-->Court Rejects Tax Strategy Merrill Sold to Companies
By LANDON THOMAS Jr.


federal appeals court yesterday rejected a $226 million tax refund for the drug company Wyeth, reversing a lower court's ruling concerning a tax-avoidance strategy promoted by Merrill Lynch & Company in the early 1990's.

The Federal Court of Appeals for the District of Columbia Circuit ruled that an offshore partnership set up by Merrill for American Home Products — which later changed its name to Wyeth — was a"sham" whose sole purpose was to reduce the company's tax bill. Several other companies set up similar partnerships with Merrill's help.

The court's decision closes the book on the lucrative offshore tax partnerships, which Merrill aggressively sold in 1989 and 1990 to corporate clients, including Schering-Plough and AlliedSignal.

The partnerships were developed and marketed by a close-knit team of Merrill Lynch bankers led by E. S. Purandar Das, a managing director who left the firm in the mid-1990's. Also prominent within the group was an associate vice president, Arshad R. Zakaria, who is now president for global markets and investment banking, and Richard Luciano, who is now a managing director in the corporate finance department.

While Mr. Luciano's role was a junior one — he helped Mr. Zakaria prepare client presentations, according to court documents — he is the son of Robert P. Luciano, who was chairman and chief executive of Schering-Plough when it was sold the offshore partnership. Robert Luciano, a Merrill director at the time, was an enthusiastic participant in the partnerships as chief executive of Schering-Plough. He is still on Merrill's board.

While the partnerships were sold to a small number of clients, they were extremely lucrative for Merrill. They required no commitment of capital from the firm and instead relied on the quantitative skills of a small core of bankers. To a large extent, the partnerships helped start the career of Mr. Zakaria, a junior banker at the time. American Home Products paid $7 million in fees to Merrill, while other clients paid as much as $15 million or more. Merrill also received substantial commissions from serving as a broker for trades made within the partnerships.

The partnerships were attractive to companies because they provided a way to avoid paying steep capital gains taxes when they sold subsidiaries.

In the case of American Home Products, Merrill set up the Boca Investerings Partnership in a favorable tax jurisdiction in the Antilles. The partnership permitted American Home Products to make securities transactions that resulted in a capital loss that in turn offset a $605 million capital gain on the sale of a subsidiary.

The partnership ended in September 1991. The Internal Revenue Service, in auditing Boca's books, concluded that the partnership was in effect a tax sham. It consequently ruled that the gains and losses within the partnership were designed expressly to help Merrill Lynch's clients avoid paying capital gains taxes.

American Home paid its taxes, but, unlike other Merrill clients that participated in the partnerships, it sued the government for a refund, which a federal district judge ordered in October 2001. Several other Merrill clients that invested in the partnerships took their cause to tax court, where they lost.

The appeals court decision reverses the order in the Wyeth case and closes the door on the partnerships. Merrill Lynch declined to comment on the court decision.

Lowell B. Weiner, a spokesman for Wyeth, said:"We are disappointed with the decision and we don't agree with it. We are evaluating our options."

While the ruling was perhaps a small embarrassment for the firm, Merrill Lynch disbanded Mr. Das's team more than 10 years ago and was not party to any of the recent court decisions. Nevertheless, the extraordinary success of the partnerships as a fee-generator for the firm bolstered the careers of Mr. Zakaria and Mr. Luciano.

Until Mr. Zakaria was named head of corporate risk management in May 2000, he had spent the 1990's in the firm's corporate finance department. There, he had a significant hand in developing and marketing equity-linked products that permitted clients to raise capital while paying as little tax as possible.

While these products also drew scrutiny from the I.R.S., they were never challenged and are widely used in the marketplace.

A lawyer for the government noted in a memorandum accompanying the decision:"A tax system of rather high rates gives a multitude of clever individuals in the private sector powerful incentive to game the system."