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At the time the Chase PPNs were issued, Chase was rated A-
by Standard & Poor's and Baa2 by Moody's Investors Service
(Moody's). The Chase PPNs were not registered under the
Securities Act of 1933 and were not traded on an established
securities market.
On March 21, 1990, Chase made a timely interest payment of
$975,298.51 to Saba on the Chase PPNs. Saba included this
payment in its interest income on its Form 1065 (U.S. Partnership
Return of Income) for the taxable year ended March 31, 1990.
B. Saba's Sale of Private Placement Notes
While arranging Saba's purchase of the Chase PPNs, Merrill
Lynch began making arrangements for Saba to sell the Chase PPNs.
On March 6, 1990, and March 8, 1990, Merrill Lynch transmitted a
Summary of Terms for the Chase PPNs to Fuji Capital Markets
(Fuji) and Norinchukin Bank (Norinchukin), respectively. Fuji
and Norinchukin each prepared memoranda, seeking approval to
purchase the Chase PPNs, which stated that the transactions were
designed to provide tax savings for Merrill Lynch's customers.
Merrill Lynch had approached Fuji and Norinchukin regarding
the sale of the Chase PPNs because they were able to issue debt
instruments; i.e., LIBOR notes. Although Saba would have
incurred lower transaction costs by selling the Chase PPNs to a
money market fund, such funds were eliminated from consideration
inasmuch as they could not issue LIBOR notes.
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