Creative (?) ways now under discussion of dealing with the $10,000 State and Local tax limitation under the recently passed"Tax Cuts and Jobs Act".

Over the past three months, I have followed the entire "Tax Cuts and Jobs Act" debate process as if it were my personal soap opera, through both the House and Senate bills, and later to the Conference Committee. As I watched the drama unfolding during many a lunch break, I saw great amounts of angst and frustration were directed at the provisions of the draft bills either limiting (or doing away with) the deductions for personal state and local taxes against Federal tax liabilities, with this deduction being a staple of tax policy present since I became involved in this business starting from the days of Jimmy Carter.

When the final cut of the Bill passed both houses shortly before Christmas, the final resolution regarding the maximum amount of state and local "non-business" taxes to be deductible in years after 2017 was capped at $10,000. (Sec. 11042 (6) (B) of the Conference Committee Report). Needless to say, (and to be as polite as I possibly can) the governments of high-tax localities have attempted to come up with several innovative approaches to dealing with this situation, believing that such a policy is detrimental to their localities. One such approach that I have recently read about is in giving the option to a taxpayer to deem a part of his or her required tax payments to be "charitable contributions", and thus, allow the taxpayer a deduction against his federal liability.

Sounds to me like a neat concept.

But alas...long (and sometimes bitter) experience teaches that good ideas often become diluted when the people having the neat idea are called upon to tell us all how the idea can work in practicality. That said, within the last 24 hours I have read that the governor of one affected state, a law school graduate, no less, (who fancies himself to be an expert in this arena), has talked about setting up a "state charitable foundation" in order to receive such payments. In addition, I read an article this afternoon where the Director of State and Local Tax Policy for a HUGE national corporation said the following, (and I quote), "I don’t think (IRS is) going to allow any state to reclassify something as something that can be deductible. It’s an interesting concept. Instead of Los Angeles being a city, Los Angeles becomes a 501(c)3 charitable organization, and all the payments that you have to make to them become charitable deductions. Somebody’s being really creative. I don’t think the IRS is going to fall for that. It makes for great conversation, though.”

Now fellows, after searching the cupboards for some very strong coffee to see if I really have read what I just did, may I politely direct you to the Internal Revenue Code books now gathering dust on your respective shelves. Kindly read Section 170(c)(1) of the same. Now, WHAT does it say about contributions to state and local governments? (Hint: They are allowed as charitable deductions). And if that is Federal law, do you really NEED to set up a charitable foundation, or reclassify municipalities as nonprofits? And WHY are those of you reading this now asking me about strong coffee? (Please give me at least some credit for self-improvement, as I now realize after many years as to why many old time trust officers and practitioners kept flasks in the center drawer of their desks to help them cope with daily incongruities such as this).

But, I digress. The operative point of this article is where does this whole initiative go from here? Will we see state tax laws rewritten to allow an allocation of some tax payments to be charitable contributions? Will we see some of these localities be dumb enough to set up charitable foundations to receive (otherwise) tax payments, only to see the Federal government disqualify these organizations as non-qualifying?

In my view, I see nothing stopping a state from rewriting its tax laws to give a taxpayer the right to elect a portion of his payment to be charitable. The much bigger question will be if Congress in turn rewrites the Code in order to prevent "contributions" made in this vein, which in my estimation will be much easier to do if contributions are made other than to the municipalities themselves (i.e., to specially designated foundations). And if the Federal government tamps down on "in lieu of tax" contributions to municipalities themselves, does it also draw the line against other free-will municipal contributions made by taxpayers to towns and cities that are not so "tax motivated?". And are not many charitable contributions "tax motivated" to begin with? And what kind of decisions will those of us still crazy enough to remain in practice be called upon to make as to what is a contribution vis-a-vis what is a tax? (Or moreover, were those old guys were really wrong about drinking something other than coffee years back?)

 All I can do at this point is to stay stay tuned to this channel for further developments, as the soap opera seems destined for a blockbuster Season 2.