Free Motion for Summary Judgment - District Court of Federal Claims - federal

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c

GOERIG

_ ASSOCIATES,

L.L.C.

G_rgo E, Go.rig Laurie Beth Gregor7

1007 West 3rd Avenue, Suite 301 Anchorage, Alask_ 99501 T_lcphonc (907) 2_8-9926 Fa_imde (907) 279-9926

February 26, 2002

Mr. Brian Czerwinski The Heritage Organization, Suite 800, East Tower 5001 Spring Valley Road Dallas, TX 75244-3942

L.L.C.

RE:

Updated appraisal of the I_ R, M & C Group Limited Partnership

Dear Mr. Czerwinski: This letter is in response to your inquiry regarding updating the prior appraisal of R, R, M & C Group Limited Partnership as of February 27, 2002. Based on methodology I used in determining the value of discount on R, R, M & C Group Limited Partnership on my prior evaluation, and based on current marketability and empirical data that exists on February 27, 2002, the discount of 42% of net asset value and the discount of 50% for marketability, are still valid as of February 27, 2002. Very truly yours,

George E. Goerig GEG/rja

SANDS9077

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Expert Witness Report My name is Jerry J. McCoy and I am a practicing attorney based m Washington, DC, specializing in charitable tax planning. I have been retained by the US Department of Justice to comment on only one issue presented in Alpha I v. United States and related cases (US Court of Federal Claims Case Nos. 06-407T through 06-411 T, 06-810T, and 06-811T). That issue relates to the tax effect of the transfer of certain partnership interests to four charitable remainder unitrusts, and the termination of those trusts shortly thereafter by purchase of the charitable remainder interests by the taxpayers. I have not been asked to consider any other issue presented by these cases, and have no opinion with respect to any such other issues. PERSONAL EXPERIENCE

I have practiced in this area exclusively for the last 10 years, and I have specialized in this area for more than 25 years, representing both donors to charitable organizations and the charitable organizations themselves. I have written numerous articles in professional journals on charitable topics, and frequently speak at tax and estate planning seminars on this subject. I teach graduate level law school courses in charitable planning at two law schools (Georgetown University and the University of Miami) and I edit (and write for) two professional charitable newsletters (Charitable Gift Planning News and Family Foundation Advisor). I am co-author of Family Foundation Handbook (2008 edition) published by CCH. Attached is a copy of my professional resume. Charitable remainder trusts constitute a significant factor in my practice. In January of 2008, I spoke at the University of Miami Heckerling Institute on Estate Planning, the largest estate planning institute in the United States, on the fundamentals charitable remainder trusts. PROCEDURAL STATEMENTS

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in connection with this undertaking, I have reviewed the following items: the complaint filed in one of these consolidated cases, including exhibits; the charitable remainder unitrust documents described above; assignment and assumption of partnership interest; two designations of charitable remainder beneficiaries for the trusts; the agreement for purchase of the remainder interest in the trusts; a letter of February 26, 2002 from The Heintzberger Company providing calculations for the trusts; an opinion letter dated June 21, 2002 from Milbank Tweed; the government's response to plaintiff's motion to substitute parties and dismiss certain causes of action in one of the consolidated cases; tax returns filed for the trusts and for the charitable remainder beneficiary of the trusts; several exhibits and depositions in the case, with attachments; and an appraisal by Goerig & Associates of the partnership interests that are the focus of this case. In addition, I consulted public information on the website of Constellation Brands; tax returns filed by Education and Health Support Fund from www.gmdestar org; and

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websites of organizations designated as recipients of grants from Education and Health Support Fund. in accordance with FRCP 26(a)(2)(B), I have not testified as an expert at trial or by deposition in any other cases during the previous four years, and my compensation for the study and testimony in this case will be paid at the rate of $600 per hour, in accordance with my contract with the US Department of Justice. PART 1 - CHARITABLE REMAINDER TRUSTS Charitable Remainder Trust Basics A charitable remainder trust ("CRT") involves a trust relationship whereby the donor transfers property to a trustee to be held and managed for the benefit of the beneficiaries of the trust. The trustee makes distributions to the current beneficiaries for the term of the trust, at the end of which the remaining trust property is dlsmbuted to the remainder beneficiary, which must be a qualified charitable organization. (Alternatively, the property may be held in further trust for the benefit of the remainder beneficiary after the expiration of the trust term.) A CRT must be either an annuity trust, providing payments of a fixed amount annually to the current beneficiaries for the term of the trust, or a unitrust, providing payments which vary from year to year equal to a fixed percentage of the value of the trust property, as determined annually. The term of the trust may take either of two forms. The trust may continue for the life or lives of its current beneficiaries, or it may continue for a stated number of years (not more than twenty). A CRT is generally exempt from federal income taxes (but only if it has no unrelated business income). Instead, the income of a CRT is taxable to its current beneficiaries when it is distributed to them. Such distributions are taxed on the basis of a four-tier system, under which distributions are considered to come in turn from ordinary income, then capital gains, then other (tax-exempt) income, and finally tax-free return of principal. Distributions received by a current beneficiary for a given taxable year are deemed to come first from ordinary income, to the extent of the trust's ordinary income for the year plus all undistributed ordinary income from prior years. If distributions exceed those amounts, they are next considered capital gain to the extent of all current or undistributed capital gain of the trust. Any remaining excess will then be considered other (tax-exempt) income, and only when all of these first three tiers are exhausted will any distribution be considered corpus. Thus, over time, all or most of the income received by a CRT will be taxed in the hands of its current beneficiaries. For example, assume that a charitable remainder unitrust is created in 2008 with $1 million worth of stock, and that it is required to pay out 6% annually. Assume further that during 2008 the trust realizes a capital gain of $400,000 upon the sale of its stock, as well as dividends and interest amounting to $5,000. For 2008 the trust would distribute 6% of the $1 million corpus, or $60,000, to its current beneficiary. That $60,000 would

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be taxable to the beneficiary first as ordinary income to the extent of the trust's ordinary income, or $5,000. The remaining $55,000 would be taxed as capital gain. The same treatment would apply the next year and each year throughout the term of the trust, until the trust's $400,000 gain from 2008 had been reported in full by the current beneficiaries. The creator of a CRT is entitled to a federal income tax deduction equal to the actuarial value of the charitable remainder interest in the trust. This value is determined by multiplying the fair market value of the property transferred to the trust by the percentage set forth in IRS actuarial tables which take into account the payout rate of the trust, the term of the trust (based upon either the life expectancy of the beneficiary or beneficiaries, or the stated term of a term-of-years trust), and the official interest rate for the month of the transfer (or, at the option of the donor, the rate for either of the two preceding two months) under section 7520 of the Internal Revenue Code. Uses and Applications for CRTs Normal Usage The CRT is a popular charitable planning device, normally used by individuals who wish to secure an income stream for themselves (and/or one or more other beneficiaries) and simultaneously provide for an eventual charitable transfer. It is a very flexible device, and fits a variety of planning situations. The charitable deduction allowed for the donor's transfer to the trusts is based on the fair market value of the property transferred. Where noncash property is transferred the donor has an incentive to maximize the value of that property since a higher value will produce a larger deductmn; in addition, for a CRT that is structured as a unitrust, a higher initial value for the trust property will also lead to larger distributions to the current beneficiaries. Any property other than cash or publicly traded securities will normally have to be appraised, resulting in a natural human tendency for donors to seek as high a valuation as possible fi_omthe appraiser. The overwhelming majority of CRTs are created by donors acting upon a dual motivation; they wish to benefit a favorite charity, but in addition they need or desire to retain a fight to income from the property transferred. Typical planning situations in which a charitable remainder trust is useful (assuming the individual in question has charitable intent) include the following: · · Providing a source of retirement income for the donor and his/her spouse. Deferral of capital gain on the sale of a business or a major investment. If the donor transfers the property in question to a CRT, the trustee may sell it and reinvest the full proceeds, because the trust is exempt from capital gains tax. By contrast, if the donor had sold the property, a capital gains tax would have to be paid for the year of the sale, leaving only the after-tax proceeds available for reinvestment.

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·

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Advancement of a planned charitable bequest, thereby providing the donor with both a current income tax deduction and an income stremn for life, in addition to the eventual transfer to charity. Providing an income stream to an aged dependent, domestic helper, or other person to whom the donor does not wish to make a permanent gift of corpus.

Virtually all charitable remainder trusts continue in existence for the full trust term provided in the governing instrument. Based u_on my experience, I would estimate that relatively few CRTs -probably 1% or less- are caused to terminate before the termination date. Where such an early termination does occur, it normally results from external considerations, and not by prearrangement. O,/er the last few years, a number of IRS private letter rulings have approved the early termination of CRTs. Most of these have appeared to be the result of unfavorable financial results, such as those that resulted from the fallout in tech stocks in the early 2000's. Such results often cause the donor/beneficiary to conclude that the trust is too small, or otherwise not sufficiently viable, to justify its continuation. In other instances, divorcing spouses have sought to ternlinate a joint CRT, or to divide it into two separate trusts. I have never known or heard of a donor creating a CRT with an intention at the outset to terminate it early. Abusive Applications Because CRTs are exempt from federal income taxes, they have sometimes attracted the attention of financially motivated tax planners seeking to help their clients take advantage of this aspect of the CRT, even when such clients have no charitable motivation. The premier example of this occurred in the mid-1990s, when an abusive tax scheme known as the "accelerated charitable remainder trust" emerged. This consisted of a standard charitable remainder unitrust which provided for a two-year term and a payout rate of 80%. Thus, for each year such a trust would pay out to indlvidua| beneficiaries an amount equal to 80% of the value of the corpus at the beginning of the year. At the time, the applicable income tax regulations allowed CRT to make its distribution to current beneficiaries after the close of the year to which the distribution related. The trustee of an accelerated CRT would hold the property originally contributed to the trust until after the close of the trust's initial taxable year. At that point, during the trust's second taxable year, the trustee would sell the property and use the proceeds to make the distribution called for with respect to the trust's first taxable year. Because the trust would incur the capital gain on the property during its second year, and would receive no income during its first year, the beneficiary would take the position that such distribution represented a tax-free return of corpus. For example, asstune that on January l, 1995, a donor created an accelerated CRT with a two year term and an 80% payout rate, and funded it with property worth $100 million, having a zero basis in the hands of the donor. For 1995, this trust would be required to distribute $80 million to the donor/beneficiary. The trustee would delay the sale of this property until January of 1996. At that time, $80 million of the $100 million sales proceeds would be distributed to the donor/beneficiary, as his distribution for 1995. The

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donor/beneficiary would take the position on his 1995 tax return that this distribution was tax-free. The remaining $20 million would constitute the remaining trust corpus, and for 1996, the trust would have a required distribution of $16 million (80% of the $20 million corpus). At the end of 1996, the trustee would distribute that $16 million to the donor/beneficiary, distribute the remaining $4 million to the charitable remainder beneficiary, and the trust would terminate since its two-year term was over. Thus, if this scheme worked, utilization of the accelerated CRT would permit the donor to receive $96 million of the $100 million transferred to the trust, and pay tax (at capital gains tax rates) on only $16 million of that amount. This result was considerably more advantageous than simply arranging a sale of the asset and paying tax on the $100 million gain. This accelerated CRT concept was extremely controversial in charitable circles, as it appeared to offer large scale tax avoidance that was certain to attract the attention of Congress. In fact, that did happen, and Congress changed the applicable statute (section 664 of the Internal Revenue Code) to provide that (1) a CRT could not have a payout rate in excess of 50%, and (2) a CRT would not be qualified if the actuarial value of the charitable share at inception was less than 10% of the total value of the trust property. That latter change effectively eliminated a number of potentially abusive uses of the charitable remainder trust. In addition, while Congress was deliberating those changes, the Internal Revenue Service changed the regulations, requiring in many cases that CRT distributions could not be made after the close of the taxable year. Thus, as a result of all these changes, the accelerated CRT is no longer a viable tax device. Subsequently, aggressive tax plalmers even developed another CRT device, dubbed the "son-of-accelerated CRT," which used borrowed lands for the first year's distribution rather than waiting for proceeds of a deferred sale of trust property. This plan slipped through the safeguards adopted to block the accelerated CRT, necessitating another change in the regulations. When the accelerated CRT device first appeared, the IRS promptly warned taxpayers of its opposition to this device and its intention to challenge its use. In Notice 94-78, the IRS pointed out that "Depending on the particular facts of each case, the Service will challenge transactions of this type based on one or more legal doctrines. A mechanical and literal application of the regulations that would yield a result inconsistent with the purposes of the charitable remainder trust prowslons n'my not be respected. The tax consequences to the donor vary with the legal doctrine that is applied. * * * In addition, the donor and the trustee are likely to prearrange a delay by the trustee of the sale of the trust assets. This creates a transaction that is different in substance than in form." Those words are relevant for purposes of the present case. This warning widely supported by charitable organizations and persons who work with them. was

Charitable organizations normally react to schemes of this type with uniform and very vocal criticism of those who abuse charitable devices. Their criticism reflects a concern that such schemes could lead Congress to overreact mad curtail or eliminate the

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availability of the CRT -- an important estate planning device. Whenever tax planners come up with ways in which persons who have no charitable intent attempt to utilize charitable devices to achieve unintended tax benefits, charities have openly opposed such devices. This opposition is based upon a belief that, regardless of any short-term benefits they might derive from donors responding to such tax benefits, their long-term interests are better served by avoiding any impression in Congress or elsewhere that the benefits available for charitable contributions constitute a tax abuse that should be curtailed. Similarly, most organizations believe that persons who lack a charitable motivation should not create CRTs.

PART 2 - ALPHA I v. U.S. AND RELATED CASES Facts For purposes of my report, the following are the relevant facts: 1. On September 21, 2001, the four limited partners in R,R,M,&C Group, LP ("Group"), a Missouri Limited partnership with its principal place of business in Fairport, New York, transferred those partnership interest to four charitable remainder unitrusts ("the unitrusts") created on that same day. Each trust was created by one of the four partners of Group. Those partners were three members of the Sands Family of Rochester, New York (Richard Sands, Robert Sands, and Marilyn Sands), and CWC Partnership I (an entity whose partners were trusts created to hold the interests of the children of a fourth Sands sibhng, the late Laurie Sands Stern). 2. Brian Czerwinski, an employee of the Heritage Organization, LLC (which marketed to the Sands the arrangement that is the subject of the lingation) reported that he attended two meetings with Richard Sands and Robert Sands at which the purchase of the remainder interests in the unitrusts was discussed. Those meetings took place on August 16, 2001, and October 1, 2001. 3. The partners claimed income tax charitable deductions for the transfers to the unitrusts. The values used for these transfers were based upon an appraisal prepared by George E. Goerig, of Goerig & Associates, an appraisal firm located in Anchorage, Alaska. That appraisal started with the asset value of R,R,M,&C Group ($71,780,711) then applied two discount factors to arrive at a final valuation of $20,816,406 for the partnership and $5,198,897 for a 24.975% interest therein (the amount transferred by each of the four partners). The 42% discount was based upon a review of various publicly traded partnership factors. The second discount of another 50% was applied after that to reflect the lack of marketability and the resultant illiquidity. The appraisal states that it was prepared for the sole purpose of establishing the fair market value of a 24.975% limited partnership interest "for gifting purposes."

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4.

Four months later, each of the trust creators designated "Sands Supporting Foundation" as the charitable beneficiary of his or her trust. Each trust filed an information tax return (IRS Form 5227) reporting distributions of $166,477 to its beneficiaries for the portion of 2001 for which it was in existence. This entity played no role in the subsequent transactions, and there is no evidence that it was ever formed.

5. On October 1,2001, Group sold Constellation stock for total proceeds of $74,862,863. I understand that a principal issue in the subject litigation is the amount of basis allowable to offset the gain realized on such sale. 6. On Friday, February 22, 2002, the following a. b. events took place:

Richard and Robert Sands caused a charity called "Educational and Health Support Fund" to be formed; and The grantors of the four charitable remainder unitrusts executed irrevocable designations naming Educational and Health Support Fund as a charitable beneficiary of each trust.

7.

Five days later, on Wednesday, February 27, 2002, each of the charitable remainder unitrust grantors purchased the remainder interest in his or her charitable remainder unitrust from the new charitable remainder beneficiary, Educational and Health Support Fund. Each paid a purchase price of approximately $500,000 for his or her remainder interest, for a total of slightly more than $2 million. The appraiser who prepared the ininal appraisal supplied a supplementary letter stating that the valuation as of September 21,2001, was still valid as of February 27, 2002.

8. Educational and Health Support Fund reported the receipt of the purchase price payments from each of the charitable remainder unitrust grantors as contributions on Schedule B of its Form 990 for 2002. On page 1, line 1a of that return, the total received ($2,200,298) was listed as "direct public support" rather than as proceeds of sales of assets. 9. The purchase of the remainder interests by the current beneficiaries of the trusts was treated by the parties as causing the termination of each trust. Each trust grantor thus became the outright owner of an interest in a partnership holding assets, primarily cash, amounting in the aggregate to approximately $75 million.

10. According to their terms, the trusts in question would make annual payments in an amount calculated under a formula set forth in the trust agreements that would produce a remainder value equal to the minimum amount permismble for charitable remainder trusts, 10% of the initial corpus value. Each of these four trusts named its grantor/creator both as the recipient of trust distributions for the trust term, and (with one of the other Group partners) as trustee. The Alaska Trust Company was named as "Administrative Trustee." At the end of the stated

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20-year trust term, the remaining trust assets were to be distributed to a charitable organization to be designated by the person designated to receive trust distributions, or selected by the trustees in their discretion if no such designation was made. 11. The trusts were used by their creators as temporary partners in Group during a period when Group realized large amounts of capital gain income from sales of Constellation stock and other securities. A qualified charitable remainder trust is exempt from federal income tax under section 664(c) of the Internal Revenue Code, and as such would not be taxable on the share of Group capital gains or other taxable income passed through to it as a partner in Group. Normally, the beneficiaries would have paid tax over the twenty-year trust term on these gains realized by the trusts, under the four-tier system of tax applicable to CRT beneficiaries. The Sands trusts were terminated almost immediately after their remainder interests were purchased, so that the beneficiaries received only two partial distributions. The current beneficiaries acquired nearly $75 million in liquid assets as a result of their payments of approximately $2 million for the remainder interests. 12. Four months later, on June 21,2002, each of the trust grantors obtained an opinion letter from the New York law firm of Milbank Tweed addressing three specific issues: a. b. c. Whether the remainder interest in his or her trust may be assigned under the applicable state law (that of Alaska); Whether the trust will terminate if the grantor purchases the remainder interest; and Whether the pro'chase of the remainder interest and the termination of the trust will be a recognition event for federal income tax purposes.

13. The Milbank Tweed opinion letter was based on representations by each of the trust grantors that the trusts would be validly administered as charitable remainder trusts, that Educational mid Medical Support Fund (sic) was a public charity, and that the purchases of the remainder interests "will be at fair market value and that there was no plan, prearrangement or understanding with the charity for the purchase of the remainder prior to its designation as the charitable remainderman." Those representations were not accurate and the presence of a plan, prearrangement or understanding is unmistakable. The purchases of the CRT remainder interests were discussed and planned even before the trusts were formed. Moreover, those purchases were concluded four months before the date of the Milbank Tweed opinion letter. 14. According to tax returns Fund for calendar years are Freddy H. Robinson Carolina, and James A. (Form 990) filed by Educational and Health Support 2004 through 2006, the co-trustees of that organization and Wesley M. Stallings, both of Greensboro, North Locke of Rochester, New York. Freddy Robinson is

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Executive Partner, and Wesley M. Stallings is a tax partner, of Bernard Robinson & Co. LLP, a Greensboro, North Carolina accounting firm that prepared the tax returns for all of the Sands Group charitable remainder trusts. In addition, the address of such accounting firm listed on those trust returns (Forms 1041-A and 5227) is the same as the address for Educational and Health Support Ftmd as listed on that organization's Form 990 tax returns. James A. Locke is an attorney, a partner in the firm of Nixon Peabody LLP, and a member of the board of Directors of Constellation Brands. this firm's website indicates that he was one of two lead partners for the firm ih its representation of Constellation Brands in its acquisition of a Swedish vodka brand in 2007 and another acquisition in 2006. l 15. Although the tax returns described above list only three trustees for Educational and Health Support Fund, the Board of Trustees was increased to five members on September 25, 2003. On that date, Richard Sands and Robert Sands, as Grantors of Educational and Health Support Fund, appointed themselves as CoTrustees to fill the vacancies created by such expansion of the Board. None of the returns for the organization that I saw reflect the presence of the Sands on the Board. 16. For 2004 and 2005, all the grants made by Educational and Health Support Fund (a total of $600,000 for each year) were made to organizations located in Rochester or Canandaigua, New York. These included grants amounting to $200,000 each year to each of three grantees: FF Thompson Foundation, The Harley School, and Rochester General Hospital Foundation. The Sands family plays a prominent role in all of these grantees. Marilyn Sands is on the board of the FF Thompson Foundation, and Robert Sands is on the board of Thompson Health, an affiliated organization. Robert S. Sands is Trustee Emeritus and an alumnus of The Harley School. Robert Sands is Chair of the Board of Directors of ViaHealth, an entity affiliated with Rochester General Hospital 17. For 2006, Educational and Health Support Fund again made grants of $200,000 each to FF Thompson Foundation and Rochester General Hospital Foundation. In addition, it also granted $332,500 to The Harley School, and $50,000 to Rochester City Ballet. Nancy Sands serves as Chair of the Rochester City Ballet Board of Directors. 18. The tax returns of Educational and Health Support Fund for years before 2004 are not available on the Guidestar.org website. Conclusion It is my opinion that based upon the facts presented, the charitable remainder unitrusts created by members of the Sands Group should be disregarded as mere interim steps in a larger plan to sell Constellation Brands stock at a profit and retain substantially all the pretax proceeds realized.

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Discussion I believe that the facts surrounding the Sands charitable remainder trusts demonstrate that the various steps in the Sands family transaction made use of charitable remainder trusts as temporary partners in Group, serving in that capacity only long enough for completion of the sale of a large block of Constellation Brands stock on behalf of the Sands family. When this series of interrelated steps was concluded, the individuals who created Group (and transfen'ed that block of stock to it) then transferred their interests in Group to the charitable remainder trusts. After the sale, they took back the sales proceeds, nearly $75 mdlion, at a discounted value by purchasing the remainder interests from the trusts for a total of only $2 million. All told, these trusts existed for only 102 days in 2001 and 58 days in 2002 - a total of less than half a year - spread over two different taxable years This short life convinces me that they were never intended by their creators to have the 20-year duration provided in their governing instruments. There is no evidence of any external event or concern suggesting that the idea of purchasing the remainder interests in the CRTs arose after the creation of the trusts. Rather, all the facts I have seen indicate to the contrary that the remainder beneficiary was formed to complete the sale of the CRT remainder interests to the Sands family members. The deposition of Brian Czerwinski, commenting on his handwritten notes, indicates that Mr. Czerwinski attended meetings with Richard and Robert Sands on August 16, 2001, before the CRTs were created, and on October 10, 2001, shortly after the unitrusts were created. At both of those meetings, the attendees discussed the creation of the CRTs and the subsequent purchases of the remainder interests therein. It exceeds reasonable comprehension to believe that this newly-created orgamzation, ostensibly run by Sands family advisors, could independently negotiate an arms' length sale of those interests to the Sands family members and consummate that sale between the Friday oll which it was formed and the following Wednesday. I have never seen a transaction of this magnitude conceived and completed between independent parties within a five day period. It was only the prearrangement of all the steps - creation of the unitrusts, transfer of the partnership interests, sale of the Constellation Brands stock by the partnership, the termination of the trusts, and appropriation of the proceeds by the original ConStellation shareholders - that made it possible to conclude this complicated transaction in just five days. These transactions were all structured and controlled by the Sands Group and its advisors, and none were conducted at arm's length. Consider the following: · The charity, Educational and Health Support Fund ("EHSF"), that sold the remainder interests to the Smlds family members was created by or on behalf of the Sands family on the eve of the sale of the remainder interests (five days prior to that sale).

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·

The three trustees of EHSF were subservient to the Sands interests - two members of an accounting firm serving members of the Sands family and an attorney who served the Sands business interests and sat on the board of Constellation Brands, the Sands family business. Subsequently, in the year after the year in which the CRT transactions were completed, Robert Sands and Richard Sands even appointed themselves trustees of EHSF, although that was not reported on the EHSF tax returns. EHSF was based in the North Carolina office of the Sands family accountants who serve on its Board. Subsequently, Richard Sands mad Robert Sands appointed themselves to the Board. All of the grants paid by EHSF, at least in years from 2004 tl-u'ough 2006, went solely to organizations in upstate New York for which Sands family members served as directors or principal officers.

·

·

·

By any objective standard, EHSF was not at any time independent of the Sands family. To characterize the sales of its remainder interests in the charitable remainder trusts to Sands family members as arm's length transactions with independent third parties is to ignore the obvious reality of the situation. It is my opinion that the transitory participation of the Sands CRTs as transitory partners to receive the sales proceeds of the Constellation stock sales should be ignored for tax purposes. To respect those transactions would approve a new tax avoidance device that is as abusive and inappropriate as the accelerated CRT and its progeny. Several other factors likewise demonstrate that, in substance, the sale of the Constellation Brands stock was engineered by the Sands fanlily and its advisors with the sole intention of securing for them the benefit of a tax free sale. First, as previously noted, the timing of the transactions indicates that there could not have been any real discussions or negotiations between the parties. EHSF was created on Friday, February 22, 2002, by Richard and Robert Sands, and on that same day was irrevocably designated the charitable remainder beneficiary of all the Sands family CRTs. Just five days later, on Wednesday, February 27, all four members of the Sands Group purchased the remainder interests in their respective trusts from EHSF. In nay experience, it is unlikely that even a tally independent charitable organization would be able to consider and consummate a transaction of that magnitude in a five day period. The fact that a weekend intervened makes that all the more unlikely, unless the sales of the remainder interests were planned, managed and overseen by a single coordinator, in the same manner as the other transfers in question. Second, the trusts themselves were not in existence for their stated 20-year terms, but rather all four trusts went out of existence after just 160 days, as soon as they had selwed their purpose of providing the bulk of the proceeds from the Constellation Brands stock sale to the Sands Group. I have never in my 40 years of practice known a charitable remainder trust to terminate in such a short period of time. Nor have I seen an

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instance in which trust were formed with an existing intention that they would be terminated earlier than the stated end of the trust term. If the trusts had had been allowed to continue until their stated termination date, the trust beneficiaries would have been subjected to tax on all or most of the capital gains realized by the unitrusts, as they received the trusts' ammal distributions. By terminating the trusts early, almost immediately after their creation, the beneficiaries attempted to circumvent the statutory scheme and inappropriately avoid those taxes altogether. In addition, the overall context of these complicated transfers and the manner in which they were conceived and carried out indicates that the true purpose of these trusts and the related transactions was to serve the beneficiaries' tax avoidance purpose and not to accomplish the family's charitable goals. · · · This was a tax shelter deal purchased from tax shelter promoters and carried out by professionals related to those promoters. The eventual purchase of the remainder interests in the CRTs was discussed in the early stages of the plan. The appraisal of the partnership interests transferred to the CRTs was out of line with the usual appraisal for a charitable transfer. Normally, in such a situation the appraisal will be structured to support the largest value that can be realistically justified, since this is the basis for the client's charitable contribution deduction. By contrast, the Sands appraisals sought to maximize the discounts applied, much like a valuation prepared for estate tax or gift tax purposes. My conclusion is that this must have been done to bolster the lowest possible value for the eventual purchase of the remainder interests in the CRTs. The fact that those purchases occurred only five months later bolsters that conclusion. Although not conclusive, the external trappings of the transaction seem calculated to present a misleading appearance. For example, rather than complete the remainder transaction with "The Sands Supporting Foundation," the initial charitable beneficiary of the CRTs designated on January 28, 2002, a new charity with a more independent sounding name was created and designated as beneficiary 25 days later. Tile latter entity was placed in North Carolina, far from the Sands family base in upstate New York. Sands family members were not on the original Board of Trustees of that charity, but were apparently added a year later (although that fact was not reflected on Form 990 returns). The 2002 tax returns of that new entity reported the sales proceeds from the remainder sale as contributions. Similarly, the creation of the unitrusts and the purchases of the remainder interests therein, although only five months apart, were arranged so to occur in two different taxable years, thus enhancing the apparent time between the two events. Placing distance between these two events, making the trusts appear more "old and cold" with respect to the later purchases, superficially bolsters the appearance of independence and the

·

· ·

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argument that these were unrelated events. The existence of evidence that the purchases were discussed even before the umtrusts were created disproves that appearance and establishes the relationship between the two events. Finally, this use of CRTs to accomplish tax avoidance on a massive scale by persons who had only limited, if any, charitable motives is exactly the sort of abuse that causes great concern within the charitable community. I believe that any experienced charitable tax planner would have warned the participants that the transaction would be subject to tax in accordance with its substance - a sate by the Sands family of the Constellation Brands stock - rather than its fornl. The Milbank Tweed opinion letter implicitly recognized this when it conditioned its conclusion on a set of facts that were demonstrably absent - a lack of any plan, prearrangement or understanding with the charity for the purchase of the remainder prior to its designation as the charitable remalnderman. There was such a plan and the purchases were discussed with Richard and Robert Sands even before the unitrusts were created or the remainderman was designated or created. The unitrusts were not intended to function as charitable remainder trusts at

all, but rather as mere accommodation parties in an attempt to accomplish the sale of that stock on a tax-free basis. The success of the plan depended upon its not being detected upon IRS audit. The end result envisioned by the Sands family and its advisors - tax free receipt of $75 million in liquid assets for a purchase price of only $2 million - was in fact a result too good to be tree Signed,

PO Box 66491 1050 Connecticut Suite 1250

:r2o !rr o
Avenue, NW

Washington, DC 20035-6491 [202] 466-6941

13

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APPOINTMENT

OF

CO-TRUSTEES

Pursuant 5(f) of Article III

to of

the The

terms

of

subparagraphs and Health

5(c)

(ii)

and Fund,

Educational

Support

U/T/A and

dated Robert

February Sands, and

22, the Robert

2002, Grantors Sands

and of to

as

amended, said fill Trust, the

we,

Richard hereby

Sands appoint

Richard

Sands

vacant

Co-Trustee

positions of

created

pursuant

to

the

above

increase

in

the

number

Co-Trustees.

This through the use

Appointment of multiple

of origlnal

Co-Trustees counterparts.

may

be

executed

DATED

this

_

day

of

___

,

2003.

Richard

Sands

Robert'-gands "Grantors "

INCREASE IN NUMBER, APPOINTMENT AND ACCEPTANCE OF C0-TRUST_m_.-------

TH0-028700

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t 1

TELEPHONE

MEETING

WITH BLATTMACHR
I

AND JONATHAN

12/05/00

,:

'
I

(GMK, A J-B, III):jms

*:

Copyright2000The HeritageOrgan_ation,L L C. This documentand the tnformation containedin it are ConfidenttalInformahonownedby The HerttageOrganization,L L.C. The removal, copyingor disclosureof this documentand the informationcontmnedin it by anyone,olher than an authortz.ed employeeof The HerttageOrganization,L L C only m the normal performanceof their dutiesas an employeeof The Heritage Orgamzahon, L C w_theuthe expresswhiten approvalof the ChiefExecutweofThe HedtageOrganization.L L C is stnctly L t prohibitedby law andby contractandwdl be enforced accordingto any contractand prosecutedto the limitsofthe law

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!

t

TELEPHONE

MEETING

WITH_

AND JONATHAN BLATTMACHR

12/05/00

(GMK, AJB, In):jms

o

CopyrEght 2000 The HeNtage Organizatton, L L.C. This document and the information contained in it are Confidential Informatnon owned by The Heritage Organization, L.LC. The removal, copying or d_sclosure of this document and the information contained in r[ by anyone, other than an authorized employee el The Heritage Orgamzation, L L.C. only m the normal performance of their duties as an employee of'l'he Hentage OTgan_zatlon, L L C without the express wrttten approval ot the Ch_e_Executive of "[he Heritage Orgamzatlon, t_L C is strlctty prohtbiled by law and by contract and will be enforced accordtng to any contract and prosecuted to the Ilrmts of the law

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Z

GMK: JGB: GMK: JGB:

Hello? Hey Gary, how are you doing.9 Doing good, How are you? ,
i

we were talking a little about the details of this CRT and I told that if he does anything this year with the CRT he'll only do what he wants to sell this year.
I

GMK: JGB:

Right. And if he wants to do more next year and if he wants to use the CRT because it looks good, we'll do another CRT. Right. That's exactly right. And we're going to keep the CRT a life for a very short period of time, which minimizes what he could be potentially taxed on. That's exactly right. : And he understands that there are two benefits of the CRT: One, is a huge net of camouflage because there is no program to audit them; and number two, even if they attack the 752 transaction they also have to attack the CRT. That's exactly right. So those are two enormously high hurdles for them and also I think the chances of them even finding out about the CRT are exceptionally remote. Right. I totally agree with you. I mean that's the whole point, _, as far as cosmetics go this is probably the -- besides the fact that it works is it adds another thing that they would have to overcome on some type of audit. It further -- capital gains are never audited and capital gains inside a CRT are just absolutely never audited. Uh-huh. Would one put in high basis stock into the CRT?

GMK: JGB: GMK: JGB:

i

GMK: JGB:

GMK:

Copyright 2000 The Heritage Organization, L.L C TNs document and the information contained in it are Confidential Information owned by The Heritage Organization, L L.C The removal, copymg or disclosure of this document and the information contained in _tby anyone, other than an author,zed employee of The Heritage Orgamzatlon, L.L C only m the normal performance of their duties as an employee of The Heritage Orgamzation, L L C wJthout the express written approval of the Chief Executive of The Heritage Organtzat_on, L.L C is strictly prohlblled by law and by contract and will be enforced according to any contract and prosecuted to the hmlts of the law.

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I

GMK-

Yes. In other words, once the basis is stepped up see then you have the belt and suspenders. In other words, if you every got challenged on any of this, which once you have these two transactions in place, I think the chances of you even getting looked at are two or three percent at best, at most. If you ever got challenged they'd have to look at you and say, Okay -first they'd have to overcome a valid tax transaction and stepped up the basis and then they would have to overcome the fact that you did a valid transaction with the CRT. And so you would have two valid transactions that they would have to overcome to get you to ever pay any tax. And the chance of them wanting to take that one to court and expose that to the light of day are just non-existent. They have to beat you at both issues, which are totally unrelated. And the advantages of the CRT, _ -- we haven't really spent a lot of time talking about it -- but advantages of the CRT is it does not have to have a business purpose or any economic purpose.

·

,

JGB:

Right. I told These are just rules that Congress has put out. And you could go into court and say, Your Honor, I did this to save income taxes. But everybody that does a CRT is to save income taxes. That's right. Then Congress just said, These are the rules. You don't need a business purpose, you don't need a charitable motive. You create your CRT. This way you have a valid CRT. That's right. So they have an uphill battle beyond belief. Have you done this before, Gary? Have we put these two together, no. The CRT thing that -- we've just recently gotten through researching that so it's fairly new. We've used other CRTs like this but not this particular one. Right. And Gary, I told_I did this in 1994 with my one client who did the short term CRT who panicked when the notice came out.

GMK" JGB'

GMK: JGB" GMK:

JGB:

Copyright 2000 The Heritage Organization, L.L.C Thts document and the reformation contained in tt are Confidential information owned by The Heritage Organization, L L.C. The removal, copying or dtsclosure of this document and the information contained m it by anyone, other than an author_ed employee of The Heritage Organizotion, L L C only m the normal performance of their duties as an employee of The Heritage Orgamzatlon, L.L C without the express written approval of the Chief Executive of The Heritage Organlzetion, L L.C Is strictly proNbited by law and by contract and will be enforced according to any contract and prosecuted to the hmits of the law.

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°t

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GMK: JGB:

Right. But Gary that was with a major university. The guy and I went to the president and he was tickled pink. Even though he had to wait only two years for the money, he was tickled pink to sellout now. This guy also -Was that a long-term CRT?
I

_:

I

JGB: GMK: JGB:

It was a two-year CRT. Very short term. And yet the president -Why does the --

-3GB: GMK: 3GB: GMK:

_,

because the president wanted to please his donor. They just want

These are not people who are business people,_. to take the money and make some money -But he also wanted to please the donor.

Right. That's what I'm saying. They want to make the donors happy because they may give them more money. Right. In fact, Gary, we can even designate -- first of all, I told we can test the charity by giving it a little bit; but number two, we can m_5:e the designation revocable and provide it prior to the time that the interest -- before charity gets it's interest by sale or termination, he can change it. Right. You name little Red Cross or the supporting org, whatever it is, and if they say, Nope. We're really not really interested. Thanks, but we're not really interested in selling. Guess what, you're offthe list. But nobody is that dumb. Well, if we're going to do this year then I'd have to hustle around and find a charity pretty quick.

JGB:

GMK: 3GB:

Copyright2000The HeritageOrgan_atton,L L C. Th_sdocumentand the informationcontainedin ttare Confident=alnformationownedby The HedtageOrgantz.atton, LC. The I L removal,copying or disclosure of thisdocumentandthe informationcontainedmrt by anyone,otherthan an authorized employeeof The HeritageOrgamzatton, L C only _n normalperformanceof their dutiesas an employeeof The Hentage L the Organtzatton, L C without the expresswrittenapprovalof the Chtef Executtveof The HentageOrganization,L.L.C Isstnctly L proNbaedby law and by contractandwill be enforcedaccordingto any contractandprosecutedto the hmitsof the law

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b

JGB:

No you don't. We're going to do it next year. But you name it next year but you sell the stock this year.

JGB: GMK:

Yeah, that's correct. So this is just putting it in place if the stock gets up to a price - I mean the market should start rallying around somewhere in this area, somewhere between 23 and 25 hundred. I wouldn't mind selling, even at these levels, some AT&T.

GIVIK: JGB: JGB: GMK:

Okay. Because it's almost at 25. Yeah. So the nice thing about it is you get the first one in place and then you just get successive ones every time you want to sell. You don't have to use the same CRT; you can use a different one. It's like a cookie cutter. So what would be the entity that we create, a new partnership, a new LLC? '_

GMK:

Well, what we'll do is -- what I'm looking at right now,_ and Jonathan and I are talking about this -- the best thing to do is make one of these beneficiaries of this thing a supporting organization. Well, no. _ is talking about, Gary, what is he going to contribute to the CRT? Are we terminating the trading company? No. No. Yeah, we're terminating the trading company and he'll contribute partnership units. Partnership units in --

JGB:

GMK:

JGB: GMK: JGB:

Okay. In n basis.

Investments.

And n

Investments now has a high

Copyright 2000 The Heritage Organization, L L C This document and the information contained tn atare Confidentnal Informatton owned by The Heratage Organization, L L C The removal, copyung or dusctosure of INs document and the mformehon contained m it by anyone, other than an authorized employee of The Heritage Orgamzatnon, L L.C only anthe normal performance of their duties as an employee of The Heritage Organization, L L C without the express written approval of the Chief Execuhve of The HerutageOrgantzation,/L.C ts stnctly prohtbttecl by law and by contract and will be enforced according to any contract and prosecuted to the hmits of the law

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0

GMK: JGB: GMI(:

Right. And it's AT&T.
i

,!

Right. So I contribute some units of the LP; i Investments?

i

t

'i

,

GMK: JGB:

Right. And that's an'old and cold partnership. The IRS can't argue that it doesn't exist. It doesn't matter if it exist or not. ThenI Investments will sell and in fact, Gary, I'm just thinking, we're going to want. The trouble is ifI Investments sell -i

GMK: I" GMK:

By the way, let mesay one other. -- I think we want that stock in a new partnership. Wait just a second. Wait just a second. Let's talk about something. Once we get the transaction done for the CRT it would be better not to useI Investments. It would be better to distribute the stock out. Well, what we'll do, Gary I think is to put a new pass through -because we won't even have to represent it -- L.L.C into the trust. That will hold units in I Investment. Then we'll redeem those units tax free because there will be no gain. Right. Then the new L.L.C., which will be a tax pass through or maybe we'll make it a real one, will own AT&T shares directly. Right. The new L.L.Cs will sell them. The L.L.C. is going to give a K-1 to the partnership which is going to slow minimal gain or loss. Right.

JGB:

GMK: JGB: GMK: JGB: GMK:

Copyright 2000 The Heritage Organization, L L.C. This document and the informatton contained in Jtare Confidential Information owned by The Heritage Organ_.ahon, L.L.C The removal, copying or disclosure of th=sdocument and the mformatton contained m it by anyone, other than an authorced employee of The Heritage Organization, L.L C only m the normal performance of their duties as an employee of'lhe Heritage Orgamzahon, L L C wrthout the express wotten approval of the Chief Executrve of The Heritage Organizahon, EL C is str,ctly prohibited by law and by contract and wdl be enforced according to any contract and prosecuted to the lim=tsof the law

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JGB: GMK" JGB: G1VIK:

And then that CRT is going to give a K-1 tomB gain or loss.

showing minimal

Right. And you would redeem the partnership units by using the AT&T stock, right? Correct. Okay. That works for me. That way you get -Why wouldn't you just distribute the -- liquidate the / Investments, LP, designate stock and then I take whatever I need. Say for example, AT&T Stock and put it into a new limited partnership. "

JGB: GMK:

You could. It's just additional camouflage. Yeah. mR, by keeping all this stuff offyour returns and stuff, we're just better off. What Jonathan says makes good sense. Well, we wouldn't have anything in my returns the way I set it -shares year o_ Investments LP, right? i

JGB:

Well. There is no gain there or loss.

G1VIK:

Well, cosmetically, i What?

--

GMK:

Cosmetically it looks better if you don't pull the shares right back out of the partnership. I think that's where Jonathan was going. Right. And also all the trust is ever owned are interest in the new L.L.C. and we can claim a discount with the charity we're buying out. All we've ever held is these unmarketable L.L.C. interest. Do you want some or not? Yeah. That way -Let me write down the steps one after another. Okay. We end the --

JGB:

GMK:

Copyright 2000 The Heritage Organ_ahon, L.L.C. Th_s document and the mformatzon contained in stare Confidential Informatzon owned by The Her(rage Organ_ation, L L C The remover, copying or d_sclosure of thts document and the mformat_on contained m it by anyone, other than an authorized employee of The Herrtage Orgamzat_on, L L C. only in the normar performance of their duties as an employee of The Herbage Orgamzahon, L L C without the express wrilten approval of the Chief Executive of The HeNage Organ_alton, L.L C ISstrictly prohibited by law and by contract and will be enforced according to any contract and prosecuted to the hmlts of the law

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GMK:

Go through them again, Jonathan. You end them trading.
i

JGB:

Yeah. You terminateitrading and the shares of stock are distributed to i Investments, LP. Okay.

,

I

t

JGB:
t

an appropriate number of units in

Let me write that down. Okay. ,IGB: Then you contribute your interest in new L.L.C. to this CRT. I'll contribute -3GB: The membership units or the non-voting membership units -Uh-huh. JGB: GMK:, -- in the new L.L.C. to the CRT. Right. Okay. JGB: So now let's stop and see what happens. The CRT owns the nonvoting units, representing 99.9 percent the equity in new L.L.C.. You will be the managing member of that owning a tiny, tiny interest. The new L.L.C. in turn will own some units in _ Investments and i Investments will own -So CRT owns 99 percent of the -JGB: 99.9 percent. 99.9 percent of the equity and new L.L.C. JGB: Right. All non-voting. Right.
Copyright 2000 The Heritage Organization, L L C. This documenl and lhe Information contained m it ate Confidential Information owned by The Heritage Organization, L L C The removal, copying or disclosure of th=sdocument and the information contained in it by anyone, other than an authorized employee of The Hentage Orgamzation, L L.C. only in the normal per[ormance of their duties as an employee of The Heritage Orgsnizatlon, L L C without the express wrrtten approval of the Chief Executive of'l'he Heritage Organization, L L C Is stnctly prohiNted by law and by contract and will be enforced according to any contract and prosecuted to the limits of the law

i

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JGB:

New L.L.C. owns a million dollars of units in i New L.L.C. owns how much?

Investments, LP.

1

JGB: GMK:

A million dollars.
q

Whatever you want to contribute. Whatever the AT&T you want to sell is. Let's say it's a million dollars worth of units. What I want to sell this year is AT&T not Liberty.

JGB:

JGB:

Don't worry about it we're going to get there. We're going to get there. How much that do you want to sell,i_?. Let's say it's a million. I have no idea.

GMK: JGB:

JGB:

Let's just say for purpose of discussion it's a million dollars. Uh-huh.

JGB:

So you want to take a million dollars worth of the units haD Investments and contribute it to the L.L.C. and contribute the nonvoting interest and the L.L.C. to the CRT. You're going too fast. You're going to take a million dollars worth of units in_ Investments. New L.L.C. owns a million dollars of units inK Okay. Investments. :,
e

i: JGB:

JGB:

Right. And it does what? What happens next?

JGB:

Then you contribute the non-voting interest in_L.L.C.,

the new

Copyright 2000 The Her_,acje Organ_ation, L.L C This document and the _nformat_on contamed m it are Confidenttal Information owned by The Heritage Organtzahon, L L.C. The removal, copying or d_sclosure of thts document and the information contained In tt by anyone, other than an authorized employee oi The Heritage Organization, EL C. only m the normal performance of their duties as an employee of The Heritage Organization, L L C without the express written approval of the CNef Executive of The Heritage Organ_.atien, L L C is stnctly proNblted by taw and by contract and will be enforced according to any contract and prosecuted to the Iirnlts of the law

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IU

i

L.L.C., to the CRT, Okay. JGB: So at the end of the day now, i, let's take a look. 'The CKT owns 99.9 percent of the units in the new L.L.C.. You own the tiny in_erest, which is control. The new L.L.C. owns a million dollars worth of units iniInvestments Media and AT&T stock.
I )

and i

Investments owns the Liberty

,

,;

Right.
I

GMK: JGB: GM-K: JGB: GM'K: JGB: GMK: JGB:

The only thing I'd do different, Jonathan. Uh-huh. Is rather than have own that little bit, I'd have a new corporation be the managing member. Nine. Just so we have a S Corp going through his K-1. That's free. But Right. Right. Now you want to sell some stock. So ilnvestments will redeem out the i Investment units held by the new L.L.C. and it'll buy it out by giving it a million dollars worth o£AT&T; no Liberty Media. And that stock has basis, i. Right. But regardless of whether it has basis or not it's just going to buy it out with these units, Right. Redeem the units for AT&T stock. you'll control.

GMK: JGB:

GMK:

JGB:

Right. A million dollars of AT&T stock.

Copyright 2000 The Heritage Orcjanizatlon, L L C TNs document and the reformation contained m it are Confidentsal Information owned by The Hentage Organization, L L C. The removal, copying or d_sclosure of this document and the mfo[mation contained in it by anyone, other than an authorized employee of The Heritage Organization, LLC. only m the normal performance of their duties as an employee of The Heritage Orgamzatlon, L L C without the express written approval of the Chief Executive ol The Her,rage Orgamzabon, L L.C is strictly prohibited by law and by contract and will be enforced according to any contract and prosecuted to the hm_tsof the law

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1!

Okay. JGB: Now the CRT still owns the 99.9 percent interest in the new L.L.C. and the new L.L.C. owns a million dollars of AT&T and it sells it. The CRT owns 99.9 percent. And what was your point?

i
t

t
3

JGB:

The CRT owns 99.9 percent of the new L.L.C.

i

]
,I

mght.
JGB: And the new L.L.C. owns a million dollars worth of -A million dollars. JGB: Of AT&T and its brokerances sell.
i

i

Okay. JGB: And the brokerage firms records are going to show virtually no gain or loss because at the time you open up the account with the AT&T -because now we're transferring it from_Investments over to a new taxpayer, the new L.L,C., the brokerage firm is going to say, What is the basis -They don't get involved in that. 3GB: GMK: JGB: Well, some of them do. If they do ask, all you do is_tell them and they twpe it in. Right. Nobody has ever asked me. JGB: They have asked me. Is that right? GMK: Sometimes they do, your statement. Do they have to?
Copynght TheHentage 2000 Omjanizahon, L.LC.
This document and the mlormahon contained in il are Confidential Informahon removal, copying or disclosure of INs document and the mformahon contained owned by The I--tentage Qrganlzahon, L.L.C in d by anyone, other than an authorized The i

Sometimes they do and they include it in

employeefTheHentage o Organization,L C onlymthenormal erformance their L p of duhes asan employee ofTheHenlage Organ_zahon, Cwrthoutheexpress LL t writtenapproval oftheCNefExecuhve ofTheHeritage Orgamzation,L.C tsstnclly L
proNbtted by law and by contract and will be enforced accordzng to any contract and prosecuted to the limits of the taw.

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'i

GMK: JGB: GMK:

No. Nope. No. But it's good for them to because the basis is going to be thei basis that it is and it's just more -It's just more paperwork in your favor.
!

JGB:

It's some info you provide them. JGB: GMK: JGB: Yeah, but it's d record. That's right, It's a record. It doesn't mean anything. JGB: You bet it doesn't mean anything but it's a good record. Okay. So-JGB: So now the CRT still owns the 99.9 percent interest in the new L.L.C. and the new L.L.C. now has a million dollars in cash. What kind of deduction to I get this year for that? JGB: You get a deduction of a hundred thousand dollars. You really think it's worth _oing through all this trouble to -JGB: _you've got to make up your mind. I mean again, the two reasons -- again for all this massinations is one huge net of camouflage. They can't see your tank from the air. That's exactly right. Talk about stealth, _, you say you never want to be audited. This guarantees that it'll never be found. Well. JGB: And in addition if the IRS trying to attack the 752 -i

GMK:

Copyrtght 2000 The Heritage Organization, L L.C. This document and the informalion contatned In Jtare Confidential Informat=on owned by The Hentage Organtzat_on, L L.C The removal, copying or disclosure of this document and the mformat_on contained In It by anyone, other than an authorized employee of The Heritage Organization, L L C only in the normal performance of their duties as an employee of The Heritage Orgamzatlon, L.L C without the express written approval of the Chief Execut=ve of The Heritage Organlzatson, L.L.C is stnctly prohibited by law and by contract and will be enforced according to any contract and prosecuted to the limits of the law.

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lJ

They'll audit it. Speak about being audited, have you heard about this Marshall Fields audit, Gary?
4

GIVIK: JGB:

No, _,

] don't think I have. I'm not sure but I don't think I have.

I haven't heard about it either but I'm going to call some lawyers in Chicago and see if I can't answer the question for _. What's the question? Apparently they are after him for 138 million dollars for back taxes for using aggressive tax avoidance schemes,

o

GMK:

i 1

GMK: JGB: GMK: JGB:

Well, that doesn't mean anything. I'm glad they are after him rather than you. But I told something good, Gary. Right. When George Bush takes over, as he is certain to do, he is going to neuter the IRS. Right. I agree with you. They don't have any money. They got two hundred million dollars last -- appropriated to them. Do you know how much two million dollars will buy in computer systems? Very little. We!l, ! think they out to go after these companies that don't pay any -taxes.

GMK:

'.

JGB:

,IGB:

That's where they are going. That's where the money is. That's why only one, I think in 63 -- in fact, you know, when I mentioned Gary Kornman -- this past week I was down in Florida and I met with a guy from Arthur Anderson I do a fair amount of work with, Randy McPherson. And Randy -- I said, Would you like a new client? I didn't even describe_, but he said, Yeah, I'd like to work more with you Jonathan, and stuff. But I asked him, I said, How many of your individuals -- I mean really high level indiv