A lawsuit in federal court, filed July 17 seeks to challenge regulations that were recently finalized by the Internal Revenue Service (IRS) and the Treasury Department that would deny a full charitable deduction for donations to the charitable funds for which states authorize tax credits, including both long-standing charitable funds and those created after the federal government severely limited the state and local tax deduction (SALT).
The case, Village of Scarsdale v. Internal Revenue Service at al., asserts that the IRS’s regulations “usurp the lawmaking function and purport to unilaterally impose the current administration’s political will in violation of clear statutory limits.” In doing so, the regulations would cause charitable reserve funds explicitly authorized under New York State law to “suffer irreparable harm,” according to the documents. This includes the charitable reserve funds established by the Village of Scarsdale and the Town of Rye after the SALT deduction was limited by the passage of the Federal Tax Cuts and Jobs Act of 2017 (TCJA). If successful, the lawsuit would reverse the IRS’s regulations.
Both Scarsdale and the Town of Rye are members of the Coalition for the Charitable Contribution Deduction (3CD), which consists of Nassau, Suffolk, and Westchester Counties, 17 municipalities (including White Plains and Mamaroneck), 17 school districts (including White Plains City School District), and eight state and countywide professional and advocacy organizations.
“Starting today, we will stand up for New Yorkers already reeling from the cap on the SALT deduction by making our case in court that these regulations are arbitrary, capricious, and invalid,” said New York State Assemblywoman Amy Paulin (D-Scarsdale), who took the lead role in developing New York’s charitable reserve fund legislation, coordinated the coalition, and had attended the IRS’s public hearing on the proposed regulations last October. “The denial of charitable deductions for donations to charitable reserve funds disproportionately hits communities like mine. In trying to satisfy the whims of this administration without running afoul of powerful interests, the IRS regulations strayed far from the law that they were supposed to interpret. These regulations will cause real harm for villages like Scarsdale and taxpayers across the country struggling to remain in the communities they fell in love with and to send their children to the same nurturing, high-quality schools.”
The lawsuit was filed in the United States District Court for the Southern District of New York on the same day as the Attorneys General of Connecticut, New Jersey, and New York filed their own lawsuit challenging the same IRS/Treasury Department regulations.
Scarsdale and the coalition assert that in preventing individuals from receiving a full federal charitable deduction for making a contribution to a charity state or municipality when that donation has been encouraged at the state or local level with a tax credit, the IRS has broken “with judicial precedents, published guidance binding on the IRS and the Treasury Department, IRS administrative pronouncements and settled taxpayer expectations.” Prior to the IRS/Treasury Department issuing their regulations, 70 active programs across 24 states already encouraged charitable contributions to various public and private programs with tax credits at the state or local level – all of which will now be denied a full charitable contribution at the federal level.
The complaint also takes aim at the complex and confusing distinctions made by the regulations in order to create carve outs and “safe harbors” for various corporate entities who also benefit from federal deductions for charitable giving and business expenses encouraged at the state level with tax credits – distinctions which “result in divergent consequences for substantively identical circumstances without any statutory authority, let alone a reasoned explanation, for doing so, the suit claims.”
The local governments that comprise 3CD had previously stated their belief that the regulations are arbitrary and capricious, and therefore invalid. Under the Administrative Procedure Act, they now ask that the regulations be found unlawful and be set aside.