-290-
“When our conversation began with Rene Claude about acquiring MGM
Holdings, I already knew from the due diligence exercise before
that there were, I would say, complex tax issues arising from the
acquisition of that company”, including tax basis and NOL issues.
He testified that he asked Shearman & Sterling to give him “an
analysis of the ways in which a transaction could be organized
involving MGM Holdings so that any tax attributes that might have
existed could be preserved.”
Shearman & Sterling prepared two memoranda summarizing the
anticipated U.S. tax consequences of certain hypothetical
transactions involving MGM Holdings. Neither memorandum analyzes
the transaction that actually occurred between the Ackerman group
and CDR. Notably, the memoranda propose a section 351 corporate
transaction involving MGM Holdings: “In general, the most
favorable tax treatment would result if a section 351 transaction
took place in 1996, and the transactions triggering both the loss
and the gain took place in subsequent years.”204 The memoranda
204 In the first memorandum dated Aug. 27, 1996, Shearman &
Sterling analyzed two alternative transactions. In the first
alternative, the “Section 351 Transaction”, Acquirer, a U.S.
corporation, transfers property to a new or existing subsidiary
(“Sub”) in exchange for stock of Sub, and, concurrently, CDR
transfers all the stock of MGM Holdings to Sub in exchange for
cash and stock of Sub. After these transfers, Acquirer owns 80
percent of the vote and value of Sub. In the second alternative,
the “B Reorganization”, Acquirer acquires all the stock of MGM
Holdings from CDR in exchange for Acquirer’s publicly traded
voting common stock or voting preferred stock redeemable in 5
years.
(continued...)
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