Cabrera v. Commissioner

MEMORANDUM OPINION

RAUM, Judge: The Commissioner determined deficiencies in petitioners' Federal income taxes for the years 1967 through 1971 in the following amounts:

Petitioners Joaquin and Emelia Cabrera were husband and wife, residing in Miami Beach, Florida, at the time of filing their petition herein.

Petitioners became residents and taxpayers of the United States on April 11, 1959. Subsequent thereto in 1960, the Cuban Government expropriated business property belonging to petitioners, resulting in a loss of $175,000. During the same year petitioners also sustained capital losses of $50,000 in respect of worthless securities and long term capital losses of $95,413 in respect of domestic investments, none of which are in issue here.

In 1965*115 petitioners filed a joint Federal income tax return for 1964 on which they claimed a net operating loss deduction with the following explanation attached thereto:

Loss from Confiscation of Business Property by Castro Under Section 172(K) [sic] of the Revenue Code of 1954

As of January 1, 1966, petitioners had an unused net operating loss carryover of $157,931.93; petitioners' taxable income in 1966 was $8,377.16. In each of the years 1967 through 1971, petitioners filed joint Federal income tax returns on each of which they claimed a deduction in respect of the then unused portion of their net operating loss. In each instance they attached to the return a statement citing section 172(k) as authority for their claimed deduction.

In his notice of deficiency, the Commissioner determined that petitioners "did*116 not file a proper election under section 172(b)(3)(C)(iii)" on account of which petitioners were not entitled to a net operating loss deduction in any of the taxable years in issue.

The controversy here concerns petitioners' attempt to carry over the unused portion of their 1960 expropriation loss to the years in issue. Although section 172(b)(1)(B) generally permits a net operating loss carryover only to the five taxable years following the year of loss, section 172(b)(1)(D)¹ provides an exception to this rule in the case of a "foreign expropriation loss (as defined in subsection (k))" for taxable years ending after December 31, 1958, which may be carried over to each of the 10 taxable years following the year of loss (and 15 taxable years with respect to a "Cuban expropriation loss"). Section 172(k), ² a non-operative provision, simply defines the terms foreign expropriation loss and Cuban expropriation loss "[For] the purposes of subsection (b)". However, the benefits of section 172(b)(1)(D) (and the attendant burdens) ³ are not automatically available in the case of such losses. Section 172(b)(3)(C)(iii) provides that paragraph (1)(D) shall apply only if:

(iii) in the*117 case of a foreign expropriation loss for a taxable year ending after December 31, 1958, and before January 1, 1964, the taxpayer elects (in such manner as the Secretary or his delegate by regulations prescribes) on or before December 31, 1965, to have paragraph (1)(D) apply.

The accompanying regulations ⁴ require an electing taxpayer to file a statement of election, the principal features of which are: (1) Information identifying the taxpayer; (2) a statement that he elects to have section 172(b)(1)(D) apply; (3) the amount of the net operating loss for the year; and (4) a schedule showing the computation of the foreign expropriation loss. The parties agree that if the explanatory statement on petitioners' 1964 income tax return constituted an election, petitioners were entitled to carry over their Cuban expropriation loss to the years in issue. We think that they have satisfied the election requirements.

*118 The nub of the issue is whether, by citing section 172(k), petitioners indicated to the Commissioner their "unequivocal agreement to take the benefits and burdens of section 172(b)(1)(D) and related provisions". Octavio J. Valdes,60 T.C. 910, 914. As we read section 172, subsection (k) is one of the several components which together form the statutory pattern governing carryovers in respect of foreign expropriation losses. It has no purpose but to delineate the type of loss to which the operative language of subparagraph (b)(1)(D) applies. Indeed, the availability of the extended carryover under (b)(1)(D) is expressly predicated upon satisfying the definitional provisions of subsection (k). And for that reason the applicability of subsection (k) is coextensive with that of subparagraph (b)(1)(D), both of which occur only in those situations in which the taxpayer makes the required election under section 172(b)(3)(C)(iii). That being the case, petitioners' express reliance on section 172(k) could have referred only to their intention of following the statutory pattern for extended carryovers contained in subparagraphs (b)(1)(D), (b)(3)(C) and (b)(3)(D), and we consider*119 this to have been sufficient to put the Commissioner on notice that petitioners had elected to be bound by the conditions stated therein.

The Commissioner nonetheless contends that nothing in petitioners' 1964 income tax returns specifically indicated their commitment to be bound by the extended carryover provisions. In fact, he argues that their reference to Castro compels the conclusion that they thereby chose to treat their loss as one arising under section 165(i), the only provision of the Code at that time which dealt specifically with losses suffered as a result of expropriation by the Cuban Government. ⁵ This interpretation, however, cannot be reconciled with petitioners' specific reliance on section 172(k) and the incompatible limitation contained in section 165(i)(2)(C) which expressly renders section 165(i) losses ineligible for treatment as expropriation losses within the meaning of section 172(k). Furthermore, petitioners' statement identified their expropriated property as "business property". Inasmuch as section 165(i)(1)(B) makes the provisions of section 165(i) inapplicable to losses incurred in a trade or business, it is particularly awkward to conclude that petitioners*120 intended thereby to invoke the provisions of section 165(i).

Likewise, although petitioners' statement included the property's fair market value as of December 31, 1958, information referred to by section*121 165(i)(2)(B), we think that, in light of their unambiguous reliance on section 172(k), the Commissioner could not reasonably have concluded that petitioners thereby sought to disavow their reliance on section 172(k) in favor of section 165(i). By identifying their expropriated assets as business property in their election, petitioners restricted themselves to claiming a loss deduction only under section 165(c)(1). And for purposes of section 165(c)(1), the amount of the deductible loss is determined by reference to the adjusted basis of the property, not its fair market value. See section 165(b), I.R.C. 1954; sections 1.165-1(c)(1) and 1.165-7(b)(1), Income Tax Regs. Thus, regardless of the fact that in their election petitioners used the fair market value of their expropriated assets, the very nature of their loss made that figure irrelevant to the deduction which they sought. In these circumstances it is unreasonable for the Commissioner to conclude from this error that petitioners instead sought thereby to abandon their express reliance on section 172(k) in favor of section 165(i). ⁶ The Commissioner received clear notice that petitioners had chosen to apply the extended loss carryover*122 provision of section 172, and this conclusion cannot be avoided by pointing to petitioners' error in computing their actual loss by using the property's fair market value as of December 31, 1958, rather than its adjusted basis at the time it was expropriated.

We find further support for this conclusion by comparing the particulars of petitioners' election with the ineffective language employed by the taxpayers in Octavio J. Valdes,supra,60 T.C. at 911. In Valdes, the taxpayers' purported election consisted entirely of the following statement:

We are claiming Cuban Casualty Losses, Revenue Act 1964.

Not only did they fail to include any reference to section 172 whatsoever, but by citing the Revenue Act of 1964 they created the likely impression that they were relying*123 upon section 238 of that Act which added section 165(i) to the Code, the only provision of the Code at that time which dealt specifically with Cuban expropriation losses. See p. , fn. 5. By contrast, the language employed by petitioners herein clearly directed the Commissioner's attention exclusively to the extended carryover provisions of section 172 without even an oblique reference to section 165(i).

Finally, insofar as the regulations required petitioners to include in their election a statement of their foreign expropriation loss for the taxable year and a schedule showing its computation, petitioners have done so. To be sure, in their attempt to fulfill this aspect of the election they miscalculated the amount of loss which they originally had sustained. But it would be unreasonable to construe the regulation as predicating the validity of a taxpayer's election upon the Commissioner's later agreement with the amount of the taxpayer's claimed loss, a matter which in the case of a foreign expropriation may be expected to involve a considerable degree of estimation, if not plain guesswork.

We hold that by their statement attached to their 1964 income tax return, petitioners*124 fulfilled the essential requirements of section 172(b)(3)(C)(iii) of the Code and section 1.172-11(c)(3) of the Regulations; they are therefore entitled to carry over the unused portions of their 1960 Cuban expropriation loss to the taxable years here in issue as provided in section 172(b)(1)(D).

Decision will be entered for the petitioners.