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June 17, 2014
Testimony by Principal Lawrence Kolbe Cited in Ruling to Uphold Decision in Offshore Portfolio Investment Strategy (OPIS) Tax Dispute

Brattle principal Dr. Lawrence Kolbe provided testimony on behalf of the U.S. Internal Revenue Service (IRS) that aided in upholding a favorable decision in an Offshore Portfolio Investment Strategy (OPIS) tax dispute.

On June 13, 2014, Circuit Judge Hurwitz of the U.S. Court of Appeals confirmed a decision by the U.S. Tax Court in the case of John Paul Reddam v. Commissioner of Internal Revenue, finding the transaction lacked economic substance and was intended to create capital losses. The Court’s decision cited Dr. Kolbe’s testimony, stating that:

The Commissioner’s expert (Dr. Kolbe) calculated the OPIS transactions’ net present value (“NPV”) and the expected rate of return of each component relative to its individual cost of capital. … The court did find useful Dr. Kolbe’s “additional comparison of the ‘values’ of the discrete elements of the OPIS transaction to their purchase price” because it “does, partially, illuminate the economics of petitioner’s investment.” According to Dr. Kolbe, Reddam “overpaid $2,289,650 for the entire OPIS transaction” because, other than his direct purchase of Deutsche Bank stock, “each distinct aspect of the transaction was materially mispriced to [his] disadvantage.” Although this mispricing was not “dispositive,” the Tax Court noted, it “signals to this Court that the transaction was devoid of economic substance. …

[W]e read the Tax Court as properly holding that, in this case, the evidence is overwhelming that no objective investor or taxpayer would enter into the OPIS transaction for its profit making potential. Rather, the overall structure of the OPIS transaction compels the conclusion that it would be purchased solely for its ability to create capital losses.

Dr. Kolbe, a principal in Brattle’s Cambridge, MA office, specializes in financial economics, particularly as it applies to project or asset valuation and to rate regulation.