ARPOD J. ARTWOHL, ET AL. v. THE UNITED STATES, 193 Ct. Cl. 382

Nichols, Judge, delivered tbe opinion of the court: Plaintiffs herein claim just compensation under the Fifth Amendment for an alleged taking of their property by the United States. The property allegedly taken is the “excess profits” from the duty-free sale of private automobiles in Brazil by the plaintiffs pursuant to a diplomatic privilege. The commissioner found for the plaintiffs. We reverse. Plaintiffs are members of the U.S. Armed Forces who at the time of the transactions here involved were assigned to the Joint Brazil-United States Military Commission, (JBUSMC) in Bio de Janeiro, Brazil.

Coincident with this assignment was the privilege afforded them as if they were diplomatic personnel, for duty-free importation of automobiles for personal use during the tour of duty. As a result of international Executive agreements, Brazilian law and the embassy regulations permitted the duty-free sale of automobiles so imported in certain enumerated circumstances. The most common occurrence which qualified a car for sale was the passage of two years following the date of importation.

The prevailing market in Brazil was such that a sale would bring a price two or three times that originally paid for the car; obviously a considerable windfall for the seller. The findings show the scope of this business: U.S. personnel sold an average of one of these duty-free cars to a Brazilian buyer every working day, at profits of up to $3,000 per sale. Since the same car, if transported back to the United States would be worth only a fraction of its original cost, the practice was to sell the car on the Brazilian market upon completion of a tour of duty.

Similar conditions prevailed in other Latin American countries. Americans were able to recover these generous profits only by virtue of their diplomatic privilege, and the damage believed done to the American image by this “profiteering” became an object of serious concern to senior State Department officials. This concern took the form of action after an incident involving two Foreign Service officers resulted in very unfavorable local publicity. See Finks v. United States, 184 Ct. Cl. 480, 395 F. 2d 999, cert. denied 393 U.S. 960 (1968).

The action taken was a change in the regulations so that in order to take advantage of a duty-free sale, tbe seller had to agree to accept no more than his original cost plus expenses, with the excess going to a charity of his choice. It is this excess amount which plaintiffs charge was unconstitutionally taken. At the time plaintiffs imported their automobiles into Brazil, Embassy Instruction 103 of May 11,1962 was the controlling directive, both for policy and procedure, in regards to duty-free importation and sale. The

preamble to this directive set the tone for all such transactions and bears repeating here: By Executive Order of the President, the Ambassador is charged with the responsibility of exercising full and complete control over the importation, use and disposition of all items, whether of great or small value, which are brought into the country duty-free by or on behalf of the United States citizen who is in Brazil and enjoys duty-free privileges because of his relationship to the United States Government.

The Ambassador’s control extends to importations by the individual whether or not freight coste are covered by the Government, to the purchases made by and through liquor pools, Commissaries, Post Exchanges, and to items received through military postal facilities, diplomatic pouches and international mail, and to items brought in as accompanied or unaccompanied baggage and on US military aircraft and vessels.

All duty-free importations or purchases accomplished via any means must, without exception, be intended for the personal use of the individual concerned, and under no circumstances may a duty-free importation or purchase be accomplished with the intent on the part of the individual concerned to give, loan, sell or otherwise release such imported items to any person, persons or organization, or to allow the use of his name for such purpose. Sale may be authorized when related to a permanent departure from Brazil for which specific regulations are prescribed elsewhere in this Circular.

Infractions of this basic rule of international usage can jeopardize our entire structure of privileges in the country and will be viewed as a serious breach, of discipline which the Ambassador could not possibly ignore. At the present time there are over 1,200 Americans serving in Brazil representing various civilian and military Agencies of the United States Government. We are the largest single organization in the country which receives duty-free privileges for each American staff member.

It is imperative that each and every individual, as a guest in Brazil, conduct himself in such a manner so as to be free from any breath of suspicion concerning improprieties hi any aspect of his life in Brazil, and particularly with regard to his duty-free privileges. The Brazilian Government is much concerned with this question and scrutinizes each and every duty-free importation so carefully that delays in clearance are inevitable. Our efforts to expedite and streamline the clearances have had limited success because of the Brazilian Government’s serious concern.

The following rules and regulations, which shall be observed by each and every individual entitled to free-entry privüeges, are designed to inform all concerned of the procedures to be followed hi accomplishing duty-free purchases or importations, and to afford the Ambassador the means for the necessary control.

Paragraph Y (2) contained the following language in reference to JBUSMG personnel: Civilian and military personnel attached or assigned to the Joint Brazil-United States Military Commission are eligible for the same duty-free privüeges and are subject to the same rules and regulations stipulated herein, and shall make ah applications for importations, purchases or disposals to the Secretary of the United States Delegation as prescribed by JBUSMC instruction. JBUSMC Regulation 200-3 of 15 May 1963, was then published to implement Embassy Instruction 103.

Paragraph 7c was entitled, Procedure For Selling Duty-Free Automobiles, and read, in part, as follows:

(1) Request for permission to sell an automobile will be submitted to the Senior Officer, Service concerned, through the Secretary, U.S. Delegation, JBUSMC * * *

(2) The Secretary, * * *, will review the request and if it is determined that it meets the criteria for sales, as stated in these Regulations, he will forward it to the Senior Officer, service concerned, recommending approval,

(3) After approval by the Senior Officer, service concerned, the request will be returned to the Secretary, * * * , who will prepare and forward appropriate letters to the Brazilian authorities. Nothing contained in these Regulations will be deemed to prohibit the Senior Officer, service concerned, from disapproving a request even when the automobile meets all sales criteria of these Regulations.

(4) When approval is obtained from the Brazilian authorities, seller will be notified by the Secretary, U.S. Delegation, JBUSMC. «í» *[• Following notification of approval by Brazilian authorities, the seller was then free to find his own buyer. Plaintiffs admit that prior to importing their vehicles, they were advised of the then existing laws and regulations of Brazil and the United States which governed the duty-free sale of such vehicles while in Brazil.

Indeed, the message from the quoted documents is clear that such importation and sale was a privilege to be enjoyed only as it did not detract from the image of the United States mission to Brazil. Local Brazilian law granted the privilege of selling automobiles imported duty-free under certain express conditions. However, the exercise of this privilege was carefully controlled by the Ambassador. No American diplomatic personnel could directly approach the Brazilian officials for authority to sell.

Permission had to be obtained from the proper American officials who, if approval were granted, would then clear the transaction with the Brazilians. That approval was generally granted as a matter of routine could not transform this privilege into a vested right. As evidenced by JBUSMC 200-3, the “Senior Officer, service concerned” could disapprove the request by the individual even though all the requirements of Brazilian law had been met. Even when sale was authorized, the manner of sale was likewise subject to the control of tbe Ambassador.

Embassy Instruction 103 directed that, “personnel shall avoid undignified sales practices such as auctions or ‘fire sale’ type of advertisement and in advertising, the employee shall not identify therein the United States Government or any Agency thereof.” It is noteworthy that while these same policies and regulations were in effect, at least one member of JBUSMC was apparently denied permission to sell an automobile because his acknowledged motives for importing the car were not in keeping with the policy expressed in the

preamble to Embassy Instruction 103, quoted sufra. Paragraph III 2(

c) of this directive provided: Vehicles in the country less than one year may not be sold except to duty-free persons, subject to Embassy and Ministry approval, or must be exported from Brazil.

Exceptions to this rule are in the event of death of the employee/owner or retirement, with permanent departure from Brazil of the employee retiring from Government service. * * * Citing this paragraph and his pending retirement, an Air Force enlisted man forwarded a request for authority to import a new car in November, 1964, and in the same document requested permission to sell it at his retirement in August, 1965. (DF Exhibit 58.) The response from the Embassy official charged with ruling on such a request was (DF Exhibit 59), as follows: We have reviewed carefully your memorandum of August 12 and * * * attached request for the importation and later sale of an automobile.

Embassy Instruction No. 103 dated May 11,1962 states that “All duty-free importations or purchases accomplished via any means must, without exception, be intended for the individual concerned, and under no circumstances may a duty-free importation or purchase be accomplished with the intent on the part of the individual concerned to give, lend, sell or otherwise release such imported items to any person, persons, or organizations * * *” It would appear from * * * application for import of a new automobile that his purpose is as much to have a car to sell upon retirement as it is to have transportation for the balance of his tour here.

Approval of * * * request would therefore be contrary to the letter and intent of Embassy 'Instruction No. 103. [The applicant] appears to be eligible to import an automobile for his own use. Should he wish to import a car for the balance of his tour with the express understanding that he will not be authorized upon his departure to sell it, but must take it out of the country, he should submit a corrected application for our approval.

During cross-examination at the trial, one of the plaintiffs responded to questions regarding this incident with the statement that, “the honest, hardworking soldier who lays down the truth and honesty, he gets clobbered all the time. The big-time operator who is looking for all the angles, he gets away with murder all the time.” The State Department, at the instance of the National Security Council, had since 1958, been devoting considerable study to these matters and their effects on the American image in the countries concerned. On September 1,1964, following the incident described in Finks, supra, William J.

Crockett, Deputy Under Secretary of State for Administration, issued the following memorandum to various State Department officials: In many countries United States Government employees are making enormous profits by selling their automobiles on the local economy. Not only do I find this unethical, but I believe it diminishes the stature of the American mission abroad. We do not pay for the transportation of employee’s automobiles so that they may eventually take advantage of the economic plight of the host country. Profiteering never was intended to be a motive for duty abroad.

Moreover, the situation is exacerbated in certain countries by the fact that employees of certain agencies can import cars while employees of other agencies cannot. One solution would be to determine the countries where abnormal profits are being made and to authorize the Ambassador to forbid all Americcm Government emr ployees from selling their cars at the completion of a tour of duty. Another possibility would be to allow the sale of tbe car at the U.S. book value taking into consideration higher cost of maintenance, etc.

I personally favor the former solution although it admittedly would result in higher transportation costs per employee; the latter solution, while more economical to the Government, appears to be open to chicanery and circumvention. A third possibility would be to require the excess profits to be turned into the Embassy. Some of these funds could be put back into local charities and schools and a portion could be put into an Embassy recreation fund. Any comments?

On February 4, 1965, the State Department published Foreign Affairs Mamoal Circular No. 281 (FAMC 281) with the stated purpose: * * * to prohibit the sale of personal automobiles, and other personal property, of American employees abroad at prices producing profits that result essentially from import privileges derived from their official status * * *.

This directive, applicable worldwide, prohibited the sale by diplomatic personnel, “at an amount in excess of the price he paid for it plus any taxes and customs paid by him, or for any valuable consideration in excess of the total of these amounts.” Each Ambassador was given authority to issue “detailed local regulations and procedures tailored to meet unique local situations.” These regulations, of course, had no effect on the local market, and if the Americans were not allowed to sell at a greater price than cost, evidently the Brazilian buyers would fall heir to the windfall profits.

Such a situation would have been conducive to the “chicanery and circumvention” anticipated by Under Secretary Crockett, supra. An alternative was to require the employee to ship his car back to the United States at the conclusion of his tour of duty. However, in view of the inconvenience to the individual concerned and the fact that the cost of transportation was often greater than the value of the car on the American market, this latter alternative was considered undesirable.

In order to avoid any of the consequences related above, Ambassador Lincoln Gordon, with the approval of the State Department, published Embassy Instruction No. 188 of May 20, 1965. Paragraph V of that directive was entitled, Conditions for Disposition of Vehicles in Brazil under FAMC 281, and read as follows: A. Options The owner of the vehicle imported free of duty has the following options in disposing of the vehicle

(1) Export the vehicle from Brazil, at government expense if eligible; (2) 'Sell the vehicle * * * to another person enjoying duty-free privileges;

(3) Pay Brazilian duties and taxes, thus freeing the vehicle. for sale subject to approval of Brazilian authorities;

(4) Sale to the Foundation. The seller will receive only an amount consonant with the provisions of FAMC 281. In such a case the seller will be given a statement by the Foundation which will indicate the exact amount received;

(5) Sale through the Foundation. The seller will receive only an amount consonant with the provisions of FÁMC 281. He may designate, if he wishes, the charity to which any excess proceeds are to be paid. The seller will be given a statement by the buyer showing the full amount paid for the vehicle and he may be subject to the payment of a capital gains tax. B. Foundation

(1) A charitable Foundation will be established to sell or facilitate the sale of vehicles owned by the U.S. Government employees enjoying duty-free privileges. The Embassy Automobile Board will administer the Foundation, establish the procedure for the sale of vehicles in accordance with the provisions of this instruction, and dispose of the funds received by the Foundation.

(2) Pending the legal establishment of a Foundation, the funds accruing to it from the sales of duty-free vehicles will be placed in escrow in an interest bearing account in a U.'S, bank. This instruction also provided that any seller exercising either option 4 or 5, “must deal directly with the Foundation”, and “must give the Foundation a quitclaim.” Instruction 188 had to be revised and option 3 deleted due to the unwillingness of Brazilian Customs to permit the uncontrolled sale of automobiles after payment of import duties.

It is unnecessary to comment on the further revisions because there were no material changes pertinent to this discussion. All of the plaintiffs herein elected either the sale-to or sale-through option and since there are no significant differences between the two we will no longer make a distinction. Mr. Paul H. Goodman, an American citizen residing in Brazil, was hired as the “Administrative Officer” of the Foundation. Principally, it was his job to negotiate sales under options 4 and '5 with Brazilian buyers. When a sale was negotiated the seller received a “formula price”.

This price was found by our commissioner to be based, “not on the price shown on the sales invoice, but, where the seller paid the U.'S. excise tax, on the manufacturer’s New York domestic list price, plus all accessories, and, where the seller did not pay the excise tax, on the New York FAS list price, plus accessories.

Beimbursement also included all sales or title taxes paid in the United States; such costs as marine insurance, preparation charges, customs fees, port charges, and dock handling; and all inland and overseas transportation costs.” The net effect of the transaction was that the employee, at the very least, had the use of a car in Brazil throughout his tour of duty absolutely without any cost for depreciation or obsolescence, though these, as we all know, are major components of the cost of operating a motor vehicle at home.

Each plaintiff made application to sell his car on Embassy Form No. 1, which contained the following language just above the signature: I hereby choose Option No.-of my own free will. * * *. I hereby renounce any claim against the U.S. Government, the Government of Brazil, the Embassy Automobile Board, or any person concerned with the implementation of the regulations governing the sale of my car, except in the case of fraud or malfeasance.

Upon receipt of his “formula” sale price, each plaintiff executed Embassy Form No. 3, which contained the following: I accept voluntarily the above dollar amount in cash (or check No._) which I understand to be consonant with provisions of FAMC 281 issued by the Secretary of 'State and Embassy Instruction 188, issued by the Deputy Chief of Mission with the approval of the Ambassador, and do hereby release, renounce and quit claim now and forever all and any further claims against the United States Government, the Embassy of the United States of America at Kio de Janeiro and all or any person or organizations connected with this sale.

The commissioner stated that the conditions thus imposed upon duty-free sales, “that plaintiffs property be, without just compensation, appropriated for charitable purposes, was constitutionally improper.” He then held that execution by plaintiffs of the required forms did not operate as a waiver or release because, “it is recognized in situations of this kind that agreements to accept the unconstitutional condition are executed under a form of duress.” The commissioner’s conclusion presupposes that what plaintiffs surrendered was a constitutional right to make a duty-free sale. That simply is not the case here.

As we said in Finks, 184 Ct. Cl. at 488, 395 F. 2d at 1003, “Diplomatic personnel do not have a right to sell their vehicles duty-free even if these conditions are fulfilled. Compliance with these time requirements will make a vehicle eligible for duty-free resale. Authorization for the sale is necessary before a resale qualifies. To obtain authorization, the Embassy must request permission from the Ministry.

Both the Embassy and the Ministry might refuse to act.” •It may be as plaintiffs contend that “defendant certainly was not legally free to act arbitrarily or capriciously in denying privileges to individuals who had met the established eligibility requirements.” However, plaintiffs have not shown any arbitrary or capricious action on the part of the defendant. On the contrary, the record shows clearly that this action was taken only in pursuance of legitimate foreign policy goals and appeared reasonable under the circumstances. It is not for this court to tell the Ambassador how to run his embassy.

It is evident that many of us Americans have the urge to be entrepreneurs and it is well we do. Those who serve us abroad, though able and dedicated, are not per se entirely immune. It is evident that their possession and enjoyment of large quantities of luxury goods, brought to them tax and duty-free because of diplomatic immunities, in countries short of such articles but long on the love of them, makes for hazardous situations and perilous confrontations.

The Ambassador has just as much the duty to enforce discipline in the premises, to keep anyone from making the danger greater, as' if he were in command of a ship in a typhoon. He may make mistakes: few of us would always be right if in his shoes, but in doing what is clearly his duty he is not to be second-guessed or have to suffer this court’s peering over his shoulder.

Thus it is not a proper subject of our inquiry whether, as plaintiffs urge, the measures adopted really did the Brazilians no good, or whether the administrative details of the procedure (e.g., as to tax liability) were properly worked out. “They cannot be characterized as unauthorized merely because they may have been mistaken, imprudent, or wrongful.” See, Eyherabide v. United States, 170 Ct. Cl. 598, 606, 345 F. 2d 565, 570 (1965).

From all the foregoing it is evident that the Ambassador had the right to regulate these sales and even prohibit them altogether if he thought it in the interest of better relations with Brazil to do so. Plaintiffs’ counsel admitted as much in open court. Indeed, plaintiffs must urge and not deny this authority in the Ambassador or else they would not allege a cause of action under the Fifth Amendment. Royal Holland Lloyd v. United States, 73 Ct. Cl. 722, 732 (1932).

The defendant properly refers us to the cited case, which illustrates neatly the principles involved, as well as the willingness of our predecessors to draw fine distinctions. It came before us under a special jurisdictional act construed as authorizing an award under international law as well as under the Fifth. Amendment. The facts were these: during this nation’s participation in World War I, a Dutch merchant vessel put into New York in course of a voyage home from South America. The Collector of Customs prevented her departure for some six months by refusing a clearance.

He did this primarily to maintain her availability for requisitioning for U.S. war needs, but it was lawless, this court held, the duty to clear promptly on request a friendly foreign vessel for a lawful departure being mandatory. Eventually, the ship was formally requisitioned and proper compensation paid. The only issue was compensation for costs and losses to the owners during the previous period of detention.

The possibility of back-dating the requisition is not mentioned and apparently was not urged or considered, so the problem as dealt with would not have been different if the vessel had been allowed to depart at the end of the six months. This court held that the utter lack of authority for the Collector’s withholding clearance precluded liability of the United States under domestic law, but we made the owners an award under international law, wherein the obligation to pay just compensation was not dependent on the taking being lawful.

Plaintiffs’ astute counsel is thus well aware of his dilemma, which is that for them to prevail, the Ambassador’s action must be rightful and wrongful at the same time, and wrongful only in the particular of withholding just compensation lawfully due. Plaintiffs argue that the issue here is not the Ambassador’s right to regulate or even prohibit a duty-free sale, but rather their alleged Fifth Amendment right to keep the entire fund resulting after such sales were properly authorized and consummated.

But of course it is evident that the owner of property taken can agree with the taker on how he is to be compensated. We find that plaintiffs bargained away their compensation in excess of the amount agreed, to in return for the privilege of making the sale at all.

As noted above, the commissioner found that the plaintiffs assented to these conditions only under duress, because “as a practical matter there was no real choice because the cars were worth in the United States only a fraction of what they could obtain in Brazil even under the restricted formula price program.” Thus the Ambassador’s alleged wrong was in making it financially more attractive for plaintiffs to do what he wanted them to than it would have been to do otherwise. This is not a case where plaintiffs’ dilemma is the result of any real wrongdoing by the representatives of the Government.

In Fruhauf Southwest Garment Co. v. United States, 126 Ct. Cl. 51, 62, 111 F. Supp. 945, 951 (1953), we noted, “It has become settled law that the mere stress of business conditions will not constitute duress where the defendant was not responsible for those circumstances.” The question of coercion and duress by the Government has been presented to this court many times. In Fruhauf, 126 Ct. Cl. at 62, 111 F. Supp. at 951, we stated guidelines that have been frequently quoted in subsequent opinions.

We think it appropriate to quote them again: The law of duress has broadened somewhat during recent years making it virtually impossible to arrive at any clear-cut definition, and the courts have stated that its application must of necessity depend upon the circumstances of each individual case. * * *. An examination of the cases, however, makes it clear that three elements are common to all situations where duress has been found to exist.

These are: (1) that one side involuntarily accepted the terms of another; (2) that circumstances permitted no other alternative; and (3) that said circumstances were the result of coercive acts of the opposite party. * * *. In order to substantiate the allegation of economic duress or business compulsion, the plaintiff must go beyond the mere showing of a reluctance to accept and of financial embarrassment. There must be a showing of acts on the part of the defendant which produced these two factors.

The assertion of duress must be proven to have been the result of the defendant’s conduct and not by the plaintiff’s necessities. * * * In Aircraft Assoc. v. United States, 174 Ct.

Cl. 886, 896, 357 F. 2d 373, 378 (1966), although there finding duress, we cited Fruhauf, supra, with approval and noted that, “if the Government’s wrongful actions had not caused or contributed to plaintiff’s financial difficulties, the exaction of a release from plaintiff under a threat to exercise the Government’s contractual right would not vitiate the release on the ground of duress.” The Fruhauf standard is cited with approval more recently in Urban Plumbing & Heating Co. v. United States, 187 Ct. Cl. 15, 408 F. 2d 382 (1969), where duress was found; and Inland Emp. Bldrs., Ino. v. United States, 191 Ct.

Cl. 742, 424 F. 2d 1370 (1970), where plaintiff’s claim of duress was rejected. In Urban Plumbing & Heating Co., Government caused delays of 69 days put plaintiff in mere technical default on a contract for modification of a heating and power plant in Alaska. The Government threatened a termination for default, which if done would have been wrongful. Alternatively it demanded that plaintiff choose between a 69 day extension without more, which was meaningless because winter conditions then prevented any work, or a 245 day extension with a stipulation that there would be no change in the contract price.

We found that this waiver of a price increase was obtained under circumstances constituting coercion and duress. In Inland Emf. Bldrs., Ino., plaintiffs had valid claims for additional compensation on a contract, but feared that any delays caused by presentation of such would subject them to substantial interest charges. Consequently, they executed unconditional releases when called upon to do so. They were held bound by the releases on a subsequent presentation of the claims. Accord, Adler Const. Co. v. United States, 191 Ct. Cl. 607, 423 F. 2d 1362 (1970).

The Ambassador, in Embassy instruction 103, had made his authority m this matter quite plain. Plaintiffs never had any reason to believe that the policy expressed in that directive would not be enforced. With full knowledge that the Ambassador could require them to return their vehicles to the United States, plaintiffs brought them to Brazil, hopeful of a tidy profit. For reasons of policy it became necessary to eliminate or mitigate the image of profiteering.

Eather than enforce his right to require exportation, the Ambassador offered to allow plaintiffs to sell their cars in Brazil at a reduced profit, in return for their release of claims. His stance was not wrongful. Plaintiffs accepted this offer and now they are bound by it. The compensation they agreed to take was not all they now say they want, but was far above confiscation and was no mere derisory figure. As to what plaintiffs’ status might be had they chosen to export their cars and then bring this suit, we offer no comment.

In holding that plaintiffs’ claim for just compensation has been settled and is not properly in litigation, we do not wish to be understood as holding that takings occurred. We pre-termit that issue. Quaere, too, whether the taking if there was one was “for public use” in the Fifth Amendment terminology. Bee Finding 50. We hold that plaintiffs entered into an accord and satisfaction with the defendant, whereby all claims valid or invalid, for extra compensation, resulting from the duty-free sales of their automobiles at the “formula price”, were effectively released.

It follows that in this suit plaintiffs are not entitled to recover and the petition is dismissed. BINDINGS OK PACT The court having considered the evidence, the report of Trial Commissioner Saul E. Gamer, and the briefs and arguments of counsel, makes findings of fact as follows: 1. All fifteen plaintiffs are citizens of the United States.

During the events which gave rise to this suit, they were serving in one of the components of the United States Armed Services and were stationed in Eio de Janeiro, Brazil, as members of the United States Delegation to the Joint Brazil-United States Military Commission (hereinafter referred to as the “Commission” or as “JBUSMC”). JBUSMC was originally established by the two governments in Eio de Janeiro during World War II as a means of achieving their common goal of mutual security and was continued indefinitely by an Executive agreement signed in 1955.

By the terms of such agreement, JBUSMC was to function as the principal agency in Brazil for facilitating military cooperation between the two countries. 2. (

a) As a result of reciprocal, bilateral Executive agreements between Brazil and the United States, Commission members, as well as other Government personnel (herein sometimes referred to as “diplomatic personnel”), were, because of their relationship with the United States Government, accorded the diplomatic privilege of importing their automobiles into Brazil free of Brazilian customs duties. (

b) These agreements provided that an automobile was permitted into Brazil duty free only for the purpose of personal use of diplomatic personnel while stationed in that country.

The Executive agreement, entitled “Reciprocal Customs Privileges For Foreign Service Personnel,” in stating this policy, reads in part: * * * the United States of America is disposed to conclude an agreement by means of an exchange of notes, based on the principle of strict reciprocity, which would permit career and other personnel of the United States of America attached to the Embassy and accredited consular offices in Brazil, who are nationals of the former country, and Brazilian career and other personnel attached to the Embassy and accredited consular offices in the United States of America, who are Brazilian nationals, to import, free from the payment of duties, in the countries m which they reside, any and all articles for their personal use, if they are not engaged in another occupation for the purpose of gain * * *. 3.

Under an Executive order applicable to all Ambassadors, the United States Ambassador to Brazil was charged with the complete responsibility of controlling the importation, use, and disposition of all items brought into Brazil duty free by United States citizens because of their relationship with the United States Government. The Ambassador’s control extended to such importations by diplomatic personnel whether or not freight costs were defrayed by the Government. 4. In order to obtain a duty-free automobile import permit, each plaintiff had to submit a written request for Commission approval.

If such approval was granted, the Commission would obtain the necessary clearance from the appropriate Brazilian Consular Office. Such Office would then notify the Brazilian Ministry of Foreign Affairs, which would subsequently authorize the appropriate Brazilian Consulate in the United States to issue the permit. 5. (

a) The bilateral Executive agreements providing for duty-free importation of automobiles did not, however, govern the matter of duty-free resales in Brazil. Such duty-free resales were, instead, provided for by the Brazilian domestic laws, which, at the time plaintiffs imported their automobiles, permitted such sales under the following conditions:

(1) After the vehicle had been in Brazil for two years;

(2) After the vehicle had been in Brazil for one year if the owner was transferred from Brazil;

(3) If the owner retired and returned permanently to his own country;

(4) If the owner died;

(5) If the vehicle was seriously damaged. (

b) These conditions were incorporated in a comprehensive set of regulations contained in Embassy Circular Instruction No. 103, issued May 11,1962, as the basis of criteria determining eligibility for a duty-free automobile sale by diplomatic personnel.

The Embassy Instruction, entitled “Importation, Use and Disposition of Duty-Free Items,” set forth the rules and policies relating to the Ambassador’s “full and complete control over the importation, use and disposition of all items, whether of great or small value, which are brought into the country duty-free by or on behalf of the United States citizen who is in Brazil and enjoys duty-free privileges because of his relationship to the United States Government.” It contained a list of “Critical Items” and provided that “an item so classified is subject to control * * *.” It explained that an item was considered to be of a critical nature “usually because of local unavailability or resale value disproportionate to the duty-free price” and therefore was “subject to restrictions by Brazilian law.” Included in the list were “Vehicles.” No duty-free item on the critical list could be sold without the approval of the Embassy.

The Embassy Instruction further provided that personnel attached to JBUSMC “are eligible for the same duty-free privileges, and are subject to the same rules and regulations” as those applicable to other Government personnel in Brazil “and shall make all applications for importations, purchases or disposals to the Secretary of the United States Delegation as prescribed by JBUSMC instruction.” The conditions also formed the basis for vehicle eligibility for a duty-free sale in JBUSMC Kegulation No. 200-8, issued May 15,1963, and in effect at the time plaintiffs imported their automobiles into Brazil. 6. (

a) Under the prescribed procedure for effecting a duty-free sale, persons not associated with the Commission were required to complete a form, on the basis of which an Embassy official would request authorization from the Brazilian Ministry of Foreign Affairs. If the Ministry approved the sale, the Embassy would then, provided it too approved the sale, obtain the required clearance from the Brazilian Customs Authorities. (

b) The aforesaid Commission Regulation No. 200-3 provided the procedure for persons associated with the Commission which was in effect at the time plaintiffs imported their automobiles. First, a written request on a standard form was submitted to the Secretary of the United States Delegation to the Commission. If the Secretary determined that the request met the criteria for sale, he forwarded it to the Senior Officer of the particular branch of the Service to which the applicant was attached, recommending approval.

If approved by the Senior Officer, the request was returned to the Secretary, who then notified the proper Brazilian Authorities. Notification entailed transmitting the request to the President of the Commission, who was always a Brazilian. If he approved the request, the Commission would seek authorization for the sale from the Brazilian Customs. Once approval was obtained from the appropriate Brazilian Customs officials, the owner of the automobile would find a buyer and sell it directly to him. (

c) Regulation No. 200-3 further provided that: * * * Nothing contained in these Regulations will be deemed to prohibit the Senior Officer, Service concerned, ■from disapproving a request even when the automobile meets all sales criteria of these Regulations. 7. At the time plaintiffs imported their automobiles, if a duty-free sale was approved and transacted under the described procedure, the seller was permitted to sell the automobile at the prevailing local market price and retain the full proceeds of the sale.

Embassy Instruction No. 103 did provide, however, that [i]n accomplishing such sales * * * personnel shall avoid undignified sales practices such as auctions or “fire sale” type of advertisement and, in advertising, the employee shall not identify therein the United States Government or any Agency thereof. 8. (

a) Each of the plaintiffs owned the automobile giving rise to bis claim herein, and each plaintiff imported his automobile into Brazil free of customs duties in accordance with all existing laws and regulations. (

b) Each plaintiff had been advised beforehand of the then existing laws and regulations of both the United States and Brazil governing a duty-free sale of such vehicles in Brazil. 9. (

a) The sale, at prices substantially above original cost, of personal automobiles by American employees stationed 'in certain overseas posts has been considered a significant problem by the United States Government for a number of years. (

b) In April 1958, the Operations Coordinating Board (hereinafter referred to as the “OCB”), an interagency group established in the Executive Office of the President and placed under the jurisdiction of the National Security Council, submitted a report entitled “United States Employees Overseas” to the National Security Council. The report was prepared in response to a National Security Council 1957 instruction that the OCB review (

a) existing agency practices “having a bearing on foreign attitudes toward U.S. citizens stationed abroad in certain countries selected as potential trouble spots,” and (b) “specific actions designed to improve these foreign attitudes.” The report, in a separate

section entitled “General World-Wide Administrative Practices And Policies To Improve Foreign Attitudes Toward U.S. Personnel Overseas,” presented the results of a detailed examination of the practices of the agencies having the preponderance of United States employees abroad, i.e., the Defense and State Departments, the United States Information Agency, and the International Cooperation Administration. Practices concerning “six main areas” were discussed, one of which was set forth as follows: UU.S. Vehicles. The impact on host countries of large numbers of American-built and operated vehicles has been of such magnitude as to warrant discussion in a separate section.” In the

section dealing with such automobiles, the report examined various factors creating “irritation and friction” with the citizens of the host countries. The report stated in part as follows: Finally, in certain parts of the world the sale of American automobiles prior to the departure of the employee from the area has resulted in excessive profits. In this latter area, the three agencies are studying a possible policy statement defining a “fair price” for American vehicles and restricting the sales of such vehicles in foreign countries to such price. (

c) In a

section of the report captioned “Disposal of Personal Property,” it was recommended that an interagency ad hoc committee be created to establish guidelines which could be used by the Chiefs of Mission in foreign countries in the development of uniform regulations for the disposal abroad of United States employees’ personal property. In commenting on this recommendation, the report stated: This recommendation applies, to a most difficult and complex area of personal activity which has not been systematically, reviewed by all agencies concerned. In developing guides the ad hoc committee should consider, among other things, means to ensure that sales or disposal of personal property be made (

a) in accordance with the laws and regulations of the host country, (

b) in a manner which will not bring discredit on the United States or reflect unfavorably on the individual concerned or the organization to which he is attached, and (

c) under regulations which, to the extent permitted by local law, will apply uniformly to all U.S. personnel in each country. The guides, will be sent to the Chief of each U.S. diplomatic mission for his use in developing jointly with representatives of other agencies having personnel in the country the uniform regulations appropriate for that country. 10.

By memorandum of May 21,1958, the Department of State forwarded the OCB report to all Embassies for their “information, guidance and appropriate action.” The memorandum stated tbat The President has stressed Ms view of the importance of strengthening good personal relations between foreign nationals and Americans who live and work abroad. The President also underscored his desire that the chief of mission in each country assume special responsibility in carrying out the recommendations of the report in the field.

In a message dated October 81,1958, the Department of State forwarded to all American Diplomatic Posts another OCB document, dated October 1,1958, entitled “Guides for Use in Developing Uniform Regulations for a Particular Foreign Country Relative to the Importation and Disposal of Personal Property, the Acquisition and Conversion of Local Currency and the Importation, Operation and Disposal of Motor Vehicles.” The portion of the document containing the “Guides Pertaining to Personal Property” provided, among other things, that appropriate advance approval should be obtained for importation of items of high resale value, as well as for the sale of personal property to other than Government personnel.

The portion containing the “Guides Pertaining to Motor Vehicles” provided, among other things, that Sale of imported automobiles shall be limited to one per employee at a post except in circumstances which can be justified to and approved by the designated control authority. No other specific form of controls was suggested, the document simply stating that Each Ambassador is responsible for the development of regulations and procedures embodying these guides which will apply to all U.S. personnel and their dependents assigned or attached to diplomatic and consular offices in the country to which he is accredited.

The memorandum transmitting the “Guides” document reiterated that each Ambassador was responsible for the development of regulations and procedures embodying the guidelines. The “Guides” liad been formulated by an ad lioc committee composed of representatives of the Departments of State, Treasury, and Defense, and the Agency for International Development. They were approved by the OCB on September 24,1958. 11. (

a) In July 1959, another OCB report, entitled “United States Personnel Overseas,” was issued. This report reviewed the status (as of March 31, 1959) of agency and field actions on the recommendations contained in the April 1958 OCB report. It noted that response to the guidelines from the Embassies, in the form of adopting appropriate regulations, had been slow and that only 30 percent of the Embassies had “developed regulations completely responsive to the OCB Directive, with regard both to achievement of policy objectives and to comprehensive procedure.” (

b) In a letter forwarding the July 1959 OCB report to all Diplomatic 'and Consular Posts, the Acting Secretary of State, on August 28,1959, advised as follows: The Department emphasizes the importance it attaches to this Beport. The problem of enhancing the American presence abroad is one of gravest concern throughout the Government and the United States. Careful study of the [Report and unceasing efforts to carry out its recommendations can contribute immeasurably to the furthering of United States national policy objectives.

The report was accompanied by a Presidential letter dated July 29, 1959, which stated: “The head of each department and agency, chiefs of mission, commanders of unified commands and other senior representatives overseas are asked to give this matter their continuing personal attention and leadership.” 12.

The April 3,1961 Department of State Foreign Affairs Manual contained provisions which emphasized the requirement that Diplomatic Missions, in furtherance of their obligations to develop appropriate regulations regarding economic and financial conduct of American employees, should pay particular attention to the need for regulations concerning, inter alia, the “importation, operation and disposal of motor vehicles.”

Section 626.2-2 of the Manual gave certain suggestions as to how to control the importation and sale of personal property. One suggestion was to require “all employees to report all proposed sales of personal property and to obtain prior approval. If the proposed sale or method of sale is not justified, permission to sell is denied.” The establishment of committees to evaluate requests for free entry and for sales was suggested, as well as the development and publication of standards “based on ethics, the local laws, regulations of the Department, et'c.” for the approval of such requests.

Pursuant to the foregoing directives, the various Embassies promulgated regulations concerning the disposition of personal property, including automobiles. For example, the Embassy at Mexico City, which was cited in the 1959 OCB report as an example of outstanding compliance with its guidelines, issued on March 28,1962, its Circular No. 211 setting forth certain regulations concerning the importation and sale of personally owned automobiles, including the requirement of permission by the Embassy for the sale in Mexico of vehicles. The

preamble to such regulation, which imposed restrictions on the frequency with which employees couild sell their automobiles, stated in pertinent part as follows: The United States Government expects its employees abroad to maintain standards of behavior which will not bring discredit to the United States nor draw criticism from the local community in which they are regarded as representatives of the United States. The sale abroad of automobiles by U.S.

Government personnel has so often led to widespread criticism that it has been necessary for policies to be established at the highest level of Government to prevent abuses in this field. The Circular established an Embassy Car Board of Embassy officials to pass upon difficult cases. In a subsequent regulation dealing with personal property in general, the Embassy provided, on April 3, 1963, that such property could be sold under certain conditions, but that such sales “shall be made at a fair price, without profiteering or the appearance of profiteering.” 13. (

a) In 1964 the State Department became specially concerned with what it considered to be the problem of excessive profits resulting from sales of private vehicles by Government employees which existed in certain areas of Latin America. The problem in Brazil received special attention. On August 4, 1964, the American Consulate in Recife, Brazil, sent a telegram to the State Department reporting that the local press featured an

article concerning an altercation between two employees of the Agency for International Development and a Brazilian national over an alleged breach of a contract for the duty-free sale of their automobiles to the Brazilian. The automobiles involved were imported under the same regulations in effect at the time of the importation of plaintiffs’ automobiles. The State Department was concerned about the case principally because of the damage to the United States image in Brazil. (

b) On August 17, 1964, Covey T. Oliver, Ambassador to Colombia, wrote to William J. Crockett, Deputy Under Secretary for Administration of the State Department, to express his disapproval of excessive profit-taking in Colombia.

He stated that££ [a] utomobile resale profits in Colombia are enormous.” He felt that “uniform basic rules and an appropriate delegation of subordinate rule-making and decision-making authority” were necessary; that “[importations of automobiles and other items commanding high internal prices * * * are not to be thought of as normal, free enterprise business operations but as Government-related operations”; that “[a]bnormal profits (by ordinary U.S. standards) should, therefore, not go to the seller.

Rather, they should be used for purposes of official interest to the United States,” such as “the well-being and happiness of Mission clerical personnel [who had no automobile import privilege in Colombia].” (

c) At or about the time Mr. Crockett received Ambassador Oliver’s letter, he had conversations concerning the same matter with other Ambassadors, including Ralph A. Dun-gan, Ambassador to Chile, and Lincoln Gordon, Ambassador to Brazil. Botb Ambassador Dungan and Ambassador Gordon agreed that charges of profiteering through sales of automobiles imported under diplomatic privileges were resulting in an unfavorable reflection upon the United States image abroad. 14. (

a) As a result of these developments, Mr. Crockett, on September 1, 1964, issued the following memorandum to the executive directors of the five bureaus responsible for administrative problems in all State Department missions throughout the world: In many countries United States Government employees are making enormous 'profits 'by selling their automobiles on the local economy. Not only do I find this unethical, but I believe it diminishes the stature of the American mission abroad.

We do not pay for the transportation of employees’ automobiles so that they may eventually take advantage of the economic plight of the host country. Profiteering never was intended to be a motive for duty abroad. Moreover, the situation is exacerbated in certain countries by the fact that employees of certain agencies can import cars while employees of other agencies cannot. One solution would be to determine the countries where abnormal profits are being made and to authorize the Ambassador to forbid all American Government employees from selling their cars at the completion of a tour of duty.

Another possibility would be to allow ■the sale of the car at the U.S. book value taking into consideration higher cost of maintenance, etc. I personally favor the former solution although it admittedly would result in higher transportation costs per employee; the latter solution, while more economical to the Government, appears to be open to chicanery and circumvention. A third possibility would be to require the excess profits to be turned into the Embassy. Some of these funds would be put back into local charities and schools and a portion could be put into an Embassy recreation fund. Any comments ?

The memorandum was also addressed to the Assistant Secretary of State for Administration, the Assistant Director of the United States Information Agency (USIA), and the Assistant Administrator of the Agency for International Development (AID), among others. In addition, Mr. Crockett directed the Office of the Assistant Secretary of State for Administration to develop, in coordination with AID, USIA, and the Department of Defense, an appropriate regulation with respect to the problem. (

b) By memorandum of September 11, 1961, USIA responded that it agreed “U.S.

Government employees should not be permitted to sell automobiles on the local economy at enormous profits to themselves,” but that a “world-wide procedure would seem to be difficult to prescribe, in view of the considerable variation which exists from country to country on such matters as the impact on local economies, the American image, or local requirements governing import and sale.” USIA also questioned the advisability of a “world-wide policy of mandatory export,” which would not only be a burden on Departmental appropriations but also would raise questions concerning “the use of taxpayers’ dollars to ship a car worth only a fraction of the shipping costs,” and further stated that “* * * a general policy of limiting sales to blue book values or requiring charitable donations in excess profits would be subject to a number of

interpretations. ” 15. The problem also became a matter of congressional interest at the same time. In December 1964, the Subcommittee on Foreign Operations and Government Information of the House Committee on Government Operations requested the State Department to furnish a list of problem countries where its employees could sell their automobiles for amounts in excess of the prices originally paid, together with a description of the limitations imposed by the host country on the entry of personally owned automobiles of State Department employees. 16.

In part to supply the House Subcommittee with the desired information, the State Department initiated a survey to determine the countries where its employees could sell their personally owned automobiles for amounts in excess of the prices they had paid. The results indicated that there were several countries in which such excess was substantial. One of the chief problem areas was South America.

The following figures represent the highest profit (defined as the amount received in excess of the original purchase price) realized on the last group of sales prior to the reporting date in December 1964: Brazil, $3,756; Chile, $8,194; Argentina, $7,000; United Arab Republic, $4,058; Uruguay, $4,767; Cambodia, $4,168; Korea, $7,161; Colombia, $7,600. The survey indicated that in Brazil an American-made car two years old could generally be sold for at least twice its original purchase price. 17.

On January 1, 1965, the American Embassy at Rio de Janeiro issued Embassy Instruction No. 181, entitled “Transportation, Use and Sale of Personally-Owned Motor Vehicles.” Its stated purpose was the establishment of policies to prevent abuses in the sale abroad of automobiles by Government personnel leading to criticism and the bringing of discredit to the United States. Among other things, the instruction forbade (

a) the importation of an automobile exceeding the manufacturer’s list price of $3,000 (not including excise taxes or optional accessories); (

b) the “receipt of funds, advances, deposits or anything of value from local sources for the purchase of vehicles * * * if this involves ownership, use or control in any degree by the one furnishing the funds or if it involves in any maimer a promise or obligation, express or implied, to grant, give, sell, convey or release the vehicle at any time to the one supplying the funds * * and (

c) the receipt of anything of value from local sources, or any consideration, for any vehicle “other than a fair market price.” The instruction set forth the procedure for obtaining permission to import vehicles, as well as rules for their use in Brazil (the obtaining of driving permits and insurance, and the observation of local traffic regulations). As to the “Sale of Automobiles in Brazil,” the Instruction provided: A. The sale of an automobile imported free of duty is a privilege and not a right. B.

No vehicle may be sold except with the express approval of (1) the Embassy (or JBUSMC when applicable) and (2) the Brazilian Government (Ministry of Foreign Affairs or Brazilian Military Authorities in case of JBUSMC Personnel). The Instruction further set forth (

a) the Brazilian Government Regulations for the sale of duty-free automobiles (including the two-year rule); (

b) the Embassy Regulations (including the requirement that no negotiations for the sale of a vehicle could take place until the application was approved by the Embassy and transmitted to the Brazilian Authorities for their approval); and (

c) the procedure to be followed (both by regular United States employees and JBUSMC personnel) in applying for the sale of duty-free vehicles. Finally, the instruction created a six-member Embassy Automobile Board, consisting of the following officials: The Counselor for Administration, Chairman The Counselor for Economic Affairs The Counselor for Public Affairs The Executive Officer of AID The Air Attache The Secretary of the U.S. Delegation, JBUSMC The duties of the Board included (

a) the approval of import applications where an individual had already had two duty-free vehicle importations and sales; (

b) the approval, in cases of retirement, of all applications to sell a duty-free vehicle; (

c) deciding appeals by employees; and (

d) granting exemptions from the requirement that vehicle sales in Brazil must be completed prior to the owner’s final departure. 18. Upon the completion of the above-mentioned survey, the Office of Management under the Assistant Secretary of State for Administration drafted a worldwide regulation relating to the automobile problem. Drafts of the regulation were circulated to AID, USIA, and the Department of Defense in accordance with Mr. Crockett’s instructions. All of these agencies approved the proposed regulation, and on J anuary 25, 1965, it was submitted to Mr. Crockett for his approval.

The regulation, entitled “Importation and Sale of Personal Automobiles and Other Personal Property Abroad,” was thereafter issued on February 4, 1965, to become effective on March 1,1965, as Foreign Affairs Manual Circular No. 281 (hereinafter referred to as “FAMC 281”). 19.

FAMC 281 contained the following pertinent provisions: Paragraph 1 stated the purpose of the new regulation, as follows: The purpose of this circular is to prohibit the sale of personal automobiles, and other personal property, of American employees abroad at prices producing profits that result essentially from import privileges derived from their official status as employees of the United States Government. Its provisions apply to all American employees, regardless of agency, attached to United States embassies and constituent posts.

Paragraph 2 gave the following background for the Circular: The sale of personal property, particularly automobiles, abroad by American employees has, in certain instances, come under strong criticism because of profits the sellers have realized on the transactions. Profit-taking on sales of this kind diminishes the stature of the American mission? damages the United States image abroad, and results m undue personal advantages under circumstances created in substantial part by reason of official Government service to which special customs and import privileges are attached.

Paragraph 3, headed “Policy,” provided that the importation and sale of automobiles must be “in accordance with the laws, regulations and conventions of the host country”; that such automobiles should be “unostentatious in appearance and modestly equipped;” and that automobiles were to be imported only for “bona fide personal use” and “not with intent of sale or transfer.” With, respect to the sale price, Paragraph 3(

d) stated: The employee will not be permitted to sell his personal property, including motor vehicles, at an amount in excess of the price he paid for it plus any taxes and customs paid by him, or for any valuable consideration in excess of the total of these amounts. However, an employee need not sell his personal property, including motor vehicles; he may export it, at his own or United States Government expense, under pertinent travel or shipping regulations. He must export it if required to do so by local law, local government regulation, or rules established by the ambassador.

Paragraph 4 provided that the Ambassador was charged with full responsibility for controlling the importation and sale of personal property, and that he was required to “issue and ensure compliance with local regulations consistent with” the policy set forth in the Circular.

Paragraph 5 provided that since conditions varied widely from country to country, the local regulations issued by the individual Ambassadors would be “tailored to meet unique local situations,” and that certain alternatives were available to the Ambassadors, such as limiting or prohibiting the importation of certain kinds of property, including motor vehicles, limiting the classes of persons to whom sales could be made, or requiring the exportation of the property. 20.

On February 25,1965, the Embassy in Eio de Janeiro issued Embassy Instruction No. 183, headed “Importation and Sale of Personal Automobile,” which was applicable to all civilian and military personnel who were United States citizens and employees of the United States Government in Brazil. The Instruction attached FAMC 281 and made the regulations effective as of March 1, 1965. The Instruction continued, as follows: The Embassy Automobile Board has approved the following: 1. Cars which became eligible for sale under the two-year rule on or before February 28, 1965 will not be affected. 2.

Cars approved and cleared by Brazilian authorities for sale on or before February 28, 1965 under the one-year rule because of the owner’s transfer from Brazil will not be affected. AH other persons whose cars do not qualify for sale as of February 28,1965 will have the choice of taking their cars with them on their departure from Brazil or of selling them under the new arrangements being developed by the Automobile Board and which will be announced later. 21. The Ambassador to Brazil, Lincoln Gordon, immediately requested the Embassy Automobile Board to prepare new regulations to implement FAMC 281.

However, certain problems arose in connection therewith, and Ambassador Gordon sent a cablegram to the State Department, dated March 19,1965, in which he made certain comments upon and suggestions relating to FAMC 281. For one thing, he felt that it was not advisable to permit, as the Circular did, direct negotiation and sale between seHer and buyer if the seller elected to dispose of his automobile in Brazil.

The cablegram stated that the problem was not a small one in Brazil since Government personnel there disposed of approximately 250 vehicles a year, or about one per working day; that the Embassy’s previous regulations were directed to certain abuses, such as importing cars as de facto agents for dealers and to obtain compliance with the relevant Brazilian requirements; that “we have had surprisingly good results including general absence scandals and press criticisms * * * despite few extremely annoying cases such as Finks-Willette”; that he was trying to fulfill the Circular’s 'basic purpose of eliminating “bad reflections on U.S. image abroad” resulting from charges of “profiteering through sales of cars imported under diplomatic privileges,” but that, while su'ch “purpose is laudable,” the new proposed regulations “must fit facts of life in local market situation”; that in Brazil, a two- or three-year-old car had a market value of between $500 and $3,000 above cost price “and even further above resale value in U.S.,” but that such prices were not out of line with those of new locally manufactured cars; and that, unless the employees’ cars are “aH compelled to be returned home (which would be unjust to employees and anti-economic), this extra margin will accrue to someone”; and that lie saw no prospect of [fclie Brazilian Government] revising own regulations or taking on major headaches of potential quarrel with rest of diplomatic corps and/or auto dealers’ fraternity in order constitute a workable system for their capturing the margin. * * * Some language of [FAMC 281] seems to come down to saying that we tell employees not to sell for more than cost price and then simply leave it between sellers and buyers how this is to be worked out.

This would, in my considered judgment, make FAMC 281 completely unenforceable, would open door to every form of extra payment in cash or kind, would in some cases give a wholly unjustified windfall to certain lucky dealers and in other cases lead to true or false charges of corruption and abuse, and would do irreparable damage to U.S. image here as well as to employee morale. Finks/Willette case is good illustration of this. * * * I personally cannot and will not accept responsibility for issuing regulations in that sense.

Workable regulations must be uniform in application to employees and leakproof, or whole purpose new policy will be frustrated. Finally, Ambassador Gordon made the following suggestion: Only viable solution consistent with letter and spirit of FAMC 281 is to prevent direct dealings between employees and dealers, although not interjecting embassy or agency thereof as formal intermediary who buys and resells. Clearly employee must file quitclaim on excess profits relinquished by him, to avoid subsequent legal complications.

Eecipient these funds should not be embassy or USG, but must be some nonprofit institution formed under aegis embassy or USG, and presumably legally resident in U.S., to whom the donation of these funds by the employees would be tax deductible. Begula-tions camiot permit variations in treatment pother than option of returning car home) [without] inviting abuses suggested in Paragraph 3 above.

Summary our new regulations in final stages preparation provides for: (

A) Selection of reputable broker; (

B) Appointment of committee consisting American employees major U.S. Government agencies supervise broker’s activities; (

C) Sellers given choice export or sell through broker; (

D) Establishment nonprofit or charity fund or foundation to be administered by board appointed by ambassador; (

E) Owner desiring sell rather than export would give legal power of attorney authorizing broker sell car and release profits on sales to special fund or foundation; (

F) Seller would give quitclaim on receipt of money for his car and on releasing funds to foundation; (

G) Seller would indicate how profits to be used, indicating by memo his preferred charities, cultural activities and/or scholarships, etc. The Ambassador asked the Department to reconsider FAMC 281 and requested its reaction to the new regulations he was drafting. 22. In response to Ambassador Gordon’s message, the Department cabled the following reply on April 2,1965: Department has no objection embassy plan which we understand to be as follows: 1. Establishment of charitable foundation offi-cered by embassy personnel serving in private capacities. 2.

Selection reputable and cooperative broker for sale of cars. 8. Seller will have choice of export or sale through broker with understanding employee would receive return allowed under FAMC 281, para. 3d, with excess proceeds paid by broker to f oundation. Power of attorney and quit claim would protect USG. 4. Seller would designate use of excess proceeds. Department concerned this may create tax problem. 5. Foundation would administer disposition of excess proceeds.

Assume local IBS_ will be consulted on all sales and other questions relating to income taxes. _ * * * No objection employee group acting as foundation or other private capacity. 23. On April 20, 1965, the Department of State issued FAMC No, 281-1, the purpose of which was “to supplement and further explain the requirements of FAMC No. 281 without in any way changing its intended meaning or objective.” The Circular read in part as follows: 2.

General Statement The provisions of FAMC No. 281 were not intended to convey the impression that employees would be forced to sell their property at cost to a dealer or individual who would in turn sell it at the market price and retain the difference. It was intended that embassies would establish regulations compatible with local conditions, which would permit the employee in his discretion to sell his personal property for the price he paid for it plus any •taxes and customs paid by him.

If the employee does not desire to dispose of his property locally at cost, the way was left open for the property to be exported under current travel or shipping regulations. 3. Facilitating Plans to Avoid Export of Property a. To facilitate the handling of property within the intent and purpose of FAMC No. 281, ambassadors may wish to consider the desirability of establishing a charitable foundation or other organizational arrangement, officered by post personnel serving in a private capacity, through which the property can be sold and the excess proceeds managed for charitable purposes.

If local.conditions permit and arrangements can be made with a reputable dealer (or dealers through sealed bid or otherwise) to purchase and resell the property under an agreement to turn over the excess proceeds to the foundation, this may be done. If for any reason a dealer agreement is not feasible or desirable under local conditions, consideration may be given to having the charitable foundation itself handle the purchase-resale transaction. b.

If due to local conditions the ambassador determines that the purpose of FAMC No. 281 can be achieved effectively through direct sale by the employee, adequate controls to ensure compliance should be established through employee certification under oath of sale and disposition of excess proceeds if any, and embassy review of related documentation. 4. Cautions in Issuing Local Regulations In developing local regulations several points should be kept in mind: a. As an alternative to selling on the local market, the employee may export the property. He should be given the opportunity to exercise this option. b.

If the employee chooses to sell at cost as defined in FAMC No. 281, he should be permitted to do so, provided the embassy is consulted and concludes that the arrangement satisfies the basic purposes of the Department’s policy. c. To avoid any misunderstanding of the rights and obligations of the parties involved, preferably transfer of title should be consummated through sale of the property by the employee to a designated dealer, or to a foundation, and resale by such purchaser. d. The need for obtaining a power of attorney or quitclaim from the employee selling the property. e.

The employee’s designation of charitable organizations or institutions to receive the excess proceeds should be honored, but the U.S. tax aspect should be considered. f. Proceeds of sale should not pass through United States Government accounts. However, there is no objection to handling such proceeds in a non-Government account on an interim basis pending establishment of a charitable foundation or similar arrangement. g. The locally available IRS office should be consulted on all sales and other questions relating to income taxes. 24.

Pursuant to FAMG 281-1, Embassy Instruction No. 188, headed “Transportation, Use and Sale of Personally Owned Motor Vehicles,” was issued by the Embassy at Rio de Janeiro on May 20,1965. Such instruction again set forth the basic policies involved, and the rules and procedures concerning the importation and use of vehicles. It also provided in part as follows: V. CONDITIONS FOR DISPOSITION OP VEHICLES IN BRAZIL under FAMC 281 A. Options The owner of a vehicle imported free of duty has the following options in disposing of the vehicle:

(1) Export the vehicle from Brazil, at government expense if eligible;

(2) Sell the vehicle (non-liberated vehicles only) to another person enjoying duty-free privileges;

(3) Pay Brazilian duties and taxes, thus freeing the vehicle for sale subject to approval of Brazilian authorities;

(4) Sale to the Foimdation. The seller will receive only an amount consonant with the provisions of FAMC 281. In such a case the seller will be given a statement by the Foundation which will indicate the exact amount received;

(5) Sale through the Foundation. The seller will receive only an amount consonant with the provisions of FAMC 281. He may designate, if he wishes, the charity to which any excess proceeds are to be paid. The seller will be given a statement by the buyer showing the full amount paid for the vehicle and he may be subject to the payment of a capital gains tax. B. Foundation

(1) A charitable Foundation will be established to sell or facilitate the sale of vehicles owned by U.S. Government employees enjoying duty-free privileges. The Embassy Automobile Board avIII administer the Foundation, establish the procedure for the sale of vehicles in accordance with the provisions of this instruction, and dispose of the funds received by the Foundation.

(2) Pending the legal establishment of a Foundation, the funds accruing to it from the sales of duty-free vehicles will be placed in escrow in an interest bearing account in a U.S. bank. YI. BeqotiiemeNts pot, Sale or Vehicles in Beazil C. Embassy Regulations $ $ $ ;Jt ❖

(5) No negotiations for the sale of a vehicle, except under option V A (2), shall take place until the Embassy has approved the application and transmitted it to the Brazilian Authorities for their approval. D. Procedure ■■■.i * * * *

(3) If the seller exercises either of the options set forth in

Section V A, paragraphs (2) and (3) above, he can negotiate directly with the buyer of the vehicle. If the seller opts for V A (2), he must file with the Committee a statement that he made no profit in the transaction. If he opts for V A (3) he must obtain the approval of the Embassy and/or JBUSMC, and of the Brazilian authorities to pay the duties and taxes;

(4) If the seller exercises either of the options set forth in

Section V A, paragraphs (4) and (£>)., above, he must deal directly with the Foundation, or its authorized representative. In either case, the seller must give the Foundation a quit claim;

(5) If the seller exercises one of the options set forth in

Section V A, paragraphs (2), (4) or (5), he must submit with his application for sale acceptable documentary proof of the cost of the vehicle (invoices, receipts, certificates, etc.) ; ‡ ‡ ‡ $ VII. JBUSMC PERSONNEL Civilian and military personnel assigned to the Joint Brazil-United States Military Commission are eligible for the same privileges, and are subject to the same rules and regulations stipulated herein and shall submit all applications for importations and disposals to or through, as applicable, the Secretary of the United States Delegation, JBUSMC.

The Instruction continued the existence of the Embassy Automobile Board and its provisions, effective immediately, were made applicable to all duty-free vehicles which were eligible for sale after March 1,1965. 25. By Administrative Circular also dated May 20, 1965, the Administrative Officer of the Embassy at Bio de Janeiro, Mr. Sylvain B.

Loupe (who, by virture of his position, was also the Chairman of the Embassy Automobile Board), advised all employees that the Ambassador “has approved the appointment of a Foundation Broker and Manager” and that such appointee was expected to assume his duties by May 21, 1965. The Circular also advised that the Embassy Automobile Board was drafting regulations for the sale of motor vehicles “for an amount consonant with the provisions of FAMC 281,” and that new application forms for permission to sell would be available on May 24,1965, when “the wheels will be rolling again.

The Automobile Board has removed its foot from your 'brakes. In the meantime, the road has been damaged and your ride is no longer smooth. Also, we are now able to give you information instead of inflammation.” 26. Some Embassies, such as those in Argentina and Colombia, preferred to let the employee handle the sale himself and then certify that the excess profit, 'as defined, had been donated to an approved charity of the employee’s choice, and they therefore chose the alternative suggested by Paragraph 3(

b) of FAMC 281-1. This was discretionary with each Ambassador however, and Ambassador Gordon chose to base his regulations on the “broker” approach, as outlined in his previous communications addressed to the State Department and as subsequently authorized for all Embassies by Paragraph 3 (

a) of FAMC 281-1. 27. (

a) On May 24, 1965, the Automobile Board, by its Chairman, contracted with Mr. Paul H. Goodman, an American citizen residing in Brazil, to serve as the “Administrative Officer” of the Foundation, at a salary of $1,000 per month. The contract provided in part as follows : 2) The Contractor [Mr.

Goodman] agrees to provide his. services as Administrative Officer of a Foundation which is being established for the purpose of receiving, using, and distributing for charitable purposes funds from various and sundry sources, principally from the sale and disposition of automobiles entrusted to the Foundation for sale by US Government employees assigned to and serving in Brazil.

The Contractor further agrees to act on behalf of the Foundation in all matters relating to the sale and disposition of motor vehicles entrusted to the Foundation except for those processes which by Brazilian law or decree must be handled by the Embassy and/or the owner but including and not limited to the taking of physical possession of such motor vehicles as required; conducting negotiations with potential buyers in order to obtain the best possible market price; preparation and execution of related documents; maintenance of pertinent files and receiving and disposing of funds derived from the sale of such automobiles; subject, in all such actions, to the supervision, direction and review of the Embassy Automobile Board or of its designee or designees.

It was further agreed that Mr. Goodman was not, by virtue of the contract “or of any promise verbal or implied from anyone, an employee of the Government of the United States of America nor of any of its agencies * * Mr. Goodman’s office was located in the United States Embassy in Eio de Janeiro, the contract specifying that the Board should provide him “with office s

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