-58-
of the conversion, having a discrete business purpose and economic
significance: (1) Petitioner needed the cruzados to pay the agreed
purchase price to IFC and pay its other transaction expenses; (2)
the Central Bank was entitled to extinguish approximately $12.5
million of Brazil's foreign debt; (3) the Central Bank did not
need to use its limited supply of U.S. dollars at this time; (4)
the Central Bank received petitioner's assurance that its equity
investment would remain in Brazil for 12 years; and (5) IFC could
use the cruzados without restriction.
Thus, taking into account the cruzados' independent economic
significance, petitioner's exchange of blocked deposits for
cruzados and the conversion of the cruzados into stock cannot be
ignored under the step transaction doctrine. Accordingly, we
follow the analysis in G.M. Trading35 and hold that petitioner's
loss, if any, is measured by the difference between its basis in
the blocked deposits ($12,577,136) and the value of the cruzados
($12,577,136 before any discount, see infra) on the date of the
transaction. Because we hold that the step transaction doctrine is
inapplicable herein, we need not determine the fair market value
35 While we agree with petitioner that the facts in G.M.
Trading Corp. v. Commissioner, 103 T.C. 59 (1994), are not
identical to those herein, the legal propositions stated in G.M.
Trading are nonetheless applicable herein.
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