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LAW REPORT
A Newsletter of the Tax & Corporate Practice Group SUMMER 2007

Editor’s Note… Small Business and Work Opportunity

Our firm contin-
ues to expand and
Tax Act of 2007
enhance its corpo- BY ELAINE J. PETRUZZIELLO
rate, commercial
and securities law The Small Business and Work Opportunity Tax Act of 2007 (the
capabilities with the “Act”) was enacted on May 25, 2007 in conjunction with legislation to
lateral addition of continue funding the war in Iraq and to raise the minimum hourly
Fred Ruttenberg as wage. The tax provisions are generally designed to provide benefits to
small businesses that may be burdened due to the increase in the
Richard J. Flaster a shareholder and
minimum wage. The most material provisions are summarized below.
member of our
Corporate Practice Group. Expansion of Kiddie Tax on Unearned Income of Child. For
tax years beginning in and after 2008, the unearned income of children
This issue of the Tax & Business in excess of an established threshold ($1,700 for 2008) is taxed to the
Report offers a broad spectrum of children at the rate that would apply if the income were included in the parents’ return or
articles—covering tax and commercial the child’s rate, if higher. The Act expands the rules to apply to children age 18 on
topics ranging from a summary of the December 31st, and to children over 18 but under age 24 on December 31st if full-time
newly-enacted federal tax law and new students, and if the child’s earned income does not exceed one-half of the amount of the
procedures for tax offers in compro- child’s support, which is defined the same as for determining dependency deduction
Office Locations mise to insights into a new asset
protection technique and the impact
requirements, but excluding academic scholarships. Section 1(g)(2).
Business Tax Credits Offset of AMT. For tax years beginning after December 31,
of an accountant’s violation of his 2006, business tax credits generally cannot exceed the taxpayer’s income tax liability, but
1810 Chapel Avenue West 190 South Main Road non-solicitation covenant.
Cherry Hill, NJ 08002-4609 Vineland, NJ 08360 excess credits can be carried back one, and forward 20, years. Although most business
If you provide us with your e-mail credits could not offset the taxpayer’s alternative minimum tax (“AMT”) under prior law,
Tel 856-661-1900 Tel 856-691-6200
MORRISTOWN address and the e-mail addresses of the Act provides that for years after 2006, the individual and corporate AMT limitations do
Fax 856-661-1919 Fax 856-696-8150
colleagues who would be interested in not apply, and the Work Opportunity Credit and the FICA tip credit (the employer’s credit
receiving this Report, we would be for FICA tax paid on employee tip income) are permitted to offset the taxpayer’s AMT
2900 Fire Road, Suite 102A 8 Penn Center
liability and be carried back. Employers are also now eligible for the full FICA tip credit
Egg Harbor Twp., NJ 08234 1628 JFK Boulevard PA pleased to include that information in
despite the increase in the minimum wage. Sections 38(c)(4)(B), 45B and 51(c) and (d).
Tel 609-645-1881 Philadelphia, PA 19103 the data bank for this Report. Please
Fax 609-645-9932 Tel 215-279-9393 send that information to me at Work Opportunity Tax Credit. The Work Opportunity Credit is a 40 percent tax
rick.flaster@flastergreenberg.com. credit, now available through August 31, 2011, for the first $6,000 of wages paid by
Fax 215-279-9394
89 Headquarters Plaza North
TRENTON business to employees from targeted groups of qualifying individuals. The Act expands the
14th Floor, Suite 1472
qualifying list to include any individual who is a veteran entitled to compensation for a service-
Morristown, NJ 07960
Tel 973-605-1799
913 North Market Street
Suite 1001 PHILADELPHIA NJ In This Issue. . . connected disability and hired by the employer within one year of being discharged or
released from active duty and who has been unemployed for at least six months during the
Wilmington, DE 19801 year preceding the date of hire. For these veterans, the amount of first year wages eligible
Fax 973-605-1344 Tel 302-351-1910 New 2007 Federal Tax Law ..........1 for the credit is increased from $6,000 to $12,000. The Act also expands the coverage by
CHERRY HILL
Fax 302-351-1919 Alert: IRS Defers New Tax Act changing the “high-risk youth” category to “designated community residents,” to include
200 American Metro Blvd. Change for Return Preparers ....3 individuals age 18 but not yet age 40 on the hiring date and individuals in rural counties
VINELAND
Suite 126 that have suffered significant population losses in the five year periods from 1990 to 1994
Trenton, NJ 08619 Swiss Annuities for Asset and from 1995 to 1999. Section 51.
Tel 609-858-5900 Protection ..................................3
DE EGG HARBOR TOWNSHIP Increase in Section 179 Depreciation Expense. A taxpayer (other than an estate,
Fax 609-858-5919 New IRS Procedures for Offers trust and certain non-corporate lessors) may elect under Section 179 to currently deduct (as
in Compromise ..........................4 an expense, rather than depreciate over time), up to a specified amount of the cost of new
or used tangible personal property placed in service in the taxpayer’s trade or business
Accountant’s Breach of during the tax year. The Act increases the expense limit to $125,000 effective for years
Non-Solicitation Covenant ........5
(continued on page 2)

Copyright © 2007 Tax & Business Law Report • Flaster/Greenberg P.C.

 2 3
Small Business and Work Opportunity Tax Act of 2007
CONTINUED FROM PAGE 1
beginning after 2006 and extends the election through 2010. The
expense deduction begins to phase out, dollar for dollar, if more than
$500,000 of eligible property is placed in service during the year.
Simplification of Family Business Taxation. Under prior
law, a married couple conducting an unincorporated business was
subject to penalties for failing to file as a partnership. Under the
Act, effective for tax years beginning after December 31, 2006,
spouses who file a joint return and make the appropriate election
will not have to treat their unincorporated business as a partnership
for tax purposes. Instead, all items of income, gain, loss, deduction
and credit will be divided between the spouses according to their
respective interests in the business, and each spouse’s respective
share of these items will be taken into account as if attributable to a
trade or business conducted by the spouse as a sole proprietor. To
qualify for this election, the spouses must be the only owners, and
they must both materially participate in the business. Further, the
self-employment tax rules have been amended to provide that each
spouse’s share of income or loss from the business is taken into
account in determining the spouse’s net earnings from self-employ-
ment and for purposes of the Social Security benefit rules. Thus,
both spouses receive credit for paying Social Security and Medicare
taxes. Sections 761(f) and 1402 (a)(17).
Qualified Subchapter S Subsidiary. An S corporation can
have a 100 percent owned qualified Subchapter S Subsidiary (a
“QSub”) that is treated as part of the S corporation rather than as
a separate entity. Under prior law, an S corporation was required to
recognize 100 percent of the gain inherent in the QSub’s assets if it
sold more than 20 percent of the stock of the QSub. Under the Act,
for tax years beginning after December 31, 2006, the S corporation
is only required to recognize gain proportionate to the percentage
of stock sold. Section 1362(b)(3)(C).
S Corporation Capital Gain. An S corporation with earnings
and profits from C corporation years is subject to a corporate level
tax, and the S election will terminate if more than 25 percent of its
gross receipts is passive investment income. Under prior law, passive
investment income was defined to include gross receipts derived
from sales or exchanges of stock or securities. However, for tax years
beginning after May 25, 2007, the Act eliminates gains on sales of
Tax & Business Law Report • Flaster/Greenberg P.C.
stock and securities from the definition of passive investment
income and provides that only gains (as distinct from gross receipts)
on the sale or exchange of stock or securities are taken into account.
Section 1362(d)(3).
S Corporation Accumulated Earnings and Profits. Under
certain circumstances, the distributions of an S corporation’s
accumulated earnings and profits is treated as a taxable dividend. An
S corporation may have accumulated earnings and profits arising
from when it was a C corporation or from pre-1983 S corporation
years when the law provided that income earned by an S corporation
gave rise to earnings and profits. The S corporation may also have
accumulated earnings and profits if it was not an S corporation for
its first tax year beginning after December 31, 1996, because pre-1983
earnings and profits were eliminated from accumulated earnings
and profits for any corporation that was an S corporation prior to
1983, but only if also an S corporation in its first taxable year
beginning after December 31, 1996. However, no policy reason
existed for making relief from pre-1983 S corporation earnings and
profits dependant on whether the corporation continues to be an S
corporation after 1996. Accordingly, for tax years beginning after
May 25, 2007, the Act eliminates from accumulated earnings and
profits pre-1983 earnings and profits arising during S corporation
years regardless of whether the corporation was an S corporation in
its first taxable year beginning after December 31, 1996. Thus,
where an S corporation with pre-1983 earnings and profits now
makes a distribution in excess of its accumulated adjustment
account, any portion of the excess that would have previously been
treated as a dividend (when pre-1983 earnings and profits were
included in accumulated earnings and profits) will be treated as a
return of shareholder basis. Section 8235.
Restricted Bank Director Stock. An S corporation can have
no more than 100 shareholders and only one class of stock. To
comply with national or state banking laws, bank directors often
own stock in a bank. The director and the bank also routinely agree
that the bank will purchase the stock at the price paid by the director,
when the director leaves office (“restricted bank director stock”).
For tax years beginning after December 31, 2006, the Act clarifies
that the stock will not be taken into account as outstanding stock in
applying the S corporation rules and for purposes of determining
whether the S corporation holds 100 percent of the stock of a
QSub. This stock will also be disregarded in allocating items of
income and loss and other items among the shareholders. Sections
1361(f) and 1368(f).
ESBT Interest Expense Deduction Incurred to Acquire S
Corporation Stock. Under prior law, the only deductions permitted
against an ESBT’s income were administrative expenses. For tax years
beginning after December 31, 2006, the Act permits an electing
ESBT to claim an income tax deduction for any interest incurred in
the purchase S corporation stock. Section 642(c)(2).
Jeopardy Levies and State Refund Collection. The IRS
must notify taxpayers in writing of their right to a due process
hearing prior to an IRS levy. Although the IRS’ notice of intent to
levy usually accompanies this notification, the IRS is not required to
send the pre-levy notice if it determines that the ability to collect the
tax is in jeopardy, or before levying on a taxpayer’s State income tax
refund, but the taxpayer is entitled to a post-levy due process
(continued on page 6)
Alert: IRS Defers New
Tax Act Change for Return
Preparers
BY RICHARD J. FLASTER
The new tax law (described above)
imposed new penalties on tax return preparers
for returns prepared after May 25, 2007.
Under those new rules, preparers of
essentially all types of returns could no
longer safely take undisclosed positions which
they determine to have a “realistic probability”
of being sustained and would now be subject
to material penalties if the positions taken do
not meet the new higher standard of being “more likely than
not” to be sustained. Further, for disclosed positions, the new
law now replaces the requirement that such positions not be
frivolous with the higher standard that there be a reasonable
basis for the positions taken. Sections 6694(a), (b). As might be
expected, these new requirements have sent shivers down the
backs of return preparers, who would now be confronted with
the choice of either refusing to reflect tax positions which do not
meet these high standards or being subjected to the risk of newly
increased penalties. However, in response to the uproar
following this new enactment, the IRS has now partially backed
off from this position and offered some respite.
• In IRS Notice 2007-54 (issued on June 12, 2007), the IRS has
announced that effective May 25, 2007 (the effective date of the
new tax act,), transitional relief will apply to reporting positions
governed by Section 6694(a) for returns, amended returns and
refund claims due on or before December 31, 2007, estimated
returns due by January 15, 2008, and 2007 employment or
excise tax returns due before January 31, 2008. For income tax
positions which are disclosed (e.g., with disclosure made on Form
8275 or 8275-R and attached to the return), the transitional
relief will allow the old rules to apply. For all other types of tax
returns and claims for refund, the “reasonable basis standard” of
the current Regulations will continue to apply in determining
whether a Section 6694(a) penalty will apply. However, no relief
from the new rules is accorded for preparers who exhibit willful
or reckless conduct in their reporting positions and are subject
to Section 6694(b). ◆
Swiss Annuities Useful for
Asset Protection
BY MICHAEL P. SPIRO
As American society becomes more and
more litigious, many individuals are seeking to
arrange their affairs in a manner that will
ensure that their assets are safe from the reach
of creditors. Asset protection planning has
commonly entailed the use of family limited
partnerships or limited liability companies, as
well as domestic and offshore asset protection
trusts. However, a new type of asset protection
vehicle that is becoming increasingly popular is the Swiss annuity.
Swiss annuities are simply annuities issued by a Swiss insurance
company. Like American annuities, these products come in a wide
variety of forms—eg., fixed annuities, (which pay a set dollar
amount per year to the beneficiary either for life or for a fixed term),
variable annuities (whose payout
is determined based on the
performance of underlying assets),
and numerous specially tailored
variations of these products.
While the form of Swiss annuity
will have United States tax and
investment implications, the
Swiss creditor protection laws
apply to a creditor’s ability to
reach any annuity issued by a
Swiss insurance company.
Asset Protection. Annuities issued by a Swiss insurance
company are considered “life insurance policies” which receive
the following protections against debt collection procedures.
Under Swiss law:
• A creditor would have to bring an action in Switzerland to
attach the annuity.
• If the beneficiary of the annuity is the owner’s spouse or descen-
dants, the anti-duress provisions of Swiss law prevent a creditor
from forcing the owner to change the beneficiary designation to
the creditor or liquidate the annuity.
• If the beneficiary of the annuity is the owner’s spouse or descen-
dants and the owner becomes a debtor in bankruptcy, ownership
of the annuity will automatically shift to the beneficiary by
operation of Swiss law.
• If the beneficiary designation is irrevocable, the owner’s trust
can be designated as the beneficiary, and no one can force a
change of beneficiary.
Cost. Swiss Annuities are also attractive because they are far
less expensive and less complex than establishing either offshore
or domestic trusts, in that the only applicable cost is the
purchase commission. Moreover, U.S. courts are likely to look
more favorably upon annuities (which are familiar investment
products) than on self-created trusts, whose primary purpose is
to thwart creditors.
Income Tax. Generally, if a U.S. citizen purchases a U.S.
annuity, the investment income build-up can be used to defer
(continued on page 4)
www.flastergreenberg.com
 2 3
Small Business and Work Opportunity Tax Act of 2007
CONTINUED FROM PAGE 1
beginning after 2006 and extends the election through 2010. The
expense deduction begins to phase out, dollar for dollar, if more than
$500,000 of eligible property is placed in service during the year.
Simplification of Family Business Taxation. Under prior
law, a married couple conducting an unincorporated business was
subject to penalties for failing to file as a partnership. Under the
Act, effective for tax years beginning after December 31, 2006,
spouses who file a joint return and make the appropriate election
will not have to treat their unincorporated business as a partnership
for tax purposes. Instead, all items of income, gain, loss, deduction
and credit will be divided between the spouses according to their
respective interests in the business, and each spouse’s respective
share of these items will be taken into account as if attributable to a
trade or business conducted by the spouse as a sole proprietor. To
qualify for this election, the spouses must be the only owners, and
they must both materially participate in the business. Further, the
self-employment tax rules have been amended to provide that each
spouse’s share of income or loss from the business is taken into
account in determining the spouse’s net earnings from self-employ-
ment and for purposes of the Social Security benefit rules. Thus,
both spouses receive credit for paying Social Security and Medicare
taxes. Sections 761(f) and 1402 (a)(17).
Qualified Subchapter S Subsidiary. An S corporation can
have a 100 percent owned qualified Subchapter S Subsidiary (a
“QSub”) that is treated as part of the S corporation rather than as
a separate entity. Under prior law, an S corporation was required to
recognize 100 percent of the gain inherent in the QSub’s assets if it
sold more than 20 percent of the stock of the QSub. Under the Act,
for tax years beginning after December 31, 2006, the S corporation
is only required to recognize gain proportionate to the percentage
of stock sold. Section 1362(b)(3)(C).
S Corporation Capital Gain. An S corporation with earnings
and profits from C corporation years is subject to a corporate level
tax, and the S election will terminate if more than 25 percent of its
gross receipts is passive investment income. Under prior law, passive
investment income was defined to include gross receipts derived
from sales or exchanges of stock or securities. However, for tax years
beginning after May 25, 2007, the Act eliminates gains on sales of
Tax & Business Law Report • Flaster/Greenberg P.C.
stock and securities from the definition of passive investment
income and provides that only gains (as distinct from gross receipts)
on the sale or exchange of stock or securities are taken into account.
Section 1362(d)(3).
S Corporation Accumulated Earnings and Profits. Under
certain circumstances, the distributions of an S corporation’s
accumulated earnings and profits is treated as a taxable dividend. An
S corporation may have accumulated earnings and profits arising
from when it was a C corporation or from pre-1983 S corporation
years when the law provided that income earned by an S corporation
gave rise to earnings and profits. The S corporation may also have
accumulated earnings and profits if it was not an S corporation for
its first tax year beginning after December 31, 1996, because pre-1983
earnings and profits were eliminated from accumulated earnings
and profits for any corporation that was an S corporation prior to
1983, but only if also an S corporation in its first taxable year
beginning after December 31, 1996. However, no policy reason
existed for making relief from pre-1983 S corporation earnings and
profits dependant on whether the corporation continues to be an S
corporation after 1996. Accordingly, for tax years beginning after
May 25, 2007, the Act eliminates from accumulated earnings and
profits pre-1983 earnings and profits arising during S corporation
years regardless of whether the corporation was an S corporation in
its first taxable year beginning after December 31, 1996. Thus,
where an S corporation with pre-1983 earnings and profits now
makes a distribution in excess of its accumulated adjustment
account, any portion of the excess that would have previously been
treated as a dividend (when pre-1983 earnings and profits were
included in accumulated earnings and profits) will be treated as a
return of shareholder basis. Section 8235.
Restricted Bank Director Stock. An S corporation can have
no more than 100 shareholders and only one class of stock. To
comply with national or state banking laws, bank directors often
own stock in a bank. The director and the bank also routinely agree
that the bank will purchase the stock at the price paid by the director,
when the director leaves office (“restricted bank director stock”).
For tax years beginning after December 31, 2006, the Act clarifies
that the stock will not be taken into account as outstanding stock in
applying the S corporation rules and for purposes of determining
whether the S corporation holds 100 percent of the stock of a
QSub. This stock will also be disregarded in allocating items of
income and loss and other items among the shareholders. Sections
1361(f) and 1368(f).
ESBT Interest Expense Deduction Incurred to Acquire S
Corporation Stock. Under prior law, the only deductions permitted
against an ESBT’s income were administrative expenses. For tax years
beginning after December 31, 2006, the Act permits an electing
ESBT to claim an income tax deduction for any interest incurred in
the purchase S corporation stock. Section 642(c)(2).
Jeopardy Levies and State Refund Collection. The IRS
must notify taxpayers in writing of their right to a due process
hearing prior to an IRS levy. Although the IRS’ notice of intent to
levy usually accompanies this notification, the IRS is not required to
send the pre-levy notice if it determines that the ability to collect the
tax is in jeopardy, or before levying on a taxpayer’s State income tax
refund, but the taxpayer is entitled to a post-levy due process
(continued on page 6)
Alert: IRS Defers New
Tax Act Change for Return
Preparers
BY RICHARD J. FLASTER
The new tax law (described above)
imposed new penalties on tax return preparers
for returns prepared after May 25, 2007.
Under those new rules, preparers of
essentially all types of returns could no
longer safely take undisclosed positions which
they determine to have a “realistic probability”
of being sustained and would now be subject
to material penalties if the positions taken do
not meet the new higher standard of being “more likely than
not” to be sustained. Further, for disclosed positions, the new
law now replaces the requirement that such positions not be
frivolous with the higher standard that there be a reasonable
basis for the positions taken. Sections 6694(a), (b). As might be
expected, these new requirements have sent shivers down the
backs of return preparers, who would now be confronted with
the choice of either refusing to reflect tax positions which do not
meet these high standards or being subjected to the risk of newly
increased penalties. However, in response to the uproar
following this new enactment, the IRS has now partially backed
off from this position and offered some respite.
• In IRS Notice 2007-54 (issued on June 12, 2007), the IRS has
announced that effective May 25, 2007 (the effective date of the
new tax act,), transitional relief will apply to reporting positions
governed by Section 6694(a) for returns, amended returns and
refund claims due on or before December 31, 2007, estimated
returns due by January 15, 2008, and 2007 employment or
excise tax returns due before January 31, 2008. For income tax
positions which are disclosed (e.g., with disclosure made on Form
8275 or 8275-R and attached to the return), the transitional
relief will allow the old rules to apply. For all other types of tax
returns and claims for refund, the “reasonable basis standard” of
the current Regulations will continue to apply in determining
whether a Section 6694(a) penalty will apply. However, no relief
from the new rules is accorded for preparers who exhibit willful
or reckless conduct in their reporting positions and are subject
to Section 6694(b). ◆
Swiss Annuities Useful for
Asset Protection
BY MICHAEL P. SPIRO
As American society becomes more and
more litigious, many individuals are seeking to
arrange their affairs in a manner that will
ensure that their assets are safe from the reach
of creditors. Asset protection planning has
commonly entailed the use of family limited
partnerships or limited liability companies, as
well as domestic and offshore asset protection
trusts. However, a new type of asset protection
vehicle that is becoming increasingly popular is the Swiss annuity.
Swiss annuities are simply annuities issued by a Swiss insurance
company. Like American annuities, these products come in a wide
variety of forms—eg., fixed annuities, (which pay a set dollar
amount per year to the beneficiary either for life or for a fixed term),
variable annuities (whose payout
is determined based on the
performance of underlying assets),
and numerous specially tailored
variations of these products.
While the form of Swiss annuity
will have United States tax and
investment implications, the
Swiss creditor protection laws
apply to a creditor’s ability to
reach any annuity issued by a
Swiss insurance company.
Asset Protection. Annuities issued by a Swiss insurance
company are considered “life insurance policies” which receive
the following protections against debt collection procedures.
Under Swiss law:
• A creditor would have to bring an action in Switzerland to
attach the annuity.
• If the beneficiary of the annuity is the owner’s spouse or descen-
dants, the anti-duress provisions of Swiss law prevent a creditor
from forcing the owner to change the beneficiary designation to
the creditor or liquidate the annuity.
• If the beneficiary of the annuity is the owner’s spouse or descen-
dants and the owner becomes a debtor in bankruptcy, ownership
of the annuity will automatically shift to the beneficiary by
operation of Swiss law.
• If the beneficiary designation is irrevocable, the owner’s trust
can be designated as the beneficiary, and no one can force a
change of beneficiary.
Cost. Swiss Annuities are also attractive because they are far
less expensive and less complex than establishing either offshore
or domestic trusts, in that the only applicable cost is the
purchase commission. Moreover, U.S. courts are likely to look
more favorably upon annuities (which are familiar investment
products) than on self-created trusts, whose primary purpose is
to thwart creditors.
Income Tax. Generally, if a U.S. citizen purchases a U.S.
annuity, the investment income build-up can be used to defer
(continued on page 4)
www.flastergreenberg.com
 4 5
New IRS Procedures for Offers in Compromise
BY ALAN H. ZUCKERMAN
The IRS can grant an Offer in Compromise
on the basis of (i) doubt as to collectibility, (ii)
doubt as to liability, or (iii) effective tax admin-
istration. Doubt as to collectibility refers to
doubt that the taxpayer can pay the full amount
of the tax liability within the remaining statuto-
ry period for collection. Doubt as to liability
refers to doubt that the taxpayer actually owes
the tax. Effective tax administration refers to
the existence of exceptional circumstance that would prompt the
IRS to consider such an offer but the taxpayer must demonstrate
that the collection of the tax would create an economic hardship or
would be unfair and inequitable.
Over the past 12 months, there have been two major revisions to
the IRS Offer in Compromise Program. When submitting an Offer
in Compromise, the taxpayer must now pay a $150 application fee
(or file a request for waiver of the fee in the case of low-income tax-
payers). In addition, and even more importantly, in the event of a
lump sum offer, the taxpayer must now pay at least 20 percent of the
amount offered and, in the case of a periodic payment offer, submit
the first monthly payment and the monthly payments must contin-
ue while the IRS is processing the offer. All of the above payments
are generally non-refundable even if the offer is not accepted.
An Offer in Compromise may be submitted based on three pay-
ment scenarios: a lump sum payment (which under the new rules
means a payment that will be made within five or fewer monthly
Swiss Annuities Useful for Asset Protection
CONTINUED FROM PAGE 3
income tax until the annuity
pay date. For example, if a per-
son purchases an annuity that
will pay a fixed return of
$50,000 per year, beginning
in 10 years, the contract
will not be subject to
income tax until pay-
ments begin, even
though the annuity
purchase price is
calculated assum-
ing that the original
investment will grow.
However, the federal tax law
does not extend this treatment
to foreign fixed annuities. In contrast, a fixed Swiss
Annuity will be taxed currently on its growth, even
though no money is paid out.
Observation. A variable Swiss annuity is not subject to
the “original issue discount” rules because of its lack of a
fixed return.
Tax & Business Law Report • Flaster/Greenberg P.C.
installments), a short-term offer (which means a payment made
over 24 months), or a deferred payment offer (which means pay-
ments will be made over the remaining term of the collection
statute of limitations). If the taxpayer is already on an installment
agreement and intends to submit an Offer in Compromise, the tax-
payer must continue to make the installment payments if the tax-
payer makes a lump sum offer, but if the taxpayer makes a periodic
payment offer, the taxpayer is not required to continue to make the
monthly installment payments under an installment agreement.
Observation. In many cases, an Offer in Compromise is made
because the taxpayer has illiquid assets and intends to either sell assets
or obtain financing to pay the Offer in Compromise but does not
have cash to do so. The new IRS requirement for payments upon
submission will impede the ability of many taxpayers to make an Offer
in Compromise. ◆
Fraudulent Transfers. Notwithstanding the foregoing, the
protections of a Swiss annuity will not be available if the
purchase of the annuity is a fraudulent transfer under Swiss
law—such as where:
• The contract was purchased within one year of bankruptcy or
the commencement of an action leading to bankruptcy;
• The purchase of the contract rendered the owner insolvent; or
• The contract was purchased with the intent to defraud creditors.
Currency. It should also be noted that while Swiss annuities
are available in all currencies, most annuities are issued in Swiss
Francs. Although the Swiss Franc has historically been very
stable, it does insinuate the potential currency fluctuations
factors into the investment decision. ◆
This report is for general use and information, and the
content should not be interpreted as rendering legal advice
on any matter. Specific situations may raise additional or
different issues and such information should be coordinated
with professional legal advice.
Damages for Accountant’s Breach of Non-Solicitation Covenant
BY MICHAEL D. HOMANS
The New Jersey Supreme Court recently At trial, 26 different clients testified about their decisions to leave
limited the damages for the breach of an Buyer and go to work for Lane—indicating that they had developed
accountant’s covenant not to solicit the clients a personal relationship with Lane, considered him to be their
of his former employer, awarding a decision accountant, and that they were dissatisfied with Buyer’s services and
that reinforces the difficulty of proving would not have remained clients of Buyer after learning of Lane’s
damages in such circumstances. Totaro, Duffy, departure. Some admitted that Lane’s solicitation letter prompted
Cannova and Company, LLC v. Lane, their move, while others did not recall receiving the letter.
Middleton & Company, LLC. Lane’s defense was essentially that the clients were longtime
The case highlights the limitations on non- personal clients who would not have remained with Buyer
solicitation covenants when dealing with a professional services irrespective of his solicitation and, therefore, that Buyer could not
employee or partner, who may be able to take business with him— prove any damages from his breach.
whether he solicits it or not. It also provides lessons for other
The trial court did not closely examine the causation issue but
professional service firms on restrictive covenants and litigation: rejected Lane’s claim that his breach had not damaged the Buyer
• the continued willingness of New Jersey courts to enforce and determined that Buyer had lost its compliance accounting busi-
restrictive covenants against accountants and other professionals; ness during the first year after Lane’s departure. It then applied an
“attrition rate” of 35-40 percent (which the evidence indicated to
• the benefits of using general non-competition (as opposed to
be the accounting industry standard) and then applied a 53 percent
non-solicitation) agreements;
profit rate (which the evidence indicated to be Buyer’s historical net
• the costs and length of litigation; and
profits percentage), and concluded that this produced the damages
• the need to move promptly to restrain and enjoin a breach of a award for Buyer’s lost profit for the first year following Lane’s
restrictive covenant when it occurs. departure. The court then multiplied that award by the three years
remaining on the agreement, for a total damage award and added
The facts—accountant leaves and solicits clients pre-judgment interest.
In 1997, defendant Lane formed a new accounting firm, but the On appeal, the sole issue was whether Lane’s mailing was a
new firm (known as Lane, Middleton & Co., LLC) was owned proximate cause of damage to the Buyer. The court held that
entirely by Middleton. because this was a breach of contract claim, the defendant was
In 2000, Middleton decided to sell the firm Totaro, Duffy,
Cannova and Company, LLC. As part of the sale, Buyer required (continued on page 6)
that Lane enter into an agreement and a restrictive covenant,
limiting his right to compete. In particular, the agreement
provided that Lane would not solicit opportunities to provide
compliance accounting services to any of the Lane Middleton
clients that were sold to Buyer and, in exchange, would provide
Lane with free office space for a year and a payment of $112,500
(which represented the final payment due as part of his original
agreement to work with Middleton).
After the sale, Buyer began to perform accounting services that
included compliance accounting services for all of the purchased
clients. Although Lane worked with the Buyer for three months, he
then notified the Buyer that he was terminating (viz., claiming the
office space provided to him was inadequate and that the practice
was poorly managed).
Prior to departing, Lane obtained a list of the clients from the
Buyer’s computer and, using the list, he then sent a solicitation
letter to the clients he had worked for while associated with the
Buyer—announcing the opening of his own office, a fee schedule,
and a form of disengagement letter for the clients to send to Buyer.
In response, many of Buyer’s clients discontinued the relationship
with Buyer and moved their work to Lane’s new firm.
The legal battle—it’s all about the damages
Given these facts, Lane did not dispute that he had violated his
covenant not to solicit. Rather, the claim boiled down to
damages—that is, what amount of losses, if any, Lane’s solicitation
caused Buyer. And this proved a difficult and litigious challenge.
www.flastergreenberg.com
 4 5
New IRS Procedures for Offers in Compromise
BY ALAN H. ZUCKERMAN
The IRS can grant an Offer in Compromise
on the basis of (i) doubt as to collectibility, (ii)
doubt as to liability, or (iii) effective tax admin-
istration. Doubt as to collectibility refers to
doubt that the taxpayer can pay the full amount
of the tax liability within the remaining statuto-
ry period for collection. Doubt as to liability
refers to doubt that the taxpayer actually owes
the tax. Effective tax administration refers to
the existence of exceptional circumstance that would prompt the
IRS to consider such an offer but the taxpayer must demonstrate
that the collection of the tax would create an economic hardship or
would be unfair and inequitable.
Over the past 12 months, there have been two major revisions to
the IRS Offer in Compromise Program. When submitting an Offer
in Compromise, the taxpayer must now pay a $150 application fee
(or file a request for waiver of the fee in the case of low-income tax-
payers). In addition, and even more importantly, in the event of a
lump sum offer, the taxpayer must now pay at least 20 percent of the
amount offered and, in the case of a periodic payment offer, submit
the first monthly payment and the monthly payments must contin-
ue while the IRS is processing the offer. All of the above payments
are generally non-refundable even if the offer is not accepted.
An Offer in Compromise may be submitted based on three pay-
ment scenarios: a lump sum payment (which under the new rules
means a payment that will be made within five or fewer monthly
Swiss Annuities Useful for Asset Protection
CONTINUED FROM PAGE 3
income tax until the annuity
pay date. For example, if a per-
son purchases an annuity that
will pay a fixed return of
$50,000 per year, beginning
in 10 years, the contract
will not be subject to
income tax until pay-
ments begin, even
though the annuity
purchase price is
calculated assum-
ing that the original
investment will grow.
However, the federal tax law
does not extend this treatment
to foreign fixed annuities. In contrast, a fixed Swiss
Annuity will be taxed currently on its growth, even
though no money is paid out.
Observation. A variable Swiss annuity is not subject to
the “original issue discount” rules because of its lack of a
fixed return.
Tax & Business Law Report • Flaster/Greenberg P.C.
installments), a short-term offer (which means a payment made
over 24 months), or a deferred payment offer (which means pay-
ments will be made over the remaining term of the collection
statute of limitations). If the taxpayer is already on an installment
agreement and intends to submit an Offer in Compromise, the tax-
payer must continue to make the installment payments if the tax-
payer makes a lump sum offer, but if the taxpayer makes a periodic
payment offer, the taxpayer is not required to continue to make the
monthly installment payments under an installment agreement.
Observation. In many cases, an Offer in Compromise is made
because the taxpayer has illiquid assets and intends to either sell assets
or obtain financing to pay the Offer in Compromise but does not
have cash to do so. The new IRS requirement for payments upon
submission will impede the ability of many taxpayers to make an Offer
in Compromise. ◆
Fraudulent Transfers. Notwithstanding the foregoing, the
protections of a Swiss annuity will not be available if the
purchase of the annuity is a fraudulent transfer under Swiss
law—such as where:
• The contract was purchased within one year of bankruptcy or
the commencement of an action leading to bankruptcy;
• The purchase of the contract rendered the owner insolvent; or
• The contract was purchased with the intent to defraud creditors.
Currency. It should also be noted that while Swiss annuities
are available in all currencies, most annuities are issued in Swiss
Francs. Although the Swiss Franc has historically been very
stable, it does insinuate the potential currency fluctuations
factors into the investment decision. ◆
This report is for general use and information, and the
content should not be interpreted as rendering legal advice
on any matter. Specific situations may raise additional or
different issues and such information should be coordinated
with professional legal advice.
Damages for Accountant’s Breach of Non-Solicitation Covenant
BY MICHAEL D. HOMANS
The New Jersey Supreme Court recently At trial, 26 different clients testified about their decisions to leave
limited the damages for the breach of an Buyer and go to work for Lane—indicating that they had developed
accountant’s covenant not to solicit the clients a personal relationship with Lane, considered him to be their
of his former employer, awarding a decision accountant, and that they were dissatisfied with Buyer’s services and
that reinforces the difficulty of proving would not have remained clients of Buyer after learning of Lane’s
damages in such circumstances. Totaro, Duffy, departure. Some admitted that Lane’s solicitation letter prompted
Cannova and Company, LLC v. Lane, their move, while others did not recall receiving the letter.
Middleton & Company, LLC. Lane’s defense was essentially that the clients were longtime
The case highlights the limitations on non- personal clients who would not have remained with Buyer
solicitation covenants when dealing with a professional services irrespective of his solicitation and, therefore, that Buyer could not
employee or partner, who may be able to take business with him— prove any damages from his breach.
whether he solicits it or not. It also provides lessons for other
The trial court did not closely examine the causation issue but
professional service firms on restrictive covenants and litigation: rejected Lane’s claim that his breach had not damaged the Buyer
• the continued willingness of New Jersey courts to enforce and determined that Buyer had lost its compliance accounting busi-
restrictive covenants against accountants and other professionals; ness during the first year after Lane’s departure. It then applied an
“attrition rate” of 35-40 percent (which the evidence indicated to
• the benefits of using general non-competition (as opposed to
be the accounting industry standard) and then applied a 53 percent
non-solicitation) agreements;
profit rate (which the evidence indicated to be Buyer’s historical net
• the costs and length of litigation; and
profits percentage), and concluded that this produced the damages
• the need to move promptly to restrain and enjoin a breach of a award for Buyer’s lost profit for the first year following Lane’s
restrictive covenant when it occurs. departure. The court then multiplied that award by the three years
remaining on the agreement, for a total damage award and added
The facts—accountant leaves and solicits clients pre-judgment interest.
In 1997, defendant Lane formed a new accounting firm, but the On appeal, the sole issue was whether Lane’s mailing was a
new firm (known as Lane, Middleton & Co., LLC) was owned proximate cause of damage to the Buyer. The court held that
entirely by Middleton. because this was a breach of contract claim, the defendant was
In 2000, Middleton decided to sell the firm Totaro, Duffy,
Cannova and Company, LLC. As part of the sale, Buyer required (continued on page 6)
that Lane enter into an agreement and a restrictive covenant,
limiting his right to compete. In particular, the agreement
provided that Lane would not solicit opportunities to provide
compliance accounting services to any of the Lane Middleton
clients that were sold to Buyer and, in exchange, would provide
Lane with free office space for a year and a payment of $112,500
(which represented the final payment due as part of his original
agreement to work with Middleton).
After the sale, Buyer began to perform accounting services that
included compliance accounting services for all of the purchased
clients. Although Lane worked with the Buyer for three months, he
then notified the Buyer that he was terminating (viz., claiming the
office space provided to him was inadequate and that the practice
was poorly managed).
Prior to departing, Lane obtained a list of the clients from the
Buyer’s computer and, using the list, he then sent a solicitation
letter to the clients he had worked for while associated with the
Buyer—announcing the opening of his own office, a fee schedule,
and a form of disengagement letter for the clients to send to Buyer.
In response, many of Buyer’s clients discontinued the relationship
with Buyer and moved their work to Lane’s new firm.
The legal battle—it’s all about the damages
Given these facts, Lane did not dispute that he had violated his
covenant not to solicit. Rather, the claim boiled down to
damages—that is, what amount of losses, if any, Lane’s solicitation
caused Buyer. And this proved a difficult and litigious challenge.
www.flastergreenberg.com
 6 7
Damages for Accountant’s Breach of Non-Solicitation Covenant
CONTINUED FROM PAGE 5
“liable for all of the natural and probable consequences of the
breach of that contract,” and added that although the loss “must be
a reasonably certain consequence of the breach, . . . the exact
amount of the loss need not be certain.”
Despite Lane’s presentation of evidence that most of the clients
would have left the Buyer to join him regardless of his solicitation,
the Supreme Court turned its focus to the timing of when those
clients would have left. Based on the quick responses to Lane’s
prohibited solicitation letter (viz., only two months after he
departed from the Buyer), the Supreme Court concluded that it
was reasonable to conclude that the clients left when they did
because of Lane’s solicitation.
However, while the Supreme Court affirmed the award of the
first year’s loss in profits, it also ruled that the evidence indicated
that the clients would not have stayed with the Buyer for the
duration of the three-year restrictive covenant period and,
therefore, vacated the damage award for that period.
The bottom line result was that after nearly six years of litigation
over Lane’s violation of non-solicitation agreement and acceptance
of more than 150 clients, Buyer only achieved an award of
$21,961.80 for the first year’s losses.
Lessons learned
What lessons can we take from this lengthy litigation? We think
the following are the most important:
• New Jersey courts continue to enforce restrictive covenants
involving accountants and other professional services, especially
when they are related to the sale of a practice. Significantly,
no one challenged the four-year term of the non-solicitation
covenant.
• Damages are difficult to prove in restrictive covenant cases.
Buyer is not celebrating this decision—which awards it
Small Business and Work Opportunity Tax Act of 2007
CONTINUED FROM PAGE 2
hearing. However, effective for levies issued on or after September
22, 2007, the Act amends these rules to provide that the pre-levy
notice and opportunity for hearing do not apply to levies to
collect unpaid employment taxes arising in the prior two years,
but that taxpayers are entitled to a post-levy hearing. Sections
6330(f) and (h).
Abatement of Interest and Penalties. Under prior law, the
IRS had 18 months to provide a notice to the taxpayer of interest
and penalties due for violations on a timely filed return, and if the
notice was not timely provided, the IRS had to suspend the
imposition of interest and penalties. Effective for notices provided
after November 25, 2007, the Act increases the 18 months to 36
months, so now the IRS has additional time to issue the notice.
Section 6404(g).
Bad Checks. Effective for checks or money orders received
after May 25, 2007, the Act increases the minimum penalty for bad
checks of less than $1,250 to the lesser of $25 or the amount of the
bad check. Section 6657.
Tax & Business Law Report • Flaster/Greenberg P.C.
Save the Dates
$21,961.80 in lost profits, despite losing nearly 150 clients that
it thought it had acquired and paid for.
July 17th ◆ October 16th
• Lawsuits are expensive and time-consuming. It took six years
of litigation, including two appeals, for this case to be resolved. 2007 Rutgers Quarterly Business Outlook
In other words, two years after the four-year restrictive covenant
expired, the litigation marched on. No doubt, counsel fees were Free breakfast conference: 7:45 a.m. - 9:30 a.m.
much more than the $21,961 damage award. What to do?
Weigh the costs of litigation (including potential appeals) Clarion Hotel and Conference Center
carefully before launching a lawsuit or rejecting reasonable on Rt. 70 in Cherry Hill
alternatives for a prompt private settlement.
• Restrictive covenants that prohibit providing competitive A distinguished panel of industry leaders will forecast what bodes
services to clients are preferable to those merely limiting for the Southern New Jersey economy each quarter of ’07.
solicitation, to avoid a fate similar to Buyer. If Buyer had
obtained such a non-competition agreement, it could have Moderator: Rutgers University School
obtained a restraining order, enjoining Lane from working for
the clients at issue — regardless of whether or not they came to
of Business-Camden Dean Mitchell Koza
him because of the illicit solicitation. This would have
avoided the lost business and the lengthy litigation on the issue Supported by Flaster/Greenberg P.C. and
of damages. the Chamber of Commerce Southern New Jersey in partnership with
• If you are going to seek injunctive relief, do it as quickly as
the Rutgers University School of Business-Camden
possible. It appears that Buyer did not obtain an injunction
barring further solicitation by Lane until he had already Advance registration is required. To register, contact the Chamber of Commerce Southern New Jersey
obtained most of the clients. This was too little, too late. at (856) 424-7776, register online at www.chambersnj.com/calendar.mv,
Temporary restraining orders (“TROs”) and preliminary or send an email with your name and company to firm@flastergreenberg.com.
injunctions can be obtained in short order—perhaps in a matter
of days or weeks—and if this relief had been sought when the
first client transferred to Lane’s new firm, it might have prevented
further loss of clients and eliminated the need to prove
monetary damages for such losses. ◆
Michael D. Homans, a shareholder, concentrates his practice
in employment and labor law, executive compensation, and TAX & CORPORATE PRACTICE GROUP
complex litigation. He can be reached at 215-279-9379 or
michael.homans@flastergreenberg.com. Richard J. Flaster Alan H. Zuckerman Michael P. Spiro
rick.flaster@flastergreenberg.com alan.zuckerman@flastergreenberg.com michael.spiro@flastergreenberg.com
856-661-2260 856-661-2266 856-382-2203
Stephen M. Greenberg William S. Skinner Mitchell R. Cohen *
steve.greenberg@flastergreenberg.com william.skinner@flastergreenberg.com mitchell.cohen@flastergreenberg.com
856-661-2261 856-661-2262 856-382-2222
Laura B. Wallenstein Elaine J. Petruzziello Jeffrey A. Cohen
Erroneous Refund Claim. Under prior law, no separate laura.wallenstein@flastergreenberg.com elaine.petruzziello@flastergreenberg.com jeff.cohen@flastergreenberg.com
penalty was imposed on the filing of a refund claim that had no basis 856-661-2263 609-858-5921 856-382-2240
in fact or law. Under the Act, effective for claims filed after May 25,
Allen P. Fineberg Marc R. Garber * A. Fred Ruttenberg
2007, a claim for refund or credit (other than a claim relating to the allen.fineberg@flastergreenberg.com marc.garber@flastergreenberg.com fred.ruttenberg@flastergreenberg.com
earned income credit which has its own compliance rules) that has 856-661-2264 856-382-2237 856-382-2257
no reasonable basis in fact or law is subject to a penalty equal to 20
percent of the disallowed portion of the claim. Section 6676. Markley S. Roderick Elliot D. Raff Michele G. Tarantino
mark.roderick@flastergreenberg.com elliot.raff@flastergreenberg.com michele.tarantino@flastergreenberg.com
Return Preparer Penalties. Effective for returns prepared 856-661-2265 856-382-2241 856-661-2274
after May 25, 2007, the Act expands preparer penalties on all types
of tax returns (viz., employment, excise, exempt organization, Peter R. Spirgel Dennis J. Helms * Of Counsel
estate and gift tax), increases the penalty amounts, and redefines the peter.spirgel@flastergreenberg.com dennis.helms@flastergreenberg.com
856-661-2267 856-382-2238
definitions for unreasonable positions taken on a tax return as well
as for the category of willful and reckless tax positions. Sections
6694(a), (b) and 7701(a)(36). PRACTICE AREAS
User Fees. Effective for ruling requests made after May 25, Alternative Dispute Resolution; Business & Corporate Services; Closely-Held and Family Businesses; Commercial Litigation; Commercial Real Estate;
2007, the Act makes the IRS User Fees permanent. Section 7528. ◆ Construction Law; Employee Benefits & Executive Compensation; Employment & Labor Law; Environmental Law; Estate Planning & Administration;
Family Law and Adoption; Financial Restructuring & Bankruptcy ; Health Care ; Intellectual Property; Land Use & Zoning; Mergers & Acquisitions;
Pensions & Retirement Plans; Redevelopment; Risk Management; Securities Regulation; Taxation; Technology and Emerging Businesses
www.flastergreenberg.com
 6 7
Damages for Accountant’s Breach of Non-Solicitation Covenant
CONTINUED FROM PAGE 5
“liable for all of the natural and probable consequences of the
breach of that contract,” and added that although the loss “must be
a reasonably certain consequence of the breach, . . . the exact
amount of the loss need not be certain.”
Despite Lane’s presentation of evidence that most of the clients
would have left the Buyer to join him regardless of his solicitation,
the Supreme Court turned its focus to the timing of when those
clients would have left. Based on the quick responses to Lane’s
prohibited solicitation letter (viz., only two months after he
departed from the Buyer), the Supreme Court concluded that it
was reasonable to conclude that the clients left when they did
because of Lane’s solicitation.
However, while the Supreme Court affirmed the award of the
first year’s loss in profits, it also ruled that the evidence indicated
that the clients would not have stayed with the Buyer for the
duration of the three-year restrictive covenant period and,
therefore, vacated the damage award for that period.
The bottom line result was that after nearly six years of litigation
over Lane’s violation of non-solicitation agreement and acceptance
of more than 150 clients, Buyer only achieved an award of
$21,961.80 for the first year’s losses.
Lessons learned
What lessons can we take from this lengthy litigation? We think
the following are the most important:
• New Jersey courts continue to enforce restrictive covenants
involving accountants and other professional services, especially
when they are related to the sale of a practice. Significantly,
no one challenged the four-year term of the non-solicitation
covenant.
• Damages are difficult to prove in restrictive covenant cases.
Buyer is not celebrating this decision—which awards it
Small Business and Work Opportunity Tax Act of 2007
CONTINUED FROM PAGE 2
hearing. However, effective for levies issued on or after September
22, 2007, the Act amends these rules to provide that the pre-levy
notice and opportunity for hearing do not apply to levies to
collect unpaid employment taxes arising in the prior two years,
but that taxpayers are entitled to a post-levy hearing. Sections
6330(f) and (h).
Abatement of Interest and Penalties. Under prior law, the
IRS had 18 months to provide a notice to the taxpayer of interest
and penalties due for violations on a timely filed return, and if the
notice was not timely provided, the IRS had to suspend the
imposition of interest and penalties. Effective for notices provided
after November 25, 2007, the Act increases the 18 months to 36
months, so now the IRS has additional time to issue the notice.
Section 6404(g).
Bad Checks. Effective for checks or money orders received
after May 25, 2007, the Act increases the minimum penalty for bad
checks of less than $1,250 to the lesser of $25 or the amount of the
bad check. Section 6657.
Tax & Business Law Report • Flaster/Greenberg P.C.
Save the Dates
$21,961.80 in lost profits, despite losing nearly 150 clients that
it thought it had acquired and paid for.
July 17th ◆ October 16th
• Lawsuits are expensive and time-consuming. It took six years
of litigation, including two appeals, for this case to be resolved. 2007 Rutgers Quarterly Business Outlook
In other words, two years after the four-year restrictive covenant
expired, the litigation marched on. No doubt, counsel fees were Free breakfast conference: 7:45 a.m. - 9:30 a.m.
much more than the $21,961 damage award. What to do?
Weigh the costs of litigation (including potential appeals) Clarion Hotel and Conference Center
carefully before launching a lawsuit or rejecting reasonable on Rt. 70 in Cherry Hill
alternatives for a prompt private settlement.
• Restrictive covenants that prohibit providing competitive A distinguished panel of industry leaders will forecast what bodes
services to clients are preferable to those merely limiting for the Southern New Jersey economy each quarter of ’07.
solicitation, to avoid a fate similar to Buyer. If Buyer had
obtained such a non-competition agreement, it could have Moderator: Rutgers University School
obtained a restraining order, enjoining Lane from working for
the clients at issue — regardless of whether or not they came to
of Business-Camden Dean Mitchell Koza
him because of the illicit solicitation. This would have
avoided the lost business and the lengthy litigation on the issue Supported by Flaster/Greenberg P.C. and
of damages. the Chamber of Commerce Southern New Jersey in partnership with
• If you are going to seek injunctive relief, do it as quickly as
the Rutgers University School of Business-Camden
possible. It appears that Buyer did not obtain an injunction
barring further solicitation by Lane until he had already Advance registration is required. To register, contact the Chamber of Commerce Southern New Jersey
obtained most of the clients. This was too little, too late. at (856) 424-7776, register online at www.chambersnj.com/calendar.mv,
Temporary restraining orders (“TROs”) and preliminary or send an email with your name and company to firm@flastergreenberg.com.
injunctions can be obtained in short order—perhaps in a matter
of days or weeks—and if this relief had been sought when the
first client transferred to Lane’s new firm, it might have prevented
further loss of clients and eliminated the need to prove
monetary damages for such losses. ◆
Michael D. Homans, a shareholder, concentrates his practice
in employment and labor law, executive compensation, and TAX & CORPORATE PRACTICE GROUP
complex litigation. He can be reached at 215-279-9379 or
michael.homans@flastergreenberg.com. Richard J. Flaster Alan H. Zuckerman Michael P. Spiro
rick.flaster@flastergreenberg.com alan.zuckerman@flastergreenberg.com michael.spiro@flastergreenberg.com
856-661-2260 856-661-2266 856-382-2203
Stephen M. Greenberg William S. Skinner Mitchell R. Cohen *
steve.greenberg@flastergreenberg.com william.skinner@flastergreenberg.com mitchell.cohen@flastergreenberg.com
856-661-2261 856-661-2262 856-382-2222
Laura B. Wallenstein Elaine J. Petruzziello Jeffrey A. Cohen
Erroneous Refund Claim. Under prior law, no separate laura.wallenstein@flastergreenberg.com elaine.petruzziello@flastergreenberg.com jeff.cohen@flastergreenberg.com
penalty was imposed on the filing of a refund claim that had no basis 856-661-2263 609-858-5921 856-382-2240
in fact or law. Under the Act, effective for claims filed after May 25,
Allen P. Fineberg Marc R. Garber * A. Fred Ruttenberg
2007, a claim for refund or credit (other than a claim relating to the allen.fineberg@flastergreenberg.com marc.garber@flastergreenberg.com fred.ruttenberg@flastergreenberg.com
earned income credit which has its own compliance rules) that has 856-661-2264 856-382-2237 856-382-2257
no reasonable basis in fact or law is subject to a penalty equal to 20
percent of the disallowed portion of the claim. Section 6676. Markley S. Roderick Elliot D. Raff Michele G. Tarantino
mark.roderick@flastergreenberg.com elliot.raff@flastergreenberg.com michele.tarantino@flastergreenberg.com
Return Preparer Penalties. Effective for returns prepared 856-661-2265 856-382-2241 856-661-2274
after May 25, 2007, the Act expands preparer penalties on all types
of tax returns (viz., employment, excise, exempt organization, Peter R. Spirgel Dennis J. Helms * Of Counsel
estate and gift tax), increases the penalty amounts, and redefines the peter.spirgel@flastergreenberg.com dennis.helms@flastergreenberg.com
856-661-2267 856-382-2238
definitions for unreasonable positions taken on a tax return as well
as for the category of willful and reckless tax positions. Sections
6694(a), (b) and 7701(a)(36). PRACTICE AREAS
User Fees. Effective for ruling requests made after May 25, Alternative Dispute Resolution; Business & Corporate Services; Closely-Held and Family Businesses; Commercial Litigation; Commercial Real Estate;
2007, the Act makes the IRS User Fees permanent. Section 7528. ◆ Construction Law; Employee Benefits & Executive Compensation; Employment & Labor Law; Environmental Law; Estate Planning & Administration;
Family Law and Adoption; Financial Restructuring & Bankruptcy ; Health Care ; Intellectual Property; Land Use & Zoning; Mergers & Acquisitions;
Pensions & Retirement Plans; Redevelopment; Risk Management; Securities Regulation; Taxation; Technology and Emerging Businesses
www.flastergreenberg.com
 PRSRT STD
U.S. POSTAGE
PAID
Bellmawr, NJ
TAX &
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Permit No. 64

Return Service Requested

BUSINESS
Cherry Hill, NJ 08002-4609
LAW REPORT
A Newsletter of the Tax & Corporate Practice Group SUMMER 2007

Editor’s Note… Small Business and Work Opportunity

Our firm contin-
ues to expand and
Tax Act of 2007
enhance its corpo- BY ELAINE J. PETRUZZIELLO
rate, commercial
and securities law The Small Business and Work Opportunity Tax Act of 2007 (the
capabilities with the “Act”) was enacted on May 25, 2007 in conjunction with legislation to
lateral addition of continue funding the war in Iraq and to raise the minimum hourly
Fred Ruttenberg as wage. The tax provisions are generally designed to provide benefits to
small businesses that may be burdened due to the increase in the
Richard J. Flaster a shareholder and
minimum wage. The most material provisions are summarized below.
member of our
Corporate Practice Group. Expansion of Kiddie Tax on Unearned Income of Child. For
tax years beginning in and after 2008, the unearned income of children
This issue of the Tax & Business in excess of an established threshold ($1,700 for 2008) is taxed to the
Report offers a broad spectrum of children at the rate that would apply if the income were included in the parents’ return or
articles—covering tax and commercial the child’s rate, if higher. The Act expands the rules to apply to children age 18 on
topics ranging from a summary of the December 31st, and to children over 18 but under age 24 on December 31st if full-time
newly-enacted federal tax law and new students, and if the child’s earned income does not exceed one-half of the amount of the
procedures for tax offers in compro- child’s support, which is defined the same as for determining dependency deduction
Office Locations mise to insights into a new asset
protection technique and the impact
requirements, but excluding academic scholarships. Section 1(g)(2).
Business Tax Credits Offset of AMT. For tax years beginning after December 31,
of an accountant’s violation of his 2006, business tax credits generally cannot exceed the taxpayer’s income tax liability, but
1810 Chapel Avenue West 190 South Main Road non-solicitation covenant.
Cherry Hill, NJ 08002-4609 Vineland, NJ 08360 excess credits can be carried back one, and forward 20, years. Although most business
If you provide us with your e-mail credits could not offset the taxpayer’s alternative minimum tax (“AMT”) under prior law,
Tel 856-661-1900 Tel 856-691-6200
MORRISTOWN address and the e-mail addresses of the Act provides that for years after 2006, the individual and corporate AMT limitations do
Fax 856-661-1919 Fax 856-696-8150
colleagues who would be interested in not apply, and the Work Opportunity Credit and the FICA tip credit (the employer’s credit
receiving this Report, we would be for FICA tax paid on employee tip income) are permitted to offset the taxpayer’s AMT
2900 Fire Road, Suite 102A 8 Penn Center
liability and be carried back. Employers are also now eligible for the full FICA tip credit
Egg Harbor Twp., NJ 08234 1628 JFK Boulevard PA pleased to include that information in
despite the increase in the minimum wage. Sections 38(c)(4)(B), 45B and 51(c) and (d).
Tel 609-645-1881 Philadelphia, PA 19103 the data bank for this Report. Please
Fax 609-645-9932 Tel 215-279-9393 send that information to me at Work Opportunity Tax Credit. The Work Opportunity Credit is a 40 percent tax
rick.flaster@flastergreenberg.com. credit, now available through August 31, 2011, for the first $6,000 of wages paid by
Fax 215-279-9394
89 Headquarters Plaza North
TRENTON business to employees from targeted groups of qualifying individuals. The Act expands the
14th Floor, Suite 1472
qualifying list to include any individual who is a veteran entitled to compensation for a service-
Morristown, NJ 07960
Tel 973-605-1799
913 North Market Street
Suite 1001 PHILADELPHIA NJ In This Issue. . . connected disability and hired by the employer within one year of being discharged or
released from active duty and who has been unemployed for at least six months during the
Wilmington, DE 19801 year preceding the date of hire. For these veterans, the amount of first year wages eligible
Fax 973-605-1344 Tel 302-351-1910 New 2007 Federal Tax Law ..........1 for the credit is increased from $6,000 to $12,000. The Act also expands the coverage by
CHERRY HILL
Fax 302-351-1919 Alert: IRS Defers New Tax Act changing the “high-risk youth” category to “designated community residents,” to include
200 American Metro Blvd. Change for Return Preparers ....3 individuals age 18 but not yet age 40 on the hiring date and individuals in rural counties
VINELAND
Suite 126 that have suffered significant population losses in the five year periods from 1990 to 1994
Trenton, NJ 08619 Swiss Annuities for Asset and from 1995 to 1999. Section 51.
Tel 609-858-5900 Protection ..................................3
DE EGG HARBOR TOWNSHIP Increase in Section 179 Depreciation Expense. A taxpayer (other than an estate,
Fax 609-858-5919 New IRS Procedures for Offers trust and certain non-corporate lessors) may elect under Section 179 to currently deduct (as
in Compromise ..........................4 an expense, rather than depreciate over time), up to a specified amount of the cost of new
or used tangible personal property placed in service in the taxpayer’s trade or business
Accountant’s Breach of during the tax year. The Act increases the expense limit to $125,000 effective for years
Non-Solicitation Covenant ........5
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Copyright © 2007 Tax & Business Law Report • Flaster/Greenberg P.C.