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3. The partnership purchases high-grade, floating-rate
private placement notes (PPNs), which include put
options, permitting the notes to be sold to the issuer
at par.
4. The partnership sells the PPNs for consideration
consisting of 80 percent cash and 20 percent LIBOR-
indexed installment notes (LIBOR notes)1.
5. The partnership reports the sale of the PPNs using
the installment method under section 453. The gain is
allocated according to each partner's partnership
interest (i.e., the foreign partner recognizes most of
the gain).
6. The partnership purchases high-grade financial
instruments. Income on such instruments is allocated
among the partners.
7. AlliedSignal buys a portion of the foreign
partner's interest and becomes the majority partner.
8. The partnership distributes the LIBOR notes to
AlliedSignal and cash to the foreign partner.
AlliedSignal sells the LIBOR notes.
9. The partnership liquidates within 12 to 24 months
of formation.
Merrill Lynch's representatives explained that the PPN sale could
be reported pursuant to the installment sale rules. Under these
rules, a small fraction of the PPNs' basis would be used to
calculate the gain on the sale and the remaining basis would be
allocated to the LIBOR notes. Thus, the PPN sale would create a
large capital gain, and the LIBOR note sale would create a large
1 LIBOR (London Interbank Offering Rate) is the interest
rate that most international banks dealing in Eurodollars charge
each other for large loans. The contingent obligations are
called LIBOR notes because payments are based on the product of
LIBOR times a notional amount.
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Last modified: May 25, 2011