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By mid-1988, petitioner’s long-term plan included the
strategic objective of increasing its market share by various
means, including the acquisition of other discount brokerages.
On March 31, 1989, petitioner purchased all of the shares of
stock in Rose & Co. Investment Brokers, Inc. (Rose), from Chase
Manhattan Corp. (Chase). Petitioner paid $34,122,661 cash at a
time when Rose’s liabilities totaled $146,279,570. In addition,
petitioner’s capitalized acquisition fees for the acquisition of
the Rose stock were $974,638. Accordingly, petitioner’s
“Modified Aggregate Deemed Sales Price” (MADSP), as defined in
section 1.338(h)(10)-1T(f), Temporary Income Tax Regs., 51 Fed.
Reg. 745 (Jan. 8, 1986) (in effect for 1989), was $181,376,869
($34,122,661 + $146,279,570 + $974,638 = $181,376,869).
Petitioner also paid $3 million for an agreement not to compete
from Chase.
Christopher V. Dodds was a key employee of petitioner who
was responsible for evaluation and implementation of corporate
acquisitions and investment opportunities. Mr. Dodds was
individually responsible for the quantitative and qualitative
evaluation that was used as the basis for petitioner’s
acquisition of Rose. Mr. Dodds prepared a report, “Project
Colors”, which he presented to petitioner’s board of directors.
In addition to preparing the report, Mr. Dodds was one of the two
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