Economic Substance in a DAD Transaction

Brattle was retained by the government to analyze deals – commonly known as distressed asset/debt (DAD) transactions – that involved the sale of Russian receivables, with a high claimed tax basis but whose market value was transformed by economic upheaval in Russia. A Brattle Principal examined whether a rational investor would have entered into the transaction were it not for the claimed tax benefits. To do this, he analyzed the economic environments and the incentives of the various parties involved in the transactions.

The United States Tax Court ruled in favor of the government that transactions entered into separately by various partnership entities (Buyuk LLC et al., and Beyazit LLC et al.) lacked economic substance, and denied the taxpayers involved their claims. Judge Laro stated that he agreed with the expert’s opinion that “there was no realistic possibility for the transactions at issue to break even absent any tax benefits.” This was one of the first tax cases in the US that used the technique of “expert hot tubbing.”