Claymont Investments, Inc., As Successor in Interest to New CCI, Inc. and Subsidiaries - Page 1

                                 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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