- 121 -
Those facts are easily distinguishable from the facts in
these cases. Here, petitioners have failed to show that the
commercial paper would not have been issued without the guarantee
fees. The Spanish investors, through Dapy and Roundabout,
provided the money and controlled the entities through which the
money flowed. Dapy and Roundabout also guaranteed the issuance
of the commercial paper and received the guarantee fees. The
guarantee fees were not a condition of the issuance and did not
alter the economic substance of the transaction because the fees
did not change the level of risk for any of the participants.
Dapy and Roundabout had the $10 million that was originally
advanced to Gatetown returned to them approximately 6 months
after it was advanced. Additionally, the transactions underlying
the guarantee payments were shams that were entered into solely
for tax-avoidance purposes.
The interest was not paid on genuine indebtedness as
required by section 163. There was no ordinary and necessary
business purpose for the guarantee fees as required by section
162(a). Therefore, petitioners cannot deduct the interest and
guarantee expenses on the lump-sum royalty payments.
Accordingly, we sustain respondent's determinations as to those
issues.
IV. Interest Deductions on the Section 351 Transactions
Petitioners deducted interest payments on the promissory
notes given in exchange for assets in the section 351
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