WI NTE R 2008

TAX & BUSINESS

Estate Tax Value Of Closely-Held
Corporation Reduced By
“Full” Latent Capital Gains Tax
by Peter R. Spirgel, Esq.
Background
Prior case decisions by the Tax Court and a few Circuit Courts
had held that a corporation’s tax liability for latent capital gains
should reduce the value of the corporate stock. However, the
cases differed as to whether the full reduction should be allowed
in full or discounted to present value based on a reasonable
Attorneys Practicing in
tax & CORPORATE:
What’s New at Flaster/Greenberg Jeffrey A. Cohen A Newsletter of the Tax and Corporate practice group
jeff.cohen@flastergreenberg.com
• The firm’s position in a highly competitive marketplace for law firms was recently 856-382-2240
elevated when Toll Brothers cited Flaster/Greenberg as a “Go To” law firm for Mitchell R. Cohen * Alternative Dispute Resolution u Automotive u
Litigation in a soon to be released issue of Corporate Counsel magazine. mitchell.cohen@flastergreenberg.com Tax Changes Impact on Charitable Gifting of
• In response to the legal and regulatory compliance issues unique to automotive and
856-382-2222
Business & Corporate Services u Closely-
Held Businesses u Construction Law u E-Commerce S Corporation Assets vs. S Corporation Stock............................................... 2
& Internet u Emerging Business u Employee Benefits
truck dealerships, Flaster/Greenberg has announced the launch of an Automotive
Practice Group. The group taps into the collective experience of 17 attorneys across
Allen P. Fineberg
allen.fineberg@flastergreenberg.com & Executive Compensation u Environmental Law
Problem with Proposed Change to New Jersey
Estate Tax Rules on Out-of-State Property.................................................... 3
856-661-2264 & Litigation u Estate Planning & Administration u
offices in New Jersey and Pennsylvania to help automotive dealers seek advice Richard J. Flaster Family Law & Adoption u Financial Restructuring, Misclassifying Workers as Independent
related to a range of complex business and legal issues. rick.flaster@flastergreenberg.com Bankruptcy & Risk Management u Health Care Contractors Now a Crime in New Jersey....................................................... 4
856-661-2260 u Intellectual Property u Labor & Employment u
• Michele G. Tarantino, a shareholder in the Real Estate Practice Group, has
Marc R. Garber * Litigation u Mergers & Acquisitions u Real Estate Corporation’s Stock Value for Estate Tax
been selected as one of the Top Women in Real Estate by Real Estate New marc.garber@flastergreenberg.com & Land Use u Redevelopment u Securities Law u Reduced by Full Latent Capital Gains Tax..................................................... 5
Jersey. Tarantino was named as one of the rising stars in commercial real estate, 856-382-2237 Taxation u Technology
including development, brokerage and real estate services, property management Kevin Greenberg
Planning Point and law. Recipients were selected based on their biographies and professional kevin.greenberg@flastergreenberg.com
Lifetime transfers of interests in closely-held businesses are 215-279-9912
accomplishments.
frequently employed to shift assets to the next generation Stephen M. Greenberg
within a family and remove future appreciation from the older steve.greenberg@flastergreenberg.com
856-661-2261
generation’s taxable estate (commonly referred to as an “estate
freeze” technique). Increasingly, tax planners are employing the Dennis J. Helms

Save the Date

dennis.helms@flastergreenberg.com
projection of when the tax would actually be incurred. use of intentionally defective grantor trusts or grantor retained 856-382-2238
New Case interest trusts to transfer shares in closely-held businesses to
Elaine J. Petruzziello
the younger generation while allowing the grantor to remain
A recent decision by the 11th Circuit Court of Appeals in
Estate of Jelke v. Comm’r, the Court reversed the U.S. Tax in control of the corporation. Since the rationale of the 11th Rutgers Quarterly Business Outlook elaine.petruzziello@flastergreenberg.com
609-858-5921 www.flastergreenberg.com
Circuit’s decision may not be limited to transfers made at
Court and approved the dollar-for-dollar valuation reduction
death, this decision could also have broad implications for the
April 22, July 15, October 21, 2008 Elliot D. Raff
without any discount for the projected present value of the elliot.raff@flastergreenberg.com
potential tax for the valuation of the stock for estate tax valuation of lifetime transfers of closely-held stock between Breakfast Program 856-382-2241
purposes. related parties. Accordingly, when determining the value of Markley S. Roderick
these transfers, practitioners should now factor in 100 percent of Clarion Hotel, Cherry Hill mark.roderick@flastergreenberg.com
Facts of Case the built-in gains tax liability in addition to the other discounts 856-661-2265
In Jelke, the decedent died owning stock in a closely-held typically applied for lack of marketability, minority interest (lack Register by calling the Chamber of Commerce Southern New Jersey
A. Fred Ruttenberg
investment holding company that in turn owned appreciated of control) and restrictions on transferability. (856) 424-7776; visiting www.chambersnj.com/calendar.mv; or by sending fred.ruttenberg@flastergreenberg.com
marketable securities. On its estate tax return, the estate reduced an e-mail with your name and company to events@flastergreenberg.com. 856-382-2257
the value of Jelke’s interest by 100 percent of the contingent Observations
William S. Skinner
built-in capital gains tax liability, under the assumption that • Would the Jelke court have ruled differently if the william.skinner@flastergreenberg.com
the estate should be treated as if it had liquidated the shares corporation operated a business rather than simply holding 856-661-2262
on the decedent’s date of death. The IRS had argued that the marketability securities? Peter R. Spirgel
capital gains tax discount should be reduced to present value peter.spirgel@flastergreenberg.com
arguing that it would take sixteen years for the investments • Interestingly, the estate had also claimed a 20 percent ERRATA 856-661-2267
held by the investment holding company to be sold and the discount for lack of control (Jelke died with a 6.44 percent Michele G. Tarantino
T&B michele.tarantino@flastergreenberg.com
tax incurred—viz., a $20 million reduction rather than the $51 interest in the investment company) and a 35 percent
The article summarizing the Small Business and Work Opportunity Tax Act in our last 856-661-2274
million reduction claimed by the estate. discount for lack of marketability. The Tax Court reduced
these discounts to 10 percent and 15 percent respectively, issue incorrectly described the prior law’s definition of “passive income” for S corporation Renee C. Vidal
In reversing the Tax Court, the 11th Circuit adopted the 5th purposes as including gross income from the sale of stock and securities when it should renee.vidal@flastergreenberg.com
Circuit’s holding in Estate of Dunn v. Comm’r., which established which determination was upheld by the Circuit Court. 856-382-2250
have read net income.
the assumption that all assets are sold in liquidation on the • Permissibility for the full discounting for the tax on latent Laura B. Wallenstein
valuation date and 100 percent of the built-in tax liability is gain may also creep into negotiations for stock sales of laura.wallenstein@flastergreenberg.com A Newsletter of the Tax and Corporate practice group
offset against the fair market value of the stock, dollar-for-dollar. If you provide us with your e-mail address and the e-mail addresses of colleagues who would be interested 856-661-2263 & BUSINESS
closely-held businesses, where the buyer is asked to absorb TAX
More importantly, the Court rejected the holdings of numerous in receiving this Report, we would be pleased to include that information in the data bank for this Report. Alan H. Zuckerman
cases prior to Estate of Dunn that forced an analysis of when the the future latent capital gains tax. alan.zuckerman@flastergreenberg.com
Please send that information to me at rick.flaster@flastergreenberg.com.
assets would ultimately be sold. 856-661-2266 Cherry Hill
* Of Counsel Clarion Hotel

www.flastergreenberg.com
Breakfast Program
www.flastergreenberg.com
Business Outlook
Rutgers Quarterly
Office locations:
Cherry Hill, NJ April 22
Egg Harbor Twp., NJ
Morristown, NJ
Philadelphia, PA the date
Trenton, NJ Save
Vineland, NJ
Wilmington, DE
5
Editor’s Note...
O
ˇ ur Estates and Corporate capabilities continue to grow with the addition of Renee Vidal as our newest
shareholder. Consistent with our firm’s philosophy in serving its closely-held business clients on a “holistic basis”, Renee
also has the capability of providing integrated estate and corporate services, and is a welcome addition to our firm.
To illustrate our approach to the inter-related aspects of representing privately-held businesses, this issue of the Tax & Business
Report offers articles on several noteworthy developments in the field of estate, tax and commercial law, which specially
impact the owners of such businesses.
Tax Changes Impact On Donations
Of S Corporation Assets Vs.
Corporate Stock
by Richard J. Flaster, Esq.
Background
Background: There was thought to be an unwarranted disparity
in the tax treatment accorded a Taxpayer’s charitable donation
of appreciated S corporation stock and a charitable donation of
appreciated assets by an S corporation owned by that Taxpayer.
Prior to the Act, the conventional wisdom in fashioning a plan
for charitable giving for S corporation shareholders was that it
was better to donate appreciated corporate stock rather than
the appreciated assets of the S corporation. The underlying
rationale for this view was that upon an asset donation, the
deduction passed through to the shareholder but reduced the
Taxpayer’s basis in the S corporation stock by the full value
of the contribution (viz., thus lowering the Taxpayer’s basis in
his stock and creating a potential for future gain) whereas the
contribution of the S corporation stock would reduce his stock
basis proportionately.
New Law
To rectify that situation, the Pension Protection Act of 2006 (the
“Act”) modified Section 1367(a)(2) of the Internal Revenue Code
to bring these two similar situations into parity—now calling for
the stock basis to be reduced only by the corporate basis in the
donated asset (rather than the full value of the donation).
Illustration
Assume Taxpayer (T) owns all 100 shares of stock in S
corporation with a stock basis of $12,000, and the S corporation
holds 100 shares of GM stock costing it $12,000 but now worth
$20,000 (and ignoring all percentage deduction limitations).
Under Pre-Act Law
Hypo #1
T donates to charity 50 shares of S corporation stock with a
basis of $6,000 and value worth $10,000.
Tax Result
T obtains a $10,000 personal charitable gift deduction and T’s
basis in his S corporation stock is reduced proportionately to
$6,000 (viz., one-half (1/2) of his $12,000 original basis). If T
sells his remaining shares in S corporation a few years later for
$10,000 (i.e., the current value of T’s remaining 50 shares in S
corporation), T realizes a gain of $4,000, since his basis in his
remaining S Corporation stock is $6,000.
Hypo #2
S corporation donates to charity 50 shares of GM stock, with a
basis of $6,000 and value of $10,000.
2 3
Tax Result
T obtains a $10,000 ordinary deduction as a pass-through
from S corporation, but T must reduce his stock basis in the S
corporation stock by the $10,000 value of the donated property
—thus reducing T’s basis in his 100 shares of S corporation
stock to $2,000. If T sells his remaining 50 shares of stock in
S corporation a few years later for $10,000 (i.e., the current
value of the remaining GM shares held by the S corporation),
he realizes a gain of $8,000 (since T’s basis in the S corporation
stock is then $2,000)—thus obtaining only a deferral of the
$4,000 gain on the donated GM stock transaction.
Under New Law
Under the new provisions of Code Section 1367(a)(2), as
amended by the Act, upon donation of the GM stock the
charitable deduction that passes through to T would still be
$10,000, but the reduction in his stock basis will now be only
$6,000 (i.e., the S corporation’s basis in the donated GM stock)
instead of the $10,000 value of the donated stock under the Pre-
Act rule. As a consequence, T will be subject to the same result
as if he had made a contribution of S corporation stock.
Observations
• The intention of the new rule is to virtually eliminate the
distinction between making a charitable contribution
of appreciated S corporation stock and having the S
corporation contribute appreciated assets.
• Public charities generally prefer to receive tangible property
rather than S corporation stock, since such stock would
be treated as an interest in an “unrelated trade or business”
under Section 512 of the Internal revenue Code -- making
all income it derives from such stock taxable as “Unrelated
Trade and Business Income”. Under this new rule, their
interests can be better accommodated.
Planning Point
The new rules take effect for charitable donations made in tax
years beginning after December 31, 2007.
UPDATE
Pending Technical Corrections Act of 2007 should fix a
continuing “glitch” in the law by amending section 1366(d) to
have the basis limitation for deductions not apply to the amount
of deductible appreciation in contributed property.
Problem with New Jersey Division of
Taxation Proposal for Estate Tax
Relief
by Stephen M. Greenberg, Esq.
Background
For 2001 and earlier years, decedents with taxable estates of
less than $675,000 were exempt from federal estate tax, and
for those decedents with taxable estates exceeding $675,000,
there was a credit against federal estate tax for any amount of
state inheritance or estate tax paid by the decedent’s estate.
That credit represented “free revenue” to states that did not tax
certain inheritances because the amount of the credit would
either be paid to the federal government or to the state. Few
states lost the opportunity to tap into this source of revenue
and made sure they enacted so-called “soak up” taxes designed
to tax the estates of their resident decedents just to the extent
of the available federal estate tax credit. New Jersey was
no exception.
In 2001, however, there were significant changes to the federal
estate tax. Among other things, the federal estate tax exemption
increased significantly—it is currently $2 million and is
scheduled to increase to $3.5 million in 2009. In addition, the
federal estate tax credit for state death tax payments was also
phased out over time and eliminated completely for decedents
dying after 2004.
Most of the states adjacent to New Jersey (including
Pennsylvania), chose to follow the federal estate tax rules and
did not impose estate taxes on estates under the federal estate
tax exemption. But most of these states also do not have the
budgetary problems faced by New Jersey and New Jersey,
unwilling to give up this estate tax revenue, “decoupled” its
own estate tax from the federal estate tax. As a result, the New
Jersey estate tax is frozen in time in 2001. New Jersey taxable
estates in excess of $675,000 are still subject to estate tax as
if the decedent had died in 2001 and required to complete a
federal estate tax return using a 2001 form to calculate the
New Jersey estate tax. As a result, estate planning and estate
administration for New Jersey residents is more complex and
expensive, and death taxes are higher than for residents of
the surrounding states. (Indeed, this is one reason why New
Jersey residents who are approaching retirement often consider
changing their domicile to another state.)
New Rule
In an October 1, 2007 release, the New Jersey Division of
Taxation proposed a rule change that offers some estate tax
relief for New Jersey decedents who die owning tangible
property located outside of New Jersey. In short, the proposed
regulation states that the New Jersey estate tax “shall be
reduced by the portion of said tax that is attributable to
property located outside New Jersey . . .”. Under the current
rules, the New Jersey estate tax is based on a computation of
the federal estate tax (as it would have been calculated in 2001),
and the value of all property owned by the decedent is included
in the calculation (regardless of where situated). This means
that under New Jersey’s current rules, decedents pay New
Jersey estate tax on their business property in Pennsylvania or
their vacation home in Florida. Recognizing that New Jersey
may not have the constitutional authority to tax tangible
property located out of state, the Division of Taxation has
moved to correct this.
Unfortunately, the new proposal does not simply eliminate out
of state property from the estate tax computation. Instead, it
calculates an estate tax reduction attributable to out of state
property by multiplying the tax due on the entire estate by a
fraction, the numerator of which is the value of the decedent’s
property located outside of New Jersey and the denominator is
the value of the entire estate. The result is a New Jersey estate
tax that is higher than simply calculating the estate tax on the
decedent’s gross estate by excluding the out of state property.
For example, in cases where the elimination of the out of state
property would result in a New Jersey taxable estate of less than
$675,000, there would be no New Jersey estate tax whereas
the calculation methodology in the proposed regulation would
reduce, but not eliminate the New Jersey estate tax.
Observation
Although this may have been an oversight by the Division of
Taxation, some have suggested that it was intentional in order
to decrease the State’s revenue loss.
The Division of Taxation invited written comments on the
proposed regulation until November 30, 2007, after which it
will consider all such comments and eventually issue a final
regulation.
Planning Point
The Division of Taxation has said that it “will entertain refund
claims based upon this changed position that are filed within
the statute of limitations, which is three years from the date
of payment . . .”. Since the statute of limitations is currently
running, this means that all those who paid New Jersey estate
tax within the last three years should examine the filed returns
to see if they included out of state property. If they did, then
refund claims should be submitted, reducing the tax by that
attributable to the out of state property—even though the
regulation on which the refund claim is being submitted is not
yet final.
Misclassifying Workers Of
Independent Contractors
Now A Crime In N.J.
by Alan H. Zuckerman, Esq.
New Jersey recently enacted a new law, effective July 13, 2007, is performed outside of all the places of business of the employer
called the Construction Industry Independent Contractor Act for which the service is performed; and (c) the individual is
(the “Act”), N.J.S.A.34:20-1 et seq., which could cause potentially customarily engaged in an independently established trade,
devastating consequences for a business misclassifying a worker occupation, profession, or business. Thus, unless the worker in
as an independent contractor rather than an employee. question meets all three components of the ABC test, the worker
Background will be deemed to be an employee for purposes of the Act.
The ambiguity in making such a
classification always had significant
he Act now makes it a criminal offense to misclassify
consequences for purposes of
employment tax liability, withholding, certain workers as independent contractors rather than
and eligibility for benefits. employees and extends the statutory definition of an employee
Historically, the determination of to not only the unemployment compensation law, but also to
whether a worker was an independent
contractor or an employee was
the New Jersey Prevailing Wage Act, the Temporary Disability
made under the so-called common Benefits Law, the New Jersey Gross Income Tax Act, and certain
law test, which considered several other laws.
factors to determine the level of
“control and supervision” of the
worker. For certain purposes in New Jersey (including the New The Act imposes severe penalties for an employer who
Jersey Unemployment Compensation Law), there was, and still misclassifies any of these workers. The Act provides that the
is, a statutory definition of an employee that requires many employer (as well as any officer, agent, or employee of the
workers to be classified as “employees” for unemployment tax employer) who fails to properly classify an individual shall
withholding, even though the worker would not otherwise be an be guilty of a disorderly persons offense subject to possible
employee under the common law test. imprisonment. Further, each week in any day in which a worker
is misclassified constitutes a separate offense. Moreover, if the
New Law
The Act now makes it a criminal offense to misclassify certain failure is done knowingly, the employer, officer, agent or other
workers as independent contractors rather than employees and employee is guilty of a crime of the second, third or fourth
extends the statutory definition of an employee to not only the degree (depending upon the amounts in question), and could also
unemployment compensation law, but also to the New Jersey be subject to damages to the employee for losses incurred by
Prevailing Wage Act, the Temporary Disability Benefits Law, the the employee as a result of being misclassified as an independent
contractor. The Act also provides for the imposition of additional
New Jersey Gross Income Tax Act, and certain other laws. The
penalties (such as prohibiting the employer from doing work
Act applies to employers in the construction industry only, but
on public contracts, suspension of a contractor’s New Jersey
this is broadly defined to include any services performed in the
registration, and stop work orders) and also provides a private
making of improvements to real property. Under the Act, the
performance of such services by an individual for remuneration cause of action for the worker in question to bring a civil action
for damages against the employer.
paid by an employer is deemed to be employment unless it
is shown to the satisfaction of the Department of Labor and Planning Point
Workforce Development that it meets all three of the following As a result of the Act, any business engaged in making
requirements (the so-called “ABC test”): (a) the individual has improvements to real property that engages workers as
been and will continue to be free from control or direction over independent contractors, including sub-contractors, should
the performance of that service, both under a contract for service immediately review the status of that classification with legal
and in actuality; (b) the service is either outside the usual course counsel to minimize the risk of violations of the Act.
of the business for which the service is performed or the service
www.flastergreenberg.com
4
Editor’s Note...
O
ˇ ur Estates and Corporate capabilities continue to grow with the addition of Renee Vidal as our newest
shareholder. Consistent with our firm’s philosophy in serving its closely-held business clients on a “holistic basis”, Renee
also has the capability of providing integrated estate and corporate services, and is a welcome addition to our firm.
To illustrate our approach to the inter-related aspects of representing privately-held businesses, this issue of the Tax & Business
Report offers articles on several noteworthy developments in the field of estate, tax and commercial law, which specially
impact the owners of such businesses.
Tax Changes Impact On Donations
Of S Corporation Assets Vs.
Corporate Stock
by Richard J. Flaster, Esq.
Background
Background: There was thought to be an unwarranted disparity
in the tax treatment accorded a Taxpayer’s charitable donation
of appreciated S corporation stock and a charitable donation of
appreciated assets by an S corporation owned by that Taxpayer.
Prior to the Act, the conventional wisdom in fashioning a plan
for charitable giving for S corporation shareholders was that it
was better to donate appreciated corporate stock rather than
the appreciated assets of the S corporation. The underlying
rationale for this view was that upon an asset donation, the
deduction passed through to the shareholder but reduced the
Taxpayer’s basis in the S corporation stock by the full value
of the contribution (viz., thus lowering the Taxpayer’s basis in
his stock and creating a potential for future gain) whereas the
contribution of the S corporation stock would reduce his stock
basis proportionately.
New Law
To rectify that situation, the Pension Protection Act of 2006 (the
“Act”) modified Section 1367(a)(2) of the Internal Revenue Code
to bring these two similar situations into parity—now calling for
the stock basis to be reduced only by the corporate basis in the
donated asset (rather than the full value of the donation).
Illustration
Assume Taxpayer (T) owns all 100 shares of stock in S
corporation with a stock basis of $12,000, and the S corporation
holds 100 shares of GM stock costing it $12,000 but now worth
$20,000 (and ignoring all percentage deduction limitations).
Under Pre-Act Law
Hypo #1
T donates to charity 50 shares of S corporation stock with a
basis of $6,000 and value worth $10,000.
Tax Result
T obtains a $10,000 personal charitable gift deduction and T’s
basis in his S corporation stock is reduced proportionately to
$6,000 (viz., one-half (1/2) of his $12,000 original basis). If T
sells his remaining shares in S corporation a few years later for
$10,000 (i.e., the current value of T’s remaining 50 shares in S
corporation), T realizes a gain of $4,000, since his basis in his
remaining S Corporation stock is $6,000.
Hypo #2
S corporation donates to charity 50 shares of GM stock, with a
basis of $6,000 and value of $10,000.
2 3
Tax Result
T obtains a $10,000 ordinary deduction as a pass-through
from S corporation, but T must reduce his stock basis in the S
corporation stock by the $10,000 value of the donated property
—thus reducing T’s basis in his 100 shares of S corporation
stock to $2,000. If T sells his remaining 50 shares of stock in
S corporation a few years later for $10,000 (i.e., the current
value of the remaining GM shares held by the S corporation),
he realizes a gain of $8,000 (since T’s basis in the S corporation
stock is then $2,000)—thus obtaining only a deferral of the
$4,000 gain on the donated GM stock transaction.
Under New Law
Under the new provisions of Code Section 1367(a)(2), as
amended by the Act, upon donation of the GM stock the
charitable deduction that passes through to T would still be
$10,000, but the reduction in his stock basis will now be only
$6,000 (i.e., the S corporation’s basis in the donated GM stock)
instead of the $10,000 value of the donated stock under the Pre-
Act rule. As a consequence, T will be subject to the same result
as if he had made a contribution of S corporation stock.
Observations
• The intention of the new rule is to virtually eliminate the
distinction between making a charitable contribution
of appreciated S corporation stock and having the S
corporation contribute appreciated assets.
• Public charities generally prefer to receive tangible property
rather than S corporation stock, since such stock would
be treated as an interest in an “unrelated trade or business”
under Section 512 of the Internal revenue Code -- making
all income it derives from such stock taxable as “Unrelated
Trade and Business Income”. Under this new rule, their
interests can be better accommodated.
Planning Point
The new rules take effect for charitable donations made in tax
years beginning after December 31, 2007.
UPDATE
Pending Technical Corrections Act of 2007 should fix a
continuing “glitch” in the law by amending section 1366(d) to
have the basis limitation for deductions not apply to the amount
of deductible appreciation in contributed property.
Problem with New Jersey Division of
Taxation Proposal for Estate Tax
Relief
by Stephen M. Greenberg, Esq.
Background
For 2001 and earlier years, decedents with taxable estates of
less than $675,000 were exempt from federal estate tax, and
for those decedents with taxable estates exceeding $675,000,
there was a credit against federal estate tax for any amount of
state inheritance or estate tax paid by the decedent’s estate.
That credit represented “free revenue” to states that did not tax
certain inheritances because the amount of the credit would
either be paid to the federal government or to the state. Few
states lost the opportunity to tap into this source of revenue
and made sure they enacted so-called “soak up” taxes designed
to tax the estates of their resident decedents just to the extent
of the available federal estate tax credit. New Jersey was
no exception.
In 2001, however, there were significant changes to the federal
estate tax. Among other things, the federal estate tax exemption
increased significantly—it is currently $2 million and is
scheduled to increase to $3.5 million in 2009. In addition, the
federal estate tax credit for state death tax payments was also
phased out over time and eliminated completely for decedents
dying after 2004.
Most of the states adjacent to New Jersey (including
Pennsylvania), chose to follow the federal estate tax rules and
did not impose estate taxes on estates under the federal estate
tax exemption. But most of these states also do not have the
budgetary problems faced by New Jersey and New Jersey,
unwilling to give up this estate tax revenue, “decoupled” its
own estate tax from the federal estate tax. As a result, the New
Jersey estate tax is frozen in time in 2001. New Jersey taxable
estates in excess of $675,000 are still subject to estate tax as
if the decedent had died in 2001 and required to complete a
federal estate tax return using a 2001 form to calculate the
New Jersey estate tax. As a result, estate planning and estate
administration for New Jersey residents is more complex and
expensive, and death taxes are higher than for residents of
the surrounding states. (Indeed, this is one reason why New
Jersey residents who are approaching retirement often consider
changing their domicile to another state.)
New Rule
In an October 1, 2007 release, the New Jersey Division of
Taxation proposed a rule change that offers some estate tax
relief for New Jersey decedents who die owning tangible
property located outside of New Jersey. In short, the proposed
regulation states that the New Jersey estate tax “shall be
reduced by the portion of said tax that is attributable to
property located outside New Jersey . . .”. Under the current
rules, the New Jersey estate tax is based on a computation of
the federal estate tax (as it would have been calculated in 2001),
and the value of all property owned by the decedent is included
in the calculation (regardless of where situated). This means
that under New Jersey’s current rules, decedents pay New
Jersey estate tax on their business property in Pennsylvania or
their vacation home in Florida. Recognizing that New Jersey
may not have the constitutional authority to tax tangible
property located out of state, the Division of Taxation has
moved to correct this.
Unfortunately, the new proposal does not simply eliminate out
of state property from the estate tax computation. Instead, it
calculates an estate tax reduction attributable to out of state
property by multiplying the tax due on the entire estate by a
fraction, the numerator of which is the value of the decedent’s
property located outside of New Jersey and the denominator is
the value of the entire estate. The result is a New Jersey estate
tax that is higher than simply calculating the estate tax on the
decedent’s gross estate by excluding the out of state property.
For example, in cases where the elimination of the out of state
property would result in a New Jersey taxable estate of less than
$675,000, there would be no New Jersey estate tax whereas
the calculation methodology in the proposed regulation would
reduce, but not eliminate the New Jersey estate tax.
Observation
Although this may have been an oversight by the Division of
Taxation, some have suggested that it was intentional in order
to decrease the State’s revenue loss.
The Division of Taxation invited written comments on the
proposed regulation until November 30, 2007, after which it
will consider all such comments and eventually issue a final
regulation.
Planning Point
The Division of Taxation has said that it “will entertain refund
claims based upon this changed position that are filed within
the statute of limitations, which is three years from the date
of payment . . .”. Since the statute of limitations is currently
running, this means that all those who paid New Jersey estate
tax within the last three years should examine the filed returns
to see if they included out of state property. If they did, then
refund claims should be submitted, reducing the tax by that
attributable to the out of state property—even though the
regulation on which the refund claim is being submitted is not
yet final.
Misclassifying Workers Of
Independent Contractors
Now A Crime In N.J.
by Alan H. Zuckerman, Esq.
New Jersey recently enacted a new law, effective July 13, 2007, is performed outside of all the places of business of the employer
called the Construction Industry Independent Contractor Act for which the service is performed; and (c) the individual is
(the “Act”), N.J.S.A.34:20-1 et seq., which could cause potentially customarily engaged in an independently established trade,
devastating consequences for a business misclassifying a worker occupation, profession, or business. Thus, unless the worker in
as an independent contractor rather than an employee. question meets all three components of the ABC test, the worker
Background will be deemed to be an employee for purposes of the Act.
The ambiguity in making such a
classification always had significant
he Act now makes it a criminal offense to misclassify
consequences for purposes of
employment tax liability, withholding, certain workers as independent contractors rather than
and eligibility for benefits. employees and extends the statutory definition of an employee
Historically, the determination of to not only the unemployment compensation law, but also to
whether a worker was an independent
contractor or an employee was
the New Jersey Prevailing Wage Act, the Temporary Disability
made under the so-called common Benefits Law, the New Jersey Gross Income Tax Act, and certain
law test, which considered several other laws.
factors to determine the level of
“control and supervision” of the
worker. For certain purposes in New Jersey (including the New The Act imposes severe penalties for an employer who
Jersey Unemployment Compensation Law), there was, and still misclassifies any of these workers. The Act provides that the
is, a statutory definition of an employee that requires many employer (as well as any officer, agent, or employee of the
workers to be classified as “employees” for unemployment tax employer) who fails to properly classify an individual shall
withholding, even though the worker would not otherwise be an be guilty of a disorderly persons offense subject to possible
employee under the common law test. imprisonment. Further, each week in any day in which a worker
is misclassified constitutes a separate offense. Moreover, if the
New Law
The Act now makes it a criminal offense to misclassify certain failure is done knowingly, the employer, officer, agent or other
workers as independent contractors rather than employees and employee is guilty of a crime of the second, third or fourth
extends the statutory definition of an employee to not only the degree (depending upon the amounts in question), and could also
unemployment compensation law, but also to the New Jersey be subject to damages to the employee for losses incurred by
Prevailing Wage Act, the Temporary Disability Benefits Law, the the employee as a result of being misclassified as an independent
contractor. The Act also provides for the imposition of additional
New Jersey Gross Income Tax Act, and certain other laws. The
penalties (such as prohibiting the employer from doing work
Act applies to employers in the construction industry only, but
on public contracts, suspension of a contractor’s New Jersey
this is broadly defined to include any services performed in the
registration, and stop work orders) and also provides a private
making of improvements to real property. Under the Act, the
performance of such services by an individual for remuneration cause of action for the worker in question to bring a civil action
for damages against the employer.
paid by an employer is deemed to be employment unless it
is shown to the satisfaction of the Department of Labor and Planning Point
Workforce Development that it meets all three of the following As a result of the Act, any business engaged in making
requirements (the so-called “ABC test”): (a) the individual has improvements to real property that engages workers as
been and will continue to be free from control or direction over independent contractors, including sub-contractors, should
the performance of that service, both under a contract for service immediately review the status of that classification with legal
and in actuality; (b) the service is either outside the usual course counsel to minimize the risk of violations of the Act.
of the business for which the service is performed or the service
www.flastergreenberg.com
4
Editor’s Note...
O
ˇ ur Estates and Corporate capabilities continue to grow with the addition of Renee Vidal as our newest
shareholder. Consistent with our firm’s philosophy in serving its closely-held business clients on a “holistic basis”, Renee
also has the capability of providing integrated estate and corporate services, and is a welcome addition to our firm.
To illustrate our approach to the inter-related aspects of representing privately-held businesses, this issue of the Tax & Business
Report offers articles on several noteworthy developments in the field of estate, tax and commercial law, which specially
impact the owners of such businesses.
Tax Changes Impact On Donations
Of S Corporation Assets Vs.
Corporate Stock
by Richard J. Flaster, Esq.
Background
Background: There was thought to be an unwarranted disparity
in the tax treatment accorded a Taxpayer’s charitable donation
of appreciated S corporation stock and a charitable donation of
appreciated assets by an S corporation owned by that Taxpayer.
Prior to the Act, the conventional wisdom in fashioning a plan
for charitable giving for S corporation shareholders was that it
was better to donate appreciated corporate stock rather than
the appreciated assets of the S corporation. The underlying
rationale for this view was that upon an asset donation, the
deduction passed through to the shareholder but reduced the
Taxpayer’s basis in the S corporation stock by the full value
of the contribution (viz., thus lowering the Taxpayer’s basis in
his stock and creating a potential for future gain) whereas the
contribution of the S corporation stock would reduce his stock
basis proportionately.
New Law
To rectify that situation, the Pension Protection Act of 2006 (the
“Act”) modified Section 1367(a)(2) of the Internal Revenue Code
to bring these two similar situations into parity—now calling for
the stock basis to be reduced only by the corporate basis in the
donated asset (rather than the full value of the donation).
Illustration
Assume Taxpayer (T) owns all 100 shares of stock in S
corporation with a stock basis of $12,000, and the S corporation
holds 100 shares of GM stock costing it $12,000 but now worth
$20,000 (and ignoring all percentage deduction limitations).
Under Pre-Act Law
Hypo #1
T donates to charity 50 shares of S corporation stock with a
basis of $6,000 and value worth $10,000.
Tax Result
T obtains a $10,000 personal charitable gift deduction and T’s
basis in his S corporation stock is reduced proportionately to
$6,000 (viz., one-half (1/2) of his $12,000 original basis). If T
sells his remaining shares in S corporation a few years later for
$10,000 (i.e., the current value of T’s remaining 50 shares in S
corporation), T realizes a gain of $4,000, since his basis in his
remaining S Corporation stock is $6,000.
Hypo #2
S corporation donates to charity 50 shares of GM stock, with a
basis of $6,000 and value of $10,000.
2 3
Tax Result
T obtains a $10,000 ordinary deduction as a pass-through
from S corporation, but T must reduce his stock basis in the S
corporation stock by the $10,000 value of the donated property
—thus reducing T’s basis in his 100 shares of S corporation
stock to $2,000. If T sells his remaining 50 shares of stock in
S corporation a few years later for $10,000 (i.e., the current
value of the remaining GM shares held by the S corporation),
he realizes a gain of $8,000 (since T’s basis in the S corporation
stock is then $2,000)—thus obtaining only a deferral of the
$4,000 gain on the donated GM stock transaction.
Under New Law
Under the new provisions of Code Section 1367(a)(2), as
amended by the Act, upon donation of the GM stock the
charitable deduction that passes through to T would still be
$10,000, but the reduction in his stock basis will now be only
$6,000 (i.e., the S corporation’s basis in the donated GM stock)
instead of the $10,000 value of the donated stock under the Pre-
Act rule. As a consequence, T will be subject to the same result
as if he had made a contribution of S corporation stock.
Observations
• The intention of the new rule is to virtually eliminate the
distinction between making a charitable contribution
of appreciated S corporation stock and having the S
corporation contribute appreciated assets.
• Public charities generally prefer to receive tangible property
rather than S corporation stock, since such stock would
be treated as an interest in an “unrelated trade or business”
under Section 512 of the Internal revenue Code -- making
all income it derives from such stock taxable as “Unrelated
Trade and Business Income”. Under this new rule, their
interests can be better accommodated.
Planning Point
The new rules take effect for charitable donations made in tax
years beginning after December 31, 2007.
UPDATE
Pending Technical Corrections Act of 2007 should fix a
continuing “glitch” in the law by amending section 1366(d) to
have the basis limitation for deductions not apply to the amount
of deductible appreciation in contributed property.
Problem with New Jersey Division of
Taxation Proposal for Estate Tax
Relief
by Stephen M. Greenberg, Esq.
Background
For 2001 and earlier years, decedents with taxable estates of
less than $675,000 were exempt from federal estate tax, and
for those decedents with taxable estates exceeding $675,000,
there was a credit against federal estate tax for any amount of
state inheritance or estate tax paid by the decedent’s estate.
That credit represented “free revenue” to states that did not tax
certain inheritances because the amount of the credit would
either be paid to the federal government or to the state. Few
states lost the opportunity to tap into this source of revenue
and made sure they enacted so-called “soak up” taxes designed
to tax the estates of their resident decedents just to the extent
of the available federal estate tax credit. New Jersey was
no exception.
In 2001, however, there were significant changes to the federal
estate tax. Among other things, the federal estate tax exemption
increased significantly—it is currently $2 million and is
scheduled to increase to $3.5 million in 2009. In addition, the
federal estate tax credit for state death tax payments was also
phased out over time and eliminated completely for decedents
dying after 2004.
Most of the states adjacent to New Jersey (including
Pennsylvania), chose to follow the federal estate tax rules and
did not impose estate taxes on estates under the federal estate
tax exemption. But most of these states also do not have the
budgetary problems faced by New Jersey and New Jersey,
unwilling to give up this estate tax revenue, “decoupled” its
own estate tax from the federal estate tax. As a result, the New
Jersey estate tax is frozen in time in 2001. New Jersey taxable
estates in excess of $675,000 are still subject to estate tax as
if the decedent had died in 2001 and required to complete a
federal estate tax return using a 2001 form to calculate the
New Jersey estate tax. As a result, estate planning and estate
administration for New Jersey residents is more complex and
expensive, and death taxes are higher than for residents of
the surrounding states. (Indeed, this is one reason why New
Jersey residents who are approaching retirement often consider
changing their domicile to another state.)
New Rule
In an October 1, 2007 release, the New Jersey Division of
Taxation proposed a rule change that offers some estate tax
relief for New Jersey decedents who die owning tangible
property located outside of New Jersey. In short, the proposed
regulation states that the New Jersey estate tax “shall be
reduced by the portion of said tax that is attributable to
property located outside New Jersey . . .”. Under the current
rules, the New Jersey estate tax is based on a computation of
the federal estate tax (as it would have been calculated in 2001),
and the value of all property owned by the decedent is included
in the calculation (regardless of where situated). This means
that under New Jersey’s current rules, decedents pay New
Jersey estate tax on their business property in Pennsylvania or
their vacation home in Florida. Recognizing that New Jersey
may not have the constitutional authority to tax tangible
property located out of state, the Division of Taxation has
moved to correct this.
Unfortunately, the new proposal does not simply eliminate out
of state property from the estate tax computation. Instead, it
calculates an estate tax reduction attributable to out of state
property by multiplying the tax due on the entire estate by a
fraction, the numerator of which is the value of the decedent’s
property located outside of New Jersey and the denominator is
the value of the entire estate. The result is a New Jersey estate
tax that is higher than simply calculating the estate tax on the
decedent’s gross estate by excluding the out of state property.
For example, in cases where the elimination of the out of state
property would result in a New Jersey taxable estate of less than
$675,000, there would be no New Jersey estate tax whereas
the calculation methodology in the proposed regulation would
reduce, but not eliminate the New Jersey estate tax.
Observation
Although this may have been an oversight by the Division of
Taxation, some have suggested that it was intentional in order
to decrease the State’s revenue loss.
The Division of Taxation invited written comments on the
proposed regulation until November 30, 2007, after which it
will consider all such comments and eventually issue a final
regulation.
Planning Point
The Division of Taxation has said that it “will entertain refund
claims based upon this changed position that are filed within
the statute of limitations, which is three years from the date
of payment . . .”. Since the statute of limitations is currently
running, this means that all those who paid New Jersey estate
tax within the last three years should examine the filed returns
to see if they included out of state property. If they did, then
refund claims should be submitted, reducing the tax by that
attributable to the out of state property—even though the
regulation on which the refund claim is being submitted is not
yet final.
Misclassifying Workers Of
Independent Contractors
Now A Crime In N.J.
by Alan H. Zuckerman, Esq.
New Jersey recently enacted a new law, effective July 13, 2007, is performed outside of all the places of business of the employer
called the Construction Industry Independent Contractor Act for which the service is performed; and (c) the individual is
(the “Act”), N.J.S.A.34:20-1 et seq., which could cause potentially customarily engaged in an independently established trade,
devastating consequences for a business misclassifying a worker occupation, profession, or business. Thus, unless the worker in
as an independent contractor rather than an employee. question meets all three components of the ABC test, the worker
Background will be deemed to be an employee for purposes of the Act.
The ambiguity in making such a
classification always had significant
he Act now makes it a criminal offense to misclassify
consequences for purposes of
employment tax liability, withholding, certain workers as independent contractors rather than
and eligibility for benefits. employees and extends the statutory definition of an employee
Historically, the determination of to not only the unemployment compensation law, but also to
whether a worker was an independent
contractor or an employee was
the New Jersey Prevailing Wage Act, the Temporary Disability
made under the so-called common Benefits Law, the New Jersey Gross Income Tax Act, and certain
law test, which considered several other laws.
factors to determine the level of
“control and supervision” of the
worker. For certain purposes in New Jersey (including the New The Act imposes severe penalties for an employer who
Jersey Unemployment Compensation Law), there was, and still misclassifies any of these workers. The Act provides that the
is, a statutory definition of an employee that requires many employer (as well as any officer, agent, or employee of the
workers to be classified as “employees” for unemployment tax employer) who fails to properly classify an individual shall
withholding, even though the worker would not otherwise be an be guilty of a disorderly persons offense subject to possible
employee under the common law test. imprisonment. Further, each week in any day in which a worker
is misclassified constitutes a separate offense. Moreover, if the
New Law
The Act now makes it a criminal offense to misclassify certain failure is done knowingly, the employer, officer, agent or other
workers as independent contractors rather than employees and employee is guilty of a crime of the second, third or fourth
extends the statutory definition of an employee to not only the degree (depending upon the amounts in question), and could also
unemployment compensation law, but also to the New Jersey be subject to damages to the employee for losses incurred by
Prevailing Wage Act, the Temporary Disability Benefits Law, the the employee as a result of being misclassified as an independent
contractor. The Act also provides for the imposition of additional
New Jersey Gross Income Tax Act, and certain other laws. The
penalties (such as prohibiting the employer from doing work
Act applies to employers in the construction industry only, but
on public contracts, suspension of a contractor’s New Jersey
this is broadly defined to include any services performed in the
registration, and stop work orders) and also provides a private
making of improvements to real property. Under the Act, the
performance of such services by an individual for remuneration cause of action for the worker in question to bring a civil action
for damages against the employer.
paid by an employer is deemed to be employment unless it
is shown to the satisfaction of the Department of Labor and Planning Point
Workforce Development that it meets all three of the following As a result of the Act, any business engaged in making
requirements (the so-called “ABC test”): (a) the individual has improvements to real property that engages workers as
been and will continue to be free from control or direction over independent contractors, including sub-contractors, should
the performance of that service, both under a contract for service immediately review the status of that classification with legal
and in actuality; (b) the service is either outside the usual course counsel to minimize the risk of violations of the Act.
of the business for which the service is performed or the service
www.flastergreenberg.com
4
 WI NTE R 2008

TAX & BUSINESS

Estate Tax Value Of Closely-Held
Corporation Reduced By
“Full” Latent Capital Gains Tax
by Peter R. Spirgel, Esq.
Background
Prior case decisions by the Tax Court and a few Circuit Courts
had held that a corporation’s tax liability for latent capital gains
should reduce the value of the corporate stock. However, the
cases differed as to whether the full reduction should be allowed
in full or discounted to present value based on a reasonable
Attorneys Practicing in
tax & CORPORATE:
What’s New at Flaster/Greenberg Jeffrey A. Cohen A Newsletter of the Tax and Corporate practice group
jeff.cohen@flastergreenberg.com
• The firm’s position in a highly competitive marketplace for law firms was recently 856-382-2240
elevated when Toll Brothers cited Flaster/Greenberg as a “Go To” law firm for Mitchell R. Cohen * Alternative Dispute Resolution u Automotive u
Litigation in a soon to be released issue of Corporate Counsel magazine. mitchell.cohen@flastergreenberg.com Tax Changes Impact on Charitable Gifting of
• In response to the legal and regulatory compliance issues unique to automotive and
856-382-2222
Business & Corporate Services u Closely-
Held Businesses u Construction Law u E-Commerce S Corporation Assets vs. S Corporation Stock............................................... 2
& Internet u Emerging Business u Employee Benefits
truck dealerships, Flaster/Greenberg has announced the launch of an Automotive
Practice Group. The group taps into the collective experience of 17 attorneys across
Allen P. Fineberg
allen.fineberg@flastergreenberg.com & Executive Compensation u Environmental Law
Problem with Proposed Change to New Jersey
Estate Tax Rules on Out-of-State Property.................................................... 3
856-661-2264 & Litigation u Estate Planning & Administration u
offices in New Jersey and Pennsylvania to help automotive dealers seek advice Richard J. Flaster Family Law & Adoption u Financial Restructuring, Misclassifying Workers as Independent
related to a range of complex business and legal issues. rick.flaster@flastergreenberg.com Bankruptcy & Risk Management u Health Care Contractors Now a Crime in New Jersey....................................................... 4
856-661-2260 u Intellectual Property u Labor & Employment u
• Michele G. Tarantino, a shareholder in the Real Estate Practice Group, has
Marc R. Garber * Litigation u Mergers & Acquisitions u Real Estate Corporation’s Stock Value for Estate Tax
been selected as one of the Top Women in Real Estate by Real Estate New marc.garber@flastergreenberg.com & Land Use u Redevelopment u Securities Law u Reduced by Full Latent Capital Gains Tax..................................................... 5
Jersey. Tarantino was named as one of the rising stars in commercial real estate, 856-382-2237 Taxation u Technology
including development, brokerage and real estate services, property management Kevin Greenberg
Planning Point and law. Recipients were selected based on their biographies and professional kevin.greenberg@flastergreenberg.com
Lifetime transfers of interests in closely-held businesses are 215-279-9912
accomplishments.
frequently employed to shift assets to the next generation Stephen M. Greenberg
within a family and remove future appreciation from the older steve.greenberg@flastergreenberg.com
856-661-2261
generation’s taxable estate (commonly referred to as an “estate
freeze” technique). Increasingly, tax planners are employing the Dennis J. Helms

Save the Date

dennis.helms@flastergreenberg.com
projection of when the tax would actually be incurred. use of intentionally defective grantor trusts or grantor retained 856-382-2238
New Case interest trusts to transfer shares in closely-held businesses to
Elaine J. Petruzziello
the younger generation while allowing the grantor to remain
A recent decision by the 11th Circuit Court of Appeals in
Estate of Jelke v. Comm’r, the Court reversed the U.S. Tax in control of the corporation. Since the rationale of the 11th Rutgers Quarterly Business Outlook elaine.petruzziello@flastergreenberg.com
609-858-5921 www.flastergreenberg.com
Circuit’s decision may not be limited to transfers made at
Court and approved the dollar-for-dollar valuation reduction
death, this decision could also have broad implications for the
April 22, July 15, October 21, 2008 Elliot D. Raff
without any discount for the projected present value of the elliot.raff@flastergreenberg.com
potential tax for the valuation of the stock for estate tax valuation of lifetime transfers of closely-held stock between Breakfast Program 856-382-2241
purposes. related parties. Accordingly, when determining the value of Markley S. Roderick
these transfers, practitioners should now factor in 100 percent of Clarion Hotel, Cherry Hill mark.roderick@flastergreenberg.com
Facts of Case the built-in gains tax liability in addition to the other discounts 856-661-2265
In Jelke, the decedent died owning stock in a closely-held typically applied for lack of marketability, minority interest (lack Register by calling the Chamber of Commerce Southern New Jersey
A. Fred Ruttenberg
investment holding company that in turn owned appreciated of control) and restrictions on transferability. (856) 424-7776; visiting www.chambersnj.com/calendar.mv; or by sending fred.ruttenberg@flastergreenberg.com
marketable securities. On its estate tax return, the estate reduced an e-mail with your name and company to events@flastergreenberg.com. 856-382-2257
the value of Jelke’s interest by 100 percent of the contingent Observations
William S. Skinner
built-in capital gains tax liability, under the assumption that • Would the Jelke court have ruled differently if the william.skinner@flastergreenberg.com
the estate should be treated as if it had liquidated the shares corporation operated a business rather than simply holding 856-661-2262
on the decedent’s date of death. The IRS had argued that the marketability securities? Peter R. Spirgel
capital gains tax discount should be reduced to present value peter.spirgel@flastergreenberg.com
arguing that it would take sixteen years for the investments • Interestingly, the estate had also claimed a 20 percent ERRATA 856-661-2267
held by the investment holding company to be sold and the discount for lack of control (Jelke died with a 6.44 percent Michele G. Tarantino
T&B michele.tarantino@flastergreenberg.com
tax incurred—viz., a $20 million reduction rather than the $51 interest in the investment company) and a 35 percent
The article summarizing the Small Business and Work Opportunity Tax Act in our last 856-661-2274
million reduction claimed by the estate. discount for lack of marketability. The Tax Court reduced
these discounts to 10 percent and 15 percent respectively, issue incorrectly described the prior law’s definition of “passive income” for S corporation Renee C. Vidal
In reversing the Tax Court, the 11th Circuit adopted the 5th purposes as including gross income from the sale of stock and securities when it should renee.vidal@flastergreenberg.com
Circuit’s holding in Estate of Dunn v. Comm’r., which established which determination was upheld by the Circuit Court. 856-382-2250
have read net income.
the assumption that all assets are sold in liquidation on the • Permissibility for the full discounting for the tax on latent Laura B. Wallenstein
valuation date and 100 percent of the built-in tax liability is gain may also creep into negotiations for stock sales of laura.wallenstein@flastergreenberg.com A Newsletter of the Tax and Corporate practice group
offset against the fair market value of the stock, dollar-for-dollar. If you provide us with your e-mail address and the e-mail addresses of colleagues who would be interested 856-661-2263 & BUSINESS
closely-held businesses, where the buyer is asked to absorb TAX
More importantly, the Court rejected the holdings of numerous in receiving this Report, we would be pleased to include that information in the data bank for this Report. Alan H. Zuckerman
cases prior to Estate of Dunn that forced an analysis of when the the future latent capital gains tax. alan.zuckerman@flastergreenberg.com
Please send that information to me at rick.flaster@flastergreenberg.com.
assets would ultimately be sold. 856-661-2266 Cherry Hill
* Of Counsel Clarion Hotel

www.flastergreenberg.com
Breakfast Program
www.flastergreenberg.com
Business Outlook
Rutgers Quarterly
Office locations:
Cherry Hill, NJ April 22
Egg Harbor Twp., NJ
Morristown, NJ
Philadelphia, PA the date
Trenton, NJ Save
Vineland, NJ
Wilmington, DE
5
 WI NTE R 2008

TAX & BUSINESS

Estate Tax Value Of Closely-Held
Corporation Reduced By
“Full” Latent Capital Gains Tax
by Peter R. Spirgel, Esq.
Background
Prior case decisions by the Tax Court and a few Circuit Courts
had held that a corporation’s tax liability for latent capital gains
should reduce the value of the corporate stock. However, the
cases differed as to whether the full reduction should be allowed
in full or discounted to present value based on a reasonable
Attorneys Practicing in
tax & CORPORATE:
What’s New at Flaster/Greenberg Jeffrey A. Cohen A Newsletter of the Tax and Corporate practice group
jeff.cohen@flastergreenberg.com
• The firm’s position in a highly competitive marketplace for law firms was recently 856-382-2240
elevated when Toll Brothers cited Flaster/Greenberg as a “Go To” law firm for Mitchell R. Cohen * Alternative Dispute Resolution u Automotive u
Litigation in a soon to be released issue of Corporate Counsel magazine. mitchell.cohen@flastergreenberg.com Tax Changes Impact on Charitable Gifting of
• In response to the legal and regulatory compliance issues unique to automotive and
856-382-2222
Business & Corporate Services u Closely-
Held Businesses u Construction Law u E-Commerce S Corporation Assets vs. S Corporation Stock............................................... 2
& Internet u Emerging Business u Employee Benefits
truck dealerships, Flaster/Greenberg has announced the launch of an Automotive
Practice Group. The group taps into the collective experience of 17 attorneys across
Allen P. Fineberg
allen.fineberg@flastergreenberg.com & Executive Compensation u Environmental Law
Problem with Proposed Change to New Jersey
Estate Tax Rules on Out-of-State Property.................................................... 3
856-661-2264 & Litigation u Estate Planning & Administration u
offices in New Jersey and Pennsylvania to help automotive dealers seek advice Richard J. Flaster Family Law & Adoption u Financial Restructuring, Misclassifying Workers as Independent
related to a range of complex business and legal issues. rick.flaster@flastergreenberg.com Bankruptcy & Risk Management u Health Care Contractors Now a Crime in New Jersey....................................................... 4
856-661-2260 u Intellectual Property u Labor & Employment u
• Michele G. Tarantino, a shareholder in the Real Estate Practice Group, has
Marc R. Garber * Litigation u Mergers & Acquisitions u Real Estate Corporation’s Stock Value for Estate Tax
been selected as one of the Top Women in Real Estate by Real Estate New marc.garber@flastergreenberg.com & Land Use u Redevelopment u Securities Law u Reduced by Full Latent Capital Gains Tax..................................................... 5
Jersey. Tarantino was named as one of the rising stars in commercial real estate, 856-382-2237 Taxation u Technology
including development, brokerage and real estate services, property management Kevin Greenberg
Planning Point and law. Recipients were selected based on their biographies and professional kevin.greenberg@flastergreenberg.com
Lifetime transfers of interests in closely-held businesses are 215-279-9912
accomplishments.
frequently employed to shift assets to the next generation Stephen M. Greenberg
within a family and remove future appreciation from the older steve.greenberg@flastergreenberg.com
856-661-2261
generation’s taxable estate (commonly referred to as an “estate
freeze” technique). Increasingly, tax planners are employing the Dennis J. Helms

Save the Date

dennis.helms@flastergreenberg.com
projection of when the tax would actually be incurred. use of intentionally defective grantor trusts or grantor retained 856-382-2238
New Case interest trusts to transfer shares in closely-held businesses to
Elaine J. Petruzziello
the younger generation while allowing the grantor to remain
A recent decision by the 11th Circuit Court of Appeals in
Estate of Jelke v. Comm’r, the Court reversed the U.S. Tax in control of the corporation. Since the rationale of the 11th Rutgers Quarterly Business Outlook elaine.petruzziello@flastergreenberg.com
609-858-5921 www.flastergreenberg.com
Circuit’s decision may not be limited to transfers made at
Court and approved the dollar-for-dollar valuation reduction
death, this decision could also have broad implications for the
April 22, July 15, October 21, 2008 Elliot D. Raff
without any discount for the projected present value of the elliot.raff@flastergreenberg.com
potential tax for the valuation of the stock for estate tax valuation of lifetime transfers of closely-held stock between Breakfast Program 856-382-2241
purposes. related parties. Accordingly, when determining the value of Markley S. Roderick
these transfers, practitioners should now factor in 100 percent of Clarion Hotel, Cherry Hill mark.roderick@flastergreenberg.com
Facts of Case the built-in gains tax liability in addition to the other discounts 856-661-2265
In Jelke, the decedent died owning stock in a closely-held typically applied for lack of marketability, minority interest (lack Register by calling the Chamber of Commerce Southern New Jersey
A. Fred Ruttenberg
investment holding company that in turn owned appreciated of control) and restrictions on transferability. (856) 424-7776; visiting www.chambersnj.com/calendar.mv; or by sending fred.ruttenberg@flastergreenberg.com
marketable securities. On its estate tax return, the estate reduced an e-mail with your name and company to events@flastergreenberg.com. 856-382-2257
the value of Jelke’s interest by 100 percent of the contingent Observations
William S. Skinner
built-in capital gains tax liability, under the assumption that • Would the Jelke court have ruled differently if the william.skinner@flastergreenberg.com
the estate should be treated as if it had liquidated the shares corporation operated a business rather than simply holding 856-661-2262
on the decedent’s date of death. The IRS had argued that the marketability securities? Peter R. Spirgel
capital gains tax discount should be reduced to present value peter.spirgel@flastergreenberg.com
arguing that it would take sixteen years for the investments • Interestingly, the estate had also claimed a 20 percent ERRATA 856-661-2267
held by the investment holding company to be sold and the discount for lack of control (Jelke died with a 6.44 percent Michele G. Tarantino
T&B michele.tarantino@flastergreenberg.com
tax incurred—viz., a $20 million reduction rather than the $51 interest in the investment company) and a 35 percent
The article summarizing the Small Business and Work Opportunity Tax Act in our last 856-661-2274
million reduction claimed by the estate. discount for lack of marketability. The Tax Court reduced
these discounts to 10 percent and 15 percent respectively, issue incorrectly described the prior law’s definition of “passive income” for S corporation Renee C. Vidal
In reversing the Tax Court, the 11th Circuit adopted the 5th purposes as including gross income from the sale of stock and securities when it should renee.vidal@flastergreenberg.com
Circuit’s holding in Estate of Dunn v. Comm’r., which established which determination was upheld by the Circuit Court. 856-382-2250
have read net income.
the assumption that all assets are sold in liquidation on the • Permissibility for the full discounting for the tax on latent Laura B. Wallenstein
valuation date and 100 percent of the built-in tax liability is gain may also creep into negotiations for stock sales of laura.wallenstein@flastergreenberg.com A Newsletter of the Tax and Corporate practice group
offset against the fair market value of the stock, dollar-for-dollar. If you provide us with your e-mail address and the e-mail addresses of colleagues who would be interested 856-661-2263 & BUSINESS
closely-held businesses, where the buyer is asked to absorb TAX
More importantly, the Court rejected the holdings of numerous in receiving this Report, we would be pleased to include that information in the data bank for this Report. Alan H. Zuckerman
cases prior to Estate of Dunn that forced an analysis of when the the future latent capital gains tax. alan.zuckerman@flastergreenberg.com
Please send that information to me at rick.flaster@flastergreenberg.com.
assets would ultimately be sold. 856-661-2266 Cherry Hill
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