EFTA02673779

From: McCaffrey, Carlyn Sent: Friday, February 7, 2014 5:27 PM To: Jeffrey Epstein (jeevacation@qmail.com) Subject: FYI http://servi=es.taxanalysts.comitaxbase/stn3.nsf/(Number/2014+STT+26-33?OpenDoc=ment&Login chttp://services.taxanalysts.comitaxbase/s=n3.nsfANumber/2014+STT+26-33?OpenDocument&Login> Transfers of Property Between Settlor and Grantor Trust Su=ject to New York Sales Tax Citations: TSB-A-14(6)S; Petition =o. 51310O7A <1=> The New York State Department of Taxation and Finance explained that when a=settlor transfers property to a grantor trust or a revocable living trust =n exchange for trust property, the transfer is subject to sales tax becaus= an exchange has been made between two separate entities, even if there is no negotiation and the transfer is=not supported by consideration. Sales Tax January 29, 2014 ADVISORY OPINION The Department of Taxation and Finance received a Petition for an Advisory =pinion from ' ' ' name and address redacted ' ' ' . Petitioner requests gu=dance on whether the substitution of property between himself and the trus= is subject to sales and use taxes in New York. EFTA_R1_01952459 EFTA02673779 We conclude =hat the Petitioner and the trust are separate taxpayers capable of enterin= into a sale. Any substitution of property between the two entities would be a sale, because it would constitute a transfer of title =r possession for consideration. Therefore, sales and use taxes are due on =ny substitution of property transferred between the Petitioner and the tru=t. Facts Petitioner (=he "Settlor") created an irrevocable trust (the "Trust"=) pursuant to a trust agreement between the Trustees and the Settlor. The =ettlor is deemed to own the Trust property for Federal and New York State income =ax purposes, as provided in §§ 671-679 of the Internal Revenue Code (I=C). Under the terms of the Trust Agreement, the Settlor has the administra=ive right to reacquire trust property by substituting property of equivalent value at any time (the "Power =o Reacquire"). The provision of the Trust Agreement creating the Sett=or's Power to Reacquire reads as follows: POWER TO REACQUIRE. Except as otherwise provided below, the Grantor,=in an individual and nonfiduciary capacity, without the approval or consen= of any person in a fiduciary capacity, shall have the power to reacquire =roperty of the trust, other than shares of voting stock of a controlled corporation (within the meaning of =ection 2036(b) of the Code), whether owned directly or indirectly through =ne or more limited liability companies, partnerships or other entities, by=substituting other property of an equivalent value; provided that the Independent Trustees are satisfied =hat the substituted property is of equivalent value. If no Independent Tru=tee is then serving, upon the exercise of this power by the Grantor, the T=ustees shall appoint an Independent Trustee in accordance with subparagraph (C)(1) of Clause EIGHTH. Notwithst=nding the foregoing, the Grantor may not exercise his power under this par=graph in such a manner that may shift benefits among the trust beneficiari=s within the meaning of Revenue Ruling 2008.22 and Revenue Ruling 2011-28. The Grantor may at any time and=from time to time release, in whole or in part, the powers retained by him=under this Clause SEVENTH. Such release may be for a limited period or und=r stated conditions or indefinitely. Such release shall be made by an instrument in writing delivered to the Tr=stees The Settlor in this case wishes to exercise the Power to Reacquire by subst=tuting tangible personal property he owns (the "Substituted Property&=uot;) for Trust property other than tangible personal property (the "=rust Property") having an equivalent value to the Substituted Property. He has requested guidance on whether this substi=ution is considered a sale subject to New York State sales and use taxes. Analysis<=span> When a Settl=r establishes an irrevocable trust for another's benefit but retains non-f=duciary dominion and control, pursuant to IRC §§ 671-679, the Settlor has created an intentionally defective grantor trust. This tru=t is treated differently by different parts of the IRC. For the Estate tax= the property is no longer considered to be part of the Settlor's estate. =owever, for the Personal Income Tax, income from the trust is considered part of the Settlor's income, bec=use he retains non-fiduciary dominion and control over the income produced=by the trust and can enter into transactions for his own benefit. The ques=ion presented in this case is how the trust should be treated for purposes of the sales and use tax in New Y=rk. Section 1105=a) of the Tax Law imposes sales tax on the receipts from every retail sale=of tangible personal property, unless otherwise exempt. Section 1101(a) of the Tax Law provides that the term "person" includes =quot;an individual, partnership, limited liability company, society, assoc=ation, joint stock company, corporation, estate, receiver, trustee, assign=e, referee, and any other person acting in a fiduciary or representative capacity, whether appointed by a court or otherwise, and=any combination of the foregoing." In addition, for sales tax purpose=, a "sale" includes "Ia]ny transfer of title or possession =r both, exchange or barter, rental, lease or license to use or consume ... conditional or otherwise, in any manner or by any =eans whatsoever for a consideration, or any agreement therefor...."= Tax Law § 1101(b)(5); see also 20 NYCRR § 526.7 (a), (b). 2 EFTA_R1_01952460 EFTA02673780 When an indi=idual transfers title or possession of property to a trust, a transfer has=been made to a separate entity. See TSB-A-99(22)S. This is true even in the case of a grantor trust =r a revocable living trust. Id. If there is consideration given in any form in connection=with the transfer, a retail sale of tangible personal property occurs and =ales tax is imposed. Id. Even though such a transfer may be a non-event for income=tax purposes, it will still be a sale under the sales tax as long as it is=made to a separate entity. See TSB-A-06(8)S. Petitioner c=ntends that the terms of the trust agreement do not allow the exchange bet=een the Settlor and Trust to be supported by consideration. The Settlor alone, in a non-fiduciary capacity, decides whether to exercis= the Power to Reacquire and what property will be substituted. The Trustee= have no power to consent or agree to the substitution. Under these terms,=the Petitioner contends there is no negotiation or bargaining between the parties and the exchange is not s=pported by consideration. However, a t=ansfer to a trust does not require negotiation to be supported by consider=tion. See TSB-A-99(22)S; see also 20 NYCRR 526.7(a)(3) (definition =f sale includes involuntary transfer). As long as the individual receives =omething of value in the transfer, consideration is present. Id. Because Petitioner plans to transfer tangible personal property =o the trust and receive other than tangible personal property of equivalen= value from the trust in return, this transaction is a sale for sales tax =urposes and, unless some other exemption applies, the sales tax will be imposed on the value of the prope=ty received in the exchange. Sales tax is=imposed on retail sales of tangible personal property. See Tax Law § 1105(a). A "retail sale" is defined, in pa=t, as sale "for any purpose other than . .. resale as such....&qu=t; Tax Law § 1101(b)(4) . Petitioner's initial purchase of the tangible =ersonal property that is to be transferred to the trust may qualify for the resale exclusion if Petitioner intended at the time th= property was purchased to transfer it to the trust for consideration. See Matter of D.J.H. Construction v. Chu, 145 AD2d 716 (3d Dep't 198=). However, to establish that he purchased the property for resale and the=eby qualify the purchase for the resale exclusion, Petitioner must "s=ow that (the property) was purchased for one and only one purpose: resale." Matter of the Petition of P=H Fine Arts, Ltd, Tax Appeals Tribunal, October 13, 1994, confirmed 227 AD2d 683 (3d Dep't 1996) (petitioner's purchase of art=ork does not qualify for the resale exclusion because petitioner displayed=the artwork before reselling it). Although not determinative, later activi=ies may be relevant to ascertain Petitioner's intent at the time of sale. See Matter of D.J.H. Construct=on, supra. DATED: Janua=y 29, 2014 Deborah R. Liebman Deputy Counsel NOTE: An Advisory Opinion is issued at t=e request of a person or entity. It is limited to the facts set forth ther=in and is binding on the Department only with respect to the person or entity to whom it is issued and only if the person or entity=fully and accurately describes all relevant facts. An Advisory Opinion is =ased on the law, regulations, and Department policies in effect as of the =ate the Opinion is issued or for the specific time period at issue in the Opinion. The information provided=in this document does not cover every situation and is not intended to rep=ace the law or change its meaning. &nbs=; <http://services.taxanalysts.com/www/website=nsf/Web/Search?OpenDocument&Login> &nbs=; My Profile <http://services.taxanalysts.com/=axbase/nay.nsf/UserProfile?ReadForm> &nbs=; Help <http://services.taxanalysts.comftww/website.nsf/Web/Help:TOC?OpenDocument&simple=1> &nbs=; Customer Service <http://www.taxanalysts.com/www/w=bsite.nsf/Web/CustomerService?OpenDocument> 3 EFTA_R1_01952461 EFTA02673781 &nbs=; Sign Out <http://services.taxanalysts.comtrames.nsf?Logout&RedirectTo=http://www.taxanalysts.comk CI Tax Analysts (2014) Save t= My Profile Enter your e-mail address Name this document: Optional Category: Optional Notes: Carlyn S. McCaffrey I Partner McDermott Will & Emery LLP 1340 Madison Avenue, New York, NY 10=73 <=a> I www.mwe.com <http://www.mwe.com> t**t*• ****** R••#s IRS Circular 230 Disclosure: To comply with requirements imposed by the IRS= we inform you that any U.S. federal tax advice contained herein (includin= any attachments), unless specifically stated otherwise, is not intended o= written to be used, and cannot be used, for the purposes of (i) avoiding penalties under the Internal Rev=nue Code or (ii) promoting, marketing or recommending to another party any=transaction or matter herein. This message is a PRIVILEGED AND CONFIDENTIAL communication. This message a=d all attachments are a private communication sent by a law firm and may b= confidential or protected by privilege. If you are not the intended recip=ent, you are hereby notified that any disclosure, copying, distribution or use of the information contained =n or attached to this message is strictly prohibited. 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