Proposed law may dampen AOL merger talks with CompuServe

Merger negotiations between CompuServe and America Online could be threatened because of newly proposed US tax legislation, according to a published report.

Merger negotiations between CompuServe and America Online could be threatened because of newly proposed US tax legislation, according to a published report.

The legislation targets the so-called "Morris Trust" provision, which allows a company to split itself into two parts on a tax-free basis and then combine one of those parts with another company, also on a tax-free basis. Some legislators, who introduced the law in the US House and Senate last week, see the provision as an unintended tax loophole that lets companies escape paying taxes on such spinoffs.

The proposed legislation could put a damper on H&R Block's rumoured talks to sell its 80% stake in CompuServe to America Online (AOL), since without the Morris Trust provision, such a deal would result in huge tax bills, according to a report in the Wall Street Journal.

AOL isn't commenting on the legislation or the rumoured deal. H&R Block, which has confirmed that it is engaged in "discussions regarding a possible business combination that would involve CompuServe", won't comment on any impact the legislation might have. H&R Block officials have also declined to reveal who is involved in negotiations with them.

"We are still engaged in these discussions and don't have any further comment beyond that," says Linda McDougall, assistant vice-president for corporate communications at H&R Block.

One tax attorney says most companies in H&R Block's situation would likely wait to see whether the law passes before moving forward on any deal.

"Most people would have to see if it passes ... because no one is going to take a chance on doing it on a taxable basis," says Peter Canellos, tax partner at Wachtell, Lipton, Rosen & Katz, a law firm in New York City.

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