Some Additional Reading on IRS Notice Regarding State and Local Deductions

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My post last week discussing the IRS’s Strategic Plan briefly referred to the IRS notice indicating that Treasury intended to issue proposed regulations that will “assist taxpayers in understanding the relationship between the federal charitable contribution deduction and the new statutory limitation on the deduction for state and local tax payments.”

For those wanting some more on the IRS notice, I recommend Two Cheers for IRS Guidance on the New SALT Cap on Medium by University of Chicago Law School Professor Dan Hemel.  Dan’s post distinguishes between what is in the IRS notice’s crosshairs, i.e., plans enacted or on the books that allow taxpayers to get credit for charitable contributions to state-linked funds, from other state plans, like the NY State Employer Compensation Expense Program, that allow employees to claim credits if as Dan notes the “employer opts into a new payroll tax regime.”

Dan discusses some interesting procedural issues as well, emphasizing that a 2011  informal Chief Counsel memorandum,which some have used as legal support for the deduction of proceeds contributed to state linked charitable funds, is not precedential. (For those wanting some more substance on the support for the workaround see Federal Income Tax Treatment of Charitable Contributions Entitling Donor to a State Tax Credit, an article posted on SSRN by Dan, Joe Bankman, Jacob Goldin, David Gamage, Darien Shankse, Kirk Stark, Dennis Ventry and Manoj Viswanathan).

Dan’s post discusses how states may be able to avoid the reach of the Anti-Injunction Act (AIA) to bring a pre-enforecement judicial challenge to any future regs. Dan’s main point here is that absent a pre-enforcement challenge, states would have little direct chance to challenge the regulations when they are eventually promulgated. As Dan discusses, in 1984 the Supreme Court in South Carolina v Reagan allowed states to challenge legislation that pegged the federal income tax exemption of interest from state and local obligations to bonds issued in registered rather than bearer form. Despite objections from the federal government that the AIA should restrict a state’s ability to challenge that legislation, the Court disagreed:

In sum, the Anti-Injunction Act’s purpose and the circumstances of its enactment indicate that Congress did not intend the Act to apply to actions brought by aggrieved parties for whom it has not provided an alternative remedy. In this case  if the plaintiff South Carolina issues bearer bonds, its bondholders will, by virtue of 103(j)(1), be liable for the tax on the interest earned on those bonds. South Carolina will incur no tax liability. Under these circumstances, the State will be unable to utilize any statutory procedure to contest the constitutionality of 103(j)(1). Accordingly, the [AIA]cannot bar this action.

Dan’s flagging of South Carolina v Regan and its allowing states to challenge the future guidance seems spot on to me.

Stay tuned, both for 1) more IRS/Treasury guidance on this and other workaround plans and 2) states challenging whatever regulations Treasury eventually promulgates.

Leslie Book About Leslie Book

Professor Book is a Professor of Law at the Villanova University Charles Widger School of Law.

Comments

  1. Jesse Langel says:

    This blog is incredible. Thank you so much for giving us this content. I look forward to digging into it, and keeping up with your current posts. Thank you!

  2. As a CPA, the new SALT provisions will be challenging to work through with clients. Some of my clients in CA or east coast states will be paying more tax. But as a preparer, returns will be easier to prepare so I guess I can’t complain that much.

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