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November 05, 2012
Brattle Principal Provides Testimony on Economic Substance and Business Purpose for a CARDS Tax Transaction

Brattle principal Dr. Lawrence Kolbe provided testimony on behalf of the U.S. Internal Revenue Service that helped shape the outcome of a Custom Adjustable Rate Debt Structure (CARDS) tax dispute in U.S. Tax Court. On Thursday, November 1, 2012, the judge ruled in favor of the U.S. Government. After reviewing the CARDS transaction, Judge Jacobs found Dr. Kolbe’s expert report “persuasive that the CARDS transaction lacked economic substance. His analysis noted that the CARDS transaction reduced petitioners’ wealth by more than $500,000 and would have reduced it even more had the CARDS transaction lasted longer than one year. This loss would exist no matter what investments petitioners made with the proceeds because the same investments could have been financed by a more conventional type of loan.” Dr. Kolbe’s expert report focused on the CARDS transaction as a financing decision, and it therefore analyzed the credit facility itself, not what was done with the proceeds derived therefrom. The judge’s decision also described Dr. Kolbe’s conclusion that the CARDS transaction was not economically rational because the expected rate of return on the amount invested did not exceed or even equal the cost of capital.