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approximately 18 months before it was closed. In a basic back-
to-back operation, a client’s funds deposited with LTD were used
as collateral for loans to a related client account. More
specifically, the mechanism took the following form: a client,
usually a Mexican corporation, placed U.S. dollars in LTD's MMA
II fund. The money was then lent to the owner of the client
corporation (MMA II notes). The dollars were exchanged by the
owner of the client corporation into pesos, and the pesos were
used to buy Mexican Treasury bills or "cetes", which were lent to
the client corporation. The Treasury bills were sold by the
client corporation and exchanged into dollars, and the dollars
were deposited into the client corporation's MMA II fund with
LTD. LTD charged its client corporations 1 percent more for the
loan than the interest rate paid on the MMA II notes.
One of LTD’s "Direct Costs" of its interest income is an
item entitled "Interest Expense - Special Accounts". Such
expense represents the amount that LTD paid to LTD accounts such
as, inter alia,7 FEIM Fund, Currency Fund, and TVA, for their
positions in, inter alia, Eurodeposits, IFF, Pace Investments,
and InverCedes.
The gross receipts and direct costs relating to LTD’s
"Interest Income" for each taxable year are as follows:
7
We note that LTD had more investment products and investment
funds during the taxable years in issue than the parties have
addressed.
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