-292-
2. Ernst & Young Memorandum
On February 21, 1997, Robert Feinberg and Jeffrey N. Bilsky
of Ernst & Young, LLP, prepared a draft memorandum which it sent
to Mr. Rhodes. The draft memorandum is not an opinion letter and
is entitled “DRAFT”. It purports to address SMP’s claimed tax
basis in the SMHC receivables and stock; however, it repeatedly
emphasizes that the scope of its review is limited, incomplete,
and cannot be relied on except for internal purposes.206 For
example, the draft memorandum begins:
As you know, we have not been asked to perform a
comprehensive tax basis study with respect to the
subject assets. Consequently, the scope of our
services and related procedures have been limited to
reviewing the available materials and commenting as to
their relevance and reasonableness for use in
determining the tax basis of the assets. To the extent
that additional documents and information become
available, we will need to review our analysis since it
could be materially affected.
Our analysis may be used by current management of Santa
Monica solely for internal purposes and may not be
disclosed to third parties. When we are fully informed
of the intended use of the information, including
review of all related materials expected to be issued,
we can further review whether disclosure to any third
parties will be acceptable.
206 With respect to the SMHC receivables, Ernst & Young
reached a rather ambivalent conclusion: “We have seen nothing
inconsistent in the materials made available to date with the
view that the outstanding balance of the receivable in the hands
of Santa Monica could be as high as the amount reflected on the
contribution agreement”.
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