- 83 -
Temporary Income Tax Regs., 46 Fed. Reg. 10711 (Feb. 4, 1981).
On November 3, 1989, ACM purchased $205 million of Citicorp
Notes, and, 3 weeks later, it sold $175 million of the notes to
BOT and BFCE for $140 million in cash and eight LIBOR Notes with
a present value of $35 million. The LIBOR Notes did not provide
for the payment of a stated principal amount. For FYE 11/30/89,
ACM applied the ratable basis recovery rules of section
15a.453-1(c), Temporary Income Tax Regs., supra, recovering only
$29,250,761 of its basis in the notes and recognizing
$110,749,239 of capital gain. ACM allocated $91,516,689 of the
gain to Kannex, an entity that was not subject to U.S. tax.
In FYE 12/31/91, after ACM redeemed Kannex's partnership
interest, ACM sold the BOT LIBOR Notes to BFCE for $10,961,581,
and, under section 15a.453-1(c), Temporary Income Tax Regs.,
supra, recognized a capital loss of $84,997,111. ACM allocated
$84,537,479 of this loss to Colgate and Southampton.
We must decide whether ACM's planned sequence of investments
and dispositions should be respected for tax purposes. We
sometimes refer to ACM's planned sequence of investments and
dispositions calculated to create the capital losses that were
the objective of the CINS transaction as the "section 453
investment strategy".
1. Mechanics of a Contingent Payment Sale
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