ACM Partnership, Southampton-Hamilton Company, Tax Matters Partner - Page 114

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          New York vis-a-vis Merrill Capital.  When Kannex's indirect                 
          interest in the LIBOR Notes held by the partnership changed                 
          significantly as a result of the distribution of the BFCE Notes             
          to Southampton on December 13, 1989, the partial purchase of                
          Kannex's partnership interest on June 27, 1991, and the                     
          redemption of its remaining interest on November 27, 1991, both             
          legs of the hedge swaps were adjusted proportionately.  At these            
          times, the portion of the swap that was to be terminated would be           
          marked to market, and the counterparty that would otherwise have            
          benefitted from the change in market interest rates would receive           
          a compensatory termination payment.  The back-to-back hedge swaps           
          satisfied complementary needs.  Kannex was able to stabilize its            
          return on $28 million of its partnership investment.  Likewise,             
          Merrill Capital was able partly to offset the interest rate                 
          exposure that it incurred in connection with its hedge swaps with           
          BOT and BFCE.                                                               
               The back-to-back hedge swaps relating to the LIBOR Notes               
          also served an additional function that can be understood only by           
          reference to the terms of the structured transactions in which              
          the LIBOR Notes were issued.  According to the analysis of                  
          petitioner's expert, the transaction spreads implied in Merrill's           
          pricing of the Citicorp Notes and LIBOR Notes for purposes of the           
          contingent payment sale could be expected to result in the                  
          transfer of between $1.8 and $1.9 million of value from ACM to              






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