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K. Audit of LTL by Canadian Tax Authorities
Canadian income tax authorities audited LTL for 1987 and
1988. LTL wrote that its U.S. subsidiaries used funds that it
advanced to them to provide capital and that those funds became
part of the permanent capital of the company. LTL said that the
advances provided about 35 percent of the total capital of
Laidlaw in 1987 and 1988. LTL said that if it were to incur a
loss on a loan to a subsidiary it would not be allowed to deduct
the loss as a bad debt. LTL said:
3. Laidlaw Inc. acts as a conduit in providing funds
for its operating subsidiaries. The funds are used by
the subsidiaries as working capital and for capital
acquisitions. Without these funds, the subsidiaries
would be seriously undercapitalized. The loans are in
the nature of capital contributions to the
subsidiaries.
II. OPINION
A. Contentions of the Parties
The sole issue for decision is whether payments totaling
$133,515,459 from petitioners' subsidiaries to LIIBV during the
years in issue are deductible as interest under sections 162 and
163(a).
Respondent determined and contends that petitioners may not
deduct the payments in dispute as interest because the LIIBV
advances to Transit, Tree, and LWSI were capital contributions
and not loans. Petitioners contend that the amounts in dispute
are deductible as interest under sections 162 and 163(a) because
the LIIBV advances were debt and because the amounts at issue
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