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and UA entities, including the more recent corporate
restructurings. The Kaye Scholer memorandum also provided a
discussion of CDR’s tax basis in MGM Holdings stock ($605
million), MGM Holdings’s tax basis in MGM Group Holdings stock
($483 million), MGM Group Holdings’s tax basis in New MGM stock
($300 million), New MGM’s tax basis in its assets ($1.14
billion), as well as tax loss carryforwards, and net operating
loss carryforwards.
A memorandum dated May 31, 1996, from Kaye Scholer to
Capella Films, which Mr. Lerner received, describes an “MGM
Acquisition/Partnership Structure” and explains:
The proposed structure outlined herein would
increase the amount receivable by CDR over a straight
purchase. Under the proposed structure CDR would
contribute the $873 million of debt owed to it by MGM
to the capital of Holdings, which in turn would
contribute the debt to Group, which in turn would
contribute the debt to MGM. Such contributions would
increase the tax basis of the stock of each of the
companies. As a result, CDR would have a tax basis in
the stock of Holdings of approximately $1.478 billion.
CDR would then form a limited liability company (the
‘LLC’) by contributing the stock of Holdings in
exchange for a 99% interest in the LLC. An unrelated
party would receive a 1% interest in exchange for a
nominal amount. Then CDR would sell half of its
interest, or 49.5% of the LLC, to an investor who could
benefit from the use of a capital loss (“Investor”).
The LLC would not make an election under section 754
* * * to adjust the basis of its assets. Group would
then sell the stock of MGM to Capella and make an
election under section 338(h)(10) of the Code to treat
the stock sale as an asset sale. Group would use a
portion of the proceeds to repay to CDR the $970
million of debt. The remainder of the proceeds would
be held by Group, other than the amount necessary to
pay any taxes on the sale (inasmuch as MGM’s NOL’s may
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