From: Kelley Lynch <kelley.lynch.2010@gmail.com>
Date: Sat, Oct 25, 2014 at 4:56 PM
Subject: Traditional Holdings - Richard Westin Letters - March 2002
To: "irs.commissioner" <irs.commissioner@irs.gov>, Washington Field <washington.field@ic.fbi.gov>, ASKDOJ <ASKDOJ@usdoj.gov>, MollyHale <MollyHale@ucia.gov>, nsapao <nsapao@nsa.gov>, fsb <fsb@fsb.ru>, "Doug.Davis" <Doug.Davis@ftb.ca.gov>, Dennis <Dennis@riordan-horgan.com>, rwest0@gmx.com, sedelman <sedelman@gibsondunn.com>, "kevin.prins" <kevin.prins@ryan.com>
Hello IRS,
In the March 10, 2002 letter, Westin reviews corporate documents with me and Cohen. I personally read this letter to Cohen. Cohen now agrees that he authorized payment of $20,000 per year while willfully disregarding the second payment, on a separate line in the agreement with separate dates, even though the agreement is quite clear and Westin explained this amount on March 6, 2002. Kory thought this was a real estate agreement. I have no idea. I do not know what Westin was talking about re. items in the operating agreement that are moved outside the operating agreement via this management agreement for tax purposes. Do you understand this IRS? Prins listed one $20,000 payment per year; willfully disregarded the $24,000/year; and the $240,000/year. Also Prins did not take anything having to do with TH and the year (pro rated) 2000 into account. Westin did.
Westin advised us that TH bypasses Cohen’s estate. The only entity assigned to Cohen’s revocable family trust (probate) is LCI.
Leonard Cohen has confirmed receiving Westin's March 6, 2002 letter. I asked Westin to prepare it after the insanity arose re. Ken Cleveland's meltdown over the $7 million Sony 1099 issued to Cohen. I've gone through the March 6, 2002 letter with you and the payment of $240,000/year (which totals $20,000/month) was confirmed by Westin.
In the March 10, 2002 letter, Westin reviews corporate documents with me and Cohen. I personally read this letter to Cohen. Cohen now agrees that he authorized payment of $20,000 per year while willfully disregarding the second payment, on a separate line in the agreement with separate dates, even though the agreement is quite clear and Westin explained this amount on March 6, 2002. Kory thought this was a real estate agreement. I have no idea. I do not know what Westin was talking about re. items in the operating agreement that are moved outside the operating agreement via this management agreement for tax purposes. Do you understand this IRS? Prins listed one $20,000 payment per year; willfully disregarded the $24,000/year; and the $240,000/year. Also Prins did not take anything having to do with TH and the year (pro rated) 2000 into account. Westin did.
There are minutes ratifying the private annuity agreement and minutes clarifying that I have the authority to handle corporate matters as instructed.
There are minutes chiding Cohen for his DANGEROUS LEVEL OF BORROWING.
I don't know what Westin is referring to re. Sony's filthy mess.
I think these two letters are very straightforward. I also think these people should stop lying.
All the best,
Kelley
2002
Richard Westin letter to Leonard Cohen dated March 6, 2002
Cohen confirmed receipt.
March 6, 2002 – Draft
See KL notes to Richard Westin
and Cohen comnments. Faxed to RW.
Dear Leonard,
I have now reviewed all the documents that were forwarded me in order to prepare the Traditional Holdings return. I would like to point out that I did not notice any sloppy record keeping and all the documents were delivered to me in a timely manner.
I would like to review the structure of TH at this time because it is ornate you may need further clarification. I will start at the beginning. TH came about as the result of Neal and myself being approached by Kelley at your request to search for a tax structure that would benefit you with respect to the Sony royalty buyout. At that time, you were looking at ordinary income that would have been taxed at the rate of 47%. Traditional Holdings purchased your royalty buy-out properties using a private annuity. A private annuity is a contract under which a person sells property in exchange for deferred payments that end when the seller dies. The deferred payments are payments to you (which I will address later in this letter) and it is these deferred payments that allow the tax to be deferred. The payments cease upon your death. Private annuities have been around for decades and are not controversial.
In the year 2011, you will begin receiving about $38,000 a month for the remainder of your life. You will then pay taxes yearly on this amount at whatever the tax rate is on ordinary income.
You have therefore saved tremendously in taxes because you avoided the ordinary income tax of approximately $3.5 million in the year of the sale and will pay taxes as you receive your deferred payments. In the interim, your money is invested and if well managed it is also growing.
All monies you take from TH until 2011 need to be documented as loans. This is why some confusion arose for Kelley in the year 2001 with respect to your personal tax return payment. Neal made the decision that the funds should come from TH and Kelley then contacted me in order to determine what paperwork, if any, was required. I had to prepare a note that was to be placed in the file with a copy of the return. It is important to have these “loans” documented by notes.
RW will prepare all loan documents. He is also handling matters related to the Sony 1099. RW and KC will discuss who will prepare the LCI and BMT returns.
To reiterate, TH obtained the properties with a private annuity in order to defer taxes. Kelley had to be brought in, and agreed to do so in order to help you, because you need a third party’s involvement so that this transaction is not viewed as your selling something to yourself. The third party should not be a relative of yours therefore Kelley was selected. We had Kelley sign a promissory note in the amount of $245,000 to TH which shows that she invested in TH. She
is to receive $24,000 a year for the first 17 years, then $31,250 a year, which allows her to repay the note; and, $20,000 a year which allows her to pay taxes on the amount she has received.
It complicates things for Kelley and possibly eats into her lifetime gift tax exemption that would benefit her children.
RW – advised that the promissory note payments total $44,000/year. Addressed in corporate books and management agreement. Cohen, RW, and NG have discussed the profits to be allotted to me and this will be addressed in writing. Indemnity Agreement should be placed in corporate file.
It is possible that estate taxes will change in the future and Kelley will not suffer any penalties. To summarize, Kelley was brought into this situation in order to help you accomplish a beneficial tax structure.
Leonard asked if I would be responsible for payments on the promissory note in the event he died. Westin said no.
At this time, Kelley needs to begin repaying the note to TH. She must pay $24,000 debt service on the note this year so that the entity remains legitimate. The way we anticipated handling this was to allocate $240,000/year of TH profits to Kelley each year which allows her to pay the taxes on the income that has created for Kelley.
RW will advise KL how taxes will be handled on thos $240,000/year allocation. He will prepare all necessary tax documents.
Unfortunately, because Kelley did not make the $24,000 payment in 2001 (she was not aware that she had to do so), this may create hardship for her with respect to taxes. In order to resolve this situation, I propose that Kelley be allocated the sum of $___________________ for the years 2001 and 2002. Out of this amount, Kelley will pay the note (by writing a check to TH) and pay the taxes she incurs by receiving these monies from TH, which we will call a fee for
the sake of simplicity.
It is often the case that once a structure has been established and taken out of the realm of theory, it takes time for all parties to understand what its function is and how it operates. I have basically raised three points here: (1) that a private annuity has been established in order to defer taxes; (2) you will eventually begin receiving monthly payments and until that time, all withdrawals from TH need to be documented as loans; (3) Kelley’s participation was essential and requires a yearly payment to her which allows her to repay the note and the taxes she incurs because of the payment.
On a separate note, I am giving some thought to your gift tax situation. I understand that you are giving Adam approximately $42,000 a year in support. This cancels out the possibility of gift him $11,000 a year (which is now the yearly gift amount) with respect to the property you have purchased. I also understand that Anjani Thomas has been given sums possibly in excess of
$11,000 permitted yearly gift and need to rethink how the loan to her for the house should be handled.
LC asked RW to address gifts to Lorca – including mortage payment he makes on the Melrose property. Chudd’s firm advised that Cohen should have a lease with Lorca - $55/sq. foot. Cohen decided against this.
I would like to take some time and review the larger picture of your gifts with Kelley - this would include your voluntary monthly gift to the children’s mother which comes to $45,600 per year.
Kelley has advised me that you would like to know if there is some way for you to give gifts to your children in a manner that does not create a gift tax. This is something Reeve Chudd and I need to think through.
Since my involvement in your tax planning, several entities have been created: two charitable remainder trusts (which I understand Neal will address with you separately), and Traditional Holdings. These three entities - the two charitable remainder trusts and TH are really the essence of your tax and estate planning.
Last year was a very complex year but going forward everything should be quite
smooth and uncomplicated.
Richard
Cohen asked Westin if I could be compensated with 15% of LCI (as was the case with BMT). Westin advised that I should have been.
Westin advised us that TH bypasses Cohen’s estate. The only entity assigned to Cohen’s revocable family trust (probate) is LCI.
Followed up with Greenberg on memo he is preparing re. charitable remainder trusts. He will speak directly to RW re. Cohen’s withdrawals from those accounts.
Richard Westin letter to Leonard Cohen & Kelley Lynch
Dated March 10, 2002
Traditional Holdings, LLC – Comments on Binder
Letter explains certain documents. Minutes adopting a management agreement. All this does is move the money Kelley gets for managing TH from inside the operating agreement to a separate document. This is done for the technical reason that it creates tax law clarity to as the nature of the payment. Having it in the operating agreement makes it unclear whether it is a so-called guaranteed payment or a payment deemed made with an outsider. Because the allocation provisions in the LLC agreement are complicated enough, I wanted to remove this piece to keep the tax picture clearer. This is purely a technical issue. This was fastened on as compensation in order to keep the structure commercially reasonable. To date, KL has not been paid. She is owed for the year 2000 and 3 months of 2001. The next payment is due June 30.
The same minutes also ratify the certificates to be issued by the company and approves the note Kelley signed.
The next item is the addendum. It implements the management agreement described immediately above.
Next are minutes ratifying the private annuity.
The next item are minutes observing the durable power of attorney. The purpose is to clarify to anyone dealing with later documents that Kelley had the authority she claimed to deal with Leonard’s stake in the company.
The next item is a set of minutes ratifying the tax returns and chiding Leonard for borrowing so much money. This should operate as a tickler to get Leonard to amalgamate these loans and pay them as one. I would much prefer to see Leonard get some money from Neal and repay Traditional Holdings This pattern of borrowing is dangerous to the structure.
The tax return is done. I sent comments on it earlier.
What is left is LC Investments and cleaning up Sony’s filthy mess.