action to
enforce payment would in all probability not result in the
satisfaction of execution on a judgment, a showing of these facts
will be sufficient evidence of the worthlessness of the debt for
the purpose of deduction."
"And article 144 reads in part:"
"If the stock of a corporation becomes worthless, its cost or
its fair market value as of March 1, 1913, if acquired prior
thereto, may be deducted by the owner in the taxable year in which
the stock became worthless, provided a satisfactory showing of its
worthlessness be made as in the case of bad debts."
Article 561, making these provisions applicable to
Page 274 U. S. 402
The case turns upon the question whether the loss, concededly
sustained by the respondent through the seizure of the assets of
the German company in 1918, was so evidenced by a closed
transaction within the meaning of the quoted statute and treasury
regulations as to authorize its deduction from gross income of that
year. The statute obviously does not contemplate, and the
regulations (Art. 144) forbid, the deduction of losses resulting
from the mere fluctuation in value of property owned by the
taxpayer. New York Ins. Co. v. Edwards, 271 U.
, 271 U. S. 116
cf. Miles v. Safe Deposit Co., 259 U.
. But, with equal certainty, they do contemplate
the deduction from gross income of losses which are fixed by
identifiable events, such as the sale of property (Arts. 141, 144),
or caused by its destruction or physical injury (Arts. 141, 142,
143), or, in the case of debts, by the occurrence of such events as
prevent their collection (Art. 151).
The transaction evidencing the loss here was the seizure of the
property of the German company. The loss resulted to the respondent
because it was a creditor and stockholder of that company which, as
a result of the sequestration, was left without property or assets
of any kind. The sequestration of enemy property was within the
rights of the German government as a belligerent power and when
effected left the corporation without right to demand its release
or compensation for its seizure at least until the declaration of
peace. See Littlejohn & Co. v. United States,
270 U. S. 215
White v. Mechanics' Securities Corp., 269 U.
, 269 U. S.
-301; Swiss Insurance Co. v. Miller,
267 U. S. 42
Stoehr v. Wallace, 255 U. S. 239
255 U. S.
-244; Central Trust Co. v. Garvan,
254 U. S. 554
Brown v. United
8 Cranch 110, 12 U. S. 122
What would ultimately come back to it, as the event proved, might
be secured, not as a matter of right, but as a matter either of
grace to the vanquished or exaction by the victor. In any case, the
amount realized would be dependent upon the hazards of the war then
That legal action by respondent upon its open accounts against a
corporation thus despoiled would have been fruitless within the
meaning of Art. 151 seems not open to question. No distinction is
urged by the government between respondent's investment in the
stock of the German company and in its open accounts. It is equally
apparent that the stock after the seizure was as worthless as the
obligations of the German company and was deductible under Art. 144
on the same basis as had debts.
If the seized assets are viewed as the property of respondent,
ignoring the entity of the German company, the result is the same.
The quoted regulations, consistently with the statute, contemplate
that a loss may become complete enough for deduction without the
Page 274 U. S. 403
establishing that there is no possibility of an eventual
recoupment. It would require a high degree of optimism to discern
in the seizure of enemy property by the German government in 1918
more than a remote hope of ultimate salvage from the wreck of the
war. The taxing act does not require the taxpayer to be an
We need not attempt to say what constitutes a closed transaction
evidencing loss in other situations. It is enough to justify the
deduction here that the transaction causing the loss was completed
when the seizure was made. It was nonetheless a deductible loss
then, although later the German government bound itself to repay
and an award was made by the Mixed Claims Commission which may
result in a recovery.