Claymont Investments, Inc., As Successor in Interest to New CCI, Inc. and Subsidiaries - Page 22

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          petitioners.  More specifically, section 1.482-1(f)(2)(ii),                 
          Income Tax Regs., provides:                                                 
               the district director will evaluate the results of a                   
               transaction as actually structured by the taxpayer                     
               unless its structure lacks economic substance.                         
               However, the district director may consider the                        
               alternatives available to the taxpayer in determining                  
               whether the terms of the controlled transaction would                  
               be acceptable to an uncontrolled taxpayer faced with                   
               the same alternatives and operating under comparable                   
               circumstances.  In such cases, the district director                   
               may adjust the consideration charged in the controlled                 
               transaction based on the cost or profit of an                          
               alternative as adjusted to account for material                        
               differences between the alternative and the controlled                 
               transaction, but will not restructure the transaction                  
               as if the alternative had been adopted by the taxpayer.                
               * * *  [Emphasis added.]                                               
          While respondent was not authorized to restructure the                      
          transaction as if petitioners had adopted his proposed                      
          alternative, he could have adjusted the terms of the CIC/CIHI               
          transaction (e.g., reduced the interest rate).  Id.  Instead,               
          respondent seeks to collapse two separate transactions (i.e., the           
          Holdings/CIC and CIC/CIHI transactions), which were 8 years apart           
          in execution, and create a contractual relationship (i.e.,                  
          between Holdings and CIHI) that never existed.  Accordingly, we             
          conclude that respondent exceeded his section 482 grant of                  
          authority, and his determination is arbitrary and capricious.               
               B.   The Economic Substance Doctrine Is Inapplicable                   
               In the alternative, respondent contends that the economic              
          substance doctrine is applicable because “the transaction was               
          structured * * * solely to generate an inflated interest                    

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