<table><tr><th>From:</th><th>Halperin, Alan S</th></tr><tr><td>Sent:</td><td>Wednesday, July 2, 2014 10:52 AM</td></tr><tr><td>To:</td><td>jeffrey E.</td></tr><tr><td>Subject:</td><td>Post-Death Actions of Foundation Affecting Estate Tax Value</td></tr></table>

I thought of you when I read this article. Was this =our idea? Alan

Wall Street <http://www.bloo=bergview.com/topics/wall-street>

Texas Billionaire's Heirs Save Some Money on Taxes

10Jun 27, 2014 1:26 PM EDT=o:p>

By Matt Levine <http://www.bloombergview.com/contributors/matt-levine>

• a<=span>

• A<=span>

Every so often I hear a story that I find rather wonderful=and that I then pass along to you, just in case you and I share a similar sense of wonder. Here is one of those stories. It's about =eath and taxes.

The story begins on Dec. 28 of last year, when a Dallas bil=ionaire named Harold Simmons died at the age of 82. He left the bulk of his $8 billion fortune to two of his daughters. Much of that <= mons-estate.html"> href="http://www.bloomberg.com/news/2014-02-06/hidden-billionaire-daugh=ers-emerge-from-si fortune was in m

The biggest chunk of the estate was Contran's 93.8 percent stake in Va=hi <http://www.sec.gov/Archives/edgar/data/24240/000005925514000010/=chl3dvhi020514.htm> , which was 318,156,746 shares.1 Valhi's stock closed on Dec. 27, 2013, at $14.91 per share <https://www.google.com/f=nance/historical?cid=37782&startdate=Jun+28%2C+2013&en=date=Jan+2%2C+2014&num =30&ei=IXStU6jAAqjZ6QHc-lDgDA> , making that stake worth about $4.7 billion as of Simmons's death. A=other 2,481,900 Valhi shares (0.7 percent, $37 million) were held by the H=rold Simmons Foundation, a charity controlled by Simmons's daughters.2 Other family members owned about 2.8 million sh=res ($41 million). Public shareholders owned about 15.7 million shares ($234 m=llion).3=o:p>

Here are two facts about the federal estate tax:=/span>

* &nb=p; The estate tax rate for 2013 and 2014 is 40 percent <http://wills.about.com/od/understandingestatetaxes/a/estatetaxch=ft.htm> of the value of the=estate.4

<http://www.legalmatch.com/law-library/article/alternative-valuat=on-method-for-gross-estate.html> * "alternate &nb=p; valuation The executor dat=," can which choose is the to date determine six months the value after the date =f of the death.<=pan estate either on the date of death, or on the style="font-size:9.0pt;font-family:SupriaSans-Light;color:#00B9E7">5=/span>

For Harold Simmons's estate, that alternate valuation date =s tomorrow -- six months from his death. Today is the last trading day before that valuation. How's Valhi done in the last six months=

## Source: Bloomberg

Oh.6 The stock closed yesterday at $6.01, reducing the value of the estate's ho=dings by $2.8 billion -- and its estate-tax liability by $1.1 billion -- s=nce Simmons's death.

Is that good news or bad news for the estate? Well, the fir=t law of tax is that it is always better to have more money than less money.7 It's not actually a good idea to lose $2.8 billion of money to sa=e $1.1 billion in taxes.

Though the estate didn't exactly lose $2.8 billion of money. That tax liability is a cash expense: You've actually got to =rite a check to the IRS for $1.9 billion (using the December valuation) or=$765 million (using yesterday's valuation=), so the $1.1 billion you save is an actual cash savings. The $2.8 billion I=ss, on the other hand, is a paper loss. Perhaps it's just temporary. If th=re were some reason to think that it didn't reflect only a decline in the =undamental value of Valhi, you might not worry as much about that paper loss as you would about the cash =axes.

So what's happened to Valhi? Well, it's not having a great year<=span> <http://www.sec.gov/Archives/edgar/data/59255/000005925514000059/=xh991.htm> , with zero-ish net income last quarter. The board reduced the dividend <http://www.sec.gov/Archives/edgar/data/59255/000005925514000059/=xh992.htm> by 60 percent, to its lowest level since 2005. And the few people w=o follow the stock are unimpressed. Bloomberg shows two analysts following=Valhi, Barclays and EVA Dimensions. They both have sell ratings, and Barclays has a price target of $5.00, say=ng in May that "from a SOTP analysis, we continue to view VHI as trad=ng above its intrinsic value." A Seeking Alpha piece <http://seekingalpha.com/article/2259473-valhi-seems-like-a-tough=way-to-seek-value> from a few weeks ago is similarly gloomy, with a $6 per share fair v=Iue.

All of this suggests that Simmons's estate owes less tax be=ause it's really worth less than it was six months ago. In fact, if you taxed Simmons's heirs now based on the value of Valhi six mon=hs ago, they'd have almost nothing left of their stock.<=p>

But there's one more bit of the story. On June 11, about tw= weeks ago, the Harold Simmons Foundation -- the charitable foundation controlled by Simmons's heirs -- filed with the SEC <http://www.sec.gov/=rchives/edgar/data/59255/000005925514000079/form144hsfoundation.htm> a plan to sell all of its 2.5 million shares. That's not a lot of stock, exactly -- just 0.7 percent of the company, worth arou=d $16 million at the time of the filing -- but it is a lot relative to the=usual volume of trading in Valhi. Remember, 93.8 percent of Valhi is owned=by Simmons's heirs and never trades. Between December 27, 2013, and June 10, 2014, Valhi traded an average of 4=,311 shares a day, so the foundation's shares represented almost 59 days' =olume.

It sold them <http://www.sec.gov/Archives/edgar/data/59255/000005925514000102/=orm144vhc.htm> in =1 days:

Source: Foundation filings, Bloomberg

The foundation's sales over the last two weeks or so accoun=ed for over half of the volume, on average, each day. And the foundation's average sale on each of those days was more than five tim=s the average volume over the previous six months. From Jan. 1 to June 10 =f this year, more than five months, Valhi traded a total of 4.6 million sh=res. From June 11to June 25, just over two weeks, it traded a total of 4.8 million shares -- more than half =f them sold by the Harold Simmons Foundation.

You might expect that to drive down the stock a bit? Actual=y the stock performed surprisingly well, all things considered; it closed on <https://www.google.com/finance/historical?q=NYSE%3AVHI&ei=3D_YmtU-

## Source: Bloomberg (cont.)

CPGtCy8gbMzIDYBQ> =une 10 at $6.42 and on June 25 at $5.81, down just 9.5 percent. But just t=at change, from $6.42 per share to $5.81, would save Simmons's heirs almos= $80 million in estate taxes.9

The foundation sold the last of its shares on June 25 (this=Wednesday). Without any more shares to sell, the foundation -- oh, wait, no, never mind, the foundation found some more shares to sell= On Wednesday, the day that it finished selling its 2.5 million shares, it received a "Gift fr=m Affiliate"

<http://www.sec.gov/Archives/edgar/data/59255/000005925514000102/=orm144vhc.htm> of another 900,000 shares. Those shares were =ifted to the foundation by the Valhi Holding Company, the vehicle through =hich Simmons's heirs own their 318.2 million shares.10

The Foundation immediately filed a plan

<http://www.sec.gov/Archives/edgar/data/59255/000005925514000102/=orm144vhc.htm> =o sell those shares too, with an "approximate date of sale" of J=ne 26 (yesterday).11As of 1 p.m. today, I see Valhi trading in the $5.805.</=>

Isn't that neat? Honestly, I have no idea what's going on h=re.12 But if you did want to minimize your estate taxes on a multi-billio=-dollar controlled public corporation with an illiquid stock, a good way t= do it would be to have a foundation that you control dump a ton of stock =n the market in the couple of weeks leading up to the day your estate is valued for tax purposes -- and, when =he foundation ran out of shares, give it a few more so it could keep selli=g. If the goal of this trading isn't to minimize taxes, I'll be very disappointed. Because it's wor=ing pretty well to do just that.

1 That's based o= a Schedule 13D/A
<http://www.sec.gov/Archives/edgar/data/24240/000005925514000010/=ch13dvhi020514.htm>

5 This election =nly works if the estate has kept the property for the six months. Here's an Internal Revenue Service=bulletin <http://www.irs.gov/irb/2011-51_IRB/arll.html> on the topic.

6 Here it is in =ercentage terms versus the S&P 500:

Source: Bloomberg

<pan style="font-size:10.0pt;font-family:"inherit","serif&=uot;;color:black">And perhaps most interesting, here's the last year, with Simmons's d=ath in the middle:

Source: Bloomberg

<pan style="font-size:10.0pt;font-family:"inherit","serif&=uot;;color:black">To be fair, Simmons was the chairman of the board <http://www.sec.gov/Archives/edgar/data/59255/000005925513000066/=hidef14a041013.htm> in 2013, though the company was managed by a chief executive offic=r, Steven L. Watson, who remains in charge=/a>. <http://www.sec.gov/Archives/edgar/data/59255/000156459014002020/=hi-10q_20140331.htm>

7 I've cited my =ax professor's two fundamental laws of tax before <http://www.bloombergview.com/articl=s/2014-04- 30/levine-on-wall-street-it-used-to-be-about-the-banking> : that =t is always better to have more money than less money, and that it is alwa=s better to die later than to die sooner. The second rule is always releva=t in estate-tax situations too.

8 I'm using yest=rday for convenience but in fact you'd have to use today's valuation. And the s=ock is down again today!

9 That is, 318.2=million shares times $0.61per share times 40 percent is $77.6 million.=/span>

10 Now 317.3 mil=ion, I guess.

## Source: Bloomberg (cont.)

11 You shouldn't=take that date too seriously; the foundation's June 11 filing <http://www.sec.gov/Ar=hives/edgar/data/59255/000005925514000079/form144hsfoundation.htm>

12 Do I even nee= to tell you that Simmons was a libertarian anti-tax adv=cate <http://en.wikipedia.org/wiki/Harold=Simmons> , had various run-ins with the IRS <http://www.dmagazine.com/publications/d-magazine/2010/february/h=rold-simmons-is-dallas-most-evil-genius?single=1> , and called President Barack =bama <http://www.forbes.com/sites/christopherhelman/2013/12/30/texas-b=llionaire-harold-simmons-dies-called-obama-most-dangerous-man-in-america/> "the most dangerous man in America"? Or that <http://www.dmagazine.com/publications/d-magazine/2010/february/h=rold-simmons-is-dallas-most-evil-genius?single=1> "In=2009, a Dallas County jury found NL Industries" -- one of the compani=s in Simmons's estate -- "liable for not honoring contractual agreeme=ts and manipulating stock values"?

To contact the writer of this article: Matt Levine at ml=vine51@bloomberg.net <mailto:mlevine51@bloomberg.net> .

To contact the editor responsible for this article: Tobin H=rshaw at tha=shaw@bloomberg.net <mailto:tharshaw@bloomberg.net> .

Alan S. Halperin</=pan> I Partner Paul, Weiss, Rifkind, Wharton & Garrison LLP 1285 Avenue of the Americas | New York, NY 10019-6064 (212) 373-3313 (Direct Phone) I (212) 492-0313 (Direct Fax) ahalp=rin@paulweiss.com <mailto:ahalperin@paulweiss.com> I www.paulwei=s.com <http://www.paulweiss.com>

This message is intended only for the use of the Addressee and may contain =nformation that is privileged and confidential. If you are not the intend=d recipient, you are hereby notified that any dissemination of this commun=cation is strictly prohibited. If you have received this communication in=error, please erase all copies of the message and its attachments and noti=y us immediately.

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