Grewal: The New SALT Regulations Need A Few More Sprinkles

Andy Grewal (Iowa), The New SALT Regulations Need a Few More Sprinkles, 36 Yale J. on Reg.: Notice & Comment (Aug. 24, 2018):

My article, The Charitable Contribution Strategy: An Ineffective SALT Substitute, 38 Virginia Tax. Rev. — (2018), argues that the charitable contribution strategy fails under existing law. The article acknowledges several different argumentative paths, but the best analysis characterizes the strategy in two parts. First, the taxpayer’s transfer to the state-controlled fund should be treated as an arm’s length exchange for state tax credits. And second, the state tax credits acquired on that exchange, when applied against the taxpayer’s tax liability, should give rise to tax payments that face the Section 164 deduction limits. See id. at Part II.C.b. The Article argues that the IRS should issue regulations adopting that two-part approach.

The IRS just issued proposed regulations on the charitable contribution strategy, and I was pleased to see that they are consistent with the first part of my analysis. That is, they treat a donation to a state-controlled fund as a quid pro quo transaction for state tax credits. See Prop. Reg. § 1.170A-1(h)(3), REG-112176-18. However, the regulations do not discuss the consequences associated with the later use of state tax credits. ...

Though the proposed regulations contain warts, the IRS should be commended for acting relatively quickly and responsibly to address troublesome state strategies. Additionally, though the IRS oftens skips notice and comment procedures and immediately imposes burdensome regulations on the public, the IRS acted here through proposed regulations. It should be commended for (gradually) observing the Administrative Procedure Act’s safeguards. One hopes that the IRS meaningfully responds to public comments and that the final regulations provide clear, consistent, and sound rules for taxpayers.