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substance of the transaction. Petitioner’s substantial economic
role in the transaction, however, will not be disregarded.
Capital Contribution of Alleged Excess Value
Petitioner and the amici curiae argue that any value
petitioner may have realized over its US$634,000 hard dollar cost
of participating in the transaction (referred to by petitioner as
"excess value") should be treated, under section 118, as a
nontaxable capital contribution by the Mexican Government to
petitioner or to Procesos.
Petitioner's argument oversimplifies and neglects important
facts relating to the nature of this transaction and to the
consideration paid and received by petitioner, on the one hand,
and by the Mexican Government, on the other.
Petitioner did not transfer US$600,000 to the Mexican
Government. Rather, petitioner provided those U.S. dollars to a
commercial bank in exchange for U.S. dollar-denominated debt of
the Mexican Government with a face amount of US$1,200,000.
Petitioner then exchanged not the US$600,000 in cash but the
US$1,200,000 Mexican Government debt for Mex$1,736,694,000. As a
further, significant element of the transaction, petitioner was
also given Mexican governmental permission to construct a
lambskin processing plant in Mexico, and petitioner was provided
pesos at a very favorable exchange rate. The Mexican Government
was relieved of its US$1,200,000 debt without using its limited
supply of U.S. dollars, and it obtained a commitment that the
Mexican pesos it provided would stay in Mexico.
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