Anti-SALT Workaround Regs Survive Loper Bright, Government Argues
I told you last fall that New York, New Jersey and Connecticut were appealing from a judgment denying their request that the Treasury Regulations 1.170A-1(h)(3) be declared invalid. Those regulations shut down the SALT workarounds various states enacted after the TCJA limited state and local deductions to $10,000. The States filed their action before Loper Bright overturned Chevron deference, but the appeal will obviously be decided in the aftermath and that gives the States better chances than they had before Loper Bright. The Government’s brief addresses the impact of Loper Bright, predictably asserting that the regulation survives nevertheless. Late last fall, Trump suggested that he was considering lifting the CAP on SALT deductions so the case might be rendered moot before the Second Circuit rules on the appeal.
Last week the Government filed its Reply Brief. You can read the States’ initial brief through the prior post.
SUMMARY OF ARGUMENT
The Court should affirm the district court’s judgments. To begin with, the district court lacked jurisdiction because this lawsuit is barred by the Anti-Injunction Act. That Act broadly prohibits actions, like this one, that seek to restrain the government from assessing and collecting taxes; instead, it generally requires that to challenge a tax law, a taxpayer must pay the tax then sue for a refund. By attempting to enjoin the government from applying the Regulation, which will increase tax collection, plaintiffs are doing what the AIA forbids. While the district court held that the exception to the AIA created in Regan applies here, that exception should be narrowly construed and limited to constitutional cases. See infra Point I.
On the merits, the Regulation should be upheld, as the Regulation’s interpretation is the best reading of IRC § 170. That statute defines a deductible “charitable contribution” as a “contribution or gift,” and the plain meaning of that phrase requires that no compensation be received in return. Both the IRS and the Supreme Court have accordingly recognized that payments that are part of a quid pro quo exchange are not deductible; thus the value of a benefit received in return for a payment must be subtracted from the deductible amount. The Regulation applies that principle to state tax credits that are received in return for a payment to a charitable entity. Its rule thus not only applies longstanding law, but furthers Congress’s purpose in allowing charitable contribution deductions, namely, to encourage gratuitous, altruistic giving to charities. And the Regulation properly treats state tax credits as return benefits in a quid pro quo. While some tax incentives have long been allowed with no reduction in the deductible amount, the Regulation continues to permit more limited tax benefits, primarily deductions on state tax returns, while treating the far larger and more easily calculable benefit received from a state tax credit as a quid pro quo.
If there is doubt about the meaning of §170, the Court should respect the IRS’s interpretation. Although Chevron has been overruled, agency experience and expertise may still inform courts’ reading of a statute—particularly the IRC, because, as the Supreme Court has stated, Congress has granted the IRS broad interpretive authority. And Congress has specifically granted the IRS authority, in §170 itself, to decide when charitable contributions are allowable as deductions. The Regulation falls within the scope of the IRS’s authority to address the changed circumstances resulting from the SALT deduction cap and the states’ implementation of workaround funds. While the Regulation abandons the position taken in the 2010 CCA, that document was nonprecedential by statute, and the Regulation explains why the IRS has departed from its conclusions: the 2010 CCA was never persuasive, and it rested on assumptions that are no longer true after the enactment of the SALT deduction cap.
Nor is the Regulation arbitrary and capricious: the Regulation survives the APA’s deferential review. The IRS properly considered all relevant factors, including that the workaround funds will cause revenue loss to the federal government by bypassing the SALT deduction cap, which was a revenue-raising enactment. And the Regulation reasonably distinguishes state tax credits from other tax benefits like state and federal tax deductions, as the latter have more limited value to the taxpayer, and thus cause more limited revenue loss for the government and are less likely to be used to circumvent the SALT deduction cap. The value of a deduction is also more variable, and harder to calculate, than the value of a tax credit. Additionally, the Regulation reasonably excepted small tax credits, those worth 15% or less of the donation, from its requirement, on the ground that a credit of that size has approximately the same value as a tax incentive in the form of a state tax deduction. See infra Point II.C.
The district court’s judgments should be affirmed.
darryll k. jones