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the firm summarized the contemplated transaction as follows:
A (a foreign entity), B, and C form the ABC Partnership (ABC) on
June 30, 1989, with respective cash contributions of $75, $24,
and $1. Immediately thereafter, ABC invests $100 in short-term
securities which it sells on December 30, 1989, to an unrelated
party. The fair market value and face amount of the short-term
securities at the time of the sale is still $100. In
consideration for the sale, ABC receives $70 cash and an
installment note that provides for six semiannual payments,
commencing 6 months after the sale. Each payment equals the sum
of a notional principal amount multiplied by the London Interbank
Offering Rate (LIBOR) at the start of the semiannual period.2
ABC uses the $70 cash and the first payment on the installment
note to liquidate A's interest in ABC and uses the subsequent
interest payments to purchase long-term securities.
Relying on section 15a.453-1(c), Temporary Income Tax Regs.,
46 Fed. Reg. 10711 (Feb. 4, 1981), the law firm advised Fields
that ABC would be entitled to report the sale of the short-term
securities on the installment method, and that ABC would recover
an equal portion of its basis in the short-term securities in
each year in which a payment on the note could be received. The
law firm advised Fields that ABC would recover $25 of its basis
in each of the 4 taxable years from 1989 through 1992, and that
2 LIBOR is the primary fixed income reference rate used in
Euro markets.
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