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     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