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     the  federal  alternative  minimum  tax  by  disallowing  the  deduction  for  state/local  taxes.5  As   a   result,   from   1987   onward,   taxpayers   subject   to   the   federal   AMT   have   found   it   advantageous   to   make   charitable   gifts   generating   state   tax   credits.6  These   gifts   had   the   felicitous   effect   of   increasing   the   taxpayer’s   (deductible)   charitable   contributions   while   simultaneously   reducing   her   (non-­‐deductible)   state   tax   obligations.   In   light   of   recent   federal   legislation   further   limiting   the   deductibility   of   state   and   local   taxes,7  states   may   expand   their   use   of   charitable   tax   credits   in   this   manner,   focusing   new   attention   on   the   legal  underpinnings  of  the  Full  Deduction  Rule.     The  Full  Deduction  Rule  has  been  applied  to  credits  that  completely  offset  the  pre-­‐tax   cost  of  the  contribution.    In  most  cases,  however,  the  state  credits  offset  less  than  100%  of   the   cost.     We   believe   that,   at   least   in   this   latter   and   more   typical   set   of   cases,   the   Full   Deduction   Rule   represents   a   correct   and   long-­‐standing   trans-­‐substantive   principle   of   federal   tax   law.     According   to   judicial   and   administrative   pronouncements   issued   over   several   decades,   nonrefundable   state   tax   credits   are   treated   as   a   reduction   or   potential   reduction   of   the   credit   recipient’s   state   tax   liability   rather   than   as   a   receipt   of   money,   property,   contribution   to   capital,   or   other   item   of   gross   income.     As   discussed   in   greater   detail  below,  the  Full  Deduction  Rule  is  supported  not  only  by  decades  of

r   item   of   gross   income.     As   discussed   in   greater   detail  below,  the  Full  Deduction  Rule  is  supported  not  only  by  decades  of  precedent  but  by   a   host   of   policy   considerations.     These   considerations   include   federal   respect   for   state   initiatives   and   allocation   of   tax   liabilities,   and   near-­‐insuperable   administrative   burdens   posed  by  alternative  rules.   The  combination  of  precedent  and  policy  justifications  suggests  that  the  Full  Deduction   Rule  should  survive  administrative  and  judicial  challenge.  We  believe  that  changes  to  the   Full   Deduction   Rule   would   require   legislation.   We   also   caution   Congress   that   a   legislative   override   of   the   Full   Deduction   Rule   would   raise   significant   administrability   concerns   and   would  implicate  important  federalism  values.  Congress  should  tread  carefully  if  it  seeks  to   alter  the  Full  Deduction  Rule  by  statute.   Background  on  the  Charitable  Contribution  Deduction     Availability  of  Deduction.  Section  170(a)  of  the  federal  Internal  Revenue  Code  provides   for   a   deduction   for   “charitable   contributions”   as   defined   in   section   170(c).   Deductible                                                                                                                           5  26  U.S.C.  56(b)(1)(A)(ii)  (enacted  as  part  of  the  Tax  Reform  Act  of  1986).   6  See,   e.g.,   Bryan   Strike,   Charitable   Donation   and   State   Tax   Credit!,   Kays   Financial   Advisory   Corporation,   Professional   Wealth   Management   Services   (September   20,   2016)   (describing   tax   advantages   for   AMT   taxpayers   to   make   deductible   gifts   to   Georgia’s   Student

anagement   Services   (September   20,   2016)   (describing   tax   advantages   for   AMT   taxpayers   to   make   deductible   gifts   to   Georgia’s   Student   Scholarship   Organizations,   which   entitle   donors   to   100%   state   tax   credit);   David   Slade,   ‘Donation’   Can   Make   You  a  Profit,  The  Post  and  Courier  (July  12,  2014)  (describing  benefit  to  AMT  taxpayers  of  making   deductible   gifts   to   South   Carolina’s   Exceptional   SC   fund,   which   entitle   donors   to   100%   state   tax   credit).       7  P.L.   115-­‐97,   An   act   to   provide   for   reconciliation   pursuant   to   titles   II   and   V   of   the   concurrent   resolution  on  the  budget  for  fiscal  year  2018.   2     Electronic copy available at: https://ssrn.com/abstract=3098291