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Berkshire Hathaway Inc. Message Board

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  • There's a post on the GenRe board quoting
    Bloomberg story on tax law complications arising from this
    merger. Perhaps someone with more computer literacy than
    I can cut it and paste it on this board. The idea
    of BRK having to go to court adds a new dimention to
    this deal that nobody wants.

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    • From GRN Board...

      Berkshire and General Re
      Must Grapple With 1997 Tax Law Change
      (edited for
      length...check bloomberg.com for full
      article)

      Washington, June 30 (Bloomberg) -- Congressional moves to
      close a
      popular tax loophole last year may
      complicate the $21 billion purchase of General Re Corp. by
      Warren Buffett's Berkshire Hathaway Inc., according to
      analysts and regulatory filings.

      Berkshire, an
      Omaha, Nebraska, insurance holding company, is seeking
      an Internal Revenue Service ruling that its
      acquisition of the Stamford, Connecticut, reinsurer will be
      tax-free. While Berkshire likely will get the ruling, the
      process may prove more difficult than usual, tax experts
      said.

      Buffett's tax lawyers must contend with a
      seemingly unrelated issue: 1997 legislation to prevent big
      investors from diversifying their stock portfolios without
      reporting a capital gain. To contend with the problem,
      Berkshire attorneys have fashioned an intricate merger
      agreement that made at least one expert dizzy.


      Under the terms of the merger agreement, filed with the
      U.S. Securities and Exchange Commission, Berkshire
      plans to issue its Class A and Class B stock for
      General Re common shares. The agreement also permits
      Berkshire to issue a mix of stock and a small amount of
      cash if the IRS refuses to rule that the all- stock
      transaction is tax-free.

      Buffett could use the cash
      contingency plan if Berkshire's request for a tax-free ruling
      from the IRS gets hung up by legislation Congress
      passed last year. That measure was designed to clamp
      down on so-called exchange funds, which let
      well-heeled insiders at public companies diversify their
      portfolios without incurring tax liabilities.

      The
      tax code does prohibit tax-free treatment under
      Section 351 when the merger produces an ``investment
      company.'' An investment company is one that has more than
      80 percent of its assets in stocks and bonds and
      results in diversification for the parties to the
      transaction, said Gilbert Bloom, a partner in the Washington
      national tax practice of KPMG Peat Marwick LLP.


      The new law has not been subject to many interpretive
      announcements,'' Bloom said. That could cause trouble for
      Berkshire Hathaway because the company has chosen to seek
      tax-free treatment for its purchase of General Re under

      Section 351. With the laws passed by Congress last year,
      the combined companies face a small risk that they
      could be considered akin to exchange funds.


      Berkshire created a new holding company for the acquisition
      that has two shell companies as subsidiaries.
      Berkshire itself will merge with one of the subsidiaries
      and General Re will merge with the other. In merger
      parlance, that is known as a `horizontal double dummy''
      technique. Each of the insurers then will be a subsidiary of
      the holding company, which will adopt Berkshire's
      name. Investors, including Buffett, will get stock in
      the holding company.

      The problem is that
      Berkshire's main assets are its well- known
      investment
      stakes in companies such as Coca-Cola Co., American
      Express Co., and Gillette Co. General Re has a $25
      billion investment portfolio of its own. When combined,
      the companies may well have 80 percent or more of
      their assets in securities.

      Berkshire and
      General Re should be able to convince the IRS that they
      were already diversified before the acquisition,
      Willens said. The two companies also may rely on
      exemptions carved out for insurers under the investment
      company restriction. They have to persuade the IRS that
      the assets are stocks and bonds held
      for use in
      the insurance business,'' Willens said. ``That
      leanses those assets.''

      Don Alexander, a former
      IRS commissioner, doesn't have much doubt that
      Berkshire and General Re will get the tax-free ruling. He
      has particular faith in Charles Munger, the vice
      chairman of Berkshire Hathaway.

    • If BRK is now $77,500 and it was $19 in 1967
      which is 410000% $19 * 410000% = $77,900) or 12813% per
      year over 32 years. I do not have a financial
      calculator for calculating coupounded returns nor do I know
      the manual to formula for calculating the coupounded
      returns.

      The 68% return this year off about a $46,000 start
      greatly changes the 24% compounded return BRK stated for
      year ended 12/97.

      • 1 Reply to benkea
      • Assuming a share price of $19 on 7/1/67 a return
        of 30.8% gives you a share price of $78,270 on
        7/1/98. Any one know where you can get historical quotes
        going back this far?

        This may be confused with
        the other % increases like the growth of book value
        that WEB mentions in the first paragraph of the last
        annual report as 24.1% over the last 33 years.

        He
        also mentions growth rates for investments per share
        and pre-tax earnings per share excluding investment
        income which have increased 25.6% and 24.2% respectively
        for the past 30 years.

        These are all different
        from increases in both BRK share price and growth in
        intrinsic value. WEB has stated that intrinsic value growth
        has outpaced the growth in book value over time which
        would account for the difference between the 24 and
        30%.

 
BRK-A
216,240.00-760.00(-0.35%)Mar 26 4:00 PMEDT