IRS could easily block Democratic scheme to increase CA tax deductions

Tax formDemocratic state lawmakers’ interest in pursuing an unprecedented plan to minimize the hit that California’s high-income residents face because of the federal tax overhaul’s $10,000 cap on deductibility of state and local taxes may be losing momentum – undermined by strong warnings from Treasury Secretary Steven Mnuchin, who oversees the Internal Revenue Service, and by a new analysis that says the IRS could easily squelch the maneuver.

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Senate President Pro Tem Kevin de Leon, D-Los Angeles introduced Senate Bill 227 early this month. It would allow the estimated 6 million Californians who itemize their federal income taxes to effectively continue to write off state and local tax deductions in excess of $10,000 by allowing them to pay their state taxes to a state charitable foundation, the California Excellence Fund.

Tax experts note that states have long allowed tax deductions for charitable donations and say de Leon’s ploy is protected by the fact that tax laws are traditionally subject to stricter interpretation than most federal laws because of concerns that a rogue IRS could target individuals or companies it didn’t like.

Democratic lawmakers embraced de Leon’s proposal, saying the move would allow the 6 million state taxpayers who itemize deductions to save an average of more than $8,000 a year.

Washington Post: California shows how to take on Trump

But after Washington Post coverage of the legislation asserted it could create a “national boilerplate for skirting Trump tax changes,” the Trump administration took notice of what California was up to.

Politico reported that Mnuchin called the proposal in California and similar proposals in other high-tax states “ridiculous.” Mnuchin emphasized that the IRS was allowed to decide what qualifies as an IRS-recognized charity.

“Let me just say again from a Treasury standpoint and IRS, I don’t want to speculate on what people will do, but I think it’s one of the more ridiculous comments to think you can take a real estate tax that you are required to make and dress that up as a charitable contribution,” Mnuchin told reporters at the White House. He described the ploy as an obvious attempt by states “to evade the law.”

Mnuchin’s comments were backed up in a report by the Washington, D.C.-based Tax Foundation.

“This proposal, while interesting, is fairly obviously in violation of existing law and jurisprudence,” wrote veteran tax analyst Jared Walczak. “Just because the IRS has not consistently cracked down on some minor efforts here and there does not mean it would turn a blind eye to a concerted effort to contravene the tax code by providing a contribution in lieu of taxes program.”

Walczak warned state lawmakers that when it comes to de Leon’s Senate Bill 227, the IRS could readily thwart it under precedents that allow it to block deductions for charitable donations if the agency concluded there was no “charitable intent” to the donations.

Given that de Leon and other backers of the bill have openly described it as being designed to reduce Californians’ payments to the U.S. Treasury, lawyers defending the bill if it became law and was rejected by the IRS would face a difficult task: making a plausible case that a “charitable donation” that was undertaken with the goal of reducing an individual’s or family’s tax obligations meets the requirements set by the IRS for allowable charitable deductions.

The latest IRS overview of which deductions are allowed – Publication 526, released in 2016 under the Obama administration – doesn’t seem to allow such self-serving deductions.

It says that for a donation to qualify for a deduction, it must be “made without getting, or expecting to get, anything of equal value. … Qualified organizations include nonprofit groups that are religious, charitable, educational, scientific or literary in purpose, or that work to prevent cruelty to children or animals.”

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  1. John Skidmore says

    Well, not sure about other Californians, but I certainly don’t feel as though I get anything in return for my tax dollars.
    I wonder, since they’re using the guise of a charitable donation, if I could elect to retain the money for myself. I’m just not feeling charitable towards this state.

  2. Mark Davis says

    Love it!

  3. TheRandyGuy says

    At least CA pols are consistent. Selling pot is a crime under federal law. CA made it legal. Harboring illegals is a crime under federal law. CA made it (defacto) legal. When (not if) the IRS disallows all charitable deductions claimed by CA taxpayers, what will the pols in Sacramento do then?

  4. It is time to arrest deLeon, Brown, Camel Harris, and Newsom for violating Federal Law. When will it happen?

  5. Time for ICE to send Leon and the half of his relatives he claims are illegals back to Mexico.

  6. Tippy-toeing around tax fraud.Is this punishable by a stint in the room with the ric-rac wallpaper? You becha’.

  7. retiredxlr8r says

    If de Leon would direct his efforts at serving the Citizens of California and not himself and illegals he just might be able to come up with a solution to California’s debt problem???
    But, guys like de Leon, Newsome, Brown, Feinstein, Harris, Schiff, and others (Democrats in general) all believe that if they throw enough money at a problem (except for addressing their debt) the problem (poverty, homeless, excessive pensions, useless legislators, bad budget management, et al) will either go away or enough people will be earning a living off of it that the problem has to remain because of the tax income revenue (wait a minute it’s funded by tax revenue!).
    God help us but we are governed, not by stupid people but ignorant people. People without any virtues of honor or integrity, selfish people, in office to serve their own purpose.
    As I said, if de Leon and his peers would direct their efforts at serving the Citizens, he might solve some problems!!!
    On can only hope?

  8. THE IRS IS A FOREIGN ENTITY.. Do your homework.. study @

  9. Study the EXECUTIVE ORDER signed by President Trump 12/21/18.. The “State Of California” is a Franchise. Everything is a corporation, The DMV for petes sake. All done unbeknownst to the people. Look it up. Everything has its dunns number.. Treason anyone??

  10. Just Sayin says

    They should be the first to go. The whole illegal family!

  11. Just like Al Capone, hopefully the IRS will throw these idiots in jail for tax evasion…
    Or criminal stupidity….

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