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Petitioner contends that the CINS transactions were imbued
with economic substance inasmuch as the partnerships accepted the
benefits and burdens of ownership of the PPNs and CDs, and later
the LIBOR notes. Petitioner asserts that the partnerships
assumed financial risks associated with the PPNs and CDs,
including: (1) Credit risk--the risk that Chase or IBJ would not
be able to make an interest or principal payment; (2) event
risk--the risk that a single event or circumstance could preclude
Chase or IBJ from repaying its obligations; (3) credit spread
risk--the risk that general credit spreads in the market may rise
or fall; and (4) liquidity risk--the risk that the owner of a
debt instrument will not be able to convert the instrument into
cash at or near its market value. Petitioner further contends
that the economic substance of the CINS transactions is reflected
in the interest (both paid and accrued) that Saba and Otrabanda
earned on the PPNs and CDs, as well as the reduced price that the
partnerships received upon the sale of the instruments reflecting
their lack of liquidity. Petitioner maintains that the
partnerships assumed similar financial risks, as well as
benefits, when they sold the PPNs and CDs for cash and LIBOR
notes.
There is no dispute that the partnerships owned the PPNs and
CDs, that the partnerships earned interest on these instruments,
or that the partnerships sold the PPNs and CDs for cash and LIBOR
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