Claymont Investments, Inc., As Successor in Interest to New CCI, Inc. and Subsidiaries - Page 20

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          Holdings by CIHI must be redistributed as a “deemed * * *                   
          [distribution] by CIHI to Petitioner and by Petitioner to Carlton           
          followed by a constructive contribution of this amount by Carlton           
          to Holdings.”  We disagree for reasons set forth below.                     
               First, the interest rate Holdings charged CIC was arm’s                
          length and, as a result, section 1.482-2(a)(1), Income Tax Regs.,           
          is not applicable to the Holdings/CIC transaction.  Because the             
          Holdings/CIC and CIC/CIHI transactions are separate transactions,           
          respondent may make reallocations only between CIC and CIHI.                
          Respondent, however, seeks to consolidate and recast both                   
          transactions as a repayment of the loan between Holdings and CIC            
          followed by a new loan between Holdings and CIHI, thus triggering           
          the recognition of foreign exchange gain by CIC.                            
               Second, respondent was not authorized, pursuant to section             
          1.482-1(d)(3)(ii)(B), Income Tax Regs., to recast the                       
          Holdings/CIC and CIC/CIHI transactions because these transactions           
          had economic substance.  Respondent does not contend that the               
          Holdings/CIC transaction lacked economic substance.  Moreover,              
          CIC’s and CIHI’s conduct established that the terms of their                
          agreement were consistent with the economic substance of the                
          underlying transaction.  See sec. 1.482-1(d)(3)(ii)(B), Income              
          Tax Regs.  In 1996, Carlton contemplated various financing                  
          options to acquire RSA and Cinema Media, Ltd.  One of those                 
          options was to fund a part of the acquisition internally with               

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