Yesterday in a press release the IRS commented on efforts by NY and follow-on efforts by NJ to avoid the new cap on state and local tax (“SALT”) deductions.

“Taxpayers should be mindful that federal law controls the proper characterization of payments for federal income tax purposes.”

Tax reform created a cap of $10,000 for state and local income and property tax deductions.  In response some of the so-called blue states passed legislation allowing local governments to set up charitable organizations that can accept tax payments.  Homeowners, in turn, can declare those donations as a deduction for federal income tax purposes.  Charitable contributions were not capped in the most recent round of tax reform.

Yesterday’s comments are the first from the IRS.  Earlier this year Treasury Secretary Steven Mnuchin called such state workaround schemes “ridiculous.”

States have a great deal of financial resources and political capital invested in these workarounds so attempts by the IRS to disallow them would likely result in litigation.

As Aristotle famously said, “A is A.”  State and local income and property taxes are state and local income and property taxes.  Calling them charitable contributions can’t change that.  The concern, therefore, is that taxpayers who contribute to these state and local charities will be subject to federal taxes, interest and penalties should the IRS prevail.