Appeal from the United States Tax Court, Washington, D.C. Leo H. Irwin, Judge.
Sprecher and Wood, Circuit Judges, and Wollenberg, Senior District Judge.*fn*
The salient issue in this appeal is the proper method of converting Argentine pesos into United States dollars for income tax purposes. What appears to be a simple question has so far required two Tax Court decisions and two appeals to this court.
This income tax case is another chapter in the history of the controversial drug Krebiozen,*fn1 developed by Dr. Stevan Durovic, and financed in part by his brother, Marko Durovic, the appellant-taxpayer in this case.
The Tax Court originally entered its decision on April 20, 1972, in accordance with its opinion in 54 T.C. 1364, filed on June 24, 1970. This court affirmed most of the Tax Court's findings and conclusions, in Durovic v. Commissioner of Internal Revenue, 487 F.2d 36 (7th Cir. 1973), cert. denied, 417 U.S. 919, 94 S. Ct. 2625, 41 L. Ed. 2d 224 (1974), but remanded the case to the Tax Court (1) "for further exploration of the law and fact, and a proper determination" of the issue of the applicable conversion rate of exchange, and (2) "to determine whether the taxpayer is to get a deduction for the cost of the 63,903 free ampules distributed as an advertising expense or as an amortizable good will expense." 487 F.2d at 44, 48.
The Tax Court entered its decision on remand on February 23, 1976, in accordance with its opinion in 65 T.C. 480, filed on December 3, 1975, holding (1) that the conversion rate of exchange was nine Argentine pesos per United States dollar, and (2) that the free distribution of 63,903 ampules was a capital expenditure in the nature of good will and the taxpayer, having failed to establish a useful life over which such expenditure could be amortized, was not entitled to a deduction with respect thereto.
Marko Durovic, while a resident of Argentina, acquired two grams and 35 centigrams of Krebiozen, from Juan Manuel Tanoira, also a resident of Argentina, on January 26, 1950, for 3,005,000 Argentine pesos, after borrowing 2,000,000 pesos from the Argentine banking house of Armando Ferrari. On February 7, 1950, Marko brought this property into the United States as a biological product without the payment of duty to the United States and contributed it as his investment in an equal partnership with Stevan.
The two grams, 35 centigrams of Krebiozen were later manufactured into 200,000 ampules of Krebiozen, the cost of which the Tax Court found to be 3,005,000 Argentine pesos. The amount of the cost of goods sold must be measured in, and hence converted to, United States dollars for the practical reason that the Durovic brothers filed United States partnership returns for the years 1954-1958 in which, of course, the amounts received for the sale of Krebiozen ampules in the United States were expressed in United States dollars. According to the Tax Court's determined rate of exchange of nine pesos per United States dollar, the cost of the goods sold would be $333,888, resulting in a substantially greater income tax eventually due than if Marko's contention before the Tax Court and on this appeal that the proper rate of exchange should be 3.36 pesos per dollar (in which case the cost of goods sold would be $894,345) should prevail.
The taxpayer relies upon the rate of exchange established by 31 U.S.C. § 372, which reads in pertinent part:
(b) For the purpose of the assessment and collection of duties upon merchandise imported into the United States . . ., wherever it is necessary to convert foreign currency into currency of the United States, such conversion . . . shall be made at the values proclaimed by the Secretary of the Treasury . . . .
(c)(1) If no value has been proclaimed . .,
(A) at a value measured by [the] . . . buying rate . . . .
(2) . . . the . . . 'buying rate ' . . . shall be determined by the Federal Reserve Bank of New York and certified to the Secretary of the Treasury. . . .
Taxpayer's expert witness, Max L. Baughman, testified that in 1949, there was a strong relationship between Argentina and Great Britain because Argentina shipped a substantial amount of meat to Great Britain. When the British devalued the Sterling pound on September 18, 1949, it "threw the currency exchanges in Argentina in an uproar and they had to suspend all trading until October the 3rd," on which date the Argentine Central Bank published a list of seven rates, three for importation and four for exportation-the basic rate, Preferential A, Preferential B and a special rate.
According to taxpayer's Exhibit 76, on August 29, 1950 the Argentine Finance Ministry announced a simplified exchange rate system, whereby a "Preferential" rate replaced Preferential A and Preferential B, and the special rate was discontinued. Exhibit 76, which constitutes the buying rate in New York, certified by the Federal Reserve Bank of New York to the Secretary of the Treasury in accordance with 31 U.S.C. § 372(c)(2), specifies a January 1950, basic buying rate of 29.778 cents per Argentine peso, or 3.3582 pesos per dollar. However, a footnote explains that up to August 29, 1950, the basic rate existed in conjunction with the three other rates (Preferential A, Preferential B and Special) and "for quotations on the discontinued rates, see [Federal Reserve] Bulletin for October 1950, p. 1419."
Consequently, on the crucial date involved in this case-January 26, 1950-there existed at least four different buying rates of exchange for Argentine pesos. This was not necessarily an unusual situation. In Barr v. United States, 324 U.S. 83, 90, 89 L. Ed. 765, 65 S. Ct. 522 (1944), the Supreme Court noted that "[dual] or multiple exchange rates have resulted in recent years from measures for the control and restriction of foreign exchange and export transactions." Hence, the Court concluded that it would violate Congressional purpose to conclude "that on a given date only one buying rate for ...