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execution.26 Before the negotiations to form ACM, Merrill had
already begun negotiations to purchase the Citicorp Notes.
Before their purchase, Merrill was negotiating for their
disposition. By the time ACM acquired the LIBOR Notes, Merrill
was arranging with Sparekassen the terms on which some of them
would be sold. The contingent payment sale was scheduled to take
place before the end of ACM's first taxable year in order to
permit the partnership to spread its tax basis in the Citicorp
Notes over 6 years instead of 5. The distribution and sale of
the BFCE Notes was scheduled to occur before the end of Colgate's
1989 taxable year in order to offset Southampton's share of the
contingent payment sale gain on Colgate's consolidated return.
It was the understanding of the principals that Kannex would
26 Respondent's expert, Irving H. Plotkin, concluded that:
In judging the economic rationality of the
Partnership, it must be remembered that the complex
financial transactions and the profits realized by the
parties did not occur as a reaction to or consequence
of random economic factors. Likewise, the very low
pretax rate of return suffered by Colgate was not the
result of poorly chosen investments or of any
unexpected adverse market conditions. Rather the
transactions and the returns were the result of a
carefully crafted and faithfully executed sequence of
sophisticated and costly financial maneuvers that left
little to chance or market opportunities. The score
for the Partnership's actions was very detailed and the
libretto even included the writing of the minutes of
the Partnership meetings weeks before those meetings
occurred. The actual Partnership transactions
conformed to each of the seven steps choreographed in
Merrill Lynch's September 1989 presentation to Colgate.
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