-53-
principal face amount). 103 T.C. at 62, 65. The taxpayer
exchanged the $1.2 million debt for 1,736,694,000 pesos (Mex$),32
and the Mexican Government deposited the pesos in Procesos'
restricted bank account. The pesos were to be used to build a
lambskin processing plant. Procesos issued shares of its stock to
the Mexican Government, which in turn transferred the shares to the
taxpayer. The U.S. company surrendered the debt to the Mexican
Government, which then canceled it. Id. at 63-64. The Court
rejected the taxpayer's view that the transaction was a tax-free
contribution to the capital of the Mexican subsidiary. The Court
declined to disregard the taxpayer's exchange of U.S. dollar-
denominated debt for Mexican pesos and held that the taxpayer
realized a $410,000 gain on the exchange, equal to the difference
between the taxpayer's basis in the debt ($634,000) and the fair
market value of the pesos for which the debt was exchanged
(Mex$1,736,694,000 with a fair market value of $1,044,000 on the
date of the transaction). Id. at 68-71.
By analogy to G.M. Trading, respondent asserts that in the
instant situation we should decline to disregard petitioner's
32 The Mex$1,736,694,000 had a $1,044,000 fair market
value at the official exchange rate. The $1.2 million debt had a
fair market value of $1,044,000 because of a 13-percent discount
rate of the debt's face value. G.M. Trading Corp. v.
Commissioner, 103 T.C. 59, 63 (1994), supplemented by 106 T.C.
257 (1996), on appeal (5th Cir., Oct. 4, 1996).
Page: Previous 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 NextLast modified: May 25, 2011