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     Snyder  v.  Commissioner.24  The  1990  decision  of  the  U.S.  Court  of  Appeals  for  the   Sixth   Circuit  in  Snyder  v.  Commissioner  adopted  the  same  logic  as  Holding  (3)  of  Rev.  Rul.  79-­‐315.   The   Snyder   case   involved   a   taxpayer   who   was   a   partner   in   a   partnership   that   operated   a   horse   racing   track   near   Cleveland,   Ohio.   Under   Ohio   law   in   effect   at   the   time,   all   such   racetracks  were  required  to  collect  and  remit  to  the  state  certain  pari-­‐mutuel  taxes  based   on   the   gross   amount   wagered   at   the   track   each   day.   Ohio   law   also   provided   for   a   credit   against   such   taxes   equal   to   70   percent   of   the   amount   of   certain   capital   improvements   made   to   the   racetrack   property   as   certified   by   the   state.   The   partnership   made   certified   capital  improvements  to  its  racetrack  in  an  amount  sufficient  to  entitle  it  to  a  tax  credit  of   $534,712,   which   was   used   to   reduce   its   pari-­‐mutuel   tax   obligations   in   1976   ($252,826)   and   1977  ($281,886).     The   question   addressed   by   the   court   in   Snyder   was   how   the   taxpayer   should   treat   these  state  tax  credits  for  federal  income  tax  purposes.  In  lower  court  proceedings  before   the  U.S.  Tax  Court,  the  government  took  the  position  that  because  Snyder  was  an  accrual   method  taxpayer,  it  was  required  to  include  the  full  value  of  the  tax  credits  in  income  in   the   year   the   credits   were   certified.   Under   this   view,   the   taxpayer   would   be   entitled   to   deduct   the   full   amount   of   the   pari-­‐mutuel   taxes   rather   than   treating   the  

this   view,   the   taxpayer   would   be   entitled   to   deduct   the   full   amount   of   the   pari-­‐mutuel   taxes   rather   than   treating   the   tax   credits   as   a   reduction  in  the  amount  of  tax  owed.  The  Sixth  Circuit  rejected  this  approach,  concluding   instead  that  the  proper  treatment  of  the  tax  credit  was  simply  “to  reduce  the  deductions   available   to   the   [the   partnership]   for   its   pari-­‐mutuel   tax   obligations,   which   reduced   deductions   accrued   as   those   taxes   become   due.”   The   Sixth   Circuit’s   decision   on   this   question   expressly   rejected   two   alternative   views:   (1)   the   value   of   the   tax   credits   was   income   to   the   taxpayers,25  and   (2)   the   taxpayer’s   basis   in   the   improvements   should   be   reduced   by   the   amount   the   credits.26  In   rejecting   these   alternatives,   the   court   embraced   the   same   logic   that   subsequently   formed   the   basis   of   the   2011   IRS   memo   on   charitable   tax   credits   –   i.e.,   state   tax   credits   are   not   treated   as   a   payment   from   the   government   but   rather  merely  represent  an  adjustment,  or  potential  adjustment,  to  the  recipient’s  state  tax   obligations.                                                                                                                               24  894  F.2d  1337  (6th  Cir.  1990)  (unpublished  opinion).   25  The   view   that   the   tax   credits   were   income   to   the   Snyders   was   the   position   advanced   by   the   government  and  accepted  by  the  Tax  Court,  but  that  position  was  ultimately  rejected  not  only  by   the   Sixth   Circuit   but   also   by   the   government

 accepted  by  the  Tax  Court,  but  that  position  was  ultimately  rejected  not  only  by   the   Sixth   Circuit   but   also   by   the   government   (“The   Commissioner   concedes   that   he   and   the   Tax   Court  were  wrong  on  this  point,  and  the  Snyders  were  right.”)   26  The  taxpayers  initially  took  the  view  that  their  basis  in  the  capital  improvements  (completion  of   which   generated   the   credit)   should   be   reduced   by   the   amount   of   the   tax   credit.   However,   as   the   Sixth   Circuit   noted,   all   of   the   parties   agreed   that   this   treatment   was   erroneous   (“It   is   undisputed   that  the  partnership’s  treatment  of  the  pari-­‐mutuel  tax  reduction  was  wrong…”)     8