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Since the overall transaction must have economic substance
for the Federal tax statutes to apply, we first consider whether
the section 453 investment strategy had economic substance.
Petitioner concedes that the section 453 investment strategy was
tax motivated, but argues that tax-independent considerations
informed and justified each step of the strategy. Petitioner
explains ACM's investment in the Citicorp Notes as follows:
"[T]he ACM partners believed the Citicorp Notes offered a
reasonable return on ACM's investment until such time as ACM
might require cash for the purchase of Colgate debt". The
Citicorp Notes were sold after 24 days to enable the partnership
to invest in Colgate debt and LIBOR Notes. Petitioner argues
that the investment in LIBOR Notes had two purposes. First,
unlike an interest rate swap, which ACM could have used as an
alternative hedging instrument, the LIBOR Notes provided the
partners with an investment return. According to petitioner,
"there was a realistic prospect that ACM would have made a profit
on the LIBOR Notes." Petitioner contends that ACM disposed of
the BFCE Notes and the BOT Notes when the hedging protection was
no longer needed. Second, ACM invested in LIBOR Notes because it
was "within the four corners of the partnership to operate as a
hedge".
In light of each of these stated purposes, we examine the
economic substance of the section 453 investment strategy.
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