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     these  precedents  represent  instances  where  a  state  tax  credit  was  treated  as  a  reduction   or   potential   reduction   in   tax   liability   (rather   than   as   a   payment   from   the   state)   and   thus   support  the  Full  Deduction  Rule.     Rev.  Rul.  79-­‐315,  Holding  (3).  In  Rev.  Rul.  79-­‐315,  the  IRS  described  the  federal  income   tax  treatment  of  income  tax  rebates  paid  by  the  state  of  Iowa  to  its  residents  in  1979.  By   virtue   of   legislation   enacted   in   May   1979,   the   state   of   Iowa   determined   that   individuals   subject   to   the   state’s   income   tax   in   1978   should   receive   a   rebate   of   a   portion   of   their   1978   state  income  tax  liability.  Rulings  (1)  and  (2)  concern  taxpayers  for  whom  the  1979  rebate   took   the   form   of   a   refund   of   1978   taxes   paid   on   returns   that   had   already   been   filed.   In   those  two  cases,  the  treatment  of  the  refund  turned  on  the  application  of  the  familiar  tax   benefit  rule  under  which  the  refund  is  (1)  taxable  if  the  taxes  refunded  were  deducted  on   the   individual’s   1978   federal   income   tax   return,   but   (2)   not   taxable   if   the   taxes   refunded   were  not  deducted  on  the  individual’s  1978  federal  income  tax  return.     Holding  (3)  —  i.e.,  the  one  relevant  to  the  present  analysis  —  concerns  those  taxpayers   for  whom  the  Iowa  rebate  took  the  form  of  a  credit  against  1978  income  taxes  not  yet  paid.   Under  Holding  (3),  “[i]f  all  or  a  portion  of  an  individual’s  refund  is  credited  against  tax  due   for   1978,   the   amount   credited   is   treated   as   a   reduction   of  

a  portion  of  an  individual’s  refund  is  credited  against  tax  due   for   1978,   the   amount   credited   is   treated   as   a   reduction   of   the   outstanding   tax   liability.   The   amount   credited   against   unpaid   1978   tax   is   neither   includible   in   the   individual’s   gross   income  for  1979  nor  deductible  under  section  164(a)(3)  of  the  Code  as  a  state  income  tax   paid  in  1979.”22     The  intuition  underlying  Holding  (3)  of  Rev.  Rul.  79-­‐315  is  that  where  a  state  grants  a   taxpayer   an   income   tax   credit   on   their   state   tax   return,   that   credit   is   not   treated   as   the   receipt  of  cash  or  other  item  of  value  but  rather  merely  represents  an  adjustment  to  the   taxpayer’s   as   yet   undetermined   state   income   tax   liability.   This   may   seem   like   a   formal   distinction,   but   of   course   there   are   numerous   instances   throughout   all   of   U.S.   tax   law   where   substantive   outcomes   turn   on   formal   distinctions.23  In   this   case,   the   formality   of   being   granted   a   state   tax   credit,   rather   than   receiving   a   cash   refund   from   the   state,   results   in   the   taxpayer   simply   treating   the   amount   as   a   reduction,   or   potential   reduction,   in   as   yet   undetermined  tax  liability  rather  than  going  through  the  process  of  applying  the  tax  benefit   rule.   In   effect,   the   Ruling   is   concluding   that,   in   the   case   of   taxpayers   receiving   a   credit   instead   of   a   cash   refund,   the   final   amount   of   their   1978   state   income   tax   liability   is   not   yet   known  and  the  credit  is  simply  applied  in  making  that  determination.  Accordingly,  Holding   (3)  of  Rev.  Rul.  79-­‐315  supports  the

  yet   known  and  the  credit  is  simply  applied  in  making  that  determination.  Accordingly,  Holding   (3)  of  Rev.  Rul.  79-­‐315  supports  the  conclusion  of  the  2011  IRS  memo  that  the  granting  of  a   state  tax  credit  is  not  treated  as  the  payment  of  money  or  receipt  of  property  that  might  be   regarded  as  a  quid  pro  quo,  but  rather  merely  represents  an  adjustment  of  the  taxpayer’s   as  yet  undetermined  tax  liability.                                                                                                                             22  Rev.  Rul.  79-­‐315,  Holding  (3)  (emphasis  added).   23  See,  e.g.,  26  U.S.C.  199A(d)(2)(A)  (2018).   7