IRS Notice on SALT limitations and "charitable contributions"

[FEDUKE404]

It does look as if the IRS is planning to bring a skunk to the picnic for the governors and other politicians who have decided to call state and local tax payments "contributions" to skirt the IRS regulations. Things could get interesting!

FE


SOURCE: https://www.irs.gov/newsroom/irs-iss...tax-deductions

IR-2018-122, May 23, 2018

WASHINGTON — The U.S. Department of the Treasury and the Internal Revenue Service issued a notice today stating that proposed regulations will be issued addressing the deductibility of state and local tax payments for federal income tax purposes. Notice 2018-54 also informs taxpayers that federal law controls the characterization of the payments for federal income tax purposes regardless of the characterization of the payments under state law.

The Tax Cuts and Jobs Act (TCJA) limited the amount of state and local taxes an individual can deduct in a calendar year to $10,000. In response to this new limitation, some state legislatures have adopted or are considering legislative proposals allowing taxpayers to make payments to specified entities in exchange for a tax credit against state and local taxes owed.

The upcoming proposed regulations, to be issued in the near future, will help taxpayers understand the relationship between federal charitable contribution deductions and the new statutory limitation on the deduction of state and local taxes.

Taxpayers should also be aware the U.S. Department of the Treasury and the Internal Revenue Service are continuing to monitor other legislative proposals being considered to ensure that federal law controls the characterization of deductions for federal income tax filings.

The limitation imposed by the TCJA applies to taxable years beginning after Dec. 31, 2017 and before Jan. 1, 2026.

Updates on the implementation of the TCJA can be found on the Tax Reform page of IRS.gov.

[Rapid Robert]

It's funny [to me] how everyone else seems to know what the proposed regulations are going to contain, I certainly don't.

According to some CCH material I have,

"Although proposed regulations provide guidance for tax planning, taxpayers may not ordinarily rely on them to support a tax
position. Courts have generally determined that proposed regulations are not entitled to judicial deference, and carry no more
weight than a position advanced on brief by one of the parties [Boyer, 55 TCM 871, TC Memo. 1988-220, CCH Dec.
44,788(M); Freesen, 84 TC 920, CCH Dec. 42,098, rev'd on other grounds CA-7, 86-2 USTC ¶9617, 798 F2d 195; Natomas
North America, Inc., 90 TC 710, CCH Dec. 44,700]."

[TaxGuyBill]

It's funny [to me] how everyone else seems to know what the proposed regulations are going to contain, I certainly don't.

Part of Notice 2018-54 says "Despite these state efforts to circumvent the new statutory limitation on state and local tax deductions, taxpayers should be mindful that federal law controls the proper characterization of payments for federal income tax purposes ...The proposed regulations will make clear that the requirements of the Internal Revenue Code, informed by substance-over-form principles, govern the federal income tax treatment of such transfers."


In my opinion, that clearly indicates the Proposed Regulations are going to say that the "substance-over-form" is that the payment is for real estate taxes, and not a charitable contribution.



While I agree that Proposed Regulations don't carry a lot of direct weight, I DO think a Proposed Regulation means that if the IRS were to audit a tax return with this issue, that the IRS will bring it to Court if necessary, because they think the Court will rule in their favor.

[Rapid Robert]

While I agree that Proposed Regulations don't carry a lot of direct weight, I DO think a Proposed Regulation means that if the IRS were to audit a tax return with this issue, that the IRS will bring it to Court if necessary, because they think the Court will rule in their favor.

Good point. I'm guilty of not reading the entire notice, as I think are many others who still automatically assume what will be in the proposed regs.

I understand "substance over form"; however I don't think the regs can successfully directly over-ride what the law says are valid charitable contributions. See §170(c)(1).

This is similar to the idea of pre-paying 2018 state estimated taxes before year-end 2017. (for example, 2018 Q1 estimated payment for state in Dec 2017). Despite what some blowhard contributors in other forms asserted, it was not clear that this was prohibited until Congress itself finally added a new change to the law. The same thing should apply here -- if the Congress intends to re-define charitable contributions, they should do so. Of course, that would require a Congress with able leadership that doesn't try to ram through major tax changes with insufficient time or effort spent figuring out how to do it right, so no point for now in expecting anything like that.

[TaxGuyBill]

a Congress with able leadership that doesn't try to ram through major tax changes with insufficient time or effort spent figuring out how to do it right

So you don't think that manually crossing off sentences in the printed version, hand-writing things in the margins (some of which was illegible), and voting on it a couple of hours later is sufficient time? [/sarcasm font off] :-)



I agree that the Regs can't over-ride the Code, but the Courts can interpret the laws and apply substance-over-form to them, despite the literal reading of the Code.

[New York Enrolled Agent]

RR - I agree with your reference to the definition of a contribution at §170(c)(1) including contributions to state/local government.

However there are final regulations that make me think these political exercises are fools errands. In particular Reg. §1.170A-1(h) (at least to me ) is tough to overcome. That regulation was in response to and aligned to the Supreme Court decision in American Bar.

I'm just pasting one small passage from TD 8690. I think any taxpayer who make these "contributions" to a state/local government does indeed get goods or services in return.

Intent to Make a Charitable Contribution

Section 1.170A–1(h) of the final regulations incorporates the two-part test adopted by the Supreme Court in United States v. American Bar Endowment , 477 U.S. 105 (1986), for determining deductibility under section 170(a) of a payment that is partly in consideration for goods or services. A deduction is not allowed for a payment to charity in consideration for goods or services except to the extent the amount of the payment exceeds the fair market value of the goods or services. In addition, a deduction is not allowed unless the taxpayer intends to make a payment in excess of the fair market value of the goods or services.

The Courts have not objected to the reg since it was finalized in 1996.

I jusy don't see how these "contributions" will pass the smell test.

[Rapid Robert]

What about tax deduction instead of credit?

Intent to Make a Charitable Contribution

Can we agree that a significant portion of current charitable contributions are in part dependent on the availability of a federal itemized tax deduction? We have already seen reports that charities are working hard to get their donors to work on alternate-year-doubling strategies for continuing to get some kind of tax break, so somebody involved thinks the tax break is an item of value received by their donors in exchange for the donation. And then there is the continuing popularity of the QCD from the IRA for 70 1/2 year olds and up, I think that is most often promoted as a tax break.

For making a donation to a state or locality for the general good (allowed under the tax code previously cited), what if instead of a credit against state taxes, they gave a deduction against state taxable income? Call it the "double (or triple) your federal deduction" deduction. If taxpayer donates $1,000 to a qualified gov't charity or whatever we're calling it, then they get $1,000 federal itemized charitable deduction and $2,000 (or $3,000) state itemized charitable deduction, under state law. After all, on the federal return of itemizers, there is a deduction allowed for charitable contributions, and that doesn't seem to conflict with the "expecting something in return" (tax break) rule.

If the state deduction for charitable contributions was pegged to AGI somehow, it could probably be fine-tuned to work similarly to the credit. I haven't yet tried to work up test cases to get the exact ratio of state to fed deduction, but could if needed. Paying into the state/local public benefit charity would of course be optional for everyone.