TAX AND
BUSINESS
LAW REPORT
A Newsletter from the Tax & Corporate Practice Group
www.flastergreenberg.com
Editor’s Note…
Richard J. Flaster
As Flaster/Greenberg turns “30” this
year, I cannot help but nostalgically reflect
on how we have transformed the firm over
the last 15 years from a small tax boutique
into a full-service business law firm, with
nearly 50 professionals.
Most recently, we enhanced our
Employee Benefits Practice Group with
the addition of Elliot D. Raff and Marc R.
Garber (Of Counsel), with prospective new
attorneys expected to join the firm in the
coming months.
Lastly, with the objective of broadening
our base of readership, we may soon offer
e-mail transmission of this Report as an
alternative to postal service. If you provide
us with your e-mail address and the
e-mail addresses of colleagues who would
be interested in receiving our quarterly
Tax and Business Report, we would be
pleased to include that information in
the distribution database. Please send the
e-mail addresses to my attention at:
Rick.Flaster@flastergreenberg.com.
In This Issue…
New Jersey Tax Amnesty............1
New IRS Procedures
for Issuing EINs........................1
New Federal Tax Stimulus Law....2
ESOPs as a Business Tool............3
Copyright © 2002
Spring 2002
New Jersey Enacts Tax Amnesty
By Alan H. Zuckerman
ew Jersey has recently enacted a short term Tax Amnesty Program
Alan H. Zuckerman
N which will permit a taxpayer who owes any New Jersey tax for any
return due on or after January 1, 1996 and prior to January 1, 2002,
to pay the tax by June 10, 2002 and in such case no penalties, interest or
collection costs will be charged, and there will be no criminal prosecution.
The amnesty apparently applies not only to Observations:
unreported tax liabilities, but also to tax liabili-
◆ While the tax amnesty program provides a
ties that are currently the subject of audit,
window of opportunity for taxpayers to pay
assessment or dispute–other than a taxpayer
outstanding New Jersey tax liabilities at a
who is under criminal investigation. However,
significantly reduced cost (as a result of the
if the taxpayer has filed an administrative
waiver of penalties, interest and collection
appeal or a complaint in Tax Court with
costs), it will create a significant hardship
respect to the tax in question, the tax amnesty
to those taxpayers who are unable to pay
applies only if the Director of the Division of
their New Jersey tax liabilities by June 10,
Taxation consents to allow the taxpayer to take
2002, because it will thereafter prevent
advantage of the amnesty program. If the tax-
waiver of penalties and interest as well as
payer elects to take advantage of the amnesty
engender an additional 5% penalty.
program, the taxpayer must waive all rights to
appeal the tax assessment and to claim any ◆ Since the window covers tax liabilities for
refund with respect to the tax paid. returns due on or after January 1, 1996, a
tax liability arising during 1995 could
If a taxpayer who is eligible to take advan- potentially enjoy protection under the
tage of the amnesty fails to do so, the Division amnesty if reportable on a tax return due
will be thereafter precluded from waiving or after January 1, 1996.
abating penalties or interest, and an additional
◆ The amnesty program appears to apply to
5% penalty will ultimately be imposed in addi-
tion to the normal penalties, interest, and both corporate and individual taxpayers
costs of collection. and to apply to any state tax liability and
not just income tax liabilities.
New IRS Procedures for Issuing
Employer Identification Numbers
By Richard J. Flaster
he IRS recently consolidated its processing of requests for Employer Identification Numbers
T (“EINs”) from the existing 10 Service Centers to the three located in Brookhaven, NY;
Cincinnati, OH, and Philadelphia, PA. Calls to the Internal Revenue Services’ 800 number
(866-816-2065), which were previously forwarded to the region of the applicant, are now
apparently being connected to any one of these three Service Centers. As a result of this
consolidation, applicants are encountering material delays in obtaining EINs.
Previously, the Philadelphia Service Center could not issue an EIN number for a New Jersey
or Florida entity, because the first two digits of the EIN indicated the business location of the
taxpayer and the applicable Service Center. However, it can now do so, since the first two digits
of the EIN number are no longer relevant to location.
Tax & Business Report • Flaster/Greenberg P.C.
 2

New Federal Tax Stimulus Law

By Richard J. Flaster
he Job Creation and Worker Assistance Act of 2002 (the “Act”) was

T signed into law by President Bush on March 9, 2002 and provides for
several new taxes. In general terms, the following is a summary of the
Act’s most-significant tax savings features:
Luxury cars can also
qualify for the Extra First-
◆ Extra First-Year Depreciation: Taxpayers may take an additional first-
year depreciation deduction for qualified property in an amount equal Year Depreciation Deduction
to 30% of its adjusted basis. Qualified property generally includes new
property acquired during the period September 11, 2001 through up to the prescribed limit…
Richard J. Flaster September 10, 2004 and placed in service by December 31, 2004 and
having a recovery period of 20 years or less.
◆ Higher “Luxury Car” Deduction: Luxury cars can also qualify for the Extra First-Year
Depreciation Deduction up to the prescribed limit, and the deduction limit for first-year
depreciation is increased to $7,660 for new automobiles acquired and placed in service ◆ Limitation on Use of Non-Accrual
during the period from September 11, 2001 through December 31, 2002. Method of Accounting: The Act general-
ly limits the use of the non-accrual method
◆ Longer Net Operating Loss Carryback Period: The loss carryback period has been
of accounting (viz., which allows taxpayers
increased from two years to five years, effective for tax years ending before January 1, 2003.
to exclude accrued income derived from
Taxpayers may elect to opt out of the extended carryback period.
services rendered which are not anticipated
◆ No S Corporation Basis Increase Upon Cancellation of Debt: Last year, the Supreme to be collected) to apply to uncollectible
Court held in Gitlitz v. Commissioner that an S corporation shareholder could obtain a stock income either derived from “qualified serv-
basis increase upon a cancellation or discharge of debt to the insolvent or bankrupt S corpo- ices” (viz., health, law, engineering, archi-
ration and thereby transform the shareholder’s unusable suspended S corporation losses into tecture, accounting, actuarial service, per-
net loss carrybacks/carryovers which could be used to shelter the shareholder’s personal forming arts by consulting services) or to
income. The Act now repeals the Gitlitz rule for all cancellations or discharges of indebted- uncollectible income derived by other
ness after October 11, 2001 (other than discharges of indebtedness after October 11, 2001, small businesses with average annual gross
but before March 1, 2002 which arise pursuant to a bankruptcy reorganization plan filed receipts for the three preceding tax years
before October 11, 2001). that is not in excess of $5,000,000.

Tax & Corporate Practice Group Services

Federal and State Taxation Wealth Preservation and Employee Benefits
◆ Tax planning Transfer ◆ Implementation and administration
◆ Corporations, partnerships and ◆ Estate planning of qualified retirement plans
LLC’s ◆ Drafting wills, trusts and other ◆ Employee Stock Ownership Plans
◆ Sales, mergers and acquisitions estate planning documents (ESOPs)
◆ IRS rulings ◆ Administration of estates and trusts ◆ Stock options, phantom stock and
◆ Tax litigation ◆ Guardianships and conservatorships SAPs
◆ Tax collections/liens ◆ Litigation involving trusts and ◆ Plan qualification, IRS audits and
estates compliance issues
Business Corporate Services ◆ Asset protection ◆ Cafeteria plans and other welfare
◆ Business formations benefit programs
◆ Business transfers from one
◆ Structuring ownership ◆ Employee benefit trusts
generation to the next
arrangements ◆ Deferred compensation
◆ Corporate control/management Technology, E-Commerce and arrangements
contracts Internet
◆ Shareholder disputes ◆ Contract agreements This report is for general use and
◆ Contracts ◆ Protecting intellectual property information, and the content should
◆ Sales, commercial mergers and rights not be interpreted as rendering
acquisitions ◆ Licensing legal advice on any matter. Specific
◆ Securities and finance ◆ Government regulation situations may raise additional or
◆ Buy-ins/Buy-outs different issues and such information
◆ Venture capital
should be coordinated with
◆ Employee agreements and professional legal advice.
terminations

Tax & Business Report • Flaster/Greenberg P.C.

 3

ESOP as a Business Succession Tool 2. The shareholder must file an election with
the IRS and the corporation must file a
written acknowledgment that it is poten-
tially subject to certain excise taxes;
By Elliot D. Raff
3. The shareholder must purchase “qualified
s both a retirement plan and a tool of corporate finance, an employee

A stock ownership plan (“ESOP”) is a hybrid vehicle that can provide a

tax-advantaged way for the owner of a privately held business to
transfer ownership while retaining a significant measure of control over
replacement property” (generally, stock in
a domestic corporation) during a “replace-
ment period” beginning three months
before and ending 12 months after the
future sales of the corporation’s stock. However, an ESOP and those
transaction;
responsible for it, are subject to extensive regulation by both the Internal
Revenue Code (the “Code”) and the Employee Retirement Income 4. The former selling shareholder (and certain
Security Act of 1974 (“ERISA”). Further, since ESOPs serve as both a family members and other key shareholders)
retirement plan and tool of corporate finance, and corporate executives typ- may not receive any allocation, as an ESOP
Elliot D. Raff participant, of the employer securities
ically also serve as ESOP trustees, the ESOP trustees must pay special
attention to fiduciary issues in the formation and administration of the ESOP. acquired by the ESOP in the exchange for
a period of 10 years, effectively precluding
Introduction to ESOPs: An ESOP is a “qualified plan” that is designed to invest primarily
participation in the ESOP.
in the stock of the sponsoring corporation (“employer securities”). As such, an ESOP (like any
qualified plan) conveys three significant tax benefits: Given the requirement to purchase qualified
replacement property within 12 months of the
◆ Permissible contributions are currently deductible;
sale, these exchanges usually involve leveraged
◆ The ESOP’s earnings build up tax-free until distributed; ESOPs; otherwise, the shareholder would not
◆ Distributions may be made on a tax-free basis as rollovers. have proceeds to reinvest within the deadline.
Employer securities may be contributed directly to the ESOP each year by the corporation,
or the ESOP may borrow funds (or use seller financing) to purchase a large block of employer Observations:
securities. Either way, employer securities are allocated to accounts established in the ESOP in ◆ A tax-free exchange with a leveraged
the name of each participant. ESOP can be a powerful tool for business
As a “qualified plan,” an ESOP must satisfy many of the same rules that apply to profit succession planning. Since only 30% of the
sharing plans, such as minimum coverage and vesting corporation’s stock must be owned by the
requirements. In addition, there are many other ESOP ESOP, the remaining 70% could be disposed
requirements. For example, participants can demand a of through a different avenue for a business
distribution in the form of employer securities instead …ESOPs do convey succession and/or estate planning purposes.
of cash (subject to certain exceptions). While the rules For example, a typical transaction involves
applicable to qualified plans generally are complex, the
special tax benefits not an ESOP acquiring 30% of a corporation’s
stock, and a management group and/or
additional rules applicable to an ESOP administration available for other the corporation itself acquiring some or all
are even more challenging. However, ESOPs do convey
of the balance.
special tax benefits not available for other qualified plans. qualified plans
This article will discuss the special ESOP tax benefits ◆ Such an exchange allows the owner to
that relate to ESOPs as a business succession tool. better plan and manage retirement income
by having his large holding of employer
Used to Spread Employee Ownership: Since an ESOP must cover broad categories of securities replaced on a tax-free basis with
employees and invest primarily in employer securities, its use will generally entail a spreading of a diversified portfolio that can be managed
ownership of the corporation among employees. However, this may occur gradually over time to generate income or appreciation, as
and may be limited by the amount of employer securities contributed to or acquired by the needed.
ESOP, and by the buy-out provisions at the time of benefit distributions. ◆ A degree of control over the corporation
Used as a Tool of Corporate Finance: Although normally the corporate sponsor of a can be retained during a transition to new
qualified retirement plan may not make a loan to the plan nor sell property to a plan, ESOPs executive officers. This can be accomplished
qualify for exceptions to such prohibitions. For example, a loan may be made directly to the by having the selling shareholder serve as
ESOP or the corporation may obtain a loan and extend a matching loan to the ESOP (“back-to- an ESOP trustee, with the authority to act
back ESOP loan”). The proceeds are then used to purchase employer securities. Alternately, the as a shareholder, and with management
corporation may sell the stock to the ESOP in exchange for a promissory note given by the control negotiated to allow management
oversight over certain major transactions.
ESOP. Thereafter, the corporation makes deductible annual contributions to the ESOP to fund
repayment of the loan. As the ESOP repays the loan, a proportionate number of shares are ◆ As noted above, those who control an
released to the participant accounts. Through this “leveraged” approach, the corporation may be ESOP will be subject to ERISA’s fiduciary
able to obtain more attractive financing and repay it through deductible contributions over a duties. ESOP trustees often face unique
long period of time. fiduciary problems, particularly where
officers and/or directors serve as the
Used as Exit Strategy for an Owner: In a privately held C corporation, an ESOP offers ESOP trustees. Often the appropriate
the opportunity for an owner to extricate himself from sole ownership in the corporation and ERISA considerations differ from and may
diversify his investment assets through a special tax-free exchange. The owner sells his stock to be at odds with appropriate corporate
the ESOP, reinvests the sale proceeds in marketable stocks or securities, and does not incur considerations and the wrong approach
taxation on the gain until the sale of the replacement stock or securities. In order to qualify: could result in personal liability under
1. The ESOP must, immediately after the transaction, hold at least 30% of either each class of ERISA. Thus, careful attention to
fiduciary duties and regular involvement
the corporation’s stock or of the total value of all stock;
of ERISA counsel is critical.

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Tax & Corporate Practice Group

Richard J. Flaster
Harvard Law School, J.D. 1966
Stephen M. Greenberg
Yale Law School, J.D. 1976
Laura B. Wallenstein

Office Locations Rutgers Law School, J.D. 1977

New York University Law School, L.L.M. 1981
Allen P. Fineberg
Commerce Center 190 S. Main Road Columbia Law School, J.D. 1979
1810 Chapel Avenue West Vineland, NJ 08360
Markley S. Roderick
Cherry Hill, NJ 08002-4609 (856) 691-6200 University of Virginia Law School, J.D. 1982
(856) 661-1900
Peter R. Spirgel
216 North Avenue Georgetown Law School, J.D. 1985
300 Walnut Street Cranford, NJ 07016 Temple Law School, L.L.M. 1988
Philadelphia, PA 19106 (908) 245-8021 Alan H. Zuckerman
(215) 922-4000 CPA 1982; Temple Law School, J.D. 1985
2900 Fire Road, Suite 102A William S. Skinner
Egg Harbor Township, NJ 08234 University of Pennsylvania Law School, J.D. 1986
(609) 645-1881 Elaine J. Petruzziello
Willamette University, J.D., MBA 1985
University of Denver, L.L.M. 1986

Practice Areas Jeffrey S. Brenner

Rutgers Law School, J.D. 1989
Bankruptcy • Business and Corporate Services • Closely-Held and Family Businesses Elliot D. Raff
• Commercial Litigation • Commercial Real Estate • Construction Law • Employee University of Wisconsin Law School, J.D. 1990
Benefits • Employment and Labor Law • Environmental Law • Estate Planning and Aaron C. Buser
Administration • Family Law and Adoption • Financial Work-Outs • Health Care Rutgers Law School, J.D. 2001
• Land Use • Pension and Retirement Plans • Securities Regulation • Taxation Mitchell R. Cohen (Of Counsel)
• Technology and Emerging Businesses Temple University Law School, J.D. 1979
Marc Garber (Of Counsel)
Duquesne University School of Law, J.D. 1981
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