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placement discount on the sale of the IBJ CDs eventually was
borne solely by Brunswick following the distribution and sale of
the LIBOR notes.
A portion of the $750,000 private placement discount on the
sale of the IBJ CDs was attributable to the CDs' lack of
liquidity. If Otrabanda had invested directly in LIBOR notes, as
opposed to first purchasing the IBJ CDs, Otrabanda could have
avoided the portion of the $750,000 discount attributable to the
CDs' lack of liquidity.
O'Brien understood that Otrabanda had invested in the IBJ
CDs, prior to its investment in the LIBOR notes, to ensure that
the transactions would be treated for tax purposes as CINS
transactions. The IBJ CDs were not readily tradeable on an
established market. In addition, because the Sumitomo LIBOR
notes provided for 20 variable, quarterly payments, Otrabanda
could not determine the aggregate selling price of the IBJ CDs by
the end of its July 31, 1990 taxable year. Consequently,
Otrabanda reported the sale of the IBJ CDs as an "installment
sale" under section 453(b). Otrabanda computed its gain on the
sale of the IBJ CDs through a ratable allocation (or recovery) of
its basis in the IBJ CDs under section 15A.453-1(c), Temporary
Income Tax Regs., 46 Fed. Reg. 10711 (Feb. 4, 1981).
Although the Sumitomo LIBOR notes provided for 20 quarterly
payments to be paid over a 5-year period beginning November 1,
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