-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 provided
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