Derivatives Tax and Economic Substance Expert Witness
When the tax answer depends on how the trade really works.
Capital Market Risk Advisors (CMRA) provides expert witness testimony and risk advisory on derivatives tax and economic substance questions, led by partner Dr. Peter Niculescu .
Dr. Niculescu has submitted a comment letter on IRS Notice 2026-62 recommending how to measure the economic risk and expected pretax profit of fund derivatives positions.
CMRA is independent, with no bank, broker or product affiliations, and its economic substance work dates back to CMRA founder Leslie Rahl’s expert testimony in Boca Investerings Partnership v. United States.
Treasury and the IRS have put derivatives-based fund tax strategies under the microscope.
Questions that look like tax questions, such as whether offsetting positions really reduce risk, whether a box spread is an investment or a financing, and what a swap was worth when it was terminated, are at bottom questions of market practice and valuation .
Capital Market Risk Advisors answers them as independent market practitioners who have traded, priced and risk-managed these instruments themselves.
CMRA’s Comment Letter on IRS Notice 2026-62
On September 28, 2026, Treasury and the IRS issued Notice 2026-62, which identifies investment fund strategies that the government views as producing tax results inconsistent with the Internal Revenue Code, and invited public comment by October 28, 2026.
The strategies include box spreads held inside ETFs, in-kind distributions of the gain leg of a straddle, identified straddles under Section 1092 that pair capital gains with ordinary losses, same-day foreign currency elections under Section 988, and swap terminations under Section 1234A.
CMRA partner Dr. Peter Niculescu has submitted a comment letter offering a neutral, market-practitioner view of how to measure the economic risk and expected pretax profit of these positions.
The letter takes no position on whether any strategy is abusive or on its tax treatment, and is not submitted on behalf of any client. It is intended to help taxpayers, IRS examiners and courts assess the economic facts consistently.
The letter recommends that expected pretax profit be judged as of the decision date, using real-world probabilities consistent with risk-neutrality, a range of scenarios and the full costs of the position. It proposes complementary measures of retained risk, including factor sensitivities, value-at-risk (VaR), expected shortfall, basis risk, stress tests and non-market risks, rather than any single numerical threshold.
Expert Witness for Derivatives Tax and Economic Substance Disputes
With guidance possibly applying retroactively, funds and their investors may face IRS examinations and litigation over positions taken years ago, including challenges under the economic substance doctrine of Section 7701(o).
These disputes turn on facts a court can only assess with an expert who has traded, priced and risk-managed the instruments. Dr. Niculescu provides that testimony for taxpayers and their counsel, or for the government.
Straddles and Risk Reduction — Section 1092
Whether offsetting positions substantially diminished risk, and how a trader would identify and manage them.
Box Spreads: Investment or Financing
The economics of box spreads, their implied interest rate, and whether they behave as an investment or a loan.
Swap and Currency Positions — Sections 1234A and 988
Valuation of swaps at termination, FX forwards and options, and the timing of currency elections.
Economic Substance and Profit Potential
Whether a strategy could realistically earn a pretax profit, and whether its risk was real, tested by simulating the full range of pretax outcomes. CMRA’s quantitative team uses Python and other tools to rebuild positions with both current methods and the methods in use when the trades were made.
Valuation on Key Dates
Fair value of positions distributed in kind, redeemed, or contributed to a fund.
Rebuttal of Opposing Experts
Critiques of opposing experts’ valuation and risk analyses, tested against how the instruments actually trade.
Derivatives Tax Risk Advisory for Funds and ETFs
For fund managers, ETF sponsors, fund boards and institutional investors, the better time to test a tax-aware strategy is before an examiner does.
CMRA’s risk advisory practice offers an independent review, led by Peter Niculescu .
Strategy Review
An independent assessment of the economics and risk of derivatives positions used in tax-aware strategies, and how they would look to a regulator or a court.
Documentation of Business Purpose
Analysis showing the non-tax risk and return of a position, prepared before it is challenged.
Board and Risk-Committee Briefings
Plain-English explanations of what Notice 2026-62 means for a fund’s positions, helping directors meet their oversight duties. CMRA helped the Mutual Fund Directors Forum develop its 2010 Risk Principles for Fund Directors.
Exit and Transition Analysis
Risk, cost and market impact of unwinding or restructuring positions if guidance changes.
Market Experience Behind the Analysis
Partner and Lead Testifying Expert
Dr. Niculescu is a Partner and Lead Testifying Expert at Capital Market Risk Advisors. He holds a Yale PhD in economics and is a CFA charter-holder. He was a Managing Director at Goldman Sachs and Executive Vice President and Chief Investment Officer at Fannie Mae. He has testified at trial and in arbitration in four countries, and co-edited Risk Budgeting with CMRA founder Leslie Rahl .
Boca Investerings Partnership v. United States
CMRA’s tax experience goes back decades. Leslie Rahl testified for the taxpayer in Boca Investerings Partnership v. United States, one of the landmark corporate tax shelter cases, which turned on whether the transactions had a non-tax business purpose. The court recognized her as an expert in risk management , financial engineering, valuation of complex instruments and new securities, and market practices.
Derivatives Tax and Economic Substance
What is IRS Notice 2026-62?
Notice 2026-62, issued by Treasury and the IRS on September 28, 2026, identifies investment fund strategies using derivatives that the government views as producing tax results inconsistent with the Internal Revenue Code. They include box spreads held in ETFs, in-kind distributions of the gain leg of a straddle, identified straddles, same-day currency elections and swap terminations. Public comments were due October 28, 2026.
What does economic substance mean for a derivatives position?
Under the economic substance doctrine, codified in Internal Revenue Code Section 7701(o), a transaction is respected only if it meaningfully changes the taxpayer’s economic position apart from its tax effects and the taxpayer has a substantial non-tax purpose. For derivatives, that usually turns on how much risk the position really carried and whether it could realistically earn a pretax profit.
When do offsetting positions form a tax straddle?
Under Section 1092, positions are offsetting when holding one substantially diminishes the risk of loss from holding the other. Whether risk was substantially diminished is a factual question about correlation, hedge ratios and how traders actually manage the positions, which is why courts rely on experts with trading and risk management experience.
Is a box spread an investment or a loan?
A box spread combines options so that its payoff at expiration is fixed, so its economics resemble borrowing or lending at an implied interest rate. Whether a particular box spread behaves as an investment or a financing depends on its terms, its pricing and how it was used, which an expert can analyze from market data.
Does CMRA work for taxpayers or the government?
Both. Capital Market Risk Advisors provides expert witness testimony for taxpayers and their counsel or for the government, and risk advisory for fund managers, ETF sponsors, fund boards and institutional investors. CMRA is independent, with no bank, broker or product affiliations.
Who is Peter Niculescu?
Dr. Peter Niculescu is a Partner and Lead Testifying Expert at Capital Market Risk Advisors. He holds a Yale PhD in economics, is a CFA charterholder, was a Managing Director at Goldman Sachs and Chief Investment Officer at Fannie Mae, and has testified at trial and in arbitration in four countries.