text:
39 Pa. D. & C.3d 381.
Post-trial motion for new trial based on excessiveness of jury verdict, Katz, Judge.
Court of Common Pleas of Pennsylvania, Philadelphia County.
Plaintiff Judith Richardson Haimes and her husband, Allen N. Haimes, brought this medical-malpractice action to recover damages suffered by Mrs. Haimes as a result of undergoing a computerized axiotomography (CT scan), a type of diagnostic x-ray. The principal items of damages sought by plaintiff related to chronic and disabling headaches which, according to plaintiff, prevented her from practicing her occupation as a psychic. The case was tried over four days before a jury. The jury rendered a verdict in the amount of $600,000 against defendants Judith Hart, M.D., the physician who administered the CT scan, and Temple University Hospital.
Presently before this court are defendants' post-trial motions in which they seek, inter alia, a new trial based on the excessiveness of the verdict. In reviewing these motions, we are mindful that the right to trial by jury is a fundamental right in our democratic judicial system, recognized in the Magna Charta, the Declaration of Independence, and both our state and federal constitutions. It has been characterized as "the glory of the English law" and "the most transcendent privilege which any subject can enjoy." Dimick v. Schiedt, 293 U.S. 474, 485, 55 S. Ct. 296, 300 (1935). (Citations omitted.) Notwithstanding the importance of the right to trial by jury, under appropriate circumstances a new trial should be ordered. For reasons which will be explored in this opinion, we find that under the facts of this case and the applicable law, a new trial is warranted.
As a result of the nature of plaintiff's occupation, the amount of the verdict, and the widespread attention *383 currently being focused on the insurance crisis under the guise of tort reform, this case achieved monumental notoriety. Many lobby groups, legislatures and government agencies perverted the facts of this case and the basis of the jury verdict and used it as an example of one of the causes of the alleged insurance crisis. There is a danger that such ill-conceived publicity will jade potential jurors. To preserve the integrity of the jury system, prospective jurors need to be educated not only about the size of a jury verdict, but also the basis of the verdict and the power of the trial court to rectify inappropriate verdicts. Despite the publicity engendered by the facts of this case, we are mindful of our mandate to decide all controversies purely on the facts and law applicable to each case.
Plaintiff Judith Richardson Haimes testified that she was born with psychic powers N.T. Excerpt 64. [FN1] According to plaintiff, a person endowed with psychic powers has the ability to use an extra sense, other than sight, smell, hearing and touch. There are different types of psychic powers. Some psychics are clairvoyant or clairaudient; these persons see visions or hear things before they happen. Some psychics can psychometrize; these persons enter a room and feel vibrations of an event that took place in that room. Some psychics have precognitive dreams; these persons dream of something and then it happens. Although plaintiff has had clairvoyant experiences, her forte was her ability to read auras. An aura is a light or glow that surrounds *384 people and objects. By interpreting the shapes, colors, sizes and flecks of the aura, an aura reader can discover different things about the individual, including things about the subject's past and future.
FN1. "N.T. Excerpt" refers to the separately transcribed testimony of the plaintiff.
In 1969, plaintiff opened an office in New Castle, Delaware, out of which she read auras and provided psychic counselling. In addition, she devoted one day a week to assisting law enforcement agencies. She also lectured and appeared on radio and television. In September, 1976, one of plaintiff's clients, a physician, suggested that she consult an otolaryngolist, an ear, nose and throat specialist, in connection with suspected tumors. Plaintiff had previously undergone approximately 14 or 15 surgical procedures for the removal of tumors on her feet, scalp, pelvic bones and spine. Plaintiff followed her client's advice and consulted Dr. Max Ronis, who conducted tests and also referred plaintiff for a CT scan.
On September 7, 1976, plaintiff went to the radiology department of Temple University Hospital to undergo the CT scan. Judith Hart, M.D., who had completed a residency in radiology and was then a fellow in neuroradiology, was to administer the test. Prior to performing the CT scan, contrast medium or dye had to be introduced into plaintiff's bloodstream. As Dr. Hart was about to inject plaintiff with dye, plaintiff explained to Dr. Hart that she had previously undergone tests that utilized dye and had suffered reactions including nausea, vomiting, hives and difficulty breathing. There were also discussions between plaintiff and Dr. Hart concerning plaintiff's choice as to whether to proceed with the test, plaintiff's anxiety about the test and the special precautions which would be taken by Dr. Hart. As a result of these discussions, Dr. Hart set up an intravenous line so that if a problem arose, drugs could *385 be administered quickly. Dr. Hart also administered a test dose of the dye. First, two drops of dye were released, and approximately five or seven minutes later, an additional eight drops were released. Almost immediately, plaintiff experienced difficulty breathing, tightness of the throat, pain, nausea, vomiting, hives and welts. Dr. Hart stopped the flow of the dye and administered epinephrine and benadryl. For the next 15 or 20 minutes, plaintiff remained in the radiology department under observation. At her own insistence, plaintiff then reported for a previously scheduled appointment with Dr. Cramer, another physician at the same hospital. After being examined by Dr. Cramer for an unrelated hand disorder, she returned to the radiology department. Dr. Hart examined plaintiff and advised her that she could leave the hospital. Plaintiff was then driven by a friend to her home in New Castle. Over the next 48 hours, plaintiff experienced vomiting, nausea and headaches. She had welts on her body for three days and hives for two or three weeks. In addition, plaintiff testified that she continues to suffer from headaches and nausea.
Much of plaintiff's testimony concerned her psychic activities and her inability to practice these activities following the CT scan. To read an aura, according to plaintiff, it is necessary to go into an altered state, a state of deep concentration. However, subsequent to the CT scan, whenever plaintiff entered this altered state she developed excruciating headaches. Consequently, she stopped reading auras. Because she no longer could read auras, she closed her office in Delaware and stopped assisting law enforcement officers. She was also unable to continue reading the auras of her husband and children. As a result, plaintiff holds herself responsible *386 for the death of her son in "an automobile accident that didn't have to take place."
Plaintiff's husband, Allen N. Haimes, D.D.S., also testified concerning the headaches experienced by plaintiff since she underwent the CT scan, the changes he observed in plaintiff and the effect these changes have had on the lifestyle of the Haimes family.
Plaintiff presented the deposition testimony of several witnesses in support of her claim of loss of psychic powers. [FN2] The first witness was Lieutenant Fritzinger, who testified that he had brought pictures of a homicide victim and eight to 10 suspects to plaintiff's office. Plaintiff was able to tell Fritzinger about the victim's lifestyle, age and family. Plaintiff then provided a detailed description of the manner of the victim's death, identified a photograph of the murderer and advised Fritzinger that the murderer had an extensive criminal record and had previously committed a similar crime.
FN2. The parties did not request transcription of the testimony of these witnesses. The depositions are part of the record. In compliance with the court's oral rulings on defendants' motions in limine, portions of the depositions were not read into the record.
Fritzinger visited plaintiff a second time. At this meeting, plaintiff advised Fritzinger that his wife and father should seek medical attention. Fritzinger convinced his father, who was approximately 73 years old, to visit a doctor. The doctor discovered that Fritzinger's father suffered from emphysema and high blood pressure.
Mary Fritzinger, the wife of Lt. Fritzinger, testified that she sought medical attention at the suggestion of plaintiff. She first consulted a gynecologist, who performed a urine test that revealed a *387 minor urinary tract infection. Over the next two weeks she began feeling tired and consulted her family physician, who prescribed medication. Her condition worsened and shortly thereafter she was admitted to the hospital for removal of a kidney.
Special Agent McCormack testified that he sought plaintiff's advice in solving five to seven homicide cases. On these occasions, plaintiff provided McCormack with information that corroborated information his office had already obtained. The information later proved to be 80 or 90 percent accurate.
Plaintiff also called Julian Millman, D.O., who testified concerning an unnamed patient who, at the suggestion of plaintiff, consulted him for a suspected malignancy. The patient had previously been treated for cervical cancer and had been given a "clean bill of health." Dr. Millman's examination of the patient and the PAP smear he took were negative. For reasons related to the patient's history of cancer, Dr. Millman performed a hysterectomy. Slides prepared during the operation revealed that the patient had stage-one carcinoma.
Special Agent Raymond H. Schellhammer testified that he sought plaintiff's help in finding a missing woman. After viewing a picture of the woman and articles of her clothing, plaintiff supplied Schellhammer with background information concerning the victim, her husband and the husband's mistress, and further reported that the husband had fled to Florida. The husband subsequently returned to the area. Plaintiff went to visit him at his store and then plaintiff told the police that the husband had killed his wife and buried her body near his store. Sometime later, the husband was charged with homicide. Prior to his trial, he confessed to the *388 crime and led Schellhammer to the spot near his store where his wife's body was buried.
Several years later, in 1978, Schellhammer managed to contact plaintiff in Florida and asked for her assistance in finding the body of a police officer who had disappeared after a drowning accident. Plaintiff initially refused to help Schellhammer, explaining that she developed pain when she performed her psychic activities. She nonetheless agreed to perform a reading and later described the boating accident to Schellhammer, including a description of the area in which the officer's body would be found. The body subsequently came to the surface in the area pinpointed by plaintiff.
At the close of plaintiff's case, defendants moved for a non-quit, or in the alternative, a partial non-quit. We granted the motion for a partial non-quit, which was based on the complete absence of expert medical testimony regarding the causal relationship between defendants' alleged negligent acts and plaintiff's chronic and debilitating headaches. In granting this motion, we were mindful that a motion for compulsory nonsuit should be granted only when plaintiff cannot recover under any view of the evidence, with every doubt resolved against its entry and all inferences drawn most favorably to plaintiff. Scott v. Purcell, 490 Pa. 109, 415 A.2d 56 (1980); Gallegor v. Felder, 329 Pa. Super. 204, 478 A.2d 34 (1984). It is plaintiff's burden to establish a causal connection between defendants' conduct and plaintiff's injury. Hamil v. Bashline, 481 Pa. 256, 392 A.2d 1280 (1978). In other words, "defendant's conduct must be shown to have been the proximate cause of plaintiff's injury." Id. at 265, 392 A.2d at 1284. In personal-injury cases, although it is sometimes possible for a jury to reasonably infer causation, "it is generally acknowledged that the complexities *389 of the human body place questions as to the cause of pain or injury beyond the knowledge of the average layperson." Id. at 267, 392 A.2d at 1285. Accordingly, plaintiff must present expert medical testimony establishing the causal relationship between defendants' conduct and plaintiff's injury.
"Q. Now, Doctor, according to the testimony of Judith Richardson Haimes . . . in September of 1976 while having a contrast dye medium introduced into her body, and while laying on a table during this particular procedure she felt nausea, vomiting, shortness of breath, constricutre [sic] of the throat, and she developed hives. A. (Nodded affirmatively.) Q. Doctor, do you have an opinion, within a reasonable degree of medical certainty, what that condition was related to? A. Oh, I think it was immediately after the introduction of the dye that it was a reaction to the dye. Q. And that type of a reaction, Doctor, would that be an anaphylactic reaction? A. I doubt that. Q. What kind of a reaction would that be? A. An antigenetobody reaction and anaphylactic stages."
Thus, Dr. Borota's testimony relative to medical causation addressed only the nausea, vomiting, shortness of breath, constricture of the throat and hives suffered by plaintiff immediately after the introduction of the dye. Dr. Borota failed to establish a causal connection between defendants' acts and *390 plaintiff's chronic headaches. [FN3] In the absence of the required expert testimony, a partial nonsuit was properly entered. This ruling encompassed plaintiff's claim of chronic headaches. In addition, because plaintiff testified that it was the prolonged headaches which deterred her from practicing her psychic powers, the partial nonsuit also encompassed plaintiff's damages that arose from her inability to practice her psychic powers.
FN3. Plaintiff refers to the following testimony as related to causation: "Q. Dr. Borota, Mrs. Haimes had, by all admissions, a reaction to contrast medium, is that correct? A. Yes. Q. No one disputes that. A. (Nodded affirmatively.) Q. Isn't that indisputable? A. I couldn't, we have tried to banter around this point, but I don't think you can get around it. I think she had a reaction to the dye. Q. We don't dispute that point that she had a reaction. A. Um-hum. Q. But my question to you is, was she treated for the reaction? A. Yes." Although in this testimony Dr. Borota acknowledges that plaintiff had a reaction to the dye, he does not offer an opinion as to what symptoms or damages were causally related to the reaction.
Defendants were therefore instructed that all testimony to be offered by them should be limited to evidence relevant to the issues of whether or not defendants' conduct was negligent, and whether or not their negligence, if any, caused plaintiff to suffer nausea, vomiting, shortness of breath, constricture of the throat and hives immediately following the introduction of the dye. In accordance with these instructions, defendants did not call many of *391 their intended expert witnesses, including James Randi, author and investigator of paranormal claims. Instead, defendants presented only the testimony of Donald Redmond, Assistant Administrator of Temple University Hospital, who read into the record medical records, and Dr. Judith Hart, who testified as to the events of September 7, 1976 and the standard of care applicable to the administration of CT scans.
"First, I must explain to you, since this was done out of your presence yesterday that, as a result of a legal ruling I made, certain issues are no longer present in this case and they are not for your consideration. Specifically, you need not decide whether or not plaintiff, Judith Richardson Haimes, suffered from or presently suffers from headaches. You also need not decide whether or not plaintiff ever possessed psychic powers or whether, if she did, she lost her psychic powers as a result of a reaction to the dye administered to her during the CAT scan. That is not for your consideration and you are not to concern yourself as to the reasons for my ruling because they all pertain to matters of law."
The court further charged the jury: "As I mentioned at the beginning of my instructions, you may not award the plaintiff damages for certain items. Specifically, you may not award damages for disabilities related to the plaintiff's headaches, either past or future, . . . or the loss of the plaintiff's psychic abilities and her claimed loss of earnings or earning power. They are not for your consideration.
Rather, the plaintiff would be entitled, if you found the facts that I enumerated before, the plaintiff *392 would be entitled to be fairly and adequately compensated for such physical pain, mental anguish, discomfort, inconvenience and distress as you find she may have endured immediately and shortly after the dye was administered to her, relative to the reactions, thereto."
After deliberating for less than one hour, the jury returned a verdict in the amount of $600,000, which included Dr. Haimes' claim for loss of consortium. Pursuant to Pennsylvania Rule of Civil Procedure 238, the verdict was molded to include delay damages of $386,465.75, bringing the total award to $986,465.75.
Defendants have filed a motion for a new trial. They seek relief from a jury verdict they consider contrary to applicable legal standards and unsupported by relevant evidence. We recognize, as do defendants, that it is the responsibility of the jury to make the ultimate determination of issues of fact. Jurors are entrusted with the responsibility of evaluating often complex and conflicting testimony and arriving at a fair and just verdict. The trial court, however, has not only the power, but the duty to grant a new trial where the verdict is so diametrically opposed to the evidence that the judicial conscience cannot allow the result to stand. Otherwise, a serious injustice would result. Sindler v. Goldman, 256 Pa. Super. 417, 389 A.2d 1192 (1978). Although the granting of a new trial is within the sound discretion of the trial judge who is present at the offering of the testimony, that discretion is not absolute. Austin v. Ridge, 435 Pa. 1, 255 A.2d 123 (1969). A new trial should not be granted because of a mere conflict in testimony or because the trial judge on the same facts would have arrived at a different *393 conclusion. Rather, a new trial should be awarded only when the jury's verdict is so contrary to the evidence as to shock one's sense of justice and a new trial is necessary to rectify the situation. Thompson v. City of Philadelphia, 507 Pa. 586, 493 A.2d 669 (1985).
Defendants offer two possible explanations for the $600,000 verdict. First, this award might represent compensation for plaintiff's legally proven injuries. If this explanation is accurate, the verdict is excessive. Second, the jury disregarded the court's instructions and took into account the damages that were precluded by virtue of the nonsuit order. If this explanation is accurate, a new trial should be awarded because the jury disregarded the law. Regardless of which explanation of the jury's verdict is correct, for the reasons explored below, a new trial is warranted. Since we are certain that one of the above two scenarios occurred, we need not ascertain which rationale actually supported the jury verdict.
Assuming that the jury verdict represented compensation for plaintiff's legally proven damages, we must determine whether the award is excessive. In reviewing defendants' claim that the damages awarded by the jury are excessive, we recognize that the duty of assessing damages is within the province of the jury and should not be interfered with except where it clearly appears that the amount awarded resulted from a misconception of law or evidence, caprice, prejudice, partiality, corruption or some other improper influence. Tonik v. Apex Garages, Inc., 442 Pa. 373, 275 A.2d 296 (1971); *394Jenkins Towel Service, Inc. v. Fidelity Philadelphia Trust Co., 400 Pa. 98, 161 A.2d 334 (1960). A court should not find a verdict excessive unless it is so grossly excessive as to shock the court's sense of justice. Thompson v. Anthony Crane Rental, Inc., 325 Pa. Super. 386, 473 A.2d 120 (1984). In determining whether this standard is met, one court has remarked that "[w]hen the jury's verdict, at the time of its rendition, causes the trial judge to lose his breath, temporarily, and causes him to almost fall from the bench, then it is truly shocking to judicial conscience." Swartz v. Smolowitz, 400 Pa. 109, 116, 161 A.2d 330, 333 (1960). Although this court did not manifest any of the aforementioned gyrations, we nonetheless find the verdict to be so grossly excessive as to shock the court's sense of justice.
I could here [sic] them, the one nurse to my left saying, My God, she's welting" and they are hollering, "get the Epi and all kinds of motion and movement and then, all of a sudden, I got my breath back and when I did I started to vomit with such force that it went all the way down to the foot of the foot, over my shoes, over my legs and then I just starting laying there vomiting and kind of heaving and just bile and dry heaves and foam was coming out of my mouth. I had no control over my arms and legs at all. They were twitching. I coldn't hold them still. They were jumping up and down and then I wet myself."
Plaintiff further testified that while she was on the table she knew that she was going to die. The pain in her chest, arm, and neck felt like it would feel if "somebody was stabbing you over and over and over with a knife, all the way through into your bones."
"I had a pain under my arm and down my arm and in the side of my neck and in my chest, unlike any pain I had ever felt before. It was stabbing. I could breathe, but I couldn't inhale deeply and I couldn't exhale very hard. Worst of all was the pain in my head. My head, it was just an unbearable pain."
Thus, the compensable damages suffered by plaintiff, those that occurred immediately and shortly after the dye was administered, were nausea, vomiting, shortness of breath, constricture of the throat and the attendant pain and suffering. As defendants note, plaintiff's reaction did not prevent her from seeing another doctor for a previously scheduled appointment, leaving the hospital shortly after the procedure, or travelling from Philadelphia to her home in New Castle. Plaintiff did not lose consciousness or require resuscitation or intubation. She also did not seek a physician's help after returning home. Plaintiff's symptoms were transitory and nonpermanent lasting, at most, several weeks.
As discussed earlier in this opinion, a trial court has the discretion to grant a new trial based on the excessiveness of a jury verdict. In determining whether the court has abused its discretion, appellate courts analyze the following criteria: 1. The severity of the injury. 2. Whether the injury was demonstrated by physical evidence or whether it was revealed by subjective testimony of plaintiff. 3. Whether the injury was healed or whether it will affect a plaintiff permanently. 4. Plaintiff's ability to continue with employment. 5. The disparity between out-of-pocket expenses and the amount of the verdict. Kemp v. Philadelphia Transportation Co., 239 Pa. Super. 379, 382- 85, 361 A.2d 362, 364-66 (1976).
Applying these factors to the case at bar, we find the verdict grossly excessive. First, plaintiff's compensable injuries consisted of nausea, vomiting, shortness of breath, constricture of the throat and the attendant pain and suffering. Although these injuries *397 were such that plaintiff remained in bed until the symptoms subsided, they are no greater than the symptoms experienced by a person suffering from a flu or virus. Secondly, only some of plaintiff's symptoms, i.e., the welts, hives, nausea and vomiting, were demonstrated by physical evidence. Third, the injuries were transient and did not affect plaintiff permanently. Fourth, plaintiff's legally proven injuries did not affect her ability to work. Lastly, plaintiff had no special damages and thus the disparity between plaintiff's out-of-pocket expenses and the amount of the verdict is great. In light of the above, it is within our discretion to grant a new trial based on the exessiveness of the jury verdict.
Alternatively, the amount awarded resulted from a misconception of law. Specifically, defendants suggest that the jury disregarded the court's instructions to the contrary and awarded plaintiff damages for continued pain and suffering, chronic and disabling headaches and loss of psychic powers and the consequences thereof. We agree with defendants that this explanation is reasonable. As explained by defendants, plaintiff's case and plaintiff's evidence focused on her alleged psychic powers, the corroboration of such powers and the damages resulting from the loss of these powers. This theme was established in the opening statement given by plaintiff's counsel in which he described plaintiff's psychic powers and the effect the loss of these powers had on her life and the life of her family. Over the course of the next two and a half days, the court heard from witnesses who, with the exception of plaintiff's expert, testified as to either the existence of plaintiff's psychic powers or the damages resulting *398 from her inability to exercise these powers. On the other hand, because of the partial non-quit, defendants did not call their expert witnesses to dispute plaintiff's claim of psychic powers and her claim that plaintiff's chronic, disabling headaches and inability to practice her psychic activities were related to her contrast dye reaction. Thus, the jury heard only plaintiff's undisputed version of the claims that were the subject of the partial nonsuit order. Given the nature of plaintiff's claims and the size of the award, we agree with defendants that it is likely that the jury disregarded the court's instructions and considered plaintiff's evidence of continued pain and suffering and loss of psychic powers.
Defendants next contend that the court erred in admitting the depostion testimony of Lt. Fritzinger, Mary Fritzinger, Robert McCormack, Dr. Millman and Officer Raymond Schellhammer. According to defendants, these depositions constituted hearsay, improper character evidence and improper expert testimony. [FN4] These witnesses corroborated plaintiff's claim that she possessed psychic powers. As discussed earlier, this court granted defendants' motion for a partial non-quit, thereby dismissing plaintiff's damage claims related to chronic headaches and loss of psychic powers. Thus, although the testimony *399 offered by these witnesses was relevant to plaintiff's damage claims at the time the depositions were read into evidence, as a consequence of the court's ruling on the motion for a partial non-quit, the testimony of these five witnesses became irrelevant. The jury was instructed to disregard all evidence related to plaintiff's loss of psychic powers. Therefore, any error in admitting these depositions into evidence was harmless. Nonetheless, to facilitate appellate review of these issues, we will address these arguments.
FN4. Defendants filed motions in limine to preclude the testimony of Lt. Fritzinger, Robert McCormack, Dr. Millman and Officer Schellhammer. These motions, which contained substantially the same arguments as are raised in the post-trial motions, were denied.
Although we will discuss each witness's testimony individually, one argument is common to all of the witnesses. Defendants argue that the testimony of these witnesses improperly constituted evidence of good character and reputation. Defendants do not point to a specific section of the testimony as being character evidence. If it is defendants' contention that evidence of psychic powers is evidence of good character, we reject this contention. Plaintiff's evidence of psychic powers was offered in support of her claim of past and future loss of earning capacity. Furthermore, plaintiff's alleged ability to perform psychic activities does not make it more or less probable that plaintiff has a good character. Lastly, this evidence was not offered in the form of reputation testimony.
Defendants claim that the court erred in admitting the testimony of plaintiff's witness Lt. Alfred Fritzinger. Their principal argument is that Lt. Fritzinger's testimony was hearsay because it pertained to a police investigation founded upon information supplied by an unidentified informant. We reject defendant's contention that the absence of *400 the police records or the failure of Fritzinger to reveal the informant's identity has any bearing on whether Lt. Fritzinger's testimony was hearsay. Similiarly, defendants' inability to use the medical records of Lt. Fritzinger's wife or father to cross-examine Lt. Fritzinger does not have any bearing on whether or not the testimony is hearsay. Nonetheless, isolated portions of the deposition did contain hearsay statements which were properly excluded. Specifically, we excluded Fritzinger's discussion of a vehicle analysis and his testimony concerning what he was told by an informant. Although Fritzinger's testimony concerning conversations between his wife and father and their respective physicians may also have contained hearsay statements, no objection to this testimony was made during the deposition and therefore the claim is waived.
Defendants further argue that the characterization by Fritzinger of plaintiff's information as "accurate" signified a "seal of approval." As such, it transformed Fritzinger into an expert witness whose opinions should have been disclosed pursuant to Rule 4003.5. The mere fact that Fritzinger offered an opinion as to the accuracy of plaintiff's information does not make the witness an expert witness. Moreover, to the extent that the opinion was not proper opinion evidence, no objection was raised and thus the issue is waived.
Defendants claim that the court erred in admitting the testimony of Dr. Millman, who testified concerning a patient who had been referred to him by plaintiff. Dr. Millman neither disclosed the patient's name nor produced the patient's medical *401 records. Defendant's principal argument is that Dr. Millman's testimony constituted hearsay because they were unable to confront the patient or otherwise determine the accuracy of Dr. Millman's testimony. We do not believe that defendants' inability to confront the patient or use the patient's medical records to cross-examine Dr. Millman has any bearing on whether or not the testimony is hearsay.
Dr. Millman's testimony did contain isolated hearsay statements. Specifically, Dr. Millman testified concerning a surgical procedure that the patient had undergone prior to the time he treated the patient. This testimony was not based on Dr. Millman's personal observations; rather, it was based on statements he had read in medical records which were prepared by other physicians. These statements constituted hearsay and should have been excluded. However, an erroneous ruling on evidence constitutes reversible error only if the error is shown to be harmful to the complaining party. Whitman v. Riddell, 324 Pa. Super. 177, 471 A.2d 521 (1984). Insofar as the jury was instructed that [it] should disregard all evidence related to plaintiff's alleged psychic powers, the erroneous admission of the above-quoted sentences could not, in and of itself, have been prejudicial.
Defendants next claim that the court erred in admitting the testimony of Mary Fritzinger. Although motions in limine were filed with respect to the testimony of the law enforcement officers and Dr. Millman, no such motion was filed with respect to the testimony of Mary Fritzinger. Since no objections were raised prior to or at trial, we will not review the objections now raised to the testimony of Mary Fritzinger. Dillipline v. Lehigh Valley Trust Co., 457 Pa. 255, 322 A.2d 114 (1974).
Defendants next allege that the court erred in the admission of testimony by Robert McCormack concerning conversations between him and plaintiff because the tape recordings of the meetings were not produced. We again reject the argument that the inability of defendant to use the tape recordings to cross-examine the witness renders the witness's testimony hearsay. Similiarly, for the reasons discussed earlier, we find no merit in defendants' claims that the testimony of McCormack constituted hearsay, improper opinion evidence in violation of Rule 4003.5 and improper character evidence.
"Q. And he led you to the spot where the body was, in fact, found? A. That's correct." Although nonverbal conduct, such as a nod of the head, may constitute hearsay where the actor intended it to be an assertion, Commonwealth v. Farrior, 312 Pa. Super. 408, 458 A.2d 1356 (1983), we do not believe that the act of a defendant in a homicide case of leading police to the body constituted such conduct. Moreover, even if this conduct did constitute hearsay, it falls under the admission exception to the hearsay rule. Defendants also object to the following exchange: "Q. What occurred when the investigation was moved? A. The body of the sheriff's officer came to the men in the boat. * * * Q. Tell us how it came to the boat, as you so indicated. * * * The Witness: As I understand, the men who were searching from the boat had thrown a grappling hook into the lake and it had become lodged on the bottom and the men were leaning to one side and pulling on the grappling hook. One man turned *404 around and he, the officer's body, was there. It rose to the surface."
Schellhammer's use of the phrase [a]s I understand indicates to this court that he did not personally observe the recovery of the body. Thus, the testimony did constitute hearsay and should have been excluded. Nonetheless, an erroneous ruling on evidence constitutes reversible error only if the error is shown to be harmful to the complaining party. Whitman v. Riddell, 324 Pa. Super. 177, 471 A.2d 521 (1984). Insofar as the jury was instructed that [it] should disregard all evidence related to plaintiff's alleged psychic powers, the erroneous admission of the above-quoted sentences could not, in and of itself, have been prejudicial.
The next argument raised by defendants concerns the tape recordings of the meeting between Schellhammer and plaintiff. Defendants argue that they should have been provided with the tapes prior to the deposition, rather than in the midst of their cross-examination of the witness. Defendants have not demonstrated that they had a right to the tapes. Although they refer to Rule 4003.5, as we discussed earlier, the law enforcement officer was not an expert witness and, therefore, the rule is inapplicable. In addition, defense counsel has no right to inspect a document used by a witness outside of court to refresh his memory. Commonwealth v. Hardrick, 268 Pa. Super. 103, 407 A.2d 458 (1979); Commonwealth v. Samuels, 235 Pa. Super. 192, 340 A.2d 880 (1975). Because Schellhammer did not listen to the tapes during his testimony, defendants had no right to inspect the tapes.
The remaining objections to Schellhammer's testimony, i.e., that the testimony constituted improper expert-opinion evidence, violated the best-evidence rule, constituted improper character evidence and *405 was irrelevant and prejudicial, have been disposed of previously.
Defendants submit that the court erred when, after granting the partial non-quit, it failed to immediately instruct the jury to disregard all of plaintiff's testimony and evidence unrelated to an immediate contrast dye reaction. Instead, following the court's explanation of the basis for granting the partial non-quit, the court asked counsel whether the ruling was clear. Counsel replied affirmatively and the jury was brought back into the courtroom. The court then stated that it would "withhold any comment to the jury until the charge," whereupon the defense called its first witness.
Prior to trial defendants moved to preclude the videotape trial testimony of plaintiff's expert, Ray Boroto, M.D. The gravaman of this motion in limine was that Dr. Borota's testimony was inconsistent with, and went beyond the fair scope of, his testimony in discovery proceedings.
On or about April 6, 1982, plaintiff responded as follows to an interrogatory requesting that she identify her expert witnesses: "At the present time, plaintiff has not determined what expert witness will be present to testify on the plaintiff's claim. It is plaintiff's understanding that defendant will admit that on the date in question plaintiff did suffer anaphylactic shock. It is the plaintiff's understanding that it may be necessary to prove the subsequent loss of her psychic powers to the anaphylactic shock suffered on the date of the incident."
On or about November 8, 1982, plaintiff supplied defendants with a report prepared by Dr. Borota. In this report, Dr. Borota recounted that plaintiff had been evaluated for acoustic neurinoma and von Recklinghausen's disease; that plaintiff had had a myelogram in Philadelphia; that prior to the administration of the dye, she informed the doctor that she was allergic to dye; that she had an anaphylactoid reaction to the dye; that since the dye study she has suffered from severe headaches; that Dr. Borota's examination of plaintiff revealed no evidence of acoustic neurinoma or von Recklinghausen's disease; and that plaintiff sustained a reaction to the dye which historically is related to her headaches and inability to manifest psychic function.
On November 11, 1985, a videotape trial deposition of Dr. Borota was conducted. At the deposition, *407 Dr. Borota testified, inter alia, concerning the appropriateness of performing a CT scan on a patient with a history of adverse reactions to contrast dye and the proper procedure to be followed in administering a CT scan. According to defendants, this testimony should have been precluded because in none of the discovery proceedings was it disclosed that Dr. Borota would testify concerning the standard of care in the administration of contrast dye and the deviation from that standard by defendants.
The relevant rule is 4003.5(c) which provides that: "To the extent that the facts known or opinions held by an expert have been developed in discovery proceedings under subdivision (a)(1) or (2) of this rule, his direct testimony at the trial may not be inconsistent with or go beyond the fair scope of his testimony in the discovery proceedings as set forth in his deposition, answer to an interrogatory, separate report or supplement thereto. However, he shall not be prevented from testifying as to facts or opinions on matters on which he has not been interrogated in the discovery proceedings."
The Superior Court recently acknowledged that there is no hard and fast rule for determining when a particular expert's testimony exceeds the fair scope of his testimony in the discovery proceedings. Wilkes-Barre Iron & Wire Works, Inc. v. Pargas of Wilkes-Barre, Pa. Super., 502 A.2d 210 (1985).
"Rather, the determination must be made with reference to the particular facts and circumstances of each case. The controlling principle which must guide us is whether the purpose of Rule 4003.5 is being served. The purpose of requiring a party to disclose, at his adversary's request, 'the substance of the facts and opinions to which the expert is expected *408 to testify' is to avoid unfair surprise by enabling the adversary to prepare a response to the expert testimony. . . . In other words, in deciding whether an expert's trial testimony is within the fair scope of his report, the accent is on the word 'fair.' The question to be answered is whether, under the particular facts and circumstances of the case, the discrepancy between the expert's pretrial report and his trial testimony is of a nature which would prevent the adversary from preparing a meaningful response, or which would mislead the adversary as to the nature of the appropriate response." Id., 502 A.2d at 212-213. (Citations omitted.) The phrase "fair scope" contemplates a reasonable explanation and even an enlargement of the expert's written words. For example, in Trent v. Trotman, Pa. Super., 508 A.2d 580 (1986), plaintiff responded to interrogatories by stating that his expert would testify concerning inadequacies in his surgical and post-surgical care. At trial, defendant objected to the testimony of the expert regarding causation, claiming that the answers to interrogatories did not mention that the expert would testify regarding "causation." The Superior Court rejected this contention, finding that although the word "causation" was not specifically mentioned in the answers to interrogatories, defendant should not have been surprised or prejudiced by the expert's testimony concerning causation; thus, the expert's testimony concerning causation was within the fair scope of the answers to interrogatories.
An expert may not, however, testify to a new or different theory of liability. In Wilkes-Barre, the expert stated in his report that propane tank was defective because it lacked a protective collar. At trial, the expert testified that the tank was defective because it lacked a welded collar. Since the defense *409 was that the tank had a removable collar, the court found that defendant was misled in the preparation of its defense and, therefore, the expert's trial testimony was not within the fair scope of his report.
Applying these standards to the case at bar, we find that Dr. Borota's testimony regarding the standard of care was within the fair scope of the answers to interrogatories and report. From the outset, the issues in this case were narrowly defined. For example, plaintiff's interrogatories, dated August 1, 1979, addressed to defendant Dr. Hart, and the May 13, 1980 deposition of Dr. Hart, explored the propriety of administering contrast dye to a patient with a history of adverse reactions. Moreover, we agree with plaintiff that defendants should have expected expert testimony from plaintiff on the standard of care required in the administration of a contrast dye test. Dr. Borota was the sole expert witness who had been listed by plaintiff in her discovery material. Insofar as the deposition of Dr. Borota was conducted on what was to have been the eve of trial, defendants should not have been surprised by his testimony on the standard of care and were therefore not prejudiced by Dr. Borota's testimony. Thus, although the expert report filed by Dr. Borota did not expressly refer to the standard of care, under the facts and circumstances of the case, the discrepancy between the expert's pretrial report and his trial testimony was not of a nature which would mislead defendants or prevent them from preparing a meaningful response. Accordingly, the expert's testimony was within the fair scope of his testimony in the discovery proceedings.
Defendants also argue that Dr. Borota, being an otolaryngologist rather than a neuroradiologist or radiologist, was not qualified to testify concerning the standard of care in performing a CT scan. In *410 Dambacher v. Mallis, 336 Pa. Super. 22, 485 A.2d 408 (1984), the court tightened the standard for qualifying an expert witness, holding that an expert must show knowledge on the very question upon which he intends to express an opinion. Although "it may appear that the scope of the witness's experience and education may embrace the subject in question in a general way, . . . the subject may be so specialized that even so, the witness will not be qualified to testify. Thus, every doctor has a general knowledge of the human body. But an opthalmologist, for example, is not qalified to testify concerning the causes and treatment of heart disease." Id. at 43, 485 A.2d at 418-419.
Applying this standard to the facts of the case at bar, we found that Dr. Borota was qualified to testify about the standard of care applicable to the administration of CT scans. As part of his medical training, Dr. Borota learned about anaphylactoid reactions to drugs. Because anaphylactoid reactions to drugs confront physicians in many medical specialties, Dr. Borota has kept abreast of the literature in the field. Although Dr. Borota had not performed diagnostic procedures using contrast dyes since 1976 when he entered private practice, he has ordered such tests and assisted radiologists in the administration of these tests. Since the subject is not highly specialized and Dr. Borota had knowledge of and experience with the subject, we found him qualified to testify as an expert.
Defendants argue that they sought to establish that plaintiff lacked motivation to return to the work force because of her present lifestyle and circumstances. According to defendants, the evidence was relevant to plaintiff's duty to mitigate damages by seeking alternative employment. We disagree. Plaintiff sought compensation for her loss of earning capacity, i.e., the ability to earn money, that she suffered as a result of defendants' negligence. Plaintiff's ability to earn money is not affected by the size of her house or whether or not she has a swimming pool. Thus, the court properly excluded evidence relative to plaintiff's standard of living.
During the testimony of defendant Dr. Judith Hart, which was presented by way of videotape deposition, the judge did not remain in the courtroom. Although defendants acknowledge that the judge also absented himself from the courtroom during the videotape testimony of plaintiff's expert, Dr. Borota, they claim that the court's failure to explain his absence, as he did prior to Dr. Borota's testimony, created a negative inference and prejudiced the jury.
"Members of the jury, you are going to see the videotape, as I mentioned, of Dr. Borota that was taken in Saint Petersburg, Florida, on November the 11th, 1985.
Now, I have read the transcript of 74 pages so I know exactly what Dr. Borota is going to say so I expect to leave the courtroom shortly after it starts and *413 I am attending to other work in this building where my chambers is upstairs. If for some reason I'm needed, of course, the lawyers know I'm available. I don't want you to infer from my departure that I regard this witness less than any other witness. It's just that I have read this witness. The only advantage to staying here would be to see him testify. I think in my case it's not important because you are the factfinders.
I do want you to watch, in addition to observe, visually, and listen to the doctor so that, as in the case of a live witness you always have the opportunity to observe a witness' demeanor. You can't do that with a deposition because you don't see anybody. You only hear words spoken. This deposition will run until about 3:30, I believe, close to it and then we'll take a short recess and we'll have a deposition after this, that is, without videotape, just the reading of a transcript which I am told will take approximately a half hour or so a little beyond 4:00, at which time we'll adjourn for the day."
Defendants argue that since the court had not had the opportunity to review Dr. Hart's testimony, this explanation did not apply to Dr. Hart's deposition. However, the jury was unaware that the court had not previously reviewed the deposition. Thus, as far as the jury knew, the instructions applied with equal force to the court's absence during Dr. Hart's deposition and, therefore, defendants were not prejudiced by the failure of the court to repeat these instructions.
"I mentioned this before and I will repeat it. You heard the testimony of Dr. Borota and Dr. Hart, taken *414 by videotape deposition prior to this trial. You also heard testimony by way of depositions of Raymond Schellhammer, Lt. Fritzinger, Robert McCormick, Dr. Millman, all who were deposed prior to trial. Remember, that this testimony was given under oath in the presence of the attorneys for all parties and they all participated in the questioning of the witnesses. A court reporter was present, took down everything that was said and then transcribed the testimony. This form of testimony is entitled to neither more or less consideration by the jury because of the manner of its admission." Defendants allege that the court erred in emphasizing the testimony of witnesses whose testimony had no probative value to the issues sent to the jury. Had this issue been brought to the court's attention, we would have given curative instructions. We reject defendants' excuse that no curative instructions could have undone the prejudice. Moreover, we consider defendants' failure to object to the charge, whether or not a tactical decision, to constitute a waiver of the issue.
For the foregoing reasons, this court concludes that defendants' motion for a new trial should be granted.
And now, this August 7, 1986, upon consideration of the briefs submitted and oral argument duly held, it is hereby ordered and decreed that defendants' motion for a new trial is granted.

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text:
Sick call, conducted by a physician or other person designated by a physician as capable of performing such duty, shall be available to each inmate according to a written procedure for sick call. All inmates must be informed of these procedures including any copay requirements, as well as procedures for submitting grievances, upon admission. Rules of the Tennessee Corrections Institute, Rule 1400-1-.13(11).
While society does not expect that inmates will have unqualified access to health care, a jail official who does not attend to the serious medical needs of an inmate violates that inmate's constitutional right. See Hudson v. McMillian, 503 U.S. 1, 9, 112 S.Ct. 995, 1000, 117 L.Ed.2d 156 (1992). See also Dawson v. Kendrick, 527 F.Supp. 1252, 1308 (S.D. W.Va. 1981) (holding that the “denial of adequate medical screening, classification, record keeping, sick call procedures and timely access to care at the Mercer County Jail constitutes deliberate indifference to the potentially serious medical needs of the pre-trial detainees and convicted prisoners alike in violation of the Eighth Amendment”); Facility Review Panel v. Holden, 356 S.E.2d 457, 460-461 (W.Va. 1987) (holding that failure to medically screen inmates upon admission, to keep medical records, or to hold regular sick call violated prohibition against cruel and unusual punishment under federal constitution).
It has been held that sick call administered by prison security staff instead of medical staff violates constitutional standards and subjects prisoners to cruel and unusual punishment. Carty v. Farrelly, 957 F.Supp. 727, 737-738 (D. Virgin Islands 1997). It has also been held that providing inadequate medical staff effectively denies inmates access to diagnosis and treatment and constitutes deliberate indifference. Inmates of Allegheny County Jail v. Pierce, 612 F.2d 754, 762 (3d Cir. 1979). However, the mere fact that staff is not on “sick call” seven days a week does not constitute deliberate indifference to the serious medical needs of prisoners so long as emergency treatment is available during weekends and holidays. Luca v. Scalzo, 892 F.2d 83 (9th Cir. 1989) (The failure to provide regular medical office hours for two out of every seven days for nonemergency medical needs is not evidence of serious understaffing establishing deliberate indifference.); Wood v. Housewright, 900 F.2d 1332, 1335 (9th Cir.1990) (Only delays that cause substantial harm violate the Eighth Amendment.). See also Gregory v. McGann, 1992 WL 559661 (N.D. Ind. 1992) (finding policy of one day a week hospital sick call (except for emergencies) does not offend the Eighth Amendment); Pounds v. Myers, 76 Fed.Appx. 630 (6th Cir. 2003) (holding that allegations that nurse told inmate that he could be seen for only one complaint per sick call along with one day suspension of sick call privileges failed to state a claim upon which relief could be granted absent any allegation that the delay in receiving treatment had any detrimental effect on inmate’s condition); County of El Paso v. Dorado, --- S.W.3d ----, 2005 WL 3254498 (Tex. App. 2005) (“Evidence of sick call requests, examinations, diagnoses and medications may rebut an inmate's claim of deliberate indifference.”).

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In his § 2241 petition, Petitioner raises various additional state law claims. He claims that Respondents violated state law by failing to ensure LCCF met or exceeded corrections department standards. Further, Petitioner claims that the contracts violate state law because Lea County is not in the business of providing correctional jail services as contemplated by state law. Finally, Petitioner claims Respondents' conduct constitutes fraud, deceptive trade practices, and a pattern of racketeering, all in violation of state law. A magistrate judge sua sponte issued an order to show cause why the petition should not be dismissed for failure to exhaust state remedies. In his response, Petitioner claimed that exhaustion was not required because "Petitioner has raised claims implicating important state interests." Petitioner further claimed that the state waived the exhaustion requirement. Finally, Petitioner claimed that he would be prejudiced by exhaustion due to undue delay and futility in the state court proceedings. After considering Petitioner's objections, the district court dismissed the petition without prejudice for failure to exhaust. The district court subsequently denied Petitioner's application for a certificate of appealability, noting that Petitioner failed to make the required showing under 28 U.S.C. § 2253(c)(2). We deny Petitioner's application for a certificate of appealability as well, and dismiss his appeal.
1. Because the § 2241 petition in this case is nearly identical to those filed in Seifert v. Williams, No. 00-2146 (10th Cir., filed May 1, 2000), Ayon v. Williams, No. 00-2161 (10th Cir., filed May 16, 2000), Martinez v. Williams, No. 00-2169 (10th Cir., filed May 22, 2000), Keck v. Williams, No. 00-2192 (10th Cir., filed June 16, 2000), our order and judgments in those cases are virtually identical to this one.
2. We note that the district court did not have the benefit of our decisions in Montez and Rael, which we decided after the district court dismissed the petition.


This outline covers various ways to compensate key employees using non-ERISA compensation plans. Most of the outline covers the types of equity compensation plans. The final part of the outline covers non-equity deferred compensation plans. Section 409A, enacted as part of the American Jobs Creation Act of 2004, must be considered when dealing with non-qualified deferred compensation plans.
In general, Section 409A provides that if a nonqualified deferred compensation plan fails to satisfy specific requirements related to timing of elections and distributions and to funding, amounts deferred under the plan for the current taxable year and all preceding taxable years are includable in gross income to the extent not subject to a substantial risk of forfeiture and not previously included in income.
Equity compensation plans can be broadly divided into three categories: (1) actual equity ownership, such as restricted stock plans; (2) potential equity ownership plans, such as stock options; and (3) those plans which do not result in actual or potential equity ownership but give a contractual right to a cash payment based on appreciation in the company's value, such as stock appreciation rights. Each of these equity compensation plans aligns the employee's interest with the interest of the shareholders by rewarding the employee for increases in stock value. Most plans are subject to vesting provisions that are tied to continued employment, company performance goals, or more specific performance goals tailored to the individual employee or the division.
1. Description. A restricted stock award is the grant of stock or sale of stock at market value or discounted value to an employee subject to a vesting schedule. Unvested shares are typically subject to forfeiture or resale to the company at the original purchase price upon the employee's termination of employment or resignation.
employee make the Section 83(b) election as discussed below. IRC § 83(a).
b. Disposition Prior to Vesting. An arm's-length disposition of restricted stock will trigger compensation income equal to the value of the stock as of the date of the disposition less any amount paid for the stock. Treas. Reg. § 1.83-1(b)(1). A non-arm's-length disposition such as a gift or contribution to a related entity does not close the compensation element and the employee is still subject to tax when the stock becomes vested even though the employee no longer owns the stock. Treas. Reg. § 1.83-1(c).
C. Vesting. Employee recognizes compensation income (i.e., ordinary income) when restricted stock is transferable or no longer subject to substantial risk of forfeiture (i.e., upon vesting). IRC § 83(a). Amount of gain at time of vesting equals the difference between fair market value of the stock at that time less any amount paid for the stock. IRC § 83(a). The employee's holding period begins at time of vesting for purposes of the one-year requirement for long-term capital gains and the five-year requirement for the 50% exclusion under Section 1202. IRC § 83(f). For purposes of determining fair market value, restrictions on the stock such as securities law, lock-up, and similar restrictions are ignored. IRC § 83(a). The only restriction that is taken into account in determining value is one that by its terms will never lapse such as a buy-sell agreement. IRC § 83(a).
d. Sale of Stock. Future appreciation in stock is taxed as capital gain when employee sells stock. If the employee held the stock for one year from the vesting date, then the 20% long-term capital gains rate will apply.
(1) The value of restricted stock may increase substantially prior to vesting, resulting in a large ordinary income tax liability for the employee upon vesting. Moreover, at the time the restricted stock becomes vested it may still be illiquid, resulting in phantom income to the employee (i.e., taxable income with no cash).
(2) An employee can avoid this result by making an election under Section 83(b) to recognize compensation income at the time restricted stock is granted. Amount of compensation income is the difference between fair market value of stock at time of grant less any amount paid for stock. Fair market value is determined without regard to any restrictions other than restrictions which by their terms will never lapse. A Section 83(b) election also starts the employee's holding period. IRC §83(f).
(3) Any future appreciation in stock value from grant date is taxed as capital gain when employee sells stock. If the employee held the stock for one year from the original grant, then the 20% long-term capital gains rate will apply.
(4) The Section 83(b) election must be filed with the IRS within 30 days after employee receives the restricted shares. This is an absolute deadline with no exceptions.
(5) The Section 83(b) election can provide employees substantial tax benefits under the right circumstances. The election is usually made when the stock has little value when received, or when employee paid close to fair market value for the stock, and employee anticipates stock value to appreciate substantially during the vesting period.
a. Deduction. Employer receives tax deduction for restricted stock at the time the employee recognizes compensation income in an amount equal to the employee's income. IRC § 83(h).
b. Requirements for Deduction. The regulations provide that the employer is entitled to the deduction if the employee “included the amount in income.” Treas. Reg. § 1.83-6(a)(1). Significantly, an employee will be deemed to have included the amount in income if the employer timely satisfies applicable Form W-2 or Form 1099 reporting requirements. Treas. Reg. § 1.83-6(a)(2). Under this deemed inclusion rule, employers will be entitled to the deduction if they satisfy the reporting requirements even if they fail to withhold and the employee fails to report the income. Thus, employers should carefully comply with the reporting requirements to preserve their deduction.
C. Withholding Requirements. Although companies are not required to withhold in order to obtain the tax deduction, companies are still required to withhold and pay applicable income and employment taxes. Failure to do so can subject employer to liability for the taxes that should have been withheld plus interest and penalties.
4. Summary of Restricted Stock Advantages.
a. Substantial tax benefits to the employee if stock is issued when the value is low. The employee can make the Section 83(b) election and thereby preserve capital gains treatment and potential Section 1202 exclusion on all future appreciation in the value of the stock. Thus, restricted stock plans are especially popular for founders and other senior executives in start-up companies.
b. Gives employee an immediate ownership interest in company.
5. Summary of Restricted Stock Disadvantages.
a. Potential for substantial phantom ordinary income. If the stock value is high when issued, the employee would likely not make the Section 83(b) election. Instead, the employee would be taxed when the stock became vested, potentially resulting in substantial phantom ordinary income if the employee cannot immediately sell a portion of the stock. Thus, restricted stock plans are usually not a viable choice for private companies with substantial current value, unless the company expects to be public when the restricted stock becomes vested and the employee would be able to sell, a portion of his stock to avoid phantom income.
c. Issuance of restricted stock to employees may make employer less attractive to venture capitalists or other financiers who do not wish to see such dilution without a corresponding cash inflow at the stock's fair market value.
B . Stock Option Plans.
1. Description. Stock options are the most common equity compensation plan. A stock option is a right to buy stock at the exercise price at some point in the future. Exercise of stock options is typically subject to vesting provisions. Unvested options are forfeited upon the employee's termination or resignation. There are two types of stock options: incentive stock options ("ISOs") and nonqualified stock options ("NQOs"). ISOs are options that provide employees favorable tax consequences under Section 422. ISOs must meet the rigid requirements set forth in Section 422. Any option that does not meet the ISO requirements is an NQO. Section 409A does not apply to ISOs, but does apply to NQOs unless certain conditions are met.
(1) Grant. No tax upon the grant of an ISO. IRC § 421 (a).
(2) Exercise. No tax upon the exercise of an ISO except may be subject to alternative minimum tax ("AMT") as discussed below. IRC § 421 (a).
(3) Sale of Stock. Full appreciation in value of the stock is subject to tax at the capital gains rate when the stock is sold. Thus, ISOs provide two benefits: (i) employees generally defer tax until the underlying stock is sold; and (ii) all of the gain is treated as capital gains.
(1) No Deduction. No deduction for employer upon either the grant or exercise of an ISO or the employee's sale of the underlying stock. IRC § 421(a)(2).
(2) Reporting Requirements. Employer must furnish a statement to each employee who exercises an ISO during the year by January 31 of the following year setting forth: (i) the employer's name, address, and taxpayer identification number; (ii) the name, address, and taxpayer identification number of the person to whom the ISO shares are transferred; (iii) the name and address of the corporation issuing the ISO stock if different from the employer corporation; (iv) the ISO grant date; (v) the ISO exercise date; (vi) the fair market value of the stock on the exercise date; (vii) the number of ISO shares transferred upon exercise of the ISO; (viii) statement that the option was an ISO; and (ix) the exercise price. IRC § 6039(a)(1); Prop. Treas. Reg. § 1.6039-2(a).
market value of stock is $8.
Year 3: ISOs are exercised when fair market value of stock is $12.
Year 5: Employee sells stock for $16.
Employee receives $32,000 ($80,000 - $40,000 exercise price - $8,000 capital gains tax).
Employer has no cash flow benefit in ISO situation.
(1) To obtain the favorable ISO tax consequences, employees must hold the stock received on the exercise of an ISO for the later of (i) 2 years from the grant of the ISO or (ii) 1 year from the exercise of the ISO. IRC § 422(a)(1). Thus, both holding periods must be satisfied.
(2) Failure to satisfy the holding period requirement does not disqualify the ISO but rather results in a disqualifying disposition. Any gain recognized by the employee on a disqualifying disposition will first be treated as ordinary income to the extent of the difference between the stock's fair market value on the date the ISO was exercised and the exercise price. IRC §421 (b). Any remaining gain will be treated as long-term capital gain if the employee held the stock after the exercise of the ISO for at least one year or short-term capital gain if the employee did not hold the stock for a year.
(3) The employer is entitled to a deduction in the year of a disqualifying disposition in an amount equal to the employee's ordinary income recognized on the disqualifying disposition. To ensure that it is entitled to the deduction under the deemed inclusion rule discussed in Part III(A)(2)(b) above, the employer should file Form W-2 on or before the due date for the employer's return for the year in which it is claiming the deduction.
(4) In many cases, employees will not satisfy the requirement that they hold the stock for one year from the exercise date. This is especially true for employees who hold ISOs in a start-up company that goes public or a company that is sold.
Although the exercise of an ISO does not result in a regular tax liability, the exercise may result in the 26% or 28% AMT. The difference between the fair market value of the ISO stock on the exercise date and the exercise price is treated as an adjustment for AMT purposes. IRC § 56(b)(3). The starting point in calculating AMT is the taxpayer's regular taxable income. The taxable income is then adjusted upwards and downwards for the AMT adjustments such as the ISO adjustment and the AMT exemption amount to arrive at alternative minimum taxable income ("AMTI"). AMTI is then multiplied by the AMT rate of either 26% or 28% depending on the amount of AMTI. If the resulting amount exceeds the taxpayer's regular tax liability, the excess amount is the taxpayer's AMT.
f. ISO Requirements. ISOs must meet each of the statutory requirements set forth in Section 422. Failure to satisfy any requirement will result in the ISO being treated as an NQO.
(1) Employees of Granting Corporation or Affiliated Corporation. ISOs can be granted only to employees of the corporation granting the ISOs or a parent or subsidiary corporation of the granting corporation. IRC § 422(a)(2).
(a) Employees Only. ISOs may be granted only to employees. Whether an individual is an employee is determined under the withholding tax rules of Section 3401(c), which generally follow the common law factors. Treas. Reg. § 1.421-7(h)(1); Ellison v. Commissioner, 55 T.C. 142 (1970), acq. 1971-1 C.B. 2. Thus, ISOs may not be granted to directors or independent contractors.
(b) Termination of Employment. If the recipient of an ISO leaves employment for any reason, including death, then the employee or his legal representative must exercise the ISO within 3 months in order to preserve the ISO treatment. The only exception is if the employee leaves due to a disability, in which case the 3 -month period is extended to one year. IRC § 422(c)(6). Leaves of absences of less than 90 days for whatever reason are not considered leaving employment. Treas. Reg. § 1.421-7(h)(2). If the leave extends beyond 90 days, however, employment will be considered terminated at the end of the 90-day period and the employee has 30 days from that date to exercise the ISO.
(c) No Nondiscrimination or Coverage Rules. There are no nondiscrimination or coverage requirements like there are for qualified plans. Thus, ISOs can be granted to whichever employees the employer desires, including only to highly compensated employees.
(2) Plan Requirements. ISOs must be granted pursuant to a plan that (i) states the aggregate number of shares that may be issued to employees; (ii) specifies the eligible employees or class of employees; and (iii) is approved by shareholders 12 months before or after the date that the plan is adopted by the Board of Directors.
(a) Addback Provisions. Plans which provide that shares received by the company on a share-for-share exercise go back into the plan may not satisfy the ISO requirement that the plan specify the maximum number of shares which can be issued under the plan. A potential solution is to add language that the recycled shares could only be issued for nonqualified options. Alternatively, a definite limit could be set on the number of shares which can go back into the plan.
(b) Evergreen Provisions. Companies may want to automatically add more shares to the plan each year without having to get shareholder approval to replenish an option plan. Alternatively, companies may want the maximum number of ISO shares to be a percentage of the total outstanding shares. If drafted incorrectly, such a provision may not satisfy the ISO requirement that the maximum number of shares subject to the plan must be specified. For example, a plan that merely specifies a stated percentage of outstanding shares will not meet the requirement. Prop. Treas. Reg. § 1.422A-2(b)(3). Plans which provide that the total number of shares added will be the lesser of a set number or a set percentage of the total outstanding shares should satisfy the ISO requirement. A public company may want to include a "sunset" provision so that existing shareholders are protected from excessive dilution in the future.
(c) ISOs and NQ0s. A plan that offers both ISOs and NQOs does not need to state how many ISOs and how many NQOs can be granted. The plan can simply state the total options, regardless of whether an ISO or NQO. Treas. Reg. § 14a.422A-IT (Q&A-22).
(d) Designation of Eligible Employees. Plan may provide that employees designated by the President, the compensation committee or some other individual or group of individuals are eligible for ISOs. Prop. Treas. Reg. § 1.422A-2(b)(3)(iii). This gives the company maximum flexibility in granting ISOs.
(e) Amendments to the Plan. The only amendments that require shareholder approval for ISO purposes are changes to the number of shares or the eligible employees. Prop. Treas. Reg. § 1.422A-2(b)(3)(iii).
(3) Fair Market Value Exercise Price. Exercise price of ISO must not be less than the fair market value of the stock at the time of grant. IRC §422(b)(4).
(b) Determination of Fair Market Value. The Board of Director's good faith determination of fair market value is sufficient in this instance. Treas. Reg. § 422(c)(1); Treas. Reg. § 14a.422A-IT (Q&A 2(c)(4)); Prop. Treas. Reg. § 1.422A-2(e). Thus, the Board will not later be second guessed if the determination, in hindsight, appears to be wrong. The Board must, however, establish that it made a good faith determination of fair market value given all the facts and circumstances at such time. The Board should memorialize its fair market value determination in the Board minutes. See Keogh v. Commissioner, T. C. Memo 1992-13 1, affd by unpublished op., 95-2 U.S.T.C. 1 1995 (2d Cir. 1995), cert. denied No, 95-1014 (U.S. 1/22/96)(denying ISO treatment where no evidence that the option price was intended to be the stock's fair market value).
(c) Effect of Restrictions on Stock. In making its good faith determination of value, the Board must ignore any restrictions (e.g., securities law restrictions) other than those which, by their terms, will never lapse. IRC § 422(c)(7). This is the same rule under Section 83 discussed in Part III(A)(2)(c)(I) above.
(d) Grant Date. Because the exercise price must equal fair market value on the grant date, it is important to determine the grant date. In general, the grant date is the date when the corporation completes all corporate action constituting an offer to sell stock under the ISO. Treas. Reg. § 1.421-7(c)(1).
(e) Conditional Grants. A conditional grant is not a grant for ISO purposes. For example, if an individual is granted an ISO on the condition that he become an employee, the grant date will not be until the first date of employment. Treas. Reg. § 1.421-7(c)(2). It is crucial to distinguish between conditions to the grant (i.e., conditions precedent) and conditions to the exercise of the option. For example, the grant date for an employee who is hired and granted ISOs conditioned on continued employment for 6 months may be treated as the six-month anniversary date. If the value of the stock increased during this 6-month period and the employee was given an exercise price based on the value as of the hire date, then the option would fail to qualify as an ISO because the exercise price would not equal the stock value on the grant date six months later. To avoid this issue, employers should make clear that the grant of the ISO is unconditional but that the employee has to remain employed for six months to exercise the ISO subject to any other vesting provisions. One exception is that the grant of an ISO conditioned on subsequent shareholder approval will not be viewed as a conditional grant for ISO purposes so that the grant date is when the ISO is granted. Treas. Reg. § 1.421-7(c)(2).
(4) 10-Year Grant Period. ISOs must be granted within 10 years from the date that the plan is adopted by the Board or approved by the shareholders (whichever is later). IRC § 422(b)(3).
(5) 10-Year Exercise Period. ISO agreement must state that the ISO may not be exercised more than 10 years from date of grant. IRC § 422(b)(3).
(6) Non-Transferrable. ISO agreement must state that the ISO may not be transferred except by will or by laws of descent. IRC § 422(b)(5).
(7) $100,000 Per Year Limitation. Aggregate fair market value (determined as of the grant date) of stock that can be purchased by employee pursuant to ISOs exercisable for the first time during any one calendar year under all plans may not exceed $100,000. IRC § 422(d).
(a) For example, assume an employee is granted 60,000 shares with a fair market value exercise price of $10 with the ISOs vesting 1/6 per year over 6 years. In any given year, the maximum that the employee could exercise, based on the grant date value, is $100,000, thereby satisfying the $100,000 per year limitation. By contrast, if the employee vested over 3 years, the employee could exercise, based on the grant date value, $200,000 per year, thereby failing the $100,000, per year limitation.
(b) The ISO plan may permit more than $100,000 per year so long as it specifies that the excess over $100,000 will be treated as NQOs. Notice 87-49, 1987-2 C.B. 355. The company can designate which options are ISOs and which are NQOs and when an ISO is exercised it can designate the stock as ISO stock. If this is not done, then a pro rata share of each option will be an ISO and a pro rata share of each stock will be ISO stock.
(1) Stock. ISO plans can allow employees to exercise ISOs with stock of the employer corporation rather than cash. IRC § 422(c)(4)(A). The employee will recognize no gain on the use of the appreciated employer stock to pay the exercise price. IRC § 1036.
(2) Reload Provisions. ISO plans may provide a reload provision under which an employee who uses employer stock to exercise an ISO will automatically be granted a new ISO for the same number of shares used to exercise the ISO.
(1) Deemed Grant of a New ISO. If the terms of an ISO are modified to give the employee additional benefits, the modification will be treated as the grant of a new ISO and all of the ISO requirements must be met as of the modification date. IRC § 412(h). Most importantly, the exercise price must equal the fair market value on the modification date. If the value of the stock has gone up since the original grant and the exercise price is not changed to reflect the higher value, the modified ISO will no longer qualify as an ISO.
(2) Change in Exercise Price and Shares. A change in the exercise price and the number of shares to reflect a decrease in stock value is a modification. Rev. Rul. 69-535, 1969-2 C.B. 90. By contrast, a change in exercise price and number of shares to reflect a stock split is not a modification. Treas. Reg. § 1.425-1(e)(5)(ii)(a).
(3) Change in Payment Terms. A favorable change in payment terms such as allowing the employee to pay with stock rather than cash constitutes a modification. Treas. Reg. § 1.425-1(e)(5)(i).
(4) Acceleration of Exercise. Acceleration of the time within which the ISO may be exercised does not constitute a modification. IRC §424(h). For example, accelerating the vesting of an employee's options upon termination without cause does not constitute a modification. PLR 8308062.
(5) Administrative and Legal Changes. Administrative changes such as the method for designating beneficiaries are not treated as a modification. Rev. Rul. 69-648,1969-2 C.B. 103. Similarly, changes made by the employer to satisfy securities law or other laws are not modifications. Rev. Rul. 71-166, 197 1 -1 C.B. 13 5; Rev. Rul. 74-144, 1974-1 C.B. 105; Rev. Rul. 69-328, 1969-1 C.B. 136.
j. Summary of ISO Advantages.
(1) Allows employees to defer tax until stock is sold, and then pay only a 20% capital gains rate on the full amount of the appreciation in the stock if they hold the stock for one year; this favorable tax treatment makes ISOs very popular with employees.
(2) Holding period requirements encourage employee to remain with employer for a longer term.
k. Summary of ISO Disadvantages.
or LLC electing to be taxed as a corporation).
(3) Must be granted "at-the-money."
(4) The $100,000 rule limits the usefulness of ISOs for senior executives of established companies and makes them especially popular for "rank and file" employees. For start-up companies, however, it is easier to grant ISOs to senior management due to lower valuations.
(5) Lack of transferability by employee.
(1) Grant. The grant of an NQO is generally not subject to tax.
(a) NQOs With Readily Ascertainable Fair Market Value.The grant of an NQO with a readily ascertainable fair market value is subject to tax. IRC § 83(e)(4). An NQO will have a readily ascertainable fair market value if it is actively traded on an established market. Treas. Reg. § 1.83-7(b)(1). If the NQO is not actively traded, it will have a readily ascertainable fair market value only if (i) the NQO is transferable; (ii) the NQO is immediately exercisable; (iii) the NQO is not subject to restrictions that have a significant effect on value; and (iv) the value of the option privilege can be readily ascertained. Treas. Reg. § 1.83-7(b)(2). The practical effect of the regulations is that the grant of an NQO will not be subject to tax except in the rare case where it is traded on an established market.
(b) Deeply Discounted NQOs. Section 409A has completed changed the tax implications of deeply discounted NQOs. See Section (d) below. The discussion in this Section (b), therefore, applies mainly to options not covered by the provision. 409A generally applied to amounts that are “deferred” in taxable years beginning after 12.31.04.
1314.1.2 (1999); see also Keith A. Mong, Discounted Options as an Alternative to Deferred Compensation, 39 Tax Mgmt. Memo 167 (1998) (concluding that only discounts in excess of 75% would likely be challenged by the IRS). If the grant of a deeply discounted NQO is treated as the issuance of the underlying stock, the employee will be taxed under the restricted stock rules discussed in Part III(A) above.
(c) No IRC §83(b) Election. Employees may not make a Section 83(b) election with respect to NQOs. This is one of the potential disadvantages of NQOs over restricted stock.
(d) Effect of Section 409A. NQOs generally are covered under 409A unless (i) the exercise/strike price may never be less than the fiar market value of the underlying stock on the date of grant and the number of shares subject to the option is fixed on the date of grant, (ii) the option is taxed under the Section 83 rules, and (iii) the option does not provide for any additional deferral of income. If an NQO is subject to Section 409A, taxation would occur on the date of vesting of the option, even if it is not exercised at that time.
(2) Transfer of NQ0. An arm's-length disposition of an NQO will trigger compensation income equal to the amount realized on the sale less the tax basis in the NQO (which will usually be zero). Treas. Reg. § 1.83-1(b)(1). A non-arm's-length disposition such as a gift or contribution to a related entity does not close the compensation element and the employee is still subject to tax when the NQO is exercised by the transferee even though the employee no longer owns the NQO. Treas. Reg. § 1.83-1 (c).
(a) Gift Tax Issues. Transfer of NQO is treated as a completed gift when the donee's right to exercise the option is no longer conditioned on the donor's future services. Rev. Rul. 98-21, 1998-18 IRB 7. Thus, if the NQO is not vested, the gift will be when the NQO becomes vested, at which time the value of the stock may be higher. In valuing the gift of an NQO, Rev. Proc. 98-34 sets forth a methodology that requires valuing the option privilege.
(b) Estate Tax Issues. An NQO that is gifted prior to death will not be included in the employee's estate upon his death, so long as he does not retain any rights or powers associated with the transferred NQO.
(3) Exercise. Employee recognizes ordinary compensation income upon exercise of the NQO in an amount equal to the value of the stock at exercise less the exercise price. IRC § 83(a).
(a) Stock Restrictions are Ignored in Determining Value. For purposes of determining fair market value upon exercise of the NQO, restrictions on the stock such as securities law, lock-up, and similar restrictions are ignored. IRC § 83(a). The only restrictions that are not ignored are those which by their terms will never lapse. See Part III(A)(2)(c)(I) above.
(b) Receipt of Restricted Stock. If the stock received upon exercise of the NQO is subject to a substantial risk of forfeiture (i.e., not vested), then the employee will not be taxed on exercise of the NQO. Instead, the rules for restricted stock discussed in Part III(A) above will apply to the receipt of the restricted stock. In general, the employee would be taxed when the stock became vested. Alternatively, the employee could make a Section 83(b) election to be taxed on the restricted stock as of the exercise date.
(4) Sale of Stock. Any future appreciation in the stock after exercise of the NQO is taxed as capital gains when the employee sells the stock. IRC §§ 1001, 1221 and 1222. If the employee holds the stock for at least one year after exercising the NQO, the capital gain will be long term subject to the 20% preferential long-term capital gains rate. The holding period does not begin to run until the employee exercises the NQO. IRC § 83(f).
(1) Deduction. Employer receives tax deduction at time the employee recognizes compensation income in an amount equal to the employee's compensation income. IRC §83(h). To take advantage of the deemed inclusion rule, the employer must satisfy the applicable Form W-2 or Form 1099 reporting requirements. See Part III(A)(3)(b) above.
(2) Withholding Requirements. Employer is subject to income and employment tax withholding at the time the employee has compensation income. The option agreement should specify how the withholding is to be handled. Oftentimes, the employee will be required to remit cash or shares equal to the withholding amount as a condition to exercising the NQO. Alternatively, the employer may provide employee with a "grossed up" cash bonus to allow the employee to pay the tax liability.
$ 10 when fair market value of stock is $ 10.
Year 5 Employee sells stock for $20.
tax to Employee (using 39.6% rate).
$17,000 tax reduction (using 34% rate).
resulting in $10,000 tax (using 20% rate).
Employee receives $70,200 ($200,000 - $100,000 exercise price - $19,800 ordinary tax - $ 10,000 capital gains tax).
Employer receives $17,000 tax benefit.
Employee receives $80,000. Employer has no cash flow benefit.
d. Use of Employer Stock to Exercise. The NQO agreement may allow the employee to pay the exercise price with stock of the employer. Under Section 1036, the employee will not recognize gain on the exchange of the employer stock. Rev. Rul. 80-224, 1980-2 C.B. 234.
(1) Use of ISO Shares to Exercise NQ0s. An employee may choose to exercise NQOs using ISO shares. The tax consequences are the same regardless of whether Mature ISO shares or Immature ISO shares are used. The use of the ISO shares will not be a "disqualifying disposition," even if immature ISO shares are used. IRC §424(c)(1)(B). The basis and holding period of the ISO shares exchanged will carryover to an equal number of NQO shares. The remaining NQO shares will be treated as compensation. For example, if 25 ISO shares are used to exercise 100 NQOs, then basis and holding period will transfer as to the first 25 NQO shares, the remaining 75 NQO shares are treated as compensation to their FMV. PLR 9629028; Rev. Rul 80-244; IRC §1036.
flexibility in establishing their terms.
(2) Useful when designing plan for senior management because NQOs are not subject to $100,000/year cap as are ISOs and the exercise price can be set below fair market value at time of issuance in order to create immediate benefit for executive. See, however, the effects of Section 409A, as above.
(3) Can be issued by wide range of business entities (not just corporations).
(1) Employee has tax liability at ordinary rates at time of exercise. This can result in significant tax liability if stock has appreciated in value since the time the NQO was granted.
(2) The Section 83(b) election is not available for NQOs.
(3) Employer has withholding obligation, but may not have a source of employee funds from which to withhold at the time of exercise.
D. Stock Appreciation Rights and Other Phantom Equity Plans.
1. Description. A stock appreciation right (SAR) is a contractual right to receive a cash payment based on the value or increase in value in the company's stock. The SAR payment can be tied to: (a) a fixed settlement date; (b) the employee's exercise of the SAR; or (c) upon certain events (such as sale of the company). A phantom equity plan is where the employee is granted an "interest" in a phantom ownership account. Employer promises to pay the value of all vested fictional interests in the employee account at a specified future date. A performance unit plan uses a more specific performance measurement (e.g., performance of a division) in lieu of overall company performance when determining amount of reward to be received by the employee. SARs and other phantom equity plans may be subject to a vesting schedule. The tax consequences of SARs and other phantom equity plans are the same.
a. Grant. Employee is not subject to tax on grant of award. The grant is treated as an unfunded, unsecured promise to pay that is not "property" for poses of Section 83. Treas. Reg. §1.83-3(e); PLR 8230147. Consider the effect of Section 409A, however.
b. Payment. Employee recognizes compensation income when he receives payment pursuant to the award.
a. Grant. Employer is not entitled to a deduction at time of grant regardless of whether a cash method or accrual method taxpayer. For accrual method taxpayers, the all events test for deductibility has not been satisfied. Treas. Reg. § 1.461-1(a)(1).
b. Payment. Employer is entitled to a deduction in the year the employee includes the payment in income regardless of whether a cash method or accrual method taxpayer. IRC § 404(a)(5); PLR 8230147. Employer must satisfy income and employment tax withholding obligations.
a. Useful in closely-held company where management does not want to give actual or potential equity ownership in the company to employees and wants to avoid minority shareholder issues.
b. Permits employee to realize the appreciation inherent in stock without payment of the option price upon exercise.
C. SARs are often issued in conjunction with NQOs in order to alleviate employee's cash flow problems at the time of the exercise of the NQO. SARs are designed to provide sufficient liquidity to allow the employee to pay the tax due at exercise.
a. Least favorable to employee because entire amount received by employee is treated as ordinary compensation income.
b. Employee may prefer a "true equity" interest to a SAR.
1. Definition - An NDC Plan is a plan or arrangement providing for the payment of compensation for services to an employee or independent contractor after the year in which the individual performs the services.
2. Tax Considerations – Generally try to structure arrangement to defer tax to employee until the employee receives payment. If not properly structured, could be taxed under the constructive receipt doctrine or the economic benefit doctrine, or under Section 409A. See Rev. Proc. 92-65. Generally, must elect to defer before the beginning of the period of service for which the compensation is payable.
Irrevocable trust used to fund employee’s benefit under an NDC. Assets must remain subject to general creditors of the employer to avoid economic benefit doctrine from currently taxing the employee. Employer is treated as the grantor of the trust under §671 and 677(a), so the employer is taxed on the income.
(1) Trust assets have to be available to all the general creditors of the employer if the employer files for bankruptcy.
(2) Involevency triggers to hasten payments to the employee when the employer’s net worth falls below a certain point are not permitted.
(3) The employer is required to adopt a procedure to porvide notice to the trustee in the event of its bankruptcy or financial hardship, and if such event occurs, payments to participants have to be suspended.
In Rev. Proc. 92-64, 1992-2 C.B. 422, the IRS provided a model rabbi trust to serve as a safe harbor for the taxpayers that adopt and maintain grantor trusts in connection with unfunded NDC plans. To get an IRS ruling, the model language of Rev. Proc. 92-64 must be adopted verbatim except where substitute language is expressly permitted. The Trustee must be an independent third party and must be given same investment discretion.