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Colgate could not have achieved a non-negative net present
value under any reasonable forecast of future interest rates. A
major war, an oil crisis, a resurgence of double digit inflation
or other economic catastrophe might have been capable of inducing
a sudden rise in interest rates by 400-500 basis points and might
perhaps have sustained such levels for a period of months or
years. But nothing in the record suggests that anyone involved
in planning the section 453 investment strategy anticipated, or
had any reason to anticipate, the extraordinary economic
conditions which would have been necessary in order to make
Colgate's investment in the LIBOR Notes profitable.
Appreciation of the LIBOR Notes was not the only source of
potential profit from the section 453 investment strategy.
Petitioner and its experts contend that some or all of the
transaction costs of the strategy could have been recovered out
of returns from the Citicorp Notes. They identify three sources
of potential profit: (1) Gain on the sale of the Citicorp Notes
attributable to an improvement in Citicorp's credit, (2) gain
attributable to an increase in the commercial paper rate to which
the coupon on the notes was linked, and (3) accumulation of
interest income over the period the partnership held the notes.
With respect to petitioner's first claim that an improvement
in Citicorp's credit could produce a profit, petitioner states
that "ACM's exposure to Citicorp's credit was real, not
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