Letter to Acting Commissioner Kautter - Rule In Favor Of New York State Law

Letter

Dear Acting Commissioner Kautter:

I write to express my concerns with the Internal Revenue Service's (IRS) Notice 2018-54, which announces an intention to initiate federal rulemaking on the federal deductibility of charitable donations made to newly created state-operated charitable funds. Any attempts by the IRS to alter the federal tax treatment of charitable contributions where the donation entitles the donee to a state or local tax credit would upend years of precedent, infringing on the rights of states and municipalities to provide local tax benefits for charitable contributions.

The new federal tax law, P.L 115-97, significantly raised taxes on many New Yorkers and diminished tax incentives for many to contribute to charitable causes. The cap on federal state and local tax deductions raised taxes on residents of states like New York, who were already net-contributors to federal coffers. After their residents were targeted for additional federal revenues, New York, and other states established programs to incentivize giving to state-operated charitable funds and mitigate the effects of the new tax increases.

As you know, New York State's new tax law provides a charitable tax credit for donations to state funds that will go towards healthcare and public education programs. These donations can be treated as a charitable deduction under the federal tax code. New York State also authorized municipalities within New York to set up similar tax credit programs.

Unfortunately, the IRS's recent notice appears to be an attempt to target state tax credit programs, like New York's, developed after the new tax law. The donations to these new state-operated charitable funds should be fairly treated by the IRS as charitable donations, with no reduction in their value due to the states' tax credits. Any attempts to undermine the value of donations made to New York State's new charitable funds through the federal tax code would diverge from years of precedent. Similar state charitable tax incentives exist in 32 states and have long been found by the IRS to be admissible. In an IRS Chief Counsel Advisory memo published in 2011, the IRS cited various case law to support the conclusion that any state or local tax benefit received by the donor should not be considered income or "a thing of value." The memo finds that a state or local tax credit should be treated just like the federal charitable deduction - as a reduction in tax liability.

The IRS must carefully consider the potential political implications of targeting the states, like New York, that have implemented laws after the federal tax law went into effect, all of which are controlled by Democratic administrations. The IRS has left alone the 32 states that have existing charitable tax programs. Our federal tax laws must be applied fairly and equitably, without regard to political party.

I urge the IRS to issue unbiased guidance -- making it clear that donations to New York State's charitable funds will be treated like charitable contributions to other state-operated charitable funds. The IRS should implement the new tax law as written and as historically interpreted by the agency.

Sincerely,

Charles E. Schumer

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