## Facts

- Phanor J. Eder and his wife, son, and daughter (U.S. taxpayers) each owned 25% of a Colombian corporation that earned income in Colombian pesos.
- Colombian foreign exchange controls caused some pesos to be “blocked,” limiting conversion into U.S. dollars and remittance to the United States.
- The Commissioner treated blocked pesos as having the same dollar value as freely convertible (“free”) pesos based on the prevailing free exchange rate, increasing taxable income and asserting deficiencies.
- The taxpayers conceded blocked pesos had some value but argued they could not be valued at the free exchange rate due to legal restrictions.
- The Tax Court upheld the Commissioner’s valuation method and deficiencies.

## Issues

1. Whether blocked Colombian pesos may be valued for U.S. income tax purposes at the same exchange rate as freely convertible pesos.
2. Whether income is non-taxable because it cannot be spent in the United States or used to pay U.S. income taxes.

## Decision

- The Second Circuit held the Commissioner and Tax Court erred by valuing blocked pesos at the current exchange rate for free pesos.
- The court rejected the claim that inability to expend funds in the United States or use them to pay U.S. taxes necessarily precludes taxability.
- The court remanded to the Tax Court to determine an appropriate valuation method and allowed the parties to introduce additional evidence.

## Legal Principles

- Foreign currency subject to legal remittance or convertibility restrictions may constitute taxable income if the taxpayer can obtain economic benefit from use or investment abroad.
- Blocked foreign currency must be valued for U.S. tax purposes using a reasonable measure that reflects its restricted utility; the free-market exchange rate for unrestricted currency is not automatically appropriate.
- Legal or contractual barriers to distribution or transfer of income do not, by themselves, defeat taxability when the taxpayer can still realize economic satisfaction from the income.

## Conclusion

The court ruled that blocked pesos can be taxable because they can provide economic benefit in the foreign country, but their dollar value cannot be presumed equal to freely convertible pesos; the case was remanded for development of a valuation method that reflects the restrictions and the evidence.


Eder v. Commissioner of Internal Revenue, 138 F.2d 27 (2d Cir. 1943)