-2- 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 providedPage: Previous 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Next
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