- 86 -
"[B]oth parties agree that the question of substance is critical
to the outcome. At the most fundamental level, this case is
about very different views of commercial reality and very
different views of the tax law's concept of substance."
ACM sold the $175 million aggregate principal amount of
Citicorp Notes for $140 million in cash and eight LIBOR Notes,
and, in connection therewith, reported a capital gain for
FYE 11/30/89 and a corresponding capital loss for FYE 12/31/91.
Respondent eliminated this gain and disallowed the loss.
Respondent determined that the underlying transactions should not
be given effect for Federal income tax purposes because it was
tax-driven and devoid of economic substance. Respondent argues
that the formation of the partnership and its activities during
the relevant years were merely prearranged steps in a contrived,
tax-motivated transaction that was carried out in accordance with
Merrill's pursuit of approximately $100 million in taxable losses
for Colgate. Respondent states that the liability management
functions ascribed to ACM in documentation prepared by Merrill
and Colgate were spurious. Respondent alleges that the
structured transactions in which the LIBOR Notes were created and
sold formed a "tax shelter market" that was controlled by
Merrill, and that was operated in accordance with unwritten
understandings. Respondent asserts that this "market" was
supported by subsidizing the participating banks, as well as by
Page: Previous 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 NextLast modified: May 25, 2011