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

a  portion  of  an  individual’s  refund  is  credited  against  tax  due   for   1978,   the   amount   credited   is   treated   as   a   reduction   of   the   outstanding   tax   liability.   The   amount   credited   against   unpaid   1978   tax   is   neither   includible   in   the   individual’s   gross   income  for  1979  nor  deductible  under  section  164(a)(3)  of  the  Code  as  a  state  income  tax   paid  in  1979.”22     The  intuition  underlying  Holding  (3)  of  Rev.  Rul.  79-­‐315  is  that  where  a  state  grants  a   taxpayer   an   income   tax   credit   on   their   state   tax   return,   that   credit   is   not   treated   as   the   receipt  of  cash  or  other  item  of  value  but  rather  merely  represents  an  adjustment  to  the   taxpayer’s   as   yet   undetermined   state   income   tax   liability.   This   may   seem   like   a   formal   distinction,   but   of   course   there   are   numerous   instances   throughout   all   of   U.S.   tax   law   where   substantive   outcomes   turn   on   formal   distinctions.23  In   this   case,   the   formality   of   being   granted   a   state   tax   credit,   rather   than   receiving   a   cash   refund   from   the   state,   results   in   the   taxpayer   simply   treating   the   amount   as   a   reduction,   or   potential   reduction,   in   as   yet   undetermined  tax  liability  rather  than  going  through  the  process  of  applying  the  tax  benefit   rule.   In   effect,   the   Ruling   is   concluding   that,   in   the   case   of   taxpayers   receiving   a   credit   instead   of   a   cash   refund,   the   final   amount   of   their   1978   state   income   tax   liability   is   not   yet   known  and  the  credit  is  simply  applied  in  making  that  determination.  Accordingly,  Holding   (3)  of  Rev.  Rul.  79-­‐315  supports  the

  yet   known  and  the  credit  is  simply  applied  in  making  that  determination.  Accordingly,  Holding   (3)  of  Rev.  Rul.  79-­‐315  supports  the  conclusion  of  the  2011  IRS  memo  that  the  granting  of  a   state  tax  credit  is  not  treated  as  the  payment  of  money  or  receipt  of  property  that  might  be   regarded  as  a  quid  pro  quo,  but  rather  merely  represents  an  adjustment  of  the  taxpayer’s   as  yet  undetermined  tax  liability.                                                                                                                             22  Rev.  Rul.  79-­‐315,  Holding  (3)  (emphasis  added).   23  See,  e.g.,  26  U.S.C.  199A(d)(2)(A)  (2018).   7

FEDERAL  TAX  TREATMENT  OF  STATE  CHARITABLE  TAX  CREDITS     Snyder  v.  Commissioner.24  The  1990  decision  of  the  U.S.  Court  of  Appeals  for  the   Sixth   Circuit  in  Snyder  v.  Commissioner  adopted  the  same  logic  as  Holding  (3)  of  Rev.  Rul.  79-­‐315.   The   Snyder   case   involved   a   taxpayer   who   was   a   partner   in   a   partnership   that   operated   a   horse   racing   track   near   Cleveland,   Ohio.   Under   Ohio   law   in   effect   at   the   time,   all   such   racetracks  were  required  to  collect  and  remit  to  the  state  certain  pari-­‐mutuel  taxes  based   on   the   gross   amount   wagered   at   the   track   each   day.   Ohio   law   also   provided   for   a   credit   against   such   taxes   equal   to   70   percent   of   the   amount   of   certain   capital   improvements   made   to   the   racetrack   property   as   certified   by   the   state.   The   partnership   made   certified   capital  improvements  to  its  racetrack  in  an  amount  sufficient  to  entitle  it  to  a  tax  credit  of   $534,712,   which   was   used   to   reduce   its   pari-­‐mutuel   tax   obligations   in   1976   ($252,826)   and   1977  ($281,886).     The   question   addressed   by   the   court   in   Snyder   was   how   the   taxpayer   should   treat   these  state  tax  credits  for  federal  income  tax  purposes.  In  lower  court  proceedings  before   the  U.S.  Tax  Court,  the  government  took  the  position  that  because  Snyder  was  an  accrual   method  taxpayer,  it  was  required  to  include  the  full  value  of  the  tax  credits  in  income  in   the   year   the   credits   were   certified.   Under   this   view,   the   taxpayer   would   be   entitled   to   deduct   the   full   amount   of   the   pari-­‐mutuel   taxes   rather   than   treating   the  

this   view,   the   taxpayer   would   be   entitled   to   deduct   the   full   amount   of   the   pari-­‐mutuel   taxes   rather   than   treating   the   tax   credits   as   a   reduction  in  the  amount  of  tax  owed.  The  Sixth  Circuit  rejected  this  approach,  concluding   instead  that  the  proper  treatment  of  the  tax  credit  was  simply  “to  reduce  the  deductions   available   to   the   [the   partnership]   for   its   pari-­‐mutuel   tax   obligations,   which   reduced   deductions   accrued   as   those   taxes   become   due.”   The   Sixth   Circuit’s   decision   on   this   question   expressly   rejected   two   alternative   views:   (1)   the   value   of   the   tax   credits   was   income   to   the   taxpayers,25  and   (2)   the   taxpayer’s   basis   in   the   improvements   should   be   reduced   by   the   amount   the   credits.26  In   rejecting   these   alternatives,   the   court   embraced   the   same   logic   that   subsequently   formed   the   basis   of   the   2011   IRS   memo   on   charitable   tax   credits   –   i.e.,   state   tax   credits   are   not   treated   as   a   payment   from   the   government   but   rather  merely  represent  an  adjustment,  or  potential  adjustment,  to  the  recipient’s  state  tax   obligations.                                                                                                                               24  894  F.2d  1337  (6th  Cir.  1990)  (unpublished  opinion).   25  The   view   that   the   tax   credits   were   income   to   the   Snyders   was   the   position   advanced   by   the   government  and  accepted  by  the  Tax  Court,  but  that  position  was  ultimately  rejected  not  only  by   the   Sixth   Circuit   but   also   by   the   government

 accepted  by  the  Tax  Court,  but  that  position  was  ultimately  rejected  not  only  by   the   Sixth   Circuit   but   also   by   the   government   (“The   Commissioner   concedes   that   he   and   the   Tax   Court  were  wrong  on  this  point,  and  the  Snyders  were  right.”)   26  The  taxpayers  initially  took  the  view  that  their  basis  in  the  capital  improvements  (completion  of   which   generated   the   credit)   should   be   reduced   by   the   amount   of   the   tax   credit.   However,   as   the   Sixth   Circuit   noted,   all   of   the   parties   agreed   that   this   treatment   was   erroneous   (“It   is   undisputed   that  the  partnership’s  treatment  of  the  pari-­‐mutuel  tax  reduction  was  wrong…”)     8

FEDERAL  TAX  TREATMENT  OF  STATE  CHARITABLE  TAX  CREDITS     Recent  Judicial  Authority  Supporting  the  Full  Deduction  Rule   At  the  time  of  the  2011  IRS  memo,  there  was  no  judicial  authority  directly  addressing   the  Full  Deduction  Rule.  As  noted  above,  the  Snyder  holding  embraced  the  underlying  logic   of   the   Full   Deduction   Rule   (i.e.,   state   tax   credits   are   not   a   payment   from   the   state   but   merely   an   adjustment   to   state   tax   owed),   but   Snyder   itself   concerned   state   tax   credits   granted   in   exchange   for   making   certain   capital   improvements   rather   than   in   the   charitable   gift  context.  More  recently,  however,  the  U.S.  Tax  Court  (in  Tempel  v.  Commissioner,  Route   231   LLC   v.   Commissioner,   and   SWF   Real   Estate,   LLC   v.   Commissioner)   and   at   least   two   federal   courts   of   appeals—the   Tenth   Circuit   (in   Esgar   Corporation   v.   Commissioner,   affirming   Tempel   v.   Commissioner)   and   the   Fourth   Circuit   (in   Route   231   LLC   v.   Commissioner,  affirming  the  Tax  Court)  have  effectively  endorsed  the  Full  Deduction  Rule,   fortifying   the   legal   underpinnings   of   the   determination   reached   by   the   IRS   in   its   2011   advisory  memo.   Tempel   v.   Commissioner. 27  The   Tempel   case   involved   taxpayers   who   had   made   donations   of   conservation   easements   on   54   acres   of   land   in   Colorado   in   2004.   Under   Colorado   law,   the   donation   of   a   perpetual   conservation   easement   (PCE)   entitled   the   donor   to   a   transferable   state   income   tax   credit.   For   2004,   the   amount   of   the   charitable   tax   credit   was  equal  to  100  percent  of  the  value  of  the  donation  up  to  $100,000  plus

  2004,   the   amount   of   the   charitable   tax   credit   was  equal  to  100  percent  of  the  value  of  the  donation  up  to  $100,000  plus  40  percent  of   the   value   in   excess   of   $100,000   –   up   to   a   maximum   allowable   credit   of   $260,000.     Because   the   value   of   the   PCE   donated   by   the   taxpayers   was   $836,500,   the   taxpayers   claimed   the   maximum   allowable   credit   of   $260,000.   In   the   two   weeks   immediately   following   the   receipt   of   the   credits   from   the   state,   the   taxpayers   sold   a   portion   of   the   credits   (representing   $110,000   of   credits)   to   unrelated   third   parties   for   $82,500.   The   central   question   raised   in   Tempel   was   the   appropriate   federal   income   tax   treatment   of   the   sale   of   the   Colorado   tax   credits,   in   particular   whether   the   gain   from   the   sale   of   the   credits   was   capital  gain  or  ordinary  income.     The  court’s  focus  on  the  tax  consequences  of  selling  the  credits  is  important  because  it   reveals  the  parties’  (and  the  court’s)  agreement  with  regard  to  the  logically  prior  question   of  how  to  treat  the  receipt  of  state  charitable  tax  credits.  As  the  Tax  Court  noted  early  in  its   opinion,   the   government   took   the   position   (and   the   taxpayers   agreed)   “that   petitioners’   receipt   of   State   tax   credits   as   a   result   of   their   conservation   easement   contribution   was   neither  a  sale  or  exchange  of  the  easement  nor   a   quid   pro   quo   transaction.”28  This  is,  of   course,   the   exact   view   expressed   in   CCA   201105010,   so   it   is   no   surprise   that   the   government  would  advance  this  position  in  litigation.  Since  there  was

expressed   in   CCA   201105010,   so   it   is   no   surprise   that   the   government  would  advance  this  position  in  litigation.  Since  there  was  no  disagreement  on   this   point,   the   court   did   not   devote   much   of   its   analysis   to   the   quid   pro   quo   question,   focusing  instead  on  its  holding  that  the  credits  were  capital  assets  the  sale  of  which  gave                                                                                                                           27  136  T.C.  341  (2011).   28  Id.  at  344  (emphasis  added).   9

FEDERAL  TAX  TREATMENT  OF  STATE  CHARITABLE  TAX  CREDITS     rise   to   short-­‐term   capital   gain   equal   to   the   sale   proceeds   received   by   the   taxpayers   in   exchange   for   the   credits.   Nevertheless,   in   reaching   that   conclusion,   the   Tax   Court   did   offer   some  relevant  legal  guidance  regarding  the  federal  income  tax  treatment  of  the  receipt  of   state   charitable   tax   credits.   There   are   two   elements   in   particular   of   the   Tax   Court’s   holding   in  Tempel  that  deserve  mention.     First,  in  considering  one  of  the  government’s  arguments  regarding  the  character  of  the   gain  from  the  sale  of  the  credits,  the  court  offered  its  own  view  of  the  tax  consequences  of   the   receipt   of   a   state   charitable   tax   credit.   It   was   necessary   for   the   court   to   address   this   question   because   the   IRS   had   argued   that   the   tax   credits   represented   the   “economic   equivalent   of   ordinary   income”   on   the   theory   that   “if   an   individual   taxpayer   who   sells   credits   itemizes   deductions   (ignoring   phase-­‐outs),   that   taxpayer’s   section   164   Federal   income   tax   deduction   is   greater   than   it   would   have   been   had   the   taxpayer   retained   and   used  the  credits.”  In  other  words,  the  IRS  was  arguing  that  because  the  taxpayer’s  failure  to   use   the   credits   preserved   a   deduction   reducing   ordinary   income,   the   sale   of   the   credit   should  be  treated  as  giving  rise  to  ordinary  income.     Importantly,   the   Tax   Court   not   only   rejected   this   argument,   but   also   used   the   opportunity  to  emphasize  that  the  receipt  of  a  state  charitable  tax  credit  is  a  non-­‐event  and   that   the   reduction

also   used   the   opportunity  to  emphasize  that  the  receipt  of  a  state  charitable  tax  credit  is  a  non-­‐event  and   that   the   reduction   in   state   tax   liability   that   the   credit   enables   does   not   create   income.   The   court   first   noted   that   a   “reduction   in   a   tax   liability   is   not   an   accession   to   wealth.   Consequently,   a   taxpayer   who   has   more   section   164   deductions   has   not   received   any   income.”  Here  the  court  notes  that  “[e]ven  respondent  recognizes  that  a  reduction  in  taxes   does   not   create   income”   (citing   Rev.   Rul.   79-­‐315).   The   court   goes   on   to   observe   that   “[t]he   parties   and   this   Court   agree   that   the   receipt   of   a   State   tax   credit   is   not   an   accession   to   wealth   that   results   in   income   under   section   61.”   In   two   additional   passages,   the   court   further  underscored  this  point:   “It   is   without   question   that   a   government’s   decision   to   tax   one   taxpayer   at   a  lower  rate  than  another  taxpayer  is  not  income  to  the  taxpayer  who  pays   lower   taxes.   A   lesser   tax   detriment   to   a   taxpayer   is   not   an   accession   to   wealth  and  therefore  does  not  give  rise  to  income.”   and   “Credits   do   not   increase   a   donor’s   wealth,   as   long   as   they   are   used   to   offset  or  reduce  the  donor’s  own  State  tax  responsibility.  A  reduced  tax  is   not   an   accession   to   wealth.   It   is   only,   as   occurred   in   the   instance   case,   when   the   donor   sells   or   exchanges   a   State   tax   credit   to   a   third   party   for   consideration  that  an