Saba P'ship v. Commissioner

T.C. Memo. 1999-359

UNITED STATES TAX COURT

SABA PARTNERSHIP, BRUNSWICK CORPORATION,
TAX MATTERS PARTNER, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

OTRABANDA INVESTERINGS PARTNERSHIP, BRUNSWICK CORPORATION,
TAX MATTERS PARTNER, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 1470-97, 1471-97. Filed October 27, 1999.

During 1990 and 1991, B, a domestic corporation,
realized substantial capital gains from the sale of a
number of its business units.

In 1990, B joined with a foreign bank (ABN) to
form two general partnerships, S and O. Immediately
upon their formation, S purchased private placement
notes (PPNs) and O purchased certificates of deposit
(CDs). Within 1 month, and immediately prior to the
close of the partnerships' first taxable year, S and O
sold their PPNs and CDs for cash (80 percent) and LIBOR
notes (20 percent). These transactions were intended
to satisfy the requirements of a contingent installment
sale under I.R.C. sec. 453. Relying on the ratable
basis recovery rules under sec. 15A.453-1(c), Temporary
 - 2 -

Income Tax Regs., 46 Fed. Reg. 10711 (Feb. 4, 1981),
the partnerships applied one-sixth of their bases in
the PPNs and CDs in computing their "gains" on the
sales of the PPNs and CDs. Due to a large disparity in
the partners' initial capital contributions to the
partnerships, ABN was allocated 90 percent of the
"gains" on the sales of the PPNs and CDs. As a foreign
entity, ABN's distributive share of the partnerships'
"gains" was not subject to U.S. income tax.

Following the close of the partnerships' first
taxable year, ABN's interests in the partnerships were
reduced through direct purchases by B and redemptions
by the partnerships. S and O subsequently distributed
cash to ABN and the LIBOR notes to B. B sold the LIBOR
notes for cash. Relying on the ratable basis recovery
rules under sec. 15A.453-1(c), Temporary Income Tax
Regs., supra, B allocated the remaining bases in the
PPNs and CDs in computing its "losses" on the sales of
the LIBOR notes. For the taxable years ending 1990 and
1991, B reported capital losses of $142,953,624 and
$32,631,287, respectively.

Held: The disputed transactions were not
motivated by legitimate non-tax business purposes and
were not imbued with objective economic substance.
Held, further, the disputed transactions are shams that
will not be respected for Federal income tax purposes.
Held, further, the partnerships' income for the years
in issue does not include interest earned on the PPNs
and CDs. Held, further, the partnerships are entitled
to deductions for certain organizational expenses
subject to the limitations contained in sec. 709(b),
I.R.C.

Joel V. Williamson, Thomas C. Durham, Daniel A. Dumezich,

Clisson S. Rexford, Gary S. Colton, Jr., Stuart E. Thiel, Neil B.

Posner, and Judith P. Zelisko, for petitioner.

Jill A. Frisch, Karen P. Wright, Lewis R. Mandel, and

Theresa G. McQueeney, for respondent.
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CONTENTS

FINDINGS OF FACT . . . . . . . . . . . . . . . . . . . . . 7

I. Brunswick Corporation . . . . . . . . . . . . . . . . . . 7
A. Business Groups . . . . . . . . . . . . . . . . . . . 7
B. Takeover Concerns/Defenses . . . . . . . . . . . . . . 8
C. Divestitures . . . . . . . . . . . . . . . . . . . . 11
D. Merrill Lynch Partnership Proposal . . . . . . . . . 14
E. The Zelisko Memorandum . . . . . . . . . . . . . . . 14
F. O'Brien's Interest Rate Forecast . . . . . . . . . . 20

II. Algemene Bank Nederlands N.V. . . . . . . . . . . . . . 20

III. Saba Partnership . . . . . . . . . . . . . . . . . . . . 23
A. Sodbury Corporation . . . . . . . . . . . . . . . . 23
B. Skokie Investment Corporation . . . . . . . . . . . 25
C. Saba Organizational Meeting . . . . . . . . . . . . 25
D. Miscellaneous Fees . . . . . . . . . . . . . . . . . 27

IV. Saba Transactions . . . . . . . . . . . . . . . . . . . 30
A. Purchase of Private Placement Floating Rate Notes . 30
B. Saba's Sale of Private Placement Notes . . . . . . . 31
C. McManaman's Tax Projections . . . . . . . . . . . . 37
D. Brunswick's Purchase of 50 Percent of Sodbury's
Partnership Interest . . . . . . . . . . . . . . . 38
E. Brunswick-ABN Consulting Agreement . . . . . . . . . 39
F. Payments on 4 LIBOR Notes . . . . . . . . . . . . . 39
G. Distribution of 3 LIBOR Notes to Brunswick . . . . . 39
H. Brunswick's Sale of 3 LIBOR Notes . . . . . . . . . 40
I. Partial Redemption of Sodbury's Partnership Interest
. . . . . . . . . . . . . . . . . . . . . . . . . 43
J. Payments on Norinchukin LIBOR Note . . . . . . . . . 43
K. Transfer and Termination of 3 LIBOR Notes . . . . . 44
L. Formation of SBC International Holdings, Inc. (SBC) 44
M. Downgrade of Brunswick’s Credit Rating . . . . . . . 45
N. Dissolution of Saba . . . . . . . . . . . . . . . . 45
O. Dissolution of Sodbury . . . . . . . . . . . . . . . 47
P. SBC's Sale of Remaining Norinchukin LIBOR Note . . . 48
Q. Termination of Chase Private Placement Notes . . . . 49

V. Saba-Related Swaps . . . . . . . . . . . . . . . . . . . 49
A. Fuji and Norinchukin Swaps . . . . . . . . . . . . . 49
B. Sodbury-ABN-Merrill Lynch Swaps . . . . . . . . . . 51
C. Bank of Tokyo Swaps . . . . . . . . . . . . . . . . 51
 - 4 -

D. Banque Francaise du Commerce Exterieur Swaps . . . . 51
E. Brunswick Swaps . . . . . . . . . . . . . . . . . . 52

VI. Otrabanda Investerings Partnership . . . . . . . . . . . 53
A. Structure . . . . . . . . . . . . . . . . . . . . . 53
B. Bartolo Corporation . . . . . . . . . . . . . . . . 55
C. Otrabanda Organizational Meeting . . . . . . . . . . 56
D. Miscellaneous Fees . . . . . . . . . . . . . . . . . 60

VII. Otrabanda Transactions . . . . . . . . . . . . . . . . 61
A. Otrabanda's Purchase of Certificates of Deposit . . 61
B. Otrabanda's Sale of Certificates of Deposit . . . . 62
C. Brunswick's Purchase of 50 Percent of Bartolo's
Partnership Interest . . . . . . . . . . . . . . . 67
D. Payments on LIBOR Notes . . . . . . . . . . . . . . 68
E. Distribution of LIBOR Notes to Brunswick . . . . . . 68
F. Brunswick's Sale of LIBOR Notes . . . . . . . . . . 69
G. Partial Redemption of Bartolo's Partnership Interest
. . . . . . . . . . . . . . . . . . . . . . . . . 70
H. Formation of OBC International Holdings, Inc. . . . 72
I. Dissolution of Otrabanda . . . . . . . . . . . . . . 72
J. Dissolution of Bartolo . . . . . . . . . . . . . . . 74
K. Termination of the 4 LIBOR Notes . . . . . . . . . . 75
L. Termination of the IBJ CDs . . . . . . . . . . . . . 75

VIII. Otrabanda-Related Swaps . . . . . . . . . . . . . . . 75
A. Otrabanda Swap . . . . . . . . . . . . . . . . . . . 75
B. Sumitomo Swaps . . . . . . . . . . . . . . . . . . . 75
C. Bartolo-ABN-Merrill Lynch Swaps . . . . . . . . . . 76
D. Banque Francaise du Commerce Exterieur Swaps . . . . 76
E. Brunswick Swaps . . . . . . . . . . . . . . . . . . 76

IX. Saba's and Otrabanda's Tax Returns . . . . . . . . . . . 77

X. Brunswick's Partnership Expenses . . . . . . . . . . . . 77
A. Transaction Costs . . . . . . . . . . . . . . . . . 77
B. Legal and Accounting Fees . . . . . . . . . . . . . 78
C. Total Expenses . . . . . . . . . . . . . . . . . . . 79

XI. Interest Rate Forecasts . . . . . . . . . . . . . . . . 81

XII. Brunswick's Tax Returns and Related Documents . . . . . 83

XIII. Respondent's Determinations . . . . . . . . . . . . . 85
A. Saba FPAA . . . . . . . . . . . . . . . . . . . . . 85
B. Otrabanda FPAA . . . . . . . . . . . . . . . . . . . 86
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OPINION . . . . . . . . . . . . . . . . . . . . . . . . . . . 87

I. Evidentiary Matters . . . . . . . . . . . . . . . . . . . 88
A. Attorney-Client Privilege . . . . . . . . . . . . . 89
B. Work-Product Doctrine . . . . . . . . . . . . . . . 91

II. Contingent Installment Sale Provisions . . . . . . 93

III. Petitioner's Argument That An Economic Substance Analysis
Is Not Warranted . . . . . . . . . . . . . . . . . . . . 96
A. Gregory v. Helvering and Horn v. Commissioner . . . 96
B. Section 1001 and Cottage Savings . . . . . . . . . . 103

IV. Petitioner's Contention That CINS Transactions Are Imbued
With Economic Substance . . . . . . . . . . . . . . . . 110
A. Business Purpose . . . . . . . . . . . . . . . . . . 112
B. Economic Substance . . . . . . . . . . . . . . . . . 117
C. Conclusion . . . . . . . . . . . . . . . . . . . . . 129

V. Secondary Issues . . . . . . . . . . . . . . . . . . . . 130

MEMORANDUM FINDINGS OF FACT AND OPINION

NIMS, Judge: Respondent issued a notice of final

partnership administrative adjustment (FPAA) to Saba Partnership

(Saba) setting forth adjustments to Saba's partnership returns

for the taxable years ended March 31, 1990, March 31, 1991, and

June 21, 1991. Respondent also issued an FPAA to Otrabanda

Investerings Partnership (Otrabanda) setting forth adjustments to

Otrabanda's partnership returns for the taxable years ended July

31, 1990, and June 21, 1991. Brunswick Corporation, the tax

matters partner for both Saba and Otrabanda, invoked the Court's

jurisdiction by filing timely petitions for readjustment

challenging the FPAAs. (For simplicity, we refer to Brunswick
 - 6 -

Corporation as Brunswick or petitioner.) These cases were

consolidated for purposes of trial, briefing, and opinion.

On the date that Brunswick filed the petitions herein, Saba

and Otrabanda had been liquidated and no longer maintained a

principal place of business.

Respondent's adjustments in these cases are based on

alternative determinations. The central issue for decision is

whether the partnerships' purported contingent installment sale

transactions (hereinafter CINS transactions) should be

disregarded for tax purposes because they lack economic

substance.

Unless otherwise clear from the context, the following

words, their derivatives, and related terms are used for

narrative convenience only to describe the form of the disputed

transactions: "invest", "purchase", "gain", "loss", "borrow",

"loan", "pay", "sale", "distribute", "note", "agreement",

"commission", and "interest". By our use of such terms, we do

not mean to suggest any conclusions concerning the actual

substance or characterization of the transactions for tax

purposes. Unless otherwise indicated, section references are to

sections of the Internal Revenue Code in effect for the years in

issue, and Rule references are to the Tax Court Rules of Practice

and Procedure.
 - 7 -

FINDINGS OF FACT

Some of the facts have been stipulated and are so found.

The stipulated facts and exhibits are incorporated herein by this

reference.

I. Brunswick Corporation

A. Business Groups

Brunswick, headquartered in Skokie, Illinois, has been in

business for over 150 years. Brunswick's stock is traded on the

New York, Midwest, Pacific, London, and Tokyo stock exchanges.

During the late 1980s, Brunswick's operations were

organized among 3 lines of business: Marine, Recreation, and

Technical. The Marine group manufactured and sold pleasure and

fishing boats and marine engines on a worldwide basis. The

Recreation group operated 125 recreation centers worldwide and

manufactured and sold fishing rods, reels, and accessories, and

golf, bowling, and billiards products. The Technical group,

which consisted of the Defense, Technetics, and Industrial

Products divisions, manufactured and sold a wide variety of

products for military, aerospace, and industrial use.

Jack F. Reichert (Reichert) served as Brunswick's chairman,

president, and chief executive officer; William R. McManaman

(McManaman) served as Brunswick's vice president-Finance; Thomas

K. Erwin (Erwin) served as Brunswick's controller; Richard S.
 - 8 -

1. O'Brien (O'Brien) served as Brunswick's treasurer; and

Judith P. Zelisko (Zelisko), an attorney, served as Brunswick's

assistant vice president, Director of Taxes.

In June 1988, Reichert informed Brunswick's Board of

Directors that the company's sales of marine products, then

approximately 75 percent of Brunswick's overall net sales,

appeared to be slowing. In fact, between 1988 and 1989,

Brunswick's net marine sales dropped from $2,449,000,000 to

$2,000,000,000, or by approximately 18 percent. In response to

these developments, Brunswick immediately reduced capital

expenditures in marine-related manufacturing facilities and

equipment, permanently closed two boat manufacturing plants,

idled 5 other plants, and laid off 5,000 employees.

On October 24, 1989, Standard and Poor's Corporation

(Standard & Poor's) downgraded Brunswick's long-term debt rating

from A- to BBB+. Standard and Poor's did not change Brunswick's

commercial paper rating. During this period, Reichert and

McManaman determined that it would be in Brunswick's best

interests to maximize the company's cash-flow and reduce debt.

B. Takeover Concerns/Defenses

In 1981, Brunswick's stock was selling at a discount to book

value. In January 1982, Whittaker Corporation (Whittaker) made

an unsolicited tender offer in an effort to acquire 49 percent of

the total voting power of Brunswick's outstanding securities. It
 - 9 -

appears that Whittaker coveted Sherwood Medical Industries, Inc.

(Sherwood), a Brunswick subsidiary, and that Whittaker intended

to sell Brunswick's remaining businesses if its takeover attempt

were successful. Brunswick determined that the Whittaker tender

offer was unfair to Brunswick's shareholders and successfully

defeated the takeover attempt by selling Sherwood to American

Home Products, Inc.

During the period 1982 to 1983, Gulf & Western Industries,

Inc. (Gulf & Western), accumulated up to 21 percent of

Brunswick's stock and threatened a takeover. The Gulf & Western

takeover threat abated when Gulf & Western's chief executive

officer died unexpectedly in February 1983.

During the 1980s, Brunswick took the following steps to

deter a hostile takeover: (1) Revised several of its

compensation-related programs in order to protect the interests

of its employees; (2) amended its charter to (a) provide for

staggered elections of directors, (b) restrict actions by

stockholders outside of stockholder meetings, and (c) increase

the number of authorized shares of Brunswick common stock from 40

million to 100 million shares; (3) amended the company's salaried

pension plans to protect against the use of Brunswick's excess

pension funds to finance a hostile takeover of the company; (4)

adopted a Preferred Share Purchase Rights Plan or poison pill;

and (5) amended its deferred compensation arrangements to provide
 - 10 -

that all amounts held under such arrangements could be paid to

the participants in the event of a change in control of the

company.

During March 1989, rumors surfaced that Irwin Jacobs or Ron

Perlman might attempt to take over Brunswick. On March 30, 1989,

Dow Jones News Service reported that McManaman had dismissed the

rumors. Nevertheless, on March 31, 1989, Brunswick's Board of

Directors called a special meeting and decided to amend the

company's "poison pill" to provide, among other things, that if a

person or group were to acquire 15 percent or more of Brunswick's

common stock, other stockholders would be permitted to purchase

Brunswick common stock at a discount of 50 percent of market

price. On April 1, 1989, the New York Times reported that Mr.

Jacobs had denied that he was planning a takeover bid for

Brunswick. In April 1989, Brunswick amended its Employee Stock

Option Plan (ESOP) to permit the plan to borrow funds in order to

purchase Brunswick stock. Shortly after the amendment was

adopted, the ESOP obtained a bridge loan of $100 million,

guaranteed by Brunswick, and purchased 5,095,542 shares of

Brunswick common stock.

No formal hostile takeover attempt was initiated against

Brunswick during 1989 or 1990.
 - 11 -

C. Divestitures

In 1988, Brunswick decided to sell a number of businesses in

its Technical group. In June 1989, Brunswick announced its

intention to sell its Industrial Products Division (IPD),

including Vapor Corporation and a group of businesses known as

TXT. In October 1989, Brunswick announced its intention to sell

its Technetics Division, including Energy Conservation Systems,

Circle Seal, and MIMS.

On June 24, 1989, Brunswick executed a letter agreement with

Merrill Lynch Capital Markets, a subsidiary of Merrill Lynch &

Co., Inc. (hereinafter collectively referred to as Merrill

Lynch), under which Merrill Lynch agreed to act as Brunswick's

exclusive financial adviser in connection with the sale of IPD

(the IPD fee agreement). Brunswick agreed to pay Merrill Lynch a

fee for its services as follows:

(i) in the case of a single sale transaction, 1.25% of
the aggregate purchase price paid in such sale
transaction, (but in no event less than $1,000,000) or
(ii) in the case of multiple sale transactions, the sum
of (1) 1.25% of the aggregate purchase price paid for
Vapor and (2) 2.50% of the aggregate purchase price
paid for any or all of the businesses which comprise
TXT, each such transaction fee payable in cash upon the
closing of each such sale transaction.

As of January 1989, Brunswick owned 3.1 million shares, or

approximately 36 percent, of Nireco Corporation (Nireco), a

Japanese corporation. In October 1989, Brunswick sold 400,000 of

its Nireco shares in connection with a public offering and
 - 12 -

listing of Nireco shares on the Japanese Over-the-Counter stock

exchange. In November 1989, Brunswick decided to sell all of its

remaining Nireco shares.

On January 29, 1990, Brunswick and Merrill Lynch executed a

letter agreement under which Merrill Lynch agreed to act as

Brunswick's exclusive financial adviser in connection with the

sale of Brunswick's Nireco stock in exchange for a fee of 1.125

percent of the proceeds of the sale (the Nireco fee agreement).

On March 5, 1990, Reichert and McManaman appeared before the

New York Society of Security Analysts. McManaman informed the

analysts that Brunswick anticipated realizing approximately $125

million from the sale of businesses in its Technical group and

that net proceeds from the sales would be used to reduce

Brunswick's debt. Between October 1989 and October 1990,

Brunswick's debt to capitalization ratio was reduced from 42.2

percent to 28.3 percent.

On March 28, 1990, Brunswick and Merrill Lynch executed a

letter agreement amending the IPD and Nireco fee agreements to

provide that Brunswick would pay additional fees of $750,000,

$500,000, and $250,000 upon the sales of Vapor Corporation, TXT,

and Brunswick's Nireco stock, respectively.

On September 4, 1990, Brunswick and Merrill Lynch executed a

letter agreement further amending the IPD and Nireco fee

agreements to provide that Brunswick would pay additional fees of
 - 13 -

$500,000 and $675,000 upon the sales of Vapor Corporation and

Brunswick's Nireco stock, respectively.

Brunswick sold the following businesses from its Technical

group on the dates and at the prices indicated:

Transaction Date Sales Price
Nireco - 400,000 shares October, 1989 $16,606,964
Energy Conservation Systems May 11, 1990 37,220,000
Vapor AC June 27, 1990 4,515,000
Nireco - 2,386,000 shares July 1990 91,061,851
TXT (Valve & Control) August 24, 1990 22,532,000
Circle Seal September 6, 1990 24,500,000
MIMS September 6, 1990 845,000
Nireco - 450,000 shares September, 1990 13,433,275
Vapor December 21, 1990 39,502,000

The $22,532,000 sales price for TXT included a $7,500,000

promissory note. On December 28, 1990, Brunswick received

$5,500,000 in exchange for cancellation of the note.

On October 22, 1990, Brunswick paid Merrill Lynch

$1,210,493--an amount equal to 1.125 percent of the proceeds from

the sale of 2,836,000 Nireco shares, plus an additional $925,000

pursuant to the March 28 and September 4, 1990, amendments to the

Nireco fee agreement.

On January 18, 1991, Brunswick paid Merrill Lynch

$1,161,116--an amount equal to 1.25 percent of the proceeds from

the sale of Vapor Corporation and Vapor AC, and 2.5 percent of

the sales price of TXT, plus an additional $1,750,000 pursuant to

the March 28 and September 4, 1990, amendments to the IPD fee

agreement.
 - 14 -

Brunswick filed a Form 1120 (U.S. Corporation Income Tax

Return) for 1990 reporting capital gains of $29,809,938 and

$100,782,182 attributable to the sales of its Technetics division

businesses and Nireco stock, respectively.

D. Merrill Lynch Partnership Proposal

In December 1989, after Brunswick had announced its

intention to sell its Technical businesses and Nireco stock,

Brunswick officials, including McManaman, Erwin, and Zelisko, met

with representatives of Merrill Lynch's investment banking group,

including E.S.P. Das (Das), managing director and vice chairman

of Investment Banking, Arshad R. Zakaria (Zakaria), Thomas R.

Williams, Jr. (Williams), and Jeff Neal (Neal). During this

meeting, Das described a structured transaction, including the

formation of a partnership between Brunswick and a foreign

financial institution, that would generate capital losses that

Brunswick could use to offset the capital gains that it would

realize from the sale of its Technical businesses.

Merrill Lynch used flowcharts in making its presentation to

Brunswick. The only scenario depicted in the flowcharts was a

tax loss for Brunswick.

E. The Zelisko Memorandum

In January 1990, O'Brien and Zelisko attended a second

meeting with Das and other Merrill Lynch representatives for

further discussions regarding the partnership proposal. On
 - 15 -

January 26, 1990, Zelisko prepared a memorandum, addressed to

Erwin and McManaman, summarizing the Merrill Lynch partnership

proposal in pertinent part as follows:

Set forth below is a bullet point summary of a
transaction proposed by Merrill Lynch to Brunswick
Corporation (BC) on December 8, 1989 to generate
sufficient capital losses to offset the capital gain
which will be generated on the sale of the Nireco
shares. The specific dollar amounts can be adjusted to
increase or decrease the capital loss required.

Step 1:

BC and an unrelated foreign partner (FP) would form a
Partnership no later than March 1, 1990 with BC
contributing $20 million in cash and the FP
contributing $180 million in cash. The Partnership
would have a fiscal year-end of March 31st since that
would be the year-end of the FP, the majority Partner.

Step 2:

Partnership buys a private placement note for $200
million with the cash in the Partnership and holds the
note for one month.

Step 3:

Before March 31, 1990, the Partnership would sell the
$200 million private placement note for $160 million in
cash and five-year contingent note with an assumed fair
market value (fmv) of $40 million. Under this
contingent note, payments would be made to the
Partnership over a five-year period equal to LIBOR[1]
times a fixed notional principal. The details
concerning the terms of this note require further
discussion by the Treasury Department with Merrill
Lynch.

1
LIBOR is an acronym for London Interbank Offering Rate
which is the primary fixed income index reference rate used in
European financial markets.
 - 16 -

The Partnership would recognize gain on the sale of the
private placement note calculated as follows:

Cash 160.0
Basis 33.3
(1/6 of 200) _____
Gain 126.7

BC's Gain 12.67
FP's Gain 114.03
Total Gain 126.70

BC's share of the gain equals its 10% ownership in the
Partnership for a taxable gain to BC of $12.67 million
in 1990.

Step 4:

In April 1990 or later, (i.e. until there has been some
movement in the value of the contingent note) BC buys
50% of FP's interest in the Partnership for $90
million, assuming that the fmv of the contingent note
is still $40 million. With this purchase, BC's basis
in its Partnership interest is $122.67 million
calculated as follows:

BC's initial investment $20.0 million
Gain 12.67
Purchase of 50% of FP's
interest 90.00
122.67

Step 5:

The Partnership distributes the contingent note to BC
assuming a fmv of $40 million. In addition, the
Partnership would distribute approximately $32.72
million in cash to FP which is the equivalent cash
distribution to FP given its percentage ownership.

Step 6:

BC sells the contingent note for cash. This sale of
the contingent note by BC generates the capital loss.
 - 17 -

BC's basis in the note 122.67
FMV of the note 40.00
Capital loss 82.67
Net Gain on sale of FP note 12.67
Net Capital loss 70.00

After the sale of the note, BC's tax basis in the
Partnership is zero and the Partnership still has
127.28 in cash (160-32.72).

Step 7:

In April 1991, the Partnership will be terminated.
There cannot have been any agreements, negotiations, or
understandings of any kind among the Partners or their
representatives regarding the possible liquidation of
the Partnership or the assets to be distributed to each
respective Partner upon termination and liquidation of
the Partnership or the transactions described in Steps
4 and 5. Prior to termination, 55% of the cash in the
Partnership will be contributed to Newco, a wholly-
owned subsidiary of the Partnership. Upon termination
of the Partnership, the Newco stock will be distributed
to BC and the remaining cash to FP.

Risks Involved

[Redacted material deleted.] Merrill Lynch did assure
us that their fee would not be due if the tax law
changed prior to implementation.

Cost Involved:

1. Merrill Lynch's fee is 5-10% of the tax savings.
Assuming a capital loss of $82 million, the tax savings
would be around $28 million and a 10% fee on such savings
results in a fee of $2.8 million. This 10% fee is
negotiable. Also, need to clarify whether the fee is on the
gross or net capital loss generated.

2. Legal fees for BC and operating expenses of the
Partnership which would be paid by BC, would run about
$400,000 - $500,000.

3. Compensation fees to the FP. Merrill Lynch talked
in terms of 40-75 basis points on the FP's equity
investment.
 - 18 -

4. Bid/offer spread on the private placement note and
on the contingent note.

The foregoing should be viewed as a summary of the
Merrill Lynch proposal. [Redacted material deleted.]

Merrill Lynch's partnership proposal, and specifically the

partnership's purchase of private placement notes (PPNs) and

their subsequent sale for approximately 80 percent cash and 20

percent LIBOR notes, was intended to comply with the contingent

installment sale provisions and ratable basis recovery rules

under section 453 and section 15A.453-1(c), Temporary Income Tax

Regs., 46 Fed. Reg. 10709 (Feb. 4, 1981).

Merrill Lynch's role was to manage all aspects of the

transactions, including enlisting the foreign partner, serving as

a financial adviser to the partnership, arranging for the

purchase and sale of the PPNs, and arranging for the purchase and

sale of the LIBOR notes.

On February 7, 1990, O'Brien wrote a memorandum to McManaman

regarding investment of the proceeds that Brunswick would derive

from the sale of its Technical businesses. O'Brien suggested

that Brunswick's need for investment advice should be used as a

"vehicle to acquaint ourselves with the investment expertise of a

sophisticated financial institution with worldwide marketplace

experience."
 - 19 -

On February 13, 1990, McManaman, O'Brien, and Zelisko

appeared before Brunswick's Board of Directors. The minutes of

the meeting state in pertinent part:

Mr. McManaman described a proposal for a
partnership with a foreign entity. The arrangement
would require the Company to make an equity investment
in the partnership of at least $20 million and not more
than $120 million in cash which would be invested in a
diversified portfolio of investments, including high
quality debt instruments, by the partnership. Mr.
McManaman then discussed the business purpose, tax
benefits and risks in the arrangement.

The minutes do not describe the business purpose underlying

Brunswick's participation in the partnership. McManaman

recommended approval of the proposal with the caveat that

Brunswick would not proceed with the transaction if management

were dissatisfied with the proposed foreign partner. McManaman

believed that tax benefits were a primary reason for Brunswick to

invest in the partnership.

The Board of Directors immediately authorized both McManaman

and O'Brien, or either of them, to enter into a partnership on

behalf of Brunswick for an equity investment of at least $20

million and not more than $120 million. On April 3, 1990,

Brunswick's Board of Directors conducted a meeting by way of a

telephone conference call and, upon the recommendation of

McManaman, authorized McManaman or O'Brien, or either of them, to

enter into a second partnership on behalf of Brunswick for an

equity investment of at least $20 million and not more than $120
 - 20 -

million. The second partnership investment was recommended

because Brunswick was generating additional cash and capital

gains from the sale of its Technical businesses and Nireco stock.

The Board of Directors also authorized McManaman and/or O'Brien

to enter into agreements on behalf of Brunswick for the purchase

and sale of treasury securities for forward delivery and to

increase the amount authorized for interest rate swap

transactions up to $225 million.

F. O'Brien's Interest Rate Forecast

One of O'Brien's duties as Brunswick's treasurer was to

track the movement of interest rates. In early 1990, O'Brien

believed that interest rates would rise. However, during the

period June through September 1990, O'Brien's view of the

direction of interest rates was "in transition", and he was

uncertain whether interest rates would rise or fall. By early

September 1990, O'Brien was convinced that interest rates would

fall.

II. Algemene Bank Nederlands N.V.

During the period in question, Algemene Bank Nederlands N.V.

(ABN), was the largest bank in the Netherlands. During all

relevant periods, ABN offered comprehensive corporate,

institutional, and individual financial services including

domestic and international lending, trade finance and

international payments, international corporate finance and
 - 21 -

advisory services, global investment management and advisory

services, foreign exchange, treasury, and risk management

services, and trust services. ABN Trust Company (ABN Trust), was

an ABN affiliate.

In 1989, Merrill Lynch representatives contacted Johannes

den Baas (den Baas), vice president, Corporate Finance (ABN-New

York), and proposed that ABN enter into general partnerships with

certain U.S. corporations. In an August 7, 1989 memorandum to

Arthur Arnold, executive vice president, Corporate Finance (ABN-

New York), den Baas described the structure of the partnerships

and timing of partnership investments in terms substantially

similar to those set forth in the Zelisko memorandum. Unlike the

Zelisko memorandum, den Baas stated that the partnership was

designed to reduce a U.S. corporation's liability for alternative

minimum tax. The den Baas memorandum includes a discussion of

the financial risks to ABN in pertinent part as follows:

Credit risk: The structure demands that virtually no
credit risk will be taken in the partnership since any
defaults on the principal of the investments will
jeopardize the objective as described hereafter. The
nature of paper invested in will be of the highest
credit quality and will have short term maturities.
* * *

* * * * * * *

Market interest rate risk: ABN New York will take care
of perfect hedges in order to protect the bank from the
changes in the value of the underlying securities * * *
due to interest rate fluctuations. * * *
 - 22 -

Legal and tax risk for ABN will be covered by opinions
of legal and tax counsel. Furthermore the proposed
structure for ABN that follows will in itself provide a
protection against U.S. tax liabilities.

den Baas summarized ABN's remuneration for participating in the

partnerships as follows:

The remuneration for ABN * * * will be 70-80 bps.
spread over the outstanding participation plus $100,000
upfront fee and all out of pocket expenses covered
(legal fees etc.). Since the structure itself will not
carry the possibilities for this level of remuneration
the income will be received by ABN New York in upfront
payments made by the corporation.

ABN eventually formed partnerships with several U.S.

corporations.

In early 1990, Merrill Lynch representatives contacted den

Baas and inquired whether ABN would enter into a partnership with

Brunswick. On February 15, 1990, den Baas drafted a memorandum

proposing a $180 million facility or loan to a Netherland

Antilles special purpose corporation (SPC) that would be managed

by ABN Trust and would enter into a partnership with Brunswick.

The memorandum stated in pertinent part:

ABN will receive again an upfront fee representing 75
bps over LIBOR over the outstanding plus the 15 bps
funding difference between LIBOR and CP [commercial
paper] upfront. The amount will be around $600,000 but
we have negotiated a minimum fee of $750,000 upfront
excluding ABN Trust Curacao's fees.

On the same date, den Baas drafted a credit proposal which

included a description of the partnership's anticipated

investment activities, including the purchase in the last week of
 - 23 -

February of highly rated PPNs, the sale of the PPNs in late March

for cash and installment notes, investment of the cash proceeds

in highly rated commercial paper, and Brunswick's gradual buy-

down of ABN's partnership interest. den Baas' credit proposal

stated that ABN would have the option to withdraw fully from the

partnership after January 1, 1991.

On February 20, 1990, ABN's North Atlantic Credit Committee

recommended approval of den Baas' credit proposal stating:

WE RECOMMEND APPROVAL. AS BRUNSWICK DOES NOT POSSESS
THE SAME HIGH CREDIT STANDING AS PREVIOUS DEALS, PLEASE
MAKE SURE WE CAN LIQUIDATE THE PORTFOLIO IF BRUNSWICK
IS UNABLE TO COME UP WITH THE CASH TO PAY US OUT BY
JANUARY 1991.

On February 23, 1990, ABN's Risk Management Department

granted approval for ABN to participate in the proposed

partnership on the condition that ABN would maintain the right to

liquidate the portfolio.

III. Saba Partnership

A. Sodbury Corporation

In The Netherlands, a foundation or stichting is a legal

entity that is managed and administered by a board. On January

18, 1990, ABN established two stichtings, Ronde Klip Foundation

(Ronde Klip) and Pietermaai Foundation (Pietermaai).

On January 18, 1990, Sodbury Corporation (Sodbury) was

incorporated in Curacao, Netherlands Antilles. On February 23,

1990, Sodbury and ABN Trust executed an agreement under which ABN
 - 24 -

Trust agreed to provide managerial services to Sodbury in

exchange for an annual fee of $25,000. At the time that Sodbury

was incorporated, Ronde Klip and Pietermaai each received one-

half or 3,000 shares of the 6,000 shares of Sodbury common stock

authorized to be issued. Each Sodbury share had a par value of

$1 for a total capitalization of $6,000.

On February 26, 1990, ABN's Willemstad branch (ABN-

Willemstad) and Sodbury entered into a revolving credit agreement

(RCA) under which ABN-Willemstad agreed to loan Sodbury up to

$125 million. By agreements dated February 26, 1990, Ronde Klip

and Pietermaai pledged their Sodbury stock as security for the

RCA.

On February 26, 1990, ABN-Willemstad and Sodbury entered

into a second agreement under which ABN-Willemstad agreed to lend

Sodbury up to $60 million, subordinated to the RCA described

above. Sodbury would not be required to pay interest on any such

loan unless the outstanding principal was not paid on the

expiration date.

By agreements dated February 26, 1990, Ronde Klip and

Pietermaai granted ABN irrevocable options to purchase their

Sodbury shares at par value.
 - 25 -

Sodbury was organized to participate as a general partner in

Saba because ABN was not interested in assuming the unlimited

liability of a general partner and ABN's loans to Sodbury could

be syndicated.

B. Skokie Investment Corporation

On February 21, 1990, Brunswick organized a wholly owned

subsidiary, Skokie Investment Corporation (Skokie), under the

laws of the State of Delaware. On February 28, 1990, Brunswick

agreed to lend Skokie $1 million in exchange for a demand

promissory note in that amount with interest at the prime rate.

C. Saba Organizational Meeting

On February 22, 1990, Brunswick representatives McManaman,

O'Brien, and Zelisko met in Bermuda with ABN representatives den

Baas and Peter H. de Beer (de Beer), Assistant Managing Director,

and Merrill Lynch representatives Macauley R. Taylor (Taylor),

Managing Director for Merrill Lynch Capital Markets, Das, and

Zakaria. Lawyers from the law firms of Cravath, Swaine & Moore,

and Mayer, Brown, & Platt, also attended the Bermuda meeting.

This was the first meeting between Brunswick and ABN. During

this meeting, McManaman and ABN representatives discussed the

possibility of ABN’s providing consulting services to Brunswick

for a fee.

On February 22, 1990, Brunswick and Merrill Lynch executed a

letter agreement under which Merrill Lynch agreed to serve as
 - 26 -

Brunswick's financial adviser regarding Saba in exchange for a

fee of $500,000. Brunswick paid Merrill Lynch's fee on April 4,

1990.

By partnership agreement dated February 23, 1990, Brunswick,

Skokie, and Sodbury formed Saba as a general partnership under

the laws of the State of New York. The partners agreed that Saba

would maintain its principal place of business in Curacao,

Netherlands Antilles. The partnership agreement stated that the

partnership was being formed "for the object and purpose of

making investments in notes, bonds, debentures, and other

interest bearing instruments, owning, managing and supervising

such investments, sharing the profits and losses therefrom, and

engaging in such activities necessarily incidental or ancillary

thereto." The partnership agreement further stated that

generally each item of partnership income, gain, expense, and

loss for each fiscal year would be allocated among the partners

in proportion to each partner's capital account. However, if a

partner's proportionate interest in partnership capital were to

change during any fiscal year, the partnership's books would be

closed as of the date of such a change and partnership income,

gain, expense, and loss would be allocated to the partners in

proportion to their respective capital accounts as determined

immediately prior to such change. The partnership agreement

stated that a partner would be permitted to request in writing
 - 27 -

that the partnership redeem all or any portion of its partnership

interest provided that no such request may be made by a partner

before April 1, 1991, if such redemption would reduce the

partner's partnership interest to less than $10 million.

However, the partnership agreement stated that no such redemption

would be permitted if Merrill Lynch determined that the

redemption would cause a disorderly liquidation of the

partnership's assets.

On February 28, 1990, the Saba partners made capital

contributions as follows:

Percentage
Capital Contribution Interest
Skokie $1,000,000 .5
Brunswick 19,000,000 9.5
Sodbury 180,000,000 90.0
$200,000,000 100.0

Skokie made its capital contribution from the proceeds of its

loan from Brunswick. Sodbury made its capital contribution from

the proceeds of its loans from ABN-Willemstad. The partners'

capital contributions were deposited into Saba's bank account at

ABN-New York.

D. Miscellaneous Fees

On February 23, 1990, Saba executed a letter agreement with

N.V. Fides (Fides), an ABN affiliate, under which Fides agreed to

provide a variety of administrative services for Saba in exchange

for an annual fee of $25,000. On the same date, Saba and Fides
 - 28 -

executed a second letter agreement in which Saba agreed to

indemnify Fides. During 1990 and 1991, Saba made the following

payments to N.V. Fides:

Date Amount

May 21, 1990 $53,921.81
August 22, 1990 1,156.50
September 20, 1990 972.16
January 3, 1991 1,035.10
March 15, 1991 1,093.31
April 17, 1991 1,191.57
June 21, 1991 1,074.35

On February 23, 1990, Saba (through Fides) and Merrill Lynch

executed a letter agreement under which Merrill Lynch agreed to

act as Saba's exclusive financial adviser. The letter agreement

does not state the amount of Merrill Lynch's fee for such

services. Merrill Lynch expected to be compensated for its

services (at least in part) by acting as the dealer in

transactions with Saba.

Saba maintained certain audited and unaudited financial

statements. The audited financial statements were prepared by

Arthur Andersen, Willemstad, Curacao (Arthur Andersen). The

unaudited financial statements were prepared by Fides pursuant to

its agreement with Saba.

Saba made the following payments to Cravath, Swaine & Moore

and Arthur Andersen for professional fees:
 - 29 -

Date Amount Payee

July 31, 1990 $130,266 Cravath
November 16, 1990 10,000 Arthur Andersen
June 21, 1991 10,000 Arthur Andersen
June 21, 1991 8,851 Cravath
$159,117

The $130,266 fee paid to Cravath on July 31, 1990, was composed

of $125,000 for professional services and advice, $2,962.35 for

miscellaneous costs, i.e., postage, copying, and messenger

charges, and $2,303.65 for travel and transportation charges.

In a December 2, 1994 memorandum from Cravath to Brunswick,

Cravath itemized the $125,000 charge for professional services as

follows:

The $125,000.00 fee was for negotiation and
drafting of the documentation, and for other related
services, in connection with: (a) the formation of Saba
($19,452.45), (b) the purchase by Saba of certain notes
($25,576.37), (c) the sale by Saba of such notes
($46,649.86), (d) the assignment of Saba’s right to
receive payments from such sale ($11,887.60) and (e)
other related matters ($21,433.72). * * *

Saba paid commercial paper fees as follows:

Date Amount

August 10, 1990 $3,342.50
September 12, 1990 620.00
October 3, 1990 510.00
November 6, 1990 840.00
December 18, 1990 620.00
January 9, 1991 195.00
February 14, 1991 450.00
March 15, 1991 415.00
April 17, 1991 345.00
May 31, 1991 305.00
June 12, 1991 115.00
$7,757.50
 - 30 -

IV. Saba Transactions

A. Purchase of Private Placement Floating Rate Notes

Merrill Lynch prearranged for Chase Manhattan Bank (Chase)

to sell private placement floating rate notes (Chase PPNs) to

Saba. On February 26, 1990, Merrill Lynch transmitted to Chase a

Summary of Terms for the PPNs. On February 28, 1990, the same

day that the Saba partners made their capital contributions to

the partnership, Saba paid Chase $200 million for one newly-

issued 5-year PPN in the principal amount of $200 million. On

March 19, 1990, Chase reissued the $200 million PPN as four $50

million 5-year PPNs. Other than the principal amounts, the 4

PPNs had the exact same terms as the original $200,000,000 PPN.

In particular, the Chase PPNs were due on February 15, 1995, and

paid interest at the 1-month commercial paper rate plus nine

basis points (360-day year) converted to a money market yield for

the actual number of days in the coupon period. The rate on the

PPNs was favorable to Chase because it was slightly less than

Chase's alternative sources of funding. Interest on the Chase

PPNs was due and payable monthly on the third Wednesday of each

month commencing on March 21, 1990. The Chase PPNs included a

European-style put option exercisable by the holder on April 17,

1991, at par plus accrued interest.
 - 31 -

At the time the Chase PPNs were issued, Chase was rated A-

by Standard & Poor's and Baa2 by Moody's Investors Service

(Moody's). The Chase PPNs were not registered under the

Securities Act of 1933 and were not traded on an established

securities market.

On March 21, 1990, Chase made a timely interest payment of

$975,298.51 to Saba on the Chase PPNs. Saba included this

payment in its interest income on its Form 1065 (U.S. Partnership

Return of Income) for the taxable year ended March 31, 1990.

B. Saba's Sale of Private Placement Notes

While arranging Saba's purchase of the Chase PPNs, Merrill

Lynch began making arrangements for Saba to sell the Chase PPNs.

On March 6, 1990, and March 8, 1990, Merrill Lynch transmitted a

Summary of Terms for the Chase PPNs to Fuji Capital Markets

(Fuji) and Norinchukin Bank (Norinchukin), respectively. Fuji

and Norinchukin each prepared memoranda, seeking approval to

purchase the Chase PPNs, which stated that the transactions were

designed to provide tax savings for Merrill Lynch's customers.

Merrill Lynch had approached Fuji and Norinchukin regarding

the sale of the Chase PPNs because they were able to issue debt

instruments; i.e., LIBOR notes. Although Saba would have

incurred lower transaction costs by selling the Chase PPNs to a

money market fund, such funds were eliminated from consideration

inasmuch as they could not issue LIBOR notes.
 - 32 -

On March 13, 1990, Saba conducted a partnership meeting at

Merrill Lynch's office in Toronto. O'Brien represented Brunswick

and Skokie at the meeting, while de Beer represented ABN by way

of a telephone conference call. Taylor and Joel Van Dusen, an

Investment Banking analyst, participated in the meeting on behalf

of Merrill Lynch.

During the meeting, the partners discussed their belief that

interest rates were likely to rise due to a stronger economy,

rising rates in Japan and Europe, and the reunification of

Germany. According to minutes of this meeting, Saba adopted a

resolution (at the suggestion of Merrill Lynch) authorizing and

directing the sale of the Chase PPNs for consideration consisting

of 80 percent cash and 20 percent contingent payments based on

LIBOR. The LIBOR notes would provide for periodic payments at a

designated LIBOR rate on a notional principal amount (NPA) for a

set term. The LIBOR note NPA was not intended to represent the

principal amount due but was used solely as a multiplier to

determine the amount of LIBOR-based contingent payments.

On March 23, 1990, immediately prior to close of Saba's

first taxable year, Saba sold 2 Chase PPNs to Fuji and 2 Chase

PPNs to Norinchukin. In exchange for the 2 Chase PPNs sold to

Fuji, Saba received $80 million in cash and 2 installment

purchase agreements dated March 23, 1990 (Fuji LIBOR notes), each

with a stated NPA of $25,720,000 for a total NPA of $51,440,000.
 - 33 -

In exchange for the 2 Chase PPNs sold to Norinchukin, Saba

received $80 million in cash and 2 installment purchase

agreements dated March 23, 1990 (Norinchukin LIBOR notes), each

with a stated NPA of $25,765,000 for a total NPA of $51,530,000.

At the time of these transactions, Fuji was rated Aa1 by

Moody's and AA by Standard & Poor's, while Norinchukin was rated

Aaa by Moody's and AAA by Standard & Poor's.

The sale of the Chase PPNs to Fuji and Norinchukin included

$94,384 of interest that had accrued on the PPNs for the period

from March 21, 1990 through March 23, 1990. Saba reported this

amount as interest income on its Form 1065 for the taxable year

ended March 31, 1990.

The Fuji and Norinchukin LIBOR notes were effective as of

April 2, 1990, and provided for a stream of 20 quarterly

payments, beginning on July 2, 1990, and ending on April 2, 1995,

in an amount that would float based on 3-month LIBOR determined

at the beginning of the payment period multiplied by (1) the NPA

of the note, and (2) a fraction consisting of the number of days

between payment dates divided by 360.

Saba sold the Chase PPNs at 99.25 percent of par, or at a

private placement discount of $1,500,000 (75 basis points times

$200,000,000). Paul A. Pepe (Pepe), vice president for Merrill

Lynch Capital Markets, determined the origination value for the

Fuji and Norinchukin LIBOR notes based upon the sum of the par
 - 34 -

value of the Chase PPNs and the accrued interest on the PPNs,

less the private placement discount and the cash received upon

the sale of the Chase PPNs, as follows:

Fuji LIBOR Notes

Par value of 2 Chase PPNs $100,000,000
Plus accrued interest (through March 23) 47,192
100,047,192
Less private placement discount (750,000)
99,297,192
Less cash received (80,000,000)
Merrill Lynch origination value $ 19,297,192

Norinchukin LIBOR Notes

Par value of 2 Chase PPNs $100,000,000
Plus accrued interest (through March 23) 47,192
100,047,192
Less private placement discount (750,000)
$ 99,297,192
Less cash received (80,000,000)
Merrill Lynch origination value $ 19,297,192

According to Pepe's computations, Saba received

consideration totaling $198,594,384 consisting of the

$160,000,000 in cash and the Fuji and Norinchukin LIBOR notes

with a combined present value of $38,594,384. The difference

between the par value of the Chase PPNs plus accrued interest

($200,094,384) and the total consideration that Saba received

($198,594,384) reflects the $1,500,000 private placement discount

on the sale of the Chase PPNs.

Contrary to the origination value that Pepe assigned to the

LIBOR notes, Saba listed the value of the LIBOR notes in its
 - 35 -

general ledger for the period ended March 31, 1990, at

$40,094,384. Saba carried the LIBOR notes on its audited and

unaudited financial statements at cost; i.e., the present value

of the LIBOR notes of $38,594,384, plus the $1,500,000 private

placement discount on the sale of the Chase PPNs. Saba adopted

this approach based upon advice from Merrill Lynch. As discussed

in detail below, the private placement discount on the sale of

the Chase PPNs eventually was borne solely by Brunswick following

the distribution and sale of the LIBOR notes.

A portion of the $1,500,000 private placement discount on

the sale of the Chase PPNs was attributable to the PPNs' lack of

liquidity. If Saba had invested directly in LIBOR notes, as

opposed to first purchasing and then selling the Chase PPNs, Saba

could have avoided the portion of the $1,500,000 discount

attributable to the PPNs' lack of liquidity.

O'Brien understood that Saba had invested in the Chase PPNs,

prior to its investment in the LIBOR notes, to ensure that the

transactions would be treated for tax purposes as CINS

transactions. The Chase PPNs were not readily tradeable on an

established market. In addition, because the LIBOR notes

provided for 20 variable quarterly payments, Saba could not

determine the aggregate selling price of the Chase PPNs by the

end of its March 31, 1990, taxable year. Consequently, Saba

reported the sale of the Chase PPNs as an "installment sale"
 - 36 -

under section 453(b). Saba computed its gain on the sale through

a ratable allocation (or recovery) of its basis in the Chase PPNs

under section 15A.453-1(c), Temporary Income Tax Regs., 46 Fed.

Reg. 10711 (Feb. 4, 1981).

Although the Fuji and Norinchukin LIBOR notes provided for

20 quarterly payments to be paid over a 5-year period beginning

July 2, 1990, Saba had received the $160 million cash portion of

the sale proceeds immediately prior to the end of its March 31,

1990 taxable year. Taking the position that the maximum period

over which payments could be received on the sale of the Chase

PPNs was 6 years, Saba applied 1/6th of its basis in the Chase

PPNs in computing its gain on the sales under section 15A.453-

1(c), Temporary Income Tax Regs., supra. Saba reported the sale

of the Chase PPNs on its Form 1065 for the year ended March 31,

1990, as follows:

Cash Proceeds: $160,000,000
Cost: 200,000,000
Basis = 1/6 cost: 33,333,333
Gain: $126,666,667

Saba allocated the gain reported on its Form 1065 for the

tax year ended March 31, 1990, among its partners (per its

Schedule K-1s) as follows:
 - 37 -

Percentage
Partner Interest Gain

Skokie .5 $633,333
Brunswick 9.5 12,033,334
Sodbury 90.0 114,000,000
Total 100.0 $126,666,667

The $126,666,667 gain that Saba reported on its March 31, 1990

tax return was not included on Saba's audited or unaudited

financial statements for the year ended March 31, 1990.

Saba invested the $160 million that it received on the sale

of the Chase PPNs in time deposits and commercial paper. Saba

acquired approximately $50 million of Brunswick commercial paper

between September 20 and 26, 1990. Saba held Brunswick's

commercial paper through April 3, 1991, when it contributed the

commercial paper to SBC International Holdings, Inc. See

discussion infra p. 44.

C. McManaman's Tax Projections

On April 20, 1990, McManaman prepared a schedule entitled

"FOREIGN PARTNERSHIP TAX UPDATE" in which he projected that

Brunswick would realize capital losses of $80 million

attributable to "FOREIGN PARTNERSHIP I" (Saba) and capital losses

of $57 million attributable to "FOREIGN PARTNERSHIP II" (the yet

to be formed Otrabanda partnership). In addition, McManaman

projected that Brunswick would realize capital gains of $91

million attributable to the sales of its Technical businesses and

Nireco stock, that such capital gains would be offset by
 - 38 -

Brunswick's capital losses from its partnership investments, and

that Brunswick would have $51 million in capital losses to carry

back to taxable years 1987 through 1989. On April 25, 1990,

McManaman presented his projections to Brunswick's Board of

Directors.

D. Brunswick's Purchase of 50 Percent of Sodbury's
Partnership Interest

During a July 13, 1990, Saba partnership meeting, Sodbury

requested that the remaining partners purchase 50 percent of its

interest in the partnership. Brunswick agreed to pay $92,452,227

in cash for 50 percent of Sodbury's partnership interest based in

part upon Pepe's valuation of the Fuji and Norinchukin LIBOR

notes. In notes dated July 13, 1990, Pepe valued the Fuji and

Norinchukin LIBOR notes held by Saba at $36,213,588, and then

added to that amount $2,035,000--the sum of the $1,500,000

private placement discount and an unidentified additional amount

of $535,000. Pepe rounded the resulting figure of $38,248,588 up

to $38,250,000. By valuing the Fuji and Norinchukin LIBOR notes

in this fashion, Sodbury was relieved of the cost or private

placement discount associated with the sale of the Chase PPNs.

After Brunswick's purchase of 50 percent of Sodbury's

interest in Saba, Brunswick held a 54.5-percent partnership

interest in Saba, Skokie held a .5-percent partnership interest,

and Sodbury held a 45-percent partnership interest.
 - 39 -

On July 13, 1990, Sodbury transferred the $92,452,227

received from Brunswick to ABN to be applied as a credit against

its loan account.

E. Brunswick-ABN Consulting Agreement

On July 3, 1990, Brunswick and ABN entered into an agreement

under which ABN agreed to provide consulting services to

Brunswick in exchange for a fee. Brunswick charged the fees that

it paid to ABN pursuant to the consulting agreement against the

portion of Brunswick's Accrued Disposition Costs reserve account

allocated to partnership activity. Brunswick paid ABN a total of

$750,000 pursuant to the consulting agreement: $250,000 on or

about July 10, 1990; $250,000 on or about February 26, 1991; and

$250,000 on or about February 27, 1992.

F. Payments on 4 LIBOR Notes

On July 2, 1990, Fuji and Norinchukin made timely LIBOR note

payments to Saba of $1,115,320.33 and $1,113,372.36,

respectively. Saba included $49,882 of these payments in its

interest income on its Form 1065 for the taxable year ended

March 31, 1991.

G. Distribution of 3 LIBOR Notes to Brunswick

On August 17, 1990, Saba distributed $24,016,789 in cash to

Sodbury, $266,853 in cash to Skokie, and 2 Fuji LIBOR notes and 1

Norinchukin LIBOR note to Brunswick. In notes dated August 17,

1990, Pepe valued the 3 LIBOR notes distributed to Brunswick by
 - 40 -

first assigning a base value of $36,758,918 to all 4 of the Fuji

and Norinchukin LIBOR notes and adding to that amount the

$1,500,000 private placement discount and the $535,000 amount

that first appeared in Pepe's notes dated July 13, 1990. Pepe's

notes dated August 17, 1990, identify the $535,000 amount as a

"fee". Pepe rounded the resulting figure of $38,793,918 up to

$38,794,000 and multiplied that figure by the ratio of the total

NPA of the retained Norinchukin LIBOR note ($25,765,000) to the

NPA of all the LIBOR notes ($102,970,000). Pursuant to these

computations, Pepe valued the Norinchukin LIBOR note that Saba

retained at $9,707,000 and the 3 LIBOR notes that Saba

distributed to Brunswick at $29,087,000.

Sodbury transferred the $24,016,789 that it received from

Saba to ABN to be applied as a credit against its loan account.

H. Brunswick's Sale of 3 LIBOR Notes

In August 1990, concurrent with Saba's distribution of the 3

LIBOR notes to Brunswick, Merrill Lynch was making arrangements

for Brunswick to sell the LIBOR notes. On August 14, 1990, a

representative of the Bank of Tokyo, Ltd. (BOT) prepared a

memorandum seeking approval from BOT's head office to purchase

the 3 LIBOR notes from Brunswick in connection with a structured

transaction to be arranged by Merrill Lynch. On August 24, 1990,
 - 41 -

Brunswick and Merrill Lynch executed a letter agreement

appointing Merrill Lynch as Brunswick's exclusive agent to

arrange for the sale of the 3 LIBOR notes.

On September 6, 1990, Brunswick sold the 3 LIBOR notes to

BOT for $26,601,451. Brunswick determined that it incurred a

capital loss on the sale of the LIBOR notes. First, Brunswick

computed its inside basis in the 3 LIBOR notes by multiplying

$166,666,667 ($200,000,000 (Saba's original cost basis in the

Chase PPNs) less $33,333,333 (the portion of Saba's cost basis in

the Chase PPNs used in computing Saba's gain on the sale of the

PPNs)) by 75 percent to account for the fact that Brunswick had

received 3 of the 4 LIBOR notes originally held by Saba. Under

this formula, Brunswick determined that it had an inside basis in

the LIBOR notes of $125,000,000. In the alternative, Brunswick

computed its outside basis in Saba as of September 6, 1990, as

follows:

Contributions $19,000,000
Distributive share for 3/31/90
Capital gain 12,033,334
Income 127,470
Purchase of partnership interest 92,452,227
Total basis $123,613,031

Brunswick determined that its basis in the 3 LIBOR notes was

$123,613,031--the lesser of its outside basis in Saba or its

inside basis in the 3 LIBOR notes.
 - 42 -

On its consolidated Federal income tax return for 1990,

Brunswick reported a net short-term capital loss of $84,978,246

attributable to Saba. The $84,978,246 net short-term capital

loss consists of the difference between Brunswick's purported

basis in the 3 LIBOR notes and the sales price of the notes, less

Brunswick's distributive share of the gain reported by Saba on

the sale of the Chase PPNs: ($123,613,031 - $26,601,451) -

$12,033,334 = $84,978,246.

Brunswick reported a loss on its audited and unaudited

financial statements on the sale of the 3 LIBOR notes in the

amount of $2,485,549, which is the difference between the cash

proceeds of $26,601,451 and the $29,087,000 value that Pepe

assigned to the 3 LIBOR notes at the time that they were

distributed. The $2,485,549 loss was recorded in the portion of

Brunswick's Accrued Disposition Costs reserve account allocated

to partnership activity. Brunswick's IPD and Tech Divestitures

Analysis of Deferred Disposition Costs account number 2107265

reflects the above $2,485,549 loss.

On its consolidated Federal income tax return for 1990,

Brunswick reported Skokie’s distributive share of the gain

reported by Saba on the sale of the Chase PPNs ($633,333) as

other income, rather than capital gain. If Brunswick had

reported Skokie’s distributive share of the gain as capital gain
 - 43 -

on its consolidated Federal income tax return, Brunswick would

have reported a short-term capital loss attributable to Saba of

$84,344,913.

I. Partial Redemption of Sodbury's Partnership Interest

On September 14, 1990, Saba distributed $60,204,145 in cash

to Sodbury in redemption of a 35-percent partnership interest.

For purposes of determining the amount to be distributed in the

redemption, Pepe valued the remaining Norinchukin LIBOR note held

by Saba at $9,680,000. The $9,680,000 amount included a $375,000

private placement discount (25 percent of the original $1,500,000

private placement discount) and $133,750 (25 percent of the

unidentified $535,000 "fee").

After the September 14, 1990 distribution, Brunswick held a

89.181882-percent partnership interest in Saba, Skokie held an

.8181818-percent partnership interest, and Sodbury held a 10-

percent partnership interest.

On September 14, 1990, Sodbury transferred the $60,204,145

that it received from Saba to ABN to be applied as a credit

against its loan account.

J. Payments on Norinchukin LIBOR Note

Norinchukin made timely payments to Saba on the remaining

LIBOR note between October 1990 and April 1991. Saba amortized

the LIBOR note payments for tax purposes and reported imputed

interest as follows:
 - 44 -

LIBOR Note Imputed
Payment Date Payment Principal Interest

October 2, 1990 $551,443 $528,099 $23,344
January 2, 1991 548,356 514,425 33,931
April 2, 1991 488,126 448,778 39,348

K. Transfer and Termination of 3 LIBOR Notes

On December 27, 1990, BOT assigned its rights under the

Norinchukin LIBOR note that it had purchased from Brunswick to

Banque Francaise du Commerce Exterieur (BFCE) for $7,510,040. On

January 2, 1991, Fuji paid $16,063,182 to BOT in cancellation of

the two Fuji LIBOR notes that BOT had purchased from Brunswick.

On June 28, 1991, Norinchukin paid $7,040,954 to BFCE in

cancellation of the Norinchukin LIBOR note.

L. Formation of SBC International Holdings, Inc. (SBC)

On April 3, 1991, Saba organized SBC International Holdings,

Inc. (SBC). Saba transferred $744,109 in cash, $49,835,451 of

Brunswick commercial paper, $27,902,067 of other commercial

paper, and the remaining Norinchukin LIBOR note valued at

$7,752,000 to SBC in exchange for all 100 shares of SBC's

outstanding stock.

On April 3, 1991, Saba amended its partnership agreement to

provide, among other things, that Sodbury would not pay any

portion of SBC's Federal income taxes.
 - 45 -

M. Downgrade of Brunswick’s Credit Rating

On June 6, 1991, Moody’s announced that it was placing

Brunswick's debt ratings under review. On June 19, 1991, Moody’s

announced that it was downgrading Brunswick’s long-term debt

rating from Baa1 to Baa2.

N. Dissolution of Saba

During a June 21, 1991, Saba partnership meeting, Brunswick

informed the partnership that, due to a recent downgrading of

Brunswick’s credit rating, Brunswick would have to liquidate its

investment in Saba in order to reduce the amount of its

outstanding commercial paper and other borrowings. On June 21,

1991, Saba transferred $1,161,928 to SBC as additional paid-in

capital. The following schedule lists SBC's assets as reflected

on its June 21, 1991 unaudited financial statement:

Item Amount
Cash $1,161,928
Time deposits 2,922,499
Norinchukin LIBOR Note (as valued by Merrill Lynch) 7,760,000
Brunswick commercial paper 49,787,895
Non-Brunswick commercial paper 26,696,262
Accrued interest on Brunswick commercial paper 73,757
Accrued interest on non-Brunswick commercial paper 54,744
Accrued interest from time deposits 931
Total $88,458,016

On June 21, 1991, Saba was dissolved. For purposes of

Saba’s audited and unaudited financial statements, Brunswick was

allocated $1,101,381, Skokie was allocated $10,104, and Sodbury

was allocated $123,499 of Saba's income from April 1, 1991
 - 46 -

through June 21, 1991. For tax purposes, Brunswick was allocated

$190,177, Skokie was allocated $1,744, and Sodbury was allocated

$21,325 of Saba's income from April 1, 1991 through June 21,

1991. These differences were reported on Saba’s Form 1065

(Schedule M) for the period ended June 21, 1991.

Saba's partners received the following property in

liquidation of their Saba partnership interests: (1) Brunswick

received Saba's 100 shares of SBC stock; (2) Skokie received

$811,541 in cash; and (3) Sodbury received $9,918,840 in cash.

On June 21, 1991, Sodbury's loan account with ABN was

credited in the amounts of $4,946,172.46 and $2,000,000.

Brunswick filed SBC's Federal income tax return for the

period April 3, 1991 through June 21, 1991, reporting taxable

income of $1,054,460 and tax due of $358,516. Brunswick paid the

tax due. Brunswick included SBC on its consolidated Federal

income tax return for 1991. Brunswick did not report its receipt

of, or any gain or loss from, the 100 shares of SBC stock that it

received upon Saba's dissolution.
 - 47 -

O. Dissolution of Sodbury

On or about March 20, 1991, Sodbury paid dividends of $328

to both Pietermaai and Ronde Klip. The dividends were

transferred to ABN and were credited to Pietermaai's and Ronde

Klip's loan accounts.

On June 21, 1991, ABN-Willemstad released all of its right,

title, and interest in and to the collateral assigned to it under

the February 26, 1990, pledge agreements between ABN, Pietermaai,

and Sodbury and between ABN, Ronde Klip, and Sodbury. Effective

July 26, 1991, ABN exercised its options under the February 26,

1990, option agreements to buy Pietermaai's and Ronde Klip's

holdings in Sodbury.

On July 26, 1991, Sodbury paid ABN $3,065,347, an amount

representing Sodbury's total liabilities and stockholder's equity

of $3,071,347 less $6,000 of capital. On that same date,

Sodbury's loan account with ABN was credited in the amount of

$3,065,347. This amount is reflected as an interim dividend on

Sodbury's financial statement.

On July 29, 1991, Pietermaai and Ronde Klip each repurchased

3,000 shares of Sodbury stock from ABN for $1. On the same date,

an extraordinary meeting of Sodbury's shareholders was held, and

it was resolved to dissolve Sodbury. Curab, N.V., an entity

controlled by ABN Trust, was appointed liquidator.
 - 48 -

P. SBC's Sale of Remaining Norinchukin LIBOR Note

On July 2, 1991, SBC, then Brunswick's subsidiary, sold the

remaining Norinchukin LIBOR note via a Satisfaction and

Termination Agreement with Norinchukin dated June 28, 1991.

Norinchukin paid SBC $7,040,954 for the remaining note. Merrill

Lynch arranged the transaction. Norinchukin's July 2, 1991,

payment included a LIBOR note payment of $419,262.75 due on that

same date. SBC, through Brunswick, amortized the Norinchukin

LIBOR note payment for tax purposes and reported imputed interest

as follows:

LIBOR Note Imputed
Payment Date Payment Principal Interest

July 2, 1991 $419,263 $377,684 $41,579

Brunswick determined that SBC incurred a capital loss on the

sale of the Norinchukin LIBOR note. Brunswick computed SBC's

basis in the Norinchukin LIBOR note by multiplying $166,666,667

($200 million (original cost basis of the Chase PPNs) less

$33,333,333 (the portion of cost basis of the Chase PPNs used in

computing Saba's gain on the sale of the PPNs)) by 25 percent to

account for the fact that SBC had received 1 of the 4 LIBOR notes

originally held by Saba. Under this formula, Brunswick

determined that SBC's basis in the Norinchukin LIBOR note was

$41,666,667. Brunswick reported a long-term capital loss of

$32,631,287 on its consolidated Federal income tax return for
 - 49 -

1991 attributable to SBC's sale of the remaining Norinchukin

LIBOR note. Brunswick reported a loss of $719,046 on its audited

and unaudited financial statements attributable to the sale of

the remaining Norinchukin LIBOR note. Brunswick charged the

$719,046 loss to the portion of Brunswick's Accrued Disposition

Costs reserve account allocated to partnership activity as part

of a $758,213 entry.

Q. Termination of Chase Private Placement Notes

Between June 1990 and August 1990, Merrill Lynch exercised

its option under a side agreement with Fuji and purchased $40

million of the $100 million principal amount of Chase PPNs that

Fuji was holding. On February 25, 1991, Fuji elected to exercise

the put option with respect to the remaining $60 million

principal amount of the Chase PPNs. On April 17, 1991,

Norinchukin elected to exercise the put option with respect to

the $100 million principal amount of the Chase PPNs that it held.

V. Saba-Related Swaps

A. Fuji and Norinchukin Swaps

Merrill Lynch offered Fuji and Norinchukin structured

transactions to be implemented in conjunction with their

agreement to purchase the Chase PPNs from Saba for cash and LIBOR

notes. In financial terminology, a "structured transaction" is

one that combines two or more financial instruments or

derivatives. Most structured transactions, like those in this
 - 50 -

case, involve derivatives. The structured transaction that

Merrill Lynch offered to Fuji and Norinchukin consisted of two

swaps: (1) A basis swap related to the asset that the banks

would be purchasing (the Chase PPNs), and (2) a hedge swap

related to the liability that the banks would be undertaking in

connection with the issuance of the LIBOR notes. In general

terms, a swap is an agreement between two parties to exchange one

set of payments for another. For example, one party might

exchange payments based on a floating interest rate for a payment

based on a fixed interest rate.

Economically, the Fuji and Norinchukin swaps provided the

banks with both an asset and a liability that were attractively

priced compared to other alternatives in the market. Merrill

Lynch was the counterpart in the swaps.

The Fuji and Norinchukin basis swaps had the effect of

passing to Merrill Lynch the interest payments that accrued on

the Chase PPNs from March 21, 1990 through the date that the

Chase PPNs were terminated. Further, Merrill Lynch made payments

to Fuji and Norinchukin which, when considered in conjunction

with the purchase of the Chase PPNs, enhanced Fuji's and

Norinchukin's returns from the Chase PPNs. The net cash flows

resulting from the combination of the Chase PPNs with the basis

swaps were tied to LIBOR--the interest rate index under which

Fuji and Norinchukin normally conducted business.
 - 51 -

The Fuji and Norinchukin hedge swaps were designed to allow

the banks to transform their liabilities under the LIBOR notes to

an amortizing liability at an interest rate below LIBOR.

Consequently, the Fuji and Norinchukin hedge swaps effectively

converted the transactions, from the banks' perspective, to

synthetic funding below the banks' funding rates. Further, the

banks' payments under the hedge swaps were much less volatile

than the payments required to be made under the LIBOR notes.

B. Sodbury-ABN-Merrill Lynch Swaps

Sodbury entered into interest rate swaps with ABN and ABN

entered into mirror swaps with Merrill Lynch to reduce Sodbury's

and ABN's interest rate risk associated with the 4 LIBOR notes

held by Saba.

C. Bank of Tokyo Swaps

Effective September 6, 1990, Merrill Lynch and BOT executed

a swap in connection with BOT's purchase of the 3 LIBOR notes

from Brunswick. The swap, which was designed to replicate the

economic effect of investing in an amortizing loan that paid a

margin over LIBOR, effectively converted the purchase of the

LIBOR notes, from BOT's perspective, to a synthetic amortizing

asset at a rate above BOT's normal financing rate.

D. Banque Francaise du Commerce Exterieur Swaps

Effective January 2, 1991, Merrill Lynch and BFCE executed a

swap in connection with BOT's assignment of the Norinchukin LIBOR
 - 52 -

note to BFCE. The swap, which was designed to replicate the

economic effect of investing in an amortizing loan that paid a

margin over LIBOR, effectively converted the purchase of the

LIBOR Note, from BFCE's perspective, to a synthetic amortizing

asset at a rate above LIBOR.

E. Brunswick Swaps

On April 5, 1990, Brunswick and Merrill Lynch entered into

an Interest Rate and Currency Exchange Agreement to govern

anticipated swap transactions between them. On July 16, 1990,

concurrent with Brunswick's purchase of 50 percent of Sodbury's

interest in Saba, Brunswick and Merrill Lynch entered into a swap

agreement. Brunswick used the swap to hedge a substantial

percentage of its interest in the LIBOR notes held by Saba.

On August 20, 1990, concurrent with the Saba's distribution

of 3 LIBOR notes to Brunswick, Brunswick and Merrill Lynch

entered into a second swap agreement. Brunswick used the swap to

hedge a substantial percentage of its interest in the LIBOR

notes.

On September 6, 1990, Brunswick and Merrill Lynch partially

terminated the July 16, 1990, swap in connection with Brunswick's

sale of the 3 LIBOR notes to BOT. The July 16, 1990, swap was

completely terminated on July 2, 1991, following SBC's sale of

the remaining Norinchukin LIBOR note. On September 6, 1990,

Brunswick and Merrill Lynch partially terminated the August 20,
 - 53 -

1990, swap due to Brunswick's sale of the 3 LIBOR notes. This

swap was completely terminated on July 2, 1991, following SBC's

sale of the remaining Norinchukin LIBOR note.

On September 14, 1990, concurrent with the partial

redemption of Sodbury's partnership interest, Brunswick and

Merrill Lynch entered into a third swap. Brunswick used the swap

to hedge a substantial percentage of its interest in the

remaining Norinchukin LIBOR note held by Saba. This swap was

completely terminated on July 2, 1991, following SBC's sale of

the remaining Norinchukin LIBOR note.

VI. Otrabanda Investerings Partnership

A. Structure

On June 13, 1990, Brunswick, through Mayer, Brown & Platt,

requested that Merrill Lynch arrange a second partnership with a

structure slightly different from Saba. Brunswick requested that

the foundations (stichtings) own the stock of subsidiary #1 which

in turn would own the stock of subsidiary #2. Brunswick

requested that subsidiary #1 obtain a loan from ABN and use the

proceeds to capitalize subsidiary #2 with equity and that

subsidiary #2 act as the third partner in the new partnership.

On June 20, 1990, Brunswick and Merrill Lynch entered into a

letter agreement under which Merrill Lynch agreed to serve as
 - 54 -

Brunswick's adviser regarding Otrabanda in exchange for a fee.

On or about September 5, 1990, Brunswick paid a $250,00 fee to

Merrill Lynch.

By memorandum dated June 19, 1990, den Baas informed ABN's

Risk Management Department that Brunswick was interested in

forming a second partnership. den Baas' memorandum stated in

pertinent part:

although the loan spread will be 30 bps. the
transaction will yield 85 bps. over LIBOR (the
difference to be paid separately). Total remuneration
$600,000 excluding the Trust fee.

The previous deal has been unwound ahead of schedule
and outstandings per June 30, 1990 are $25mm.
Brunswick is in the process of divesting more of its
subsidiaries than originally planned and expects to
generate more capital gains than covered by the first
transaction. Therefore they requested ABN Trust
Curacao to create a new SPC for a second transactions
with the same parameters as before.

We will be brought down from $135mm. within three
months to appr. $20mm. and then to $10mm. before year-
end. The total term of the transaction is anticipated
for one year with a maximum term of 1.5 years.

We are in the process of further syndicating present
outstandings in Willemstad to such a level that this
transaction will not bring us over the agreed upon
level of $2 bln. per June 30, 1990. This transaction
will NOT be put on the books if this attempt is
unsuccessful and by no means will the maximum
outstandings be more than the $2 bln.

* * * * * * *

The calendar for this transaction will look as follows:

Last week of June purchase of the private placements
for a total amount of $150mm.
 - 55 -

Last week of July sale of these private placements for
cash ($120mm.) and installment note issued by AA or
better rated bank, with NPV of $30mm. Cash will be
invested in C.P. rated A-1/P-1 with a maximum of $20mm.
per name and a maximum maturity of 60 days. This to be
invested by ABN Trust and held by ABN New York.

In August the SPC's interest will be reduced to $50mm.
with a further reduction in early September to $20mm.

In December the SPC will reduce its involvement further
to $10mm. which will be reduced fully to zero in July
of 1991.

On June 19, 1990, ABN's North Atlantic Credit Committee

recommended approval of the second partnership "IN ACCORDANCE

WITH PREVIOUS ADVICES". On June 22, 1990, ABN's Risk Management

Department approved the transaction so long as ABN would have the

right to liquidate the portfolio if its interest in the

partnership were not reduced according to the proposed schedule.

B. Bartolo Corporation

On June 20, 1990, ABN established two stichtings, Rocky

Foundation (Rocky) and Jasper Foundation (Jasper).

On June 20, 1990, Bartolo Corporation, N.V. (Bartolo) was

incorporated in Curacao, Netherlands Antilles. ABN Trust was the

sole managing director of Bartolo. At the time that Bartolo was

incorporated, Rocky and Jasper each received one-half or 3,000

shares of the 6,000 shares of Bartolo common stock authorized to

be issued. Each Bartolo share had a par value of $1 for a total
 - 56 -

capitalization of $6,000. Bartolo paid ABN Trust $28,338.94,

invoiced as a $25,000 fee for management, $3,335 for

incorporation costs, and $3 in expenses.

On June 25, 1990, Clavicor Corporation, N.V. (Clavicor) was

incorporated in Curacao, Netherlands Antilles. ABN Trust was the

sole managing director of Clavicor. At the time that Clavicor

was incorporated, Rocky and Jasper each received one-half or

3,000 shares of the 6,000 shares of Clavicor common stock

authorized to be issued. Each Clavicor share had a par value of

$1 for a total capitalization of $6,000. Clavicor paid ABN Trust

$6,013, invoiced as a $3,500 fee for management, $2,500 in

incorporation costs, and $13 in expenses.

On June 25, 1990, Rocky and Jasper transferred all 6,000

shares of Bartolo to Clavicor. Bartolo was organized to serve as

a general partner in Otrabanda because ABN was not interested in

assuming the unlimited liability of a general partner and the

funding that ABN would provide to Bartolo could be syndicated.

C. Otrabanda Organizational Meeting

By partnership agreement dated June 20, 1990, Brunswick,

Skokie, and Bartolo formed Otrabanda as a general partnership

under the laws of the State of New York. The partners agreed

that Otrabanda would maintain its principal place of business in

Curacao, Netherlands Antilles.
 - 57 -

The partnership agreement stated that the partnership was

being organized "for the object and purpose of making investments

in notes, bonds, debentures, and other interest bearing

instruments, owning, managing, and supervising such investments,

sharing the profits and losses therefrom, and engaging in such

activities necessarily incidental or ancillary thereto." The

partnership agreement further stated that the partnership was

being organized to enable Brunswick and Skokie "to reduce their

credit risk exposure on investments while obtaining a yield in

excess of what they could obtain from U.S. treasury securities"

and to permit Bartolo "to earn a rate of return which reflects

the additional credit risk it may incur on Partnership

investments."

The partnership agreement provided for the payment of

"preferred amounts" from partnership income. In particular,

partnership income would be allocated on a quarterly basis, first

to Brunswick and Skokie in an amount equal to a noncompounded per

annum return on the daily amounts of their unrecovered capital at

a rate equal to the Treasury bill rate plus 10 basis points, and

then to Bartolo in an amount equal to a noncompounded per annum

return on the daily amounts of its unrecovered capital at a rate

equal to LIBOR plus 5 basis points. Any remaining partnership

income would be allocated to the partners in proportion to their

partnership percentages.
 - 58 -

The partnership agreement stated that an act of the

partnership committee would require the vote or consent of

partners whose aggregate partnership percentages were not less

than 95 percent.

By letter dated June 20, 1990, Otrabanda engaged Fides to

perform certain administrative and investment management

services. By letter dated June 20, 1990, Otrabanda entered into

an indemnity agreement with Fides. During 1990 through 1991,

Otrabanda made the following payments to Fides:

Date Amount

September 6, 1990 $50,822.79
November 14, 1990 1,471.75
February 14, 1991 1,742.61
March 15, 1991 2,390.15
June 21, 1991 1,028.01

On June 21, 1990, Brunswick representatives O'Brien and

Zelisko attended Otrabanda's organizational meeting in Bermuda.

ABN's representative, de Beer, participated in the meeting by way

of telephone conference call.

By letter agreement dated June 21, 1990, Otrabanda engaged

Merrill Lynch as its financial adviser. The June 21, 1990,

letter does not state the amount of Merrill Lynch's fee for such

services. Merrill Lynch expected to be compensated for its

services (at least in part) by acting as the dealer in

transactions with Otrabanda.
 - 59 -

On June 25, 1990, Skokie executed a promissory note

evidencing a loan of $1,500,000 from Brunswick. On November 1,

1990, Skokie made a loan repayment to Brunswick in the amount of

$354,522.67. On June 21, 1991, Skokie made a loan repayment to

Brunswick in the amount of $741,777.70. After this second

payment, the outstanding balance of the loan was $403,699.63.

On June 25, 1990, ABN-Willemstad and Clavicor entered into a

Revolving Credit Agreement (RCA) under which ABN-Willemstad

agreed to make available to Clavicor one or more loans in the

aggregate principal amount of $150 million. The RCA was to

expire no later than June 24, 1991. By agreements dated June 25,

1990, Rocky and Jasper pledged their 6,000 shares of Clavicor to

ABN-Willemstad as security for the RCA. On June 25, 1990, ABN-

Willemstad and Clavicor entered into a Subordinated Loan

Agreement (SLA) under which ABN-Willemstad agreed to loan

Clavicor $15 million, subordinated to the RCA. According to the

SLA, the loan was not to bear interest, unless the outstanding

principal was not paid on the expiration date.

By Option Agreement dated June 25, 1990, Rocky and Jasper

each granted ABN the irrevocable option to purchase up to 100

percent of their Clavicor shares at par.

On June 25, 1990, the Otrabanda partners made the following

capital contributions to the partnership:
 - 60 -

Capital Contribution Percentage Interest

Brunswick $13,500,000 9.0
Skokie 1,500,000 1.0
Bartolo 135,000,000 90.0
$150,000,000 100.0

The partners' June 25, 1990, capital contributions were deposited

into Otrabanda's bank account at ABN-New York.

Bartolo's initial capital contribution to Otrabanda came

from a loan from Clavicor. Clavicor was able to provide $135

million to Bartolo through funds obtained under its RCA with ABN-

Willemstad.

D. Miscellaneous Fees

Otrabanda maintained certain audited and unaudited financial

statements. Otrabanda's audited financial statements were

prepared by Arthur Andersen. Otrabanda made the following

payments to Arthur Andersen and Cravath, Swaine & Moore for

professional fees:

Date Amount Payee

November 14, 1990 $71,524.25 Cravath
January 7, 1991 10,000.00 Arthur Andersen
June 21, 1991 13,165.19 Cravath

The $71,524.25 fee paid to Cravath on November 14, 1990, included

a fee for professional services of $68,000. In a December 2,

1994 memorandum from Cravath to Brunswick, Cravath itemized the

$68,000 charge for professional services as follows:

The $68,000.00 fee was for negotiation and
drafting of the documentation, and for other related
 - 61 -

services, in connection with: (a) the formation of
Otrabanda ($12,215.57), (b) the purchase by Otrabanda
of certain certificates of deposit ($12,537.03), (c)
the sale by Otrabanda of such certificates
($23,193.51), (d) the assignment of Otrabanda’s right
to receive payments from such sale ($6,209.58) and (e)
other related matters ($13,844.31). * * *

Otrabanda paid commercial paper fees as follows:

Date of Payment Amount
August 10, 1990 $385
September 7, 1990 605
October 5, 1990 315
November 6, 1990 645
December 7, 1990 575
January 19, 1991 215
February 14, 1991 315
March 15, 1991 330
April 17, 1991 290
May 31, 1991 195
June 18, 1991 100

VII. Otrabanda Transactions

A. Otrabanda's Purchase of Certificates of Deposit

On June 29, 1990, Otrabanda purchased from Industrial Bank

of Japan (IBJ) 4 newly issued $25 million floating-rate

certificates of deposit (IBJ CDs) for a total principal amount of

$100 million. The IBJ CDs included a European-style put option

exercisable at par plus accrued interest by the holder on January

15, 1992, and were due to mature on June 21, 1995. The IBJ CDs

bore interest at 8.25 percent for the first month and at 1-month

LIBOR minus 12.5 basis points thereafter.
 - 62 -

At the time the IBJ CDs were issued, IBJ was rated Aaa by

Moody's. The IBJ CDs were not registered under the Securities

Act of 1933 and were not traded on an established securities

market.

On July 18, 1990, IBJ made a timely interest payment of

$435,416.67 to Otrabanda with respect to the IBJ CDs. (IBJ’s

July 18, 1990, interest payment was for $458,333.33, which

exceeded the interest amount due by $22,916.66. On July 31,

1990, the excess interest was reversed.) Otrabanda included this

interest payment in its interest income on its Form 1065 for the

taxable year ended July 31, 1990.

B. Otrabanda's Sale of Certificates of Deposit

Brunswick and Merrill Lynch discussed an investment in an

instrument analogous to an inverse floater, that would increase

in value as interest rates declined and decrease in value as

interest rates increased. Otrabanda did not purchase such an

instrument.

On July 24, 1990, Otrabanda held a partnership meeting at

Merrill Lynch's office in Toronto. Zelisko attended the meeting

on behalf of Brunswick and Skokie, while de Beer from ABN and

Taylor from Merrill Lynch participated in the meeting by way of

telephone conference call. The partnership committee adopted a

resolution, upon the advice of Merrill Lynch, authorizing and

directing the sale of the IBJ CDs for consideration consisting of
 - 63 -

cash and contingent payments based upon LIBOR. The resolution

does not explain the basis for Merrill Lynch's recommendation to

sell the IBJ CDs.

On July 27, 1990, Otrabanda sold its IBJ CDs to Sumitomo

Bank Capital Markets (Sumitomo) for $80 million in cash and 4

installment purchase agreements dated July 27, 1990 (Sumitomo

LIBOR notes) each with a stated NPA of $13,349,000 for a total

NPA of $53,396,000.

The sale of the IBJ CDs to Sumitomo included $201,562 of

interest that had accrued on the IBJ CDs for the period from July

18, 1990 through July 27, 1990. Otrabanda included this amount

in interest income on its Form 1065 for the taxable year ended

July 31, 1990.

Each of the Sumitomo LIBOR notes that Otrabanda received

provided for 20 quarterly payments of an amount equal to 3-month

LIBOR, generally set 3 months preceding the payment date,

multiplied by (1) the NPA of each note and (2) a fraction

consisting of the number of days between payment dates divided by

360. Payments on the Sumitomo LIBOR notes were to commence on

November 1, 1990, and to conclude on August 1, 1995. The

effective date of the Sumitomo LIBOR notes was August 1, 1990.

Otrabanda sold the IBJ CDs at 99.25 percent of par, or at a

private placement discount of $750,000 (75 basis points x

$100,000,000). Pepe of Merrill Lynch determined the origination
 - 64 -

value of the Sumitomo LIBOR notes based on the sum of the par

value of the IBJ CDs plus accrued interest, less the private

placement discount and the cash received upon the sale of the IBJ

CDs, as follows:

Par value of IBJ CDs $100,000,000
Plus accrued interest (through 7/29) 201,562
100,201,562
Less private placement discount (750,000)
Net amount 99,451,562
Less cash received (80,000,000)
Merrill Lynch origination value $19,451,562

Sumitomo valued the LIBOR notes that it had issued to Otrabanda

at $18,905,565.

According to Pepe's computations, Otrabanda received

consideration totaling $99,451,562 consisting of the $80 million

in cash and the Sumitomo LIBOR notes with a present value of

$19,451,562. The difference between the par value of the IBJ CDs

plus accrued interest ($100,201,562) and the total consideration

that Otrabanda received ($99,451,562) reflects the $750,000

private placement discount on the sale of the IBJ CDs.

Contrary to the origination value that Pepe assigned to the

Sumitomo LIBOR notes, Otrabanda carried the LIBOR notes on its

audited and unaudited financial statements at their cost of

$20,201,562--the present value of the LIBOR notes of $19,451,562,

plus the $750,000 private placement discount on the sale of the

IBJ CDs. Otrabanda adopted this approach based upon advice from

Merrill Lynch. As discussed in detail below, the private
 - 65 -

placement discount on the sale of the IBJ CDs eventually was

borne solely by Brunswick following the distribution and sale of

the LIBOR notes.

A portion of the $750,000 private placement discount on the

sale of the IBJ CDs was attributable to the CDs' lack of

liquidity. If Otrabanda had invested directly in LIBOR notes, as

opposed to first purchasing the IBJ CDs, Otrabanda could have

avoided the portion of the $750,000 discount attributable to the

CDs' lack of liquidity.

O'Brien understood that Otrabanda had invested in the IBJ

CDs, prior to its investment in the LIBOR notes, to ensure that

the transactions would be treated for tax purposes as CINS

transactions. The IBJ CDs were not readily tradeable on an

established market. In addition, because the Sumitomo LIBOR

notes provided for 20 variable, quarterly payments, Otrabanda

could not determine the aggregate selling price of the IBJ CDs by

the end of its July 31, 1990 taxable year. Consequently,

Otrabanda reported the sale of the IBJ CDs as an "installment

sale" under section 453(b). Otrabanda computed its gain on the

sale of the IBJ CDs through a ratable allocation (or recovery) of

its basis in the IBJ CDs under section 15A.453-1(c), Temporary

Income Tax Regs., 46 Fed. Reg. 10711 (Feb. 4, 1981).

Although the Sumitomo LIBOR notes provided for 20 quarterly

payments to be paid over a 5-year period beginning November 1,
 - 66 -

1990, Otrabanda had received the $80 million cash portion of the

sale proceeds immediately prior to the end of its July 31, 1990

taxable year. Taking the position that the maximum period over

which payments could be received on the sale of the IBJ CDs was 6

years, Otrabanda applied 1/6th of its basis in the IBJ CDs in

computing its gain on the sale under section 15A.453-1(c),

Temporary Income Tax Regs. Otrabanda reported the sale of the

IBJ CDs on its Form 1065 for the tax year ended July 31, 1990, as

follows:

Cash Proceeds: $80,000,000
Cost: 100,000,000
Basis = 1/6 cost: (16,666,666)
Gain $63,333,334

Otrabanda allocated the gain reported on its Form 1065 for

the tax year ended July 31, 1990, among its partners (per

Schedule K-1s) as follows:

Percentage
Partner Interest Gain

Skokie 1.0 $633,333
Brunswick 9.0 5,700,000
Bartolo 90.0 57,000,001
Total 100.0 $63,333,334

The $63,333,334 that Otrabanda reported on its July 31, 1990 tax

return was not included in Otrabanda's audited and unaudited

financial statements for the year ended July 31, 1990.

Otrabanda invested the $80 million that it received on the

sale of the IBJ CDs in time deposits and commercial paper.
 - 67 -

Otrabanda acquired approximately $40 million of Brunswick

commercial paper between December 5 and 7, 1990. Otrabanda held

Brunswick commercial paper until April 3, 1991, when it

contributed its commercial paper holdings to OBC International

Holdings, Inc. See discussion infra p.72.

C. Brunswick's Purchase of 50 Percent of Bartolo's
Partnership Interest

On October 11, 1990, Brunswick purchased 50 percent of

Bartolo's interest in Otrabanda for $69,239,696 in cash. For

purposes of computing the price to be paid for Bartolo's

interest, the partners relied upon Pepe to assign a value to the

Sumitomo LIBOR notes. Pepe valued the Sumitomo LIBOR notes at

$20,016,983, and then added to that amount the $750,000 private

placement discount and rounded up to derive a value of

$20,767,000. After Brunswick's purchase of 50 percent of

Bartolo's partnership interest, Brunswick held a 54.0009108-

percent partnership interest in Otrabanda, Skokie held a

.9990892-percent partnership interest, and Bartolo held a 45-

percent partnership interest.

On October 11, 1990, Bartolo transferred the $69,239,696

received from Brunswick to Clavicor. On October 11, 1990,

Clavicor transferred the $69,239,696 to ABN to be credited

against its loan account.
 - 68 -

D. Payments on LIBOR Notes

On November 1, 1990, Sumitomo made a timely payment of

$1,085,255.84 to Otrabanda on the LIBOR notes. Otrabanda

amortized this payment for tax purposes and reported $23,907 of

the payment as imputed interest on its Form 1065 for the taxable

year ended June 21, 1991.

E. Distribution of LIBOR Notes to Brunswick

On November 1, 1990, Otrabanda distributed $354,523 in cash

to Skokie, $15,968,064 in cash to Bartolo, and the 4 Sumitomo

LIBOR notes to Brunswick. The partners relied on Pepe to

determine the value of the Sumitomo LIBOR notes. Pepe assigned a

value of $19,162,000 to the Sumitomo LIBOR notes, inclusive of

the $750,000 private placement discount on the sale of the IBJ

CDs. By valuing the Sumitomo LIBOR notes in this fashion,

Bartolo was relieved of the cost or private placement discount

associated with the sale of the IBJ CDs.

On November 1, 1990, Bartolo transferred $16,100,000 to

Clavicor, including the $15,968,064 received in the Otrabanda

distribution. On November 1, 1990, Clavicor transferred

$16,083,986 of the $16,100,000 to ABN to be credited against its

loan account.
 - 69 -

F. Brunswick's Sale of LIBOR Notes

On November 5, 1990, Brunswick and Merrill Lynch executed a

letter agreement under which Merrill Lynch agreed to serve as

Brunswick's exclusive agent to arrange for the sale of the 4

Sumitomo LIBOR notes.

On November 28, 1990, Brunswick sold the 4 Sumitomo LIBOR

notes to BFCE for $17,458,827. Merrill Lynch arranged the

transaction. Brunswick determined that it incurred a capital

loss on the sale of the Sumitomo LIBOR notes. Brunswick

determined that its basis in the 4 LIBOR notes was equal to the

unused portion of Otrabanda's basis in the IBJ CDs or

$83,333,333: ($100,000,000 (Otrabanda's cost basis in the IBJ

CDs) less $16,666,667 (the portion of Otrabanda's cost basis used

in computing Otrabanda's gain on the sale of the IBJ CDs)).

On its consolidated Federal income tax return for 1990,

Brunswick reported a net short-term capital loss of $60,174,506

attributable to Otrabanda. The $60,174,506 net short-term

capital loss consists of the difference between Brunswick's

purported basis in the 4 Sumitomo LIBOR notes and the sales price

of the notes, less Brunswick's distributive share of the gain

reported by Otrabanda on the sale of the IBJ CDs: ($83,333,333 -

$17,458,827) - $5,700,000 = $60,174,506.

On its consolidated Federal income tax return for 1990,

Brunswick reported Skokie’s distributive share of the gain
 - 70 -

reported by Otrabanda on the sale of the IBJ CDs ($633,333) as

other income, rather than capital gain. If Brunswick had

reported Skokie’s distributive share of the gain as capital gain

on its consolidated Federal income tax return, Brunswick would

have reported a short-term capital loss attributable to Otrabanda

of $59,541,173.

For financial reporting purposes, Brunswick reported a loss

of $1,703,173 on the sale of the 4 Sumitomo LIBOR notes. The

$1,703,173 loss represents the difference between the cash

proceeds of $17,458,827 from the sale and the $19,162,000 present

value that Merrill Lynch assigned to the Sumitomo LIBOR notes on

the date that they were distributed to Brunswick. The $1,703,173

loss was recorded in the portion of Brunswick's Accrued

Disposition Costs reserve account allocated to partnership

activity.

G. Partial Redemption of Bartolo's Partnership Interest

On December 4, 1990, Otrabanda held a partnership meeting

and the partners agreed that the partnership would partially

redeem Bartolo’s interest in the partnership. On the same date,

Otrabanda distributed $46,370,431 in cash to Bartolo in

redemption of a 35-percent partnership interest. On December 4,

1990, Bartolo transferred the $46,370,431 plus $34,569 to

Clavicor, and Clavicor transferred the full amount to ABN to be

applied as a credit against its loan account.
 - 71 -

After the December 4, 1990 distribution, Brunswick held a

88.3651268-percent partnership interest in Otrabanda, Skokie held

a 1.6348732-percent partnership interest, and Bartolo held a 10-

percent partnership interest.

On December 4, 1990, Brunswick, Skokie, and Bartolo also

agreed to amend the Otrabanda partnership agreement to provide

that an act of the partnership committee would only require the

vote or consent of partners whose aggregate partnership

percentages were not less than 90 percent. This amendment had

the practical effect of vesting Brunswick with control of

Otrabanda inasmuch as Brunswick's and Skokie's aggregate

partnership percentage interest was exactly 90 percent.

On December 10, 1990, Brunswick paid Bartolo $645,000 in

cash. It appears that this payment represents the price that

Brunswick paid to obtain control of Otrabanda. The $645,000

amount was recorded in the portion of Brunswick's Accrued

Disposition Costs reserve account allocated to partnership

activity. Brunswick Corporation Posting Cycle Journal Entry No.

12-79 states that the $645,000 represents "fees due to ABN for

Otrabanda Partnership." On December 11, 1990, Bartolo

transferred the $645,000 to Clavicor and Clavicor transferred the

$645,000 to ABN to be applied as a credit to its loan account.
 - 72 -

H. Formation of OBC International Holdings, Inc.

On April 3, 1991, Otrabanda organized OBC International

Holdings, Inc. (OBC). Otrabanda transferred $98,734 in cash,

$39,892,597 of Brunswick's commercial paper, and $26,435,369 of

other commercial paper to OBC in return for all of OBC's

outstanding stock. On April 3, 1991, Otrabanda amended its

partnership agreement to provide, among other things, that

Bartolo would not pay any portion of OBC's Federal income taxes.

Brunswick filed OBC's Federal income tax return for the period

April 3 through June 21, 1991. This return reflects taxable

income of $891,134 and a tax due of $302,986. Brunswick paid the

tax due.

I. Dissolution of Otrabanda

During a June 21, 1991, Otrabanda partnership meeting,

Brunswick informed the partnership that, due to a recent

downgrading of Brunswick’s credit rating, Brunswick would have to

liquidate its investment in Otrabanda in order to reduce the

amount of its outstanding commercial paper and other borrowings.

As previously mentioned, on June 19, 1991, Moody’s had downgraded

Brunswick’s long-term debt rating from Baa1 to Baa2. See supra

p. 45. O'Brien proposed that Otrabanda be dissolved.

For purposes of Otrabanda’s audited and unaudited financial

statements, Brunswick was allocated $3,166,221, Skokie was

allocated $82,024, and Bartolo was allocated $3,289,820 of
 - 73 -

Otrabanda's income from August 1, 1990, through June 21, 1991.

For tax purposes, Brunswick was allocated $2,587,763, Skokie was

allocated $67,040, and Bartolo was allocated $2,688,779 of

Otrabanda's income from August 1, 1990, through June 21, 1991.

These differences were reported on Otrabanda’s Form 1065,

Schedule M, for the period ended June 21, 1991.

On June 21, 1991, Otrabanda was dissolved. Otrabanda's

partners received the following property in liquidation of their

interests in Otrabanda: (1) Brunswick received 99.265361541

shares of OBC stock; (2) Skokie received .734638459 shares of OBC

stock plus cash of $741,778; and (3) Bartolo received cash of

$7,562,179.

On June 21, 1991, OBC held the following assets:

Item Amount
Time deposits $633,979
Brunswick commercial paper 39,856,500
Non-Brunswick commercial paper 26,787,631
Accrued Interest--Brunswick commercial paper 15,375
Accrued Interest--non-Brunswick commercial paper 24,152
Accrued Interest from time deposits 197
Total $67,317,834

Brunswick treated OBC as part of its consolidated group on its

Federal income tax return for the fiscal year ended June 21,

1991. Brunswick did not report its receipt of, or any gain or

loss from, the 100 shares of OBC stock received from Otrabanda on

its Form 1120 for the 1991 tax year.
 - 74 -

J. Dissolution of Bartolo

On March 20, 1991, Clavicor paid a dividend of $494 to

Jasper and Rocky.

On June 21, 1991, ABN-Willemstad released all of its right,

title, and interest in and to the collateral assigned to it under

the June 25, 1990, pledge agreements between ABN, Jasper, and

Clavicor and between ABN, Rocky, and Clavicor.

Effective July 26, 1991, ABN exercised its options under the

June 25, 1990, option agreements with Rocky and Jasper to buy

their holdings in Clavicor. On July 26, 1991, Clavicor paid ABN

$859,917 representing Clavicor's total stockholder's equity.

On July 29, 1991, Jasper and Rocky repurchased the 6,000

shares of Clavicor from ABN for $1. Clavicor was dissolved on

the same date. Curab, N.V., an entity controlled by ABN Trust,

was appointed liquidator.

On July 29, 1991, Bartolo declared a dividend of $4,795,973,

even though its net assets only consisted of $287,404. Bartolo

had previously paid $4,514,569 to Clavicor in multiple payments;

Clavicor had then paid the $4,514,569 to ABN in multiple

payments. Bartolo was dissolved on July 29, 1991. Curab, N.V.

was appointed liquidator.
 - 75 -

K. Termination of the 4 LIBOR Notes

On August 1, 1991, the 4 Sumitomo LIBOR notes held by BFCE

were terminated in exchange for Sumitomo's payment of $15,223,523

to BFCE.

L. Termination of the IBJ CDs

On August 14, 1990, Sumitomo transferred the IBJ CDs to

Sumitomo Bank Limited, Cayman Branch (Sumitomo Cayman). Sumitomo

Cayman elected to exercise its put option with respect to the IBJ

CDs effective January 15, 1992.

VIII. Otrabanda-Related Swaps

A. Otrabanda Swap

On June 29, 1990, concurrent with Otrabanda's purchase of

the IBJ CDs, Otrabanda entered into an interest rate swap with

Merrill Lynch. The swap, which was used to transform Otrabanda's

return on the IBJ CDs from a floating LIBOR-based rate to one

based on Treasury bills, was terminated on July 27, 1990,

concurrent with Otrabanda' sale of the IBJ CDs.

B. Sumitomo Swaps

Merrill Lynch offered Sumitomo a structured transaction in

connection with its purchase of the IBJ CDs for cash and LIBOR

notes. In particular, Merrill Lynch and Sumitomo executed a swap

that provided Sumitomo with both an asset and liability that were

attractively priced versus other alternatives in the market. The

Sumitomo swap was designed to replicate the economic effect of
 - 76 -

partly financing the purchase of the IBJ CDs with a conventional

amortizing loan and effectively converted the transaction, from

Sumitomo's perspective, to synthetic funding below Sumitomo's

funding rates. Further, Sumitomo's payments under the hedge swap

were much less volatile than the payments required to be made

under the LIBOR notes.

C. Bartolo-ABN-Merrill Lynch Swaps

Bartolo entered into interest rate swaps with ABN and ABN

entered into mirror swaps with Merrill Lynch to reduce Bartolo's

and ABN's interest rate risk associated with the 4 Sumitomo LIBOR

notes held by Otrabanda.

D. Banque Francaise du Commerce Exterieur Swaps

Merrill Lynch offered BFCE a swap in connection with BFCE's

purchase of the 4 LIBOR notes from Brunswick. The Merrill Lynch-

BFCE swap, which was designed to replicate the economic effect of

investing in an amortizing loan that paid a margin over LIBOR,

effectively converted the purchase of the LIBOR notes, from

BFCE's perspective, to a synthetic amortizing asset at a rate

above BFCE's financing rate.

E. Brunswick Swaps

On October 11, 1990, concurrent with Brunswick's purchase of

50 percent of Bartolo's partnership interest in Otrabanda,

Brunswick and Merrill Lynch entered into a swap agreement. On

November 1, 1990, concurrent with the partial redemption of
 - 77 -

Bartolo's partnership interest in Otrabanda, Brunswick and

Merrill Lynch entered into a second swap agreement. Brunswick

used these swaps to hedge a substantial percentage of its

interest in the Sumitomo LIBOR notes.

On November 28, 1990, the swaps that Brunswick and Merrill

Lynch entered into on October 11, 1990, and November 1, 1990,

were completely terminated upon Brunswick's sale of the 4

Sumitomo LIBOR notes to BFCE.

IX. Saba's and Otrabanda's Tax Returns

Saba filed Forms 1065 (U.S. Partnership Return of Income)

for the years ending March 31, 1990, March 31, 1991, and June 21,

1991. Brunswick prepared the returns as Saba’s tax matters

partner.

Otrabanda filed Forms 1065 (U.S. Partnership Return of

Income) for the years ending July 31, 1990, and June 21, 1991.

Brunswick prepared the returns as Otrabanda’s tax matters

partner.

X. Brunswick's Partnership Expenses

A. Transaction Costs

Petitioner retained Clifford W. Smith, Jr. (Smith),

Professor of Finance at the William E. Simon Graduate School of

Business Administration at the University of Rochester, to serve

as an expert witness in these cases. Smith computed the present

values of the LIBOR notes that were issued to Saba and Otrabanda
 - 78 -

in connection with the sales of the Chase PPNs and IBJ CDs. In

particular, Smith determined that, as of March 23, 1990, the

present values of the Fuji and Norinchukin LIBOR notes issued to

Saba were $18,728,061 and $18,760,828, respectively. Smith

further determined that, as of July 27, 1990, the present values

of the Sumitomo LIBOR notes issued to Otrabanda were $18,909,546.

Smith's valuations of the LIBOR notes were lower than those

determined by Pepe. See supra pp. 33-34, 63-64.

Relying on his lower valuations of the LIBOR notes, Smith

concluded that Saba incurred transaction costs of $2,605,495 on

the sale of the Chase PPNs, and that Otrabanda incurred

transaction costs of $1,292,017 on the sale of the IBJ CDs.

Smith opined that these transaction costs included fees to

Merrill Lynch for locating the issuers of the PPNs and CDs and

the LIBOR notes, a spread between the bid-ask price on the sale

of the PPNs and CDs, and a spread on the bid-ask price on the

purchase of the LIBOR notes. Considering the volatile nature of

LIBOR notes, Smith concluded that the bid-ask spread included the

cost that the issuers of the LIBOR notes would incur in obtaining

interest rate swaps.

B. Legal and Accounting Fees

Brunswick paid the Mayer, Brown & Platt law firm for

services related to Saba and Otrabanda as follows:
 - 79 -

Year Amount
1990 $288,736.75
1991 72,533.90
1992 15,092.64
1993 6,027.50

Brunswick paid total fees of $26,000 to Arthur Andersen for

services related to Saba and Otrabanda.

C. Total Expenses

As of October 3, 1990, Brunswick had established a reserve

for expenses attributable to Saba and Otrabanda of $10,600,000 as

part of Brunswick's Accrued Disposition Costs account. Brunswick

established the Accrued Disposition Costs account to accrue

expenses that would be netted against the gains that Brunswick

expected to realize on the sale of its Technical businesses and

Nireco stock.

Arthur Andersen served as Brunswick's independent accountant

from 1980 through 1993. In an interoffice memorandum dated

October 16, 1990, authored by Michael P. Abrahamson (Abrahamson)

and circulated to Arthur Andersen representatives in New York and

Chicago, Abrahamson discussed Brunswick's accounting for its

investment in Saba. The memorandum states that the accounting

treatment for the transaction had been discussed with Arthur

Andersen prior to Brunswick’s recording the transaction. The

memorandum further states in pertinent part:

Any transaction costs (i.e., formation of the
partnership) to be borne by Brunswick were charged
against a gain on sale (i.e., below the line) recorded
by Brunswick in connection with the disposition of
 - 80 -

certain technical segment businesses. These costs were
charged against the gain because the only reason
Brunswick formed the partnership was to maximize the
after tax earnings and cash flow from these
dispositions.

Although the second sentence quoted above is crossed out in the

copy of the Abrahamson memorandum provided to the Court, the word

"STET" appears in the margin next to the sentence in question.

Arthur Andersen also prepared a schedule, set forth below,

itemizing Brunswick's accrual of $10,370,000 in foreign

partnership expenses for the quarter ended December 31, 1990:

Fees (in thousands) Saba Otrabanda Total

Merrill Lynch 1,750 1,425 3,175
ABN (advisory fee)(actual $645) 750 750

Bartolo-2nd FP 900 900

Cravath, Swaine & Moore 250 250 500
N.V. Fides (Trust Co.) 50 50 100

Other 300 300
Total Fees 3,100 2,625 5,725

Financing Costs

Underwriting Costs
Chase Note and 3 CNs 2,840 1,450 4,290
Swap and Other 355 355

Total 6,295 4,075 10,370
Say 10.6

Paid in Accrued TOTAL TOTAL
1990 at 12-31 EST.EXP. DIF

Merrill Lynch 1,436 1,750 3,186 3,175 11

Relying on a schedule prepared by Brunswick's accounting

department on February 4, 1991, Arthur Andersen estimated that,
 - 81 -

for the period ending December 31, 1990, Brunswick had incurred

expenses of $3,667,000 relating to the sales of Brunswick's

Technical businesses and Nireco stock. The $3,667,000 in

expenses were allocated as follows:

Company Amount
Vapor $562,000
Vapor A/C 64,000
TXT 585,000
ECS 367,000
Circle Seal 516,000
Biotech 59,000
NIRECO 1,514,000

Total 3,667,000

On October 31, 1991, Brunswick's accountants reallocated

$2,425,000 from a total reserve of $10,600,000 for partnership

expenses and accounted for the $2,425,000 as commissions paid to

Merrill Lynch in connection with the sales of Vapor, TXT, and

Nireco stock. Brunswick reallocated $1,250,000 to Vapor AC,

$500,000 to TXT, and $675,000 to Nireco. Brunswick never

informed Arthur Andersen about the reallocation of expenses.

Based upon Arthur Andersen's work papers, Brunswick incurred

net partnership expenses of $8,950,000. Accounting for the

reallocation of $2,425,000 of expenses described above, Brunswick

concluded that it incurred net partnership expenses of

$6,006,944.

XI. Interest Rate Forecasts

Smith, petitioner's expert, prepared a report in which he

employed various methods for forecasting interest rates in an
 - 82 -

effort to determine the potential profitability of an investment

in the LIBOR notes at issue. Relying on a market-based forecast

for 3-month LIBOR as of February 23, 1990 and June 20, 1990,

Smith opined that the LIBOR notes had the potential to provide

returns up to $10,826,000 over their 5-year terms. Relying on

the "symmetric" theory of interest rate behavior--the theory that

a 525 basis point increase in interest rates was as equally

probable as the actual 525 basis point decrease in interest rates

that occurred during the period in question--Smith opined that

the LIBOR notes had the potential to provide returns of up to

$40,487,000. Relying on the "equal probability" theory of

interest rate behavior--the theory that the likelihood of

interest rates falling by one-half is equal to that of interest

rates doubling over the same period--Smith opined that the LIBOR

notes had the potential to provide returns of up to $80,683,000

over their 5-year terms.

Respondent retained Richard W. Leftwich (Leftwich),

Professor of Accounting and Finance at the University of Chicago

Graduate School of Business, to serve as an expert witness in

these cases. Leftwich believed that Smith's market-based forecast

for 3-month LIBOR was too high based on prevailing market rates

and forecasts. Leftwich further opined that, in assessing the

market's forecast of future interest rates, Smith improperly

ignored the impact of the so-called liquidity and risk premium
 - 83 -

hypotheses on the shape of the yield curve. Respondent presented

evidence that market prognosticators were anticipating declining

interest rates as of February 23, 1990. Specifically, the March

10, 1990, edition of Blue Chip Economic Indicators, a monthly

publication containing a survey of the Wall Street community and

economists, reported that the "consensus" view was that Treasury

bill rates would decline from 7.7 percent in the first quarter of

1990 to 7.4 percent in the fourth quarter of 1990 and to 7.3

percent in the fourth quarter of 1991. Treasury bills are short-

term debt instruments that correlate with 3-month LIBOR. The

Blue Chip Economic Indicators survey remained fairly constant

throughout the summer of 1990. However, the August 10, 1990,

edition reported that the "consensus" view was that Treasury bill

rates would fall to 7.2 percent in the fourth quarter of 1990 and

remained virtually unchanged through the fourth quarter of 1991.

Contrary to Smith's forecast, interest rates fell

dramatically between February 1990 and September 1992.

Specifically, 3-month LIBOR rates declined from 8.375 percent in

February 1990 to 3.125 percent in September 1992. If the

partnerships had held the LIBOR notes for their full 5-year

terms, the partnerships would have lost $19,716,000.

XII. Brunswick's Tax Returns and Related Documents

Brunswick filed a Form 1120 (U.S. Corporation Income Tax

Return) for 1990 reporting (on a consolidated basis) a net short-
 - 84 -

term capital loss of $142,953,624. The $142,953,624 net loss,

reported on Schedule D, included gains and losses not specified

on Schedule D or on any related schedules. The $142,953,624

figure included $162,886,086 in capital losses attributable to

the sale of the LIBOR notes distributed to Brunswick by Saba and

Otrabanda. The $162,886,086 figure represents the sum of

$97,011,580 (the loss that Brunswick purportedly incurred on the

sale of the 2 Fuji LIBOR notes and the Norinchukin LIBOR note)

and $65,874,506 (the loss that Brunswick purportedly incurred on

the sale of the 4 Sumitomo LIBOR notes). The $142,953,624 net

loss also included capital gains of $12,033,334 (attributable to

Brunswick's distributive share of the gain purportedly realized

on the sale of the Chase PPNs) and $5,700,000 (attributable to

Brunswick's distributive share of the gain purportedly realized

on the sale of the IBJ CDs).

Brunswick applied $115,202,991 of the $142,953,624 net

short-term capital loss to offset net long-term capital gains

reported on its 1990 tax return.2 Brunswick carried back

$27,588,222 and $162,411 of the claimed 1990 capital losses to

1988 and 1987, respectively.

2
The parties stipulated that Brunswick applied
$116,135,453 of the $142,953,624 net short-term capital loss to
offset capital gains reported on its 1990 tax return. We have
relied on Brunswick's Form 1139 (Corporation Application for
Tentative Refund), filed August 30, 1991, in finding that
Brunswick actually applied $115,202,991 of the $142,953,624 to
offset capital gains reported in 1990.
 - 85 -

Brunswick filed a Form 1120 for 1991 reporting (on a

consolidated basis) a long-term capital loss of $32,631,287

attributable to SBC's sale of the remaining Norinchukin LIBOR

note. Brunswick used $846,745 of its claimed 1991 capital losses

in 1991 and carried back $16,580,600 and $6,362,009 of the loss

to 1989 and 1988, respectively. Brunswick carried forward

$8,841,933 of its claimed 1991 capital losses.

Brunswick provided reserves for 100 percent of the tax

attributable to its reported net capital losses from the Saba and

Otrabanda transactions in its deferred tax account.

XIII. Respondent's Determinations

A. Saba FPAA

On December 30, 1996, respondent issued an FPAA to Saba.

Respondent determined: (1) The transactions financing the

purchase and sale of the Chase PPNs would not be recognized for

Federal income tax purposes for lack of economic substance; (2)

Saba would not be recognized as a partnership; (3) partnership

items would be reallocated to Brunswick (95 percent) and Skokie

(5 percent); and (4) the basis of the 3 LIBOR notes distributed

to Brunswick was $26,601,451 and the basis of the remaining LIBOR

note transferred to SBC was $7,032,954. In addition, respondent

disallowed certain deductions. First, respondent disallowed

$25,000 of a $56,050 deduction that Saba had reported for amounts

paid to N.V. Fides during the taxable year ended March 31, 1991.
 - 86 -

The $25,000 item was labeled "incorporation fee". In addition,

respondent disallowed a deduction of $120,266 that Saba had

reported for amounts paid to Cravath, Swaine & Moore during the

taxable year ended March 31, 1991, as well as the amortization of

$1,500 and $8,500 attributable to amounts paid to Cravath, Swaine

& Moore for the taxable years ended March 31, 1991 and June 21,

1992, respectively. Respondent determined that the disallowed

amounts had not been substantiated and that petitioner had failed

to demonstrate that the amounts represented ordinary and

necessary business expenses.

Respondent made several alternative determinations in the

event the Court were to recognize Saba as a partnership for

Federal income tax purposes. Respondent determined in pertinent

part: (1) No gain or loss would be recognized on the purchase

and sale of the Chase PPNs because the transactions lacked

economic substance; and (2) Saba’s bases in the LIBOR notes

distributed to Brunswick and SBC were $26,601,451 and $7,032,954,

respectively.

B. Otrabanda FPAA

On December 30, 1996, respondent issued an FPAA to

Otrabanda. Respondent determined: (1) The transactions

financing the purchase and sale of the IBJ CDs would not be

recognized for Federal income tax purposes for lack of economic

substance; (2) Otrabanda would not be recognized as a
 - 87 -

partnership; (3) partnership items would be reallocated to

Brunswick (90 percent) and Skokie (10 percent); and (4)

Brunswick's basis in the 4 LIBOR notes was $17,458,827. In

addition, respondent disallowed certain deductions. First,

respondent disallowed $25,000 of a $50,823 deduction that

Otrabanda had reported for amounts paid to N.V. Fides during the

taxable year ended June 21, 1991. The $25,000 item was labeled

"incorporation fee". In addition, respondent disallowed a

deduction of $72,996 that Otrabanda had reported for amounts paid

to Cravath, Swaine & Moore during the taxable year ended June 21,

1991. Respondent determined that the disallowed amounts had not

been substantiated and that petitioner had failed to demonstrate

that the amounts represented ordinary and necessary business

expenses.

Respondent made several alternative determinations in the

event the Court were to recognize Otrabanda as a partnership for

Federal income tax purposes. Respondent determined in pertinent

part: (1) No gain or loss would be recognized on the purchase

and sale of the IBJ CDs because the transactions lacked economic

substance; and (2) Otrabanda’s basis in the LIBOR notes

distributed to Brunswick was $17,458,827.

OPINION

The central issue in these cases is whether the

partnerships' CINS transactions should be disregarded for Federal
 - 88 -

income tax purposes for lack of economic substance. Petitioner

bears the burden of proof. See Rule 142(a); Brown v.

Commissioner, 85 T.C. 968, 998 (1985), affd. sub nom. Sochin v.

Commissioner, 843 F.2d 351 (9th Cir. 1988).

As discussed in detail below, we shall sustain respondent's

adjustments on the ground that the disputed CINS transactions

lack economic substance. See ACM Partnership v. Commissioner,

157 F.3d 231 (3d Cir. 1998), affg. in part and revg. in part T.C.

Memo. 1997-115, where the Court of Appeals for the Third Circuit

affirmed this Court’s holding that virtually identical CINS

transactions arranged by Merrill Lynch lacked economic substance.

Based upon our holding in these cases, we need not decide whether

Saba and Otrabanda were valid partnerships. Cf. ASA Investerings

Partnership v. Commissioner, T.C. Memo. 1998-305, on appeal to

the Court of Appeals for the District of Columbia Circuit.

I. Evidentiary Matters

Prior to trial, petitioner asserted that certain documents

in its possession, including the Zelisko memorandum, were

privileged and not subject to discovery. After respondent moved

to compel production of the documents, the Court ordered

petitioner to submit the documents to the Court for in camera

review. On August 14, 1998, the Court issued an order holding,

among other things, that only limited portions of the Zelisko
 - 89 -

memorandum were privileged and directing petitioner to produce

the document with appropriate redactions. Petitioner complied

with the Court's order.

In its reply brief, petitioner states that "Exhibit 408-J

[the Zelisko memorandum] is protected by attorney-client

privilege and the work-product doctrine. Petitioners renew their

claim of attorney-client privilege and application of the work-

product doctrine with respect to Exhibit 408-J."

A. Attorney-Client Privilege

Our rules provide for discovery of information that is not

privileged but relevant to the subject matter involved in the

pending case. See Rule 70(b). The party opposing discovery

bears the burden of establishing that the information sought is

privileged. See Zaentz v. Commissioner, 73 T.C. 469, 475 (1979);

Branerton Corp. v. Commissioner, 64 T.C. 191, 193 (1975).

Section 7453 provides that the Court is bound by the rules

of evidence applicable in trials without a jury in the U.S.

District Court for the District of Columbia. See Rule 143(a).

The Court of Appeals for the District of Columbia "adheres to the

axiom that the attorney-client privilege must be 'strictly

confined within the narrowest possible limits consistent with the

logic of its principle.'" Linde Thomson Langworthy Kohn & Van

Dyke v. Resolution Trust Corp., 5 F.3d 1508, 1514 (D.C. Cir.
 - 90 -

1993)(quoting In re Sealed Case, 676 F.2d 793, 807 n.44 (D.C.

Cir. 1982)); see Mead Data Cent. Inc. v. U.S. Dept. of Air Force,

566 F.2d 242 (D.C. Cir. 1977).

The attorney-client privilege is "the oldest of the

privileges for confidential communications known to the common

law." Upjohn Co. v. United States, 449 U.S. 383, 389 (1981);

Hartz Mountain Indus. v. Commissioner, 93 T.C. 521, 524-525

(1989). The attorney-client privilege "applies to communications

made in confidence by a client to an attorney for the purpose of

obtaining legal advice, and also to confidential communications

made by the attorney to the client if such communications contain

legal advice or reveal confidential information on which the

client seeks advice." Hartz Mountain Indus. v. Commissioner,

supra at 525, (citing Upjohn Co. v. United States, supra).

However, "the privilege only protects disclosure of

communications; it does not protect disclosure of the underlying

facts by those who communicated with the attorney." Upjohn Co.

v. United States, supra at 395.

Except for the matters that were redacted, the Zelisko

memorandum, set forth in its redacted form supra pp. 15-18, does

not contain privileged communications. The memorandum is self-

described as "a bullet point summary of a transaction proposed by

Merrill Lynch to Brunswick Corporation (BC) on December 8, 1989

to generate sufficient capital losses to offset the capital gain
 - 91 -

which will be generated on the sale of the Nireco shares." The

portion of the Zelisko memorandum that we ordered to be disclosed

does not contain communications from Brunswick to its attorney,

or legal advice or analysis, but is merely a factual account of a

meeting between a third party, Merrill Lynch, and Brunswick’s tax

counsel. See United States v. Ackert, 169 F.3d 136, 139-140 (2d

Cir. 1999); see also Mead Data Cent. Inc. v. U.S. Dept. of Air

Force, supra at 254-255.

B. Work-Product Doctrine

It is well settled that our Rules generally protect attorney

work-product from discovery. See Note to Rule 70, 60 T.C. 1097,

1098; see also Hartz Mountain Indus. v. Commissioner, supra at

528; Zaentz v. Commissioner, supra at 478; Branerton Corp. v.

Commissioner, supra at 198; P.T. & L. Constr. Co. v.

Commissioner, 63 T.C. 404, 408 (1974). The policies and concerns

underlying the attorney work product-doctrine are explained in

Hickman v. Taylor, 329 U.S. 495, 510-511 (1947), as follows:

In performing his various duties * * * it is essential that
a lawyer work with a certain degree of privacy, free from
unnecessary intrusion by opposing parties and their counsel.
Proper preparation of a client's case demands that he
assemble information, sift what he considers to be the
relevant from the irrelevant facts, prepare his legal
theories and plan his strategy without undue and needless
interference. * * * This work is reflected, of course, in
interviews, statements, memoranda, correspondence, briefs,
mental impressions, personal beliefs, and countless other
tangible and intangible ways--aptly though roughly termed
* * * the "work product of the lawyer." Were such materials
open to opposing counsel on mere demand, much of what is now
put down in writing would remain unwritten. An attorney's
 - 92 -

thoughts, heretofore inviolate, would not be his own.
Inefficiency, unfairness and sharp practices would
inevitably develop in the giving of legal advice and in the
preparation of cases for trial. The effect on the legal
profession would be demoralizing. And the interests of the
clients and the cause of justice would be poorly served.

The attorney work-product doctrine generally protects materials

prepared in anticipation of litigation. See In re Sealed Case,

146 F.3d 881, 885-887 (D.C. Cir. 1998); Branerton Corp. v.

Commissioner, supra at 198; P.T. & L. Constr. Co. v.

Commissioner, supra at 408.

Where an attorney has prepared a document in anticipation of

litigation, the document will be protected from discovery only to

the extent that it contains opinions, judgments, and thought

processes of counsel as opposed to purely factual materials. See

In re Sealed Case, supra at 888. We recognize that the Zelisko

memorandum may have been prepared in part in anticipation of

litigation. In this regard, we permitted Brunswick to redact

portions of the document deemed to be privileged. However, the

portion of the Zelisko memorandum that we ordered to be disclosed

does not qualify for protection from disclosure under the

attorney work-product doctrine inasmuch as it consists of a

factual account of a meeting between Zelisko and representatives

of Merrill Lynch and is bereft of material that could be

characterized as Zelisko’s legal opinion or judgment.
 - 93 -

II. Contingent Installment Sale Provisions

Section 453(a) provides the general rule that income from an

installment sale shall be taken into account for purposes of

title 26 under the installment method of accounting. Section

453(b)(1) defines the term "installment sale" as a disposition of

property where at least 1 payment is to be received after the

close of the taxable year in which the disposition occurs.

Section 453(k)(2) provides that subsection (a) shall not apply to

an installment obligation arising out of a sale of stock or

securities which are traded on an established securities market

or, to the extent provided in regulations, property (other than

stock or securities) of a kind regularly traded on an established

market.

Section 453(j)(2) provides that the Secretary shall

prescribe regulations providing for ratable basis recovery in

transactions where the gross profit or the total contract price

or both cannot be readily ascertained. Pursuant to this

authority, the Secretary promulgated the ratable basis recovery

rules under section 15A.453-1(c)(3)(i), Temporary Income Tax

Regs., 46 Fed. Reg. 10711 (Feb. 4, 1981), which provides in

pertinent part:

When a stated maximum selling price cannot be
determined as of the close of the taxable year in which
the sale or other disposition occurs, but the maximum
period over which payments may be received under the
contingent sale price agreement is fixed, the
taxpayer's basis (inclusive of selling expenses) shall
 - 94 -

be allocated to the taxable years in which payment may
be received under the agreement in equal annual
increments. * * * If in any taxable year no payment
is received or the amount of payment received
(exclusive of interest) is less than the basis
allocated to that taxable year, no loss shall be
allowed unless the taxable year is the final payment
year under the agreement * * *.

In short, section 15A.453-1(c)(3)(i), Temporary Income Tax Regs.,

supra, provides that, in the case of an installment sale in which

the maximum selling price cannot be determined, but the period

over which payments are to be received is fixed, the taxpayer's

basis shall be allocated equally over the taxable years in which

payments may be received under the installment sale agreement.

Depending upon the particular terms of an otherwise valid

installment sale, the ratable basis recovery rules may have the

effect of accelerating the recognition of income on a CINS

transaction while deferring the recognition of losses. See sec.

15A.453-1(c)(7), Temporary Income Tax Regs., 46 Fed. Reg. 10709

(Feb. 4, 1981). However, the ratable basis recovery rules are

not inflexible, as explained in the preamble to the regulation,

T.D. 7768, which states in pertinent part:

Because the rules set forth in these regulations
may not provide a schedule of basis recovery which is
reasonable for every contingent transaction, these
regulations provide that a taxpayer may use an
alternative method of basis recovery where the rules in
the regulations would substantially and inappropriately
defer basis recovery. These regulations also provide
that when the general rules would substantially and
inappropriately accelerate bases recovery, the Service
may require a different method of basis recovery.
 - 95 -

Read as a whole, the regulations impart an intention to establish

a method of accounting that reasonably will match the gains and

losses reported on a CINS transaction.

The partnerships sold the PPNs and CDs for cash and LIBOR

notes and reported their gains on the sales by ratably allocating

their bases pursuant to section 15A.453-1(c)(3)(i), Temporary

Income Tax Regs., supra. Based on their partners' respective

capital accounts at the time of the sales, Saba and Otrabanda

allocated 90 percent of the gains realized on the transactions to

Sodbury and Bartolo, respectively. However, because Sodbury and

Bartolo were not subject to U.S. income tax, their distributive

shares of the gains realized on the transactions escaped U.S.

taxation. On the other hand, Brunswick's more modest 10 percent

distributive share of the gains on the sales of the PPNs and CDs

were dwarfed by the substantial capital losses that Brunswick

later realized following the distribution and sale of the LIBOR

notes.

Petitioner contends that the disputed transactions satisfy

the requirements of the contingent installment sale provisions

and the ratable basis recovery rules. In particular, the

partnerships sold PPNs and CDs--assets that are not traded on an

established securities market. See sec. 453(k)(2)(A). In

exchange, the partnerships received cash and LIBOR notes.

Petitioner contends that the LIBOR notes represent a series of
 - 96 -

contingent payments made over a period of years as required under

sections 453(b)(1) and 15A.453-1(c)(3)(i), Temporary Income Tax

Regs., supra. Respondent contends that the LIBOR notes do not

constitute qualifying contingent payments under section 453 on

the ground that Merrill Lynch's swap arrangements created an

"artificially supported market" for the LIBOR notes and

effectively converted the LIBOR notes to "purchaser evidences of

indebtedness payable on demand or readily tradable" within the

meaning of sections 453(f)(4) and 15A.453-1(e), Temporary Income

Tax Regs., supra. In light of our holding in these cases, we

need not consider this point.

III. Petitioner's Argument That An Economic Substance Analysis
Is Not Warranted

A. Gregory v. Helvering and Horn v. Commissioner

Relying primarily on Gregory v. Helvering, 293 U.S. 465, 469

(1935), and Horn v. Commissioner, 968 F.2d 1229, 1238 n.12 (D.C.

Cir. 1992), revg. Fox v. Commissioner, T.C. Memo. 1988-570,

petitioner contends that, rather than having to prove that the

disputed CINS transactions were imbued with economic substance,

petitioner is required to show only that the disputed

transactions resulted in a contingent "sale" of the PPNs and CDs

within the meaning of sections 1001(a) and 453(a).

It is well settled that taxpayers generally are free to

structure their business transactions as they please, even if

motivated by tax avoidance considerations. See Gregory v.
 - 97 -

Helvering, supra at 469; Rice's Toyota World, Inc. v.

Commissioner, 81 T.C. 184, 196 (1983), affd. in part, revd. in

part and remanded 752 F.2d 89 (4th Cir. 1985). Nonetheless, to

be accorded recognition for tax purposes, a transaction generally

is expected to have "economic substance which is compelled or

encouraged by business or regulatory realities, is imbued with

tax-independent considerations, and is not shaped solely by tax-

avoidance features that have meaningless labels attached." Frank

Lyon Co. v. United States, 435 U.S. 561, 583-584 (1978). This

last principle, which finds its origin in Gregory v. Helvering,

supra, is better known as the economic substance doctrine.

In Gregory v. Helvering, supra, the taxpayer was the sole

shareholder of United Mortgage Corporation (United) which held

1,000 shares of Monitor Securities Corporation (Monitor). The

taxpayer intended to obtain the Monitor shares and sell them for

a profit. However, the taxpayer hoped to structure the transfer

of the shares from United to herself so as to reduce or avoid the

income tax that would arise if the transfer were treated as a

dividend distribution. In this regard, the taxpayer ostensibly

arranged a "reorganization" pursuant to section 112(g) of the

Revenue Act of 1928, ch. 852, 45 Stat. 791, 818. Specifically,

the taxpayer organized a third corporation, Averill Corporation

(Averill), had United transfer its Monitor shares to Averill, and
 - 98 -

then dissolved Averill. The taxpayer ultimately received the

Monitor shares from Averill in a liquidating distribution.

Upon review of the matter, the Supreme Court sustained the

Commissioner's determination that the purported reorganization

was a sham. The Supreme Court concluded that the transaction was

carried out in contravention of the plain intent of the

controlling statute, reasoning in pertinent part as follows:

Putting aside, then, the question of motive in respect
of taxation altogether, and fixing the character of the
proceeding by what actually occurred, what do we find?
Simply an operation having no business or corporate
purpose--a mere device which put on the form of a
corporate reorganization as a disguise for concealing
its real character, and the sole object and
accomplishment of which was the consummation of a
preconceived plan, not to reorganize a business or any
part of a business, but to transfer a parcel of
corporate shares to the petitioner. No doubt, a new
and valid corporation was created. But that
corporation was nothing more than a contrivance to the
end last described. It was brought into existence for
no other purpose; it performed, as it was intended from
the beginning it should perform, no other function.
[Gregory v. Helvering, supra at 469.]

In sum, Gregory v. Helvering, supra, stands for the

principle that, although a business transaction may be structured

in strict compliance with all pertinent statutory requirements, a

court charged with reviewing the transaction is not obliged to
 - 99 -

respect its form for tax purposes where the record shows that the

transaction was in fact a contrivance designed to obtain a tax

benefit not intended by Congress under the taxing statute.

The Court of Appeals for the District of Columbia Circuit

has considered the scope and application of the economic

substance doctrine. In Horn v. Commissioner, supra, the

Commissioner disallowed losses claimed by commodities dealers

with respect to so-called option-straddle transactions on the

ground that the transactions were economic shams. This Court

granted the Commissioner's motion for summary judgment,

sustaining the Commissioner's determination that the transactions

were devoid of economic substance. See Fox v. Commissioner,

supra.

On appeal, the Court of Appeals for the District of Columbia

Circuit reversed after concluding that Congress had intended to

allow the disputed losses pursuant to section 108 of the Tax

Reform Act of 1984 (Division A of the Deficit Reduction Act of

1984, Pub. L. 98-369, 98 Stat. 494, 630), as amended under the

Tax Reform Act of 1986 (TRA 1986), Pub. L. 99-514, sec. 1808(d),

100 Stat. 2817. For the text of section 108, and the 1986

amendment, see Glass v. Commissioner, 87 T.C. 1087, 1164-1166

(1986). After reviewing Supreme Court precedent and scholarly

articles on the subject, the Court of Appeals described the sham

transaction doctrine as follows:
 - 100 -

first, the sham transaction doctrine is simply an aid
to identifying tax-motivated transactions that Congress
did not intend to include within the scope of a given
benefit-granting statute; and second, a transaction
will not be considered a sham if it is undertaken for
profit or for other legitimate nontax business
purposes. * * * As the Seventh Circuit pointed out in
Yosha,[861 F.2d at 498,] “the taxpayer [in Gregory] was
trying to take advantage of a loophole inadvertently
created by the framers of the tax code; in closing such
loopholes the courts could not rightly be accused of
having disregarded congressional intent or
overreached.” * * * [Horn v. Commissioner, 968 F.2d at
1238.]

Relying on section 108(a) and (b) as amended under TRA 1986,

the Court of Appeals stated that "Congress undoubtedly has the

power to grant beneficial tax treatment to economically

meaningless behavior, if indeed that is what happened here."

Horn v. Commissioner, 968 F.2d at 1234. Pointing to the plain

language of section 108, the Court of Appeals held that Congress

had authorized deductions for losses associated with option-

straddle transactions so long as the taxpayer qualified as a

commodities dealer. See Horn v. Commissioner, supra at 1239.

The Court of Appeals stated that "section 108(b) does all that it

need do for the taxpayers to prevail here--it creates an

irrebuttable presumption that a commodities dealer has made his

straddle trades in a trade or business, i.e., he has not engaged

in an economic sham." Id. at 1239. The Court of Appeals further

noted that section 108(a) closely tracked the sham transaction

doctrine insofar as a loss was allowed only if the transaction

was entered into for profit or in a trade or business. See id.
 - 101 -

Concluding that it was inappropriate to apply the sham

transaction doctrine to section 108, the Court of Appeals

reasoned as follows:

The sham transaction doctrine is an important judicial
device for preventing the misuse of the tax code; but
the doctrine cannot be used to preempt congressional
intent. As Government counsel properly conceded at
oral argument, Congress has the power to authorize
these transactions, whether or not they are economic
shams. And the language of section 108(a)--providing
that the deduction shall be allowed if the transaction
was in a trade or business or engaged in for profit--
coupled with the irrebuttable presumption of section
108(b) [that every straddle loss incurred by a
commodities dealer shall be treated as a loss incurred
in a trade or business], makes it clear that that is
exactly what Congress intended to do. [Horn v.
Commissioner, 968 F.2d at 1236.]

Citing Gregory v. Helvering, 293 U.S. 465 (1935), and Horn

v. Commissioner, supra, petitioner contends that "Application of

the 'economic substance' doctrine must therefore begin with the

Code, and the lack of a business purpose and the absence of a

prospect of profit are irrelevant unless the underlying Code

provisions require the presence of those elements". (Emphasis

added.) Petitioner misconstrues both cases.

As previously discussed, Gregory v. Helvering, supra, stands

for the principle that a court is not obliged to respect the form

of a transaction for tax purposes where the record shows that the

transaction was in fact a contrivance designed to obtain an

unintended tax benefit. Although the Supreme Court made it clear

that a transaction cannot be disregarded solely because it was
 - 102 -

driven by a tax motive, the Supreme Court held that the

reorganization in question was a sham in large part because the

transaction had no business or corporate purpose. See Gregory v.

Helvering, supra at 469. The Supreme Court's reliance on the

lack of a business or corporate purpose for the transaction is

notable in that the corporate reorganization provision in

question did not explicitly require a business purpose--the

Supreme Court concluded that a business or corporate purpose was

implied in the provision. See id. at 469; see also Yosha v.

Commissioner, 861 F.2d 494, 499 (7th Cir. 1988) (quoting

Commissioner v. Transport Trading & Terminal Corp., 176 F.2d 570,

572 (2d Cir. 1949)).

Nor does Horn v. Commissioner, supra, support petitioner's

position that the economic substance doctrine is only relevant

where the controlling statutory provision by its terms requires a

business purpose and a reasonable prospect of a profit. Although

the Court of Appeals in Horn v. Commissioner, supra, concluded

that it would be premature to proceed with an economic substance

analysis without first examining the controlling statutory

provision and its legislative history, the relevant inquiry is

not whether business purpose or the prospect of a profit are

required elements under the controlling provision, but rather

whether Congress enacted the provision with the intention of

sanctioning a particular transaction regardless of its economic
 - 103 -

substance. See Knetsch v. United States, 364 U.S. 361, 369

(1960), where the Supreme Court sustained the Commissioner's

disallowance of interest deductions on the ground that "nothing

in the Senate Finance and House Ways and Means Committee Reports

on section 264 * * * [suggests] that Congress in exempting pre-

1954 annuities intended to protect sham transactions."

Consistent with the foregoing, an analysis of the economic

substance of the CINS transactions is appropriate in the absence

of an indication in the controlling statutory provisions that

Congress intended to favor such transactions regardless of their

economic substance.

B. Section 1001 and Cottage Savings

Petitioner further contends that an analysis of the economic

substance of the disputed CINS transactions is unwarranted under

section 1001(a) and the Supreme Court's interpretation of that

provision in Cottage Sav. Association v. Commissioner, 499 U.S.

554 (1991). Specifically, petitioner maintains that section

1001(a) and Cottage Savings demonstrate that the gain or loss

realized on a sale or exchange of property shall be recognized

for tax purposes regardless of the business purpose or potential

for profit underlying the transaction.

Section 1001(a) provides that gain or loss from a sale or

other disposition of property is determined by the difference

between the amount realized from the sale and its adjusted basis.
 - 104 -

Section 1001(b) defines the "amount realized" as "the sum of any

money received plus the fair market value of the property (other

than money) received." Section 1001(c) provides: "Except as

otherwise provided in this subtitle, the entire amount of the

gain or loss, determined under this section, on the sale or

exchange of property shall be recognized."

According to petitioner, section 1001(c) and section 1.1002-

1(b), Income Tax Regs., which provides that exceptions to the

general rule of section 1001(c) must be "strictly construed and

do not extend either beyond the words or the underlying

assumptions and purposes of the exception", compel the Court to

respect the tax consequences of a sale or exchange of property

regardless of the economic substance of the transaction.

Petitioner further asserts that the legislative history of

section 1001 reflects Congress' clear intent to tax the gain or

loss on all exchanges of property. Petitioner cites the

legislative history of section 203 of the Revenue Act of 1924,

ch. 234, 43 Stat. 253, which states:

It appears best to provide generally that gain or loss is
recognized from all exchanges and then except specifically
and in definite terms those cases of exchange in which it is
not desired to tax the gain or allow the loss. This results
in definiteness and accuracy and enables a taxpayer to
determine prior to the consummation of a given transaction
 - 105 -

the tax liability that will result therefrom. [H. Rept. 179,
68th Cong., 1st Sess. (1924), 1939-1 C.B. (Part 2) 251; S.
Rept. 398, 68th Cong., 1st Sess. (1924), 1939-1 C.B. (Part
2) 275.]

Unlike the statutory provision at issue in Horn v.

Commissioner, 968 F.2d 1229 (D.C. Cir. 1992), neither the plain

language of section 1001 nor its legislative history lends any

support to the proposition that Congress intended to respect the

tax consequences of sales or exchanges of property that lack

economic substance. While it is true that Congress crafted

section 1001 as a provision that would be broadly applicable to

sales or exchanges of property, subject to specific statutory

exceptions, Congress did not proscribe an analysis of the

economic substance of a sale or exchange of property. Cf. Compaq

Computer Corp. v. Commissioner, 113 T.C. 17 (1999) (Rejecting the

taxpayer’s argument that the foreign tax credit regime completely

sets forth Congress’ intent as to allowable foreign tax credits

and that an additional economic substance requirement was not

intended by Congress). In this regard, it is important to

recognize that the economic substance doctrine is not a

judicially created exception to the general rule of section

1001(c), as petitioner implies, but rather is a "canon of

statutory interpretation that statutes should not be read to

create 'absurd results.'" Horn v. Commissioner, supra at 1239.

Moreover, petitioner's position conflicts with long-standing

Supreme Court precedent holding that the tax consequences of
 - 106 -

sales or exchanges of property need not be respected where "the

challenged tax event is * * * a sham”, and that the Government

may look at the realities of a transaction and "disregard the

effect of the fiction as best serves the purposes of the tax

statute." Higgins v. Smith, 308 U.S. 473, 477 (1940). In

Higgins v. Smith, supra, the Supreme Court held that a taxpayer

did not sustain a loss within the meaning of section 23(e) of the

Internal Revenue Code of 1939 when he sold securities below cost

to his wholly owned corporation. Because the taxpayer retained

dominion and control over the stock transferred through his

ownership of the corporate transferee, the Court found that "no

loss in the statutory sense could occur upon a sale by a taxpayer

to * * * [a wholly owned corporation]", notwithstanding the fact

that an actual transfer of the stock had occurred. Id. at 476;

see also Frank Lyon Co. v. United States, 435 U.S. 561 at 573

("In applying this doctrine of substance over form, the Court has

looked to the objective economic realities of a transaction

rather than to the particular form the parties employed.");

Commissioner v. Court Holding Co., 324 U.S. 331, 334 (1945) ("To

permit the true nature of a transaction to be disguised by mere

formalisms, which exist solely to alter tax liabilities, would

seriously impair the effective administration of the tax policies

of Congress.")
 - 107 -

Petitioner's reliance on Cottage Sav. Association v.

Commissioner, 499 U.S. 554 (1991), likewise is misplaced.

Petitioner contends that the disputed CINS transactions must be

respected for tax purposes inasmuch as they were structured and

carried out in strict compliance with the requirements of

sections 1001 and 453.

In Cottage Sav. Association v. Commissioner, supra, the

taxpayer, a savings and loan association, owned participation

interests in mortgages that had declined in value due to a surge

in interest rates during the late 1970s. After holding the

participation interests for a number of years, the taxpayer sold

them to several savings and loan associations and purchased from

them participation interests in mortgages of approximately equal

fair market value. The taxpayer claimed a $2.4 million loss

deduction equal to the excess of its bases in the participation

interests that it sold over the fair market value of the

participation interests that it purchased.

The Commissioner disallowed the claimed loss on alternative

grounds: (1) The taxpayer had not realized the losses within the

meaning of regulations promulgated under section 1001; and (2)

the transactions lacked economic substance. However, the Supreme

Court sustained the taxpayer's loss deduction, holding that the

taxpayer had realized a loss pursuant to section 1001 because the

participation interests exchanged were "materially different"
 - 108 -

embodying "legally distinct entitlements". Id. at 566. In

rejecting the Commissioner's determination that the losses should

be disallowed because they lacked economic substance, the Supreme

Court noted that the Commissioner's argument on the point had

consisted of one sentence in a footnote in his brief with a

citation to Higgins v. Smith, supra. See Cottage Sav.

Association v. Commissioner, supra at 567-568. Emphasizing that

the transfers in question were made at arm's length, the Supreme

Court concluded that the Commissioner's citation to Higgins v.

Smith, supra, without further elaboration, was insufficient to

deny the losses under section 165(a). Cottage Sav. Association

v. Commissioner, supra at 568.

We reject petitioner's contention that we are obliged to

respect the tax consequences of the CINS transactions at issue in

these cases under Cottage Sav.. In rejecting the Commissioner's

economic substance argument in Cottage Sav., the Supreme Court

held that the Commissioner had failed to rebut evidence that the

transaction was conducted at arm's length. See Lerman v.

Commissioner, 939 F.2d 44, 55-56 n.14 (3d Cir. 1991), affg. Fox

v. Commissioner, T.C. Memo. 1988-570. The Supreme Court did not

apply the economic substance test as fully articulated in cases

such as Frank Lyon Co. v. United States, 435 U.S. at 583-584, and

Horn v. Commissioner, 968 F.2d at 1237. Accordingly, Cottage

Sav. Association v. Commissioner, supra, "cannot be read for the
 - 109 -

proposition that, as long as a transaction is bona fide, i.e.,

actually occurred, it cannot be denied economic substance."

Lerman v. Commissioner, supra at 55-56 n.14.

In any case, the transaction disputed in Cottage Sav.

Association v. Commissioner, supra, is fundamentally different

from the transactions disputed in the cases before the Court.

The taxpayer in Cottage Sav. Association v. Commissioner, supra,

sought to minimize its taxes by closing out a real economic loss,

whereas the disputed CINS transactions were designed to generate

fictional losses to offset Brunswick's capital gains. See Compaq

Computer Corp. v. Commissioner, 113 T.C. 17 (1999).

In ACM Partnership v. Commissioner, 157 F.3d 231 (3d Cir.

1998), affg. in part and revg. in part T.C. Memo. 1997-115, the

Court of Appeals for the Third Circuit affirmed this Court’s

holding that a CINS transaction that Merrill Lynch had arranged

for Colgate-Palmolive Company lacked economic substance. We

agree with the Court of Appeals’ reasoning in that case,

distinguishing Cottage Sav. Association v. Commissioner, supra,

in pertinent part as follows:

The distinctions between the exchange at issue in
this case and the exchange before the Court in Cottage
Savings predominate over any superficial similarities
between the two transactions. The taxpayer in Cottage
Savings had an economically substantive investment in
assets which it had acquired a number of years earlier
in the course of its ordinary business operations and
which had declined in actual economic value by over $2
million from approximately $6.9 million to
approximately $4.5 million from the time of acquisition
 - 110 -

to the time of disposition. See Cottage Sav., 499 U.S.
at 557-58, 111 S.Ct. at 1506. The taxpayer's
relinquishment of assets so altered in actual economic
value over the course of a long-term investment stands
in stark contrast to ACM's relinquishment of assets
that it had acquired 24 days earlier under
circumstances which assured that their principal value
would remain constant and that their interest payments
would not vary materially from those generated by ACM's
cash deposits. [ACM Partnership v. Commissioner, supra
at 251; fn. ref. omitted.]

In accord with the preceding discussion, we conclude that

Cottage Sav. Association v. Commissioner, supra, neither mandates

that we respect the tax consequences of the CINS transactions

disputed in these cases, nor precludes a review of the economic

substance of those transactions. Moreover, based upon our review

of sections 1001 and 453, and their underlying regulations and

legislative histories, we are satisfied that Congress did not

intend to create the loophole that the partnerships have

attempted to exploit. See Horn v. Commissioner, 968 F.2d at

1238. Consequently, we will proceed with an analysis of the

economic substance of the CINS transactions.

IV. Petitioner's Contention That CINS Transactions Are Imbued
With Economic Substance

Petitioner contends that respondent's partnership

adjustments must be rejected even assuming that the economic

substance doctrine, as articulated in ACM Partnership v.

Commissioner, supra, is applicable.

An evaluation of the economic substance of the CINS

transactions requires: (1) A subjective inquiry whether the
 - 111 -

partnerships carried out the transactions for a valid business

purpose other than to obtain tax benefits; and (2) an objective

inquiry whether the CINS transactions had practical economic

effects other than the creation of tax benefits. See ACM

Partnership v. Commissioner, supra at 247-248; Horn v.

Commissioner, 968 F.2d at 1237; Casebeer v. Commissioner, 909

F.2d 1360, 1363 (9th Cir. 1990), affg. in part, revg. and

remanding in part Larsen v. Commissioner, 89 T.C. 1229 (1987),

and affg. Memorandum Opinions of this Court; Rose v.

Commissioner, 868 F.2d 851, 853-854 (6th Cir. 1989), affg. 88

T.C. 386 (1987).

A transaction imbued with economic substance normally will

be recognized for tax purposes even in the absence of a nontax

business purpose. See Northern Ind. Pub. Serv. Co. v.

Commissioner, 115 F.3d 506, 512 (7th Cir. 1997), affg. 105 T.C.

341 (1995); Larsen v. Commissioner, supra at 1253. The Court of

Appeals for the District of Columbia Circuit has held that "a

transaction undertaken for a nontax business purpose will not be

considered an economic sham even if there was no objectively

reasonable possibility that the transaction would produce

profits." Horn v. Commissioner, 968 F.2d at 1237. But cf.

Kirchman v. Commissioner, 862 F.2d 1486, 1492 (11th Cir. 1989),

(existence of a nontax business purpose does not mandate the
 - 112 -

recognitition of a transaction that otherwise lacks economic

substance) affg. Glass v. Commissioner, 87 T.C. 1087 (1986).

A. Business Purpose

Petitioner argues that the partnerships engaged in the CINS

transaction to achieve a number of business objectives other than

to obtain tax benefits. Petitioner first contends that the

partnerships provided an appropriate investment vehicle for the

proceeds from the sale of Brunswick's Technical businesses and

Nireco stock, at a time when Brunswick was vulnerable to a

takeover attempt. The partnerships purportedly were viewed in

part as a means to "tie up" Brunswick's excess cash so that it

could not be used against Brunswick in a leveraged buy out.

Petitioner further contends that the acquisition of LIBOR notes,

with floating interest rates, provided a hedge against a decline

in Brunswick's marine sales (and lower profits) associated with

periods of rising interest rates. Finally, petitioner maintains

that the partnerships provided Brunswick with an opportunity to

establish a relationship with a large, international financial

institution consistent with Brunswick's long-term strategic

planning.
 - 113 -

Despite petitioner's assertions to the contrary, there is

overwhelming evidence in the record that Saba and Otrabanda were

organized solely to generate tax benefits for Brunswick.

Although petitioner has attempted to downplay the significance of

the document, the Zelisko memorandum is direct and compelling

evidence that Brunswick intended to use the partnerships as a

device to generate capital losses to offset the capital gains

that Brunswick anticipated on the sales of its Technical

businesses and Nireco stock. The Zelisko memorandum, prepared

shortly after Ms. Zelisko's meeting with Merrill Lynch

representatives and well in advance of the formation of the

partnerships, describes in precise detail the steps that would be

required for the CINS transactions to generate substantial

capital losses for Brunswick's benefit. Each of the partnerships

subsequently fulfilled all of the steps outlined in the Zelisko

memorandum.

Equally compelling is the "FOREIGN PARTNERSHIP TAX UPDATE"

that McManaman prepared on April 20, 1990, in which he projected

that Brunswick would realize capital losses of $80 million and

$57 million from its participation in Saba and Otrabanda,

respectively. Significantly, McManaman's projections generally
 - 114 -

were consistent with those set forth in the Zelisko memorandum

and were made 2 months before the Otrabanda partnership was

formed. McManaman's projections were also made well before

O'Brien purportedly formed the view that interest rates would

fall. On April 25, 1990, McManaman's projections were presented

to Brunswick's Board of Directors.

The record also shows that ABN and the other financial

institutions involved in the CINS transactions fully understood

Brunswick's intentions. The assumptions underlying the Zelisko

memorandum and McManaman's projections are echoed in a number of

ABN documents describing the partnerships. In addition, internal

memoranda maintained by Fuji and Norinchukin stated that the

transactions were designed to provide tax savings for Merrill

Lynch's customers. Finally, an internal Arthur Andersen

memorandum stated that "the only reason Brunswick formed the

partnership was to maximize the after tax earnings and cash flow"

from the sale of its Technical businesses.

Against this backdrop, we conclude that each of the

ostensible business purposes that petitioner cites as a tax-

independent justification for Brunswick's participation in the

partnerships is nothing more than a derivative or by-product of

the CINS transactions. Specifically, the partnerships' purchase

of the PPNs and CDs was not driven by the desire to "tie-up"

Brunswick's funds at a time when Brunswick was vulnerable to a
 - 115 -

hostile takeover, but rather was driven by section 453(k)(2)

which provides that the installment sale provisions do not apply

to sales of stock, securities, or certain other property which is

traded on an established market. In other words, as O'Brien

admitted at trial, the partnerships attempted to comply with

section 453(k)(2) by initially investing in the PPNs and CDs. We

are not convinced on the record presented that Brunswick

participated in these partnerships because it was particularly

vulnerable to a hostile takeover attempt during the period in

question or because the partnerships would "tie-up" Brunswick's

funds. And even if Brunswick considered itself vulnerable, it

had already taken far more meaningful and effective steps to

counter any takeover attempt.

Similarly, the partnerships did not agree to receive LIBOR

notes in partial payment for the PPNs and CDs in order to provide

Brunswick with a hedge against its interest rate risk, but rather

the partnerships accepted partial payment in the form of LIBOR

notes in an effort to ensure that at least 1 payment would be

received after the close of the taxable year in which the PPNs

and CDs were sold as required by section 453(b)(1) and to ensure

that the "total contract price" could not be readily ascertained

as required under the ratable basis recovery rules prescribed in

section 453(j)(2) and section 15A.453-1(c)(3)(i), Temporary

Income Tax Regs., 46 Fed. Reg. 10711 (Feb. 4, 1981). The fact
 - 116 -

that Brunswick entered into swaps partially to hedge its exposure

to the LIBOR notes belies petitioner's assertion that the LIBOR

notes were intended to hedge against a decline in boat sales (and

lower profits) associated with periods of rising interest rates.

Moreover, it can hardly be said that Brunswick's modest interest

in the LIBOR notes provided a meaningful hedge against

Brunswick's marine sales which totaled $2 billion in 1989.

Finally, Brunswick did not participate in the partnerships

in order to establish a relationship with a large international

financial institution. To the contrary, Brunswick entered into

the partnerships with a foreign partner to ensure that the bulk

of the partnerships' "gains" on the sales of the PPNs and CDs

could be allocated to a foreign entity that would not be subject

to U.S. income tax.

In closing on this point, we observe that the record

contains little in the way of notes or documentation, such as

corporate minutes or similar material, in which Brunswick's

officers or directors discussed the business purposes that

purportedly motivated Brunswick to participate in the

partnerships. Considering the entire record in these cases, the

self-serving testimony of Brunswick's officers involved in

planning and implementing the CINS transactions is insufficient

to convince us that the transactions were pursued for any nontax

business purposes. We conclude that the proffered business
 - 117 -

purposes amount to little more than window dressing for

transactions that were designed and implemented solely to

generate tax benefits for Brunswick.

B. Economic Substance

As previously mentioned, a transaction imbued with economic

substance normally will be recognized for tax purposes even in

the absence of a nontax business purpose. See Northern Ind. Pub.

Serv. Co. v. Commissioner, 115 F.3d at 511-512; Larsen v.

Commissioner, 89 T.C. at 1253. In Knetsch v. United States, 364

U.S. 361, 366 (1960) (quoting Gilbert v. Commissioner, 248 F.2d

399, 411 (2d Cir. 1957) (J. Hand, dissenting), the Supreme Court

held that the transaction in question was a sham because it did

"not appreciably affect * * * [the taxpayer's] beneficial

interest except to reduce his tax". In Northern Ind. Pub. Serv.

Co. v. Commissioner, supra at 512, the Court of Appeals for the

Seventh Circuit held that the Commissioner could not set aside

transactions which resulted "in actual, non-tax related changes

in economic position." See ACM Partnership v. Commissioner, 157

F.3d at 248; Jacobson v. Commissioner, 915 F.2d 832, 837 (2d Cir.

1990). In Horn v. Commissioner, 968 F.2d at 1237, the Court of

Appeals for the District of Columbia Circuit indicated that,

before declaring a transaction an economic sham, the court should

consider whether the transaction presented a reasonable prospect

for economic gain.
 - 118 -

Petitioner contends that the CINS transactions were imbued

with economic substance inasmuch as the partnerships accepted the

benefits and burdens of ownership of the PPNs and CDs, and later

the LIBOR notes. Petitioner asserts that the partnerships

assumed financial risks associated with the PPNs and CDs,

including: (1) Credit risk--the risk that Chase or IBJ would not

be able to make an interest or principal payment; (2) event

risk--the risk that a single event or circumstance could preclude

Chase or IBJ from repaying its obligations; (3) credit spread

risk--the risk that general credit spreads in the market may rise

or fall; and (4) liquidity risk--the risk that the owner of a

debt instrument will not be able to convert the instrument into

cash at or near its market value. Petitioner further contends

that the economic substance of the CINS transactions is reflected

in the interest (both paid and accrued) that Saba and Otrabanda

earned on the PPNs and CDs, as well as the reduced price that the

partnerships received upon the sale of the instruments reflecting

their lack of liquidity. Petitioner maintains that the

partnerships assumed similar financial risks, as well as

benefits, when they sold the PPNs and CDs for cash and LIBOR

notes.

There is no dispute that the partnerships owned the PPNs and

CDs, that the partnerships earned interest on these instruments,

or that the partnerships sold the PPNs and CDs for cash and LIBOR
 - 119 -

notes. Further, the partnerships may have been exposed to some

financial risk as a consequence of investing in the PPNs and CDs,

although such risk was minimized insofar as Saba and Otrabanda

had invested their funds with highly rated banks and both had the

option to put or sell the PPNs and CDs back to Chase and IBJ,

respectively, at their original purchase prices with accrued

interest. Nevertheless, the partnerships' ownership of the PPNs,

CDs, and LIBOR notes does not establish that the CINS

transactions possessed "purpose, substance, or utility apart from

their anticipated tax consequences". Goldstein v. Commissioner,

364 F.2d 734, 740 (2d Cir. 1966), affg. 44 T.C. 284 (1965); see

Sheldon v. Commissioner, 94 T.C. 738, 759-760 (1990).

Petitioner maintains that the CINS transactions appreciably

affected the partnerships' beneficial interests in light of the

potential for the LIBOR notes to appreciate in value if interest

rates were to rise. Consistent with the Supreme Court's

admonition to "[fix] the character of the proceeding by what

actually occurred", Gregory v. Helvering, 293 U.S. at 469, we

will briefly summarize the financial results of the CINS

transactions before proceeding with our analysis.

Saba's CINS Transaction

On February 28, 1990, Saba's partners made capital

contributions totaling $200 million. On the same day, Saba

invested $200 million in the Chase PPNs. On March 21, 1990,
 - 120 -

Chase made a $975,298 interest payment to Saba. Between March 21

and 23, 1990, Saba earned interest of $94,384 on the Chase PPNs.

On March 23, 1990, Saba sold the Chase PPNs for $160 million in

cash and 4 LIBOR notes with a present value somewhere between

$37,488,889 and $38,594,384. Thus, Saba sold the Chase PPNs

worth $200,094,384 ($200 million (principal) plus $94,384

(accrued interest)) for cash and LIBOR notes worth no more than

$198,594,384. The $1,500,000 difference between the value of the

Chase PPNs and the total consideration that Saba received

represents Saba's transaction costs.

Taking into account the $975,298 interest payment that Saba

received on the PPNs, Saba walked away from its $200 million

investment in the Chase PPNs with no more than $199,569,682.

On July 13, 1990, Brunswick increased its interest in the 4

LIBOR notes held by Saba by purchasing 50 percent of Sodbury's

partnership interest. On August 17, 1990, Saba distributed 3 of

the LIBOR notes to Brunswick. On September 6, 1990, Brunswick

sold the 3 LIBOR notes for $26,601,451, resulting in a loss to

Brunswick of approximately $2,500,000. On April 3, 1991, Saba

transferred the remaining LIBOR note to SBC. On July 2, 1991,

SBC sold the LIBOR note for $7,040,954, resulting in a loss to

Brunswick of approximately $719,000.
 - 121 -

Otrabanda's CINS Transaction

On June 25, 1990, Otrabanda's partners made capital

contributions totaling $150 million. On June 29, 1990, Otrabanda

invested $100 million in the IBJ CDs. On July 18, 1990, IBJ made

a $435,416 interest payment to Otrabanda. Between July 18, 1990

and July 27, 1990, Otrabanda earned interest of $201,562 on the

IBJ CDs. On July 27, 1990, Otrabanda sold the IBJ CDs for $80

million in cash and 4 LIBOR notes with a present value somewhere

between $18,909,546 and $19,451,562. Otrabanda sold the IBJ CDs

worth $100,201,562 ($100 million (principal) plus $201,562

(accrued interest)) for cash and LIBOR notes worth no more than

$99,451,562. The $750,000 difference between the value of the

IBJ CDs and the total consideration that Otrabanda received

represents Otrabanda's transaction costs.

Taking into account the $435,416 interest payment that

Otrabanda received on the CDs, Otrabanda walked away from its

$100 million investment in the IBJ CDs with no more than

$99,886,978.

On October 11, 1990, Brunswick increased its interest in the

LIBOR notes held by Otrabanda by purchasing 50 percent of

Bartolo's partnership interest. On November 1, 1990, Otrabanda

distributed the 4 LIBOR notes to Brunswick. On November 28,

1990, Brunswick sold the 4 LIBOR notes for $17,458,827, resulting

in a loss to Brunswick of approximately $1,700,000.
 - 122 -

As the foregoing clearly illustrates, Saba and Otrabanda

lost at least $430,318 and $113,022, respectively, on their

purchase and sale of the PPNs and CDs. Moreover, Brunswick (and

SBC) subsequently lost nearly $5 million on the sale of the LIBOR

notes. Even considering the payments of approximately $4,700,000

that the partnerships received on the LIBOR notes, the

transactions were at best a wash. Without more, we are unable to

conclude that the CINS transactions appreciably affected the

partnerships’ beneficial interests.

Although the partnerships actually lost money on the CINS

transactions, petitioner nevertheless contends that, at the time

the CINS transactions were entered into, the partners anticipated

that the LIBOR notes would appreciate in value due to an expected

rise in interest rates. We reject this contention for two

reasons. First, neither the partnerships nor Brunswick ever

intended to hold the LIBOR notes more than a brief time and

certainly not long enough to recoup their transaction costs.

Second, we are not convinced that the profit potential of the

LIBOR notes was sufficient to imbue the CINS transactions with

objective economic substance.

We have already documented that the CINS transactions were

scripted well in advance. Brunswick and ABN understood, prior to

the formation of the partnerships, that the partnerships would

invest in PPNs and CDs for less than a month, that the PPNs and
 - 123 -

CDs would be sold for 80 percent cash and 20 percent LIBOR notes,

and that the LIBOR notes would be distributed to Brunswick and

sold after a brief holding period. Brunswick and ABN also

understood that there would be significant transaction costs

associated with the sale of the PPNs and CDs, as well as the

LIBOR notes. In connection with the foregoing, we dismiss

Brunswick's assertion that it was unaware that it would

eventually bear the transaction costs on the sale of the PPNs and

CDs for cash and LIBOR notes. Indeed, the Zelisko memorandum

suggests that Brunswick knew that it would be expected to absorb

these costs.

Brunswick's records indicate that it incurred net

partnership expenses of at least $6 million. Respondent contends

that circumstantial evidence, including the Zelisko memorandum,

ABN memoranda discussing its fees, the ABN-Brunswick consulting

agreement, the Otrabanda "control" fee that Brunswick paid to

Bartolo, and Brunswick's reallocation of $2,425,000 of expenses

from its partnership reserve account to commissions paid to

Merrill Lynch in connection with the sale of Brunswick's

Technical businesses and Nireco stock, suggest that Brunswick's

partnership expenses were much higher. Respondent contends that

Brunswick disguised its partnership expenses as fees paid to ABN
 - 124 -

and broker commissions paid to Merrill Lynch. In light of our

holding in these cases, we need not address this particular

contention.

Considering all the evidence, we are convinced that

Brunswick was cognizant of the costs associated with the CINS

transactions and accepted those costs as a "fee" for obtaining

tax benefits. Given the substantial costs associated with the

transactions, there was no possibility that the transactions

would generate a profit over the short period that the LIBOR

notes were intended to be held.

Another aspect of the CINS transactions that bolsters our

conclusion that neither the partnerships nor Brunswick intended

to profit from their investment in the LIBOR notes relates to the

timing of the transactions. In particular, the partnerships were

investing in new LIBOR notes, and Brunswick was increasing its

interest in those notes, during a period when O'Brien's view of

the direction of interest rates was changing. From June through

September 1990, O'Brien's interest rate forecast was in

"transition". By September 1990, O'Brien had abandoned the view

that interest rates would rise and came to believe that interest

rates would fall. Because the value of the LIBOR notes would

decline with falling interest rates, we are not convinced that

either the partnerships or Brunswick reasonably expected to

profit from the CINS transactions.
 - 125 -

Nor are we convinced that the profit potential of the LIBOR

notes, measured over the 5-year terms of the notes, supports the

proposition that the CINS transactions were imbued with economic

substance. Smith, petitioner's expert, opined that the LIBOR

notes had the potential to provide returns over their 5-year

terms ranging from $10,800,000 (using a market-based forecast for

3-month LIBOR) to a high of $80,683,000 (based on the "equal

probability" theory of interest rate behavior). Respondent

presented evidence that the LIBOR notes were not likely to

generate profits for the partnerships given the "consensus" view

of a broad group of market prognosticators that interest rates

would decline between 1990 and 1991.

Contrary to Smith's projections, interest rates fell

dramatically between February 1990 and September 1992.

Specifically, 3-month LIBOR rates declined from 8.375 percent in

February 1990 to 3.125 percent in September 1992. If the

partnerships had held the LIBOR notes for their full 5-year

terms, the partnerships would have lost $19,716,000.

Smith candidly concedes in his report that "it is impossible

to predict the actual path that interest rates will follow over a

given period of time." Weighing the evidence that we have on the

point, we are not convinced that Smith's market-based forecast

for 3-month LIBOR provides a reasonable basis for measuring the

potential profitability of the LIBOR notes. Smith's forecast
 - 126 -

produced an interest rate curve that gradually increased over the

5-year terms of the LIBOR notes. However, respondent produced

evidence that a broad cross-section of economists and financial

experts were forecasting falling interest rates during 1990 and

1991. Under the circumstances, we conclude that it was

unreasonable to believe that there would be any substantial

appreciation in the LIBOR notes over their 5-year terms. That is

not to say that it would have been unreasonable to expect any

profits on an investment in the LIBOR notes, only that such

profits would be limited.

Relatively modest profits are insufficient, standing alone,

to clothe the disputed CINS transactions with economic substance.

In particular, even assuming for the sake of argument that the

partnerships reasonably could have expected profits of up to

$10,800,000 on a 5-year investment in the LIBOR notes, such

profits would be inconsequential when compared with the capital

losses of approximately $170,000,000 that the CINS transactions

were designed to generate for Brunswick. See Sheldon v.

Commissioner, 94 T.C. 738, 767-768 (1990); see also ACM

Partnership v. Commissioner, 157 F.3d at 258; Goldstein v.

Commissioner, 364 F.2d at 739-740.

In Yosha v. Commissioner, 861 F.2d 494, 499 (7th Cir. 1988),

the Court of Appeals for the Seventh Circuit stated:

A transaction has economic substance when it is the
kind of transaction that some people enter into without
 - 127 -

a tax motive, even though the people fighting to defend
the tax advantages of the transaction might not or
would not have undertaken it but for the prospect of
such advantages--may indeed have had no other interest
in the transaction.

In the instant cases, the partnerships converted large sums of

cash into relatively illiquid investments (PPNs and CDs) and,

within a few weeks, incurred significant costs converting the

investment to 80 percent cash and 20 percent LIBOR notes. The

partnerships' short-term investment in the PPNs and CDs, which

guaranteed a net economic loss after accounting for transaction

costs, begs the question why the partnerships did not simply

invest 20 percent of its cash in LIBOR notes. The only plausible

explanation is that the partnerships' short-term investment in

the PPNs and CDs set the stage for greater financial returns in

the form of tax losses for Brunswick. We are convinced that no

reasonable business person would have participated in the CINS

transactions, as they were designed and implemented in these

cases, except for a tax motive.

In Goldstein v. Commissioner, supra, one of the taxpayers,

Tillie Goldstein, sought to shelter $140,000 that she won in the

Irish sweepstakes by borrowing $945,000 from 2 banks at 4 percent

interest, and investing the proceeds in $1 million face amount

U.S. Treasury securities maturing in 3 or 4 years, and which paid

interest of either one-half of 1 percent or 1-1/2 percent. She

then prepaid interest in the amount of $81,396, and sought to
 - 128 -

deduct this amount under section 163(a). The taxpayer offered

evidence that she reasonably expected to profit from the

transactions based upon assumptions related to the movement of

Treasury rates.

The Court of Appeals for the Second Circuit dismissed the

argument that the taxpayer reasonably expected to profit from the

transactions on the grounds that the taxpayer’s profit

projections did not account for transaction costs of $6,500 and

were based on unreasonable assumptions that the Treasury notes

could be sold considerably in excess of par. The Court of

Appeals further held that “to allow a deduction for interest paid

on funds borrowed for no purposive reason, other than the

securing of a deduction from income, would frustrate section

163(a)’s purpose; allowing it would encourage transactions that

have no economic utility and that would not be engaged in but for

the system of taxes imposed by Congress.” Goldstein v.

Commissioner, 364 F.2d at 742. In short, the taxpayer’s

investment did not meaningfully change her economic position, and

it therefore lacked economic substance.

The same may be said of Brunswick’s involvement in the CINS

transactions. The intricate manipulation of the contingent

installment sales rules in this case could not conceivably be the

type of economically sterile transaction Congress intended to

sanction. At the end of the day, Brunswick’s involvement in the
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CINS transactions, with their attendant intricate investments in

the PPNs, CDs, LIBOR notes, money market accounts, hedges, swaps,

etc., all carefully masterminded by Merrill Lynch, did not

meaningfully change Brunswick’s economic position, and it

therefore lacked the requisite economic substance necessary to

validate Brunswick’s targeted capital losses.

C. Conclusion

In sum, broad parallels may be drawn between the CINS

transactions at issue herein and the purported reorganization

deemed a sham in Gregory v. Helvering, 293 U.S. 465 (1935). We

find that the CINS transactions served no valid business purpose,

but they were designed and implemented to take the form of a CINS

in a well-scripted attempt to take advantage of an unintended

loophole in the contingent installment sale rules. Although the

partnerships can claim ownership of substantial investments, the

disputed transactions were structured to minimize the

partnerships' exposure to risk and for no other purpose than to

generate fictional tax losses for Brunswick.

The CINS transactions were carried out in these cases in an

effort to exploit rather than to respect the principle that

contingent installment sales should be reported in a manner

intended reasonably to match gains and losses. As the Court of

Appeals for the Third Circuit aptly concluded in ACM Partnership

v. Commissioner, 157 F.3d at 252:
 - 130 -

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.
 - 131 -

Respondent contends that the partnerships are required to

report interest income derived from both the PPNs and CDs as well

as the LIBOR notes. Respondent further contends that petitioner

failed to prove that the amounts paid to Fides and Cravath,

Swaine, & Moore are legitimate partnership expenses.

Consistent with our determination that the partnerships’

purchase and sale of the PPNs and CDs will not be respected for

tax purposes, we agree with petitioner that the interest paid on

the PPNs and CDs is not includable in the partnerships’ income

for the years in issue. See, e.g., Sheldon v. Commissioner, 94

T.C. 738, 762 (1990). Consistent with this holding, the

partnerships are not entitled to any deductions associated with

the purchase and sale of the PPNs and CDs.

The parties are in agreement that the partnerships are

required to include in their taxable income the interest payments

that they received on the LIBOR notes during the taxable years in

issue. Consistent with the parties’ agreement on this point, we

conclude that the partnerships are entitled to deduct a portion

of the fees that Saba and Otrabanda paid to the Cravath firm.

Respondent disallowed a deduction of $120,266 that Saba had

reported for amounts paid to the Cravath firm during the taxable

year ended March 31, 1991, as well as the amortization of $1,500

and $8,500 attributable to amounts paid to the Cravath firm for

the taxable years ended March 31, 1991 and June 21, 1992,
 - 132 -

respectively. Respondent also disallowed a deduction of $72,996

that Otrabanda had reported for amounts paid to the Cravath firm

during the taxable year ended June 21, 1991. However, the record

in these cases includes a memorandum from Cravath to Brunswick

dated December 2, 1994, in which Cravath itemized its $125,000

charge to Saba for professional services as follows:

The $125,000.00 fee was for negotiation and
drafting of the documentation, and for other related
services, in connection with: (a) the formation of Saba
($19,452.45), (b) the purchase by Saba of certain notes
($25,576.37), (c) the sale by Saba of such notes
($46,649.86), (d) the assignment of Saba’s right to
receive payments from such sale ($11,887.60) and (e)
other related matters ($21,433.72). * * *

In the same memorandum, Cravath itemized its $68,000 charge to

Otrabanda for professional services as follows:

The $68,000.00 fee was for negotiation and
drafting of the documentation, and for other related
services, in connection with: (a) the formation of
Otrabanda ($12,215.57), (b) the purchase by Otrabanda
of certain certificates of deposit ($12,537.03), (c)
the sale by Otrabanda of such certificates
($23,193.51), (d) the assignment of Otrabanda’s right
to receive payments from such sale ($6,209.58) and (e)
other related matters ($13,844.31). * * *

We hold that Saba and Otrabanda are entitled to deductions

for fees paid to the Cravath firm other than fees associated with

the purchase and sale of the PPNs and CDs. Based upon the record

presented, we hold that Saba and Otrabanda are entitled to deduct

$19,452.45 and $12,215.57, respectively, representing the fees

paid to Cravath in connection with the formation of the

partnerships, subject to the limitations on the deduction of
 - 133 -

organization expenses set forth in section 709(b). Petitioner

has failed to show that any of the remaining fees paid to the

Cravath firm are unrelated to the purchase and sale of the PPNs

and CDs.

Finally, we sustain respondent’s disallowance of the $25,000

deductions that both Saba and Otrabanda claimed for

“incorporation fees” paid to N.V. Fides. Petitioner simply has

failed to substantiate these particular deductions to the Court’s

satisfaction.

To reflect the foregoing,

Decisions will be

entered under Rule 155.