State Of New York et al v. Mnuchin et al
Filing
47
DECLARATION of Owen T. Conroy in Support re: 44 CROSS MOTION for Summary Judgment .. Document filed by State Of Connecticut, State Of New York, State of Maryland, State of New Jersey. (Attachments: # 1 Exhibit 1, # 2 Exhibit 2, # 3 Exhibit 3, # 4 Exhibit 4, # 5 Exhibit 5, # 6 Exhibit 6, # 7 Exhibit 7, # 8 Exhibit 8, # 9 Exhibit 9, # 10 Exhibit 10, # 11 Exhibit 11, # 12 Exhibit 12, # 13 Exhibit 13, # 14 Exhibit 14, # 15 Exhibit 15, # 16 Exhibit 16, # 17 Exhibit 17, # 18 Exhibit 18, # 19 Exhibit 19, # 20 Exhibit 20, # 21 Exhibit 21, # 22 Exhibit 22, # 23 Exhibit 23, # 24 Exhibit 24, # 25 Exhibit 25, # 26 Exhibit 26, # 27 Exhibit 27, # 28 Exhibit 28, # 29 Exhibit 29, # 30 Exhibit 30, # 31 Exhibit 31, # 32 Exhibit 32, # 33 Exhibit 33, # 34 Exhibit 34, # 35 Exhibit 35, # 36 Exhibit 36, # 37 Exhibit 37, # 38 Exhibit 38, # 39 Exhibit 39, # 40 Exhibit 40, # 41 Exhibit 41, # 42 Exhibit 42, # 43 Exhibit 43, # 44 Exhibit 44, # 45 Exhibit 45, # 46 Exhibit 46, # 47 Exhibit 47, # 48 Exhibit 48, # 49 Exhibit 49, # 50 Exhibit 50, # 51 Exhibit 51, # 52 Exhibit 52, # 53 Exhibit 53, # 54 Exhibit 54, # 55 Exhibit 55, # 56 Exhibit 56, # 57 Exhibit 57, # 58 Exhibit 58, # 59 Exhibit 59, # 60 Exhibit 60, # 61 Exhibit 61, # 62 Exhibit 62, # 63 Exhibit 63, # 64 Exhibit 64, # 65 Exhibit 65, # 66 Exhibit 66, # 67 Exhibit 67, # 68 Exhibit 68, # 69 Exhibit 69, # 70 Exhibit 70, # 71 Exhibit 71, # 72 Exhibit 72, # 73 Exhibit 73, # 74 Exhibit 74, # 75 Exhibit 75, # 76 Exhibit 76, # 77 Exhibit 77, # 78 Exhibit 78, # 79 Exhibit 79, # 80 Exhibit 80, # 81 Exhibit 81, # 82 Exhibit 82, # 83 Exhibit 83, # 84 Exhibit 84, # 85 Exhibit 85, # 86 Exhibit 86, # 87 Exhibit 87, # 88 Exhibit 88, # 89 Exhibit 89, # 90 Exhibit 90, # 91 Exhibit 91, # 92 Exhibit 92, # 93 Exhibit 93, # 94 Exhibit 94, # 95 Exhibit 95, # 96 Exhibit 96, # 97 Exhibit 97, # 98 Exhibit 98, # 99 Exhibit 99, # 100 Exhibit 100, # 101 Exhibit 101, # 102 Exhibit 102, # 103 Exhibit 103, # 104 Exhibit 104, # 105 Exhibit 105, # 106 Exhibit 106)(Conroy, Owen)
Exhibit 105
Federal Register / Vol. 83, No. 166 / Monday, August 27, 2018 / Proposed Rules
you notify your principal inspector, or
lacking a principal inspector, the manager of
the local flight standards district office or
certificate holding district office before
operating any aircraft complying with this
AD through an AMOC.
(h) Additional Information
The subject of this AD is addressed in
European Aviation Safety Agency (EASA) AD
No. 2017–0011, dated January 25, 2017. You
may view the EASA AD on the internet at
http://www.regulations.gov in the AD Docket.
(i) Subject
Joint Aircraft Service Component (JASC)
Code: 6510 Tail Rotor Driveshaft.
Submissions may be hand-delivered
Monday through Friday between the
hours of 8:00 a.m. and 4:00 p.m. to
CC:PA:LPD:PR (REG–112176–18),
Courier’s Desk, 1111 Constitution
Avenue NW, Washington, DC 20224, or
sent electronically, via the Federal
eRulemaking Portal at
www.regulations.gov (indicate IRS and
REG–112176–18). The public hearing
will be held in the IRS Auditorium,
Internal Revenue Building, 1111
Constitution Avenue NW, Washington,
DC 20224.
FOR FURTHER INFORMATION CONTACT:
Issued in Fort Worth, Texas, on August 10,
2018.
Lance T. Gant,
Director, Compliance & Airworthiness
Division, Aircraft Certification Service.
[FR Doc. 2018–18472 Filed 8–24–18; 8:45 am]
Concerning the proposed regulations,
Merrill D. Feldstein and Mon Lam at
(202) 317–4059; concerning submission
of comments and requests for a public
hearing, Regina Johnson at (202) 317–
6901 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
BILLING CODE 4910–13–P
Background
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG–112176–18]
RIN 1545–BO89
Contributions in Exchange for State or
Local Tax Credits
Internal Revenue Service (IRS),
Treasury.
ACTION: Notice of proposed rulemaking
and notification of public hearing.
amozie on DSK3GDR082PROD with PROPOSALS1
AGENCY:
SUMMARY: This document contains
proposed amendments to regulations
under section 170 of the Internal
Revenue Code (Code). The proposed
amendments provide rules governing
the availability of charitable
contribution deductions under section
170 when a taxpayer receives or expects
to receive a corresponding state or local
tax credit. This document also proposes
amendments to the regulations under
section 642(c) to apply similar rules to
payments made by a trust or decedent’s
estate. This document provides
notification of a public hearing on these
proposed regulations.
DATES: Written and electronic comments
must be received by October 11, 2018.
Requests to speak and outlines of topics
to be discussed at the public hearing
scheduled for November 5, 2018, must
be received by October 11, 2018.
ADDRESSES: Send submissions to
Internal Revenue Service,
CC:PA:LPD:PR (REG–112176–18), Room
5203, P.O. Box 7604, Ben Franklin
Station, Washington, DC 20044.
VerDate Sep<11>2014
17:27 Aug 24, 2018
Jkt 244001
Section 170(a)(1) generally allows an
itemized deduction for any ‘‘charitable
contribution’’ paid within the taxable
year. Section 170(c) defines ‘‘charitable
contribution’’ as a ‘‘contribution or gift
to or for the use of’’ any entity listed in
that subsection. Section 170(c)(1)
includes a contribution or gift to or for
the use of a State, a possession of the
United States, or any political
subdivision of the foregoing, but only if
the contribution or gift is made
exclusively for public purposes. Section
170(c)(2) includes, in general, a
contribution or gift to or for the use of
certain corporations, trusts, or
community chests, funds, or
foundations, organized and operated
exclusively for religious, charitable,
scientific, literary, or educational
purposes, or to foster national or
international amateur sports
competition, or for the prevention of
cruelty to children or animals.
Section 164 generally allows an
itemized deduction for the payment of
certain taxes, including state and local,
and foreign, real property taxes; state
and local personal property taxes; and
state and local, and foreign, income, war
profits, and excess profits taxes. Section
164(b)(6), as added by section 11042 of
‘‘An Act to provide for reconciliation
pursuant to titles II and V of the
concurrent resolution on the budget for
fiscal year 2018’’ (the Act), Public Law
115–97, limits an individual’s
deduction for the aggregate amount of
state and local taxes paid during the
calendar year to $10,000 ($5,000 in the
case of a married individual filing a
separate return). This new limitation
applies to taxable years beginning after
PO 00000
Frm 00005
Fmt 4702
Sfmt 4702
43563
December 31, 2017, and before January
1, 2026.
I. The Charitable Contribution
Deduction
In 1986, the Supreme Court
interpreted the phrase ‘‘charitable
contribution’’ in section 170. See United
States v. American Bar Endowment, 477
U.S. 105, 116–118 (1986). The Court
held that the ‘‘sine qua non of a
charitable contribution is a transfer of
money or property without adequate
consideration’’—that is, without the
expectation of a quid pro quo. Id. at 118.
A ‘‘payment of money generally cannot
constitute a charitable contribution if
the contributor expects a substantial
benefit in return.’’ Id. at 116. The Court
recognized that some payments may
have a ‘‘dual character’’—part charitable
contribution and part quid pro quo—
whereby the taxpayer receives some
‘‘nominal benefit’’ of lesser value than
the payment. Id. at 117. In such cases,
the Court reasoned, ‘‘it would not serve
the purposes of § 170 to deny a
deduction altogether.’’ Id. Instead, the
Court held, the charitable contribution
deduction is allowed, but only to the
extent the amount donated or the fair
market value of the property transferred
by the taxpayer exceeds the fair market
value of the benefit received in return,
and only if the excess amount was
transferred with the intent of making a
gift. Id.
For the benefit received in return to
reduce the allowable charitable
contribution deduction under section
170, the benefits received, or expected
to be received, by a donor need only be
greater than those benefits that inure to
the general public from transfers for
charitable purposes. See, e.g., Singer Co.
v. United States, 449 F.2d 413, 422–423
(Ct. Cl. 1971); American Bar
Endowment, 477 U.S. at 116–17 (citing
Singer); Hernandez v. Commissioner,
490 U.S. 680 (1989). In addition, the
benefits received need not come directly
from the donee to reduce the allowable
deduction, nor do they need to be
specifically quantifiable at the time of
transfer. See, e.g., Singer, 449 F.2d at
422. The Treasury Department and the
IRS have incorporated many of these
principles into regulations under
section 170. Section 1.170A–1(h)(1) of
the Income Tax Regulations provides,
for example, that no part of a payment
that a taxpayer makes to or for the use
of an organization described in section
170(c) that is in consideration for (as
defined in § 1.170A–13(f)(6)) goods or
services (as defined in § 1.170A–
13(f)(5)) is a contribution or gift within
the meaning of section 170(c) unless the
taxpayer (i) intends to make a payment
E:\FR\FM\27AUP1.SGM
27AUP1
43564
Federal Register / Vol. 83, No. 166 / Monday, August 27, 2018 / Proposed Rules
amozie on DSK3GDR082PROD with PROPOSALS1
in an amount that exceeds the fair
market value of the goods or services;
and (ii) makes a payment in an amount
that exceeds the fair market value of the
goods or services. Section 1.170A–
13(f)(5) defines goods or services to
include cash, property, services,
benefits, and privileges, and § 1.170A–
13(f)(6) provides that a donee provides
goods or services in consideration for a
taxpayer’s payment if, at the time the
taxpayer makes the payment to the
donee organization, the taxpayer
receives or expects to receive goods or
services in exchange for that payment.
II. State and Local Tax Credit Programs
In recent years, it has become
increasingly common for states and
localities to provide state or local tax
credits in return for contributions by
taxpayers to or for the use of certain
entities listed in section 170(c). As the
use of these tax credit programs by
states and localities became more
common, the IRS Office of Chief
Counsel (IRS Chief Counsel), in
multiple Chief Counsel Advice
memoranda (CCAs), considered whether
the receipt of state tax credits under
these programs were quid pro quo
benefits that would affect the amount of
taxpayers’ charitable contribution
deductions under section 170(a).
Although CCAs are released to the
public for information purposes, it
should be noted that CCAs are not
official rulings or positions of the IRS,
are not ordinarily reviewed by the
Treasury Department, and are not
precedential.
In CCAs issued in 2002 and 2004, IRS
Chief Counsel reviewed programs
involving the issuance of state tax
credits in return for the transfer of
conservation easements and for
payments to certain child care
organizations. See CCA 200238041 (July
24, 2002); CCA 200435001 (July 28,
2004). In these CCAs, IRS Chief Counsel
recognized that these programs raised
complex questions and recommended
that the tax credit issue be addressed
through official published guidance.
In 2010, another CCA explained that
published guidance on the issue was not
contemplated at that time, but it offered
further advice. See CCA 201105010
(Oct. 27, 2010) (the 2010 CCA). This
2010 CCA observed that a payment to a
state agency or charitable organization
in return for a tax credit might be
characterized as either a charitable
contribution deductible under section
170 or a payment of state tax possibly
deductible under section 164. The 2010
CCA advised that taxpayers may take a
deduction under section 170 for the full
amount of a contribution made in return
VerDate Sep<11>2014
17:27 Aug 24, 2018
Jkt 244001
for a state tax credit, without subtracting
the value of the credit received in
return. The analysis in the 2010 CCA
assumed that after the taxpayer applied
the state or local tax credit to reduce the
taxpayer’s state or local tax liability, the
taxpayer would receive a smaller
deduction for state and local taxes
under section 164. The 2010 CCA
cautioned, however, that ‘‘there may be
unusual circumstances in which it
would be appropriate to recharacterize a
payment of cash or property that was, in
form, a charitable contribution as, in
substance, a satisfaction of tax liability.’’
In addition to the CCAs, IRS Chief
Counsel has taken the position in the
U.S. Tax Court that the amount of a state
or local tax credit that reduces a tax
liability is not an accession to wealth
under section 61 or an amount realized
for purposes of section 1001, and the
Tax Court has accepted this view. See,
e.g., Maines v. Commissioner, 144 T.C.
123, 134 (2015) (holding that the nonrefundable portion of a state income tax
credit, the amount of which was based
on previously-paid property taxes,
reduced the current year’s tax liability
and is not taxable or treated as an item
of income); Tempel v. Commissioner,
136 T.C. 341, 351–354 (2011) (holding
that state income tax credits received by
a donor for the transfer of a conservation
easement and sold by the donor were
capital assets, but that the donor had no
adjusted basis in the credits), aff’d sub
nom. Esgar Corp. v. Commissioner, 744
F.3d 648 (10th Cir. 2014). However, the
application of sections 61 and 1001 to
state or local tax credits presents
different issues than the application of
section 170, and none of these cases
addressed whether a taxpayer’s
expectation or receipt of a state or local
tax credit may reduce a taxpayer’s
charitable contribution deduction under
section 170. Nor has the Treasury
Department or the IRS ever addressed
this question in published guidance.
income tax liability because any
increased deduction under section 170
would be offset by a decreased
deduction under section 164.
However, as a result of the new limit
on the deductibility of state and local
taxes under section 164(b)(6) (as added
by the Act), treating a transfer pursuant
to a state or local tax credit program as
a charitable contribution for federal
income tax purposes may reduce a
taxpayer’s federal income tax liability.
When a charitable contribution is made
in return for a state or local tax credit
and the taxpayer has pre-credit state and
local tax liabilities in excess of the
$10,000 limitation in section 164(b)(6),
a charitable contribution deduction
under section 170 would no longer be
offset by a reduction in the taxpayer’s
state and local tax deduction under
section 164. Thus, as a consequence,
state and local tax credit programs now
give taxpayers a potential means to
circumvent the $10,000 limitation in
section 164(b)(6) by substituting an
increased charitable contribution
deduction for a disallowed state and
local tax deduction. State legislatures
are also now considering or have
adopted proposals to enact new state
and local tax credit programs with the
aim of enabling taxpayers to
characterize their transfers as fully
deductible charitable contributions for
federal income tax purposes, while
using the same transfers to satisfy or
offset their state or local tax liabilities.
In light of the tax consequences of
section 164(b)(6) and the resulting
increased interest in preexisting and
new state tax credit programs, the
Treasury Department and the IRS
determined that it was appropriate to
review the question of whether amounts
paid or property transferred in exchange
for state or local tax credits are fully
deductible as charitable contributions
under section 170.
III. New Limitation in Section 164
At the time the 2010 CCA was issued,
section 164 generally allowed an
itemized deduction—unlimited in
amount—for the payment of state and
local taxes. Accordingly, the question of
how to characterize transfers pursuant
to state tax credit programs had little
practical consequence from a federal
income tax perspective because, unless
the taxpayer was subject to the
alternative minimum tax (AMT) under
section 55, a deduction was likely to be
available under either section 164 or
section 170. Permitting a charitable
contribution deduction for a transfer
made in exchange for a state or local tax
credit generally had no effect on federal
IV. Notice 2018–54
PO 00000
Frm 00006
Fmt 4702
Sfmt 4702
Pursuant to this review, in Notice
2018–54, 2018–24 I.R.B. 750, the
Treasury Department and the IRS
announced on June 11, 2018, their
intention to propose regulations
addressing the federal income tax
treatment of payments made by
taxpayers for which the taxpayers
receive a credit against their state and
local taxes. The notice stated that
federal tax law controls the proper
characterization of payments for federal
income tax purposes and that proposed
regulations would assist taxpayers in
understanding the relationship between
the federal charitable contribution
deduction and the new limitation on the
E:\FR\FM\27AUP1.SGM
27AUP1
Federal Register / Vol. 83, No. 166 / Monday, August 27, 2018 / Proposed Rules
amozie on DSK3GDR082PROD with PROPOSALS1
deduction for state and local tax
payments.
Although Notice 2018–54 was issued
in response to state legislation proposed
after the enactment of the limitation on
state and local tax deductions under
section 164(b)(6), the rules in these
proposed regulations are based on
longstanding federal tax law principles,
which apply equally to taxpayers
regardless of whether they are
participating in a new state and local tax
credit program or a preexisting one.
Accordingly, the proposed regulations,
and the analysis underlying the
proposed regulations, are intended to
apply to transfers pursuant to state and
local tax credit programs established
under the recent state legislation as well
as to transfers pursuant to state and
local tax credit programs that were in
existence before the enactment of
section 164(b)(6).
V. Proposed Regulations
After reviewing the issue, and in light
of the longstanding principles of the
cases and tax regulations discussed
above, the Treasury Department and the
IRS believe that when a taxpayer
receives or expects to receive a state or
local tax credit in return for a payment
or transfer to an entity listed in section
170(c), the receipt of this tax benefit
constitutes a quid pro quo that may
preclude a full deduction under section
170(a). In applying section 170 and the
quid pro quo doctrine, the Treasury
Department and the IRS do not believe
it is appropriate to categorically exempt
state or local tax benefits from the
normal rules that apply to other benefits
received by a taxpayer in exchange for
a contribution. Thus, the Treasury
Department and the IRS believe that the
amount otherwise deductible as a
charitable contribution must generally
be reduced by the amount of the state
or local tax credit received or expected
to be received, just as it is reduced for
many other benefits. Accordingly, the
Treasury Department and the IRS
propose regulations proposing to amend
existing regulations under section 170 to
clarify this general requirement, to
provide for a de minimis exception from
the general rule, and to make other
conforming amendments.
Compelling policy considerations
reinforce the interpretation and
application of section 170 in this
context. Disregarding the value of all
state tax benefits received or expected to
be received in return for charitable
contributions would precipitate
significant revenue losses that would
undermine and be inconsistent with the
limitation on the deduction for state and
local taxes adopted by Congress in
VerDate Sep<11>2014
17:27 Aug 24, 2018
Jkt 244001
section 164(b)(6).1 Such an approach
would incentivize and enable taxpayers
to characterize payments as fully
deductible charitable contributions for
federal income tax purposes, while
using the same payments to satisfy or
offset their state or local tax liabilities.
Disregarding the tax benefit would also
undermine the intent of Congress in
enacting section 170, that is, to provide
a deduction for taxpayers’ gratuitous
payments to qualifying entities, not for
transfers that result in economic returns.
The Treasury Department and the IRS
believe that appropriate application of
the quid pro quo doctrine to substantial
state or local tax benefits is consistent
with the Code and sound tax
administration.
Explanation of Provisions
The proposed regulations generally
provide that if a taxpayer makes a
payment or transfers property to or for
the use of an entity listed in section
170(c), and the taxpayer receives or
expects to receive a state or local tax
credit in return for such payment, the
tax credit constitutes a return benefit, or
quid pro quo, to the taxpayer and
reduces the charitable contribution
deduction.
In addition to credits, the proposed
regulations also address state or local
tax deductions claimed in connection
with a taxpayer’s payment or transfer.
Although deductions could be
considered quid pro quo benefits in the
same manner as credits, the Treasury
Department and the IRS believe that
sound policy considerations as well as
considerations of efficient tax
administration warrant making an
exception to quid pro quo principles in
the case of dollar-for-dollar state or local
tax deductions. Because the benefit of a
dollar-for-dollar deduction is limited to
the taxpayer’s state and local marginal
rate, the risk of deductions being used
to circumvent section 164(b)(6) is
comparatively low. In addition, if state
and local tax deductions for charitable
contributions were treated as quid pro
quo benefits, it would make the accurate
1 The Joint Committee on Taxation estimated that
the limitation on state and local tax deductions
along with certain other reforms of itemized
deductions would raise $668 billion over ten years.
A substantial amount of this revenue would be lost
if state tax benefits received in exchange for
charitable contributions were ignored in
determining the charitable contribution deduction.
This estimate is not a revenue estimate of the
proposed regulations, in part because it includes
other reforms of itemized deductions but does not
reflect certain other provisions of the Act. See Joint
Committee on Taxation, ‘‘Estimated Budget Effects
of the Conference Agreement for H.R. 1, The ‘Tax
Cuts and Jobs Act,’ ’’ JCX–67–17, December 18, 2017
available at https://www.jct.gov/publications.
html?func=startdown&id=5053.
PO 00000
Frm 00007
Fmt 4702
Sfmt 4702
43565
calculation of federal taxes and state
and local taxes difficult for both
taxpayers and the IRS. For example, the
value of a deduction could vary based
on the taxpayer’s marginal or effective
state and local tax rates, making for
more complex computations and adding
to administrative and taxpayer burden.
The proposed regulations thus allow
taxpayers to disregard dollar-for-dollar
state or local tax deductions. However,
the proposed regulations state that, if
the taxpayer receives or expects to
receive a state or local tax deduction
that exceeds the amount of the
taxpayer’s payment or the fair market
value of the property transferred, the
taxpayer’s charitable contribution
deduction must be reduced. The
Treasury Department and the IRS
request comments on how to determine
the amount of this reduction.
To provide consistent treatment for
state or local tax deductions and state or
local tax credits that provide a benefit
that is generally equivalent to a
deduction, the proposed regulations
include a de minimis exception under
which a taxpayer may disregard a state
or local tax credit if such credit does not
exceed 15 percent of the taxpayer’s
payment or 15 percent of the fair market
value of the property transferred by the
taxpayer. The de minimis exception
reflects that the combined value of a
state and local tax deduction, that is the
combined top marginal state and local
tax rate, currently does not exceed 15
percent. Accordingly, under the
proposed regulations, a state or local tax
credit that does not exceed 15 percent
does not reduce the taxpayer’s federal
deduction for a charitable contribution.
The Treasury Department and the IRS
request comments on this proposed
exception.
In drafting the proposed regulations,
the Treasury Department and the IRS
also considered whether a taxpayer may
decline the receipt or anticipated receipt
of a state or local tax credit by taking
some affirmative action at the time of
the taxpayer’s payment or transfer. See
Rev. Rul. 67–246, 1967–2 C.B. 104
(allowing a full charitable contribution
deduction if the taxpayer does not
accept or keep any indicia of a return
benefit). Because procedures for
declining the state or local tax credit
would depend on the procedures of
each state and locality in administering
the tax credits, the Treasury Department
and the IRS request comments regarding
a rule that would allow taxpayers to
decline state or local tax credits and
receive full deductions for charitable
contributions under section 170.
Trusts and decedents’ estates may
claim an income tax deduction for
E:\FR\FM\27AUP1.SGM
27AUP1
43566
Federal Register / Vol. 83, No. 166 / Monday, August 27, 2018 / Proposed Rules
charitable contributions under section
642(c). For the same reasons provided
above, the proposed regulations amend
§ 1.642(c)–3 to provide that the
proposed rules under § 1.170A–1(h)(3)
apply to payments made by a trust or
decedent’s estate in determining its
charitable contribution deduction under
section 642(c).
Proposed Applicability Date
The amendments to these regulations
are proposed to apply to contributions
after August 27, 2018.
amozie on DSK3GDR082PROD with PROPOSALS1
Special Analyses
Executive Orders 12866 and 13563
direct agencies to assess costs and
benefits of available regulatory
alternatives and, if regulation is
necessary, to select regulatory
approaches that maximize net benefits
(including potential economic,
environmental, public health and safety
effects, distributive impacts, and
equity). Executive Order 13563
emphasizes the importance of
quantifying both costs and benefits, of
reducing costs, of harmonizing rules,
and of promoting flexibility. These
proposed regulations have been
designated as subject to review under
Executive Order 12866 pursuant to the
Memorandum of Agreement (April 11,
2018) between the Treasury Department
and the Office of Management and
Budget (OMB) regarding review of tax
regulations. OMB has determined that
the proposed regulations are subject to
review under section 1(b) of the
Memorandum of Agreement. These
proposed regulations have been
reviewed by OMB. These proposed
regulations are anticipated to be
regulatory actions under E.O. 13771.
The analysis below can provide further
detail on this designation.
I. Need for Regulations
These proposed regulations provide
guidance on the deductibility of
charitable contributions when a
taxpayer receives or expects to receive
a corresponding state or local tax credit.
These proposed regulations are
intended to clarify the relationship
between the federal charitable
contribution deduction and the
recently-enacted statutory limitation on
deductions for state and local taxes paid
(the ‘‘SALT cap’’) and to make the
federal tax system more neutral with
respect to taxpayers’ decisions regarding
donations. Compelling policy
considerations reinforce the
interpretation and application of section
170 in this context. Disregarding the
value of all state tax benefits received or
expected to be received in return for
VerDate Sep<11>2014
17:27 Aug 24, 2018
Jkt 244001
charitable contributions would
precipitate revenue losses that would
undermine and be inconsistent with the
limitation on the deduction for state and
local taxes adopted by Congress in
section 164(b)(6).
Pursuant to section 6(a)(3)(B) of
Executive Order 12866, the following
qualitative analysis provides further
details regarding the anticipated impact
of the proposed regulations. After
identifying a baseline in Part II, this
analysis provides illustrative scenarios
in Part III. Part III.A describes the tax
effects of the contributions prior to
enactment of the SALT cap in the Act.
Part III.B provides examples comparing
the enactment of the SALT cap but
absent the proposed rule (the baseline)
to the proposed rule. Finally, Part IV
provides a qualitative assessment of the
potential costs and benefits of the
proposed rule compared to the baseline.
II. Baseline
Prior to this proposed rule, there was
no authoritative regulatory guidance on
the treatment of state or local tax credits
arising from charitable contributions to
entities listed in section 170(c), and
there was no guidance aside from Notice
2018–54 addressing the interaction
between section 170 and the newly
enacted SALT cap. As a result, there
was a degree of taxpayer uncertainty as
to whether state and local tax credits are
a return benefit that reduces a taxpayer’s
charitable contribution deduction. For
informational and analytical purposes,
however, this analysis assumes as a
baseline that state and local tax credits
are generally not treated as a return
benefit or consideration and therefore
do not reduce the taxpayer’s charitable
contribution deduction under section
170(a).
III. Illustrative Scenarios
For the following illustrative
scenarios, assume the following facts:
Charitable organizations A and B are
entities listed in section 170(c) and
provide similar public goods.
Contributions to charity A are eligible
for a dollar-for-dollar state tax credit.
Contributions to charity B are ineligible
for this credit but are deductible from
state taxable income. A taxpayer
itemizes deductions, and these itemized
deductions in aggregate are at least
$1,000 more than the standard
deduction. The taxpayer has the choice
to contribute $1,000 to charity A, and
this $1,000 contribution generates a
state tax credit of $1,000,2 that is, the tax
2 Note that this analysis only addresses state tax
credits offering a 100% benefit. The results may
differ for credits offering a lower benefit, but the
PO 00000
Frm 00008
Fmt 4702
Sfmt 4702
credit is dollar-for-dollar but does not
otherwise figure into the calculation of
the taxpayer’s state tax liability. The
taxpayer has more than $1,000 of state
tax liability, so that the taxpayer’s state
tax liability is reduced by the entire
$1,000 of the state tax credit. Finally, if
the taxpayer makes the $1,000
contribution that generates a state tax
credit of $1,000, the taxpayer reduces by
$1,000 the withholdings or other
payments of state taxes during the
taxable year in question. The state taxes
paid by the taxpayer are therefore
reduced by the full amount of the state
tax credit in the same taxable year as the
contribution is made.3 Further assume
the taxpayer is in the 24 percent federal
tax bracket, itemizes federal tax
deductions, and has a state tax rate of
5 percent. If the taxpayer is subject to
the AMT, assume an AMT marginal tax
rate of 26 percent.
The Act and proposed regulations
alter the incentives taxpayers face about
whether and how much to give to
organizations that receive charitable
contributions as well as to which
organizations. This is illustrated in the
following scenarios, which are also
summarized in Table 1 (below).
A. Prior Law: Section 170 Charitable
Contributions Prior to the Act
The tax effects of contributions prior
to enactment of the Act are illustrated
in the columns labeled ‘‘Prior Law’’ in
Table 1.
1. Taxpayer Not Subject to AMT
Prior to enactment of the Act, if the
taxpayer made a $1,000 contribution to
charity A that generated a state tax
credit of $1,000, the deduction for
charitable contributions under section
170(a) increased by $1,000, and the
deduction for state and local taxes paid
under section 164 decreased by $1,000.
The taxpayer’s itemized deductions,
taxable income, and federal tax liability
were unchanged from what they would
have been in the absence of the
contribution.4 The taxpayer’s state tax
liability decreased by $1,000 because of
the state tax credit. The combined
federal and state tax benefits of the
comparative results of the below illustrative
examples would be similar.
3 The results of the examples are generally
unchanged if the taxpayer instead receives the
credit as a refund of state taxes paid that were
deducted from federal taxable income, as such
refund would be includible in federal taxable
income in the following year.
4 This assumes the taxpayer was not subject to
limitations such as the overall limitation on
itemized deductions under section 68 or subject to
a percentage limitation for the deduction under
section 170, an assumption that is maintained
throughout the succeeding discussion.
E:\FR\FM\27AUP1.SGM
27AUP1
Federal Register / Vol. 83, No. 166 / Monday, August 27, 2018 / Proposed Rules
$1,000 contribution were therefore
$1,000, and the cost to the taxpayer and
to the federal government of making the
contribution was $0. This is shown in
column A under Prior Law for Example
1 in Table 1 and replicated in the same
column for Example 2.
amozie on DSK3GDR082PROD with PROPOSALS1
2. Taxpayer Subject to AMT
If the taxpayer were subject to the
AMT under section 55, however, there
was a net benefit to the taxpayer from
contributions to charity A, which
provided state tax credits. State and
local taxes paid are not deductible
expenses in determining taxable income
under the AMT, but charitable
contributions are deductible expenses in
determining taxable income under the
AMT. If the taxpayer contributed
$1,000, taxable income under the AMT
was reduced by $1,000 due to the
charitable contribution deduction under
section 170, but there was no
corresponding reduction in the
deduction for state and local taxes.
Under an AMT marginal tax rate of 26
percent, the federal tax benefit of this
$1,000 contribution would be $260.
Because of the dollar-for-dollar state tax
credit, the taxpayer received a combined
federal and state tax benefit of $1,260
for a $1,000 contribution, a net benefit
of $260. This is shown in column A
under Prior Law for Example 3 in Table
1.
3. Comparison of Contributions to
Different Organizations Under Prior Law
In combination, state and federal tax
laws generally provide a greater
incentive to contribute to organizations
eligible for state tax credits (charity A)
than to other organizations (charity B).
The effect of a contribution to charity A
are described above.
Prior to enactment of the Act, for a
taxpayer not subject to the AMT, a
$1,000 contribution to charity B yielded
a smaller combined federal and state tax
benefit than to charity A. The state tax
benefit was $50 ($1,000 times the 5
percent state tax rate). The taxpayer’s
itemized deductions at the federal level
increased by $950 (the $1,000 charitable
contribution deduction less than $50
reduction in state taxes paid). The
federal tax benefit of this increase was
$228 ($950 times the 24 percent federal
tax rate), resulting in a combined federal
and state tax benefit of $278. The net
cost to the taxpayer of the $1,000
contribution was $722. This is shown in
column B under Prior Law for Example
1 in Table 1 and replicated in the same
column for Example 2.
For a taxpayer subject to the AMT, a
$1,000 contribution to charity B yielded
a combined federal and state benefit of
VerDate Sep<11>2014
17:27 Aug 24, 2018
Jkt 244001
$310—the $1,000 contribution
multiplied by the taxpayer’s marginal
tax rate under the AMT of 26 percent,
or $260, plus the value of the deduction
from state tax, or $50 ($1,000 times the
5 percent state tax rate). The net cost to
the taxpayer of the $1,000 contribution
was $690. This is shown in column B
under Prior Law for Example 3 in Table
1.
Contributing to either charity A or
charity B reduced the taxpayer’s
combined federal and state tax liability,
but the existence of the state tax credit
for contributions to charity A made
contributions to that organization more
attractive. This is seen by comparing the
Total Tax Benefit in column A under
Prior Law to the corresponding value in
column B for each of the three
examples. For taxpayers not subject to
the AMT, contributions to charity A
yielded a combined federal and state tax
benefit of $1,000, compared to a
combined federal and state tax benefit of
$278 for a contribution to charity B. The
AMT increased the disparity for
contributions to charity A versus charity
B, resulting in a combined federal and
state tax benefit of $1,260 for a
contribution to charity A versus $310
for a contribution to charity B.
B. Examples Under Baseline (Current
Law and Practices Under the Act) and
Proposed Rule
The enactment of the SALT cap in the
Act has, in limited circumstances,
altered the federal tax effects of
charitable contributions as described in
the following examples. These are
illustrated in the columns labeled
‘‘Baseline’’ and ‘‘Proposed Rule’’ in
Table 1.
1. Example 1: Taxpayer Is Above the
SALT Cap and Not Subject to the AMT
a. Baseline
If a taxpayer that has a state tax
liability of more than $1,000 above the
SALT cap and is not subject to the AMT
makes a $1,000 contribution to charity
A, the deduction for charitable
contributions under section 170(a)
increases by $1,000, but the deduction
for state and local taxes paid under
section 164 is unchanged.
Consequently, itemized deductions
increase by $1,000, and taxable income
decreases by $1,000. If the taxpayer is in
the 24 percent bracket, federal liability
will decrease by $240, and state tax
liability will decrease by the $1,000
state tax credit. The combined federal
and state tax benefits of the $1,000
contribution are therefore $1,240, and
the taxpayer receives a $240 net benefit
while the federal government has a loss
PO 00000
Frm 00009
Fmt 4702
Sfmt 4702
43567
of $240. This is shown in column A
under Baseline for Example 1 in Table
1.
b. Proposed rule
If the same taxpayer makes the $1,000
contribution to charity A under the
proposed rule, the entire $1,000
deduction is not deductible under
section 170(a), and the deduction for
state and local taxes paid under section
164 is unchanged due to the SALT cap.
The taxpayer’s itemized deductions,
taxable income, and federal tax liability
are unchanged from what they would be
in the absence of the contribution. The
taxpayer’s state tax liability decreases by
$1,000 because of the state tax credit.
The combined federal and state tax
benefits of the $1,000 contribution are
therefore $1,000, or $240 less than
under the baseline. This is shown by
comparing the Total Tax Benefit in
column A under Proposed Rule with the
corresponding value in column A under
Baseline for Example 1 in Table 1.
However, the benefit of the contribution
for this taxpayer is the same as the
taxpayer faced prior to enactment of the
Act. This is shown by comparing the
Total Tax Benefit under column A
under Proposed Rule with the
corresponding value in column A under
Prior Law for Example 1 in Table 1.
c. Comparison of Contributions to
Different Organizations and Proposed
Rule
Under the baseline and the proposed
rule, for a taxpayer with state and local
taxes paid over the SALT cap, the value
of a contribution to charity B, that is a
contribution that results in a one-for-one
state income tax deduction and not a
state tax credit, is slightly higher than it
was pre-Act. This increase is because
the state deduction does not reduce the
federal deduction for state and local
taxes for a taxpayer above the SALT cap.
As shown in the Total Tax Benefit row
under the B columns for Example 1,
under the baseline and the proposed
rule, the value of a $1,000 contribution
to charity B is $290—the charitable
contribution deduction from federal tax
($1,000 times the 24 percent federal tax
rate, or $240), plus the value of the
deduction from state tax ($1,000 times
the 5 percent state tax rate, or $50)—
compared to $278 for contributions
under prior law (described above). By
comparison, as shown in the Total Tax
Benefit row under the A columns for
Example 1, a contribution to charity A,
eligible for a state tax credit, yields a
$1,240 tax benefit under the baseline
and a $1,000 benefit under the proposed
rule.
E:\FR\FM\27AUP1.SGM
27AUP1
43568
Federal Register / Vol. 83, No. 166 / Monday, August 27, 2018 / Proposed Rules
2. Example 2: Taxpayer Is Below the
SALT Cap and Not Subject to the AMT
a. Baseline
If a taxpayer that has state and local
taxes paid below the SALT cap and is
not subject to the AMT makes the
$1,000 contribution to charity A, the
deduction for charitable contributions
under section 170(a) increases by
$1,000, and the deduction for state and
local taxes paid under section 164
decreases by $1,000. The taxpayer’s
itemized deductions, taxable income,
and federal tax liability are unchanged
from what they would be in the absence
of the contribution. The taxpayer’s state
tax liability decreases by $1,000 because
of the state tax credit. The combined
federal and state tax benefits of the
$1,000 contribution are therefore
$1,000, and the cost to the taxpayer and
to the federal government of making the
contribution was $0. This situation is
identical to prior law or what taxpayers
faced prior to enactment of the Act. This
is shown is column A under Baseline
and Prior Law for Example 2 in Table
1.
amozie on DSK3GDR082PROD with PROPOSALS1
b. Proposed Rule
If the same taxpayer makes the $1,000
contribution to charity A under the
proposed rule, the entire $1,000
contribution is not deductible under
section 170(a), but the deduction for
state and local taxes paid under section
164 still decreases by $1,000 because of
the $1,000 state tax credit. If the
taxpayer is in the 24 percent bracket, the
federal tax liability will increase by
$240. The taxpayer’s state tax liability
decreases by the $1,000 state tax credit.
The combined federal and state tax
benefits of the $1,000 contribution are
therefore $760, or $240 less than the
baseline. This is shown by comparing
the Total Tax Benefit in column A
under Proposed Rule with the
corresponding value in column A under
Baseline for Example 2. In this case, the
proposed rule has the effect of
increasing the taxpayer’s federal taxable
income compared to the baseline if the
taxpayer makes a contribution to charity
A.
c. Comparison of Contributions to
Different Organizations, Under Prior
Law, Baseline, and Proposed Rule
Under prior law, and both the
baseline scenario and the proposed rule,
the tax benefit of charitable
contributions to charity B, which are not
eligible for a state tax credit but are
deductible from both federal and state
taxable income, is unchanged from prior
law for taxpayers below the SALT cap.
Thus, in this example, the benefit of
VerDate Sep<11>2014
17:27 Aug 24, 2018
Jkt 244001
making a contribution to charity B
remains $278, as described above for
contributions under prior law. This is
shown in the Total Tax Benefit row
under the B columns for Example 2. By
comparison, as shown in the Total Tax
Benefit row under the A columns for
Example 2, a $1,000 contribution to
charity A, eligible for a state tax credit,
yields a $1,000 tax benefit under the
baseline and a $760 benefit under the
proposed rule.
3. Example 3: Taxpayer is Subject to the
AMT 5
a. Baseline
If a taxpayer subject to the AMT
makes a $1,000 contribution to charity
A, the contribution reduces the
taxpayer’s taxable income under the
AMT by $1,000. Under an AMT
marginal tax rate of 26 percent, the
federal tax benefit of this $1,000
contribution is $260. Because of the
dollar-for-dollar state tax credit, the
taxpayer would receive a combined
federal and state tax benefit of $1,260
for a $1,000 contribution, or a $260 net
benefit. This result is identical to the
result under prior law (prior to
enactment of the Act). This is shown in
the A columns under Baseline and Prior
Law for Example 3 in Table 1.
b. Proposed Rule
If the same taxpayer makes the $1,000
contribution to charity A under the
proposed rule, the entire $1,000 is not
deductible under section 170(a).
Therefore, the taxpayer’s taxable income
and federal tax liability under the AMT
would be unchanged from what they
would be in the absence of the
contribution. The taxpayer’s state tax
liability decreases by $1,000 because of
the state tax credit. The combined
federal and state tax benefits of the
$1,000 contribution are therefore
$1,000, or $260 less than under the
baseline and under the law prior to
enactment of the Act. This is shown by
comparing the A columns of Example 3
in Table 1. However, under the
proposed rule, taxpayers subject to the
AMT are in the same position as
taxpayers with state and local taxes paid
above the SALT cap who are not subject
to the AMT. This is shown by
comparing the Total Tax Benefit amount
under column A for the Proposed Rule
for Example 3 to that for Example 1.
5 The Act increased the amount of income exempt
from AMT. We estimate that only about 150,000
taxpayers will be subject to the AMT under the Act,
compared to more than 4 million under prior law.
PO 00000
Frm 00010
Fmt 4702
Sfmt 4702
c. Comparison of Contributions to
Different Organizations, Under Prior
Law, Baseline and Proposed Rule
Under the baseline and the proposed
rule, the treatment of charitable
contributions that are deductible from
both federal and state taxable income is
unchanged from prior law for taxpayers
subject to the AMT. This is shown in
the B columns for Example 3 in Table
1. In this example, the benefit of making
a contribution to charity B remains
$310, as described above for
contributions under prior law. By
comparison, a contribution to a charity
A, eligible for a state tax credit, yields
a $1,260 tax benefit under the baseline
and a $1,000 benefit under the proposed
rule. This is shown in column A under
Baseline and Proposed Rule for Example
3 in Table 1.
IV. Expected Benefits and Costs
A. Benefits
These proposed regulations likely
reduce economically inefficient choices
motivated by the potential tax benefits
described above if these proposed
regulations were not promulgated.
Under the prior law and baseline
scenarios, state and local governments
have an incentive to fund governmental
activities through independent entities
that are eligible to receive deductible
contributions and to establish tax
credits. This incentive is particularly
strong under a SALT cap scenario where
state and local governments may do so
solely to enable some taxpayers to
circumvent the SALT cap. These
proposed regulations substantially
diminish this incentive to engage in
socially wasteful tax-avoidance
behavior. As a result, it is expected that
fewer such credit programs would be
established in the future under the
proposed regulations than under the
baseline.
To the extent this result occurs, the
Treasury Department and IRS estimate
that the proposed regulations would
reduce overall complexity and
paperwork burden for states and for
taxpayers who would otherwise engage
in charitable contributions solely for the
purpose of reducing their state and local
tax liability. In addition to reducing
paperwork burden, the Treasury
Department and IRS anticipate that the
proposed regulations will also spare
some taxpayers compliance costs
associated with complex tax planning
designed to avoid the SALT cap.
In addition, these proposed
regulations are expected to make the
federal tax system more neutral to
taxpayers’ decisions regarding
donations. Under the baseline scenarios,
E:\FR\FM\27AUP1.SGM
27AUP1
43569
Federal Register / Vol. 83, No. 166 / Monday, August 27, 2018 / Proposed Rules
the combined federal and state tax
benefits favor contributions to
organizations which give rise to a state
tax credit for taxpayers, particularly for
taxpayers above the SALT cap. Under
the proposed regulations, this economic
distortion is expected to be reduced.
The Treasury Department and the IRS
request comments from the public on
the potential extent of this expected
reduction in economic distortion.
Finally, these proposed regulations
provide more certainty to taxpayers by
clarifying the rules governing the
amount that they can claim as a
charitable contribution deduction when
they receive a state tax credit or a dollarfor-dollar state tax deduction in
exchange for the contribution.
B. Costs
The proposed regulations may result
in some increase in compliance costs for
taxpayers who make contributions that
generate state tax credits. Under the
baseline, for purposes of the charitable
contribution deduction under section
170(a), taxpayers did not need to
address state tax credits received for
purposes of claiming a charitable
contribution; however, they would
know the amount of credits received as
part of the filing process for state
returns. In contrast, under the proposed
regulations, taxpayers making a
contribution to an organization listed in
section 170(c) will need to determine
the amount of any state tax credits they
will receive or expect to receive in order
to reduce their charitable contribution
deduction under section 170(a). This
additional step will generate some
additional compliance costs.
The compliance burden for recipient
organizations that directly issue tax
credits may increase under the proposed
regulations. In order to take a charitable
contribution deduction of $250 or more,
a taxpayer must have a
contemporaneous written
acknowledgment (CWA) from the donee
entity, usually provided in the form of
a letter. The CWA includes the amount
received by the entity or a description
of property received. The CWA must
also disclose whether the donee
provided any goods or services in
consideration for the contribution and a
description and good faith estimate of
the value of those goods or services
provided. State and local tax credits are
not generally provided by the donee
entity, but there may be situations in
which the entity would be providing the
credit and would need to include it in
the CWA provided to the donor. The
Treasury Department and the IRS
request comments on whether
additional guidance is needed on
substantiation and reporting
requirements for donors and donees
making or receiving payments or
transfers of property in return for state
and local tax credits and the extent to
which entities do provide tax credits
under certain circumstances.
The Treasury Department and the IRS
request comments on other potential
compliance savings, compliance costs,
costs related to increased tax planning
and other avoidance behavior, or any
effects on charitable contribution
decisions that may occur as a result of
these proposed regulations. In
particular, the Treasury Department and
the IRS request comments as to how the
proposed regulations might alter
incentives regarding contributions to
state and local tax credit programs.
Based on an analysis of confidential
taxpayer return data and forecasts using
that data, the Treasury Department and
the IRS note that these proposed
regulations will leave charitable giving
incentives entirely unchanged for the
vast majority of taxpayers. After passage
of the Act, which significantly increased
the standard deduction, it is estimated
that ninety percent of taxpayers will not
claim itemized deductions of any kind.
Those taxpayers are entirely unaffected
by these proposed regulations. It is
estimated that approximately five
percent of taxpayers will itemize and
will have state and local income tax
deductions above the SALT cap; these
taxpayers will receive the same federal
tax benefits under the proposed
regulations as they received prior to the
Act. See Example 1 above. It is
estimated that approximately five
percent of taxpayers will itemize but
will not have state and local income tax
deductions above the SALT cap. The
federal tax benefits available to this
fraction of taxpayers could be affected
by the proposed regulations only if they
contribute to programs that entitle them
to state tax credits of greater than 15
percent. See Example 2 above. The
Treasury Department and the IRS
believe that most taxpayers in this third
category have never used any state tax
credit programs affected by the
proposed regulations, and that the
proposed regulations will have at most
a highly limited, marginal effect on
taxpayer decisions to donate to tax
credit programs that pre-date TCJA,
including educational scholarship
programs.6 The Treasury Department
and the IRS request comments on this
important consideration and any
potential unintended consequences of
the proposed regulations not addressed
here.
TABLE 1—TAX TREATMENT OF $1,000 CONTRIBUTION TO (A) ORGANIZATION THAT GIVES RISE TO $1,000 STATE TAX
CREDIT AND (B) ORGANIZATION FOR WHICH CONTRIBUTION IS DEDUCTIBLE AT THE STATE LEVEL
Prior law
Baseline
Proposed rule
Change in
A
B
A
B
A
B
amozie on DSK3GDR082PROD with PROPOSALS1
Example 1: Taxpayer Above the SALT Cap, Not Subject to the AMT
State Income Tax Liability ...............................................
Federal Income Tax:
Charitable Contribution Deduction ............................
Deduction for State and Local Taxes .......................
Itemized Deductions .................................................
Taxable Income ........................................................
Federal Tax Liability .........................................................
Total Tax Benefit (Federal + State) .................................
Net Cost to Taxpayer of $1,000 Contribution ..................
6 The Treasury Department and the IRS are aware
of potential concerns about educational scholarship
programs in particular. Based on projections for
VerDate Sep<11>2014
17:27 Aug 24, 2018
Jkt 244001
¥1,000
¥50
¥1,000
¥50
¥1,000
¥50
1,000
¥1,000
0
0
0
1,000
0
1,000
¥50
950
¥950
¥228
278
722
1,000
0
1,000
¥1,000
¥240
1,240
¥240
1,000
0
1,000
¥1,000
¥240
290
710
0
0
0
0
0
1,000
0
1,000
0
1,000
¥1,000
¥240
290
710
2018, most taxpayers in the third category described
above do not reside in states that offer educational
scholarship tax credit programs affected by the
PO 00000
Frm 00011
Fmt 4702
Sfmt 4702
proposed regulations, and the vast majority of them
have never used such programs.
E:\FR\FM\27AUP1.SGM
27AUP1
43570
Federal Register / Vol. 83, No. 166 / Monday, August 27, 2018 / Proposed Rules
TABLE 1—TAX TREATMENT OF $1,000 CONTRIBUTION TO (A) ORGANIZATION THAT GIVES RISE TO $1,000 STATE TAX
CREDIT AND (B) ORGANIZATION FOR WHICH CONTRIBUTION IS DEDUCTIBLE AT THE STATE LEVEL—Continued
Prior law
Baseline
Proposed rule
Change in
A
B
A
B
A
B
Example 2: Taxpayer Below the SALT Cap, Not Subject to the AMT
State Income Tax Liability ...............................................
Federal Income Tax:
Charitable Contribution Deduction ............................
Deduction for State and Local Taxes .......................
Itemized Deductions .................................................
Taxable Income ........................................................
Federal Tax Liability .........................................................
Total Tax Benefit (Federal + State) .................................
Net Cost to Taxpayer of $1,000 Contribution ..................
¥1,000
¥50
¥1,000
¥50
¥1,000
¥50
1,000
¥1,000
0
0
0
1,000
0
1,000
¥50
950
¥950
¥228
278
722
1,000
¥1,000
0
0
0
1,000
0
1,000
¥50
950
¥950
¥228
278
722
0
¥1,000
¥1,000
1,000
240
760
240
1,000
¥50
950
¥950
¥228
278
722
Example 3: Taxpayer Subject to the AMT
State Income Tax Liability ...............................................
Federal Income Tax:
Alternative minimum taxable Income .......................
Federal Tax Liability .........................................................
Total Tax Benefit (Federal + State) .................................
Net Cost to Taxpayer of $1,000 Contribution ..................
¥1,000
¥50
¥1,000
¥50
¥1,000
¥50
¥1,000
¥260
1,260
¥260
¥1,000
¥260
310
690
¥1,000
¥260
1,260
¥260
¥1,000
¥260
310
690
0
0
1,000
0
¥1,000
¥260
310
690
Assumptions: The taxpayer itemizes deductions and has more than $1,000 of state tax liability. Under prior law, the taxpayer is not subject to
the overall limitation on itemized deductions under section 68. The taxpayer faces a 24 percent marginal rate under the federal income tax. If the
taxpayer is subject to the AMT, the taxpayer faces a 26 percent marginal rate. A $1,000 contribution to charitable organization A generates a
$1,000 state tax credit. A $1,000 contribution to charitable organization B is ineligible for a state tax credit but is deductible under the state’s income tax. The taxpayer faces a 5 percent marginal rate under the state’s income tax. The baseline assumes continuation of the IRS administrative position that state and local tax credits are not reflected as a return benefit or consideration and therefore do not reduce the taxpayer’s charitable contribution deduction under section 170(a). Total Tax Benefit refers to the absolute value of the reduction of the taxpayer’s combined federal and state tax liability.
amozie on DSK3GDR082PROD with PROPOSALS1
Regulatory Flexibility Act
The Regulatory Flexibility Act (5
U.S.C. chapter 6) does not apply
because the proposed regulations
primarily affect individuals and do not
impose costs, including a collection of
information, on small entities.
Therefore, a regulatory flexibility
analysis is not required. Pursuant to
section 7805(f), this notice of proposed
rulemaking will be submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment
on its impact on small businesses.
Comments and Public Hearing
Before the regulations proposed
herein are adopted as final regulations,
consideration will be given to any
electronic and written comments that
are submitted timely to the IRS as
prescribed in this preamble under the
ADDRESSES heading. The Treasury
Department and the IRS request
comments on all aspects of the proposed
regulations including: (1) Whether there
should be recognition of gain or loss
when property is transferred in
consideration for state or local tax
credits that are not de minimis; (2)
determination of the basis of a
transferable tax credit that a taxpayer
sells or exchanges; (3) procedures by
which a taxpayer may establish that the
taxpayer declined receipt of the state or
VerDate Sep<11>2014
17:27 Aug 24, 2018
Jkt 244001
local tax credit; (4) substantiation and
reporting requirements for donors and
donees making or receiving payments or
transfers of property in return for state
and local tax credits; (5) for a taxpayer
that receives or expects to receive a state
or local tax deduction in an amount that
exceeds the amount of the taxpayer’s
payment or the fair market value of the
property transferred to an entity listed
in section 170(c), suggestions for
calculating the reduction to the
charitable contribution deduction; and
(6) whether and in what manner the
regulations should address other state or
local tax benefits, such as tax
exclusions, that may be provided as
consideration for certain payments or
transfers to an entity listed in section
170(c). Finally, the Treasury Department
and the IRS request comments on
alternative regulatory approaches that
would effectively prevent
circumvention of the new statutory
limitation on state and local tax
deductions, consistent with applicable
law.
All comments submitted will be made
available at www.regulations.gov or
upon request. A public hearing has been
scheduled for November 5, 2018,
beginning at 10 a.m. in the Auditorium
of the Internal Revenue Building, 1111
Constitution Avenue NW, Washington,
DC 20224. Due to building security
PO 00000
Frm 00012
Fmt 4702
Sfmt 4702
procedures, visitors must enter at the
Constitution Avenue entrance. In
addition, all visitors must present photo
identification to enter the building.
Because of access restrictions, visitors
will not be admitted beyond the
immediate entrance area more than 30
minutes before the hearing starts. For
more information about having your
name placed on the building access list
to attend the hearing, see the FOR
FURTHER INFORMATION CONTACT section of
this preamble.
The rules of 26 CFR 601.601(a)(3)
apply to the hearing. Persons who wish
to present oral comments at the hearing
must submit an outline of the topics to
be discussed and the time to be devoted
to each topic by October 11, 2018.
Submit a signed paper or electronic
copy of the outline as prescribed in this
preamble under the ADDRESSES heading.
An agenda showing the scheduling of
the speakers will be prepared after the
deadline for receiving outlines has
passed. Copies of the agenda will be
available free of charge at the hearing.
Drafting Information
The principal authors of these
proposed regulations are personnel from
the Office of the Associate Chief
Counsel (Income Tax and Accounting).
However, other personnel from the IRS
E:\FR\FM\27AUP1.SGM
27AUP1
Federal Register / Vol. 83, No. 166 / Monday, August 27, 2018 / Proposed Rules
and the Treasury Department
participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and
recordkeeping requirements.
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is
proposed to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation
for part 1 continues to read in part as
follows:
■
Authority: 26 U.S.C. 7805 * * *
■ Par. 2. Section 1.170A–1 is amended
by redesignating paragraphs (h)(3)
through (h)(5) as paragraphs (h)(4)
through (h)(6), and adding a new
paragraph (h)(3) to read as follows:
§ 1.170A–1 Charitable, etc., contributions
and gifts; allowance of deduction.
amozie on DSK3GDR082PROD with PROPOSALS1
*
*
*
*
*
(h) * * *
(3) Payments resulting in state or local
tax benefits. (i) State or local tax credits.
Except as provided in paragraph
(h)(3)(v) of this section, if a taxpayer
makes a payment or transfers property
to or for the use of an entity listed in
section 170(c), the amount of the
taxpayer’s charitable contribution
deduction under section 170(a) is
reduced by the amount of any state or
local tax credit that the taxpayer
receives or expects to receive in
consideration for the taxpayer’s
payment or transfer.
(ii) State or local tax deductions. (A)
In general. If a taxpayer makes a
payment or transfers property to or for
the use of an entity listed in section
170(c), and the taxpayer receives or
expects to receive a state or local tax
deduction that does not exceed the
amount of the taxpayer’s payment or the
fair market value of the property
transferred by the taxpayer to such
entity, the taxpayer is not required to
reduce its charitable contribution
deduction under section 170(a) on
account of such state or local tax
deduction.
(B) Excess state or local tax
deductions. If the taxpayer receives or
expects to receive a state or local tax
deduction that exceeds the amount of
the taxpayer’s payment or the fair
market value of the property transferred,
the taxpayer’s charitable contribution
deduction under section 170 is reduced.
(iii) In consideration for. For purposes
of paragraph (h)(3)(i) of this section, the
term in consideration for shall have the
meaning set forth in § 1.170A–13(f)(6),
VerDate Sep<11>2014
17:27 Aug 24, 2018
Jkt 244001
except that the state or local tax credit
need not be provided by the donee
organization.
(iv) Amount of reduction. For
purposes of paragraph (h)(3)(i) of this
section, the amount of any state or local
tax credit is the maximum credit
allowable that corresponds to the
amount of the taxpayer’s payment or
transfer to the entity listed in section
170(c).
(v) State or local tax. For purposes of
paragraph (h)(3) of this section, the term
state or local tax means a tax imposed
by a State, a possession of the United
States, or by a political subdivision of
any of the foregoing, or by the District
of Columbia.
(vi) Exception. Paragraph (h)(3)(i) of
this section shall not apply to any
payment or transfer of property if the
amount of the state or local tax credit
received or expected to be received by
the taxpayer does not exceed 15 percent
of the taxpayer’s payment, or 15 percent
of the fair market value of the property
transferred by the taxpayer.
(vii) Examples. The following
examples illustrate the provisions of
this paragraph (h)(3). The examples in
paragraph (h)(6) of this section are not
illustrative for purposes of this
paragraph (h)(3).
Example 1. A, an individual, makes a
payment of $1,000 to X, an entity listed in
section 170(c). In exchange for the payment,
A receives or expects to receive a state tax
credit of 70% of the amount of A’s payment
to X. Under paragraph (h)(3)(i) of this section,
A’s charitable contribution deduction is
reduced by $700 (70% × $1,000). This
reduction occurs regardless of whether A is
able to claim the state tax credit in that year.
Thus, A’s charitable contribution deduction
for the $1,000 payment to X may not exceed
$300.
Example 2. B, an individual, transfers a
painting to Y, an entity listed in section
170(c). At the time of the transfer, the
painting has a fair market value of $100,000.
In exchange for the painting, B receives or
expects to receive a state tax credit equal to
10% of the fair market value of the painting.
Under paragraph (h)(3)(vi) of this section, B
is not required to apply the general rule of
paragraph (h)(3)(i) of this section because the
amount of the tax credit received or expected
to be received by B does not exceed 15% of
the fair market value of the property
transferred to Y. Accordingly, the amount of
B’s charitable contribution deduction for the
transfer of the painting is not reduced under
paragraph (h)(3)(i) of this section.
Example 3. C, an individual, makes a
payment of $1,000 to Z, an entity listed in
section 170(c). In exchange for the payment,
under state M law, C is entitled to receive a
state tax deduction equal to the amount paid
by C to Z. Under paragraph (h)(3)(ii)(A) of
this section, C is not required to reduce its
charitable contribution deduction under
section 170(a) on account of the state tax
deduction.
PO 00000
Frm 00013
Fmt 4702
Sfmt 4702
43571
(viii) Effective/applicability date. This
paragraph (h)(3) applies to amounts
paid or property transferred by a
taxpayer after August 27, 2018.
*
*
*
*
*
§ 1.170A–13
[Amended]
Par. 3. Section 1.170A–13(f)(7) is
amended by removing the crossreference ‘‘§ 1.170A–1(h)(4)’’ and adding
in its place ‘‘§ 1.170A–1(h)(5)’’.
■ Par. 4. Section 1.642(c)–3 is amended
by adding paragraph (g) to read as
follows:
■
§ 1.642(c)–3 Adjustments and other
special rules for determining unlimited
charitable contributions deduction.
*
*
*
*
*
(g) Payments resulting in state or local
tax benefits—(1) In general. If the trust
or decedent’s estate makes a payment of
gross income for a purpose specified in
section 170(c), and the trust or
decedent’s estate receives or expects to
receive a state or local tax benefit in
consideration for such payment,
§ 1.170A–1(h)(3) applies in determining
the charitable contribution deduction
under section 642(c).
(2) Effective/applicability date.
Paragraph (g)(1) of this section applies
to payments of gross income after
August 27, 2018.
Kristen Wielobob,
Deputy Commissioner for Services and
Enforcement.
[FR Doc. 2018–18377 Filed 8–23–18; 4:15 pm]
BILLING CODE 4830–01–P
ENVIRONMENTAL PROTECTION
AGENCY
40 CFR Part 52
[EPA–R03–OAR–2017–0598; FRL–9982–
85—Region 3]
Approval and Promulgation of Air
Quality Implementation Plans;
Maryland; Regional Haze Five-Year
Progress Report
Environmental Protection
Agency (EPA).
ACTION: Proposed rule.
AGENCY:
SUMMARY: The Environmental Protection
Agency (EPA) is proposing to approve a
state implementation plan (SIP) revision
submitted by the State of Maryland.
Maryland’s SIP revision, the Regional
Haze Five-Year Progress Report,
addresses Clean Air Act (CAA)
provisions that require the State to
submit periodic reports addressing
reasonable progress goals (RPGs)
established for regional haze and to
make a determination of the adequacy of
E:\FR\FM\27AUP1.SGM
27AUP1