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funds from CIHI. On June 28, 1996, CIC and CIHI signed an
assumption agreement in which CIC agreed to transfer $49,784,881
to CIHI in exchange for CIHI’s assuming all of its obligations
relating to the note. Subsequent to the agreement, CIC
transferred the $49,784,881 to CIHI, and CIHI began making
payments pursuant to the terms of the agreement. Although the
note provided that the principal and accrued interest were not
due until October 7, 1998, CIHI paid the note in full on November
17, 1997. From June 28, 1996, through November 17, 1997, CIHI
performed all of its duties pursuant to the terms of the
agreement. Had CIHI not performed all of its duties, CIC had a
legal right to enforce the terms of the agreement. Furthermore,
petitioners were aware that by delaying repayment of the note
they could take advantage of the favorable fluctuations in the
currency exchange rates (i.e., the repayment amount could
continue to decrease if the dollar strengthened relative to the
pound). Petitioners raised, and respondent failed to adequately
refute, these factors. Accordingly, we conclude that the
contractual terms were consistent with the economic substance of
the transaction.
Finally, because the transaction had economic substance,
section 1.482-1(f), Income Tax Regs., prohibits respondent from
restructuring the terms as if his alternative had been adopted by
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