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     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