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The 1991 Subordinated Loans, which totaled $328,272,605, had a
fixed maturity date of May 30, 2001, and provided for interest at
an annual rate of 10.7 percent, payable quarterly beginning
September 30, 1991.
Effective August 22, 1991, ACQ merged into petitioner, which
assumed ACQ’s obligations under the bank loans and the 1991
Subordinated Loans. After the merger, the Schneider Lenders
owned 100 percent of the stock of petitioner.
On August 23, 1991, the Schneider Lenders transferred the
1991 Subordinated Loans to Merlin Gerin Services, S.N.C. (SNC), a
Belgian entity, in return for a 100-percent ownership interest in
SNC. SNC was classified as a partnership for U.S. Federal income
tax purposes. As a result of the transfer, the notes reflecting
the 1991 Subordinated Loans were replaced with new notes
designating petitioner as the borrower and SNC as the lender.
A year later, on August 24, 1992, Schneider made a loan,
also subordinated to the bank loans, of $80 million to petitioner
(1992 Subordinated Loan). The 1992 Subordinated Loan was
evidenced by a promissory note, which had a fixed maturity date
of May 30, 2001, and provided for interest at an annual rate of
9.8 percent, payable quarterly beginning September 30, 1992.
Although the promissory notes for the 1991 and 1992
Subordinated Loans made interest payable quarterly commencing
September 30, 1991 and 1992, respectively, the promissory notes
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