STUMP » Articles » Taxing Tuesday: IRS Sends a Shot Across the Bow » 29 May 2018, 12:11

Where Stu & MP spout off about everything.

Taxing Tuesday: IRS Sends a Shot Across the Bow  


29 May 2018, 12:11

I laughed so hard when I saw this.

Yes, I find all sorts of things funny.


Not principal-based, but principles.

Short story: the life insurance industry and regulators (which are all state-based in the U.S.) were working on a new, complicated approach to statutory reserves, which can affect tax reserves (which is a huge aspect of how life insurers are taxed.) I remember a letter from the IRS when we got closer to finishing the project in which the IRS said NUH UH…because what we did got away from the philosophy of how insurance companies should be taxed.


At the time, I said: “DANG! They saw what we were doing!” and then I said “They really go back to first principles, don’t they?”

Well, guess what “clever states”. The IRS knows exactly what you’re trying to do.


The notice is here.

I will quote it in part: [it’s only two pages – you should read the whole thing]

Guidance on Certain Payments Made in Exchange for State and Local Tax Credits

NOTICE 2018-54

This notice informs taxpayers that the Department of the Treasury (Treasury Department) and the Internal Revenue Service (IRS) intend to propose regulations addressing the federal income tax treatment of certain payments made by taxpayers for which taxpayers receive a credit against their state and local taxes.


The Treasury Department and the IRS intend to propose regulations addressing the federal income tax treatment of transfers to funds controlled by state and local governments (or other state-specified transferees) that the transferor can treat in whole or in part as satisfying state and local tax obligations. The proposed regulations will make clear that the requirements of the Internal Revenue Code, informed by substance-over-form principles, govern the federal income tax treatment of such transfers. The proposed regulations will assist taxpayers in understanding the relationship between the federal charitable contribution deduction and the new statutory limitation on the deduction for state and local tax payments.

Yeah, they do go back to first principles.

And earlier in the notice:

Despite these state efforts to circumvent the new statutory limitation on state and local tax deductions, taxpayers should be mindful that federal law controls the proper characterization of payments for federal income tax purposes.


That was the sentence that made me laugh like a maniac.


Yeah, I live in New York. But this is so so sweet. And there’s not a damn thing the states can do about it.

States can’t change federal law. They certainly can’t change it by changing state law.


IRS to Issue Guidance Clarifying Viability of SALT Deduction Cap Workarounds

While the actual guidance remains forthcoming, this is clearly bad news for the charitable contributions in lieu of taxes approach, as the IRS has underscored in this notice that it is concerned with whether a payment is made in satisfaction of tax liability, and not whether it is recharacterized in some way. The impact on other workarounds, such as New York’s optional payroll tax swap or Connecticut’s entity-level tax swap, is not immediately clear, though both approaches could be at risk as well.

The IRS may well determine that when a company remits a voluntary payroll tax to obtain an offsetting tax credit against its employees’ individual income tax liability, that company is actually paying income taxes on behalf of its employees—which is perfectly legal, but which would not succeed in avoiding the cap. Moreover, federal definitions of individual income include pass-through income, casting doubt on the viability of entity-level tax swaps.

We have repeatedly counseled skepticism of SALT deduction cap avoidance measures, which represent legally dubious strategies in service of poor policy.

Yeah, they’re all professional and stuff.

I’m not.

Not on this matter, at any rate.

Instead of “repeatedly counseled skepticism” I would say “HA HA YOUR CLEVER IDEA WAS TOTALLY DUMBASS



Yeah, I blow raspberries over stupid tax tricks.

Tricks that were obviously not going to work.

Now, I was kind of hoping the IRS was going to hang these guys out to dry til tax-filing season next year, and then do the nonchalant: “Oh, you thought this would work?”


But the IRS is actually professional… at least, it is right now.

So I guess they were waiting for some actual legislation to pass (which it did), and decide that’s enough to go on.

In my story over life insurance tax reserves above, we were actually years away from it actually getting adopted when the IRS commented. But we were close to the final form that the new regulations would take. Also, these new approaches to reserves weren’t being done for tax reasons anyway, and it definitely wasn’t seen as a cleverness trick to reduce insurer taxes. It’s just that it’s easier when you don’t have to calculate tax reserves separately from everything else.

Guys, the lawyers who said: uh-huh, you could totally do that — those people had other brilliant ideas that also didn’t fly – like forcing the disclosure of Trump’s tax returns. You see how successful that was, eh?

JUST MAYBE you need to be realistic and see there is no way in hell your highly taxed residents are going to be able to escape the SALT cap. Yes, I know you’re going to the Supreme Court with this, but given the SALT cap could be 0 (and has been in the past, implicity), you’re not going to win with THAT’S NOT FAAAAAIR whining.


Via Megan McArdle at the Washington Post: Wealthy blue states are in for a tax headache

As an army of tax attorneys helpfully explained to me on Twitter last night, taxpayers who want to fight when the IRS disallows a deduction have two options. They can pay what the IRS says they owe and then demand a refund in district court. Or they can insist on paying only what they think the IRS is entitled to, and then go to tax court. Tax courts, as you might imagine, see a lot of weaselly people who are trying to cheat the IRS. They also have to handle crazy people who think the federal income tax is unconstitutional, even though we made a whole amendment about it and everything. They are jaded people, those who work in tax court. They level the gimlet eye on anyone who thinks they’ve found a new way to avoid taxes.

So if you want to fight this battle with the IRS personally, you can choose to spend a lot of money and go to district court, or somewhat less money and take your chances with a world-weary tax court judge. Just hope that the tax judge has eaten a particularly splendid breakfast and will be in a generous mood.

Either way, you’re going to spend even more money on a tax lawyer while you wait for a definitive ruling. Maybe, in time, you get most of that money back. Or maybe the appellate judges are just as skeptical as the IRS, and you’ve just spent a lot of money for no benefit. Wise taxpayers may well just decide to wait to attempt this particular bit of tax-jiu-jitsu until someone else has taken a test case through the courts.

The state-driven lawsuits (not individual cases in tax court) may not be decided before you have to file your 2018 tax returns. You want to risk it before there’s a definitive legal resolution to the foo-for-raw?

Now, you can say “they can’t get us all!”, but it’s one thing to claim having made a few hundred dollar donations here and there through the year (as I do), and another to claim you made a $10,000 donation to something. They’re going to want some proof… including who you donated to. In TurboTax, I enter the names of the organizations I donated to, including my church.

It will be really easy for the IRS to get a list of the names of these special state funds, and then do a search in tax returns for them.

It will be really easy for the IRS to filter on “charitable donations really spiked” to grab the tax returns that need extra special scrutiny.

You want to spin that roulette wheel?


New York Times: I.R.S. Warns States Not to Circumvent State and Local Tax Cap

Gov. Philip D. Murphy of New Jersey, a Democrat, said he was certain the state’s legislation was lawful and that the I.R.S. was putting politics over policy. He said the federal government’s policy on charitable deductions has become inconsistent, which could open it to legal challenges.

“For the federal government to permit certain states to allow for charitable deductions, but not others that are following the same principles, is unconscionable,” Mr. Murphy said. “I remain committed to fighting the SALT deduction tax cap and am confident that the solution signed into law can and should be embraced by the I.R.S.”

While the I.R.S. notice was intended to formally explain where the federal government stands on the issue, the ensuing fight might make the situation all the murkier.

Richard LaBarbiera, the mayor of Paramus, N.J., and one of the early supporters of New Jersey’s attempt to help taxpayers, said the I.R.S. notice could help states get clarity on what is allowed under the new law.

“The thing that I had reservations about was asking or offering this program to the residents with the uncertainty when they go file their taxes what the I.R.S. was going to say,” he said. “I’d rather see this decided in advance before we accept a single dollar.”

Yes, that’s a very good idea.

Carl Davis, the research director for the Institute on Taxation and Economic Policy in Washington, said that Alabama provides a 100 percent state tax credit for taxpayers who donate money to organizations that give children vouchers to attend private school. Under its new law, New York gives an 85 percent state tax credit to residents who donate to a state fund that supports education.

Treating Alabama taxpayers as compliant with I.R.S. law but New Yorkers as not would be largely indefensible, he said.

He has a good point there.

Daniel Rosen, a partner at the law firm Baker McKenzie, said that the I.R.S. is likely to face litigation to block its efforts.

“This notice was issued with the intention of dissuading taxpayers from making donations to state charitable contribution funds,” Mr. Rosen, who is a former lawyer for the I.R.S., said. “I would anticipate challenges to this notice fairly quickly.”

Well, duh, but it can be that the IRS says: “You know what? We were wrong about the Alabama thing.”

LA Times: IRS takes aim at California and other states trying to help residents avoid new tax-deduction limit

The Internal Revenue Service is preparing to block attempts by California and other states to help their residents avoid a new limit on the deductibility of state and local taxes included in the Republican tax overhaul.

The average state and local deduction taken by the 6.1 million California residents who filed for it in 2015 was $18,438, according to the Tax Policy Center. Only New York and Connecticut had a higher average deduction.

A bill from De León would give residents a dollar-for-dollar charitable tax credit for state income tax payments into a new California Excellence Fund, which would pay for state services.

Taxpayers would be able to deduct the contributions to the fund on their federal returns. There are no limits on charitable deductions.

The state Senate approved the legislation in January. A similar bill is pending in the Assembly and could be voted on in August, according to De Leon’s office.

The IRS already allows people to claim contributions for payments to more than 100 charitable programs in 33 states. Some of them fund state-supported activities such as public schools and college scholarship programs, said one of those experts, Kirk Stark, a UCLA law professor who has studied the issue.

He’s a professor. What has he actually argued in court?

Stark said Wednesday that it would be difficult for the IRS to draft regulations that allow those programs to continue while invalidating efforts like those of California and New York to use credits for state and local taxes.

Unless the IRS eliminates all such programs, he predicted their new rules “will be subject to rigorous litgation.”

Again, it could happen.


So, let’s check to see what the states are doing.

Crain’s Chicago: New version of Trump tax-cap workaround goes to lawmakers

A new version of legislation creating a way for taxpayers to work around the new $10,000 federal cap on state and local deductions has been introduced into the Illinois Senate. For a variety of reasons, it may stand a better chance of approval than the prior version.

Up for a hearing this evening in the Senate Revenue Committee is a revamped SALT proposal by Sen. Julia Morrison, D-Deerfield. An earlier version overwhelmingly passed the House but hit legal and political bumps in the Senate.

Under the new version, instead of paying taxes and losing some deductions as per the law enacted by the GOP Congress and President Donald Trump, taxpayers would be allowed to donate to “charitable funds” set up to benefit state and local school districts and municipalities. Donors would get a tax credit worth 90 percent of the donation that would be used to offset their state income or local property tax liability, and because federal law does not limit charitable deductions, the donation would be fully deductible, not capped at $10,000.

AWWWW, nice try.

In an interview, Morrison said she added the 90 percent credit—down from 100 percent in the House bill—with an eye toward the IRS, which some tax experts believe will block a dollar-for-dollar credit as a sale of sorts and not a charitable donation. “We want maximum integrity,” Morrison said.

Guess what… maybe the feds will recognize 10 percent – the part that didn’t give a consideration.

Think people will be happy with that?

Man, that would be hilarious.

I’ll give you an example from real, private charity. I’ve done donations to NPR and public TV in the past (heck, I worked the phones for WUNC once… that’s a funny story. When you do this early on a Saturday morning, and Sesame Street is playing, you get a lot of phone calls from little kids. I don’t think I got a single donation.)

Often, they’ll offer “premiums” for your donation: a tote bag or a DVD of a performance or something.

And the tax deductible portion of your donation is not the full amount – it’s the amount less the value of that premium.

So I could see the IRS saying “Okay, you got only 90% credit, so sure, we’ll recognize the 10% that wasn’t deductible as a true donation.”


Oh, and while we’re here, let’s check out Seattle’s new insane idea to top the head tax: property tax increases.

A week after controversial head tax passes, Seattle City Council members propose property tax increase

SEATTLE — People who own a home in King County are paying about 17% more in property taxes this year than last year to help pay for the state’s funding of public education.

But come November, Seattle leaders will be asking voters to approve a bit more of an increase for city dwellers.

“So it’s just an enhancement of the property tax that people are currently paying and have been since 2011,” Gonzalez said.

The Mayor’s Office says it would amount to about $5 more per week for Seattle homeowners.

So 5*52 = $260 …

But the idea is coming at a time when many in the community are angry over last week’s passage of the controversial employee tax and what they call mismanagement of various city issues.

“It’s not just homelessness. It’s the bike lanes and budget overruns, the Bertha tunnel, and the overruns on that, the First Ave streetcar and overruns on that,” Seattle resident Matt Dubin said. Dubin is a local attorney now running to become a state lawmaker this year. He says he is upset over city leaders squeezing out the middle class. “It’s making it impossible for the middle class to live in Seattle. If we keep going down this road nobody will be able to live in Seattle except for the very rich and the homeless,” Dubin said.

And the very rich may leave, too.

Ben Shapiro: HOW TO DESTROY A MAJOR CITY: One Week After Passing Massive Head Tax, Seattle Democrats Consider Huge Property Tax Increase

The homelessness problem in Seattle has continued to snowball (as John Stossel and Maxim Lott point out at, Seattle’s building code is 745 pages, and the residential building code is another 685 pages); the Seattle City Council has focused far more on “road diets” — narrowing roads via bike lanes — than on the quality of traffic; King County has spent billions on useless light rail. But now they want to bust homeowners’ wallets again — after instituting a $15 minimum wage and a head tax.

This is how Leftist governance destroys thriving major cities. First, you create building codes. That raises rents. Then you increase minimum wage to compensate. That drives out small businesses. Then you tax the big businesses to compensate. So they leave. Then you tax homeowners to compensate. So they leave. Eventually, bad governance based on good intentions crushes growth. But so long as members of the Seattle City Council feel good about themselves, that’s what truly matters.

Here’s a thought: allow more high-density housing (aka apartment buildings). To be sure, they have that in Manhattan, and it costs $$$ to buy an apartment there, but Seattle is not Manhattan.


So here’s all the leftover stuff.

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