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     investments   in   tangible   property,   could   be   claimed   against   income   tax   or   corporate   franchise   tax   and   the   taxpayer   could   carry   forward   any   unused   portion   or   receive   half   of   the   excess   as   a   refund.   Similarly,   the   EZ   Wage   Credit   was   first   used   to   reduce   corporate   franchise   or   income   tax   liability   with   any   excess   credit   either   carried   forward   or   partially   refunded,   at   the   taxpayer’s   election.   Finally,   the   QEZE   Real   Property   Tax   Credit   was   calculated   by   reference   to   real   property   taxes   previously   paid   by   the   qualifying   business   but  the  credit  was  claimed  by  the  taxpayers  on  their  individual  income  tax  return.   The  Tax  Court’s  holding  in  Maines  is  consistent  with  the  approach  outlined  in  Rev.  Rul.   79-­‐315,   discussed   above.   First,   where   a   credit   entitles   a   taxpayer   to   a   refund   of   a   prior   year’s  tax  liability,  the  taxability  of  the  refund  is  determined  under  the  tax  benefit  rule.  This   holding  applied  to  the  QEZE  Credit  for  Real  Property  Taxes  and  is  consistent  with  Holdings   (1)   and   (2)   of   Rev.   Rul.   79-­‐315.   Second,   where   a   credit   is   applied   to   reduce   the   current   year’s  tax  liability,  the  credit  is  not  taxable  or  otherwise  treated  as  an  item  of  income  but   rather  simply  reduces  a  tax  obligation.  This  holding  applied  to  the  nonrefundable  portions   of  the  EZ  Investment  Credit  and  the  EZ  Wage  Credit  and  is  consistent  with  Holding  (3)  of   Rev.   Rul.   79-­‐315.   Beyond   these   two   holdings,   the   court   also   concluded   that   the   taxpayer   must  include

 with  Holding  (3)  of   Rev.   Rul.   79-­‐315.   Beyond   these   two   holdings,   the   court   also   concluded   that   the   taxpayer   must  include  in  income  the  refundable  portion  of  the  credits.36  Thus,  the  holding  in  Maines   illustrates  an  important  limitation  on  the  principle  underlying  the  Full  Deduction  Rule.  If  a   state  charitable  tax  credit  is  refundable,  entitling  a  donor  not  only  to  reduce  her  state  tax   liability  but  also  secure  a  refund  to  the  extent  that  the  credit  exceeds  tax  owed,  then  it  is   possible   that   the   refundable   portion   of   the   credit   would   be   treated   as   a   payment   from   the   state  rather  than  a  mere  reduction,  or  potential  reduction  in  tax  liability.   Randall   v.   Loftsgaarden.   To   our   knowledge,   the   Supreme   Court   has   addressed   the   federal  income  tax  treatment  of  tax  credits  in  only  one  case:  Randall  v.  Loftsgaarden.37  The   petitioners   in   that   case   purchased   interests   in   a   limited   partnership   formed   by   the   respondent  to  build  and  operate  a  motel.  The  respondent  marketed  the  scheme  as  a  tax   shelter   and   promised   substantial   after-­‐tax   returns   for   investors   in   the   top   income   tax   brackets.   While   the   partnership   did   generate   tax   benefits   for   the   petitioners   in   its   early   years,  the  enterprise  ultimately  failed,  and  the  petitioners  successfully  sued  the  respondent   for  securities  fraud.  The  issue  before  the  Supreme  Court  concerned  the  damages  to  which   the  petitioners  were  entitled.  The  relevant  provision  of  the  Securities  Act  of  1933,  section   12(2),   provides   for   recovery   in   certain   cases   equal   to   “the   consideration   paid   for   such   security

curities  Act  of  1933,  section   12(2),   provides   for   recovery   in   certain   cases   equal   to   “the   consideration   paid   for   such   security   with   interest   thereon,   less   the   amount   of   any   income   received   thereon.”38  The                                                                                                                           36  Id.  (holding  that  the  “excess  portion  that  remains  after  first  reducing  state-­‐tax  liability  and  that   may   be   refunded   in   an   accession   to   the   Maineses’   wealth,   and   must   be   included   in   their   federal   gross  income  under  section  61.”)   37  478  U.S.  647  (1986).   38  15  U.S.C.  §  77l(a).   14