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June 19, 2019

The umpire strikes back: The IRS pours SALT in NY’s tax wound

May 29, 2018
New York Governor Andrew Cuomo speaks during an announcement at The Moynihan Train Hall in New York City, U.S., August 17, 2017. REUTERS/Brendan McDermid – RC1D545994C0 (Brendan McDermid/REUTERS)

Fact: The tax cut Republicans pushed through last year steals billions upon billions of dollars from high-tax states like New York and upends an age-old federalist bargain by capping the deduction on state and local taxes, known as SALT.

Fact: Gov. Cuomo was right to try to blunt the damage done by restructuring our state’s tax code.

Fact: One big piece of that proposed restructuring, a workaround to convert taxes into charitable contributions, was from the get-go a legal long-shot. So confirmed the Internal Revenue Service in guidance issued last week.

To get around the SALT limitations, this year’s Cuomo budget introduced a scheme encouraging taxpayers to contribute to newly set up shell non-profit organizations in lieu of paying their local taxes — and then getting charitable-donation credits equal to what their tax deduction would have been.

California, New Jersey and other blue states are trying to design similar plans.

As many warned at the time, they are all probably too clever by half.

The IRS puts it in this taxese: “The requirements of the Internal Revenue Code, informed by substance-over-form principles, govern the federal income tax treatment of such transfers.”

In other words, the feds are the final arbiter of what is a legitimate federal charitable contribution — and plans explicitly and primarily crafted to get around a new tax law are not likely to get okayed by the feds.

A second workaround Cuomo is pushing, converting state income taxes into a payroll tax, is likelier to pass legal muster, but a tougher sell to employers.

Meantime, New York, New Jersey and Connecticut are tilting at windmills with a crazy lawsuit seeking to invalidate the tax statute as essentially discriminatory.

We repeat: Washington screwed us, bigly. We are right to try to fight back. But in the end, the law is the law is the law.

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