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 Rev. Rul. 75-477

1975-2 C.B. 27

Section 61 -- Gross Income Defined

IRS Headnote

Gain on disposition of foreign currency acquired at illegal exchange rates. A U.S. citizen working in a foreign country who exchanged U.S. dollars for foreign currency at illegal exchange rates and then exchanged the foreign currency for Military Payment Certificates, for personal use, having a dollar value greater than his basis in the foreign currency, has realized gain that must be reported for the taxable year in which the foreign currency was disposed of.

Full Text

Rev. Rul. 75-477

Advice has been requested regarding the Federal income tax consequence of the transactions described below.

The taxpayer, a United States citizen working in a foreign country, exchanged United States dollars for the currency of the foreign country at illegal rates of exchange, and then exchanged the foreign currency for Military Payment Certificates, for personal use, by dealing with local merchants who had acquired such certificates through illegal dealings. Thus, by purchasing 20x dollars worth of foreign currency at the illegal rate of exchange and entering into the above-described transaction the taxpayer received 40x dollars worth of Military Payment Certificates in return.

Section 61 of the Internal Revenue Code of 1954 provides that, except as otherwise provided in subtitle A, gross income means all income from whatever source derived.

Section 1.61-14 of the Income Tax Regulations provides, in part, that illegal gains constitute gross income.

In the case of Gillin v. United States, 423 F.2d 309, 311 (Ct. Cl. 1970) the United States Court of Claims said, with respect to currency fluctuations:

Obviously in fact a dollar or a mark may have different values at different times but to the law that establishes it, it is always the same. . . . For our legal system, however, foreign currency, which is not established by United States law, has a different status. Account is taken, much more often (if not always), of its fluctuations in value, and it is frequently treated, not as the medium of exchange, but as property or a commodity. This is especially likely to be so when it is converted into United States funds.

* * * * *

In this situation there is no reason why taxpayer should be free of tax on the gain. By the arrangements he made, he 'necessarily involved [himself] in a speculation in foreign exchange' and 'as things turned out, [he] gained by the speculation * * *.'

Willard Helburn, Inc. v. Commissioner of Internal Revenue, 214 F.2d 815, 818 (C.A. 1, 1954). The profit was as much as 'windfall item' as the comparable exchange profit in Willard Helburn, Inc. * * * It falls well within the generous sweep of section 61(a) ('all income from whatever source derived').

Therefore, whereas United States currency is deemed to have a constant value except in extraordinary circumstances (such as in Rev. Rul. 68-634, 1968-2 C.B. 46, where a taxpayer was held to have derived gross income from the sale and exchange of United States silver certificates), foreign currency does not have a constant value in relation to United States currency and a taxpayer may have gains and losses from dealings in it. Such gains and losses may be the result of official revaluation of the foreign currency, or they may simply result from the day-to-day fluctuation of the fair market value of the foreign currency in terms of dollars. If there is more than one rate of exchange, the Service does not always use the official rate to express the value of the foreign currency in terms of dollars. See The Foundation Company, 14 T.C. 1333, 1354-5 (1950), acq. 1950-2 C.B. 2 and  Rev. Rul. 73-163, 1973-1 C.B. 417.

Accordingly, the gain from the transactions in foreign currency in the instant case is includible in the taxpayer's gross income for Federal income tax purposes.

Since the gain from dealing in foreign currency constitutes gross income, it is necessary to determine when the taxpayer realized the gain. Rev. Rul. 75-104, 1975-1 C.B. 18, holds that a dealer in foreign currency should make his return on the same basis that he keeps his inventory accounts, whereas a nondealer realizes gain or loss when the foreign currency is disposed of or converted. One who is not a dealer in foreign currency does not realize gain or loss before disposition of the foreign currency. See Theodore Tiedemann and Sons, 1 B.T.A. 1077 (1925).

The taxpayer in the instant case was not a dealer in foreign currency.

Accordingly, the taxpayer realized a gain on the disposition of the foreign currency. Such gain is reportable for Federal income tax purposes in the taxable year of disposition of the foreign currency. In the instant case the gain was realized when the taxpayer exchanged the units of foreign currency for Military Payment Certificates having a dollar value greater than the taxpayer's basis in the units of foreign currency.