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to argue that the $26 million loan was obtained by petitioner at
an interest rate discount and that the interest rate discount
gives rise to OID associated with the loan. We decline to apply
the approach used in Monarch Cement Co. The evidence in the
instant case does not establish that the $26 million loan was
obtained at a below-market interest rate. Although bank
representatives testified that they would have liked to have
charged a higher interest rate on the $26 million loan, the
credible evidence does not establish that the parties to the $26
million loan actually negotiated and agreed to a discounted
interest rate as part of the compensation therefor.
Because the options were issued at market, petitioner and CC
Holdings incurred no direct costs in issuance of the options.
Similarly, any income to be realized by the banks on exercise of
the options in subsequent years we regard as in the nature, not
of OID, but of capital appreciation in an equity investment.
Petitioner makes numerous arguments as to why it should be
allowed OID deductions beginning either in the year the options
were issued or in the year the options were exercised. As we
have explained, the evidence does not establish that any OID was
incurred in the year of issuance.
With regard to 1992, the taxable year in which the options
were exercised, petitioner argues that it should be allowed a
deduction of $3.069 million as either OID, as loan fees, or as
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