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7. Payment of Interest
a. Background
During the years in issue, on the same day that LIIBV
received payments from petitioners which petitioners and LIIBV
denominated as interest, LIIBV generally transferred that amount
of money to one or more petitioners in what petitioners called
interest reinvestment loans. LIIBV, Transit, LWSI, and Tree did
this through a series of prearranged steps. LTL and LIIBV
decided how much interest each petitioner would owe before each
interest payment was due. LIIBV decided how much of the interest
payment to use to pay its costs of operations and to pay
dividends to LIL. LTL decided which petitioner would ask for an
interest reinvestment loan from LIIBV.
On the day that petitioners made a payment denominated as
interest to LIIBV, LIIBV typically transferred to petitioners an
amount equal or close to the amount of the payment. Petitioners
recorded these transactions in their books and records as
interest payments. Transit or LWSI made a payment denominated as
interest to LIIBV each time they received an interest
reinvestment loan from LIIBV. Many of the transactions described
in par. I-G-3, above, included interest reinvestment loans.
LIIBV transferred to Transit, LWSI, and Tree interest
reinvestment loans totaling more than 90 percent of what
petitioners contend are interest payments to LIIBV for the years
in issue.
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