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Petitioner is a Michigan corporation whose principal place
of business was in Southfield, Michigan, at the time the petition
was filed. Petitioner manufactures machined-cast automotive
parts and is the parent company of a group of corporations that
in 1988 filed a consolidated corporate income tax return.
In mid-1986, petitioner decided to build a plant in Mexico
that would supply parts to Ford Motor Company. On June 5, 1986,
petitioner formed a wholly owned domestic subsidiary, CMI-Texas,
Inc. (CMI-Texas). In turn, on June 13, 1986, CMI-Texas formed a
Mexican subsidiary, Industrias Fronterizas CMI, S.A. de C.V.
(Industrias), which issued 4,996 shares of class A stock to CMI-
Texas and one share of such stock to each of four individuals.
In late 1986, Industrias began construction of an industrial
plant in Nuevo Laredo, Tamaulipas, Mexico (Nuevo Laredo plant).
On April 30 and May 11, 1987, formal requests were made on
behalf of CMI-Texas and Industrias for authorization to engage in
a swap transaction to finance additional construction of the
Nuevo Laredo plant. On August 7, 1987, the Mexican Government
approved the transaction, authorizing CMI-Texas to acquire an
interest in U.S.-dollar-denominated debt with a face value of
US$2,300,000. On September 4, 1987, the Mexican Government
approved a 15-percent discount rate, which would be used in
calculating the amount of pesos to be transferred to Industrias.
The discount rate reflected an estimate of the proposed venture's
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