From: Harry Beller

From: Harry Beller To: Jeffrey Epstein <[email protected]> Subject: Art Date: Tue, 19 Feb 2013 15:10:10 +0000 Jeffrey this is the opinion that I received from Drew Benenson Hany Begin forwarded message: From: Drew Benenson Date: February 18, 2013 7:10:42 PM EST To: Harry Beller Subject: Art Harry, Below is Mark's response. I do not have Jeffrey's e-mail so please forward to him. I am back in the office tomorrow and can discuss. Thank you. Drew The point is well taken this type of situation--where a settlor of a grantor trust reacquires property previously contributed to the trust--does not resemble a typical sale between a "vendor" and a buyer. However, the fact that the grantor here has broad power to reacquire the property without trustee approval doesn't change anything with respect to our analysis. The fact is that the sales tax is a form-over-substance tax, and right to disregard the separate legal existence of an entity is not one that can be invoked by the taxpayer to avoid the tax consequences of the chosen form. Without any specified exemptions for a grantor trusts or casual transactions, it would have to be presumed the proposed transaction would be deemed a non-exempt "sale" for New York Sales tax purposes. The client's point about a lack of consideration in the transaction also doesn't account for the fact that the substitution of trust property for stock of the grantor would meet the definition of a "barter" or "exchange" under the definitions of both a "sale" and "consideration". Under the sales tax statutes, all "sales" of tangible personal property are subject to tax unless specifically exempted. (Tax Law § 1105(a)). Although the client correctly notes that definition of a "sale" requires that there be consideration, the definition of both a "sale" and "consideration" include an "exchange" or "barter". (See 20 NYCRR § 532(a),(b)). The right of the settlor here to re-acquire trust property is a right of substitution, meaning that substitute property must be transferred to the trust in exchange. There is nothing that would prevent the Tax Department from deeming this to be a barter transaction, where stock is exchanged as the consideration for tangible personal property (the artwork). The "consideration" in a barter or exchange is based on the value of the property given in exchange (regardless of whether the value of the property received is higher, the same, or lower). (See NYS Sales Tax Bulletin No. TB-ST-860, June 16, 2011). In sum, without any specific exemption or other guidance applicable to transactions between a grantor trust and its grantor, there doesn't appear to be any solid basis for the position that proposed transfer would be exempt from sales tax. EFTA00954552 You raised the idea of the artwork being placed into a corporation (presumably a single-member LLC) prior to the exchange so that the transaction would constitute an exchange of stock for stock, not stock for tangible personal property. But, as you pointed out, the Department could look through that transaction if there was no business purpose other than sales tax. That said, defending a valid business purpose for the contribution of the art to an LLC would be easier than arguing the art-for-stock transaction should be disregarded. If we had more facts regarding the artwork and the reason for the proposed swap we might be able to better analyze this issue. If the art is being reacquired to eventually be sold, it's possible that the exchange could constitute an exempt sale for resale. If the art is being displayed now and will continue to be displayed, placing the art into an LLC could raise the possibility of there being a constructive "lease" of the art, which could trigger additional sales tax issues (as well as NYC unincorporated business tax if NYC is involved). Drew Benenson, C.P.A. Tarlow & Co., C.P.A.'s 7 Penn Plaza Suite 210 New York, NY 10001 Tel - 212-697-8540 Fax - 212-573-6805 E-mail - [email protected] This electronic mail transmission may contain confidential or privileged information. If you believe that you have received this message in error, please notify the sender by reply transmission and delete the message without copying it or disclosing it. Pursuant to Internal Revenue Service guidance, be advised that any federal tax advice contained in this written or electronic communication, including any attachments or enclosures, is not intended or written to be used and it cannot be used by any person or entity for the purpose of (i) avoiding any tax penalties that may be imposed by the Internal Revenue Service or any other U.S. Federal taxing authority or agency or (ii)promoting or marketing or recommending to another party any transaction or matter addressed here. EFTA00954553