Quijano v. Comm'r of Internal Revenue, 93 F.3d 26 (1st Cir. 1996)

Re: treatment of sale of exchange gain and loss upon sale of foreign real property. (Compare Rev. Rul. 78-281, applicable to business property and Rev. Rul. 90-79, mortgage gain or loss.)

93 F.3d 26, 78 A.F.T.R.2d 96-6190, 96-2 USTC P 50,441

United States Court of Appeals, First Circuit.

Carlos J. QUIJANO and Jean M. Quijano, Appellants, v. UNITED STATES of America, Appellee.

No. 96-1053. Heard May 7, 1996. Decided Aug. 21, 1996.

Taxpayers, husband and wife, sought refund of income taxes relating to sale of their residence located in another country. The United States District Court for the District of Maine, Gene Carter, Chief Judge, 1995 WL 810021, rejected taxpayers' claim, and taxpayers appealed. The Court of Appeals, Cyr, Circuit Judge, held that: (1) mortgage loan transaction denominated in foreign currency could not be considered part of hedging transaction; (2) taxpayers' functional currency, for purpose of determining capital gain on real estate, was United States dollars; and (3) it was within Congress' power to determine allowable deductions from gross income.

Affirmed.

*27 Paula N. Singer, Newton, MA, with whom Robert S. Grodberg and Vacovec, Mayotte & Singer, were on brief, for appellants. Kenneth W. Rosenberg, Attorney, Tax Division, Department of Justice, Arlington, VA, with whom Jay P. McCloskey, United States Attorney, Bangor, ME, Loretta C. Argrett, Assistant Attorney General, Washington, DC, Gary R. Allen and Richard Farber, Attorneys, Tax Division, Department of Justice, Washington, DC, were on brief, for appellee.

Before CYR, Circuit Judge, ALDRICH, Senior Circuit Judge, and GERTNER, [FN*] U.S. District Judge.

FN* Of the District of Massachusetts, sitting by designation.

CYR, Circuit Judge.

Appellants Carlos J. and Jean M. Quijano, husband and wife, appeal from a district court order rejecting their joint claim for a federal income tax refund relating to the 1990 sale of their residence located in the United Kingdom. We affirm the district court judgment.

BACKGROUND

Appellants, United States taxpayers, acquired their residence for 297,500 pounds sterling on September 30, 1986. The entire purchase price was financed through a mortgage loan in pounds sterling. On October 12, 1988, it was increased to 330,000 pounds (exchange rate: $1.73 to 1 pound); on March

27, 1990, to 333,180 pounds (exchange rate $1.62 to 1 pound). Ultimately, their capital improvements to the residence cost 45,647 pounds. No U.S. funds were used either to purchase or improve the residence. On July 27, 1990, it was sold for 453,374 pounds, net of selling expenses, and the mortgage loan was retired.

Appellants' 1990 joint federal income tax return originally reported a $308,811 capital gain, utilizing the exchange rate at date of purchase ($1.49 to 1 pound) to calculate the adjusted cost basis, but using the exchange rate at date of sale ($1.82 to 1 pound) to calculate the sale price. Appellants later amended their 1990 return to claim a $30,610 refund arrived at by utilizing the exchange rate at date of sale ($1.82 to 1 pound) to determine the adjusted cost basis as well as the sale price, thus resulting in a reduced $199,491 capital gain.

After the Internal Revenue Service disallowed their amended refund claim, appellants initiated the present action. The complaint alleged that Revenue Ruling 90-79 misinterprets our decision in Willard Helburn, Inc. v. Commissioner, 214 F.2d 815 (1st Cir.1954), *28 and that the tax imposed violates the Sixteenth Amendment, see Eisner v. Macomber, 252 U.S. 189, 40 S.Ct. 189, 64 L.Ed. 521 (1920). In due course, appellants moved for summary judgment. The government responded that the total cost basis of the residence must be arrived at by utilizing the respective dollar-pound exchange rates in effect when the residence was purchased and each capital-improvement payment was made. The parties stipulated that, thus calculated, appellants had overpaid $2,668, plus related interest and penalties not presently relevant. Ultimately, the district court entered judgment for appellants in the amount of $2,668 plus interest and penalties as provided by law. On appeal, appellants challenge the district court order rejecting their motion for summary judgment in the larger amount of $30,610.

DISCUSSION [FN1]

FN1. In a civil action for refund under 26 U.S.C. § 7422(a), "the taxpayer must bear the burden of proving that the challenged IRS tax assessment was erroneous." Webb v. Internal Revenue Service of the United States, 15 F.3d 203, 205 (1st Cir.1994) (citing Lewis v. Reynolds, 284 U.S.

281, 283, 52 S.Ct. 145, 146, 76 L.Ed. 293, modified on other grounds, 284 U.S. 599, 52 S.Ct. 264, 76 L.Ed. 514 (1932)). We review the challenged summary judgment ruling de novo. McCabe v. Life-

Line Ambulance Serv., Inc., 77 F.3d 540, 544 (1st Cir.1996), petition for cert. filed, 64 U.S.L.W. 3808 (U.S. May 29, 1996) (No. 95-1929).

A. Foreign Exchange Transactions

[1] Link to KeyCite Notes[2] Link to KeyCite Notes We first consider the challenge to the tax refund calculation arrived at by the district court under Revenue Rulings 90-79 and 54- 105. Section 1011 of the Internal Revenue Code provides that the "adjusted basis for determining the gain ... from the sale or other disposition of property, whenever acquired, shall be the basis (determined under section 1012 ... ), adjusted as provided in section 1016." 26 U.S.C. § 1011. Under section 1012, generally the basis of property is its cost. Id. § 1012. For relevant purposes, section 1016(a)(1) states that a proper adjustment shall be made for "expenditures ..., or other items, properly chargeable to capital...." Id. § 1016(a)(1).

Section 985(a) generally requires that all income tax liability determinations are to be made in the "taxpayer's functional currency," id. §

985(a), which is the U.S. dollar for individual United States taxpayers, id. § 985(b)(1)(A). With exceptions not relevant here, section 165(a) permits "a deduction [for] any loss sustained during the taxable year...." Id. § 165(a). Finally and importantly, in relevant part section 165(c) limits the deductions available to individual United States taxpayers to "(1) losses incurred in a trade or business [and] (2) losses incurred in any transaction entered into for profit, though not connected with a trade or business...." Id. § 165(c).

Loss on Mortgage Loan Transaction

The government essentially agrees that appellants sustained a loss in their mortgage loan transaction, since the value of the dollar declined, as against the pound sterling, from the time of the mortgage loan to the date of its repayment. Nonetheless, says the government, appellants may not offset their mortgage-loan-transaction loss against their real-estate-transaction gain, because "the borrowing and repayment of the mortgage loan is a separate transaction from the purchase and sale of the personal residence." Rev. Rul. 90-79, 1990-38 I.R.B. 26 (citing Willard Helburn, 214 F.2d at 818-19; Church's English Shoes, Ltd. v. Commissioner,

24 T.C. 56, 59, 1955 WL 545 (1955), aff'd, 229 F.2d 957 (2d Cir.1956) (per curiam)). Moreover, since the mortgage-loan-transaction loss was not "incurred in an activity or as the result of an event described in section 165(c) of the Code[,] ... [it] may not [be] deduct[ed]...." Id. [3] Link to KeyCite Notes Appellants concede that the mortgage loan transaction was neither carried out by a trade or business nor entered into for profit, but nonetheless urge an integrated transaction approach so as to permit their $100,000 mortgage-loan-transaction loss to be set off against the capital gain realized from the sale of their residence. Appellants point out that though we employed a separate transactions approach in Willard Helburn, 214 F.2d at 818, we recognized that an integrated approach *29 to the transaction might have been elected by the taxpayer. [FN2] Unfortunately for appellants, Congress has since foreclosed an integrated transaction approach to the exclusively foreign-currency financed acquisition involved in the present case.

FN2. Willard Helburn involved the tax treatment accorded a purchase of lambskins in New Zealand for inventory in the United States, where both the purchase and the financing were in pounds sterling. We noted that "[t]he purchases of the skins in New Zealand and the various financial arrangements whereby [the taxpayer] ultimately discharged in dollars its obligations arising out of such purchases might be regarded as a single integrated transaction." 214 F.2d at 818. But we also went on to note that "[t]he purchases of the skins in New Zealand might be viewed separately and distinct from the subsequent financial arrangements...." Id. Since the taxpayer rejected the integrated transaction approach, and the parties stipulated to the tax treatment of the purchase, we treated the financing separately from the purchase. Id. at 819. Finally, since the pound had dropped in relation to the dollar, we concluded that the taxpayer had realized a taxable gain by settling the mortgage loan with less costly pounds than the pounds originally borrowed. Id.

Appellants urge, in effect, that their mortgage loan transaction be considered part of a "hedging transaction" under I.R.C. § 988(d)(1), which might result in its integrated treatment as part and parcel of their real estate transaction. See 26 U.S.C. § 988(d)(1). "To the extent provided in regulations," id., borrowing under a debt instrument in which the taxpayer is obligated to repay the loan in "a nonfunctional currency," id. §

988(c)(1), will qualify for treatment as part of a "section 988 hedging transaction" provided the taxpayer (i) entered into the transaction primarily "to reduce risk of currency fluctuations with respect to property which is held or to be held by the taxpayer," id. § 988(d)(2)(A)(i), and (ii) identified the transaction as a section 988 hedging transaction. Id. § 988(d)(2)(B).

Even assuming their transaction qualified, however, appellants were ineligible for "hedging transaction" treatment because it is conceded that their mortgage-loan-financing transaction was neither conducted by a trade or business nor entered into for profit. See id. 988(e). The Tax Reform Act of 1986 provided that the section 988 rules, and thus "hedging transaction" treatment under section 988, "would be inapplicable to foreign currency gain or loss recognized by a U.S. individual residing outside of the United States upon repayment of a foreign currency denominated mortgage on the individual's principal residence. The principles of current law would continue to apply to such transaction." H.R. Conf. Rep. No. 841, 99th Cong.,

2d Sess. II-669, reprinted in 1986 U.S.C.C.A.N. 4757. By reason of the interpretation adopted by Congress, moreover, "[e]xchange gain or loss is separately accounted for, apart from gain or loss attributable to the underlying transaction" under present law. Id. at 4750. Thus, appellants' claim fails.

Capital Gain on Real Estate Sale

[4] Link to KeyCite Notes The government follows up with the contention that "the cost and selling price of the [residence] should be expressed in American currency at the rate of exchange prevailing as of the date of the purchase and the date of the sale, respectively." Rev. Rul. 54-105, 1954-1 C.B. 12; see Church's English Shoes, 229 F.2d at 958. [FN3] Appellants agree that the 453,374 pounds received for their residence should be translated into U.S. dollars at the $1.82 exchange rate prevailing at the date of sale. They argue, however, that the 343,147 pound adjusted cost basis of the residence, consisting of the 297,500 pound purchase price and the 45,647 pounds paid for capital improvements, likewise should be expressed in U.S. dollar terms as of the date of the sale. Appellants correctly state that, viewed "in the foreign currency in which it was transacted," the purchase generated a 110,227 pound gain as of the date of the sale, which translates to approximately $200,000 at the $1.82 per pound exchange rate. Therefore, they say, the difference between the approximate $300,000 gain under the government's*30 computation, and the $200,000 gain appellants suggest, approximates a $100,000 unrealized foreign exchange gain on the residence that resulted from the increase in the dollar-pound exchange rate between the dates the residence was bought and sold. However fair and reasonable their argument may be, it amounts to an untenable attempt to convert their "functional currency" from the U.S. dollar to the pound sterling.

FN3. In Willard Helburn, the parties and the court, sub silentio, analyzed the purchase and financing of the lambskins as though the U.S. dollar were the taxpayer's functional currency. The parties stipulated that the cost of the lambskins added to the taxpayer's inventory was to be translated at the dollar-pound exchange rate prevailing at the date of their purchase, 214 F.2d at 818, and their stipulation was accepted by the court, id. at 819.

Under I.R.C. § 985(b)(1), use of a functional currency other than the U.S. dollar is restricted to qualified business units ("QBU"s). The functional currency of a QBU that is not required to use the dollar is "the currency of the economic environment in which a significant part of such unit's activities are conducted and which is used by such unit in keeping its books and records." 26 U.S.C. § 985(b)(1)(B). Although appellants correctly assert that their residence was purchased "for a pound-denominated value" while they were "living and working in a pound-denominated economy," under I.R.C. § 989(a) a QBU must be a "separate and clearly identified unit of trade or business of a taxpayer which maintains separate books and records." 26 U.S.C. § 989(a). And since appellants concede that the purchase and sale of their residence was not carried out by a QBU, the district court properly rejected their plea to treat the pound as their functional currency.

B. The Sixteenth Amendment Claim

[5] Link to KeyCite Notes Appellants launch a double-barreled claim that the income taxation at issue in this case was imposed in violation of the Sixteenth Amendment. The Sixteenth Amendment eliminated any requirement that "income taxes" imposed by Congress be apportioned among the states. See Eisner, 252 U.S. at 205, 40 S.Ct. at 192. [FN4] Since Eisner, the Supreme Court has described " 'income' ... in its constitutional sense," as "instances of undeniable accessions to wealth, clearly realized, and over which the taxpayers have complete dominion." Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 432 n. 11, 75 S.Ct. 473, 478 n. 11, 99 L.Ed. 483 (1955) (internal quotation marks omitted), id. at 431, 75 S.Ct. at 477. Their Sixteenth Amendment claim fails as well.

FN4. "The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census of enumeration." U.S. Const. amend. XVI.

The Mortgage-Loan Transaction Loss

[6] Link to KeyCite Notes[7] Link to KeyCite Notes With their initial volley, appellants implicitly challenge the longstanding congressional power to determine allowable deductions from gross income. Federal income tax deductions are matters of legislative grace. Welch v. United States, 750 F.2d 1101, 1106 (1st Cir.1985) (citing New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440, 54 S.Ct. 788, 790, 78 L.Ed. 1348 (1934)). The nonintegrated tax treatment Congress accords the acquisition, sale, and financing of appellants' residence simply renders nondeductible the foreign exchange loss on their foreign-currency denominated mortgage loan. As we have made clear in the past, Congress possesses plenary power to determine allowable deductions from the gross income it has elected to tax. See State Mut. Life Assurance Co. of Worcester v. Commissioner, 246 F.2d 319, 324 (1st Cir.1957) (citing Helvering v. Independent Life Ins. Co., 292 U.S. 371, 381, 54 S.Ct. 758, 760, 78 L.Ed. 1311 (1934)).

The Capital Gain on the Residence

[8] Link to KeyCite Notes Second, appellants argue that it would violate the Sixteenth Amendment to tax, as income, any foreign-exchange "gain" relating to the sale of their residence, since they realized no "accession to wealth" as a result of the exchange rate disparity which developed between the purchase and sale of their residence. Their argument attempts to revive the "functional currency" debate already discussed. See supra pps. 29-30. As the government points out, to purchase property with a foreign currency necessarily places the individual United States taxpayer "in a position to gain or lose from a change in the exchange rate...." Should the foreign currency increase in value (as against the dollar) by the time the property is sold, the *31 resulting gain in U.S. dollars, the functional currency of the individual United States taxpayer, plainly qualifies as realized income, fully taxable under the Constitution.

III

CONCLUSION

Accordingly, the district court judgment is affirmed. The parties shall bear their own costs.

SO ORDERED.

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1995 WL 810021 (D.Me.), 76 A.F.T.R.2d 95-7739

Motions, Pleadings and Filings

United States District Court, D. Maine. Carlos J. QUIJANO and Jean M. Quijano, Plaintiffs v. UNITED STATES OF AMERICA, Defendant No. CIV. 94-381-P-C. Dec. 15, 1995.

ORDER AFFIRMING THE RECOMMENDED DECISION OF THE MAGISTRATE JUDGE

CARTER

*1 The United States Magistrate Judge having filed with the Court on November 15, 1995, with copies to counsel, his Recommended Decision on Cross Motions for Summary Judgment (Docket No. 16); and (Plaintiffs having filed their objection thereto on December 1, 1995 (Docket No. 17), to which objection Defendant filed its response on December 13, 1995 (Docket No. 18); and this Court having reviewed and considered the Magistrate Judge's Recommended Decision, together with the entire record; and this Court having made a de novo determination of all matters adjudicated by the Magistrate Judge's Recommended Decision, and concurring with the recommendations of the United States Magistrate Judge for the reasons set forth in his Recommended Decision, and having determined that no further proceeding is necessary; it is ORDERED as follows:

(1) The objection of the Plaintiffs is hereby DENIED;

(2) The Recommended Decision of the Magistrate Judge is hereby AFFIRMED;

(3) Judgement shall enter in favor of the Plaintiffs in the amount of Two Thousand Six Hundred Sixty-Eight Dollars ($2,668.00) plus interest and penalties as provided by law.

RECOMMENDED DECISION ON CROSS MOTIONS FOR SUMMARY JUDGMENT

The plaintiffs seek to recover an overpayment of their 1990 federal income tax. The parties filed cross motions for summary judgment, [FN1] and have since agreed to have the case decided on the basis of a stipulated record. See Boston Five Cents Sav. Bank v. Secretary of the Dept of Housing & Urban Dev., 768 F.2d 5, 11-12 (1st Cir.1985). For the reasons set forth below, I recommend that judgment be entered in favor of the plaintiffs in the amount of $2,668, plus applicable interest and penalties as provided by law.

I. Facts and Procedural History

The plaintiffs bought a residence in London, England on September 30, 1986 for 297,500 Pounds Sterling ("pounds"). Stipulation of Facts (Docket No. 5) Para 6. They financed the purchase Pounds Sterling ("pounds"). Stipulation of Facts (Docket No. 5) Para 6. They financed the purchase in full in England with a mortgage loan from Mr. Quijano's employer. Id. While they owned the residence, the plaintiffs made capital improvements totaling

45,647 pounds. Id. Para 7. At no time did they use United States funds to purchase or improve the residence. Id. Para 9. They refinanced the loan in 1988 for 300,000 pounds, and again in 1990 for 333,180 pounds. Id. Para 8. On July 27, 1990 the plaintiffs sold the residence for a net price of 453,374 pounds. Id. Para 10.

The plaintiffs filed a federal tax return for 1990 in which they included $308,811 in capital gain from the sale of the residence. Id. Paras 5-6. To calculate their adjusted basis in the residence, the plaintiffs used the exchange rate in effect at the time of purchase, 1.49 U.S. dollars ("dollars") to 1 pound. Id. Para 11. The plaintiffs later filed an amended return, claiming a reduction in capital gain from $308,811 to $199,491. Id. Para 5. To calculate the adjusted basis as reflected on the amended return, the plaintiffs used the exchange rate in effect as the time of sale, 1.82 dollars to 1 pound. Id. Para 11. On January 14, 1994, after reviewing the plaintiffs' amended return, the Commissioner of Internal Revenue refused to remit to the plaintiffs the $30,610 they claim to have overpaid. Id. Para

II. Legal Analysis

*2 A taxpayer's gross income includes gain from dealings in property. 26 U.S.C. § 61(a)(3). Gain from the sale of property equals the excess of the amount realized over the adjusted basis. Id. § 1001(a). The adjusted basis is the cost of the property adjusted for certain expenditures, including capital improvements. Id. §§ 1011(a), 1012, 1016(a)(1).

In 1986, Congress added "Subpart J--Foreign Currency Transactions" to the Internal Revenue Code. Tax Reform Act of 1986, Pub.L. No. 99-514, § 1261(a),

100 Stat.2085, 2585-91. Taxpayers must make all Subtitle A (Income Taxes) determinations, including amount realized and adjusted basis, in their functional currency. 26 U.S.C. §§ 985(a) and 1001(a). "Functional currency" means the dollar, except in the case of a qualified business unit. Id. § 985(b). The plaintiffs concede that they did not operate as a qualified business unit, so their functional currency is the dollar

A. Separate Treatment of the Loan and the Residence

For purposes of determining gain or loss, borrowing and repayment of foreign currency are treated separately from the purchase and sale of property acquired with the borrowed currency. Federal Nat'l Mortgage Assn v. Commissioner, 100 T.C. 541, 582 (1993); see Rev. Rul. 90-79, 1990-38 I.R.B.

This is true even where the borrowing arose only for the sake of the underlying transaction. Federal Nat'l Mortgage Assn, 100 T.C. at 583. Thus, to the extent that the plaintiffs sustained an exchange loss [FN2] on repayment of the loan, they may not offset that loss against the gain realized from sale of their residence. Rev. Rul. 90-79 (citing 26 U.S.C. §

165) (limiting losses that individuals may deduct)).

The plaintiffs argue that Rev. Rul. 90-79 contains a fundamental flaw: if they had sold their house for the same amount in pounds as they paid for it, they would have a taxable profit because of the different exchange rates, even though they had no "real economic gain" from which to pay the tax. Ironically, this example illustrates the fundamental flaw in the plaintiffs' own argument. It is true that there would be no gain in pounds. Congress, however, requires the plaintiffs to calculate gain in the their functional currency: the dollar. 26 U.S.C. § 985(a), (b). In dollars, they would have a "real economic gain" because a given number of pounds was worth more dollars in 1990 than in 1986.

Before Congress enacted Subpart J, the conference committee noted that pre-1986 law treated exchange gain. or loss separately from gain or loss attributable to an underlying transaction. H.R. Conf. Rep. No. 99-841 at

11-662, 1986 U.S.C.C.A.N. at 4750. The committed observed that such separate treatment would continue in the case of "foreign currency gain or loss recognized by a U.S. individual residing outside of the United States upon repayment of a foreign currency denominated mortgage on the individual's principal residence." Id. at II-669, 1986 U.S.C.C.A.N. at 4757. That is precisely the situation in this case. The factual differences between cases cited in Rev. Rul. 90-79 and the present case do not undermine its applicability here. The committee's interpretation of pre-1986 law reinforces the interpretation set forth in Rev. Rul. 90-79.

*3 Section 165(a) provides a deduction for uncompensated losses. Individuals, however, may only use this deduction for losses incurred in a trade or business, losses incurred in a transaction entered into for profit, and casualty or theft losses. I.R.C. § 165(c). Thus, the plaintiffs may not offset the loss realized on repayment of the loan against the gain realized from the sale of their residence. Id.; Rev. Rul. 90-79.

B. Applicable Exchange Rates

Determining gain in their functional currency requires the plaintiffs to report the cost and selling price of their residence "at the rate of exchange prevailing as of the date of the. purchase and the date of the sale, respectively." Rev. Rul. 54-105, 1954-1 C.B. 12; see also Rev. Rul.

78-281, 1978-2 C.B. 204. Similarly, they must report the cost of capital improvements at the exchange rate prevailing on the date of each expenditure. See Rev. Rul. 54-105; see also Rev. Rul. 78-281.

The plaintiffs assert that only the exchange rate prevailing on the date of sale should be used to determine their adjusted basis. Otherwise, they argue, they will be taxed on "phantom gain," the increased value of the pound relative to the dollar. As the plaintiffs concede, however, had they converted dollars into pounds to purchase their residence they would have realized an "actual" gain when they sold it. The Internal Revenue Code treats the transaction as if the plaintiffs had converted dollars into pounds to make the purchase, because they must determine adjusted basis in their functional currency: the dollar. Accordingly, the plaintiffs must determine the cost in dollars of the purchase price and capital improvements based on the prevailing exchange rates at the time of each expenditure. See Rev. Rul. 54-105; see also Rev. Rul. 78-281.

C. Sixteenth Amendment

The plaintiffs claim that they never realized the exchange gain on the residence, so that gain is not taxable income under the Sixteenth Amendment. [FN3] See Eisner v. Macomber, 252 U.S. 189, 207, 211 (1920) (receipt of stock dividend is not income because it is not realization of profits for stockholder's own use). As the value of the pound increased relative to the dollar, the value of the plaintiffs' residence, measured in dollars, also increased. The plaintiffs realized the economic benefit of that currency gain when they sold their residence. The currency gain, therefore, constitutes taxable income within the meaning of the Sixteenth Amendment.

III. Conclusion

Accordingly, I recommend that judgment be entered in favor of the plaintiffs in the amount of $2,668, plus applicable interest and penalties as provided by law.

NOTICE

A party may file objections to those specified portions of a magistrate judge's report or proposed findings or recommended decisions entered pursuant to 28 U.S.C. § 636(b)(1)(B) for which de novo review by the district court is sought, together with a supporting memorandum, within ten (10) days after being served with a copy thereof. A responsive memorandum shall be filed within ten (10) days after the filing of the objection.

*4 Failure to file a timely objection shall constitute a waiver of the right to de novo review by the district court and to appeal the district court's order.

Dated at Portland, Maine this 14th day of November, 1995.

FN1. The defendant filed a partial motion for summary judgment because it agrees that the plaintiffs have overpaid, but disagrees as to the extent of the overpayment. The parties have stipulated that, under the defendant's method of calculation, the plaintiffs are entitled to an overpayment of $2,668, plus applicable interest and penalties as provided by law. Stipulation for Decision on the Written Record (Docket No. 14) at 1 n. 1.

FN2. "Exchange gain" and "exchange loss" refer to gain or loss arising from fluctuations in the value of foreign currency. H.R. Conf.

Rep. No. 99-841, 99th Cong., 2d Sess. II-659, reprinted in 1986 U.S.C.C.A.N. 4075, 4747.

FN3. "The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration." U.S. Const. amend. XVI.