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c. Hedging within the four Corners of the partnership
The theory of the LIBOR Note hedge was carefully developed
in contemporaneous documents and argued in these proceedings. It
forms the linchpin of petitioner's economic substance argument.
It is, however, false. It is false even if we assume arguendo
that there was as high a negative correlation between the
interest rate sensitivity of the LIBOR Notes and that of the
Colgate debt as petitioner asserts, a proposition that respondent
and her experts vigorously contest. To recognize why the theory
is false it is necessary to grasp this central insight: Neither
ABN nor Colgate needed a hedge inside the partnership for the
Colgate debt because both were effectively fully hedged outside
the partnership - ABN through swaps and Colgate by virtue of
being the issuer of the debt. Employing an additional hedging
instrument within the partnership was not only redundant, but
also flatly inconsistent with the manner in which both principals
were otherwise managing their interests in the partnership.
In his opening argument at trial, petitioner's counsel began
his analysis of the case as follows:
ACM, the partnership, is before the Court,
and the tax treatment of its transactions is
at the heart of the dispute. In many
respects, however, the real party in interest
is the Colgate-Palmolive Company and the
impact of ACM's transactions from Colgate's
vantage point is critical to understanding
the substance of this case.
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