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UNITED STATES v. ROSS

February 25, 1966

United States of America, Plaintiff,
v.
Leon I. Ross, Ross & Company, Limited and Central Trading, Inc., Defendants


Levet, District Judge.


The opinion of the court was delivered by: LEVET

Opinion, Findings of Fact and Conclusions of Law

LEVET, District Judge.

 This is a tax foreclosure action in which the United States seeks a judgment against the defendant Leon I. Ross in the sum of $227,310.57 tax and penalties of $70,579.93 for the year 1956; $207,827.95 tax and $68,167.57 penalties for the year 1957; $1,085,416.75 tax and $54,270.84 penalties for the year 1958; and $50,547.47 tax and $2,527.57 penalties for the year 1959 plus interest. Assessments involving alleged liability for foreign personal holding company taxes in the above amounts *fn1" having been timely made against the defendant Leon I. Ross and he having failed to pay the same, this action was commenced seeking to reduce the above assessments to judgment and foreclose the same against any property or rights to property which the taxpayer may have.

 The Issues

 The assessments here involve the status of Ross & Co., Ltd. and Central Trading, Inc. as foreign personal holding companies under Section 552 of the Internal Revenue Code of 1954 and the consequent liability of Leon I. Ross for their undistributed foreign personal holding company income under Section 551(a)(1) of the 1954 Code in the taxable years 1956-1959. The only question in this case is whether Ross & Co. and Central Trading meet the gross income requirements for foreign personal holding companies in the relevant years. *fn2" Int. Rev. Code of 1954, §§ 552(a)(1), 555(b). The parties have stipulated the issues to be determined by this court. For the years 1956, 1957, and 1958, the issue is whether Central Trading was a foreign personal holding company in those years, and that issue turns on two subordinate issues:

 
First, was Central Trading a dealer in the stock of Venezuelan Leaseholds, Inc. (hereinafter sometimes "INC") within the meaning of Section 553(a)(2) of the 1954 Code so that gains realized on the sale or exchange of that stock during 1956-1958 are not foreign personal holding company income?
 
Second, did Central Trading receive Venezuelan Leaseholds, Inc. stock in 1956 and 1958 for work, labor and services rendered so that its value on receipt is ordinary income of the "active" type which is not foreign personal holding company income?

 The defendants' position is that one of the above questions must be answered in the affirmative, while the government contends that neither theory is supportable.

 For the year 1959, the determinative issue is whether Ross & Co. was a foreign personal holding company, and that issue turns on the answer to the question:

 
Did Ross & Co. earn $56,484.38 interest income from Central Trading in 1959?

 If it did, Ross & Co. was a foreign personal holding company in that year.

 After hearing testimony of the parties, examining the exhibits, the pleadings, the briefs and proposed findings of fact and conclusions of law submitted by counsel, this court makes the following Findings of Fact and Conclusions of Law:

 Findings of Fact

 A. The Parties

 1. Defendant Leon I. Ross is an American citizen who resided in the Bahamas during the years 1953 through 1959.

 2. Defendant Ross & Co. is a Bahamian corporation, organized by Mr. Ross for the purpose of acting as a broker and dealer in securities and for the purpose of managing companies. All the stock of Ross & Co. was owned during the years 1956 through 1959 by defendant Ross, who served during that period as its chief executive officer.

 3. Central Trading is a Liberian corporation, organized on March 31, 1956. All of its corporate shares have at all times been owned by Ross & Co.

 B. The Business Relations of Central Trading and Ross & Co.

 4. Central Trading was a client of Ross & Co., and traded securities through Ross & Co. for which it was charged commissions. Central Trading also had a management agreement with Ross & Co. under which it paid management fees to Ross & Co. and was charged interest by Ross & Co. for loans made to it.

 5. Ross & Co. as a resident of the Bahamas was subject to the regulations of the Sterling Exchange Control and could not deal in non-Sterling securities without permission. Central Trading, as a Liberian corporation, however, was a non-resident of the Bahamas and could deal in non-Sterling securities without permission of the Exchange Control.

 6. During the applicable years, Central Trading had no office, no telephone listing, no mail box listing, was not registered with or known to the Exchange Control, was not known to the security-buying public nor, in fact, to anyone except the employees of Ross & Co.

 C. The Venezuelan Oil Deal

 (a) Its inception and the interests of Mr. Ross, Ross & Co., and Central Trading.

 7. In March 1956, Mr. Ross met one Steven Van Gelder who advised Ross that he might be able to arrange certain deals in Venezuela through political connections. Later that month, Ross went to Venezuela and learned that the government was about to solicit bids for oil concessions to be awarded for exploitation.

 8. Van Gelder, Ross, and certain Venezuelans then arranged for the formation of Venezuelan Leaseholds C.A. (hereinafter "CA"), a Venezuelan corporation which was to bid for the oil concessions.

 9. CA was organized on March 5, 1956 with an authorized capital of 15,000 shares at 100 Bs (Bolivares) a share, that is, 1,500,000 Bs (approximately $450,000). CA's Articles of Incorporation recite that the entire 15,000 share capitalization had been subscribed for by seven individuals of which one was Mr. Ross who took 9,000 shares. There is no recital of any shares being given for services rendered.

 10. Venezuelan law requires a minimum of 20% of a corporation's capital to be paid in at the time of formation. To meet this requirement, Ross & Co. through an arrangement with the Banco Provincial of Venezuela provided some $90,090.00 which was placed in the bank and credited to CA's account for a short time after which it was removed by Ross & Co.

 The books and records of CA showed $90,090.00 owing to CA from Ross & Co. in lieu of cash in that amount.

 11. The books and records of Ross & Co. showed Ross & Co. owing $90,090.00 to CA and also showed Central Trading owing $90,090.00 to Ross & Co. for the purchase by Central Trading of all the 15,000 outstanding shares of CA. Thus, it appears that Central Trading, and not the ...


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