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ACM Partnership v. Commissioner

United States Court of Appeals for the Third Circuit
157 F.3d 231 (1998)


In 1988, Colgate-Palmolive Company realized $100 million in long-term capital gains. In 1989, Colgate, Merrill Lynch Capital Services, and Algemene Bank Nederland N.V. (ABN) each created a subsidiary and formed with those three subsidiaries the ACM Partnership (plaintiff). The purpose of the partnership was for Colgate to reduce its tax liabilities and acquire long-term debt. At formation, Colgate owned a 15-percent share of the partnership. The partnership used its $200 million in investments to buy short-term securities. The partnership then promptly sold the securities for $140 million in cash and contingent payments based on the London Interbank Offering Rate (LIBOR) over the next six years. This plan resulted in significant capital gains for the partnership in its first year, and capital losses in each year thereafter. Further, after the sale, the partnership used the $140 million in cash to liquidate ABN’s interest in the partnership. Effectively, the plan was structured so that ABN was the majority partner at the outset, thus taking the majority of the significant initial capital gains (as ABN was a foreign company, it was not subject to United States taxation). After the buyout, Colgate became the majority partner, at a 97-percent share, thus taking the majority of the ensuing capital losses in order to offset its 1988 capital gains. Pursuant to the partnership agreement, Colgate bore effectively all of the $3 million in transaction costs. The Internal Revenue Service (IRS) (defendant) disapproved of this plan, finding that the parties undertook the transactions solely for tax-avoidance purposes, with no intent to make a profit. The United States Tax Court affirmed. ACM appealed. There was no dispute that the partnership’s transactions complied with the literal letter of the Internal Revenue Code.

Rule of Law


Holding and Reasoning (Greenberg, J.)

Dissent (McKee, J.)

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