T.C. Memo. 2005-254
UNITED STATES TAX COURT
CLAYMONT INVESTMENTS, INC., AS SUCCESSOR IN INTEREST TO NEW CCI,
INC. AND SUBSIDIARIES, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 14384-99, 9129-00. Filed October 31, 2005.
F is a foreign corporation. P, a U.S. subsidiary
of F, is a film processing company. On its amended
1992 and 1993 Federal income tax returns, P claimed
sec. 165, I.R.C., loss deductions relating to the
alleged termination of three customer relationships.
In 1988, S1, a U.K. subsidiary of F, lent �29,498,525
(i.e., the equivalent of $50 million) to S2, a
subsidiary of P. In 1996, S2 and S3 (i.e., another
subsidiary of P), entered into a note assumption
agreement, which provided that S3 would assume S2’s
obligations relating to the 1988 loan. Because of the
favorable currency exchange rates (i.e., between the
dollar and the pound), at the time of the assumption,
S2 could have repaid S1 with $45,811,209 instead of $50
million. As a result, S2 realized $4,188,791 in
foreign exchange gain when its obligations were
assumed. On its 1996 consolidated return, P reported
the interest expense paid by S3 to S1 and deferred the
foreign exchange gain relating to the intercompany
transaction between S2 and S3. R determined that P was
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