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       In   some   circumstances,   states   have   enacted   tax   credits   that   offset   100%   of   the   cost   of   contributions.   That   is   true   with   respect   to   school   tuition   tax   credits   adopted   in   several   states,   as   well   as   the   Cultural   Trust   credit   adopted   by   Oregon.   Currently,   these   contributions  qualify  under  the  Full  Deduction  Rule.  Many  of  the  arguments  behind  the  Full   Deduction  Rule  apply  to  these  credits  as  well.  For  example,  these  credits  increase  spending   in  targeted  areas,  and  affect  the  lives  of  state  residents.    These  credits  would  be  supported   by   considerations   of   federalism.   However,   other   policy   considerations   in   support   of   Full   Deduction   might   not   apply   to   these   credits.     For   example,   a   rule   that   treated   these   fully   offset   contributions   as   the   equivalent   of   a   tax   would   avoid   many   of   the   difficult   calculation   issues  described  above.  (It  would,  however,  create  an  arbitrary  “cliff  effect,”  as  100%  offset   contributions   were   treated   as   taxes,   while   other   creditable   contributions   qualify   for   a   deduction  of  the  full  amount,  undiminished  by  the  value  of  the  credit.)  The  administrative   considerations  supporting  the  Full  Deduction  Rule  in  other  cases  might  not  apply  here.     Contributions   that   offset   state   taxes   on   a   one-­‐to-­‐one   basis   and   were   not   specifically   targeted   to   taxpayer-­‐directed   areas   (such   as   conservation   or   education)   might   also   be   subject  to  recharacterization  as  a  tax  under  common-­‐law  tax  doctrines  such  as  substance   over   form.   In   its   2011   advisory   memo  

e   subject  to  recharacterization  as  a  tax  under  common-­‐law  tax  doctrines  such  as  substance   over   form.   In   its   2011   advisory   memo   embracing   the   Full   Deduction   Rule,   the   IRS   stated   “There  may  be  unusual  circumstances  in  which  it  would  be  appropriate  to  recharacterize  a   payment  of  cash  or  property  that  was,  in  form,  a  charitable  contribution  as,  in  substance,  a   satisfaction   of   tax   liability.” 50  We   have   no   way   of   know   what   sort   of   “unusual   circumstances”   the   IRS   may   have   had   in   mind   when   it   included   this   passage   in   its   2011   advisory  memorandum.  One  could  imagine  the  IRS  taking  the  position  that  state  charitable   tax   credits   set   to   100%   of   the   amount   donated   should   be   treated   “as,   in   substance,   a   satisfaction  of  tax  liability.”  But  since  the  IRS  and  the  courts  have  consistently  allowed  a  full   deduction  for  charitable  contributions,  without  any  reduction  for  state  tax  credits,  we  are   left  to  speculate  about  what  the  IRS  might  have  meant.   We  take  no  position  as  to  whether  the  IRS  would  attempt  to  challenge  a  deduction  for   a   contribution   that   was   100%   offset   by   tax   credits,   and   no   position   as   to   whether   that   challenge   would   be   successful.   For   state   charitable   tax   credits   less   than   100%,   more   difficult   line-­‐drawing   questions   arise.   There   is   no   clear   legal   basis   for   differentiating   among   state  charitable  tax  credits  with  varying  credit  percentages,  and  treating  all  charitable  tax   credits   as   a   quid   pro   quo,   requiring   the   donor   to   reduce   the   amount   of   their   federal   deduction   by   the   value   of   the

credits   as   a   quid   pro   quo,   requiring   the   donor   to   reduce   the   amount   of   their   federal   deduction   by   the   value   of   the   credit,   would   not   only   be   inconsistent   with   the   legal   precedent   but   would   also   entail   considerable   complexity,   both   for   taxpayers   and   tax   administrators.  Thus,  we  believe  that  current  law  supports  the  Full  Deduction  Rule  in  the   case   of   donations   where   the   donor   qualifies   for   state   charitable   tax   credits   equal   to   less   than   100%   of   the   donation.   While   legal   challenges   to   charitable   contribution   deductions   arising  from  such  donations  cannot  be  ruled  out,  in  our  view  those  challenges  should  fail                                                                                                                           50  CCA  201105010  (emphasis  added).   20