- 49 - steps by which the partnership would borrow to redeem ABN's interest in October 1991 and recognize the remainder of the total $100 million capital loss. The auditors were concerned that recognition of the large tax loss without a corresponding book loss would leave Colgate with an outside basis considerably lower than the value of the partnership assets.12 The deferred tax liability associated with this built-in gain would have to be recognized for financial accounting purposes, unless the company could demonstrate an "exit tax strategy". With Merrill's assistance, Colgate explained how the low outside basis and deferred tax liability would be eliminated through a series of contemplated tax-free asset and stock transfers among Colgate affiliates some time after 1992. The auditors were of the opinion that until it became clear that they would be sustainable, for the most part the tax benefits of the transaction should not be recognized for financial accounting purposes. They understood from Colgate's account of the partnership, however, that sizable transaction costs would be incurred in connection with its activities. Colgate explained that only a minor amount of these costs would be shared with the other partners. Colgate would bear approximately $5 million, including all of Merrill's advisory fee of $1.7 million as well as approximately $2 million to originate and remarket the LIBOR 12 "Outside basis" refers to a partner's basis in its partnership interest.Page: Previous 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 Next
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