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Income Tax Keyed to Graetz
ACM Partnership v. Commissioner
Citation:157 F.3d 231 (3rd Cir. 1998)
The ACM partnership was created by the subsidiaries of three different corporations: Algemene Bank Nederland N.V. (“ABN”), Colgate-Palmolive Company (“Colgate”), and Merril Lynch Capital Services (“Merril Lynch”). The partnership was formed to participate in a series of transactions including buying $175 million in Citicorp notes and subsequently selling those notes for $140 million in cash and purchasing another $34.4 million notes in a contingent installment exchange where the notes purchased were to pay out based on the LIBOR rate. The purchase of the LIBOR notes, pursuant to the ratable basis recovery rule under U.S. tax law, allowed for the partnership to apportion its basis in the notes over a six-year period leading to a significant gain in the first year of the partnership. This gain was absorbed by ABN, which initially owned the vast majority of ACM stock. After the first year, ABN was bought out and Colgate became a 99.7% owner of ACM stock and subsequently absorbed the losses created by the ratable basis recovery rule over subsequent years. The Commissioner of Internal Revenue disallowed the deductions passed on to Colgate, finding the transactions lacked economic substance.
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