57-18 Exhibit - Urging State of New Jersey to Implement Charitable Trust in Lieu of Local Taxes Plan.pdf

FEDERAL  TAX  TREATMENT  OF  STATE  CHARITABLE  TAX  CREDITS     $43.  And  yet  federal  tax  law  allows  (and  has  always  allowed)  a  deduction  for  $100,  even   though  the  net  cost  to  the  taxpayer  is  only  $43.  In  effect,  by  virtue  of  the  longstanding  rule   that  tax  savings  do  not  constitute  a  quid  pro  quo  requiring  the  donor  to  reduce  the  amount   of   the   deduction,   the   taxpayer   ends   up   satisfying   $57   of   her   otherwise   nondeductible   federal  income  liability10  by  making  a  deductible  charitable  gift.     State   Tax   Benefits   for   Charitable   Contributions.   Like   the   federal   government,   state   governments   commonly   provide   tax   benefits   for   charitable   gifts.   These   benefits   take   many   forms,   including   both   deductions   and   credits   allowable   in   calculating   the   taxpayer’s   state   income   tax   liability.   Like   the   fair   market   value   of   goods   or   services   received   in   return   for   making   a   gift,   as   well   as   the   federal   charitable   contribution   deduction,   state   tax   benefits   reduce   the   net   cost   of   the   gift   to   the   donor.   The   availability   of   these   benefits   raises   the   question  of  what  effect,  if  any,  these  state  tax  benefits  should  have  on  the  amount  of  the   taxpayer’s   federal   deduction   for   the   gift.   Should   they   be   treated   like   “the   value   of   goods   and   services   the   organization   provides   in   return”   under   the   quid   pro   quo   analysis   referenced  above?  Or  should  they  be  ignored  in  the  same  way  that  federal  tax  benefits  are   ignored?   State  Tax  Benefits  and  the  Federal  Charitable  Contribution  Deduction     Under   current   law,   a   donor   is   not   required   to   reduce

  State  Tax  Benefits  and  the  Federal  Charitable  Contribution  Deduction     Under   current   law,   a   donor   is   not   required   to   reduce   the   amount   of   a   federal   charitable  contribution  deduction  by  the  value  of  state  tax  benefits  generated  by  the  gift.   This  treatment  is  evident  in  the  fact  that  taxpayers  have  never  been  required  to  reduce  the   amount  of  a  federal  charitable  contribution  deduction  by  the  value  of  any  state  deduction   to  which  the  contribution  may  also  entitle  them.  Thus,  for  example,  if  a  taxpayer  makes  a   donation   of   $100   that   entitles   her   to   a   charitable   contribution   deduction   on   both   her   federal   and   state   income   tax   returns,   the   amount   of   the   federal   deduction   is   $100,   undiminished   by   the   reduction   in   tax   liability   flowing   from   either   the   federal   or   state   charitable   contribution   deduction.   This   same   result   obtains   where   the   state   tax   benefit   takes   the   form   of   a   credit   rather   than   a   deduction.   Thus,   if   a   taxpayer   makes   a   $100   donation   to   a   charitable   organization,   including   a   state   or   political   subdivision   thereof,   and   the   donation   entitles   the   taxpayer   to   a   $70   credit   against   her   state   income   tax   liability,   the   amount  of  the  federal  charitable  contribution  deduction  would  be  $100,  undiminished  by   the  value  of  the  tax  credit.  For  ease  of  exposition,  this  legal  rule  will  be  referred  to  below  as   the  “Full  Deduction  Rule.”     The   legal   authority   supporting   the   Full   Deduction   Rule   is   summarized   in   an   IRS   Chief   Counsel  Advisory  memorandum  published  in  early  2011.  The  facts  presented  in  the

Full   Deduction   Rule   is   summarized   in   an   IRS   Chief   Counsel  Advisory  memorandum  published  in  early  2011.  The  facts  presented  in  the  memo   concern   contributions   to   either   a   state   agency   or   other   qualifying   organization   in   a   state                                                                                                                           10  26  U.S.C.  275(a)(1)   4

FEDERAL  TAX  TREATMENT  OF  STATE  CHARITABLE  TAX  CREDITS     (apparently   Missouri)11  where   four   separate   programs   entitle   donors   to   state   tax   credits   with   unspecified   credit   percentages.   With   regard   to   each   of   the   four   programs   considered,   donors  may  contribute  cash  or  other  property.     The  legal  analysis  set  forth  in  the  2011  IRS  memo  is  straightforward.  The  memo   first   provides  an  overview  of  the  current  treatment  of  charitable  contributions  where  the  donor   receives   some   benefit   in   return,   noting   (consistent   with   the   analysis   above)   that   the   deduction  is  allowable  “only  to  the  extent  the  amount  transferred  exceeds  the  fair  market   value  of  the  benefit  received,  and  only  if  the  excess  amount  was  transferred  with  the  intent   of   making   a   gift.”12  Citing   judicial   holdings   in   McLennan   v.   United   States,13  Skripak   v.   Commissioner,14  and   Allen   v.   Commissioner,15  the   memo   reaffirms   the   well-­‐established   conclusion   that   the   “tax   benefit   of   a   federal   or   state   charitable   contribution   deduction   is   not  regarded  as  a  return  benefit  that  negates  charitable  intent,  reducing  or  eliminating  the   deduction   itself”   (emphasis   added).   In   addition,   citing   Browning   v.   Commissioner,16  the   memo   observes   that   the   value   of   the   deduction   “has   not   been   treated   as   an   item   of   income  under § 61,  in  the  form  of  an  amount  realized  on  the  transfer  under  § 1001.”17       In  each  of  the  court  cases  cited  in  the  memo,  the  value  of  state  tax  deduction  is  not   treated   as   a   payment   from   the   state   or   as   property   received   from   the   state   but   rather   as   a

te  tax  deduction  is  not   treated   as   a   payment   from   the   state   or   as   property   received   from   the   state   but   rather   as   a   reduction,  or  potential  reduction,  of  state  tax  liability.  In  other  words,  where  a  charitable   gift   entitles   the   donor   to   a   state   charitable   contribution   deduction,   the   Full   Deduction   Rule   applies   and   the   donor   is   not   required   to   reduce   the   amount   of   the   federal   charitable   contribution  deduction  under  Treas.  Reg.  Sec.  170A-­‐1(h)(2)(i)(B).                                                                                                                             11  While   Missouri   is   not   named   in   the   memorandum,   the   addressee   is   the   associate   area   counsel   in   Kansas  City,  and  Missouri  has  several  tax  credit  programs  that  match  the  descriptions  in  the  memo.   See  Mo.  Dep’t  of  Revenue,  Miscellaneous  Tax  Credits,  http://dor.mo.gov/taxcredit  (last  visited  Jan.   2,  2017).   12  CCA  201105010,  p.4.   13  23  Cl.  Ct.  99  (1991),  subsequent  proceedings,  24  Cl.  Ct.  102,  106  n.8  (1991),  aff’d,  994  F.2d  839   (Fed.   Cir.   1993)   (noting   that   “a   donation   of   property   for   the   exclusive   purpose   of   receiving   a   tax   deduction  does  not  vitiate  the  charitable  nature  of  the  contribution).”   14  84   T.C.   285,   319   (1985)   (noting   that   “a   taxpayer's   desire   to   avoid   or   eliminate   taxes   by   contributing  cash  or  property  to  charities  cannot  be  used  as  a  basis  for  disallowing  the  deduction   for  that  charitable  contribution”).   15  92   T.C.   1,   7   (1989)   (noting   that   “a  

 as  a  basis  for  disallowing  the  deduction   for  that  charitable  contribution”).   15  92   T.C.   1,   7   (1989)   (noting   that   “a   taxpayer's   desire   to   avoid   or   eliminate   taxes   by   contributing   cash   or   property   to   charities   cannot   be   used   as   a   basis   for   disallowing   the   deduction   for   that   charitable  contribution”).   16  109  T.C.  303,  325  (1997)  (“Respondent's  argument  suggests  that  a  taxpayer  making  a  gift  of  stock   worth  $100  to  a  charitable  organization  may  be  entitled  to  a  charitable  contribution  deduction  of   some   lesser   amount   on   account   of   the   economic   value   of   the   deduction.   That   suggestion   is   untenable.  The  regulations  provide  explicitly  that,  if  a  charitable  contribution  is  made  in  property,   the  amount  of  the  contribution  is  the  fair  market  value  of  the  property.”)   17  CCA  201105010,  p.4.   5

FEDERAL  TAX  TREATMENT  OF  STATE  CHARITABLE  TAX  CREDITS       The  central  question  the  2011  memo  aims  to  address  is  whether  “a  state  tax  benefit  in   the  form  of  a  state  tax  credit,  or  a  transferable  state  tax  credit,  is  distinguishable  from  the   benefits   of   a   state   tax   deduction”   (emphasis   added).18  This   was   not   an   issue   of   first   impression   for   the   IRS   Chief   Counsel’s   Office.   In   at   least   two   previous   advisory   memos,   the   IRS   faced   this   issue.   In   2002,   the   IRS   Chief   Counsel’s   Office   issued   an   advisory   memo   concerning  the  treatment  of  the  Colorado  Conservation  Easement  Credit,  which  entitles  a   donor  of  a  conservation  easement  to  a  credit  up  to  $260,000  against  Colorado  income  tax   liability.19  In  2004,  the  IRS  Chief  Counsel’s  Office  issued  an  advisory  memo  concerning  the   treatment   of   the   Oregon   Child   Care   Tax   Credit   program,   which   entitles   a   donor   to   the   Oregon  Child  Care  Division  to  a  credit  against  Oregon  income  tax  liability.20  In  both  cases,   the  IRS  took  note  of  the  longstanding  rule  that  a  state  charitable  contribution  deduction  “is   not  viewed  as  a  return  benefit  that  reduces  or  eliminates  a  deduction  under  section  170,  or   vitiates   charitable   intent.”21  However,   both   IRS   memos   declined   to   address   whether   the   same   rule   should   apply   for   state   tax   credits,   instead   concluding   that   this   issue   should   be   addressed  by  the  IRS  National  Office.     The   2011   memo   concludes   that   the   Full   Deduction   Rule   applies   not   only   to   state   charitable  contribution  deductions  but  also  to  state  charitable  contribution  credits,  noting   that  

ction   Rule   applies   not   only   to   state   charitable  contribution  deductions  but  also  to  state  charitable  contribution  credits,  noting   that   “Taxpayers   may   take   a   section   170   deduction   for   the   full   amount   of   their   charitable   contributions  of  cash  and  appreciated  stock,  assuming  the  requirements  of  section  170  are   otherwise  met.”    The  memo  summarizes  the  legal  basis  for  this  conclusion  as  follows:   “Based   on   our   analysis   of   existing   authorities,   we   conclude   that   the   position   reflected  in  McLennan,  Browning,  and  similar  case  law  generally  applies.    There   may   be   unusual   circumstances   in   which   it   would   be   appropriate   to   recharacterize   a   payment   of   cash   or   property   that   was,   in   form,   a   charitable   contribution  as,  in  substance,  a  satisfaction  of  tax  liability.    Generally,  however,   a  state  or  local  tax  benefit  is  treated  for  federal  tax  purposes  as  a  reduction  or   potential  reduction  in  tax  liability.    As  such,  it  is  reflected  in  a  reduced  deduction   for   the   payment   of   state   or   local   tax   under   §   164,   not   as   consideration   that   might  constitute  a  quid  pro  quo,  for  purposes  of  §  170,  or  an  amount  realized   includible  in  income,  for  purposes  of  §§  61  and  1001.”   Beyond   the   McLennan   and   Browning   decisions,   the   2011   IRS   memo   makes   specific   reference   to   two   additional   sources   of   authority   for   the   Full   Deduction   Rule:   (i)   Rev.   Rul.   79-­‐315,   Holding   (3)   and   (ii)   the   6th   Circuit’s   decision   in   Snyder   v.   Commissioner.   Both   of      

Rule:   (i)   Rev.   Rul.   79-­‐315,   Holding   (3)   and   (ii)   the   6th   Circuit’s   decision   in   Snyder   v.   Commissioner.   Both   of                                                                                                                           18  Id.   19  CCA  200238041   20  CCA  200435001   21  CCA  200238041,  pp  5-­‐6;  CCA  200435001,  p.  4  (“the  fact  that  states  typically  provide  for  a  similar   deduction   in   determining   the   taxable   income   base   for   state   tax   purposes   does   not   affect   the   federal  deduction  under  I.R.C.  Sec.  170).   6

FEDERAL  TAX  TREATMENT  OF  STATE  CHARITABLE  TAX  CREDITS     these  precedents  represent  instances  where  a  state  tax  credit  was  treated  as  a  reduction   or   potential   reduction   in   tax   liability   (rather   than   as   a   payment   from   the   state)   and   thus   support  the  Full  Deduction  Rule.     Rev.  Rul.  79-­‐315,  Holding  (3).  In  Rev.  Rul.  79-­‐315,  the  IRS  described  the  federal  income   tax  treatment  of  income  tax  rebates  paid  by  the  state  of  Iowa  to  its  residents  in  1979.  By   virtue   of   legislation   enacted   in   May   1979,   the   state   of   Iowa   determined   that   individuals   subject   to   the   state’s   income   tax   in   1978   should   receive   a   rebate   of   a   portion   of   their   1978   state  income  tax  liability.  Rulings  (1)  and  (2)  concern  taxpayers  for  whom  the  1979  rebate   took   the   form   of   a   refund   of   1978   taxes   paid   on   returns   that   had   already   been   filed.   In   those  two  cases,  the  treatment  of  the  refund  turned  on  the  application  of  the  familiar  tax   benefit  rule  under  which  the  refund  is  (1)  taxable  if  the  taxes  refunded  were  deducted  on   the   individual’s   1978   federal   income   tax   return,   but   (2)   not   taxable   if   the   taxes   refunded   were  not  deducted  on  the  individual’s  1978  federal  income  tax  return.     Holding  (3)  —  i.e.,  the  one  relevant  to  the  present  analysis  —  concerns  those  taxpayers   for  whom  the  Iowa  rebate  took  the  form  of  a  credit  against  1978  income  taxes  not  yet  paid.   Under  Holding  (3),  “[i]f  all  or  a  portion  of  an  individual’s  refund  is  credited  against  tax  due   for   1978,   the   amount   credited   is   treated   as   a   reduction   of