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2(a)(1), Income Tax Regs., is applicable to the CIC/CIHI
transaction because CIC became a creditor of CIHI and the 11.5-
percent interest rate was not arm’s length. Del. Code Ann. tit.
6, sec. 1301(3) and (4) (2005) (a creditor is defined as a person
who has a right to payment).
Respondent cites section 1.482-1(d)(3)(ii)(B) and
(f)(2)(ii), Income Tax Regs., as authority for restructuring the
transfer between CIC and CIHI as a new loan between Holdings and
CIHI. Section 1.482-1(d)(3)(ii)(B), Income Tax Regs., states:
The contractual terms, * * * agreed to in writing * * *
will be respected if such terms are consistent with the
economic substance of the underlying transactions. In
evaluating economic substance, greatest weight will be
given to the actual conduct of the parties, and the
respective legal rights of the parties * * *. If the
contractual terms are inconsistent with the economic
substance of the underlying transaction, the district
director may disregard such terms and impute terms that
are consistent with the economic substance of the
transaction.
Respondent contends that the terms of the transaction are
inconsistent with the transaction’s economic substance.
Respondent further contends that arm’s-length parties would not
have entered into this transaction because the market rate of
interest was 8 percent at the time of the assumption. As a
result, respondent recast the CIC/CIHI transaction as a repayment
by CIC to Holdings of the $49,784,881 followed by a new loan from
Holdings to CIHI at an 8-percent interest rate. Respondent
further asserts that the excess 3.5 percent interest paid to
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