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during the years at issue. Merrill Parent, through its
subsidiaries and affiliates, provides investment, financing,
insurance, leasing, and related services to clients.
I. 1986 Sale of ML Leasing
Before it was sold outside the consolidated group, Merrill
Lynch Leasing, Inc. (ML Leasing or MLL), was a wholly owned
subsidiary of Merrill Lynch Capital Resources, Inc. (ML Capital
Resources or MLCR), which in turn was wholly owned by Merrill
Parent. ML Leasing was engaged in the business of arranging
leasing transactions between third parties (lease advisory
business). ML Leasing also was engaged in the business of
leasing its own real and tangible personal property to third
parties in the capacity of lessor (principal investments
business). Immediately before the years at issue, the principal
investments business leases were generating substantial positive
cashflow but had “turned around” for income tax purposes, meaning
that if ML Leasing continued to hold the leases, the principal
investments business would generate taxable income in excess of
pretax cashflow. ML Leasing also owned, directly or through
single-purpose subsidiary corporations, general and limited
partnership interests in limited partnerships that held property
subject to operating and leveraged leases.
A. Preliminary Discussions
As early as August 22, 1985, Douglas E. Kroeger, a member of
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