EFTA00678131.pdf

From: Eileen Alexanderson < To: Jeffrey E. <1 Subject: FW: Quick Quesiton Date: Thu, 18 Sep 2014 20:22:17 +0000 Please see email exchange below regarding money for Ben. Should we make a Loan or distribution? BTW when I told him I would arrange for $1mil, he said you had talked about $1-2mi1 and he said he would like $1.5mil. ok? Thanks. From: Ada Clapp Sent: Thursday, September 18, 2014 4:15 PM To: Eileen Alexanderson; Heather Gray Subject: Fwd: Quick Quesiton Hi there, Well I am glad I checked with Alan as the question is apparently unclear and has potential risk. Is a straight out distribution to Ben an option? Sent from my iPad Begin forwarded message: From: "Halperin, Alan S" < Date: September 18, 2014 at 3:56:43 PM EDT To: Ada Clapp < Cc: "Hurtado, Christopher L" Subject: RE: Quick Quesiton Hi Ada, I have dug deeper into your question and have found nothing directly on point. However, upon reflection, there is a risk that an interest-free loan from a grantor trust to a beneficiary may subject the grantor to imputed interest under Section 7872. As you know, with a grantor trust, under 671, the grantor is treated as the owner of the underlying assets for income tax purposes. Accordingly, the grantor includes taxable income and enjoys deductions attributable to the trust assets as if he or she were the owner. Presumably Section 7872 —which causes foregone interest to be taxable in connection with a below-market loan — applies as if the grantor is the lender. On the other hand, it may be argued that an interest-free loan is a form of distribution to the beneficiary in the amount of the imputed interest. Distributions from grantor trusts, as you know, have no income tax consequences. However, the 7872/671 analysis seems to have more support from a technical perspective. As an aside, I do not feel the same way about the rent-free use of trust property by a beneficiary. While I concede that there is no definitive authority, there is a risk that, where a grantor trust is the lender, the grantor would be subject to income tax on imputed interest. EFTA00678131 Alan S. Halperin I Partner Paul, Weiss, Rifkind, Wharton & Garrison LLP 1285 Avenue of the Americas I New York, NY 10019-6064 (212) 373-3313 (Direct Phone) 1 (212) 492-0313 (Direct Fax) From: Halperin, Alan S [mailto Sent: Wednesday, September 17, 2014 5:27 PM To: Ada Clapp Cc: Hurtado, Christopher L Subject: Re: Quick Quesiton Interesting. It has been my view that, so long as the loan is made to a beneficiary, there is no income tax consequence of an interest-free loan. Chris, can you investigate? Alan S. Halperin I Partner Paul, Weiss, Rifkind, Wharton & Garrison LLP 1285 Avenue of the Americas I New York, NY 10019-6064 (212) 373-3313 (Direct Phone) 1 (212) 492-0313 (Direct Fax) From: Ada Clapp [mailto: Sent: Wednesday, September 17, 2014 05:15 PM To: Halperin, Alan S Cc: Hurtado, Christopher L Subject: Quick Quesiton If APO1 or APO2 made an interest free loan of $1 million to Ben, would Leon be taxed on the "deemed" interest as if he "forgave" it? Since the Trustees decided to make the loan—not Leon—does he still get "penalized" for income tax purposes since APO1 and APO2 are grantor trusts? I posed this question to Chris since you are out at long meetings. Ada Clapp Elysium Management LLC 445 Park Avenue Suite 1401 New York, New York 10022 Direct Dial: 646-589-0303 Fax: 646-589-0330 Email: This communication and any attachment is for the intended recipient(s) only and may contain information that is privileged, confidential and/or proprietary. If you are not the intended recipient, you are hereby notified that further dissemination of this communication and its attachments is prohibited. Please delete all copies of this communication and its attachments and notify me immediately that you have received them in error. Thank you. This message is intended only for the use of the Addressee and may contain information that is privileged and confidential. If you are not the intended recipient, you are hereby notified that any dissemination of this communication is strictly prohibited. If you have received this communication in error, please erase all copies of the message and its attachments and notify us immediately. EFTA00678132