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March 16, 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 in Houston, TX. On Wednesday, March 14, 2012, Judge Diane L. Kroupa ruled in favor of the U.S. Government. Part of her decision stated that Dr. Kolbe’s testimony “analyzed the CARDS transaction from an economic perspective. His analysis showed that the interest rate on the loan was at least twice the market rate, without fees. Additionally, his analysis showed that the longer the loan was maintained, the worse off petitioner would be economically due to the above-market cost of the loan.” In the trial, Dr. Kolbe testified regarding the CARDS transaction structure and the financial underpinnings of the transaction, explained how to evaluate the economics of the transaction, and opined on the objective profitability of the transaction and the economic rationality of entering into the CARDS transaction versus standard financing. Judge Kroupa’s decision was based in part on Dr. Kolbe’s conclusion that the loan was an unprofitable financing decision and the use of the loan to purchase any investment would create an unnecessary and material drag on the investment’s profitability. Dr. Kolbe, a principal in Brattle’s Cambridge, MA office, specializes in financial economics, particularly as it applies to rate regulation and project or asset valuation. He was assisted in this case by Brattle associate Dr. Matt Aharonian and research analyst Minal Shankar.