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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.
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