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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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