-51-
Discussion
J. Respondent's Arguments
Respondent contends that petitioner did not realize a loss on
the debt-equity conversion because it simply exchanged blocked
deposits in which it had a $12,577,136 basis for cruzados worth the
same amount. Respondent relies upon Rev. Rul. 87-124, 1987-2 C.B.
205, and 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), to support its position.
In Rev. Rul. 87-124, supra, a U.S. commercial bank holds
dollar-denominated debt at the central bank of a foreign country.
The foreign country has a program that allows the commercial bank
to exchange the debt for local currency if it uses the local
currency to invest in a company (the foreign company) organized and
engaged in business in the foreign country. In situation 2, the
commercial bank delivers the dollar-denominated debt to the central
bank. The central bank credits the account of the foreign company
and the foreign company in turn issues its capital stock to the
commercial bank. (Respondent contends that the facts herein are
similar except that petitioner paid the local currency, cruzados,
to a third party, IFC, in exchange for the stock.) The ruling
treats the commercial bank as if it received local currency from
the central bank in exchange for the debt and then contributed the
Page: Previous 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 NextLast modified: May 25, 2011