Merrill Lynch & Co., Inc. & Subsidiaries - Page 14




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               On July 3, 1986, a written “Presentation to Inspiration                
          Resources Corporation” prepared by ML Capital Markets was                   
          submitted to Inspiration.  The presentation again described the             
          assets proposed to be owned by ML Leasing at the time of sale of            
          the ML Leasing stock to Inspiration and the pretax net cashflows            
          expected to be derived from the portfolio of leases.  The 1986              
          retained assets were not included in those assets.  The                     
          presentation proposed a purchase price of $98 million and a                 
          closing date at the end of 1986.                                            
               C.  The Tax Plan and the Section 304 Cross-Chain Sale                  
               Sometime between 1985 when the possible sale of ML Leasing             
          was first discussed and July 21, 1986, when ML Leasing                      
          contributed the 1986 retained assets to Merlease Leasing Corp.              
          (Merlease), petitioner finalized a plan9 to strip ML Leasing of             
          the 1986 retained assets and to sell ML Leasing outside the                 
          consolidated group using planning techniques designed to increase           
          petitioner’s tax basis in ML Leasing and thereby eliminate gain             
          on the sale of ML Leasing.  The plan consisted of the following             
          steps:                                                                      




               9It appears from the ML Leasing offering memorandum that               
          petitioner originally intended to have MLL distribute the 1986              
          retained assets to MLCR as a dividend.  We infer from this fact             
          that petitioner finalized its plan to engage in sec. 304 cross-             
          chain sales after the ML Leasing offering memorandum had been               
          prepared.                                                                   





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