TAX AND

BUSINESS
LAW REPORT
A Newsletter from the Tax & Corporate Practice Group

www.flastergreenberg.com Summer 2004

How Taxing is the Domestic Partnership Act? By Peter R. Spirgel

ew Jersey joined a

N growing number of
states when it granted
certain legal rights to gay
and lesbian couples on July
11, 2004. Putting aside the
social implications of this
Peter R. Spirgel new legal status offered to
gay and lesbian couples, the
Domestic Partnership Act (the “Act”) creates
several beneficial tax planning opportunities
that, prior to its enactment, were not available
to same sex partners. However, it falls far short
of granting domestic partners the same status as
spouses for tax purposes. This notwithstanding, two unmarried, unrelated, same sex individuals, over the age of 18,
attorneys counseling clients who meet the who file an Affidavit of Domestic Partnership and agree to be jointly
definition of “domestic partners” under the responsible for each other’s basic living expenses. The definition of a
Act should become familiar with the tax impli- domestic partner also includes heterosexual couples over the age of 62
cations of this newly-created legal status. if they meet the other requirements of the Act.
Under the Act, a domestic partnership is At the onset, it should be recognized that the Act does not
generally defined as the relationship between impact federal tax liability. The Internal Revenue Code (the “IRC”)
(continued on page 9)

Editor’s Note… In This Issue. . .

Our Tax and Corporate Practice Group has
expanded with the recent addition of Thomas D.
Scholtes. Tom is a corporate attorney with experience How Taxing is the Domestic
in complex transactions for both public and privately- Partnership Act? ..................................1
held companies. His legal skills complement and
enhance our existing capabilities. Asset Protection Planning ......................2
Richard J. Flaster
Given the academic backgrounds and extensive Corporate Business Tax Credit
commercial experience of the lawyers in our Tax and Corporate Practice for Eligible Brownfields
Group, they are particularly suitable to serve as mediators and/or arbi- Remediation Costs ..............................3
trators for the resolution of commercial disputes. Lawyers who specialize
in such matters provide a more expeditious and cost effective alternative
approach to dispute resolution than that offered by state or federal courts Visit our Web site at:
with multi-year backlogs and judges (retired or active) who often have
far less experience in commercial transactions.

www.flastergreenberg.com

Copyright © 2004 Tax & Business Law Report • Flaster/Greenberg P.C.


Asset Protection Planning
ith litigation against
W professionals, busi-
ness executives and
other high net worth indi-
viduals becoming America’s
favorite past time, profession-
als are increasingly asked to
Richard J. Flaster consider proper planning
techniques to place assets
beyond the reach of creditors for themselves and
their clients. However, whether undertaken for
the benefit of the professional or a client, the
cardinal rule for asset protection planning is that
it must be undertaken before its need arises.
The Legal Landscape: New Jersey’s
Uniform Fraudulent Transfer Act (“UFTA”)
establishes the basic terrain, and N.J.S. 25:2-25
generally provides that a transfer made or obli-
gation incurred by a debtor is “fraudulent” as
to a creditor, whether the creditor’s claim
arose before or after the transfer was made or
the obligation was incurred, if the debtor made
the transfer or incurred the obligation:
a. with actual intent to hinder, delay, or
defraud any creditor of the debtor; or
b. without receiving a reasonably equivalent
value in exchange for the transfer or obli-
gation, and the debtor
i. was engaged or was about to engage in
a business or a transaction for which the
remaining assets of the debtor were
unreasonably small in relation to the
business or transaction; or
ii. intended to incur or believed, or reason-
ably should have believed, that the debtor
would incur debts beyond the debtor’s
ability to pay as they become due.
Accordingly, once the claim of a creditor
exists (“Current Claim”) or a claim is antici-
pated to arise from a specific existing creditor
(“Anticipated Claim”), it is usually too late for
such planning to be effective or permissible.
The determination of whether an asset
transfer that avoids Current Claims has been
made “fraudulently” (i.e., with an intent to hin-
der, delay or defraud) is generally based on the
presence or absence of a non-exhaustive list of
11 factors (referred to as “badges of fraud”):
• The transfer or obligation was to an insider;
Tax & Business Law Report • Flaster/Greenberg P.C.
2
By Richard J. Flaster
• The debtor retained possession or control of the property trans-
ferred after the transfer;
• The transfer or obligation was [not] disclosed or concealed;
• Before the transfer was made or obligation was incurred, the debtor
had been sued or threatened with suit;
• The transfer was of substantially all the debtor’s assets;
• The debtor absconded;
• The debtor removed or concealed assets;
• The value of the consideration received by the debtor was [not]
reasonably equivalent to the value of the asset transferred or the
amount of the obligation incurred;
• The debtor was insolvent or became insolvent shortly after the
transfer was made or the obligation was incurred;
• The transfer occurred shortly before or shortly after a substantial
debt was incurred; and
• The debtor transferred the essential assets of the business to a
lienor who transferred the assets to an insider of the debtor.
In contrast, the determination of whether a transfer that avoids an
Anticipated Claim was “fraudulent” must be based on a showing of
actual fraud and a specific intent to hinder, delay or defraud that spe-
cific claimant and not merely on the badges of fraud analysis.
Accordingly, the “transfer” of assets made to avoid Current Claims
or Anticipated Claims will likely be treated as voidable “fraudulent trans-
fers” and will leave the transferred assets still subject to such claims. If
the professional’s involvement in the asset transfer transactions has
exceeded the “permissible bounds for advising” (viz., merely providing
the client with truthful information about the law) or constitutes an
intentional or reckless disregard of the creditor’s rights (which could
entail the failure of appropriate due diligence efforts), the professional
may personally be deemed to be an active participant in a plan to
defraud creditors and subject to individual liability for the claims as well
as possible loss of license or even criminal charges. See, Counseling at
the Limits of The Law: An Exercise in The Jurisprudence; 104 Yale L.J.
1545 (1995) and Rule 14:3-3 of the New Jersey Rules of Professional
Conduct; see, e.g., Morganroth & Morganroth v. Norris, McLaughlin &
Marcus, 331 F.3d 406 (3rd Cir. 2003); Banco Popular North America v.
Gandi, 360 N.J. Super. 414 (App. Div. 2003) cert. granted, 177 N.J.
495; Kline v. First Weston Govt. Securities, 24 F.3d 480 (3rd Cir. 1994).
In light of such concerns, asset protection planning should generally
focus on protecting assets from the future claims of future creditors
(“Future Claims”). Since those creditors and claims do not exist at the
time of transfer, the requisite intent to defraud is definitionally absent
— even though the asset transfers are motivated by the transferor’s
generalized desire to divest himself of property and be protected in the
event a problem arises in the future.
Subject to these caveats, set forth below is a survey of the most sig-
nificant techniques generally to be considered in formulating an asset
protection plan for Future Claims.
(continued on page 4)
 3

Corporate Business Tax Credit for Eligible Brownfields

Remediation Costs
Mirage in the Contaminated Desert By Peter R. Spirgel and Matthew Azoulay

n January 15, 2004, Governor license or other authorization issued

O McGreevey signed legislation

(A.2628) establishing a corpora-
tion business tax credit for remedia-
by any other State department or
agency, authorizing the company to
engage in corporate activity within
tion costs of up to 100 percent, sub- this State; (iii) does business in the
ject to certain restrictions, for compa- State; (iv) employs or owns capital in
Peter R. Spirgel Matthew Azoulay nies that remediate and redevelop the State; (v) employs or owns prop-
brownfields sites (the “Brownfields Tax erty in the State; (vi) maintains an
Credit Act”).1 As one of the bill’s sponsors, Assemblywoman Barbara Watson office in the State; (vii) derives
Coleman, said in a statement, “[a]n improved tax credit can be the stimulus receipts from sources within the
businesses need to make these areas safe and valuable again.” The Act seemed State; or (viii) engages in contacts
to provide one more incentive for New Jersey businesses to clean up and reuse within the State.4
contaminated sites. The corporate business tax (CBT)
We started to draft a “client alert” advising of this new brownfields redevel- is computed based upon the greater
opment initiative. In fact, soon thereafter, we received several newsletters from of a net income-based tax or an alter-
firms based in Southern New Jersey and Philadelphia highlighting this legisla- native minimum assessment.5
tion and suggesting the need for companies to act quickly to take advantage of Generally, the tax rate on the entire
this new program, which is limited in duration. However, after further review net income of a corporation (other
of the Brownfields Tax Credit Act, and informal guidance from the Division of than a Subchapter “S” corporation) is
Taxation, we are alerting potential developers to proceed cautiously (if at all), nine percent. Corporations with
with a full understanding of the potential deficiencies of this program. entire net incomes of less than
$100,000 are subject to a tax rate of
7.5 percent.6 A rate of 6.5 percent is
applied to corporations with an entire
net income of $50,000 or less.7

Navigating Through New

Jersey’s Brownfields Tax Credit
Act Limitations
Pursuant to N.J.S.A. 54:10A-5.33,
a taxpayer shall receive a credit
against the CBT in an amount equal
to 100 percent of the eligible costs of
the remediation of a contaminated
site as certified by the DEP (in accor-
dance with N.J.S.A. 54:10A-5.34)
and the Director of the Division of
Taxation (in accordance with N.J.S.A.
Photo ©2002 Dan Simon
54:10A-5.35). The remediation costs
must be incurred by the taxpayer dur-
Corporation Business Tax Generally ing a three-year “privilege period”8,
By way of background, the Corporation Business Tax Act (CBTA)2 pro- beginning on or after January 1,
vides that every non-exempt domestic or foreign corporation must pay an 2004 and before January 1, 2007.9
annual franchise tax for the privilege of doing business in New Jersey.3 A cor- Notwithstanding that a corporation
poration has a taxable status in the State under the CBTA if it: (i) holds a may be entitled to a credit in an
Certificate of Authority issued by the Secretary of State; (ii) holds a certificate, amount equal to 100 percent of the
(continued on page 6)

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 4
Asset Protection Planning
Possible Planning Techniques:
Marital Home: Where a marital residence in New
Jersey is held in the form of “tenants by the entirety” by
husband and wife, the general rule is that a creditor cannot
seek to partition the property and force the sale and then
levy against one spouse’s one-half share in the proceeds.
New Jersey case law (and more recent cases in other juris-
dictions having laws similar to New Jersey) have held that
a creditor can only acquire a spouse’s rights in the home-
stead and thus cannot unseat the other spouse from that
spouse’s interest. Accordingly, the most a creditor can gain
in this situation is for the creditor to acquire the transfer-
or’s interest subject to the spouse’s “right of survivorship”
(which could ultimately prove to be worthless if the
spouse survives the transferor), or to place a lien on the
property, which may provide the creditor with a right to
an accounting of its share of income (or value) from the
spouse’s use of the residence and to collect from the pro-
ceeds on the eventual sale of the property.
In addition, New Jersey has established a rather unique
right of “joint possession” in a principal marital residence
even without joint ownership, as long as the residence was
acquired after May 20, 1980 and was thereafter occupied
Tax & Business Law Report • Flaster/Greenberg P.C.
(continued from page 2)
jointly by a married person and the person’s spouse. N.J.S.
3B:28-3. The transferor and spouse each obtain a right of
possession (i.e., to live in the house) that cannot be
released, extinguished or alienated without joint consent,
except by a court action. Further, it seems conceivable that
the spouse’s right to live in the house would effectively
extend such benefits to the transferor who certainly cannot
be denied the right to live with the spouse.
Establishment of a Qualified Personal Residence
Trust (“QPRT”): A common estate planning technique
calls for the establishment and transfer of a residence to a
QPRT, with the transferor retaining the right to use the
house for a designated term of years and the transferor’s
spouse or children designated as the beneficiaries of the
remainder interest (i.e., the interest remaining after the des-
ignated term of years). This technique would not only allow
the value of the home to be removed from the transferor’s
taxable estate at a discounted value (thus saving substantial
potential estate taxes), it would also preclude a creditor from
levying upon the residence and precluding the “enjoyment”
of the residence during the term of the QPRT.
Establishment of a Grantor Retained Annuity
Trust (“GRAT”): Another common estate planning
technique that is similar to the QPRT calls for the estab-
lishment and transfer of investment assets (viz., stocks,
securities or income-producing real estate) to a GRAT,
with the transferor retaining the right to a periodic annu-
ity (calculated in terms of a specified amount or percentage
of trust assets) for a designated term of years and the
transferor’s spouse and/or children designated as the ben-
eficiaries of the remainder interest (i.e., the interest
remaining after the designated number of years). The use
of this technique would inhibit a creditor’s right to levy
upon such assets. However, unlike the QPRT (where the
creditor could not easily seek to levy upon the transferor’s
use of the house), the creditor could likely still garnish the
annuity income that would be payable to the transferor
under the terms of the GRAT.
Transfers to a Limited Liability Company (“LLC”):
The formation and transfer of business and investment
assets into a family limited liability company with the trans-
feror’s spouse and/or children holding small membership
interests would inhibit a creditor’s right to reach those
assets. The creditor cannot force a liquidation of the LLC
but can only get a “charging order” (i.e., the right to take
whatever is actually distributed to the member). N.J.S.
42:2B-45. Although the creditor cannot reach the princi-
pal of the assets in the LLC, it can seek to garnish the
income that is distributed to the member. However, if no
income is distributed during the year, then the creditor
would get nothing. Of particular interest is that since the
charging order is apparently treated as a “judicial assign-
ment” of a profits interest in the LLC, the conventional
(continued on next page)
 5

Asset Protection Planning (continued from page 4)

wisdom is that once the creditor gets a “charging order,” creditors from taking such action. However, costs to
it is taxed on the allocable share of partnership income — establish offshore trusts can exceed $25,000 and require
even if none is actually distributed. See, Internal Revenue material additional annual payments to manage the trust
Code § 761 and Rev. Rul. 77-137, 1977 Cum.Bul. 178. and its investments.
Since the transferor (or friendly rela- Domestic Trusts: As
tives) control the LLC and the deci- an alternative to establish-
sion of whether or not to distribute ing and maintaining an
funds, the creditor could be left pay-
…direct payment of expenses would
off-shore trust with its
ing the income taxes without having be treated as “compensation income” attendant complexity, cost
received any cash to do so. Given and asset safety concerns,
the undesirability of such a situa- for tax purposes, such arrangements
several states (viz.,
tion, creditors have been characteris- have at times been effective to avoid Delaware, Alaska, Rhode
tically reluctant to seek charging Island and Nevada) have
orders over LLCs. the garnishment rules applicable to enacted statutes which
Compensation Paid by Closely- the payment of cash compensation. claim to offer similar asset
Held Business or Practice: protection for assets main-
Although employment compensa- tained by an irrevocable
tion may be subject to garnishment, trust established and fund-
the business entity may contract to recompense the individ- ed in the state. The Delaware Asset Protection Trust is
ual for services rendered by agreeing to make a direct pay- perhaps the most popular vehicle to date, in light of its
ment of the individual’s various living expenses (e.g., rental, relatively flexible rules and hospitable court system.
food, clothing and car rental). Although the direct payment However, its efficacy has not yet really been tested to
of expenses would be treated as “compensation income” ensure that the courts of other states will respect its
for tax purposes, such arrangements have at times been claimed insulation from creditors. Further, such trusts
effective to avoid the garnishment rules applicable to the often cost more than $10,000 to establish and require
payment of cash compensation. material additional annual payments to manage the trust
Shareholders’ Agreement for Corporate Stock: If and its investments.
the stock acquired is a controlling interest in the corpora- Change of Domicile: Some other states have estab-
tion, the creditors can levy upon the corporate stock in lished broader categories of assets that are exempt from
order to satisfy their adjudicated claims and then seek to Future Claims than the exemptions available to New Jersey
either operate or liquidate the corporation for their bene- residents. Although a radical course of action, it may be
fit. However, the creditors might be dissuaded from tak- appropriate to consider such a move in appropriate circum-
ing such action in the face of a Shareholders’ Agreement stances. For example, a change of domicile to Florida might
that establishes a structure which calls for the payment of effectively insulate a primary residence (in Florida) as well as
a noncompetition payment to the individual and a man- assets invested in insurance products. Alternatively, a change
dated stock redemption procedure in the event of an of domicile to Pennsylvania would protect assets held as
“involuntary transfer” of the stock to creditors. Under “tenants by the entirety” (which might include the marital
this structure, the stock redemption purchase price would home as well as investment assets). Such a change in domi-
be commensurately reduced to reflect the noncompetition cile would generally require material changes in personal
payment, and this might dissuade creditors from levying conduct (e.g., change in driver’s license, voting, etc.) as well
on the stock interest. as the maintenance of a presence in the other state for more
International (Off-Shore) Trusts: The formation than half of the year.

and transfer of assets to an irrevocable (“spendthrift”)
trust that is established outside of the United States might It is beyond the scope of this article to give more than a brief
effectively insulate such assets from the claims of creditors description of each of these techniques, and this article does not
if established in a foreign jurisdiction (for example, the address their relative benefits, risks, costs and/or efficacy or the
Cook Islands or Isle of Man) that does not honor judg- complex separate tax and economic issues engendered by each tech-
nique. However, although not definitive in scope or explanation,
ments from other countries and requires liability to be the foregoing presents a menu of the most-significant aspects of
established anew under its laws. In that situation, the asset protection planning as well as the related limitations and expo-
creditor would be forced to undertake another trial in sures that attend an ill-considered approach to such issues.
that foreign jurisdiction, to establish its claims against the This article is based on an article which first appeared in the June 14,
individual and/or the individual’s trust, and the burden 2004 issue of THE NEW JERSEY LAWYER and is reprinted here
and uncertainty of prevailing in such pursuit might dissuade with its permission.

www.flastergreenberg.com

Corporate Business Tax Credit…
eligible remediation costs, the total amount
of the CBT credits for any given tax year may
not exceed 50 percent of the CBT liability
otherwise due, and may not reduce the tax
liability to an amount less than the statutory
minimum of $500.00.10
An important provision of the Brownfields
Tax Credit Act provides that the amount of
tax year credit otherwise allowable, which
cannot be applied for the tax year due to the
annual credit limitation, may be carried for-
ward to the next five privilege periods, or tax
years.11 This carry-forward component may
not be applied to a privilege period during
which the taxpayer is merged into or acquired
by another company.12 Accordingly, counsel
should be mindful of the loss of the credit
upon merger or acquisition, and should con-
sider delaying, to the extent practicable (if at
all), the remediation expenditures until after
such merger or acquisition is complete in
order to retain the full benefit of the credit.
In addition to the carry-forward compo-
nent, under certain circumstances, a taxpayer
may be permitted to transfer the CBT credits
for use by other corporate taxpayers in the
State not affiliated with the taxpayer.13 The
Director of the Division of Taxation has been
charged with the establishment of a “corpo-
rate business tax benefit certificate transfer
program” to allow the transfer of the CBT
credits. For purposes of the Brownfields Tax
Credit Act, the test of affiliation is whether
the same entity directly or indirectly owns or
controls five percent or more of the voting
rights or five percent or more of the value of
all classes of stock of both the corporate tax-
payer receiving the benefits and a corporate
taxpayer that is surrendering the benefits.14 As
of the date of submission of this article, no
regulations have been promulgated detailing
the CBT credit transfer procedures, or gener-
al implementation of the Brownfields Tax
Credit Act. Thus, it is extremely difficult to
determine whether the transfer program will
in practice afford developers and purchasers
of remediated brownfields sites additional
flexibility when structuring a transaction
involving such a site.
Tax & Business Law Report • Flaster/Greenberg P.C.
6
(continued from page 3)
Eligibility Requirements
The eligibility requirements set forth in N.J.S.A. 54:10A-5.34 pro-
vide broad discretion to the DEP in determining whether remediation
costs are deemed eligible and whether the taxpayer is entitled to the
CBT credit. For example, before incurring any remediation costs, the
taxpayer must negotiate a satisfactory remediation plan with the DEP.
This can be an arduous and time-consuming task. The taxpayer must
also satisfy the DEP that it has clean hands under the New Jersey Spill
Compensation and Control Act (the “Spill Act”).15
To be eligible for the CBT credit for the remediation costs, the tax-
payer must submit a written application to the DEP for review and
certification of the eligible costs of the remediation. The DEP will cer-
tify the remediation costs provided that: (1) the taxpayer had entered
into a memorandum of agreement with the DEP for the remediation
of a contaminated site and the taxpayer is in compliance with the
memorandum of agreement; (2) the taxpayer is not liable pursuant to
the Spill Act for the contamination at the site16; and (3) the costs of
the remediation are actually and reasonably incurred by the taxpayer.
In addition to the DEP certification requirements outlined above,
the taxpayer also must establish a high probability that new business
activity at the site will generate new and substantial tax revenue for the
State. In order to receive the requisite certification from the Director
of the Division of Taxation that there is such a probability, the follow-
ing criteria must be met: (1) the remediated site is located within an
area designated as a Planning Area 1 (Metropolitan) or Planning Area 2
(Suburban)17;
(2) the subse-
quent business
activity at the
In addition to the DEP certification
remediated site
represents new requirements outlined above, the taxpayer
corporation
also must establish a high probability that
business tax, or
sales and use new business activity at the site will
tax or gross
generate new and substantial tax revenue
income tax
receipts; (3) for the State.
there is a high
probability that
the estimated
new tax receipts deriving from the business activity at the remediated
site, within a three-year period from the inception of the business
activity, will equal or exceed the value of CBT credits issued; and (4) if
the business activity at the remediated site is the result of a relocation
of an existing business from within the State, the tax credit authorized
pursuant to the Brownfields Tax Credit Act will equal the difference in
aggregate value of tax receipts from the CBT, the New Jersey Sales
and Use Tax,18 and the Gross Income Tax19 generated by the business
activity in the privilege period immediately following the business
(continued on next page)

Corporate Business Tax Credit…
relocation, less the aggregate value of tax
receipts generated in the privilege period
immediately prior to relocation, up to 100
percent of the eligible costs. If the difference
in aggregate value is zero or less, no tax credit
may be awarded.
Clearly, the most difficult hurdle to over-
come with respect to obtaining the requisite
certification from the Director of the Division
of Taxation is the taxpayer’s ability to establish
to the satisfaction of the Director of the
Division of Taxation that subsequent business
activity at the remediated site represents new
taxes to the State, and that the amount of the
new taxes generated will equal the value of
the CBT credit awarded within three years.
Based on requirements imposed in order to
obtain the necessary certifications from the
DEP and the Division of Taxation, a taxpayer
must involve the DEP and the Division of
Taxation in all planning aspects of the pro-
posed remediation, including the post-reme-
diation development plans for the site. The
failure of the Brownfields Tax Credit Act to
provide specific and objective guidelines about
the certification process should result, at a
minimum, in hesitation before proceeding to
remediate and redevelop a brownfields site
under the Brownfields Tax Credit Act.
While needing to proceed cautiously to be
certain that remediation costs incurred will be
reimbursable, a taxpayer considering applica-
tion of the Brownfields Tax Credit Act is
forced to begin the process relatively quickly,
7
(continued from page 6)
as the total amount of the CBT credits issued
are capped at $12,000,000 per State fiscal
year for the years 2005, 2006 and 2007.20
And all applications must be received on or
before February 1, 2005 and each February 1
thereafter.
(Un)Realization of Program Benefits
After analyzing the (limited) details of the
Brownfields Tax Credit Act, it is questionable
whether the Act’s benefits will motivate
developers facing decisions regarding remedi-
ation and redevelopment of brownfields sites.
Since the Act imposes significant hurdles
before it confers any benefits, and because the
DEP and the Division of Taxation appear to
have broad discretion in granting or denying
certification of compliance with the Act, it is doubtful that the
Brownfields Tax Credit Act will have the desired effect of stimulating
companies to undertake meaningful remediation programs. Objective
guidelines to help prospective remediators determine if the tax credits
will benefit them are not set out in the Act. Further, as a senior offi-
cial within the Division of Taxation candidly admitted, the limited
number of companies inclined to remediate brownfields sites will be
better served focusing on reimbursement for remediation costs under
the Brownfield and Contaminated Site Remediation Act.21 As a gener-
al rule, the official explained, if a developer has made the determina-
tion to remediate a brownfields site, thereby subjecting the developer
to the requirements of that Act, it might as well proceed under that
program rather than under the Brownfields Tax Credit Act since the
developer has the potential to receive a higher reimbursement
amount, in cash rather than CBT credits. Although there is no provi-
sion in the Brownfields Tax Credit Act, which addresses the exclusivity
of the Brownfields Tax Credit Act in relation to the Brownfield and
Contaminated Site Remediation Act, there has been little focus to
date by the Division of Taxation with regard to the interplay of the
two programs. Accordingly, a developer should “look to the
Brownfields Tax Credit Act only after all other avenues have been
exhausted,” a senior official advised. As the official conceded, there
will be “substantial difficulties” in implementing the provisions of the
Brownfields Tax Credit Act (such as monitoring the proper applica-
tion of the tax credits once granted) in its current form and without
extensive regulations, which do not yet exist.
Conclusion
Despite the legislature’s hope that the Brownfields Tax Credit Act
will provide an additional incentive encouraging companies to make
contaminated urban and suburban industrial sites environmentally safe
and economically viable, it appears that this program will not be a sig-
nificant motivating factor in a developers decisions as to whether to
(continued on page 8)
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 8
Corporate Business Tax Credit…
remediate and redevelop brownfields sites. Counsel may
well be advised to steer their clients in another direction.
Since the Act imposes significant
hurdles before it confers any
benefits…it is doubtful that the
Brownfields Tax Credit Act will
have the desired effect…
Federal Tax Treatment of Remediation Costs
While site remediation based upon New Jersey’s tax
incentives requires cautious consideration in light of
questionable benefits and the need to proceed quickly in
order to qualify for CBT credits, federal tax treatment
must be examined under a different set of rules and
circumstances. Whereby many businesses are faced with
existing facilities that are contaminated and need to be
remediated, the number of facilities requiring remediation
is projected to dramatically increase. However, federal tax
treatment of these costs has been the subject of much
uncertainty. Specifically, a taxpayer must determine
whether remediation expenses are capital expenses or
ordinary expenses. Further complicating the tax treatment
of remediation expenses is the Internal Revenue Code
(“IRC”) Section 162(f)’s prohibition on the deduction
of any fine or similar penalty paid to a government for
the violation of any nature.
While the availability of state tax credits for remedia-
tion costs under the newly enacted Brownfields Tax
Credit Act are in large part illusory, structuring remedia-
tion efforts to maximize tax benefits to your client can
yield tangible benefits.
Capital vs. Ordinary Expense Treatment For
Remediation Costs
Section 263 of the IRC provides that a current deduc-
tion is not permitted for amounts paid for permanent
improvements to increase the value of any property, or
amounts incurred to restore property subject to an
allowance for depreciation.
Conversely, IRC Section 162(a) allows a deduction for
“all the ordinary and necessary expenses paid or incurred
during the taxable year in carrying on any trade or busi-
ness....” The regulations promulgated under section 162
Tax & Business Law Report • Flaster/Greenberg P.C.
(continued from page 7)
permit the cost of “incidental repairs” to be deducted.
Incidental repairs are defined as repairs that neither add
materially to the value of the property nor appreciably
prolong its useful life; but rather keep it in its ordinary
efficient operating condition.22
The IRS and the courts have identified four factors,
which determine whether remediation costs should be
deducted or capitalized:
Increase in Value. If the remediation activities
materially add to the property’s value prior to the
condition that triggered the expenditures, the
expenditures are capital expenditures.23 If the
remediation costs do not substantially prolong the
useful life of the property beyond its original use-
ful life, the taxpayer can argue that they are cur-
rently deductible ordinary expenses.24
New and Different Use. If the remediation activities
qualify the property for a new or different use, then
the expenses have been held to be capital in nature.
Prolong the Property’s Useful Life. To be currently
deductible, the expenditures must not substantially
prolong the useful life of the property.
Materiality. If the costs are incidental as opposed
to substantial remediation activities such as the
replacement of a large volume of contaminated
soil, the expenses are ordinary expenses.25
Recently, the IRS issued two Revenue Rulings on the
deductibility of remediation costs. The first Revenue
Ruling, 2004-18, involved the deduction of costs incurred
to remediate ground water contamination, and reflects a
change in the IRS’ prior position discussed above. In
prior Rulings, the IRS concluded that costs incurred to
remediate ground water and soil contamination caused by
a taxpayer’s manufacturing operations were ordinary and
necessary business expenses deductible in the year
incurred pursuant to IRC Section 162.26
In Revenue Ruling 2004-18 the IRS appears to reverse
this position holding that the taxpayer must capitalize the
remediation costs by including them in inventory costs.
The IRS reasoned that the contamination caused by man-
ufacturing activities of the taxpayer were indirect costs
allocable to the inventory, since they were incurred in
conjunction with the manufacture of such inventory. This
result is not as disadvantageous as if the costs had to be
capitalized as part the taxpayer’s basis in its real property.
By treating the remediation costs as allocable to inventory,
the taxpayer will recover such remediation expenses as the
inventory is sold; however, taxpayers using the FIFO
(continued on page 10)
 9

How Taxing is the Domestic Partnership Act? (continued from page 1)

does not grant domestic partners the tax status granted to husbands term “spouse” as a person of the opposite sex.
and wives. Interestingly, the attribution rules within the IRC, which Accordingly, surviving spouse benefits under a
generally attribute the activity of one spouse to the other, frequently private employer’s pension plan would not
foil tax-planning opportunities. automatically be payable to the decedent’s
For example, IRC §267 generally disallows losses from the sale or domestic partner.
exchange of property between “related taxpayers.” The term “related Health Benefits – The Act requires
taxpayers” includes members of a family - further defined as brothers, commercial health insurers to offer coverage
sisters, spouse, ancestors and lineal descendants. (See, IRC §267(c)(4)). to qualified domestic partners but does not
Attribution rules also exist among business partners and among certain require that employers include such coverage
stockholders in a corporation; however, the IRC does not contain any as a benefit, even in instances where the
attribution rules for individuals having the status of a domestic partner employer offers family coverage to its employ-
under state law. Accordingly, transactions between domestic partners ees. To obtain health insurance coverage for
can be structured to save federal income tax, where the same transac- domestic partners, submission of proof of
tion between spouses would be ignored for federal tax purposes. domestic partner status under New Jersey law
Unlike federal law, the Act grants a domestic partner the tax status is usually required. Employers may want to
equivalent to a spouse for some, but not all, state taxes imposed on amend their group health plans to require
individuals. Of course, the legislature could have simply included in proof of certification pursuant to the proce-
the definition of a “spouse,” a person meeting the statutory require- dures set forth in the Act as a prerequisite to
ments of a domestic partner. This would have granted domestic part- obtaining coverage. If an employer does pro-
ners the same tax benefits afforded to married individuals. Instead, the vide subsidized health insurance coverage for
Act adopts a piecemeal approach by granting domestic partners only domestic partners, the cost of such coverage
limited tax benefits which, when viewed as a whole, appear to obfus- will be taxable to the employee, unless the
cate the legislative intent of recognizing these unions. domestic partner qualifies as a dependent
under the provisions of the IRC. Similar
New Jersey Gross Income Tax – The Act applies to the 2004 tax
coverage for spouses and children provided by
year, but has little effect on the calculation of New Jersey gross
the employer is not taxable to the employee
income other than allowing a taxpayer to claim an additional $1,000
for federal income tax purposes.
personal exemption for a qualified domestic partner who does not file
(continued on page 11)
a separate return. Alternatively, if the taxpayer’s domestic partner qual-
ifies as a “dependent” under IRC Section 152, the taxpayer can claim
a $1,500 state tax exemption. The Act does not allow qualified
domestic partners to file joint state income tax returns. Contrary to
similarly situated spouses, the Act does not allow an additional personal
exemption for a domestic partner over the age of 65, or for a domestic
partner who is blind or disabled.
New Jersey Transfer Inheritance Tax – The Act applies to dece-
dents dying after July 10, 2004 and exempts from inheritance tax all
transfers to qualified domestic partners. This exemption from tax
includes the transfer of membership or stock certificates in cooperative
housing corporations and the value of any pension, annuity, retirement
allowance or return of contribution.
Pension Benefits – Although the Act does not impose transfer
inheritance tax on the receipt of retirement and pension payments by a
qualified domestic partner, domestic partners are not covered by the
federal law which requires pension plans to provide survivor benefits
known as “qualified joint and survivor annuities” (“QJSA”) and
“qualified pre-retirement survivor annuities” (“QPSA”) to spouses.
The federal law known as the Defense Of Marriage Act defines the

www.flastergreenberg.com
 10

Corporate Business Tax Credit… (continued from page 8)

method of inventory accounting should be careful to avoid such

costs getting allocated to a layer of inventory that does not turn
over frequently. In situations where the contamination is caused by
activities unrelated to the manufacture of inventory (i.e., oil con-
tamination at a truck depot) it may still be possible to argue that
such expenses are currently deductible.
The second Ruling, 2004-17, examined the application of the
Photo ©2002 Dan Simon
“claim of right” doctrine27 to amounts paid to remediate environmen-
tal contamination that occurred in prior taxable years. Under the claim of right
doctrine, the taxpayer argued that the remediation expenses should be allocated
to prior years when presumably this taxpayer was in a higher tax bracket. The
taxpayer argued that it should be allowed to amend its prior returns rather than
deducting the expenses on its current return. The IRS concluded that the claim Visit us
of right doctrine does not apply where contamination from prior manufacturing
activities is remediated in the current taxable year. The IRS reasoned that the at Booth 173
remediation costs were not “income” items that were overstated in the earlier

Business
year and that such costs were not closely enough related to the prior year’s man-
ufacturing activity to satisfy the requirements of IRC Section 1341.
The tax treatment of remediation costs remains unclear and dependent on the
facts and circumstances of each case. Taxpayers faced with the need to remediate
existing contamination on their property or considering the acquisition of
contaminated property should consult with tax counsel to determine the tax
EXPO
consequences of each potential course of action. Analyzing available options before
remediating or acquiring the property could result in substantial tax savings.

This article is based on an article which first appeared in the August 2, 2004 issue of NEW
2004
JERSEY LAW JOURNAL and is reprinted here with its permission.

1
L.2003, c.296, § 1, eff. Jan. 14, 2004, codified at N.J.S.A. 54:10A-5.33, et seq.
2
N.J.S.A. 54:10A-1, et seq.
3
N.J.S.A. 54:10A-2.
4
N.J.A.C. 18:7-1.6.
5
N.J.S.A. 54:10A-5. A discussion of the alternative minimum assessment component of the CBT is beyond the scope
of this article and will not be addressed. For a concise discussion of the alternative minimum assessment component
of the CBT, see Susan A. Feeney et al., 2004 New Jersey Tax Handbook 155-158 (2004).
Thursday,
6

8
N.J.S.A. 54:10A-5(c)(1).
Id. For the calculation of the tax rate for Subchapter “S” corporations, see N.J.S.A. 54:10A-5(c)(2).
The term “privilege period” is defined under N.J.S.A. 54:10A-4 as the calendar or fiscal accounting period for which
September 23
9
a tax is payable.
N.J.S.A. 54:10A-5.33.a.
at the Hilton
10
N.J.S.A. 54:10A-5.33.b. N.J.S.A. 54:10A-5.33.e. provides that the amount of the tax credit may not, “when taken
together with the property tax exemption received pursuant to the “Environmental Opportunity Zone Act,”
P.L.1995, c.413 (C.54:4-3.151), less any in lieu of tax payments made pursuant to that act, or any other State,
Cherry Hill
local, or federal tax incentive or grant to remediate a site, exceed 100% of the total cost of the remediation.”
11
N.J.S.A. 54:10A-5.33.c.
12
N.J.S.A. 54:10A-5.33.d.
13
N.J.S.A. 54:10A-5.36. The maximum value of the tax benefits that a taxpayer may transfer over the three-year
period is $4,000,000.
14
Id.
15
See N.J.S.A. 58:10-23.11.
This report is for general use
16
In the case where the CBT credits have been transferred, the corporate taxpayer receiving the credits must also and information, and the content
establish that it too is not liable pursuant to the Spill Act for the contamination at the site. N.J.S.A. 54:10A-5.36.c.
17
As designated pursuant to the “State Planning Act,” sections 1 through 12 of P.L.1985, c.398 (C.52:18A-196 et seq.). should not be interpreted as ren-
18
N.J.S.A. 54:32B-1, et seq. dering legal advice on any matter.
19
N.J.S.A. 54A:1-1, et seq.
20
N.J.S.A. 54:10A-5.36.b. Specific situations may raise addi-
21
N.J.S.A. 58:10B-1, et seq.
22
Treas. Reg. §1.162-4.
tional or different issues and such
23
See Oberman Mfg. Co. v. Comm’r, 47 T.C. 471 (1967). information should be coordinated
24
See Illinois Merchant Trust Co. v. Comm’r, 4 B.T.A. 103 (1926).
25
Treas. Reg. §1.162-4. with professional legal advice.
26
See Rev. Rul. 94-38.
27
IRC §1341.

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

 11

How Taxing… (continued from page 9)

Tax & Corporate Practice
New Jersey Estate Tax – The New Jersey Estate Tax is based on
Group Services
the federal estate tax credit for state death taxes that was allowable Federal and State Taxation
under the provisions of the IRC in effect on December 31, 2001, if
Tax planning
the value of the decedent’s estate exceeded $675,000. The federal
Corporations, partnerships and LLC’s
estate tax does not allow a deduction for property passing to a domes-
Sales, mergers and acquisitions
tic partner. Accordingly, a decedent’s estate passing entirely to his or
IRS rulings
her qualified domestic partner would be subject to the New Jersey
Tax litigation
estate tax if the value exceeded $675,000.
Tax collections/liens
A domestic partner is not granted the right under the Act to elect Business Corporate Services
against the Will of the deceased domestic partner, nor do the laws
Business formations
governing intestate succession apply to domestic partners. Accordingly,
Structuring ownership arrangements
if one partner dies without a Will, the other partner may inherit nothing
Corporate control/management contracts
at all, while a spouse who is disinherited would be able to elect against
Shareholder disputes
the Will.
Contracts

Sales, commercial mergers and
Real Estate Transfer Tax – Transfers of real property are generally acquisitions
subject to a realty transfer tax. New Jersey allows a complete exemp-
Securities and finance
tion from this tax for transfers between spouses and for transfers
Buy-ins/Buy-outs
between a parent and child. The Act does not expand this exemption
Employee agreements and terminations
to include transfers between qualified domestic partners; however,
Trademark and copyright licensing and
transfers of real property interests between domestic partners will protection
qualify for an exemption from this transfer tax for transfers where the
Wealth Preservation and Transfer
consideration is less than $100.

Estate planning
Medicaid Planning – The Act does not impact any state-adminis-
Drafting wills, trusts and other estate
tered federal program such as the Medicaid program. Accordingly, planning documents
greater flexibility and opportunities exist when advising domestic part-
Administration of estates and trusts
ner clients seeking to insulate accumulated wealth from depletion by
Guardianships and conservatorships
one partner’s medical care expenses. Typically, all of a married
Litigation involving trusts and estates
couple’s non-exempt assets are considered when determining one
Asset protection
spouse’s eligibility for Medicaid benefits, and title to the marital assets
Business transfers from one generation to
is ignored. The healthy spouse is allowed to continue to live in the the next
marital residence, but only retain a relatively small amount of other
Technology, E-Commerce and Internet
assets. Since domestic partners are not recognized as having the status

Contract agreements
of spouses under federal law, assets held by a Medicaid applicant’s
Protecting intellectual property rights
domestic partner are not counted in determining the applicant’s
Licensing
eligibility for Medicaid benefits. As with all transfers to non-spouses
Government regulation
for less than full fair market value, transfers to a qualified domestic
Venture capital
partner by a Medicaid applicant would still be subject to a 36-month
look-back period (60 months for transfers to trusts) for purposes of Employee Benefits
determining any Medicaid ineligibility period.

Design and implementation of
qualified retirement plans
In conclusion, the Act does not equalize the tax treatment of
Employee Stock Ownership Plans
qualified domestic partners to that of spouses. Despite the disparate (ESOPs)
treatment, attorneys counseling domestic partners should be familiar
Stock options, phantom stock and SARs
with the limited tax benefits available under this new legal status.

Plan qualification, IRS audits and
compliance issues

Cafeteria plans and other welfare
This article is based on an article which first appeared in the July 12, 2004 issue benefit programs
of THE NEW JERSEY LAWYER and is reprinted here with its permission.
Employee benefit trusts

Deferred compensation arrangements

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Flaster Greenberg Tax & Corporate Practice Group

Richard J. Flaster William S. Skinner
Office Locations
Harvard Law School, J.D. 1966 University of Pennsylvania Law School, J.D. 1986 Commerce Center
Stephen M. Greenberg Elaine J. Petruzziello 1810 Chapel Avenue West
Yale Law School, J.D. 1976 Willamette University, J.D., MBA 1985 Cherry Hill, NJ 08002-4609
University of Denver, L.L.M. 1986 (856) 661-1900
Laura B. Wallenstein
Rutgers Law School, J.D. 1977 Elliot D. Raff 11 Penn Center
New York University Law School, L.L.M. 1981 University of Wisconsin Law School, J.D. 1990
1835 Market Street, Suite 1215
Allen P. Fineberg Jeffrey A. Cohen Philadelphia, PA 19103
Columbia Law School, J.D. 1979 University of Pittsburgh School of Law, J.D. 1993 (215) 569-1022
Markley S. Roderick Matthew Azoulay
University of Virginia Law School, J.D. 1982 Widener University School of Law, J.D. 1997 190 S. Main Road
Vineland, NJ 08360
Peter R. Spirgel Marc Garber (Of Counsel) (856) 691-6200
Georgetown Law School, J.D. 1985 Duquesne University School of Law, J.D. 1981
Temple Law School, L.L.M. 1988
Dennis J. Helms 216 North Avenue
Alan H. Zuckerman University of Virginia Law School, LL.B 1967 Cranford, NJ 07016
CPA 1982; Temple Law School, J.D. 1985 (908) 245-8021
Thomas D. Scholtes
Temple Law School, J.D. 2000
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