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local currency to the foreign company in exchange for its stock.
The commercial bank also recognizes a loss on the exchange of the
debt for the local currency to the extent of the excess of its
adjusted basis in the debt over the fair market value of the local
currency. The ruling assumes that the fair market value of the
stock is equal to the fair market value of the foreign currency for
which it was exchanged.
By applying the test enunciated in this ruling, respondent
argues that petitioner did not realize a loss on its exchange of
blocked deposits for cruzados because it received local currency
(cruzados) equal in value to its basis in the blocked deposits.
Moreover, respondent contends that petitioner recognizes no gain or
loss on the exchange of the cruzados for the PCC stock because the
ruling assumes that the value of the cruzados and the value of the
stock are identical.
Respondent also contends that G.M. Trading Corp. v.
Commissioner, supra, supports its position. G.M. Trading involved
a U.S. taxpayer that participated in a Mexican debt-equity swap.
In order to participate in the transaction, the taxpayer, a U.S.
company, formed a Mexican subsidiary, Procesos. The U.S. company
then purchased a previously issued $1.2 million Mexican Government
debt from an unrelated bank for $634,000 (which reflected the
market discount rate of approximately 50 percent of the debt's
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