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petitioner made allocations based on the methodology of the
tribunal. Petitioner then determined what income tax consequence
to assign to each of those allocations and reported those
consequences accordingly. Respondent agrees with petitioner’s
allocations and with all but one of the consequences determined
by petitioner. Petitioner treated $55,147,935, the amount
described by the tribunal as the “level of inflation” adjustment,
as an amount realized on the sale or other disposition of the
concession. Respondent does not agree with petitioner that the
“level of inflation” adjustment is an amount realized on the sale
or other disposition of the concession (which would give rise to
a long-term capital gain in an equal amount). Respondent
believes that the “level of inflation” adjustment (the disputed
item) is ordinary income in the nature of interest. As the
parties have framed the issue, we must determine whether the
disputed item is as petitioner describes it or is as respondent
describes it.
B. Arguments of the Parties
Petitioner’s argument is as follows:
Petitioners contend that the unexplained 10%
“inflation” factor [the disputed item] is taxable as
capital gain under section 1231 because it represented
disguised compensation for Kuwait’s premature
termination of Aminoil’s Concession, for which there is
no identifiable compensation on the face of the Award.
Respondent’s argument is as follows:
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