Install OS X Lion

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The latest OS the Late '06 MacBook supports
is OS X Lion 10.7.5.

On your iMac:

You can download an OS X Lion installer from
Apple's website, as you know.

The installer downloads in the form of a DMG.
So double-click the DMG to mount it, then
double-click the PKG inside to run the installer.

The PKG will place an "Install (Mac) OS X Lion.app"
in your Applications folder.

Once you have that, you can use DiskMaker X
to create an OS X Lion installation USB:
https://diskmakerx.com/download/
(You want "DiskMaker X 3.0.4")

Run DiskMaker X. It will automatically detect
your Install (Mac) OS X Lion.app. It'll
also ask you to select an 8GB+ USB drive,
which will be erased.
This USB drive will be used as the installation
medium for OS X Lion, to be used on your MacBook.

Once DiskMaker X is done (it'll notify you and
make a roaring noise when it is), eject the
OS X Lion installation USB drive.

On your MacBook:

Power it down if it's on.

Attach the OS X Lion installation USB drive.

While holding down OPTION, power on the MacBook.
This will take you to the boot volume selection menu.

Select the "Install (Mac) OS X Lion" volume.

Once the installer has booted, select your language.
Before continuing with the installation, you'll
want to open Disk Utility and erase your hard drive.
To do that:

Select "Disk Utility" from the "Mac OS X Utilities"
menu you're brought to.

In Disk Utility, select your HDD from the sidebar.
Note that you should *not* select whatever partition
your HDD may have, e.g. "Macintosh HD" - instead,
select the item above that, that contains whatever
partition(s) there may be.

Select the "Partition" tab, to the right of the
sidebar, near the top.

Under "Partition Layout", select "1 Partition".
Name the partition as you please - I use
"Macintosh HD" by default.
For "Format", select "Mac OS Extended (Journaled)".
Leave the size as-is.

BEFORE SELECTING APPLY, select "Options..."
(under the partition visualization) and make
sure "GUID Partition Table" is selected.
Then click OK.

Click "Apply", wait for Disk Utility to finish
doing its thing, and exit Disk Utility.

Then select "(Re)Install (Mac) OS X".

Select your HDD. Select "Continue" until
the installation starts (you won't need to
deviate from the defaults).

Your MacBook will reboot automatically when
the installation is finished. You can then
remove the installation USB drive, and setup
your MacBook as usual.