IRS could easily block state plan to increase tax deductions

Democratic state lawmakers’ interest in pursuing an unprecedented plan to minimize the hit that California’s high-income residents face because of the federal tax overhaul’s $10,000 cap on deductibility of state and local taxes may be losing momentum – undermined by strong warnings from Treasury Secretary Steven Mnuchin, who oversees the Internal Revenue Service, and by a new analysis that says the IRS could easily squelch the maneuver.

Senate President Pro Tem Kevin de Leon, D-Los Angeles, pictured, introduced Senate Bill 227 early this month. It would allow the estimated 6 million Californians who itemize their federal income taxes to effectively continue to write off state and local tax deductions in excess of $10,000 by allowing them to pay their state taxes to a state charitable foundation, the California Excellence Fund.

Tax experts note that states have long allowed tax deductions for charitable donations and say de Leon’s ploy is protected by the fact that tax laws are traditionally subject to stricter interpretation than most federal laws because of concerns that a rogue IRS could target individuals or companies it didn’t like.

Democratic lawmakers embraced de Leon’s proposal, saying the move would allow the 6 million state taxpayers who itemize deductions to save an average of more than $8,000 a year.

Washington Post: California shows how to take on Trump

But after Washington Post coverage of the legislation asserted it could create a “national boilerplate for skirting Trump tax changes,” the Trump administration took notice of what California was up to.

Politico reported that Mnuchin called the proposal in California and similar proposals in other high-tax states “ridiculous.” Mnuchin emphasized that the IRS was allowed to decide what qualifies as an IRS-recognized charity.

“Let me just say again from a Treasury standpoint and IRS, I don’t want to speculate on what people will do, but I think it’s one of the more ridiculous comments to think you can take a real estate tax that you are required to make and dress that up as a charitable contribution,” Mnuchin told reporters at the White House. He described the ploy as an obvious attempt by states “to evade the law.”

Mnuchin’s comments were backed up in a report by the Washington, D.C.-based Tax Foundation.

“This proposal, while interesting, is fairly obviously in violation of existing law and jurisprudence,” wrote veteran tax analyst Jared Walczak. “Just because the IRS has not consistently cracked down on some minor efforts here and there does not mean it would turn a blind eye to a concerted effort to contravene the tax code by providing a contribution in lieu of taxes program.”

Walczak warned state lawmakers that when it comes to de Leon’s Senate Bill 227, the IRS could readily thwart it under precedents that allow it to block deductions for charitable donations if the agency concluded there was no “charitable intent” to the donations.

Given that de Leon and other backers of the bill have openly described it as being designed to reduce Californians’ payments to the U.S. Treasury, lawyers defending the bill if it became law and was rejected by the IRS would face a difficult task: making a plausible case that a “charitable donation” that was undertaken with the goal of reducing an individual’s or family’s tax obligations meets the requirements set by the IRS for allowable charitable deductions.

The latest IRS overview of which deductions are allowed – Publication 526, released in 2016 under the Obama administration – doesn’t seem to allow such self-serving deductions.

It says that for a donation to qualify for a deduction, it must be “made without getting, or expecting to get, anything of equal value. … Qualified organizations include nonprofit groups that are religious, charitable, educational, scientific or literary in purpose, or that work to prevent cruelty to children or animals.”

5 comments

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  1. Terry
    Terry 24 January, 2018, 11:06

    Again communist CA believes the Constitution is to be ignored. US Govt is to be ignored. When will these communist be charged in Federal Court & hauled off to jail.

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  2. machiavelli
    machiavelli 24 January, 2018, 11:07

    deLeon will certainly get support for SB227, just as he gets additional support for the DMV bill, allowing illegals to get a driver’s license AND vote. Toss in California’s Constitutional Amendment 22, a piece of legislation that calls for a 7 percent surcharge on companies that have net earnings over $1 million, in addition to the current state corporate tax rate of 8.84 percent and deLeon will walk all over Senator Feinstein and replace her this November. His progressive base will love him as the rest of us pack up and exit the state.

    Reply this comment
  3. Dude
    Dude 24 January, 2018, 11:20

    Can you imagine the liberal uproar if a conservative news agency put out a story titled,”California shows how to take on Obama”. Hypocritical idiots.

    Reply this comment
  4. Anonymiss
    Anonymiss 24 January, 2018, 16:49

    “It says that for a donation to qualify for a deduction, it must be “made without getting, or expecting to get, anything of equal value. …”

    Wait a minute! If people knew that they wouldn’t be able to write off charitable donations, wouldn’t they think twice before making them?

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IRSKevin de LeonTax FoundationTaxesSteven Mnuchin

Chris Reed

Chris Reed

Chris Reed is a regular contributor to Cal Watchdog. Reed is an editorial writer for U-T San Diego. Before joining the U-T in July 2005, he was the opinion-page columns editor and wrote the featured weekly Unspin column for The Orange County Register. Reed was on the national board of the Association of Opinion Page Editors from 2003-2005. From 2000 to 2005, Reed made more than 100 appearances as a featured news analyst on Los Angeles-area National Public Radio affiliate KPCC-FM. From 1990 to 1998, Reed was an editor, metro columnist and film critic at the Inland Valley Daily Bulletin in Ontario. Reed has a political science degree from the University of Hawaii (Hilo campus), where he edited the student newspaper, the Vulcan News, his senior year. He is on Twitter: @chrisreed99.

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