                           106 T.C. No. 13



                     UNITED STATES TAX COURT


             G.M. TRADING CORPORATION, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent*



     Docket No. 6983-91.               Filed April 17, 1996.



               On reconsideration, we decline to alter
          any of the findings of fact or conclusions of
          law set forth in our prior opinion at 103
          T.C. 59 (1994). Supplemental findings of
          fact and conclusions of law made.
               Held, we adhere to our prior holding
          that petitioner is to be treated as having
          realized a taxable gain on the exchange of
          U.S. dollar-denominated Mexican Government
          debt for Mexican pesos. We also adhere to
          our prior findings and conclusions regarding
          the value of the pesos received and the
          amount of gain realized.




     This opinion supplements our prior opinion, G.M. Trading
Corp. v. Commissioner, 103 T.C. 59 (1994).
                                 - 2 -

     R. James Curphy, for petitioner.**

     T. Richard Sealy III, for respondent.


                       SUPPLEMENTAL OPINION

     SWIFT, Judge:   This matter is before us on reconsideration

of our opinion at 103 T.C. 59 (1994), in which we concluded that

petitioner realized a taxable gain in connection with a "Mexican

debt-equity-swap" transaction.    On October 13, 1994, we granted

petitioner's motion for reconsideration, and we requested that

petitioner and respondent file briefs on the points raised in

petitioner's motion for reconsideration.   We also allowed amici

briefs to be filed by Chrysler Corp. and by Harold L. Adrion.

     On reconsideration, petitioners and the amici curiae make

three primary arguments:   (1) That the value of the Mexican pesos

that were received by petitioner (or by Procesos, petitioner's

Mexican subsidiary corporation) did not exceed petitioner's U.S.

dollar cost of participating in the transaction and that

petitioner, therefore, realized no gain on the transaction;

(2) that the transaction should not be viewed as a taxable

exchange because petitioner could not legally own an interest in

the U.S. dollar-denominated debt of the Mexican Government; and

(3) that if gain was realized over petitioner's cost of

participating in the transaction, such gain should be regarded,




     Briefs amici curiae were filed by James P. Fuller, Kenneth
B. Clark, and Jennifer L. Fuller, as attorneys for Chrysler
Corp., and by Harold L. Adrion.
                                - 3 -

under section 118, as a nontaxable capital contribution by the

Mexican Government to petitioner or to Procesos.

     We have considered the arguments and voluminous material

submitted by petitioner, by the amici curiae, and by respondent.

We, however, remain convinced as to the correctness of our prior

findings and opinion.    Accordingly, we decline to alter any of

the findings of fact or conclusions of law set forth in our prior

opinion.

     Our prior opinion explained the general nature of the

Mexican debt-equity-swap transaction that is at issue in this

case, and we will not repeat that explanation.      We, however, do

make herein a number of supplemental findings of fact and

conclusions of law, and we provide additional explanation for our

opinion, as set forth below.

     For convenience, we combine our supplemental findings of

fact and conclusions of law.

     All section references are to the Internal Revenue Code in

effect for the year in issue, and all Rule references are to the

Tax Court Rules of Practice and Procedure.


Value of Mexican Pesos

     It is argued by petitioner and by the amici curiae that the

fair market value of the Mexican pesos that petitioner or

Procesos, as petitioner's designee, received to construct and to

operate a lambskin processing plant in Mexico should be presumed

to be equal to or measured by petitioner's US$634,000 cost of

participating in the transaction.    We disagree.   We continue to
                                - 4 -

believe that the fair market value of the Mexican pesos should be

governed by the fair market US$/Mex$ exchange rate that existed

on November 5, 1987.

     In order to participate in this transaction and to receive

Mex$1,736,694,000 to invest in Mexico, petitioner incurred not

only a hard currency cost of US$634,000, but petitioner also --


     (1) agreed to transfer to the Mexican Government for
     cancellation the US$1,200,000-denominated debt that
     petitioner purchased from the NMB Nederlandsche
     Middenstandsbank N.V. Bank (NMB Bank);

     (2) agreed to invest in Mexico all of the Mexican pesos
     that were received; and

     (3) agreed to provide jobs for Mexican nationals at the
     lambskin processing plant to be constructed in Mexico.


Even though these three additional elements did not have an

immediate hard currency cost to petitioner and did not increase

petitioner's tax basis or tax cost in the transaction, such

additional elements provided by petitioner to the Mexican

Government represented valuable and material aspects of the

transaction and should not be ignored if we are to properly value

the currency consideration received by petitioner (namely, the

Mex$1,736,694,000).    Petitioner's argument (and that of the amici

curiae) that the Mexican pesos are presumed equal to petitioner's

US$634,000 currency cost of participating in this transaction

ignores the value of these significant additional elements provided

by petitioner.

     Petitioner's purchase of the US$1,200,000 Mexican Government

debt and petitioner's transfer of this debt to the Mexican
                               - 5 -

Government for cancellation, without the Mexican Government

spending any U.S. dollars, constituted a primary purpose of this

transaction.   If the financial interests of the Mexican

Government would have been just as well-served (as the amici

curiae apparently contend) by the Mexican Government itself

purchasing for US$600,000 the US$1,200,000 Mexican Government

debt and then canceling that debt, perhaps the transaction could

have been so structured.

     To the contrary, however, the transaction was structured so

that the US$1,200,000 Mexican Government debt would be canceled

without the Mexican Government using any of its limited supply of

U.S. dollars and also without any of the Mexican pesos that were

used in the transaction leaving Mexico.   From the standpoint of

both petitioner and the Mexican Government, these two features or

benefits of the transaction, made possible by the additional

elements provided by petitioner as described above, shape the

form and substance of the transaction before us.

     We therefore believe that it would be artificial to presume,

as petitioner and the amici curiae would have us do, that the

value of the Mex$1,736,694,000 (the currency consideration

received by petitioner or by Procesos, as petitioner's designee,

for participating in this transaction) equals petitioner's

US$634,000 cost of purchasing the US$1,200,000 Mexican Government

debt and transferring the debt to the Mexican Government.    This

argument ignores that in reality the Mexican Government acquired
                              - 6 -

from petitioner not only the surrender of the debt, but also the

additional three elements identified above.

     Respondent, in her brief, accurately describes petitioner's

taxable gain from engaging in this transaction as follows:


     In a traditional, private market transaction, for
     US$600,000 petitioner would have obtained no more than
     Mex$998,100,000 based on the free-market exchange
     peso/dollar exchange rate at the time [of] the
     Debt/Equity Swap * * * which would have allowed it to
     have acquired land and build a plant worth only
     US$600,000. Instead, using the Debt/Equity Swap, * * *
     [petitioner] obtained Mex$1,736,694,000 for the same
     amount of money, allowing it to build a plant worth
     US$1,044,000. The increase obtained as a result of the
     swap was Mex$738,594,000 (Mex$1,736,694,000 less
     Mex$998,100,000) which, on the date of the Debt/Equity
     Swap, was equal in value to US$444,000 (Mex$738,594,000
     divided by 1,663.50 (pesos/dollar free-market exchange
     rate on date of swap)), which is precisely the amount of
     gain which respondent contends petitioner realized on the
     transaction (fair market value of Mex$1,736,694,000
     received in exchange for the US$1,200,000 Face Amount
     Mexican Debt (US$1,044,000) less amount paid for the debt
     (US$600,000)), less US$34,000 of transaction costs.

          More broadly, if the “restricted pesos” which
     petitioner obtained were worth no more than the
     US$600,000 which * * * [petitioner] paid for the debt,
     why then did * * * [petitioner] even go to the trouble
     of participating in the Debt/Equity Swap? Completing
     the swap involved a good deal of time and expense for
     petitioner--a detailed application had to be submitted,
     negotiations with relevant Mexican Government agencies
     had to be conducted, and approvals had to be obtained.
     If what was received as a result of the swap was no
     more valuable than what could have been obtained
     outside of it, why was it done? The answer is obvious
     --petitioner went to the trouble of participating in the
     swap because of the added value which it obtained through
     so doing. * * * This added value * * * [constitutes] a
     realized gain for federal income tax purposes, and no
     provision of the internal revenue laws exempts it from
     recognition. [Emphasis added.]
                               - 7 -

     Respondent's above explanation is consistent with the

following summary of the "basics" of debt-equity-swap

transactions, viewed from the U.S. taxpayer's perspective, as set

forth in an attachment to the brief of Chrysler, as amicus

curiae:


          At its simplest, a debt-equity swap (also known as
     a debt conversion) involves the purchase by a firm,
     usually foreign, of sovereign debt at a discount in the
     secondary market from the bank holding it. The issuing
     country then buys back the debt in local currency at
     close to its face value. The firm spends the local
     currency received in an approved manner within the
     country, usually to finance a fixed equity investment.
     Since the prepayment of the obligation is made at a
     substantial discount and the local funds are obtained
     at a much smaller discount, firms can realize a
     significant gain on the spread. [Business
     International Corp., Debt-Equity Swaps: How To Tap an
     Emerging Market (1987). Emphasis added.]


     With regard to the value of the Mex$1,736,694,000 that was

received, petitioner and the amici curiae argue strenuously that

the Court in our prior opinion improperly considered subjective

factors to minimize the effect of certain restrictions on the use

of the Mexican pesos and that such subjective factors are not

properly considered in the hypothetical, willing buyer/willing

seller scenario that typically governs a determination of fair

market value.   We disagree.

     The fact that petitioner and Procesos entered into the

transaction for the very purpose of obtaining Mexican pesos to

construct and to operate a lambskin processing plant in Mexico is

an undisputed fact of this transaction.   There is nothing

subjective about this fact other than that it relates generally
                               - 8 -

to the undisputed intent of representatives of petitioner and of

Procesos.   This fact and the requirements relating to the use of

the pesos reflect the transaction negotiated and bargained for by

the parties -- by petitioner, by Procesos, and by the Mexican

Government.

     In the present case, where petitioner negotiated for a

principal amount of a recognized currency in order to invest that

currency in a specific project, we do not believe that the terms,

requirements, and limitations set forth in the final negotiated

agreement regarding use of the currency (which simply reflect and

conform to the original and continuing purpose and objective of

the transaction -- namely, to invest the currency in a specific

project) should be regarded as restricting or discounting the

fair market value of the currency that is then made available

under the agreement.

     The restrictions relating to petitioner's and to Procesos'

access and use of the Mexican pesos and to certain class B stock

in Procesos were consistent with the overall purpose and

objective of each party to the transaction.   They were consistent

with the business objectives of each party.   In our judgment, as

we stated in our prior opinion, they were not significantly

different from restrictions commonly placed by financial

institutions on loan proceeds and on startup companies in

disbursing loan proceeds relating to construction loans or

project financing.
                               - 9 -

     Petitioner and the amici curiae cite numerous cases in

support of their argument that a fair market valuation of

property generally should not take into account subjective

factors (such as the intended use of the property).   Properly

read, however, the cases cited do not stand for the proposition

that all subjective elements in a transaction (such as the intent

of the parties and the purpose for the transaction) should be

disregarded in determining fair market value.   Rather, the cases

cited stand for the limited proposition that blatantly self-

serving, subjective testimony and evidence offered in an attempt,

after the fact, to revalue a transaction contrary to its

recognized market value will be rejected.

     In Rooney v. Commissioner, 88 T.C. 523, 527 (1987), because

of alleged subjective “circumstances [that] compelled * * * [the

taxpayers] to accept * * * goods and services at prices higher

than they would otherwise pay”, the taxpayers attempted to value

the goods and services at less than the recognized market value

therefor.   The Court in Rooney rejected this argument, stating

that “petitioners may not adjust the acknowledged retail price of

the goods and services received merely because they decide among

themselves that such goods and services were overpriced".     Id. at
528; accord Baker v. Commissioner, 88 T.C. 1282, 1289 (1987).

     The taxpayer's argument in Koons v. United States, 315 F.2d

542 (9th Cir. 1963), perhaps best reflects petitioner’s argument

in this regard.   In Koons, an employer paid moving expenses of

the taxpayer.   The taxpayer conceded that the value of the moving

services was includable in his gross income but attempted to
                             - 10 -

value the services at less than the employer’s cost.       The

taxpayer speculated that he personally could have paid less to

move himself than his employer had paid, that the services

received were therefore worth less to him, and that he should not

have to report the services at their recognized value.       The court

rejected this argument because the taxpayer "had no obligation to

accept these [moving] services, * * * [he] did accept them, this

being a part of the bargain with * * * [his employer], and * * *

the services were in fact rendered and were paid for [by his

employer] at the fair market value.”   Id. at 545.
     A superficial reading of Landau v. Commissioner, 7 T.C. 12

(1946), may appear to support petitioner’s position.       Therein,

however, South African pounds1 received as a gift were subject to

preexisting limitations on their removal from South Africa.       The

taxpayer had no control over these restrictions.     The

restrictions were not the product of negotiations and bargaining

by the parties, and the Court found that the fair market value of

the South African pounds received as a gift should be discounted

to reflect the preexisting restrictions.

     The present case is somewhat analogous to cases involving

the valuation of stock includable in a gross estate where the

stock, on the date of decedent's death, is subject to a

restrictive stock purchase agreement at a specified price.

Typically, in such cases, the taxpayers argue (in light of the

preexisting restrictions that are applicable to the stock) for a



     South African currency is now measured in rands.
                              - 11 -

valuation consistent with the price specified in the stock
purchase agreement.   See, e.g., Estate of Gloeckner v.

Commissioner, T.C. Memo. 1996-148; Estate of Lauder v.

Commissioner, T.C. Memo. 1992-736.

     In the instant case, in effect, petitioner (taking into

account the so-called "restrictions" and other characteristics of

the Mexican pesos to be received) and the Mexican Government

(taking into account its U.S. dollar-denominated debt to be

canceled and the perceived economic benefit to be received in

Mexico from construction of a new plant) negotiated for and

agreed to the transfer and receipt of a specified amount of

Mexican pesos (i.e., they agreed to a stated price in the form of

a recognized monetary currency).   But petitioner and the amici

curiae (contrary to the typical case involving restrictive stock

purchase agreements where the taxpayer is seeking to adhere to

the price specified in the agreement) now seek to disavow the

stated Mexican peso price that was agreed to and that is

specified in the agreement (namely, Mex$1,736,694,000).

     With regard to the transaction before us, it is noteworthy

that during the year at issue broad Mexican Government

restrictions applied generally to investments by U.S. companies

in Mexico.2   Properly viewed, the debt-equity-swap transaction

before us, and the so-called "restrictions" placed on the pesos

received, may be regarded as the opening up of a business


     See 1973 Law to Promote Mexican Investment and Regulate
Foreign Investment, as explained in Business International Corp.,
Debt-Equity Swaps: How to Tap an Emerging Market, 54-55 (1987),
which foreign law we take notice of under Rule 146.
                             - 12 -

opportunity for petitioner in Mexico (i.e., as a reduction in or

elimination of restrictions that otherwise would have prohibited

petitioner's investment in Mexico).   Viewed in this light, the

1,736,694,000 bargained-for Mexican pesos received in this

transaction may be regarded, in some respects, as more valuable

to petitioner than pesos that petitioner could have obtained on

the open market because there were attached to these pesos

special, pre-approved business opportunities for petitioner in

Mexico and because the pesos carried with them an interest rate

that protected petitioner from risks associated with inflation in

Mexico and with fluctuations in the US$/Mex$ exchange rate.   The

so-called "restrictions" attached to the pesos involved in this

transaction, therefore, in this respect served as enhancements to

the value of the pesos.


Ownership of US$1,200,000 Mexican Government Debt

     Petitioner and the amici curiae argue that only banks could

legally own the US$1,200,000 Mexican Government debt and that

petitioner, therefore, should not be treated as having acquired

the debt and as having transferred the debt to petitioner.

Petitioner and the amici curiae also argue that if petitioner is

to be regarded as having acquired the debt, petitioner's interest

therein should be treated as so fleeting and momentary that it

should be disregarded.

     Respondent acknowledges provisions of the Restructure

Agreement that place some limitations on assignment of Mexican

Government debt, but respondent notes that none of these
                              - 13 -

provisions applies to a transfer or assignment of the debt, nor

to the transfer or assignment of a participation therein, by a

bank domiciled in the United States.   Respondent also notes that

under New York case law any prohibition on assignment must be

express.

      The vague limitations on transferability of Mexican

Government debt on which petitioner relies are largely

meaningless in this case.   Under the Debt Participation and

Capitalization Agreement and the Restructure Agreement, the

Mexican Government expressly consented to the transfer of its

US$1,200,000 debt, or of a “participation” therein, to

petitioner.   The Mexican Government thereby is to be regarded as

having waived whatever restrictions generally would have applied

to such a transfer of Mexican Government debt to petitioner.

     Arguments as to petitioner's alleged lack of an ownership

interest in the debt are clearly erroneous and are rejected.

     Similarly, the argument must be rejected that any ownership

interest or participation of petitioner in the debt occurred for

such a momentary period of time that such interest or

participation should be disregarded.   It was petitioner's

provision of the US$600,000 that caused the NMB Bank to

relinquish the US$1,200,000 Mexican Government debt -- hardly an

economic fact that we can ignore.

     It does appear that another New York-based bank did act as a

mere agent in the debt-equity-swap transaction before us.    That

bank’s mere agency role has been ignored for purposes of the
                                - 14 -

substance of the transaction.    Petitioner’s substantial economic

role in the transaction, however, will not be disregarded.


Capital Contribution of Alleged Excess Value

     Petitioner and the amici curiae argue that any value

petitioner may have realized over its US$634,000 hard dollar cost

of participating in the transaction (referred to by petitioner as

"excess value") should be treated, under section 118, as a

nontaxable capital contribution by the Mexican Government to

petitioner or to Procesos.

     Petitioner's argument oversimplifies and neglects important

facts relating to the nature of this transaction and to the

consideration paid and received by petitioner, on the one hand,

and by the Mexican Government, on the other.

     Petitioner did not transfer US$600,000 to the Mexican

Government.   Rather, petitioner provided those U.S. dollars to a

commercial bank in exchange for U.S. dollar-denominated debt of

the Mexican Government with a face amount of US$1,200,000.

Petitioner then exchanged not the US$600,000 in cash but the

US$1,200,000 Mexican Government debt for Mex$1,736,694,000.    As a

further, significant element of the transaction, petitioner was

also given Mexican governmental permission to construct a

lambskin processing plant in Mexico, and petitioner was provided

pesos at a very favorable exchange rate.   The Mexican Government

was relieved of its US$1,200,000 debt without using its limited

supply of U.S. dollars, and it obtained a commitment that the

Mexican pesos it provided would stay in Mexico.
                                - 15 -

     On these facts, it is clear that the Mexican Government, as

a result of and in return for its participation in this

transaction and for the "excess value" it provided, received

direct, specific, and significant economic benefits that related

primarily to its perilous foreign exchange position.

     As we said in Federated Dept. Stores v. Commissioner, 51

T.C. 500, 519 (1968), affd. 426 F.2d 417 (6th Cir. 1970), tax-

free capital contribution treatment under section 118 is

available where the "only benefit" anticipated and received by

the governmental entity making the "contribution" constitutes an

indirect civic benefit such as anticipated increased business.

In Brown Shoe Co. v. Commissioner, 339 U.S. 583 (1950),

contributions or payments by a governmental entity to assist a

taxpayer in financing construction of a factory were not made in

exchange for, nor accompanied by, extinguishment of the

governmental entity's million dollar debt obligation.

     Perhaps, if the Mexican Government merely had transferred

the Mexican pesos to Procesos in exchange for petitioner's

commitment to use the pesos to construct a plant in Mexico,

receipt of the pesos would qualify under section 118 as a tax-

free contribution of capital.    The Mexican Government, however,

in the transaction before us, did not provide the pesos merely in

exchange for a commitment to construct a plant in Mexico.    It

also received cancellation of its US$1,200,000 debt obligation

without using any U.S. dollars, and the pesos that it provided

remained in Mexico.   The surrender of the debt constitutes a
                             - 16 -

quid pro quo that taints what otherwise may have qualified under

section 118 as a tax-free contribution of capital.

     Petitioner and the amici curiae argue that the Court

misapplies the step transaction doctrine.   Petitioner cites J.E.

Seagram Corp. v. Commissioner, 104 T.C. 75 (1995).   To the

contrary, we believe we have followed the reasoning of that case

by taking into account the "overall" transaction at issue.      Id.

at 94.

     As we understand it, the overriding function of the step

transaction doctrine is to combine individually meaningless or

unnecessary steps into a single transaction.   See Tandy Corp. v.

Commissioner, 92 T.C. 1165, 1172 (1989); Esmark, Inc. v.

Commissioner, 90 T.C. 171, 195 (1988), affd. without published

opinion 886 F.2d 1318 (7th Cir. 1989).

     However, a step in a series of transactions or in an overall

transaction that has a discrete business purpose, a discrete

economic significance, and that appropriately triggers an

incident of Federal taxation, is not to be disregarded.      Further,

the simultaneous nature of a number of steps does not require all

but the first and the last (or "the start and finish") to be

ignored for Federal income tax purposes.    Tandy Corp. v.
Commissioner, supra at 1172 (“step transaction doctrine is not

appropriate in every transaction that takes place in one or more

steps”); Rev. Rul. 79-250, 1979-2 C.B. 156, 157 (“the substance

of each of a series of steps will be recognized * * * if each

such step demonstrates independent economic significance, is not

subject to attack as a sham, and was undertaken for valid
                              - 17 -

business purposes”); 11 Mertens, Law of Federal Income Taxation,

secs. 43.254-43.255 (1990 rev.).   Under the facts of this case,

the step transaction doctrine does not require the Court to

disregard the gain realized by petitioner upon receipt of the

pesos.

     Petitioner and the amici curiae make a number of additional

arguments.   We find them to be without merit.   Also, the amici

curiae seek to raise a number of new issues not raised in the

petition in this case.   We decline to address issues not raised

in the pleadings and not properly before us.

     For the reasons stated, we decline to alter the result

reached in our opinion reported at 103 T.C. 59.


                                    Decision will be entered

                               under Rule 155.
