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     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