BOSTON OFFICE
84 STATE STREET
LAFAYETTE 3-7340

FISH, RICHARDSON & NEAVE

NEW YORK OFFICE
20 EXCHANGE PLACE
DIGBY 4-8630

FREDERICK P. FISH
(1878-1930)

W. K. RICHARDSON
(1868-1951)

HECTOR M. HOLMES
H. L. KIRKPATRICK
ROWLAND V. PATRICK

EDGAR H. KENT
W. R. HULBERT
EBERT T. LEOATES
R. W. FURLONG

MAXWELL FISH

MARTIN KIRKPATRICK
WM. W. RYMER, JR.
ROBERT S. TOPERZER
WILLIS M. ERTMAN

CHARLES NEAVE
(1893-1937)

MAXWELL BARUS
STEPHEN H. PHILBIN
ALEXANDER C. NEAVE
HENRY R. ASHTON
E. CUMMINGS SANBORN
JOHN VAUGHAN GRONER
CHARLES H. WALKER
WILLIAM J. BARNES

JAMES D. BOCK
HENRY J. ZAFIAN
LOUIS F. REED
CHARLES B. SMITH

W. PHILIP CHURCHILL
HARRY R. PUGH, JR.
FURMAN RINEHART
HELGE C. DIESERUD
RYNN BERRY
WILLIAM K. KERR
JOHN FARLEY
ROBERT B. WHITTREDGE

RONALD F. BALL
EDGAR N. JAY
DONALD E. DEGLING
DAVID W. PLANT

NEW YORK 5,

June 17, 1958

Mr. Kurt Wolff
Pantheon Books, Inc.
333 Sixth Avenue
New York City

Dear Kurt:

After talking with you I consulted my friend
Norris Darrell of Sullivan & Cromwell who is, I believe,
considered to be the leading expert on tax law in
New York. I am enclosing his letter to me and his
memorandum, and have retained a copy in my files.

I am also returning to you the minutes of the
Pantheon Books, Inc. meeting of April 17 and Mr. Walter's
letter to you of June 2.

As I view Darrell's letter, it comes down to the
simple proposition that you can't have your cake and eat
it too. that is, that you can't obtain absolute certainty
with respect to future payments and at the same time have
the payments to you taxable only when they are made to
you after retirement. This seems to me to mean that you
will have to rely upon your contractual arrangements with
Pantheon for your payments in the future, taking the risk
that they might go broke in the meantime. Otherwise you
would have to pay the tax on the full amount of the
principal in a single year.

The crux of the Darrell suggestions is contained
in the paragraph starting on the bottom of page 4 of the
memorandum. Apparently the arrangement as proposed in the
minutes seems the best that can be done with the additional
suggestion that the rights to receive payments be conditioned
on your agreement to render consulting services to Pantheon
and not compete with it.

FISH, RICHARDSON & NEAVE

TO Mr. Kurt Wolff

FOLIO 2

I should think that you would suggest to Pantheon that they have prepared a contract to implement the plan and if you so desire, I could submit that contract to Mr. Darrell for his views.

I shall, of course, be only too glad to discuss this matter with you, and if you wish, try to arrange for a meeting with Mr. Darrell or his partner, Mr. Powell. I know that these matters are very confusing and highly technical so that do not hesitate to let me know if you want any of these matters clarified.

It was a great pleasure to me to see you and Helen the other day and I hope that we can get together soon again.

ACN:AOB.

CABLE ADDRESS: "LADYCOURT," NEW YORK

SULLIVAN & CROMWELL

48 Wall Street, New York 5,

June 16, 1958

Alexander C. Neave, Esq.,
Messrs. Fish, Richardson & Neave,
20 Exchange Place,
New York 5, N.Y.

Dear Alex:

I enclose a memorandum concerning the proposed
pension arrangements for Mr. Kurt Wolff. If you would like
a shorter memorandum, please let me know. I am returning
the papers you left with me.

Fundamentally Mr. Wolff should be made to under-
stand that he cannot obtain the protection against creditors
he would like and at the same time avoid the risk of taxation
on the pension payments before he gets the money. Normally
the latter is considered the more important and, if that is
the case with him, it would seem to us that the most practical
thing to do would be to have a contract drawn up along the
lines of the proposed arrangement but with provisions care-
fully drawn having in mind the points mentioned in the enclosed
memorandum. This would seem particularly important in this
case, since the resolutions as written do not make a good
record from a tax point of view.

We have considered the alternative possibility of
a deferred compensation contract for Mr. and Mrs. Wolff under
which he would agree to work full time until April 1960 and
she would agree to render services abroad for say five years
after that for an agreed compensation and under which as a
further consideration the company would agree to pay him or
his wife $12,000 per year for five years beginning say
January 1961, provided they do not work for a competitor,
any unpaid balance to be paid to the estate of the survivor.
While this would provide a shorter period over which they
would have to risk the credit of the company, it would
otherwise appear to have less appeal to the Wolffs since
there would not be a certain lifetime pension, the income
taxes probably would be somewhat greater and it would not be
safe tax-wise to try to secure the company's obligation by a
pledge or otherwise. On balance, this plan does not seem
sufficiently attractive to make it worth while to attempt to
change the plan recommended to and adopted by the Board.

Alexander C. Neave, Esq.,

2.

As indicated in the enclosed memorandum, the trust
arrangement suggested by Mr. Walter does not seem satisfactory
if for no other reason than that the company would probably
never get a tax deduction for the amounts paid the Wolffs.

Please let me know if we can be of any further
assistance.

(Enclosures)

Draft of 6/16/58

MEMORANDUM CONCERNING PENSION ARRANGEMENTS
FOR
MR. KURT WOLFF

Mr. Kurt Wolff is a director and the Executive Vice-
President and editor of Pantheon Books, Inc. The substantial
economic progress made by Pantheon during the last several years
is in good measure attributable to the editorial efforts of Mr.
Wolff and of his wife, Helen, who also is a director of and has
a responsible position with Pantheon. Mr. Wolff is now 72 years
of age, plans definitely to retire by April 1960, if not sooner,
and contemplates returning to his native country of Germany
following retirement. Mrs. Wolff, some 20 years his junior,
would withdraw from the business at the same time to accompany
her husband. Both are now naturalized American citizens. Aside
from their income from Pantheon, Mr. and Mrs. Wolff have an annual
income of approximately $2,000 from securities registered in their
joint names. Assuming an average 4% rate of return, these securi-
ties would have a value of about $50,000.

At a meeting of the Pantheon Board of Directors on
April 17, 1958 a qualified non-contributory pension plan was
adopted for all employees other than Mr. Wolff. (No specific
reference is made in the minutes as to the inclusion or exclusion
of Mrs. Wolff.) The plan is to be funded through New England
Mutual Life Insurance Company.

The same meeting also approved the following arrange-
ments for Mr. and Mrs. Wolff:

1. Pantheon will create a reserve fund of $60,000 by setting aside $20,000 in each of its fiscal years ending April 30, 1958, 1959 and 1960, but not to exceed 50% of net profits after taxes in any one year, with any deficiency to be made up in subsequent years. The full $20,000 has been set aside for the first such fiscal year and the current performance of Pantheon indicates that the full amount will be available for the second

fiscal year ending April 30, 1959. Payments to the reserve fund are deemed to be in lieu of any further increase in Mr. Wolff's salary or bonus during the three years. If Mr. Wolff dies prior to the setting aside of the full $60,000, no further payments to the reserve are to be made in any year subsequent to the fiscal year in which his death shall occur. Pantheon will invest the reserve fund with an insurance company selected by an independent committee of three directors to provide an annuity payable to Pantheon upon terms satisfactory to Mr. Wolff. It will enter into a contract with Mr. Wolff providing that at his retirement or prior disability, Pantheon will pay him the amounts received on the annuity contract, or in the alternative the annuity contract may be assigned to Mr. Wolff. The contract will also provide that in the event of Mr. Wolff's death, the proceeds of the annuity will be payable to Mrs. Wolff.

2. Pantheon will enter into a five-year employment contract with Mrs. Wolff, as Vice-President, at a salary to be fixed from year to year by the Board of Directors but to be not less than the aggregate salary and bonus now payable to her.

3. A bonus of $5,000 to Mr. Wolff for special services rendered was approved payable before the end of the April 30, 1958 fiscal year.

The description of these arrangements in the minutes raises several questions. If Mr. Wolff were to die in the current fiscal year, it appears that the reserve fund could never exceed $40,000 and if less than $20,000 was set aside in this current fiscal year, Pantheon would not have to make up the deficiency in any subsequent fiscal year. It is also assumed that Mr. Wolff will continue to work until April 30, 1960 and, therefore, no provision is made for continuing or discontinuing payments into the reserve fund should he retire earlier.

More important, perhaps, are the tax consequences of the proposed arrangements. In this area of deferred executive compensation and pensions there is a basic conflict of interest

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between the executive and his employer. The executive wants
three things: First, to be sure that his rights are subject
to no contingencies or to as few contingencies as the circum-
stances will permit; second, to be taxed on the deferred
compensation or pension payments only when received during
the years following retirement; and third, to be assured that
the funds out of which the payments are to be made are specifically
set aside and will continue to be available irrespective of the
financial fortunes of the employer. On the other hand, the
employer wants to be certain that the amounts he sets aside
are deductible as a business expense and preferably in the year
in which set aside rather than piecemeal over a period of years
following the executive's retirement.

Under the federal income tax laws special provisions
to reconcile this conflict have been made for certain types of
pension and profit-sharing plans which are "qualified" under
those provisions. The pension plan approved by the Pantheon
Board of Directors for all employees other than Mr. Wolff is
intended to be so qualified, but Mr. Wolff could not be included
in that plan for a number of reasons.

Deferred compensation and pension arrangements which
are not "qualified" are subject to the following general rules:

1. If the interest of the executive in the amount set aside by the employer is non-forfeitable, the executive must include that amount in his gross income for the taxable year in which it is so set aside.

2. If the interest of the executive is forfeitable at the time the amount is set aside even though it becomes non-forfeitable later, that amount is not required to be included in the gross income of the executive at the time his interest becomes non-forfeitable. However, if an annuity contract is purchased by the employer and is assigned to the executive, the entire value of the annuity contract at the date of its assignment must be included in the gross income of the executive for the year in

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which the assignment takes place. Even in the absence of an
assignment, there is some risk that if the executive's rights
become non-forfeitable at retirement he will be deemed to have
"constructively received" at retirement the value of all his
future contractual rights, subject only to discount for the
period during which they are payable.

3. The executive's interest is considered non-forfeitable if there is no contingency which may cause him to lose his rights. If, for example, the executive upon termination of his services before his retirement date, whether voluntarily or involuntarily, is entitled to receive an annuity to be purchased with the employer's funds, his interest is non-forfeitable. On the other hand, if the executive would lose his rights to the annuity should his services be terminated before retirement, his interest is considered forfeitable.

4. From the employer's point of view, the amounts set aside are deductible as an expense in the year set aside only if the executive's interest is non-forfeitable at that time. If the amount is merely accrued on the books of the employer, no deduction is allowed in that year. There is even a risk that if the employer pays over the amount set aside "to a trust or under a plan" at a time when the executive's rights are forfeitable the employer will never be able to take the deduction. However, if the amounts set aside are entirely within the control and are treated as assets of the employer, the payments to the executive following retirement should be deductible at the time when made.

Applying these general rules to the proposed arrangements for Mr. Wolff it is clear that his interest prior to retirement should be forfeitable and that no assignment of the annuity contract to Mr. Wolff should be contemplated, permitted or made. It would also be preferable if Mr. Wolff's rights to receive payments following retirement could be conditioned upon his agreement to render consulting services to Pantheon and his agreement not to compete with Pantheon. This would be helpful in

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answering the "constructive receipt" argument. It is important
from the point of view both of Mr. Wolff and Pantheon that
their rights and obligations be based entirely upon the contract
between them without reference to any steps which Pantheon may
take, such as the purchase of an annuity payable to Pantheon,
in order to have funds available at the time when required. If
the proposed arrangements could be handled in the manner suggested
in this paragraph, Mr. Wolff would not be subject to income tax
prior to retirement and his risk at the time of retirement would
be minimized.

Any alternative suggestions would have to embody the
same basic conditions of forfeitability if both parties are to
be satisfied. The suggestion by Mr. Walter in his letter of June
2, 1958 might be satisfactory to Mr. Wolff, but under the rules
stated in paragraph 4 above Pantheon would never get a deduction
for the amounts paid into the trust.

The consequences of the proposed arrangements under the
federal estate tax law are probably unimportant because of the
comparatively small amount of other assets involved and on the
assumption that proper provision is made in Mr. Wolff's will to
take advantage of the marital deduction.

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