TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Monday, January 8, 2018

8 Tax Profs: Full Deduction For Charitable Contributions Resulting In State Tax Credit

Joseph Bankman (Stanford), David Gamage (Indiana), Jacob Goldin (Stanford), Daniel Hemel (Chicago), Darien Shanske (UC-Davis), Kirk Stark (UCLA), Dennis Ventry (UC-Davis) & Manoj Viswanathan (UC-Hastings), Federal Income Tax Treatment of Charitable Contributions Entitling the Donor to a State Tax Credit:

This paper summarizes the current federal income tax treatment of charitable contributions where the gift entitles the donor to a state tax credit. Such credits are very common and are used by the states to encourage private donations to a wide range of activities, including natural resource preservation through conservation easements, private school tuition scholarship programs, financial aid for college-bound children from low-income households, shelters for victims of domestic violence, and numerous other state-supported programs. Under these programs, taxpayers receive tax credits for donations to governments, government-created funds, and nonprofits.

A central federal income tax question raised by these donations is whether the donor must reduce the amount of the charitable contribution deduction claimed on her federal income tax return by the value of state tax benefits generated by the gift. Under current law, expressed through both court opinions and rulings from the Internal Revenue Service, the amount of the donor’s charitable contribution deduction is not reduced by the value of state tax benefits. The effect of this "Full Deduction Rule" is that a taxpayer can reduce her state tax liability by making a charitable contribution that is deductible on her federal income tax return. 

In a tax system where both charitable contributions and state/local taxes are deductible, the ability to reduce state tax liabilities via charitable contributions confers no particular federal tax advantage. However, in a tax system where charitable contributions are deductible but state/local taxes are not, it may be possible for states to provide their residents a means of preserving the effects of a state/local tax deduction, at least in part, by granting a charitable tax credit for federally deductible gifts, including gifts to the state or one of its political subdivisions. In light of recent federal legislation further limiting the deductibility of state and local taxes, states may expand their use of charitable tax credits in this manner, focusing new attention on the legal underpinnings of the Full Deduction Rule. 

The Full Deduction Rule has been applied to credits that completely offset the pre-tax cost of the contribution. In most cases, however, the state credits offset less than 100% of the cost. We believe that, at least in this latter and more typical set of cases, the Full Deduction Rule represents a correct and long-standing trans-substantive principle of federal tax law. According to judicial and administrative pronouncements issued over several decades, nonrefundable state tax credits are treated as a reduction or potential reduction of the credit recipient’s state tax liability rather than as a receipt of money, property, contribution to capital, or other item of gross income. The Full Deduction Rule is also supported by a host of policy considerations, including federal respect for state initiatives and allocation of tax liabilities, and near-insuperable administrative burdens posed by alternative rules.

The combination of precedent and policy justifications suggests that the Full Deduction Rule should survive administrative and judicial challenge. We believe that changes to the Full Deduction Rule would require legislation. We also caution Congress that a legislative override of the Full Deduction Rule would raise significant administrability concerns and would implicate important federalism values. Congress should tread carefully if it seeks to alter the Full Deduction Rule by statute.

Scholarship, Tax, Tax Policy in the Trump Administration | Permalink


This is a plain effort to defeat the intent of the legislation and should not be permitted. It's sad to see tax scholars used in this way.

Posted by: mike livingston | Jan 9, 2018 2:35:16 AM

@mike livingston. Should not be permitted by whom? It is already permitted in some states. Isn't that the definition of a tax loophole? Figuring out a way to subvert the intent of legislation by using the actual language of the legislation? If this succeeds, Congress can go ahead and write new legislation to subvert the subverters.

Posted by: Oliver Buckley | Jan 10, 2018 6:31:35 AM

@Oliver I'm hiring you next time I have a tax problem!

Posted by: mike livingston | Jan 11, 2018 4:26:11 AM

I think the scholarly analysis and conclusion above is plainly correct, but it does not necessarily apply to contributions made to a state. It is black letter law that a taxpayer’s deduction for a contribution to an exempt entity must be reduced by the value of any consideration received by the taxpayer from that entity in exchange for such contribution. I cannot claim a deduction for a $10,000 contribution to a private school if as direct consequence of that contribution the school gives my child a $10,000 tuition credit or discount. There is no obvious reason to invent an exception to this principle for contributions to states.

Posted by: Mike Petrik | Jan 11, 2018 9:48:26 AM

Another item for the technical corrections bill. They eliminated the deduction for purchasing seat licenses.

Posted by: JC Garrison | Jan 11, 2018 9:49:40 AM