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

 tax  detriment”  rather  than  as  a  payment  from  the  state.     For  example,  the  IRS  concluded  that  the  nonrefundable  portion  of  a  Minnesota  state   income   tax   credit   granted   to   any   resident   that   is   or   was   in   active   military   service   should   be   treated  as  a  reduction  in  state  tax  liability  rather  than  a  payment  from  the  state.46  Similarly,   the   IRS   concluded   that   the   nonrefundable   portion   of   a   Massachusetts   state   income   tax   credit  granted  to  certain  low-­‐income  taxpayers  who  paid  real  estate  taxes  or  rent  should   be   treated   as   a   reduction   in   state   tax   liability   rather   than   as   a   payment   from   the   state                                                                                                                                                                                                                                                                                                                                                                                 Company  v.  United  States,  449  F.2d  413,  422  (Ct.  Cl.  1971).    The  tax  credits  in  Winn,  and  other  such   cases,   were   only   given   to   organizations   that   satisfied   extensive   state   criteria,   as   the   Court   clearly   understood.   Winn,   563   U.S.   130-­‐31.   If   a   credit   for   donations   to   a   state-­‐established   fund   is   a   problem  (and  it  is  not),  then  why  should  a  credit  for  donations  to  a  state-­‐blessed  fund  not  also  be  a   problem?  In  both  cases,  the

m  (and  it  is  not),  then  why  should  a  credit  for  donations  to  a  state-­‐blessed  fund  not  also  be  a   problem?  In  both  cases,  the  donated  resources  are  directed  to  services  and  activities  determined   by  the  state.  Thus,  any  claim  that  state  charitable  tax  credits  constitute  a  quid  pro  quo  only  in  the   case   of   gifts   to   public   entities   is   not   consistent   with   current   law,   and   any   claim   that   such   credits   should   be   uniquely   disfavored   does   not   rest   on   a   solid   analytic   distinction.   Finally,   and   most   crucially,   as   explained   above,   federal   tax   law   has   addressed   this   specific   issue   and   has   never   regarded  any  tax  benefits,  either  federal  or  state,  and  whether  in  the  form  of  deductions  or  credits,   as   a   quid   pro   quo   benefit   requiring   a   reduction   in   the   taxpayer’s   federal   charitable   contribution   deduction.     45  As   explained   further   below,   we   have   some   doubts   as   to   whether   that   second   point   is   a   reasonable  conclusion.  Nevertheless,  the  Supreme  Court’s  views  on  this  issue  are  certainly  relevant   in  determining  the  circumstances  when  a  voluntary  gift  generating  state  credits  should  be  regarded   as,  in  substance,  the  payment  of  a  tax.   46  IRS  Chief  Counsel  Advisory  200708003.   17

FEDERAL  TAX  TREATMENT  OF  STATE  CHARITABLE  TAX  CREDITS     government.47  In   yet   another   advisory   memorandum   concerning   Massachusetts,   the   IRS   considered  the  federal  income  tax  consequences  of  five  separate  state  tax  credit  programs:   (1)   Brownfields   Tax   Credit,   (2)   Motion   Picture   Tax   Credit,   (3)   Historic   Rehabilitation   Tax   Credit,  (4)  Low-­‐Income  Housing  Tax  Credit,  and  (5)  Medical  Device  Tax  Credit.  Here  again   the  IRS  recited  the  longstanding  principle  discussed  above:     “The  taxpayer  that  originally  receives  –  that  is,  qualifies  for  –  one  or  more  of   the   described   credits   is   not   viewed   as   having   received   property   in   a   transaction   that   results   in   the   realization   of   gross   income   under   §   61.   Generally,  a  state  tax  credit,  to  the  extent  that  it  can  only  be  applied  against   the   original   recipient’s   current   or   future   state   tax   liability,   is   treated   for   federal   income   tax   purposes   as   a   reduction   or   potential   reduction   in   the   taxpayer’s   state   tax   liability,   not   as   a   payment   of   cash   or   property   to   the   taxpayer  that  is  includible  in  gross  income  under  §  61.”48     In  one  particularly  revealing  passage,  appearing  in  the  first  footnote  of  CCA  201147024,  the   IRS   observed   that   “we   do   not   agree   that   a   such   a   reduction   in   a   taxpayer's   potential   tax   liability  is  the  equivalent  of  a  payment  to

at   “we   do   not   agree   that   a   such   a   reduction   in   a   taxpayer's   potential   tax   liability  is  the  equivalent  of  a  payment  to  the  taxpayer…;  instead,  as  stated  in  the  text,  in   the  hands  of  the  taxpayer  that  originally  qualifies  for  the  benefit,  it  simply  enters  into  the   computation  of  the  taxpayer's  state  or  local  tax  liability  and  is  reflected  in  the  amount  of   the   taxpayer's   §   164   deduction.”49  It   should   be   apparent   from   the   discussion   above   that   this   italicized   passage   is   not   anomalous.   Rather,   this   principle   has   surfaced   repeatedly   throughout  federal  tax  law,  in  a  variety  of  settings,  whenever  a  question  relating  to  state   tax   credits   arises.   This   is   the   sense   in   which   the   principle   is   “trans-­‐substantive”   —   i.e.,   it   applies  not  only  in  the  context  of  charitable  contributions  generating  state  tax  credits  but   in  a  wide  range  of  other  contexts  as  well.     Policy  Considerations  in  Support  of  the  Full  Deduction  Rule     As  noted  above,  the  Full  Deduction  Rule  is  discussed  and  supported  in  cases  involving   odd   fact   patterns,   such   as   the   sale   of   tax   credits   in   Tempel,   Route   123,   LLC   or   SFW   Real   Estate,   LLC.   There   are   no   cases   challenging   the   rule   in   its   common   application:   when   a   taxpayer  takes  a  full  federal  deduction  notwithstanding  state  tax  credits  that  offset  some   but   not   100%   of   the   cost.   The   rule   in   that   situation   appears   to   be   too   obvious   to   be   challenged   or   need   defense.   The   2011   IRS   memo   confirms   the   rule   but   does   not   discuss   its   justification.  This  is  also  consistent  with  a

  need   defense.   The   2011   IRS   memo   confirms   the   rule   but   does   not   discuss   its   justification.  This  is  also  consistent  with  a  view  that  the  rule  is  well  settled  law.     We  can  think  of  at  least  three  policy  considerations  underlying  the  Full  Deduction  Rule   in  those  circumstances.                                                                                                                             47  IRS  Chief  Counsel  Advisory  201423020.   48  IRS  Chief  Counsel  Advisory  201147024.   49  Id.  (emphasis  added).   18

FEDERAL  TAX  TREATMENT  OF  STATE  CHARITABLE  TAX  CREDITS     First,   the   rule   reduces   arbitrariness   and   significant   computational   and   administrative   difficulties.   The   most   likely   alternative   rule   would   limit   the   deduction   by   the   amount   of   state   tax   benefit.   Under   that   rule,   the   amount   of   the   federal   tax   charitable   deduction   would   vary   from   state   to   state,   and   vary   from   taxpayer   to   taxpayer   within   each   state.     This   would   be   arbitrary   in   itself,   and   raise   practical   difficulties   for   taxpayers   and   tax   agencies.   A   taxpayer  would  learn  the  amount  of  her  federal  deduction  only  by  doing  simulations  at  the   time   of   filing;   first   simulating   her   state   tax   liability   with   the   contribution,   and   then   without   the   contribution.   She   would   not   know   the   amount   of   her   deduction   when   making   the   contribution.   The   simulations   would   be   burdensome   and   confusing   to   taxpayers,   and   the   fact   that   the   amount   of   deduction   could   not   be   known   at   the   time   of   the   contribution   would  create  uncertainty  that  would  likely  limit  contributions.  This  alternative  rule  would   also   be   burdensome   to   the   IRS,   since   it   could   challenge   a   deduction   only   by   making   similar   simulations   of   the   taxpayer's   state   tax   liability.   These   difficulties   would   be   magnified   if   states   adopted   the   federal   approach,   so   that   state   benefits   were   limited   by   the   federal   benefits,  just  as  federal  benefits  were  limited  by  state  benefits.  At  that  point,  determining   the  amount  of  federal  or  state  benefit  would  require  the  use  of  an  algebraic  formula  that   took  the

its.  At  that  point,  determining   the  amount  of  federal  or  state  benefit  would  require  the  use  of  an  algebraic  formula  that   took  the  limitation  of  both  benefits  into  account.  Such  a  calculation  would  be  beyond  the   comprehension  of  all  but  a  few  taxpayers  or  tax  preparers.  Variants  of  this  alternative  rule  -­‐   such   as   denying   a   deduction   when   the   state   tax   benefit   reached   a   certain   point   -­‐   would   require  similarly  confusing  calculations,  and  have  the  further  disadvantage  of  arbitrariness,   creating  a  “cliff  effect”  for  taxpayers  who  fall  just  short  of  the  acceptable  benefit.     Second,   the   Full   Deduction   Rule   is   consistent   with   the   fundamental   principles   that   underlie  the  concept  of  taxable  income.    The  federal  tax  laws  have  historically  recognized   the   entirety   of   certain   state   taxes   as   a   deduction.   However,   federal   law   has   never   attempted   to   go   beyond   those   easily   determined   figures   by   inquiring   as   to   whether   the   internal  calculations  of  state  tax  liability  generates  federal  taxable  income.  There  is  a  good   reason   for   this.   It   is   impossible   to   know   whether   the   combination   of   rates,   deductions,   credits  and  state  services  a  taxpayer  receives  makes  her  better  or  worse  off  in  a  way  that   can   be   recognized   by   a   concept   such   as   federal   taxable   income.   Theories   on   which   to   base   taxable  income,  such  as  the  Haig-­‐Simons  definition  of  income,  have  never  been  understood   to   incorporate   this   determination.   The   numerous   judicial   and   administrative   authorities   cited   above   likewise   reflect   a   judgment   not   to   regard   the   various   credits   and

  numerous   judicial   and   administrative   authorities   cited   above   likewise   reflect   a   judgment   not   to   regard   the   various   credits   and   deductions   allowed  in  computing  state  tax  liability  as  producing  taxable  income.     Finally,   the   Full   Deduction   Rule   is   supported   by   considerations   of   federalism.   State   credits  in  this  context  are  used  to  stimulate  contributions  that  impact  state  programs  and   state  residents.    For  example,  the  Colorado  conservation  credits  described  above  put  land   in   the   public   trust   for   the   benefit   of   residents   (and   visitors).   Contribution-­‐related   credits   enacted  at  the  state  level  serve  a  variety  goals,  affecting  not  only  the  taxpayers  who  qualify   for   the   credits,   but   the   wider   public   as   well.   The   Full   Deduction   Rule   is   properly   neutral   toward  these  state  initiatives.     19

FEDERAL  TAX  TREATMENT  OF  STATE  CHARITABLE  TAX  CREDITS       In   some   circumstances,   states   have   enacted   tax   credits   that   offset   100%   of   the   cost   of   contributions.   That   is   true   with   respect   to   school   tuition   tax   credits   adopted   in   several   states,   as   well   as   the   Cultural   Trust   credit   adopted   by   Oregon.   Currently,   these   contributions  qualify  under  the  Full  Deduction  Rule.  Many  of  the  arguments  behind  the  Full   Deduction  Rule  apply  to  these  credits  as  well.  For  example,  these  credits  increase  spending   in  targeted  areas,  and  affect  the  lives  of  state  residents.    These  credits  would  be  supported   by   considerations   of   federalism.   However,   other   policy   considerations   in   support   of   Full   Deduction   might   not   apply   to   these   credits.     For   example,   a   rule   that   treated   these   fully   offset   contributions   as   the   equivalent   of   a   tax   would   avoid   many   of   the   difficult   calculation   issues  described  above.  (It  would,  however,  create  an  arbitrary  “cliff  effect,”  as  100%  offset   contributions   were   treated   as   taxes,   while   other   creditable   contributions   qualify   for   a   deduction  of  the  full  amount,  undiminished  by  the  value  of  the  credit.)  The  administrative   considerations  supporting  the  Full  Deduction  Rule  in  other  cases  might  not  apply  here.     Contributions   that   offset   state   taxes   on   a   one-­‐to-­‐one   basis   and   were   not   specifically   targeted   to   taxpayer-­‐directed   areas   (such   as   conservation   or   education)   might   also   be   subject  to  recharacterization  as  a  tax  under  common-­‐law  tax  doctrines  such  as  substance   over   form.   In   its   2011   advisory   memo  

e   subject  to  recharacterization  as  a  tax  under  common-­‐law  tax  doctrines  such  as  substance   over   form.   In   its   2011   advisory   memo   embracing   the   Full   Deduction   Rule,   the   IRS   stated   “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.” 50  We   have   no   way   of   know   what   sort   of   “unusual   circumstances”   the   IRS   may   have   had   in   mind   when   it   included   this   passage   in   its   2011   advisory  memorandum.  One  could  imagine  the  IRS  taking  the  position  that  state  charitable   tax   credits   set   to   100%   of   the   amount   donated   should   be   treated   “as,   in   substance,   a   satisfaction  of  tax  liability.”  But  since  the  IRS  and  the  courts  have  consistently  allowed  a  full   deduction  for  charitable  contributions,  without  any  reduction  for  state  tax  credits,  we  are   left  to  speculate  about  what  the  IRS  might  have  meant.   We  take  no  position  as  to  whether  the  IRS  would  attempt  to  challenge  a  deduction  for   a   contribution   that   was   100%   offset   by   tax   credits,   and   no   position   as   to   whether   that   challenge   would   be   successful.   For   state   charitable   tax   credits   less   than   100%,   more   difficult   line-­‐drawing   questions   arise.   There   is   no   clear   legal   basis   for   differentiating   among   state  charitable  tax  credits  with  varying  credit  percentages,  and  treating  all  charitable  tax   credits   as   a   quid   pro   quo,   requiring   the   donor   to   reduce   the   amount   of   their   federal   deduction   by   the   value   of   the