## Facts

- G.M. Trading Corp. (a Texas corporation) formed and wholly owned a Mexican subsidiary, Procesos G.M. de Mexico, S.A. de C.V. (Procesos).
- Mexico operated a government-sponsored debt-equity swap program allowing investors to buy Mexican government debt (often at a discount) and convert it into peso funds for approved investment through a Mexican entity.
- In 1987, G.M. agreed to buy $1.2 million face amount of Mexican government debt for about $600,000 from an unrelated foreign bank.
- Mexico agreed to accept that debt under the program and, at favorable conversion terms, cause approximately Mex$1.7 million to be deposited into a restricted account for Procesos (available for plant construction).
- G.M. acquired the debt, surrendered it to Mexico under the program, and Mexico cancelled the debt.
- As part of the program mechanics, Procesos issued a large block of Class B shares that ultimately went to G.M., increasing G.M.’s equity interest.
- The restricted account could be drawn only for approved construction expenditures and earned very high interest due to inflation and currency conditions.
- Procesos used the funds to construct and equip a plant that opened in late 1988.
- The IRS determined G.M. realized taxable gain measured by the excess of the value received in the swap (imputed at roughly $1,044,000) over G.M.’s $600,000 cost basis in the debt.

## Issues

1. Whether G.M. realized taxable gain under I.R.C. § 1001 when it surrendered discounted Mexican government debt in exchange for program benefits that capitalized its subsidiary and increased its equity interest.
2. Whether the excess value attributable to Mexico’s favorable conversion terms was excludable as a nonshareholder capital contribution under I.R.C. § 118 rather than taxable gain to G.M.
3. How to determine G.M.’s “amount realized” from the swap for § 1001 purposes.

## Decision

- The Tax Court held that G.M. realized taxable gain under § 1001.
- The court treated G.M.’s surrender of the Mexican debt for cancellation as a disposition of property with an amount realized exceeding G.M.’s adjusted basis.
- The court accepted an amount-realized approach that valued the economic package received (peso funds and related equity consequences) in U.S. dollar terms, producing gain over the $600,000 basis.
- The court rejected § 118 treatment, concluding the favorable conversion benefit did not qualify as an excludable contribution to capital that displaced recognition of gain by G.M.

## Legal Principles

- A taxpayer recognizes gain under I.R.C. § 1001 when property is disposed of and the amount realized exceeds adjusted basis, including when debt instruments are surrendered for cancellation in exchange for valuable consideration.
- The “amount realized” includes the fair market value of what the taxpayer receives or controls as an economic benefit in the transaction, even if proceeds are routed through a controlled subsidiary.
- I.R.C. § 118 does not convert a taxpayer’s realized gain from disposing of property into an excludable capital contribution merely because the transaction occurs within a government program intended to encourage investment or because a subsidiary receives and uses the funds.

## Conclusion

The Tax Court concluded that G.M.’s participation in Mexico’s debt-equity swap program was a taxable disposition of discounted debt: G.M. realized gain under § 1001 measured by the value of the benefits obtained through the swap over its basis in the debt, and the favorable conversion element was not excludable under § 118.


G.M. Trading Corp. v. Comm’r, 103 T.C. 59 (1994)