Norwest Corporation and Subsidiaries - Page 2

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               Central Bank prevented petitioner from repatriating these              
               deposits because Brazil had insufficient hard currency                 
               (U.S. dollars) to make payments on the loans.  In order                
               to reduce petitioner's blocked deposit holdings and                    
               decrease its foreign debt exposure, petitioner entered                 
               into a debt-equity conversion transaction in 1987 as                   
               follows:  $12,577,136 of petitioner's blocked deposits                 
               was exchanged for a 14.361-percent interest in a                       
               Brazilian company.  Petitioner agreed to maintain the                  
               invested funds in Brazil for 12 years.                                 
                    On its consolidated 1987 return, P claimed a                      
               $4,577,136 loss with regard to the debt-equity conversion              
               transaction.  In the notice  of deficiency, respondent                 
               disallowed petitioner's claimed loss on the grounds that               
               petitioner did not establish that any deductible loss was              
               sustained in 1987.                                                     
                    1.   Held:  The step transaction doctrine is not                  
               applicable.  The Central Bank converted the full face                  
               value of petitioner's blocked deposits, plus accrued                   
               interest, at the official exchange rate without                        
               diminution or discount into cruzados, which were used to               
               pay a third party in exchange for its 14.361-percent                   
               interest in the Brazilian company.  The exchange of the                
               blocked deposits for the cruzados and the conversion of                
               the cruzados into stock was not a transitory step but                  
               rather a substantive and significant element of the                    
               conversion.  Petitioner's loss, if any, is measured by                 
               the difference between its basis in the blocked deposits               
               and the fair market value of the cruzados it received.                 
               G.M. Trading Corp. v. Commissioner, 103 T.C. 59 (1994),                
               supplemented by 106 T.C. 257 (1996), on appeal (5th Cir.,              
               Oct. 4, 1996), followed.  Petitioner did not realize a                 
               loss because the basis of the blocked deposits and the                 
               fair market value of the cruzados were identical on the                
               date of the transaction.                                               
                    2.   Held, further:  The 12-year repatriation                     
               restriction imposed on petitioner's invested funds                     
               warrants a 15-percent discount on the fair market value                
               of the cruzados P received, rendering a $1,886,570 loss                
               for petitioner's 1987 tax year.                                        
                                        III.                                          
                    In 1989, Norwest Financial Resources, one of                      
               petitioner's affiliates, acquired the lease portfolio and              
               other assets of Financial Investment Associates, Inc.,                 
               for $141,456,620. On its 1989 return, petitioner                       
               allocated $131,513,038 of the $141,456,620 purchase price              
               to the lease portfolio. The purchase agreement provided                





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