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     contributions  include  donations  not  only  to  familiar  non-­‐profit  organizations  such  as  those   qualifying  for  tax-­‐exempt  status  under  section  501(c)(3)  but  also  “a  State,  a  possession  of   the  United  States,  or  any  political  subdivision  of  any  of  the  foregoing,  or  the  United  States   or  the  District  of  Columbia,  but  only  if  the  contribution  or  gift  is  made  for  exclusively  public   purpose.”8  Donations  can  be  made  in  either  cash  or  property.     Amount  of  Deduction.  The  amount  of  the  deduction  is  generally  the  amount  of  cash  or   the   fair   market   value   (or   in   some   instances   the   basis)   of   property   contributed   to   the   qualifying  entity.  Treasury  Regulations  provide  that  the  amount  deductible  may  not  exceed   the  excess  of:   “(A)  The  amount  of  any  cash  paid  and  the  fair  market  value  of  any  property   (other  than  cash)  transferred  by  the  taxpayer  to  an  organization  described  in   section  170(c);  over     (B)  The  fair  market  value  of  the  goods  or  services  the  organization  provides   in  return.”   Treas.  Reg.  Sec.  170A-­‐1(h)(2)(i)   By  virtue  of  this  “quid  pro  quo”  provision,  a  taxpayer  who  makes  a  $100  gift  to  public  radio   and   receives   a   tote   bag   in   return   must   reduce   the   amount   of   the   deduction   by   the   fair   market  value  of  the  tote  bag.  For  example,  if  the  value  of  the  tote  bag  is  estimated  to  be   $20,  the  taxpayer  may  only  claim  a  deduction  of  $80.9  

 bag.  For  example,  if  the  value  of  the  tote  bag  is  estimated  to  be   $20,  the  taxpayer  may  only  claim  a  deduction  of  $80.9     Federal   Tax   Deduction   for   Charitable   Contributions.   The   basic   logic   underlying   the   quid   pro   quo   regulation   is   that   the   deduction   should   be   limited   to   the   actual   net   cost   of   the   gift   to  the  taxpayer  —  i.e.,  the  gross  amount  of  the  gift  minus  the  value  of  goods  or  services   received   in   exchange   for   the   gift.   While   this   “net   cost   to   the   taxpayer”   principle   makes   intuitive   sense,   it   bears   noting   that   federal   tax   law   ignores   (and   has   always   ignored)   the   value   of   the   federal   charitable   contribution   deduction   itself.   These   tax   savings   are   often   substantial.  For  a  taxpayer  subject  to  a  37  percent  marginal  tax  rate,  a  $100  gift  results  in  a   $100   deduction,   even   though   that   deduction   reduces   the   net   cost   of   the   gift   to   $63.   In   other   words,   in   making   the   quid   pro   quo   determination,   federal   tax   law   ignores   the   $37   of   tax   savings   arising   from   the   gift.   If   instead   of   cash   the   taxpayer   donates   $100   value   property  with  a  zero  basis,  she  not  only  secures  a  $100  deduction  but  also  avoids  federal   income  tax  on  the  $100  of  built-­‐in  gain,  saving  her  (assuming  the  property  is  a  capital  asset   held  for  more  than  a  year)  another  $20  in  federal  income  tax  liability.  In  this  case,  the  net   cost  of  the  gift  to  the  taxpayer—after  backing  out  the  federal  tax  savings—would  be  only                                                                  

g  out  the  federal  tax  savings—would  be  only                                                                                                                           8  26  U.S.C.  170(c)(1).   9  This   example   assumes   the   cost   of   the   tote   bag   exceeds   $10.90   and   thus   is   not   treated   as   an   “insubstantial  benefit”  within  the  meaning  of  Rev.  Proc.  90-­‐12  as  adjusted  for  inflation  under  Rev.   Proc.  2017-­‐58,  Section  2.30(2).   3