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

e,   when   the   donor   sells   or   exchanges   a   State   tax   credit   to   a   third   party   for   consideration  that  an  accession  to  wealth  has  occurred.”   These   passages   reflect   the   same   logic   underlying   Rev.   Rul.   79-­‐315   and   Snyder   v.   Commissioner,  discussed  above.  As  Tempel  confirms,  when  a  state  grants  a  taxpayer  a  tax   credit,   the   state   is   not   regarded   as   making   a   payment   to   the   taxpayer   or   transferring   an   10

FEDERAL  TAX  TREATMENT  OF  STATE  CHARITABLE  TAX  CREDITS     item   of   value   to   the   taxpayer   but   rather   is   merely   exercising   its   sovereign   power   to   “tax   one   taxpayer   at   a   lower   rate   than   another   taxpayer.”   The   tax   credit   is   simply   the   mechanism   by   which   a   state   government   decides   to   impose   a   “lesser   tax   detriment”   on   one   party   by   virtue   of   its   actions   or   attributes.   The   credit   does   not   involve   a   reduction   of   a   past  or  even  existing  liability  but  rather  is  one  of  the  many  variables  that  the  state,  in  its   sovereign  capacity,  has  decided  to  take  into  account  in  determining  the  final  amount  of  the   taxpayer’s  as  yet  undetermined  tax  liability.     The   second   element   of   the   Tempel   holding   relevant   to   the   quid   pro   quo   analysis   is   the   Tax  Court’s  discussion  of  the  taxpayer’s  basis  in  the  tax  credits  granted  to  them  by  virtue  of   the   charitable   gift.   Because   the   taxpayers   eventually   sold   the   credits,   rather   than   using   them   to   reduce   their   own   tax   liability,   it   was   necessary   to   determine   their   basis   in   order   to   calculate  the  amount  of  any  gain  or  loss  on  the  sale.29  Here  again,  the  holding  endorses  the   Full  Deduction  Rule  in  finding  that  the  taxpayer’s  basis  in  the  charitable  tax  credits  was  zero.   Recall  that  the  value  of  the  donated  easement  was  $836,500  and  the  amount  of  the  credits   granted  by  Colorado  was  $260,000.  Under  a  quid  pro  quo  analysis,  that  transaction  would   be  regarded  as  (1)  a  gift  of  property  worth  $576,500,  and  (2)  a  purchase  of  state  tax  credits   for   $260,000.   That   is  

 would   be  regarded  as  (1)  a  gift  of  property  worth  $576,500,  and  (2)  a  purchase  of  state  tax  credits   for   $260,000.   That   is   the   essence   of   the   quid   pro   quo   analysis—i.e.,   a   bifurcation   of   the   transaction   into   its   gift   and   non-­‐gift   components.   Recall   that   when   a   donor   of   $100   to   public  radio  receives  a  tote  bag  worth  $20,  she  is  treated  as  (1)  making  a  gift  of  $80,  and  (2)   purchasing  a  tote  bag  for  $20.  In  this  situation,  the  donor’s  basis  in  the  tote  bag  is  $20.      Consistent  with  the  view  that  the  receipt  of  a  state  charitable  tax  credit  is  not  a  quid   pro   quo   transaction,   the   Tax   Court   in   Tempel   rejected   this   approach,   concluding   instead   that   the   taxpayers   “did   not   acquire   the   State   tax   credits   by   purchase”30  and   therefore   they   “do   not   have   any   basis   in   their   State   tax   credits.”   In   reaching   this   conclusion,   the   Court   emphasized  that  “[i]t  was  the  State’s  unilateral  decision  to  grant  petitioners  the  State  tax   credits  as  a  consequence  of  their  compliance  with  certain  State  statutes.”31  In  other  words,   the  Tax  Court’s  view  is  that  a  state  charitable  tax  credit  is  not  regarded  as  consideration  for   the  gift,  but  rather  flows  from  the  unilateral  decision  by  the  state  government  to  confer  a   lesser   tax   detriment   on   those   who   make   qualifying   gifts   of   conservation   easements.   The   Tax  Court’s  decision  in  Tempel  v.  Commissioner  was  later  affirmed  by  the  Tenth  Circuit.32     Route  231,  LLC  v.  Commissioner.33  In  another  case  involving  state  charitable  tax  credits,   the  Tax  Court  and  the  Fourth  Circuit

32     Route  231,  LLC  v.  Commissioner.33  In  another  case  involving  state  charitable  tax  credits,   the  Tax  Court  and  the  Fourth  Circuit  also  touched  on  the  question  of  whether  such  credits   should   be   regarded   as   a   quid   pro   quo.   Route   231   LLC   v.   Commissioner   involved   a   limited                                                                                                                           29  26  U.S.C.  Sec.  1001(a).   30  136  T.C.  341,  353.   31  Id.  (emphasis  added).   32  744  F.2d  648  (10th  Cir.  2014)  (consolidated  appeal  of  Tempel  v.  Commissioner,  136  T.C.  341  (2011)   and  Esgar  Corporation  v.  Commissioner,  T.C.  Memo  2012-­‐35  (2012)).   33  T.C.  Memo  2014-­‐30;  aff’d  is  810  F.2d  247  (4th  Cir.  2016)   11

FEDERAL  TAX  TREATMENT  OF  STATE  CHARITABLE  TAX  CREDITS     liability  company  formed  in  2005  by  Raymond  Humiston  and  John  D.  Carr  for  the  purpose   of   acquiring   and   operating   certain   real   property   in   Albemarle   County,   Virginia.   The   LLC   acquired  real  property  (Castle  Hill  and  Walnut  Mountain)  in  June  2005.  Carr  and  Humiston   then  engaged  a  consultant  to  determine  whether  and  how  to  devote  some  portion  of  the   property   to   conservation   purposes.   As   a   result   of   these   deliberations,   on   December   27,   2005  the  parties  amended  the  LLC’s  operating  agreement  to  admit  a  new  member,  Virginia   Conservation   Tax   Credit   FD   LLLP   (“Virginia   Conservation”)   in   exchange   for   a   capital   contribution   of   $3,816,000.   On   December   30,   2005,   the   LLC   made   certain   charitable   contributions,   including   two   gifts   of   conservation   easements,   (one   to   the   Nature   Conservancy   and   the   other   to   the   Albemarle   County   Public   Recreational   Facilities   Authority)   and   a   third   gift   of   a   fee   interest   (to   the   Nature   Conservancy).   Under   Virginia   law   in   effect   at   the   time,   the   donor   of   a   conservation   easement   was   entitled   to   a   state   charitable  tax  credit  equal  to  50%  of  the  fair  market  value  of  the  property  donated.  Based   on  an  appraisal  undertaken  at  the  time  of  the  gift,  the  taxpayers  were  allocated  state  tax   credits   totaling   roughly   $7.4   million.   Under   the   terms   of   the   amended   LLC   operating   agreement,  $7.2  million  of  these  credits  were  allocated  to  Virginia  Conservation.       The   central   tax   question   in   the   Route   231,   LLC   litigation   was   whether   the   combined   capital

 to  Virginia  Conservation.       The   central   tax   question   in   the   Route   231,   LLC   litigation   was   whether   the   combined   capital  contribution  by  Virginia  Conservation  and  subsequent  allocation  of  the  lion’s  share   of   the   tax   credits   to   Virginia   Conservation   should   be   treated   as   a   “disguised   sale”   of   the   credits  under  section  707  of  Subchapter  K.  The  Tax  Court  determined  that  this  was  indeed   a  disguised  sale  and  the  Fourth  Circuit  agreed.  For  present  purposes,  the  relevant  aspect  of   the   Route   231,   LLC   outcome   concerns   the   federal   income   tax   consequences   of   that   sale.   That  is,  once  the  determination  is  made  that  the  substance  of  the  transaction  is  a  sale  of   the  credits  from  Route  231,  LLC  to  Virginia  Conservation  on  December  30,  2005,  what  are   the  federal  income  tax  consequences  of  that  sale  to  Route  231,  LLC?     We  know  that  the  LLC  reported  that  it  had  made  noncash  charitable  contributions  for   tax   year   2015   in   the   amount   of   $14,831,967,   representing   the   full   value   of   the   three   charitable   gifts,   undiminished   by   the   $7,415,983   worth   of   state   charitable   tax   credits   granted  by  Virginia  as  a  result  of  the  gifts.  We  also  know  that  the  IRS  did  not  challenge  that   return  position,  but  rather  took  the  view  that  the  taxpayer  sold  tax  credits  with  a  zero  basis   on   December   30,   2005.   Here   again   we   see   the   same   analysis   as   applied   in   the   Tempel   decision  discussed  above.  Where  a  donor  makes  a  gift  entitling  her  to  a  state  charitable  tax   credit:  (1)  the  amount  of  the  federal  charitable  contribution  deduction  is  the

 makes  a  gift  entitling  her  to  a  state  charitable  tax   credit:  (1)  the  amount  of  the  federal  charitable  contribution  deduction  is  the  full  value  of   the   gift,   undiminished   by   the   state   tax   credits,   and   (2)   any   subsequent   sale   of   the   credits   is   treated  as  a  sale  of  a  zero  basis  asset  since  the  credits  are  not  acquired  by  purchase  but   rather   result   from   the   unilateral   action   of   the   government   to   confer   a   lesser   tax   detriment   on  the  party  who  has  chosen  to  make  the  charitable  transfer.  In  summary,  this  application   accords   with   the   Full   Deduction   Rule   expressed   in   CCA   201105010   and   Tempel   v.   Commissioner.   12

FEDERAL  TAX  TREATMENT  OF  STATE  CHARITABLE  TAX  CREDITS     SWF  Real  Estate,  LLC  v.  Commissioner.34  In  a  separate  but  virtually  identical  case,  the   Tax   Court   in   SWF   Real   Estate,   LLC   v.   Commissioner   addressed   the   same   issues   raised   in   Route  231,  LLC.  As  with  Route  231,  the  taxpayer  purchased  real  estate  in  Albemarle  County,   Virginia   (Sherwood   Farm).   Relying   on   the   same   Virginia   statute   (i.e.,   the   Virginia   Land   Preservation   Tax   Credit   Program),   on   December   29,   2005   SWF   executed   a   deed   of   conservation   easement   conveying   the   easement   to   the   Albermarle   County   Public   Recreational   Facilities   Authority,   a   governmental   body   of   Albermarle   County   and   political   subdivision  of  the  Commonwealth  of  Virginia.  According  to  an  appraisal  undertaken  in  early   December  2005,  the  easement  had  a  value  of  $7,398,333,  meaning  that  its  donation  to  the   government  would  generate  state  tax  credits  in  the  amount  of  $3,699,167.  On  its  federal   income   tax   return   for   2005,   the   taxpayer   reported   a   noncash   charitable   contribution   of   $7,398,333   —   i.e.,   the   full   amount   of   the   gift,   undiminished   by   the   state   tax   credits   generated  by  the  gift.     As   with   Route   231,   LLC,   the   primary   question   in   SWF   Real   Estate,   LLC   concerned   whether  an  allocation  of  the  tax  credits  to  a  new  partner  (in  fact,  the  same  entity  –  Virginia   Conservation)   should   be   treated   as   a   “disguised   sale”   under   section   707.   And   as   in   that   prior   case,   the   court   determined   that   there   was   in   fact   a   disguised   sale   of   the   state   tax   credits  to  Virginia  Conservation.  For

case,   the   court   determined   that   there   was   in   fact   a   disguised   sale   of   the   state   tax   credits  to  Virginia  Conservation.  For  present  purposes,  however,  the  more  relevant  holding   of   SWF   Real   Estate,   LLC   concerns   the   amount   of   the   charitable   contribution   allowed   for   2005.   While   the   taxpayer   had   claimed   a   noncash   contribution   of   $7,398,333,   the   Tax   Court   considered   alternative   appraisals   and   determined   that   the   appropriate   amount   of   the   charitable  contribution  deduction  was  $7,350,000.  While  this  allowed  deduction  is  slightly   lower   than   the   claimed   amount,   it   is   noteworthy   that   the   amount   of   the   charitable   contribution  deduction  was  not  reduced  by  the  state  tax  credits.  Thus,  like  the  prior  cases   of  Tempel  and  Route  231,  LLC,  the  Tax  Court’s  holding  in  SWF  Real  Estate,  LLC  once  again   applied   the   Full   Deduction   Rule   in   determining   the   amount   of   the   allowable   charitable   contribution  deduction.   Maines   v.   Commissioner.35  One   final   post-­‐CCA   201105010   judicial   opinion   deserves   mention.  Although  it  does  not  involve  charitable  contributions,  the  Tax  Court’s  decision  in   Maines   v.   Commissioner   is   significant   because   of   its   discussion   of   the   federal   income   tax   treatment  of  state  tax  credits.  The  taxpayers  in  Maines  owned  interests  in  an  S  Corporation   and  a  partnership,  both  of  which  had  made  certain  investments  in  New  York  entitling  them   to   three   state   tax   credits:   the   EZ   Investment   Credit,   the   EZ   Wage   Credit,   and   the   QEZE   Credit   for   Real   Property   Taxes.   Eligibility   for   these   credits   required   investment   in   certain   impoverished  

  Credit,   and   the   QEZE   Credit   for   Real   Property   Taxes.   Eligibility   for   these   credits   required   investment   in   certain   impoverished   areas   designated   by   the   state.   While   eligibility   depended   on   the   entity   meeting  the  investment  requirements,  the  credits  passed  through  to  the  taxpayers  on  their   individual   returns.   The   EZ   Investment   Credit,   equal   to   eight   percent   of   certain   qualifying                                                                                                                           34  T.C.  Memo  2015-­‐63.     35  144  T.C.  123  (2015).   13