- 34 -
Corporation” as the likely purchaser and estimated a sales price
of $70 million, consisting of $62 million in cash plus the
assumption of $8 million in liabilities. The presentation also
explained how the sale price was determined, quantified the
after-tax income and the tax benefit that would result from the
sale, explained the tax risks of the transaction, and recommended
the creation of a $35 million tax reserve for the transaction.27
In calculating the recommended reserve, the presentation stated
the following:
As you can imagine, it is the tax aspects that make
this sale especially attractive. The Tax Department,
in conceiving this transaction, has creatively applied
two different tax concepts to maximize the calculation
of Merrill Lynch’s tax basis in ML Capital Resources.
* * * * *
The second tax concept deals with the creation of
approximately $210 million in tax basis. This basis is
created by selling the stock of certain ML Capital
Resources subsidiaries to MLAM and ML Realty Inc. for
$210 million, rather than distributing this value to ML
Consumer Markets Holdings Inc. Under the tax rules the
sale is recharacterized as two separate transactions; a
dividend by MLAM and MLRI to MLCR of $210 million and a
contribution to the capital of MLAM and MLRI by MLCR of
approximately the same amount. The dividend received
by MLCR increases Merrill Lynch’s tax basis in MLCR by
$210 million. MLCR’s contribution to the capital of
MLAM and MLRI has no effect on tax basis.
27The $35 million tax reserve consisted of a $14 million
reserve for the possible disallowance of the deemed dividend
resulting from the cross-chain sale and a $21 million reserve for
lost tax benefits if certain income projections were not
realized.
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