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the corporate tax department at Merrill Parent, sent an
interoffice memorandum to David K. Downes, corporate controller
at Merrill Parent, recommending the sale of ML Leasing’s stock,
after “stripping out” certain assets Merrill Parent did not wish
to sell, as part of a tax strategy that could result in an
increase in after-tax earnings of more than $60 million.5 On
September 16, 1985, Mr. Downes presented this tax strategy to
Jerome P. Kenny, president and chief executive officer of Merrill
Lynch Capital Markets (ML Capital Markets or MLCM),6 and Stephen
L. Hammerman, Merrill Parent’s general counsel, and arranged a
meeting to explain more fully the proposed tax strategy. The
proposed tax strategy at that time consisted of at least two
steps–-the distribution of certain assets of ML Leasing that
Merrill Parent wanted to retain within the consolidated group and
the sale of ML Leasing to a third party following the
distribution.
5The tax strategy contemplated by Mr. Kroeger was intended
to increase after-tax earnings by taking advantage of a provision
in the consolidated return regulations requiring the addback of
accelerated depreciation over straight-line depreciation when
calculating earnings and profits. See Woods Inv. Co. v.
Commissioner, 85 T.C. 274 (1985). This tax strategy is not at
issue in this case.
6Although it is unclear from the record, it appears that
Merrill Parent retained Merrill Lynch Capital Markets (ML Capital
Markets) to sell the stock of ML Leasing in 1986 and ML Capital
Resources in 1987.
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