TAX AND

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

www.flastergreenberg.com Spring 2004

Medicaid Planning Technique Eliminated By Elaine J. Petruzziello

edicaid is a joint federal and state assets (the “Community Spouse Resource Allowance” or

M program that pays for long-term

health care services for the aged
and disabled with low income and few
“CSRA”) to meet those needs. In addition, prior to the
revisions in the New Jersey Medicaid Regulations, Medicaid
planning often entailed transferring assets above the CSRA to
resources. One of the most important and commercial and private annuities or to a community spouse
well known benefits provided for eligible annuity trust (“CSAT”) established to further benefit the
recipients by Medicaid is nursing home healthy spouse. If properly structured, the annuity payments
care. The Medicaid applicant who needs could be provided to the healthy spouse, and assets used to
Elaine J. Petruzziello nursing home care (the “applicant purchase annuities or establish the CSAT were deemed to be
spouse”) must qualify by meeting both an income and a unavailable for purposes of Medicaid eligibility of the
resource test. This often engenders planning for such contin- applicant spouse. This technique greatly reduced the amount
gency by “spending down” assets over the resource limit. required to be “spent down” in order to qualify for Medicaid
Indeed, attorneys and accountants routinely assist their and simultaneously preserved assets for the benefit of the healthy
clients with strategies designed to allow the applicant spouse spouse. See, Health Care Financing Administration (“HCFA”)
to qualify for Medicaid without impoverishing the spouse Transmittal 64 (1994) and 42 U.S.C. 396p(c)(2)(B)(i).
who does not need the care (the “healthy spouse”). Even though New Jersey had initially permitted CSATs
Medicaid looks at the resources of the applicant and after HCFA Transmittal 64 was issued in 1994, New Jersey
healthy spouses and categorizes them as “available” or changed its policy in mid-July 1999 indicating that CSATs
“exempt.” Generally, the applicant spouse can retain only were deemed to be “available resources.” New Jersey invited
$2,000 of available resources, plus any exempt resources. spouses with pending applications and assets in excess of the
Recognizing the ongoing needs of the healthy spouse who resource limit at that time (when the CSAT became counted
continues to reside in the community, both federal and New as an available resource) to convert the CSAT into an unavail-
Jersey Medicaid Regulations (the “Regulations”) permit the able resource, by changing it to a commercial annuity and
healthy spouse to retain a portion of the couple’s available (continued on page 2)

Editor’s Note…
As the services required of our Corporate Practice
Group expands, we continue to search for candidates with
In This Issue. . .
exceptional credentials and experience in tax, corporate and
estate planning to join our firm and enhance the capacity of Medicaid Planning
this department. Your referral of suitable candidates would Technique Eliminated ............1
be appreciated and can be sent to my attention at
Richard J. Flaster
[email protected]. Notice to IRS of Taxpayer
Again, with the objective of broadening our base of readership, we are still Address Change ......................2
planning to turn to e-mail transmission of this Report rather than distributing copies
by mail. If you provide us with your e-mail address and the e-mail addresses of
Tax Differences for Insured
colleagues who would be interested in receiving Tax and Business Law Report, we
would be pleased to include that information in the newsletter’s database. Please S Corp Stock Buy-Outs ............3
send that information to me at [email protected].

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

 2

Notice to IRS of Taxpayer’s Tax & Corporate Practice

Last Known Address By Alan H. Zuckerman
Group Services
Federal and State Taxation
henever the IRS is required to send notices to a

W

Tax planning
taxpayer, it must send it to the taxpayer’s “last
Corporations, partnerships and LLC’s
known address,” and the taxpayer is then
Sales, mergers and acquisitions
deemed to have received the notice. In a recent case,
IRS rulings
the Tax Court held that the taxpayer’s filing of Form

Tax litigation
2848 Power of Attorney (authorizing his new accountant
to represent him before the IRS) put the IRS on

Tax collections/liens
notice of the new address and became the taxpayer’s Business Corporate Services
Alan H. Zuckerman
“last known address.” Hunter v. Comm., T.C. Memo
Business formations
2004-81 (3/23/2004).
Structuring ownership arrangements
Based on this conclusion, the Tax Court dismissed a deficiency against
Corporate control/management contracts
the taxpayer, because the IRS did not send the notice of the deficiency to
Shareholder disputes
the address of the taxpayer as listed on the Form 2848.
Contracts

Sales, commercial mergers and
Observations:
acquisitions
• Other federal courts have reached similar results with respect to a
Securities and finance
taxpayer’s address as set forth on a Form 2848 Power of Attorney.
Buy-ins/Buy-outs
See Rizzo v. Davis, 43 AFTR 2d 79-985 (W.D.Pa. 1979) and Johnson

Employee agreements and terminations
v. Comm., 45 AFTR 2d 80-775 (5th Cir. 1980).

Trademark and copyright licensing and
• To avoid this issue, the taxpayer should file a Form 8822 (which is the protection
official IRS form for notifying the IRS of the change of address)
whenever the taxpayer changes addresses.
Wealth Preservation and Transfer

Estate planning

Drafting wills, trusts and other estate
Medicaid Planning Technique Eliminated (continued from page 1) planning documents
naming the State as a remainder beneficiary upon the death of the healthy
Administration of estates and trusts
spouse. However, in a recent case, a Medicaid applicant declined the invi-
Guardianships and conservatorships
tation and sued the State’s Commissioner of the Department of Human
Litigation involving trusts and estates
Services. He lost at the trial level, with the Court upholding the State’s
Asset protection
rejection of the CSAT as an unavailable resource. Johnson v. Guhl, 91 F
Business transfers from one generation
Supp 2d 754 (D.N.J. 2000). Now, the Third Circuit has upheld that to the next
lower court decision, finding that even though the CSAT is an irrevocable
Technology, E-Commerce and Internet
trust, which provides a stream of payments to the healthy spouse, the
healthy spouse is not prevented from sharing those payments with the
Contract agreements
applicant spouse, and this makes the payments available resources for the
Protecting intellectual property rights
applicant spouse. Johnson, et al. v. Guhl (3rd Cir., No. 01-3774, 2-6-04).
Licensing

Government regulation
Observations
Venture capital
• The CSAT has been eliminated as a Medicaid planning technique in Employee Benefits
New Jersey.
Design and implementation of
• The budget crisis atmosphere prevalent in New Jersey for the past few qualified retirement plans
years has prompted the State to look at every opportunity to expand
Employee Stock Ownership Plans
the scope of the applicant spouse’s “countable resources” for purposes (ESOPs)
of determining Medicaid eligibility. Further, in recent revisions to the
Stock options, phantom stock and SARs
Medicaid Regulations, the State has also eliminated the commercial
Plan qualification, IRS audits and
and private annuity Medicaid planning technique, by treating these compliance issues
annuities as available resources (on the rationale that such annuities
Cafeteria plans and other welfare
can be sold on the secondary market and converted to cash).
benefit programs
• Despite the elimination of these techniques, Medicaid planning can
Employee benefit trusts
still save thousands of dollars if undertaken far enough in advance of
Deferred compensation arrangements
needing Medicaid benefits.

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

 3

Tax Basis Differences on Insured Stock Buyout for

Cash vs. Accrual S Corporation By Richard J. Flaster

f life insurance is proceeds by a cash-basis corporation should cause any income or basis-increase

I utilized for an
S corporation’s
buy/sell redemption
engendered by the insurance proceeds to be allocated solely to the post-death
period and, hence, only to the surviving shareholders.
Accrual Basis Taxpayer. In contrast, a recent Private Letter Ruling has
arrangements, confirmed that if the S corporation is an accrual basis taxpayer, the right to the
receipt of the insurance proceeds accrues as of the date of death (viz., when the right to the
insurance proceeds insurance benefit becomes fixed and certain). This date controls whether income
Richard J. Flaster
will create a new tax or basis increase resulting from receipt of insurance proceeds must be allocated to
basis position for the the pre-death period. Presumably,
remaining shareholders, with the it would then be allocated between the
magnitude of the difference dependant deceased and surviving shareholders
upon several factors, including whether: on the basis of their relative propor- …the items of income and
• The agreement provides for stock tions of shareholdings as of that date.
ownership to be effectively termi- Further, if the corporation and basis-increase will be allocated
nated as of the date of death or shareholders do not elect an interim
on a pro rata per diem basis
upon the date of the actual physical closing of the books, then the items
transfer of the stock; of income and basis-increase will be throughout the year.
• The corporation closes its books allocated on a pro rata per diem basis
on the date of transfer pursuant to throughout the year.
a Code §1377(a)(2) election or
allocates income and loss on a Observations:
proportionate per diem basis; • For a cash basis S corporation: To maximize the increase in basis to the
• The corporation uses the cash or surviving shareholders in an insurance-funded redemption that is effective as
accrual method of accounting; of the date of death, the election of an interim closing of books should cause
and/or, the entire basis-increase resulting from the insurance to be allocated to the
surviving shareholders. (This result should be generally equivalent to that
• The shareholder died early or late
achieved in a cross-purchase arrangement.)
in the taxable year.
• For an accrual basis S corporation: To maximize the increase in basis to
Cash Basis Taxpayer: If the
surviving shareholders in an insurance-funded redemption, do not elect the
corporation is on the cash basis method
interim closing of books. Otherwise, the pro rata per diem allocation method
of accounting and the agreement
will allocate more of the resulting basis-increase to the surviving shareholders,
provides that shareholdings become
particularly if the deceased shareholder died early in the corporation’s taxable
effectively redeemed by the corporation
year, so that the post-death period comprises a greater proportion of the full
as of the date of death of a shareholder
year than the pre-death period.
(even though the mechanics of transfer
are inevitably deferred), this should • Query: Is the basis allocated to the deceased shareholder absorbed by the usual
preclude the shareholder’s estate from basis-step-up procedures of Code §1014 and thus wasted? It would seem so.
sharing in post-death allocations of However, to the extent it is allocated to the estate of the deceased shareholder,
pass-through items giving rise to either such basis-increase should result in a capital loss to the estate.

taxable income or basis increase.
As a cash basis taxpayer, it seems that This report is for general use and information, and the content should not
the date of collection of the insurance
be interpreted as rendering legal advice on any matter. Specific situations may
proceeds will govern the date that will
raise additional or different issues and such information should be coordinated
determine income or basis-increase
arising from the receipt of the insurance with professional legal advice.
proceeds. If the corporation and
shareholders consent to an “interim
closing of the books” as of the date of Visit our Web site at: www.flastergreenberg.com
death under Code §1377(a)(2), then
the later receipt of the insurance

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Flaster Greenberg Tax & Corporate Practice Group Office Locations

Richard J. Flaster William S. Skinner
Harvard Law School, J.D. 1966 University of Pennsylvania Law School, J.D. 1986 Commerce Center
1810 Chapel Avenue West
Stephen M. Greenberg Elaine J. Petruzziello Cherry Hill, NJ 08002-4609
Yale Law School, J.D. 1976 Willamette University College of Law, J.D., 1985 (856) 661-1900
Willamette University, MBA, 1985
Laura B. Wallenstein University of Denver, L.L.M. 1986
Rutgers Law School, J.D. 1977 11 Penn Center
New York University Law School, L.L.M. 1981 Elliot D. Raff 1835 Market Street, Suite 1215
University of Wisconsin Law School, J.D. 1990 Philadelphia, PA 19103
Allen P. Fineberg (215) 569-1022
Columbia Law School, J.D. 1979 Jeffrey A. Cohen
University of Pittsburgh School of Law, J.D. 1993
Markley S. Roderick 190 S. Main Road
University of Virginia Law School, J.D. 1982 Matthew Azoulay Vineland, NJ 08360
Widener University School of Law, J.D. 1997 (856) 691-6200
Peter R. Spirgel
Georgetown Law School, J.D. 1985 Marc Garber (Of Counsel) 216 North Avenue
Temple Law School, L.L.M. 1988 Duquesne University School of Law, J.D. 1981
Cranford, NJ 07016
Alan H. Zuckerman Dennis J. Helms (908) 245-8021
CPA 1982; Temple Law School, J.D. 1985 University of Virginia Law School, LL.B 1967
2900 Fire Road, Suite 102A
Egg Harbor Township, NJ 08234
(609) 645-1881
Practice Areas 913 North Market Street, Suite 702
Bankruptcy • Business and Corporate Services • Closely-Held and Family Businesses Wilmington, DE 19810
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