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     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

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