TAX &
BUSINESS
LAW REPORT
A Newsletter of the Tax & Corporate Practice Group
Editor’s Note…
Our Philadelphia
office continues to
expand with the
lateral additions of
Abbe F. Fletman and
Jordan A. LaVine as
resident shareholders.
More importantly,
Richard J. Flaster
they enhance our
firm’s capability to handle intellectual
property and complex commercial and
securities litigation matters.
Our New Jersey presence also
expands as additional space is taken in
our Cherry Hill office and the Central
New Jersey office relocates to larger
quarters.
If you provide us with your e-mail
address and the e-mail addresses of
colleagues who would be interested in
receiving this report, we would be
pleased to include that information
in the database for this report. Please
send that information to me at
rick.flaster@flastergreenberg.com.
In This Issue. . .
Sale of Remainder Interest
May Be Better Than Qualified
Personal Residence Trust..........1
Post-Retirement Deferred
Compensation to Nonresident
Not Taxable in State Earned ....3
The Impact of Sarbanes-Oxley on
Private Companies....................3
Profitable Hospital-Physician
Gainsharing Arrangements
May Now Be Permissible..........4
Copyright © 2006
SPRING 2006
Sale of Remainder Interest
May Be Better Than
Qualified Personal Residence Trust
BY MICHAEL P. SPIRO
In the year 2000, equity in personal residences comprised 33.7
percent of the average net worth of American families, and the real
estate boom has caused that percentage to increase since then. As a
result, many estate planners have found that establishing a Qualified
Personal Residence Trust (“QPRT”), which removes the personal
residence from a client’s estate (while allowing the client to continue
living there) is one of the most effective ways to avoid substantial
estate taxes. However, an alternative technique may produce even greater benefits.
QPRT: Typically, the creator (grantor) of the QPRT transfers ownership of the res-
idence to the QPRT, retaining the right to live in the home for a term of years. The
grantor is treated as making a gift of the remainder interest in the residence equal to
the value of the residence less the value of the grantor’s retained interest. However, the
gift to the QPRT does not qualify for the $12,000 Annual Gift Tax Exclusion since it
is a gift of a future interest, and so the grantor must use a portion of the grantor’s
$1,000,000 lifetime gift tax exclusion to shelter the gift from gift tax. (If the grantor’s
lifetime exclusion has been used, the gift will be subject to current gift tax.) During the
term of the QPRT, the grantor has an unrestricted right to live in the property, and at
the termination of the QPRT term, the actual or beneficial interest in the property is
transferred to the remainder beneficiaries of the QPRT (usually, the grantor’s children).
To the extent that the grantor still wishes to live in the residence, he/she must then
pay a fair market rent to the remainder beneficiaries. If the grantor of the QPRT does
not outlive the term of the QPRT, the residence is fully included in the grantor’s estate,
and its disposition will be governed by the terms of the grantor’s will. So long as the
grantor survives the term of the QPRT, the QPRT technique allows the grantor to
remove an appreciating asset from his/her estate and only pay gift tax on a fraction of
its then-current value, with any gift tax due on the transfer likely being less than the
estate tax due on the further appreciated value of the residence at the grantor’s death.
However, QPRTs are not ideal for everyone. The primary downside of a
traditional QPRT is that in order for it to be an effective planning technique, the
grantor must outlive the term of the QPRT. If the grantor dies during the term, the
residence is included in the grantor’s estate, and the grantor will then have paid both
gift tax and estate tax on it (although a credit is allowed for the gift tax already paid).
Furthermore, the granting of the residence to the QPRT would either utilize the
(continued on page 2)
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.
Tax & Business Law Report • Flaster/Greenberg P.C.
 2
Sale Of Remainder Interest May Be Better Than Qualified Personal Residence Trust
(CONTINUED FROM PAGE 1)
grantor’s unified credit or engender current gift tax payment.
Another option to achieve the same ends — which might be
preferable for those not comfortable with the risks of a QPRT
— is the sale of a remainder interest through a Personal
Residence Trust (“PRT”).
Sale of Remainder Interest: A “remainder sale” transaction
works very similarly to a conventional QPRT transaction with
one important caveat: Rather than making a gift of the remain-
der interest in the residence to a trust, the grantor sells her
remainder interest directly to the ultimate beneficiaries. The use
of a sale rather than a gift eliminates gift tax on the transaction
and allows the grantor to live in the residence rent-free for the
remainder of his/her life without being subject to estate taxation
at death.
The structure of a “remainder sale” works like this:
1. Residence is appraised to determine fair market value. The
appraised value is then multiplied by an actuarial factor,
(supplied by the IRS), which determines the percentage of
value attributable to the grantor’s life estate. For example,
for an 83-year-old person, the IRS factor for a life estate in
property is approximately 27.136 percent, and so, 27.136
percent of the appraised value of a residence owned by an
83-year-old person would be attributable to the life estate
and 72.864 percent of the value would be attributable to
the remainder interest.
2. The grantor and the beneficiaries enter into a contract of
sale, whereby the beneficiaries purchase the remainder
interest for this fraction of the total value of the residence
attributable to the remainder interest.
Federal Estate Tax Benefits: A grantor can sell (for
adequate and full consideration) a remainder interest in the
property, live in the property for the remainder of his/her
life, and not have the property subject to estate taxation
at death. See D’Ambrosio v. Commissioner, 78 AFTR 2d
96-7347 (3d Cir. 1996), which decided that the proper way
to determine whether there had been a “bona fide sale for
adequate and full consideration” was to “compare the value
of the remainder transferred [rather than the value of the
entire fee-simple interest in the property] to the value of the
consideration received.”
Avoiding Gift Tax: Section 2702 of the Internal
Revenue Code provides that unless a retained life estate is a
“qualified” life estate, the transferor of a remainder interest is
treated as having made a gift of the entire property to the
transferee (if the transferee is a member of the transferor’s
family) and therefore, gift tax would normally be due on the
transfer. However, the Treasury Regulations also provide an
exception from this general rule for transfers to a “Personal
Residence Trust” (“PRT”). Thus, gift tax can be avoided by
Tax & Business Law Report • Flaster/Greenberg P.C.
structuring the contract for the sale of the remainder interest
as a PRT:
PRT Technique: A PRT is defined as “a trust, the govern-
ing instrument of which prohibits the trust from holding, for
the duration of the term interest, any asset other than one
residence to be used or held for use as a personal residence of
the term, holder and qualified proceeds.” Accordingly, the PRT
“governing instrument” must provide that:
• the personal residence of the term holder may not be sold
during the term estate;
• any insurance proceeds received due to damage to, or invol-
untary conversion of, the personal residence must be held
by the trustee in a separate account and reinvested in a -
personal residence;
• the personal residence may not be sold back to the term-
holder, the term-holder’s spouse or the term-holder’s estate
when the term estate expires; and
• the trust must contain as its only asset the personal resi-
dence and the qualified proceeds thereof.
Observation: Commentators have advanced the notion
that because this transfer of a remainder meets the definition of
a “transfer in trust,” the “governing instrument” of a PRT need
not actually be a trust instrument and these provisions could be
incorporated into the contract of sale.
Planning Note: Use of a QPRT offers substantial ben-
efits for those homeowners who wish to make gifts of their
personal residences with minimal gift and estate tax conse-
quences. However, where the ultimate devisees of the resi-
dence have the resources to purchase a remainder interest,
they can enjoy the same estate tax benefits without the gift
tax consequences and avoid the material estate tax risk that
the grantor may predecease the expiration of the QPRT
and thus subject the full current value of the residence to
estate taxation. ◆
QPRT Remainder Sale
Cash required from None Value of
beneficiary Remainder interest
Death during term Inclusion in No inclusion in
gross estate gross estate
Death after No inclusion No inclusion
expiration of term
Gift Tax Due Gift tax on value No gift tax
of remainder interest
 3
Post-Retirement Deferred
Compensation To
Nonresident Not Taxable
In State Earned
BY RICHARD J. FLASTER
Most state income tax laws seek to
tax even nonresidents on income
that is derived from or arises from
sources within the state — includ-
ing income paid for the rendition
of personal services in the State
(See e.g., N.J. Section 54A:5-8 and
N.Y. Tax Law Section 631(a) and
(b). The question arises, however,
whether deferred compensation, which accrued while
employed in the state, is taxable when the recipient is a
nonresident when payments are received.
In response to that question, federal law intervenes
to provide that no state may impose an income tax on
“retirement income” (which includes deferred com-
pensation as described in Section 3121(v)(2)(c) of the
Internal Revenue Code) but only if paid in a series of
substantially equal periodic payments over a period of
ten years or more. See Section 114 of Title 4 of the
United States Code.
In an interesting case arising under New York tax
law, a New York administrative law judge recently held
that deferred compensation payments made to a retired
lawyer by his former New York City law partnership
after his change of residence to Florida was not subject
to New York income taxation where the payments were
made on a uniform basis (viz., a fixed percentage of
ongoing yearly partnership profits, which fluctuate
from year to year) — even though not constituting
equal amounts each year. See In Re John McDermott,
Jr., App. Div. of Tax Appeals No. 820099 (2/2/06).
Planning Note: The use of deferred compensa-
tion as a component of buyout arrangements already
offers the opportunity for significant federal tax
savings — arising from the trade-off of “grossed-up”
tax deducible deferred compensation of non-
deductible stock payment. In addition, the long-term
buy-out arrangements might be judiciously structured
to also avoid state income taxation of this buy-out
component if the retiring owners relocate to states
without income taxation (e.g., Florida or Nevada —
and now on an expanded basis if the McDermott case
rationale is followed in New Jersey and other states. ◆
The Impact of Sarbanes-Oxley
on Private Companies
BY THOMAS D. SCHOLTES
Although the main thrust of the Sarbanes-Oxley
Act of 2002 (the “Act”) is on public companies
and the financial markets, there are two provisions
of the Act that are directly applicable to private
companies, and many other provisions that have
some impact. The two provisions that apply
directly to private companies are:
• Criminal Liability for Document Destruction. In response to
the destruction by auditors and company personnel of documents
relating to federal investigations, the Act provides criminal penalties
for anyone who intentionally destroys, alters or conceals any record
or document with the intent to impede or otherwise influence a
federal agency investigation or bankruptcy proceeding.
• Liability for Retaliation Against Whistleblowers. The Act
also makes it a crime to knowingly retaliate against any inform-
ant who provides a law enforcement officer with truthful
information relating to the commission or possible commission
of any federal offense.
However, there are a variety of circumstances in which private com-
panies are voluntarily adhering to other provisions of the Act:
• Preparing for an Initial Public Offering (“IPO”). A private
company that is considering an IPO should develop a Sarbanes-
Oxley compliance program well in advance of the IPO, because
private companies must comply with the Act in order to complete
the IPO. This means that a private company working towards an
IPO will need to begin the process of identifying and retaining
independent directors. The reconstitution of the board of direc-
tors will be further complicated if board seats are held by venture
capital firms with contractual rights to such board seats.
• Preparing for a Sale to a Public Company. A public company
purchasing a private company will consider the private company’s
compliance with the Act to be an attractive feature of such private
company because the public company acquirer will become
responsible for compliance with respect to the acquired company
after the acquisition closes. This includes the Act’s requirement
that the CEO and CFO of a public company personally certify that
they have evaluated the controls and procedures in their compa-
nies during the last quarter and have concluded that such proce-
dures are in place and effective.
• Issuers of Public Debt. Many provisions of the Act also
expressly apply to private companies that have debt securities,
which are registered with the Securities and Exchange
Commission.
Accordingly, all private companies should understand the Act and
what it might mean for them, but that the news is not all bad. Many
private companies have reported that they are using the Act as a guide
to “best practices” and will likely realize substantial benefits from
(continued on page 4)
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 4

The Impact of Sarbanes-Oxley

on Private Companies
Profitable Hospital-Physician
(CONTINUED FROM PAGE 3) Gainsharing Arrangements
improving their internal procedures. Other private companies
have elected to comply with the Act so as to reduce litigation
May Now Be Permissible
exposure to their officers and directors.
BY STEPHEN M. GREENBERG
Observation: These are a few suggestions for “Best Practices”:
With malpractice premiums escalating and
• Identify and retain one or more independent directors to
reimbursements shrinking, physicians are
serve on the Board.
always looking for new sources of revenue,
• Establish key Board committees (in particular, an audit and gainsharing arrangements between hos-
committee), elect one or more independent directors to pitals and physicians may offer such an
such committees and, if possible, have at least the majority opportunity. A “gainsharing arrangement” is
of the key board committee members be independent. typically a program by which a hospital and a
• The audit committee should meet at least quarterly and group of physicians collaborate to save
meet separately with the independent auditor. money on services provided by the hospital,
with the savings then shared between them. Under the Medicare
• Confirm that the company’s independent auditor is appro-
DRG system and managed care contracts, hospitals often receive
priately suited to the company’s needs and is independent
fixed payments for certain “episodes of care” and, therefore, are
of management and use a second independent audit firm to
under considerable pressure to cut costs. In contrast, physicians
provide non-audit services that may impair the independent
are paid separately and do not have the same incentives to cut
auditor’s independence.
hospital costs. Gainsharing arrangements are an attempt to align
• Adopt policies and practices to avoid conflicts of interest — the physicians’ incentives with those of the hospital.
e.g., prohibiting and/or, carefully monitoring, any transac-
Background: Until recently, gainsharing arrangements
tions between the company and an insider and have a board
were generally thought to run afoul of the Civil Monetary
committee comprised of independent directors approve all
Penalty Law, the federal Anti-Kickback Statute, or both. The
related party transactions.
Civil Monetary Penalty Law imposes penalties against any hos-
• Provide means for employees to submit concerns about the pital or physician that knowingly makes or receives a payment,
company’s accounting or auditing practices on an anonymous directly or indirectly, as an inducement to reduce or limit items
basis and establish a procedure for promptly investigating and or services to Medicare or Medicaid beneficiaries under a physi-
handling any such claims. cian’s care. The federal Anti-Kickback Statute makes it illegal
• Confirm proper documentation of the processes and proce- for any person to offer, pay, solicit or receive, directly or indi-
dures for financial reporting, internal controls, determination rectly, any remuneration intended to induce the referral of any
of executive compensation arrangements and enforcement of patient or service that is covered by Medicare or Medicaid.
ethics policies. ◆ Impermissible: Although earlier pronouncements by the
Office of Inspector General of the U.S. Department of Health
and Human Services (the “OIG”) made gainsharing arrange-
ments a generally dead issue, the OIG issued Advisory Opinion
Office Locations 01-1 in 2001, which at least conceptually resuscitated such
arrangements. Specifically, that Advisory Opinion concerned a
proposed gainsharing arrangement between a hospital and
1810 Chapel Avenue West 441 East State Street
Cherry Hill, NJ 08002-4609 Trenton, NJ 08608
a group of cardiac surgeons that was very limited and had
Tel 856-661-1900 Tel 609-695-4000 extraordinary controls in place in an attempt to make sure that
Fax 856-661-1919 Fax 609-695-5111 no laws were broken. The OIG found that both the Civil
Monetary Penalty Law and the Anti-Kickback Statute were tech-
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Egg Harbor Twp., NJ 08234 Vineland, NJ 08360 nically violated but declined to impose sanctions because it felt
Tel 609-645-1881 Tel 856-691-6200 that the safeguards in place were sufficient to mitigate fraud and
Fax 609-645-9932 Fax 856-696-8150 abuse concerns. However, the OIG Opinion was so limited that
89 Headquarters Plaza North 8 Penn Center
it did not send a broad green light to gainsharing arrangements.
14th Floor, Suite 1472 1628 JFK Boulevard, 15th Fl New Development: However, that has now changed. The
Morristown, NJ 07960 Philadelphia, PA 19103 OIG has subsequently issued six Advisory Opinions in which
Tel 973-605-1799 Tel 215-279-9393
it decided not to impose sanctions despite finding technical
Fax 973-605-1344 Fax 215-279-9394
violations of the Civil Monetary Penalty Law and the
(continued on page 5)

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

 5

Profitable Hospital-Physician Gainsharing Arrangements May Now Be Permissible

(CONTINUED FROM PAGE 4)

Anti-Kickback Statute. Generally, all six Advisory Opinions dealt
with arrangements under which a hospital would pay a surgical
group or cardiology group a share of the first year savings directly
attributable to specific changes in the group’s operating room or
cardiac catheterization laboratory practices. Once again, the OIG
relied on a lengthy list of safeguards in the arrangements that were
designed to severely limit or eliminate the opportunity for abuse:
• An independent third party consultant was used to identify
in advance areas where cost savings could be achieved and
compared these cost saving opportunities to objective
historical and clinical standards and the arrangements pro-
vided limits beyond which no further savings would inure
to the benefit of the physicians.
• Although savings could be generated by utilizing certain
medical devices, the full range of such devices would still be
available to the surgeons or cardiologists.
• The arrangements would last for only one year, the shared
cost savings would be calculated on a specific item-by-
item basis, and the arrangements would be reevaluated
after one year.
• The remuneration paid to the surgical or cardiology groups
would be shared on a per capita basis to make sure that no
individual physicians had a greater incentive to limit care.
• The volume of procedures for which gainsharing arrange-
ments were available would be monitored and no remuner-
ation would be payable for more of such procedures than
were provided in the base year.
• The ages, case severity, and payors would be monitored to
make sure that the surgeons and cardiologists were not
“cherry picking” by sending older or sicker patients to hos-
pitals where the gainsharing arrangements were not offered.
• The entire gainsharing arrangement would be disclosed to
each patient before admission to the hospital or, if imprac-
tical, before the patient consented to the procedure covered
by the arrangement.
Observation: With safeguards this stringent and pervasive, it
cannot be said that the OIG has now generally approved gainshar-
ing arrangements. Further, since the OIG has found underlying
violations of the Civil Monetary Penalty Law and the Anti-
Kickback Statute and is not responsible for enforcing the federal
physician self-referral law (commonly known as the “Stark
Regulations”), some commentators still feel that gainsharing
arrangements pose substantial risks. However, with six Advisory
Opinions indicating that sanctions would not be imposed in such
circumstances, there has been renewed interest in the hospital-
physician community in seeing whether such arrangements can be
permissibly structured. While gainsharing arrangements that pass
legal muster are not always possible and require careful structuring
(and related cost), the rewards on the back end may make the
pursuit worthwhile. ◆

TAX & CORPORATE PRACTICE GROUP

Richard J. Flaster Peter R. Spirgel Elliot D. Raff
rick.flaster@flastergreenberg.com peter.spirgel@flastergreenberg.com elliot.raff@flastergreenberg.com
856-661-2260 856-661-2267 856-382-2241

Stephen M. Greenberg Alan H. Zuckerman Dennis J. Helms

steve.greenberg@flastergreenberg.com alan.zuckerman@flastergreenberg.com dennis.helms@flastergreenberg.com
856-661-2261 856-661-2266 856-382-2238

Laura B. Wallenstein William S. Skinner Thomas D. Scholtes

laura.wallenstein@flastergreenberg.com william.skinner@flastergreenberg.com thomas.scholtes@flastergreenberg.com
856-661-2263 856-661-2262 856-382-2227

Allen P. Fineberg Elaine J. Petruzziello Michael P. Spiro

allen.fineberg@flastergreenberg.com elaine.petruzziello@flastergreenberg.com michael.spiro@flastergreenberg.com
856-661-2264 856-661-2287 856-382-2203

Markley S. Roderick Marc R. Garber * Mitchell R. Cohen *

mark.roderick@flastergreenberg.com marc.garber@flastergreenberg.com mitchell.cohen@flastergreenberg.com
856-661-2265 856-382-2237 856-382-2222

* Of Counsel

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