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The “favorable financing” consisted of a number of financing
arrangements, the interest rates payable on which were below
those currently prevailing in the financial markets on January 1,
1985, because of an increase in interest rates since the date on
which petitioner entered into the respective arrangements. Those
financing arrangements consisted essentially of issuances of:
(1) Notes and bonds payable; (2) subordinated debt (capital
debentures and zero coupon bonds); (3) collateralized mortgage
obligations (CMOs); and (4) guaranteed mortgage certificates
(GMCs). Petitioner claims that the net present value of future
cashflows computed at market rates as of January 1, 1985,
exceeded the net present value of future cashflows for each
respective instrument at its contract rate. It is this
difference that petitioner claims as its favorable financing
asset as of January 1, 1985. Petitioner has not reported its
favorable financing as an asset on its books or on any financial
statement. Petitioner did not acquire its favorable financing in
any purchase transaction.
Under DEFRA section 177(d)(2)(A)(ii), 98 Stat. 711, Congress
provided a specific adjusted basis for determining gain on the
sale or other disposition of property held by petitioner on
January 1, 1985. DEFRA section 177(d)(2)(A)(ii) provides that
the adjusted basis of any asset of petitioner shall “for purposes
of determining any gain, be equal to the higher of the adjusted
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