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period, this advantage would have resulted in $58,000 more income
for the partnership and less than $10,000 more income for
Colgate. In short, any yield advantage that the Citicorp Notes
may have offered over less costly alternatives would not
significantly have improved Colgate's prospects for recovering
the $2-3 million present value of transaction costs that it
expected to incur in connection with the section 453 investment
strategy. Accordingly, we reject petitioner's third contention.
We conclude that the partnership did not undertake the
section 453 investment strategy with a reasonable expectation
that it would be profitable, on a pretax basis, for Colgate. We
also conclude that the strategy was not pursued with a realistic
expectation of realizing an economic profit for ABN.
Petitioner's expert, Beder, concedes that the expected rate of
return in an environment with a 50-percent probability on a
rising rate and a 50-percent probability on a falling rate would
only equal 2.3 percent. Moreover, as the excerpt from Pepe's
testimony quoted above confirmed, the agreed allocation of
transaction costs reflected the fact that ABN did not expect to
derive any significant profit from the strategy. To the extent
that interest on the Citicorp Notes may have exceeded the
interest that could be earned on money market instruments, Kannex
would have shared in this premium pro rata, but given the short
holding period, the accumulation would not have been significant.
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