EFTA01192563.pdf

Exhibit A March 2,2005 To: Files cc: Carlyn McCaffrey Elyse Kirschner From: Amy Heller Re: Leon Black Art Partnership This memorandum summarizes the anticipated federal income and New York State sales tax consequences of a transaction being considered for Leon Black ("Leon"). As currently contemplated, the transaction involves the formation of an equal partnership between Leon and a trust taxable to him under § 671 of the Internal Revenue Code (the "Trust" and the "Art Partnership," respectively). Leon will contribute appreciated art to the Art Partnership, and the Trust will contribute liquid assets with a value equal to that of the art. Federal income tax consequences There will be no federal income tax payable on Leon's transfer of the art to the Art Partnership. Typically, § 721 of the Internal Revenue Code shields a partner's contributions to a partnership from tax. In the case of Leon's contribution of the art, however, non-taxability flows from the fact that the Trust is a grantor trust. As a grantor trust, the Trust is disregarded for federal income tax purposes, and the Art Partnership is considered as having only one partner EFTA01192563 (Leon).' For federal income tax purposes, a "partnership" with only one partner is not a partnership at all; rather, it is classified as an entity disregarded from its owner? The classification of the Art Partnership as "disregarded entity" means that for federal income tax purposes, Leon will be taxable on all of the Art Partnership's income and will be treated as owning all of the Art Partnership's assets. Accordingly, any distributions of property by the Art Partnership to Leon will not be subject to the typical partnership tax rules relating to basis adjustment or gain rccognition.3 New York State sales tax consequences Based on the New York Tax Law (the "Tax Law") and the New York Code of Rules and Regulations (the "NYCRR"). Leon's contribution of art to the Art Partnership should not be subject to New York State sales tax. Section 1105(a) of the Tax Law provides that a sales tax is imposed on "[t]he receipts from every retail sale of tangible personal property." Section 1101(bX4Xiv) of the Tax Law, however, provides that "[t]he term retail sale does not include...Mlle contribution of property to a partnership in consideration for a partnership interest therein." Section 526.6(d) of the NYCRR states that la] partner's contribution is the property valued in money or the monetary amount he contributes to the firm for commencing or carrying I See Priv. Ltr. Rul. 200102037 (LLC whose members arc an individual and a grantor trust owned by such individual within the meaning of § 671 is a disregarded entity); See also Rev. Rul. 77-402, Priv. Ltr. Ruls. 9515006, 9515008, 9515009.9515013; FSA 200035006. 2 See Treas. Reg. § 301.7701-3(b), which provides that "unless the entity elects otherwise, a domestic eligible entity is (i) a partnership if it has two or more members; or (ii) disregarded as an entity separate form its owner if it has a single owner." 3 For example, if at some point the Art Partnership were to decide to distribute the art to the Trust, the "mixing bowl" and "disguised sale" rules of §§ 704(e)(1)13) and 707(aX2XB) of the Internal Revenue Code would not be applicable. EFTA01192564 on the business whether at the commencement of the business or later. Contributions of property are not subject to sales or use tax.'a Additionally, it should be noted that the l'ax Law and the NYCRR provide an exemption from sales tax for distributions of partnership property to a partner, in whole or partial liquidation of the partner's partnership interest.5 Accordingly, should it make sense in the future for the art to be held by a partner, the Art Partnership should be able to distribute the art to the partner free of sales tax, provided that the partner's capital account is correspondingly reduced." 4 Note that § 11-2001(bX4Xii) of the New York City Administrative Code contains provisions relating to partnership contributions that are identical to those in § 526.6(d) of the NYCRR. Accordingly, Leon's contribution of the art to the Art Partnership should be exempt from both New York City and New York State sales tax. 5 Section 1101(bX4Xiv) of the Tax Law provides that "[tjhe term retail sale does not include...Dike distribution of property by a partnership to its partners in whole or partial liquidation." Section 526.6(dX3) of NYCRR states that - Mho liquidation of a partnership is the return, complete or partial, of partnership capital to the partners. In a liquidation, a partner's interest is diminished by the value of the property distributed to him. The distribution of tangible personal property pursuant to a liquidation is not a taxable sale." 6 Note that there appear to be no authorities suggesting that the consequences described in the text above should be any different where the distributed property had originally been contributed by a partner. In fact, in Duracast Contracting Corp., TSB-H-81(57)S (N.Y. State Tax Comm. 1981), the New York State Tax Commission indicated that a distribution of property followed by an immediate re-contribution of the same property to a new entity would not be subject to sales tax. Although Duracast dealt with transactions between a corporation and its shareholders, the court based its analysis on § 1101(bX4)(iv) of the Tax Law, which provides exemptions front sales tax for contributions to and distributions from corporations that parallel those described above with respect to partnerships. EFTA01192565 Clapp, Ada From: Kirschner. Elyse Sent: Friday. January 111.1111. al To: Cc: a McCaffrey, Carlyn Subject: RE: Leon Black Dear Ada: it make a pro rata If the partnership earns income from the investment assets contributed by the trust, couldn't partnership to distribute to Leon distribution of that income to its partners (Leon and the trust)? We wouldn't want the that Leon made a disguised a chunk of the assets contributed by the trust within the first 2 years (to avoid an argument would be OK. sale of the art for sales tax purposes). But I think a pro rata distribution of income Elyse Elyse G. Kirschner, Esq. Weil, Gotshal & Menges LLP 767 Fifth Avenue New York, rk 1 153 Telephone Facsimile: • . • inform you that any U.S. tax IRS Circular 230 Notice: To ensure compliance with requirements imposed by the IRS. we advice contained in this communication (including any attachments ) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or rec ' noth r n transaction or matter addressed herein. For more information about this notice,see htto.! html From: Clapp, Ada IIMMIIMMI Sent: Friday, January 15, 2010 2:14 PM To: Kirschner El se Cc: • McCaffrey, Carlyn Subject: Re: Leon Black out to Leon Since it appears that not all of the distributions corning into the 2006 Trust will be required to be distributed accounting income from Relevant Companies" ) these amounts could be contributed (because they do not represent trust partnership. That way Leon can diversify his art portfolio and get some liquidity in a couple of years without to the art Leon to just forgo the having to rely on discretionary distributions from a trust to Debra. I agree that it is better planning for mandatory distributions from the Relevant Companies but then what does he do about cash flow for the 2 years he can't access cash from the art partnership? Ada Clapp Sr. Vice President Wealth Strategist U.S. Trust Bank of America Private Wealth Management 114 West 47th Street New York, NY 10036 From: Kirschner, Elyse illiMIMI > To: Clapp, Ada Cc: Eileen Alexanderson <EAlexandersailli-; McCaffrey, Carlyn 1 EFTA01192566