Chevron Deference and Tax Benefits as Quid Pro Quo

This summer the Supreme Court is expected to overturn the 40-year-old Chevron doctrine.  Yawn.  I’m part of the crowd that thinks the sky won’t fall whether it does or doesn’t.  Without having paid much attention, I might conclude that the push to overrule the doctrine is just another example of how we have turned into a society that embraces an extreme form of intellectual and moral relativism.  That only what I suits me and what I want is objectively true or morally correct.  And that analytics and expertise are nothing but tools of the deep state conspirators. 

Meanwhile, a federal district court in New York upheld Treasury Regulation 1.170A-1(h)(3)(i) against what might be labeled an anti-Chevron deference attack launched by New Jersey, New York, and Connecticut.  Without ever mentioning its impending demise, the Court in New_Jersey_v. Mnuchin concluded that the regulation reasonably interprets a statute that can be described as ambiguous, even if it might be susceptible to different interpretations.  And that as a result, the regulation is entitled to Chevron deference.

The regulation shuts down the “workaround” that some states condoned when Congress limited SALT deductions to $10,000.  Briefly put, those states provided a credit to taxpayers who made in-state charitable contributions. Contributions that were deductible on federal returns.  The SALT offset plus the federal deduction meant that taxpayers avoided in taxes what the SALT limitation effectively imposed.  I think.  Because I thought only the wealthiest of the wealthy could even take the charitable contribution deduction. 

The most interesting part of the discussion, one I haven’t quite wrapped my head around, is when the states argue that receipt of a tax benefit is not a “return benefit” thereby precluding a charitable contribution.  The Court addresses the argument because the states argue that the opposite conclusion is unreasonable and therefore should not be cloaked with Chevron deference. 

The regulation disallows the deduction based on the notion that a donor who receives a benefit from the charitable recipient does not actually make a contribution to the extent of the benefit’s fair market value.  So if I make a donation to a charity and I get tickets to a dinner, gala and a show, I have to reduce the amount of the deduction by the value of the shindig.  The catch with SALT credit is that the charity doesn’t provide the donor with a return benefit.  The state provides a tax benefit, yes, but so does the federal government when we make charitable contributions.  Taken to its logical extreme, according to the states, the federal tax benefit should also reduce the amount of contribution.  If it doesn’t, again according to the states, the SALT credit should also not preclude a charitable contribution deduction.  The argument actually has a sort of rubik’s cube logical appeal.  The Court rejected it anyway employing a slight of hand to conclude that the contribution was made to the “state and local tax credit program” rather than to a charity, motivated by a state and local tax credit. By that conception, the recipient provides a return benefit to the donor.    

Plaintiffs do not dispute the reasoning underlying the Government’s quid pro quo assertion. They instead complain that the IRS “selectively treats certain tax incentives as a disqualifying ‘benefit’ but completely ignores other tax incentives.” According to Plaintiffs, while federal deductions, state deductions, and state credits “may differ in specifics, the essential character of each incentive is the same: each provides a potential reduction of a donor’s tax obligation to reduce the true cost of that contribution in order to encourage charitable giving.”

According to Plaintiffs, if the federal charitable contribution deduction does not constitute a return benefit for a contribution, then a state or local tax benefit likewise cannot constitute a return benefit. (citing, inter alia, Browning v. Commissioner, 109 T.C. 303 , 325 (1997) (“None of the tax consequences enjoyed by [a charitable contribution] constitutes consideration.”); McLennan v. United States, 24 Cl. Ct. 102 , 106 n.8 (1991) (“[A] donation of property for the exclusive purpose of receiving a tax deduction does not vitiate the charitable nature of the contribution.”), aff’d, 994 F.2d 839 (Fed. Cir. 1993)) Plaintiffs further argue that “since tax credits do not represent [monetary] value for purposes of calculating gross income,” state tax credits “logically do not constitute a ‘return benefit’ under Section 170 .” ( Id. at 33-34 (citing Randall v. Loftsgaarden, 478 U.S. 647 , 657 (1986) (“The ‘receipt’ of tax deductions or credits is not itself a taxable event, for the [taxpayer] has received no money or other ‘income’ within the meaning of the Internal Revenue Code .”))

The Government reads IRC §170 differently. If a taxpayer receives a state or local tax credit in return for contributions to a state or local tax credit program, the tax credit is not treated as the basis for a federal income tax deduction, but instead as a benefit received from the state or municipality in exchange for the contribution to its tax credit program. In determining whether a contribution is a “charitable contribution” or a “quid pro quo,” the Second Circuit considers whether the benefit would “come from the recipient of the gift.” Scheidelman v. Commissioner, 682 F.3d 189 , 200 (2d Cir. 2012); see also Hernandez, 490 U.S. at 690-91 (examining the “external features of a transaction,” thereby “obviating the need for the IRS to conduct imprecise inquiries into the motivations of individual taxpayers”). For example, in Scheidelman , the court found that the charity did not give a donor any “goods or services, or benefit, or anything of value” in exchange for her cash donation, and therefore her donation “would not be a quid pro quo.” Scheidelman, 682 F.3d at 200 (internal quotation marks omitted). The Second Circuit rejected the argument that a federal tax deduction is a return benefit, because the benefit “derive[d]” from the “deductibility of the gift on [the donor’s] income taxes” would come from “elsewhere,” and not from the charity. Id. Here, of course, the opposite is true: the benefit — i.e., the tax credit — came from the recipient of the taxpayer’s contribution.

The Court concludes that it was reasonable for the IRS to find that “the [state or local tax] credit constitutes a return benefit” from the state or municipality “to the taxpayer,” “or [a] quid pro quo . . . reduc[ing] the taxpayer’s charitable contribution deduction.”

I am ok with the result if only because I generally don’t like workarounds without substantive difference.  I am just not sure if the outcome fits the “quid pro quo” rule if a federal tax benefit does not.