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from petitioner not only the surrender of the debt, but also the
additional three elements identified above.
Respondent, in her brief, accurately describes petitioner's
taxable gain from engaging in this transaction as follows:
In a traditional, private market transaction, for
US$600,000 petitioner would have obtained no more than
Mex$998,100,000 based on the free-market exchange
peso/dollar exchange rate at the time [of] the
Debt/Equity Swap * * * which would have allowed it to
have acquired land and build a plant worth only
US$600,000. Instead, using the Debt/Equity Swap, * * *
[petitioner] obtained Mex$1,736,694,000 for the same
amount of money, allowing it to build a plant worth
US$1,044,000. The increase obtained as a result of the
swap was Mex$738,594,000 (Mex$1,736,694,000 less
Mex$998,100,000) which, on the date of the Debt/Equity
Swap, was equal in value to US$444,000 (Mex$738,594,000
divided by 1,663.50 (pesos/dollar free-market exchange
rate on date of swap)), which is precisely the amount of
gain which respondent contends petitioner realized on the
transaction (fair market value of Mex$1,736,694,000
received in exchange for the US$1,200,000 Face Amount
Mexican Debt (US$1,044,000) less amount paid for the debt
(US$600,000)), less US$34,000 of transaction costs.
More broadly, if the “restricted pesos” which
petitioner obtained were worth no more than the
US$600,000 which * * * [petitioner] paid for the debt,
why then did * * * [petitioner] even go to the trouble
of participating in the Debt/Equity Swap? Completing
the swap involved a good deal of time and expense for
petitioner--a detailed application had to be submitted,
negotiations with relevant Mexican Government agencies
had to be conducted, and approvals had to be obtained.
If what was received as a result of the swap was no
more valuable than what could have been obtained
outside of it, why was it done? The answer is obvious
--petitioner went to the trouble of participating in the
swap because of the added value which it obtained through
so doing. * * * This added value * * * [constitutes] a
realized gain for federal income tax purposes, and no
provision of the internal revenue laws exempts it from
recognition. [Emphasis added.]
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