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The Refinancing
On December 18, 1987, the board of directors of Waldorf II
(the Waldorf II board) resolved to borrow up to $175 million from
GECC. On December 23, 1987, Waldorf II borrowed approximately
$113,539,873.30 from GECC (the 1987 indebtedness or the borrowed
funds). At least in part, Waldorf II incurred the 1987
indebtedness in order to make a distribution to HEI with respect
to its stock in Waldorf II.
The Distribution
On December 18, 1987, the Waldorf II board resolved to
declare a dividend of $92 million payable to its shareholder,
HEI, and, on December 23, 1987, Waldorf II made a distribution to
HEI in satisfaction of that declaration of dividend (the
distribution). The distribution included a cash payment to HEI
in the amount of $73,803,000 (the cash distribution). The
borrowed funds were used to make the cash distribution.
For Federal income tax purposes, the amount of the
distribution was $123,657,000. Waldorf II had no current or
accumulated earnings or profits as of June 30, 1988. To the
extent of $41,250,353, the distribution was treated as a return
on capital on HEI's 1988 consolidated Federal income tax return.
That balance of the distribution created an "excess loss account"
within the meaning of section 1.1502-14(a)(2), Income Tax Regs.
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