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In order to be deductible, a loss must reflect actual
economic consequences sustained in an economically
substantive transaction and cannot result solely from
the application of a tax accounting rule to bifurcate a
loss component of a transaction from its offsetting
gain component to generate an artificial loss which, as
the Tax Court found is “not economically inherent in”
the transaction.
Consistent with the foregoing, we conclude that the CINS
transactions were economic shams that neither appreciably
affected the partnerships’ beneficial interests or materially
altered the partnerships’ economic positions. Accordingly, we
sustain respondent's determination that no gains or losses will
be recognized on the sales of the PPNs and CDs. In addition, we
hold that Saba’s bases in the LIBOR notes distributed to
Brunswick and SBC were $26,601,451 and $7,032,954, respectively,
while Otrabanda’s basis in the LIBOR notes distributed to
Brunswick was $17,458,827.
V. Secondary Issues
Petitioner argues that if the Court determines that the
partnerships' purchase and sale of the PPNs and CDs do not have
economic substance, then the partnerships should not be required
to include in income the interest payments that they received on
those instruments. Petitioner concedes that the partnerships are
required to include in income the interest payments that they
received on the LIBOR notes. Petitioner further contends that
the partnerships are entitled to deductions for professional fees
paid to N.V. Fides and Cravath, Swaine, & Moore.
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