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.
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.
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%.