A Valuation

A Valuation

April 10, 2010

A valuation by the IRS showed no meaningful effort by the government to arrive at a proper value, a court said.
It denied the government’s claim for more taxes.

Duchossois Industries was building a factory in Mexico to make garage door openers in the 1980’s when oil prices collapsed and left Mexico struggling to service its foreign debts. The government came up with a creative program where companies like Duchossois that needed Mexican pesos to pay local workers could buy Mexican government debt from foreign holders and then swap the debt with the government in exchange for pesos paid into restricted accounts.

Duchossois purchased Mexican debt with a face amount of $11.7 million from the First National Bank of Chicago for $5.8 million. The Mexican government then paid Duchossois $10.2 million worth of pesos to cancel the debt.

The IRS said the company had to report the difference of $4.4 million between what Duchossois paid and what it received in pesos as taxable income.

There were significant restrictions on how the pesos could be used. For example, they could only be used to pay Mexican vendors and contractors working on building the factory. The IRS claim that the company had $4.4 million in income failed to treat the pesos as worth less on account of these restrictions.

The court said it would place an unreasonable burden on taxpayers to let the government assign an arbitrary value and force taxpayers to prove property was worth less. “When the government provides nothing more than a ‘naked assessment,’ which is to say ‘without any foundation whatsoever,’ the taxpayer does not have to prove what the assessment should have been,” the court said quoting from an appeals court decision in another Mexican debt swap case.

The case is Duchossois Industries, Inc. v. United States. A federal district court in Illinois released its decision in the case in mid-April.

Keith Martin