Federal Register / Vol. 83, No. 166 / Monday, August 27, 2018 / Proposed Rules 43563 

you notify your principal inspector, or 

lacking a principal inspector, the manager of 

the local flight standards district office or 

certificate holding district office before 

operating any aircraft complying with this 

AD through an AMOC. 

(h) Additional Information 

The subject of this AD is addressed in 

European Aviation Safety Agency (EASA) AD 

No. 2017–0011, dated January 25, 2017. You 

may view the EASA AD on the internet at 

http://www.regulations.gov in the AD Docket. 

(i) Subject 

Joint Aircraft Service Component (JASC) 

Code: 6510 Tail Rotor Driveshaft. 

Issued in Fort Worth, Texas, on August 10, 

2018. 

Lance T. Gant, 

Director, Compliance & Airworthiness 

Division, Aircraft Certification Service. 

[FR Doc. 2018–18472 Filed 8–24–18; 8:45 am] 

BILLING CODE 4910–13–P 

DEPARTMENT OF THE TREASURY 

Internal Revenue Service 

26 CFR Part 1 

[REG–112176–18] 

RIN 1545–BO89 

Contributions in Exchange for State or 

Local Tax Credits 

AGENCY: Internal Revenue Service (IRS), 

Treasury. 

ACTION: Notice of proposed rulemaking 

and notification of public hearing. 

SUMMARY: This document contains 

proposed amendments to regulations 

under section 170 of the Internal 

Revenue Code (Code). The proposed 

amendments provide rules governing 

the availability of charitable 

contribution deductions under section 

170 when a taxpayer receives or expects 

to receive a corresponding state or local 

tax credit. This document also proposes 

amendments to the regulations under 

section 642(c) to apply similar rules to 

payments made by a trust or decedent’s 

estate. This document provides 

notification of a public hearing on these 

proposed regulations. 

DATES: Written and electronic comments 

must be received by October 11, 2018. 

Requests to speak and outlines of topics 

to be discussed at the public hearing 

scheduled for November 5, 2018, must 

be received by October 11, 2018. 

ADDRESSES: Send submissions to 

Internal Revenue Service, 

CC:PA:LPD:PR (REG–112176–18), Room 

5203, P.O. Box 7604, Ben Franklin 

Station, Washington, DC 20044. 

Submissions may be hand-delivered 

Monday through Friday between the 

hours of 8:00 a.m. and 4:00 p.m. to 

CC:PA:LPD:PR (REG–112176–18), 

Courier’s Desk, 1111 Constitution 

Avenue NW, Washington, DC 20224, or 

sent electronically, via the Federal 

eRulemaking Portal at 

www.regulations.gov (indicate IRS and 

REG–112176–18). The public hearing 

will be held in the IRS Auditorium, 

Internal Revenue Building, 1111 

Constitution Avenue NW, Washington, 

DC 20224. 

FOR FURTHER INFORMATION CONTACT: 

Concerning the proposed regulations, 

Merrill D. Feldstein and Mon Lam at 

(202) 317–4059; concerning submission 

of comments and requests for a public 

hearing, Regina Johnson at (202) 317– 

6901 (not toll-free numbers). 

SUPPLEMENTARY INFORMATION: 

Background 

Section 170(a)(1) generally allows an 

itemized deduction for any ‘‘charitable 

contribution’’ paid within the taxable 

year. Section 170(c) defines ‘‘charitable 

contribution’’ as a ‘‘contribution or gift 

to or for the use of’’ any entity listed in 

that subsection. Section 170(c)(1) 

includes a contribution or gift to or for 

the use of a State, a possession of the 

United States, or any political 

subdivision of the foregoing, but only if 

the contribution or gift is made 

exclusively for public purposes. Section 

170(c)(2) includes, in general, a 

contribution or gift to or for the use of 

certain corporations, trusts, or 

community chests, funds, or 

foundations, organized and operated 

exclusively for religious, charitable, 

scientific, literary, or educational 

purposes, or to foster national or 

international amateur sports 

competition, or for the prevention of 

cruelty to children or animals. 

Section 164 generally allows an 

itemized deduction for the payment of 

certain taxes, including state and local, 

and foreign, real property taxes; state 

and local personal property taxes; and 

state and local, and foreign, income, war 

profits, and excess profits taxes. Section 

164(b)(6), as added by section 11042 of 

‘‘An Act to provide for reconciliation 

pursuant to titles II and V of the 

concurrent resolution on the budget for 

fiscal year 2018’’ (the Act), Public Law 

115–97, limits an individual’s 

deduction for the aggregate amount of 

state and local taxes paid during the 

calendar year to $10,000 ($5,000 in the 

case of a married individual filing a 

separate return). This new limitation 

applies to taxable years beginning after 

December 31, 2017, and before January 

1, 2026. 

I. The Charitable Contribution 

Deduction 

In 1986, the Supreme Court 

interpreted the phrase ‘‘charitable 

contribution’’ in section 170. See United 

States v. American Bar Endowment, 477 

U.S. 105, 116–118 (1986). The Court 

held that the ‘‘sine qua non of a 

charitable contribution is a transfer of 

money or property without adequate 

consideration’’—that is, without the 

expectation of a quid pro quo. Id. at 118. 

A ‘‘payment of money generally cannot 

constitute a charitable contribution if 

the contributor expects a substantial 

benefit in return.’’ Id. at 116. The Court 

recognized that some payments may 

have a ‘‘dual character’’—part charitable 

contribution and part quid pro quo— 

whereby the taxpayer receives some 

‘‘nominal benefit’’ of lesser value than 

the payment. Id. at 117. In such cases, 

the Court reasoned, ‘‘it would not serve 

the purposes of § 170 to deny a 

deduction altogether.’’ Id. Instead, the 

Court held, the charitable contribution 

deduction is allowed, but only to the 

extent the amount donated or the fair 

market value of the property transferred 

by the taxpayer exceeds the fair market 

value of the benefit received in return, 

and only if the excess amount was 

transferred with the intent of making a 

gift. Id. 

For the benefit received in return to 

reduce the allowable charitable 

contribution deduction under section 

170, the benefits received, or expected 

to be received, by a donor need only be 

greater than those benefits that inure to 

the general public from transfers for 

charitable purposes. See, e.g., Singer Co. 

v. United States, 449 F.2d 413, 422–423 

(Ct. Cl. 1971); American Bar 

Endowment, 477 U.S. at 116–17 (citing 

Singer); Hernandez v. Commissioner, 

490 U.S. 680 (1989). In addition, the 

benefits received need not come directly 

from the donee to reduce the allowable 

deduction, nor do they need to be 

specifically quantifiable at the time of 

transfer. See, e.g., Singer, 449 F.2d at 

422. The Treasury Department and the 

IRS have incorporated many of these 

principles into regulations under 

section 170. Section 1.170A–1(h)(1) of 

the Income Tax Regulations provides, 

for example, that no part of a payment 

that a taxpayer makes to or for the use 

of an organization described in section 

170(c) that is in consideration for (as 

defined in § 1.170A–13(f)(6)) goods or 

services (as defined in § 1.170A– 

13(f)(5)) is a contribution or gift within 

the meaning of section 170(c) unless the 

taxpayer (i) intends to make a payment 


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in an amount that exceeds the fair 

market value of the goods or services; 

and (ii) makes a payment in an amount 

that exceeds the fair market value of the 

goods or services. Section 1.170A– 

13(f)(5) defines goods or services to 

include cash, property, services, 

benefits, and privileges, and § 1.170A– 

13(f)(6) provides that a donee provides 

goods or services in consideration for a 

taxpayer’s payment if, at the time the 

taxpayer makes the payment to the 

donee organization, the taxpayer 

receives or expects to receive goods or 

services in exchange for that payment. 

II. State and Local Tax Credit Programs 

In recent years, it has become 

increasingly common for states and 

localities to provide state or local tax 

credits in return for contributions by 

taxpayers to or for the use of certain 

entities listed in section 170(c). As the 

use of these tax credit programs by 

states and localities became more 

common, the IRS Office of Chief 

Counsel (IRS Chief Counsel), in 

multiple Chief Counsel Advice 

memoranda (CCAs), considered whether 

the receipt of state tax credits under 

these programs were quid pro quo 

benefits that would affect the amount of 

taxpayers’ charitable contribution 

deductions under section 170(a). 

Although CCAs are released to the 

public for information purposes, it 

should be noted that CCAs are not 

official rulings or positions of the IRS, 

are not ordinarily reviewed by the 

Treasury Department, and are not 

precedential. 

In CCAs issued in 2002 and 2004, IRS 

Chief Counsel reviewed programs 

involving the issuance of state tax 

credits in return for the transfer of 

conservation easements and for 

payments to certain child care 

organizations. See CCA 200238041 (July 

24, 2002); CCA 200435001 (July 28, 

2004). In these CCAs, IRS Chief Counsel 

recognized that these programs raised 

complex questions and recommended 

that the tax credit issue be addressed 

through official published guidance. 

In 2010, another CCA explained that 

published guidance on the issue was not 

contemplated at that time, but it offered 

further advice. See CCA 201105010 

(Oct. 27, 2010) (the 2010 CCA). This 

2010 CCA observed that a payment to a 

state agency or charitable organization 

in return for a tax credit might be 

characterized as either a charitable 

contribution deductible under section 

170 or a payment of state tax possibly 

deductible under section 164. The 2010 

CCA advised that taxpayers may take a 

deduction under section 170 for the full 

amount of a contribution made in return 

for a state tax credit, without subtracting 

the value of the credit received in 

return. The analysis in the 2010 CCA 

assumed that after the taxpayer applied 

the state or local tax credit to reduce the 

taxpayer’s state or local tax liability, the 

taxpayer would receive a smaller 

deduction for state and local taxes 

under section 164. The 2010 CCA 

cautioned, however, that ‘‘there may be 

unusual circumstances in which it 

would be appropriate to recharacterize a 

payment of cash or property that was, in 

form, a charitable contribution as, in 

substance, a satisfaction of tax liability.’’ 

In addition to the CCAs, IRS Chief 

Counsel has taken the position in the 

U.S. Tax Court that the amount of a state 

or local tax credit that reduces a tax 

liability is not an accession to wealth 

under section 61 or an amount realized 

for purposes of section 1001, and the 

Tax Court has accepted this view. See, 

e.g., Maines v. Commissioner, 144 T.C. 

123, 134 (2015) (holding that the nonrefundable portion of a state income tax 

credit, the amount of which was based 

on previously-paid property taxes, 

reduced the current year’s tax liability 

and is not taxable or treated as an item 

of income); Tempel v. Commissioner, 

136 T.C. 341, 351–354 (2011) (holding 

that state income tax credits received by 

a donor for the transfer of a conservation 

easement and sold by the donor were 

capital assets, but that the donor had no 

adjusted basis in the credits), aff’d sub 

nom. Esgar Corp. v. Commissioner, 744 

F.3d 648 (10th Cir. 2014). However, the 

application of sections 61 and 1001 to 

state or local tax credits presents 

different issues than the application of 

section 170, and none of these cases 

addressed whether a taxpayer’s 

expectation or receipt of a state or local 

tax credit may reduce a taxpayer’s 

charitable contribution deduction under 

section 170. Nor has the Treasury 

Department or the IRS ever addressed 

this question in published guidance. 

III. New Limitation in Section 164 

At the time the 2010 CCA was issued, 

section 164 generally allowed an 

itemized deduction—unlimited in 

amount—for the payment of state and 

local taxes. Accordingly, the question of 

how to characterize transfers pursuant 

to state tax credit programs had little 

practical consequence from a federal 

income tax perspective because, unless 

the taxpayer was subject to the 

alternative minimum tax (AMT) under 

section 55, a deduction was likely to be 

available under either section 164 or 

section 170. Permitting a charitable 

contribution deduction for a transfer 

made in exchange for a state or local tax 

credit generally had no effect on federal 

income tax liability because any 

increased deduction under section 170 

would be offset by a decreased 

deduction under section 164. 

However, as a result of the new limit 

on the deductibility of state and local 

taxes under section 164(b)(6) (as added 

by the Act), treating a transfer pursuant 

to a state or local tax credit program as 

a charitable contribution for federal 

income tax purposes may reduce a 

taxpayer’s federal income tax liability. 

When a charitable contribution is made 

in return for a state or local tax credit 

and the taxpayer has pre-credit state and 

local tax liabilities in excess of the 

$10,000 limitation in section 164(b)(6), 

a charitable contribution deduction 

under section 170 would no longer be 

offset by a reduction in the taxpayer’s 

state and local tax deduction under 

section 164. Thus, as a consequence, 

state and local tax credit programs now 

give taxpayers a potential means to 

circumvent the $10,000 limitation in 

section 164(b)(6) by substituting an 

increased charitable contribution 

deduction for a disallowed state and 

local tax deduction. State legislatures 

are also now considering or have 

adopted proposals to enact new state 

and local tax credit programs with the 

aim of enabling taxpayers to 

characterize their transfers as fully 

deductible charitable contributions for 

federal income tax purposes, while 

using the same transfers to satisfy or 

offset their state or local tax liabilities. 

In light of the tax consequences of 

section 164(b)(6) and the resulting 

increased interest in preexisting and 

new state tax credit programs, the 

Treasury Department and the IRS 

determined that it was appropriate to 

review the question of whether amounts 

paid or property transferred in exchange 

for state or local tax credits are fully 

deductible as charitable contributions 

under section 170. 

IV. Notice 2018–54 

Pursuant to this review, in Notice 

2018–54, 2018–24 I.R.B. 750, the 

Treasury Department and the IRS 

announced on June 11, 2018, their 

intention to propose regulations 

addressing the federal income tax 

treatment of payments made by 

taxpayers for which the taxpayers 

receive a credit against their state and 

local taxes. The notice stated that 

federal tax law controls the proper 

characterization of payments for federal 

income tax purposes and that proposed 

regulations would assist taxpayers in 

understanding the relationship between 

the federal charitable contribution 

deduction and the new limitation on the 


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1The Joint Committee on Taxation estimated that 

the limitation on state and local tax deductions 

along with certain other reforms of itemized 

deductions would raise $668 billion over ten years. 

A substantial amount of this revenue would be lost 

if state tax benefits received in exchange for 

charitable contributions were ignored in 

determining the charitable contribution deduction. 

This estimate is not a revenue estimate of the 

proposed regulations, in part because it includes 

other reforms of itemized deductions but does not 

reflect certain other provisions of the Act. See Joint 

Committee on Taxation, ‘‘Estimated Budget Effects 

of the Conference Agreement for H.R. 1, The ‘Tax 

Cuts and Jobs Act,’ ’’ JCX–67–17, December 18, 2017 

available at https://www.jct.gov/publications.

html?func=startdown&id=5053. 

deduction for state and local tax 

payments. 

Although Notice 2018–54 was issued 

in response to state legislation proposed 

after the enactment of the limitation on 

state and local tax deductions under 

section 164(b)(6), the rules in these 

proposed regulations are based on 

longstanding federal tax law principles, 

which apply equally to taxpayers 

regardless of whether they are 

participating in a new state and local tax 

credit program or a preexisting one. 

Accordingly, the proposed regulations, 

and the analysis underlying the 

proposed regulations, are intended to 

apply to transfers pursuant to state and 

local tax credit programs established 

under the recent state legislation as well 

as to transfers pursuant to state and 

local tax credit programs that were in 

existence before the enactment of 

section 164(b)(6). 

V. Proposed Regulations 

After reviewing the issue, and in light 

of the longstanding principles of the 

cases and tax regulations discussed 

above, the Treasury Department and the 

IRS believe that when a taxpayer 

receives or expects to receive a state or 

local tax credit in return for a payment 

or transfer to an entity listed in section 

170(c), the receipt of this tax benefit 

constitutes a quid pro quo that may 

preclude a full deduction under section 

170(a). In applying section 170 and the 

quid pro quo doctrine, the Treasury 

Department and the IRS do not believe 

it is appropriate to categorically exempt 

state or local tax benefits from the 

normal rules that apply to other benefits 

received by a taxpayer in exchange for 

a contribution. Thus, the Treasury 

Department and the IRS believe that the 

amount otherwise deductible as a 

charitable contribution must generally 

be reduced by the amount of the state 

or local tax credit received or expected 

to be received, just as it is reduced for 

many other benefits. Accordingly, the 

Treasury Department and the IRS 

propose regulations proposing to amend 

existing regulations under section 170 to 

clarify this general requirement, to 

provide for a de minimis exception from 

the general rule, and to make other 

conforming amendments. 

Compelling policy considerations 

reinforce the interpretation and 

application of section 170 in this 

context. Disregarding the value of all 

state tax benefits received or expected to 

be received in return for charitable 

contributions would precipitate 

significant revenue losses that would 

undermine and be inconsistent with the 

limitation on the deduction for state and 

local taxes adopted by Congress in 

section 164(b)(6).1 Such an approach 

would incentivize and enable taxpayers 

to characterize payments as fully 

deductible charitable contributions for 

federal income tax purposes, while 

using the same payments to satisfy or 

offset their state or local tax liabilities. 

Disregarding the tax benefit would also 

undermine the intent of Congress in 

enacting section 170, that is, to provide 

a deduction for taxpayers’ gratuitous 

payments to qualifying entities, not for 

transfers that result in economic returns. 

The Treasury Department and the IRS 

believe that appropriate application of 

the quid pro quo doctrine to substantial 

state or local tax benefits is consistent 

with the Code and sound tax 

administration. 

Explanation of Provisions 

The proposed regulations generally 

provide that if a taxpayer makes a 

payment or transfers property to or for 

the use of an entity listed in section 

170(c), and the taxpayer receives or 

expects to receive a state or local tax 

credit in return for such payment, the 

tax credit constitutes a return benefit, or 

quid pro quo, to the taxpayer and 

reduces the charitable contribution 

deduction. 

In addition to credits, the proposed 

regulations also address state or local 

tax deductions claimed in connection 

with a taxpayer’s payment or transfer. 

Although deductions could be 

considered quid pro quo benefits in the 

same manner as credits, the Treasury 

Department and the IRS believe that 

sound policy considerations as well as 

considerations of efficient tax 

administration warrant making an 

exception to quid pro quo principles in 

the case of dollar-for-dollar state or local 

tax deductions. Because the benefit of a 

dollar-for-dollar deduction is limited to 

the taxpayer’s state and local marginal 

rate, the risk of deductions being used 

to circumvent section 164(b)(6) is 

comparatively low. In addition, if state 

and local tax deductions for charitable 

contributions were treated as quid pro 

quo benefits, it would make the accurate 

calculation of federal taxes and state 

and local taxes difficult for both 

taxpayers and the IRS. For example, the 

value of a deduction could vary based 

on the taxpayer’s marginal or effective 

state and local tax rates, making for 

more complex computations and adding 

to administrative and taxpayer burden. 

The proposed regulations thus allow 

taxpayers to disregard dollar-for-dollar 

state or local tax deductions. However, 

the proposed regulations state that, if 

the taxpayer receives or expects to 

receive a state or local tax deduction 

that exceeds the amount of the 

taxpayer’s payment or the fair market 

value of the property transferred, the 

taxpayer’s charitable contribution 

deduction must be reduced. The 

Treasury Department and the IRS 

request comments on how to determine 

the amount of this reduction. 

To provide consistent treatment for 

state or local tax deductions and state or 

local tax credits that provide a benefit 

that is generally equivalent to a 

deduction, the proposed regulations 

include a de minimis exception under 

which a taxpayer may disregard a state 

or local tax credit if such credit does not 

exceed 15 percent of the taxpayer’s 

payment or 15 percent of the fair market 

value of the property transferred by the 

taxpayer. The de minimis exception 

reflects that the combined value of a 

state and local tax deduction, that is the 

combined top marginal state and local 

tax rate, currently does not exceed 15 

percent. Accordingly, under the 

proposed regulations, a state or local tax 

credit that does not exceed 15 percent 

does not reduce the taxpayer’s federal 

deduction for a charitable contribution. 

The Treasury Department and the IRS 

request comments on this proposed 

exception. 

In drafting the proposed regulations, 

the Treasury Department and the IRS 

also considered whether a taxpayer may 

decline the receipt or anticipated receipt 

of a state or local tax credit by taking 

some affirmative action at the time of 

the taxpayer’s payment or transfer. See 

Rev. Rul. 67–246, 1967–2 C.B. 104 

(allowing a full charitable contribution 

deduction if the taxpayer does not 

accept or keep any indicia of a return 

benefit). Because procedures for 

declining the state or local tax credit 

would depend on the procedures of 

each state and locality in administering 

the tax credits, the Treasury Department 

and the IRS request comments regarding 

a rule that would allow taxpayers to 

decline state or local tax credits and 

receive full deductions for charitable 

contributions under section 170. 

Trusts and decedents’ estates may 

claim an income tax deduction for 


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2Note that this analysis only addresses state tax 

credits offering a 100% benefit. The results may 

differ for credits offering a lower benefit, but the 

comparative results of the below illustrative 

examples would be similar. 

3The results of the examples are generally 

unchanged if the taxpayer instead receives the 

credit as a refund of state taxes paid that were 

deducted from federal taxable income, as such 

refund would be includible in federal taxable 

income in the following year. 

4This assumes the taxpayer was not subject to 

limitations such as the overall limitation on 

itemized deductions under section 68 or subject to 

a percentage limitation for the deduction under 

section 170, an assumption that is maintained 

throughout the succeeding discussion. 

charitable contributions under section 

642(c). For the same reasons provided 

above, the proposed regulations amend 

§ 1.642(c)–3 to provide that the 

proposed rules under § 1.170A–1(h)(3) 

apply to payments made by a trust or 

decedent’s estate in determining its 

charitable contribution deduction under 

section 642(c). 

Proposed Applicability Date 

The amendments to these regulations 

are proposed to apply to contributions 

after August 27, 2018. 

Special Analyses 

Executive Orders 12866 and 13563 

direct agencies to assess costs and 

benefits of available regulatory 

alternatives and, if regulation is 

necessary, to select regulatory 

approaches that maximize net benefits 

(including potential economic, 

environmental, public health and safety 

effects, distributive impacts, and 

equity). Executive Order 13563 

emphasizes the importance of 

quantifying both costs and benefits, of 

reducing costs, of harmonizing rules, 

and of promoting flexibility. These 

proposed regulations have been 

designated as subject to review under 

Executive Order 12866 pursuant to the 

Memorandum of Agreement (April 11, 

2018) between the Treasury Department 

and the Office of Management and 

Budget (OMB) regarding review of tax 

regulations. OMB has determined that 

the proposed regulations are subject to 

review under section 1(b) of the 

Memorandum of Agreement. These 

proposed regulations have been 

reviewed by OMB. These proposed 

regulations are anticipated to be 

regulatory actions under E.O. 13771. 

The analysis below can provide further 

detail on this designation. 

I. Need for Regulations 

These proposed regulations provide 

guidance on the deductibility of 

charitable contributions when a 

taxpayer receives or expects to receive 

a corresponding state or local tax credit. 

These proposed regulations are 

intended to clarify the relationship 

between the federal charitable 

contribution deduction and the 

recently-enacted statutory limitation on 

deductions for state and local taxes paid 

(the ‘‘SALT cap’’) and to make the 

federal tax system more neutral with 

respect to taxpayers’ decisions regarding 

donations. Compelling policy 

considerations reinforce the 

interpretation and application of section 

170 in this context. Disregarding the 

value of all state tax benefits received or 

expected to be received in return for 

charitable contributions would 

precipitate revenue losses that would 

undermine and be inconsistent with the 

limitation on the deduction for state and 

local taxes adopted by Congress in 

section 164(b)(6). 

Pursuant to section 6(a)(3)(B) of 

Executive Order 12866, the following 

qualitative analysis provides further 

details regarding the anticipated impact 

of the proposed regulations. After 

identifying a baseline in Part II, this 

analysis provides illustrative scenarios 

in Part III. Part III.A describes the tax 

effects of the contributions prior to 

enactment of the SALT cap in the Act. 

Part III.B provides examples comparing 

the enactment of the SALT cap but 

absent the proposed rule (the baseline) 

to the proposed rule. Finally, Part IV 

provides a qualitative assessment of the 

potential costs and benefits of the 

proposed rule compared to the baseline. 

II. Baseline 

Prior to this proposed rule, there was 

no authoritative regulatory guidance on 

the treatment of state or local tax credits 

arising from charitable contributions to 

entities listed in section 170(c), and 

there was no guidance aside from Notice 

2018–54 addressing the interaction 

between section 170 and the newly 

enacted SALT cap. As a result, there 

was a degree of taxpayer uncertainty as 

to whether state and local tax credits are 

a return benefit that reduces a taxpayer’s 

charitable contribution deduction. For 

informational and analytical purposes, 

however, this analysis assumes as a 

baseline that state and local tax credits 

are generally not treated as a return 

benefit or consideration and therefore 

do not reduce the taxpayer’s charitable 

contribution deduction under section 

170(a). 

III. Illustrative Scenarios 

For the following illustrative 

scenarios, assume the following facts: 

Charitable organizations A and B are 

entities listed in section 170(c) and 

provide similar public goods. 

Contributions to charity A are eligible 

for a dollar-for-dollar state tax credit. 

Contributions to charity B are ineligible 

for this credit but are deductible from 

state taxable income. A taxpayer 

itemizes deductions, and these itemized 

deductions in aggregate are at least 

$1,000 more than the standard 

deduction. The taxpayer has the choice 

to contribute $1,000 to charity A, and 

this $1,000 contribution generates a 

state tax credit of $1,000,2 that is, the tax 

credit is dollar-for-dollar but does not 

otherwise figure into the calculation of 

the taxpayer’s state tax liability. The 

taxpayer has more than $1,000 of state 

tax liability, so that the taxpayer’s state 

tax liability is reduced by the entire 

$1,000 of the state tax credit. Finally, if 

the taxpayer makes the $1,000 

contribution that generates a state tax 

credit of $1,000, the taxpayer reduces by 

$1,000 the withholdings or other 

payments of state taxes during the 

taxable year in question. The state taxes 

paid by the taxpayer are therefore 

reduced by the full amount of the state 

tax credit in the same taxable year as the 

contribution is made.3 Further assume 

the taxpayer is in the 24 percent federal 

tax bracket, itemizes federal tax 

deductions, and has a state tax rate of 

5 percent. If the taxpayer is subject to 

the AMT, assume an AMT marginal tax 

rate of 26 percent. 

The Act and proposed regulations 

alter the incentives taxpayers face about 

whether and how much to give to 

organizations that receive charitable 

contributions as well as to which 

organizations. This is illustrated in the 

following scenarios, which are also 

summarized in Table 1 (below). 

A. Prior Law: Section 170 Charitable 

Contributions Prior to the Act 

The tax effects of contributions prior 

to enactment of the Act are illustrated 

in the columns labeled ‘‘Prior Law’’ in 

Table 1. 

1. Taxpayer Not Subject to AMT 

Prior to enactment of the Act, if the 

taxpayer made a $1,000 contribution to 

charity A that generated a state tax 

credit of $1,000, the deduction for 

charitable contributions under section 

170(a) increased by $1,000, and the 

deduction for state and local taxes paid 

under section 164 decreased by $1,000. 

The taxpayer’s itemized deductions, 

taxable income, and federal tax liability 

were unchanged from what they would 

have been in the absence of the 

contribution.4 The taxpayer’s state tax 

liability decreased by $1,000 because of 

the state tax credit. The combined 

federal and state tax benefits of the 


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$1,000 contribution were therefore 

$1,000, and the cost to the taxpayer and 

to the federal government of making the 

contribution was $0. This is shown in 

column A under Prior Law for Example 

1 in Table 1 and replicated in the same 

column for Example 2. 

2. Taxpayer Subject to AMT 

If the taxpayer were subject to the 

AMT under section 55, however, there 

was a net benefit to the taxpayer from 

contributions to charity A, which 

provided state tax credits. State and 

local taxes paid are not deductible 

expenses in determining taxable income 

under the AMT, but charitable 

contributions are deductible expenses in 

determining taxable income under the 

AMT. If the taxpayer contributed 

$1,000, taxable income under the AMT 

was reduced by $1,000 due to the 

charitable contribution deduction under 

section 170, but there was no 

corresponding reduction in the 

deduction for state and local taxes. 

Under an AMT marginal tax rate of 26 

percent, the federal tax benefit of this 

$1,000 contribution would be $260. 

Because of the dollar-for-dollar state tax 

credit, the taxpayer received a combined 

federal and state tax benefit of $1,260 

for a $1,000 contribution, a net benefit 

of $260. This is shown in column A 

under Prior Law for Example 3 in Table 

1. 

3. Comparison of Contributions to 

Different Organizations Under Prior Law 

In combination, state and federal tax 

laws generally provide a greater 

incentive to contribute to organizations 

eligible for state tax credits (charity A) 

than to other organizations (charity B). 

The effect of a contribution to charity A 

are described above. 

Prior to enactment of the Act, for a 

taxpayer not subject to the AMT, a 

$1,000 contribution to charity B yielded 

a smaller combined federal and state tax 

benefit than to charity A. The state tax 

benefit was $50 ($1,000 times the 5 

percent state tax rate). The taxpayer’s 

itemized deductions at the federal level 

increased by $950 (the $1,000 charitable 

contribution deduction less than $50 

reduction in state taxes paid). The 

federal tax benefit of this increase was 

$228 ($950 times the 24 percent federal 

tax rate), resulting in a combined federal 

and state tax benefit of $278. The net 

cost to the taxpayer of the $1,000 

contribution was $722. This is shown in 

column B under Prior Law for Example 

1 in Table 1 and replicated in the same 

column for Example 2. 

For a taxpayer subject to the AMT, a 

$1,000 contribution to charity B yielded 

a combined federal and state benefit of 

$310—the $1,000 contribution 

multiplied by the taxpayer’s marginal 

tax rate under the AMT of 26 percent, 

or $260, plus the value of the deduction 

from state tax, or $50 ($1,000 times the 

5 percent state tax rate). The net cost to 

the taxpayer of the $1,000 contribution 

was $690. This is shown in column B 

under Prior Law for Example 3 in Table 

1. 

Contributing to either charity A or 

charity B reduced the taxpayer’s 

combined federal and state tax liability, 

but the existence of the state tax credit 

for contributions to charity A made 

contributions to that organization more 

attractive. This is seen by comparing the 

Total Tax Benefit in column A under 

Prior Law to the corresponding value in 

column B for each of the three 

examples. For taxpayers not subject to 

the AMT, contributions to charity A 

yielded a combined federal and state tax 

benefit of $1,000, compared to a 

combined federal and state tax benefit of 

$278 for a contribution to charity B. The 

AMT increased the disparity for 

contributions to charity A versus charity 

B, resulting in a combined federal and 

state tax benefit of $1,260 for a 

contribution to charity A versus $310 

for a contribution to charity B. 

B. Examples Under Baseline (Current 

Law and Practices Under the Act) and 

Proposed Rule 

The enactment of the SALT cap in the 

Act has, in limited circumstances, 

altered the federal tax effects of 

charitable contributions as described in 

the following examples. These are 

illustrated in the columns labeled 

‘‘Baseline’’ and ‘‘Proposed Rule’’ in 

Table 1. 

1. Example 1: Taxpayer Is Above the 

SALT Cap and Not Subject to the AMT 

a. Baseline 

If a taxpayer that has a state tax 

liability of more than $1,000 above the 

SALT cap and is not subject to the AMT 

makes a $1,000 contribution to charity 

A, the deduction for charitable 

contributions under section 170(a) 

increases by $1,000, but the deduction 

for state and local taxes paid under 

section 164 is unchanged. 

Consequently, itemized deductions 

increase by $1,000, and taxable income 

decreases by $1,000. If the taxpayer is in 

the 24 percent bracket, federal liability 

will decrease by $240, and state tax 

liability will decrease by the $1,000 

state tax credit. The combined federal 

and state tax benefits of the $1,000 

contribution are therefore $1,240, and 

the taxpayer receives a $240 net benefit 

while the federal government has a loss 

of $240. This is shown in column A 

under Baseline for Example 1 in Table 

1. 

b. Proposed rule 

If the same taxpayer makes the $1,000 

contribution to charity A under the 

proposed rule, the entire $1,000 

deduction is not deductible under 

section 170(a), and the deduction for 

state and local taxes paid under section 

164 is unchanged due to the SALT cap. 

The taxpayer’s itemized deductions, 

taxable income, and federal tax liability 

are unchanged from what they would be 

in the absence of the contribution. The 

taxpayer’s state tax liability decreases by 

$1,000 because of the state tax credit. 

The combined federal and state tax 

benefits of the $1,000 contribution are 

therefore $1,000, or $240 less than 

under the baseline. This is shown by 

comparing the Total Tax Benefit in 

column A under Proposed Rule with the 

corresponding value in column A under 

Baseline for Example 1 in Table 1. 

However, the benefit of the contribution 

for this taxpayer is the same as the 

taxpayer faced prior to enactment of the 

Act. This is shown by comparing the 

Total Tax Benefit under column A 

under Proposed Rule with the 

corresponding value in column A under 

Prior Law for Example 1 in Table 1. 

c. Comparison of Contributions to 

Different Organizations and Proposed 

Rule 

Under the baseline and the proposed 

rule, for a taxpayer with state and local 

taxes paid over the SALT cap, the value 

of a contribution to charity B, that is a 

contribution that results in a one-for-one 

state income tax deduction and not a 

state tax credit, is slightly higher than it 

was pre-Act. This increase is because 

the state deduction does not reduce the 

federal deduction for state and local 

taxes for a taxpayer above the SALT cap. 

As shown in the Total Tax Benefit row 

under the B columns for Example 1, 

under the baseline and the proposed 

rule, the value of a $1,000 contribution 

to charity B is $290—the charitable 

contribution deduction from federal tax 

($1,000 times the 24 percent federal tax 

rate, or $240), plus the value of the 

deduction from state tax ($1,000 times 

the 5 percent state tax rate, or $50)— 

compared to $278 for contributions 

under prior law (described above). By 

comparison, as shown in the Total Tax 

Benefit row under the A columns for 

Example 1, a contribution to charity A, 

eligible for a state tax credit, yields a 

$1,240 tax benefit under the baseline 

and a $1,000 benefit under the proposed 

rule. 


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5The Act increased the amount of income exempt 

from AMT. We estimate that only about 150,000 

taxpayers will be subject to the AMT under the Act, 

compared to more than 4 million under prior law. 

2. Example 2: Taxpayer Is Below the 

SALT Cap and Not Subject to the AMT 

a. Baseline 

If a taxpayer that has state and local 

taxes paid below the SALT cap and is 

not subject to the AMT makes the 

$1,000 contribution to charity A, the 

deduction for charitable contributions 

under section 170(a) increases by 

$1,000, and the deduction for state and 

local taxes paid under section 164 

decreases by $1,000. The taxpayer’s 

itemized deductions, taxable income, 

and federal tax liability are unchanged 

from what they would be in the absence 

of the contribution. The taxpayer’s state 

tax liability decreases by $1,000 because 

of the state tax credit. The combined 

federal and state tax benefits of the 

$1,000 contribution are therefore 

$1,000, and the cost to the taxpayer and 

to the federal government of making the 

contribution was $0. This situation is 

identical to prior law or what taxpayers 

faced prior to enactment of the Act. This 

is shown is column A under Baseline 

and Prior Law for Example 2 in Table 

1. 

b. Proposed Rule 

If the same taxpayer makes the $1,000 

contribution to charity A under the 

proposed rule, the entire $1,000 

contribution is not deductible under 

section 170(a), but the deduction for 

state and local taxes paid under section 

164 still decreases by $1,000 because of 

the $1,000 state tax credit. If the 

taxpayer is in the 24 percent bracket, the 

federal tax liability will increase by 

$240. The taxpayer’s state tax liability 

decreases by the $1,000 state tax credit. 

The combined federal and state tax 

benefits of the $1,000 contribution are 

therefore $760, or $240 less than the 

baseline. This is shown by comparing 

the Total Tax Benefit in column A 

under Proposed Rule with the 

corresponding value in column A under 

Baseline for Example 2. In this case, the 

proposed rule has the effect of 

increasing the taxpayer’s federal taxable 

income compared to the baseline if the 

taxpayer makes a contribution to charity 

A. 

c. Comparison of Contributions to 

Different Organizations, Under Prior 

Law, Baseline, and Proposed Rule 

Under prior law, and both the 

baseline scenario and the proposed rule, 

the tax benefit of charitable 

contributions to charity B, which are not 

eligible for a state tax credit but are 

deductible from both federal and state 

taxable income, is unchanged from prior 

law for taxpayers below the SALT cap. 

Thus, in this example, the benefit of 

making a contribution to charity B 

remains $278, as described above for 

contributions under prior law. This is 

shown in the Total Tax Benefit row 

under the B columns for Example 2. By 

comparison, as shown in the Total Tax 

Benefit row under the A columns for 

Example 2, a $1,000 contribution to 

charity A, eligible for a state tax credit, 

yields a $1,000 tax benefit under the 

baseline and a $760 benefit under the 

proposed rule. 

3. Example 3: Taxpayer is Subject to the 

AMT5

a. Baseline 

If a taxpayer subject to the AMT 

makes a $1,000 contribution to charity 

A, the contribution reduces the 

taxpayer’s taxable income under the 

AMT by $1,000. Under an AMT 

marginal tax rate of 26 percent, the 

federal tax benefit of this $1,000 

contribution is $260. Because of the 

dollar-for-dollar state tax credit, the 

taxpayer would receive a combined 

federal and state tax benefit of $1,260 

for a $1,000 contribution, or a $260 net 

benefit. This result is identical to the 

result under prior law (prior to 

enactment of the Act). This is shown in 

the A columns under Baseline and Prior 

Law for Example 3 in Table 1. 

b. Proposed Rule 

If the same taxpayer makes the $1,000 

contribution to charity A under the 

proposed rule, the entire $1,000 is not 

deductible under section 170(a). 

Therefore, the taxpayer’s taxable income 

and federal tax liability under the AMT 

would be unchanged from what they 

would be in the absence of the 

contribution. The taxpayer’s state tax 

liability decreases by $1,000 because of 

the state tax credit. The combined 

federal and state tax benefits of the 

$1,000 contribution are therefore 

$1,000, or $260 less than under the 

baseline and under the law prior to 

enactment of the Act. This is shown by 

comparing the A columns of Example 3 

in Table 1. However, under the 

proposed rule, taxpayers subject to the 

AMT are in the same position as 

taxpayers with state and local taxes paid 

above the SALT cap who are not subject 

to the AMT. This is shown by 

comparing the Total Tax Benefit amount 

under column A for the Proposed Rule 

for Example 3 to that for Example 1. 

c. Comparison of Contributions to 

Different Organizations, Under Prior 

Law, Baseline and Proposed Rule 

Under the baseline and the proposed 

rule, the treatment of charitable 

contributions that are deductible from 

both federal and state taxable income is 

unchanged from prior law for taxpayers 

subject to the AMT. This is shown in 

the B columns for Example 3 in Table 

1. In this example, the benefit of making 

a contribution to charity B remains 

$310, as described above for 

contributions under prior law. By 

comparison, a contribution to a charity 

A, eligible for a state tax credit, yields 

a $1,260 tax benefit under the baseline 

and a $1,000 benefit under the proposed 

rule. This is shown in column A under 

Baseline and Proposed Rule for Example 

3 in Table 1. 

IV. Expected Benefits and Costs 

A. Benefits 

These proposed regulations likely 

reduce economically inefficient choices 

motivated by the potential tax benefits 

described above if these proposed 

regulations were not promulgated. 

Under the prior law and baseline 

scenarios, state and local governments 

have an incentive to fund governmental 

activities through independent entities 

that are eligible to receive deductible 

contributions and to establish tax 

credits. This incentive is particularly 

strong under a SALT cap scenario where 

state and local governments may do so 

solely to enable some taxpayers to 

circumvent the SALT cap. These 

proposed regulations substantially 

diminish this incentive to engage in 

socially wasteful tax-avoidance 

behavior. As a result, it is expected that 

fewer such credit programs would be 

established in the future under the 

proposed regulations than under the 

baseline. 

To the extent this result occurs, the 

Treasury Department and IRS estimate 

that the proposed regulations would 

reduce overall complexity and 

paperwork burden for states and for 

taxpayers who would otherwise engage 

in charitable contributions solely for the 

purpose of reducing their state and local 

tax liability. In addition to reducing 

paperwork burden, the Treasury 

Department and IRS anticipate that the 

proposed regulations will also spare 

some taxpayers compliance costs 

associated with complex tax planning 

designed to avoid the SALT cap. 

In addition, these proposed 

regulations are expected to make the 

federal tax system more neutral to 

taxpayers’ decisions regarding 

donations. Under the baseline scenarios, 


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6The Treasury Department and the IRS are aware 

of potential concerns about educational scholarship 

programs in particular. Based on projections for 

2018, most taxpayers in the third category described 

above do not reside in states that offer educational 

scholarship tax credit programs affected by the 

proposed regulations, and the vast majority of them 

have never used such programs. 

the combined federal and state tax 

benefits favor contributions to 

organizations which give rise to a state 

tax credit for taxpayers, particularly for 

taxpayers above the SALT cap. Under 

the proposed regulations, this economic 

distortion is expected to be reduced. 

The Treasury Department and the IRS 

request comments from the public on 

the potential extent of this expected 

reduction in economic distortion. 

Finally, these proposed regulations 

provide more certainty to taxpayers by 

clarifying the rules governing the 

amount that they can claim as a 

charitable contribution deduction when 

they receive a state tax credit or a dollarfor-dollar state tax deduction in 

exchange for the contribution. 

B. Costs 

The proposed regulations may result 

in some increase in compliance costs for 

taxpayers who make contributions that 

generate state tax credits. Under the 

baseline, for purposes of the charitable 

contribution deduction under section 

170(a), taxpayers did not need to 

address state tax credits received for 

purposes of claiming a charitable 

contribution; however, they would 

know the amount of credits received as 

part of the filing process for state 

returns. In contrast, under the proposed 

regulations, taxpayers making a 

contribution to an organization listed in 

section 170(c) will need to determine 

the amount of any state tax credits they 

will receive or expect to receive in order 

to reduce their charitable contribution 

deduction under section 170(a). This 

additional step will generate some 

additional compliance costs. 

The compliance burden for recipient 

organizations that directly issue tax 

credits may increase under the proposed 

regulations. In order to take a charitable 

contribution deduction of $250 or more, 

a taxpayer must have a 

contemporaneous written 

acknowledgment (CWA) from the donee 

entity, usually provided in the form of 

a letter. The CWA includes the amount 

received by the entity or a description 

of property received. The CWA must 

also disclose whether the donee 

provided any goods or services in 

consideration for the contribution and a 

description and good faith estimate of 

the value of those goods or services 

provided. State and local tax credits are 

not generally provided by the donee 

entity, but there may be situations in 

which the entity would be providing the 

credit and would need to include it in 

the CWA provided to the donor. The 

Treasury Department and the IRS 

request comments on whether 

additional guidance is needed on 

substantiation and reporting 

requirements for donors and donees 

making or receiving payments or 

transfers of property in return for state 

and local tax credits and the extent to 

which entities do provide tax credits 

under certain circumstances. 

The Treasury Department and the IRS 

request comments on other potential 

compliance savings, compliance costs, 

costs related to increased tax planning 

and other avoidance behavior, or any 

effects on charitable contribution 

decisions that may occur as a result of 

these proposed regulations. In 

particular, the Treasury Department and 

the IRS request comments as to how the 

proposed regulations might alter 

incentives regarding contributions to 

state and local tax credit programs. 

Based on an analysis of confidential 

taxpayer return data and forecasts using 

that data, the Treasury Department and 

the IRS note that these proposed 

regulations will leave charitable giving 

incentives entirely unchanged for the 

vast majority of taxpayers. After passage 

of the Act, which significantly increased 

the standard deduction, it is estimated 

that ninety percent of taxpayers will not 

claim itemized deductions of any kind. 

Those taxpayers are entirely unaffected 

by these proposed regulations. It is 

estimated that approximately five 

percent of taxpayers will itemize and 

will have state and local income tax 

deductions above the SALT cap; these 

taxpayers will receive the same federal 

tax benefits under the proposed 

regulations as they received prior to the 

Act. See Example 1 above. It is 

estimated that approximately five 

percent of taxpayers will itemize but 

will not have state and local income tax 

deductions above the SALT cap. The 

federal tax benefits available to this 

fraction of taxpayers could be affected 

by the proposed regulations only if they 

contribute to programs that entitle them 

to state tax credits of greater than 15 

percent. See Example 2 above. The 

Treasury Department and the IRS 

believe that most taxpayers in this third 

category have never used any state tax 

credit programs affected by the 

proposed regulations, and that the 

proposed regulations will have at most 

a highly limited, marginal effect on 

taxpayer decisions to donate to tax 

credit programs that pre-date TCJA, 

including educational scholarship 

programs.6 The Treasury Department 

and the IRS request comments on this 

important consideration and any 

potential unintended consequences of 

the proposed regulations not addressed 

here. 

TABLE 1—TAX TREATMENT OF $1,000 CONTRIBUTION TO (A) ORGANIZATION THAT GIVES RISE TO $1,000 STATE TAX

CREDIT AND (B) ORGANIZATION FOR WHICH CONTRIBUTION IS DEDUCTIBLE AT THE STATE LEVEL

Change in 

Prior law Baseline Proposed rule 

A B A B A B 

Example 1: Taxpayer Above the SALT Cap, Not Subject to the AMT 

State Income Tax Liability ............................................... ¥1,000 ¥50 ¥1,000 ¥50 ¥1,000 ¥50 

Federal Income Tax: 

Charitable Contribution Deduction ............................ 1,000 1,000 1,000 1,000 0 1,000 

Deduction for State and Local Taxes ....................... ¥1,000 ¥50 0 0 0 0 

Itemized Deductions ................................................. 0 950 1,000 1,000 0 1,000 

Taxable Income ........................................................ 0 ¥950 ¥1,000 ¥1,000 0 ¥1,000 

Federal Tax Liability ......................................................... 0 ¥228 ¥240 ¥240 0 ¥240 

Total Tax Benefit (Federal + State) ................................. 1,000 278 1,240 290 1,000 290 

Net Cost to Taxpayer of $1,000 Contribution .................. 0 722 ¥240 710 0 710 


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TABLE 1—TAX TREATMENT OF $1,000 CONTRIBUTION TO (A) ORGANIZATION THAT GIVES RISE TO $1,000 STATE TAX

CREDIT AND (B) ORGANIZATION FOR WHICH CONTRIBUTION IS DEDUCTIBLE AT THE STATE LEVEL—Continued 

Change in 

Prior law Baseline Proposed rule 

A B A B A B 

Example 2: Taxpayer Below the SALT Cap, Not Subject to the AMT 

State Income Tax Liability ............................................... ¥1,000 ¥50 ¥1,000 ¥50 ¥1,000 ¥50 

Federal Income Tax: 

Charitable Contribution Deduction ............................ 1,000 1,000 1,000 1,000 0 1,000 

Deduction for State and Local Taxes ....................... ¥1,000 ¥50 ¥1,000 ¥50 ¥1,000 ¥50 

Itemized Deductions ................................................. 0 950 0 950 ¥1,000 950 

Taxable Income ........................................................ 0 ¥950 0 ¥950 1,000 ¥950 

Federal Tax Liability ......................................................... 0 ¥228 0 ¥228 240 ¥228 

Total Tax Benefit (Federal + State) ................................. 1,000 278 1,000 278 760 278 

Net Cost to Taxpayer of $1,000 Contribution .................. 0 722 0 722 240 722 

Example 3: Taxpayer Subject to the AMT 

State Income Tax Liability ............................................... ¥1,000 ¥50 ¥1,000 ¥50 ¥1,000 ¥50 

Federal Income Tax: 

Alternative minimum taxable Income ....................... ¥1,000 ¥1,000 ¥1,000 ¥1,000 0 ¥1,000 

Federal Tax Liability ......................................................... ¥260 ¥260 ¥260 ¥260 0 ¥260 

Total Tax Benefit (Federal + State) ................................. 1,260 310 1,260 310 1,000 310 

Net Cost to Taxpayer of $1,000 Contribution .................. ¥260 690 ¥260 690 0 690 

Assumptions: The taxpayer itemizes deductions and has more than $1,000 of state tax liability. Under prior law, the taxpayer is not subject to 

the overall limitation on itemized deductions under section 68. The taxpayer faces a 24 percent marginal rate under the federal income tax. If the 

taxpayer is subject to the AMT, the taxpayer faces a 26 percent marginal rate. A $1,000 contribution to charitable organization A generates a 

$1,000 state tax credit. A $1,000 contribution to charitable organization B is ineligible for a state tax credit but is deductible under the state’s income tax. The taxpayer faces a 5 percent marginal rate under the state’s income tax. The baseline assumes continuation of the IRS administrative position that state and local tax credits are not reflected as a return benefit or consideration and therefore do not reduce the taxpayer’s charitable contribution deduction under section 170(a). Total Tax Benefit refers to the absolute value of the reduction of the taxpayer’s combined federal and state tax liability. 

Regulatory Flexibility Act 

The Regulatory Flexibility Act (5 

U.S.C. chapter 6) does not apply 

because the proposed regulations 

primarily affect individuals and do not 

impose costs, including a collection of 

information, on small entities. 

Therefore, a regulatory flexibility 

analysis is not required. Pursuant to 

section 7805(f), this notice of proposed 

rulemaking will be submitted to the 

Chief Counsel for Advocacy of the Small 

Business Administration for comment 

on its impact on small businesses. 

Comments and Public Hearing 

Before the regulations proposed 

herein are adopted as final regulations, 

consideration will be given to any 

electronic and written comments that 

are submitted timely to the IRS as 

prescribed in this preamble under the 

ADDRESSES heading. The Treasury 

Department and the IRS request 

comments on all aspects of the proposed 

regulations including: (1) Whether there 

should be recognition of gain or loss 

when property is transferred in 

consideration for state or local tax 

credits that are not de minimis; (2) 

determination of the basis of a 

transferable tax credit that a taxpayer 

sells or exchanges; (3) procedures by 

which a taxpayer may establish that the 

taxpayer declined receipt of the state or 

local tax credit; (4) substantiation and 

reporting requirements for donors and 

donees making or receiving payments or 

transfers of property in return for state 

and local tax credits; (5) for a taxpayer 

that receives or expects to receive a state 

or local tax deduction in an amount that 

exceeds the amount of the taxpayer’s 

payment or the fair market value of the 

property transferred to an entity listed 

in section 170(c), suggestions for 

calculating the reduction to the 

charitable contribution deduction; and 

(6) whether and in what manner the 

regulations should address other state or 

local tax benefits, such as tax 

exclusions, that may be provided as 

consideration for certain payments or 

transfers to an entity listed in section 

170(c). Finally, the Treasury Department 

and the IRS request comments on 

alternative regulatory approaches that 

would effectively prevent 

circumvention of the new statutory 

limitation on state and local tax 

deductions, consistent with applicable 

law. 

All comments submitted will be made 

available at www.regulations.gov or 

upon request. A public hearing has been 

scheduled for November 5, 2018, 

beginning at 10 a.m. in the Auditorium 

of the Internal Revenue Building, 1111 

Constitution Avenue NW, Washington, 

DC 20224. Due to building security 

procedures, visitors must enter at the 

Constitution Avenue entrance. In 

addition, all visitors must present photo 

identification to enter the building. 

Because of access restrictions, visitors 

will not be admitted beyond the 

immediate entrance area more than 30 

minutes before the hearing starts. For 

more information about having your 

name placed on the building access list 

to attend the hearing, see the FOR

FURTHER INFORMATION CONTACT section of 

this preamble. 

The rules of 26 CFR 601.601(a)(3) 

apply to the hearing. Persons who wish 

to present oral comments at the hearing 

must submit an outline of the topics to 

be discussed and the time to be devoted 

to each topic by October 11, 2018. 

Submit a signed paper or electronic 

copy of the outline as prescribed in this 

preamble under the ADDRESSES heading. 

An agenda showing the scheduling of 

the speakers will be prepared after the 

deadline for receiving outlines has 

passed. Copies of the agenda will be 

available free of charge at the hearing. 

Drafting Information 

The principal authors of these 

proposed regulations are personnel from 

the Office of the Associate Chief 

Counsel (Income Tax and Accounting). 

However, other personnel from the IRS 


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and the Treasury Department 

participated in their development. 

List of Subjects in 26 CFR Part 1 

Income taxes, Reporting and 

recordkeeping requirements. 

Proposed Amendments to the 

Regulations 

Accordingly, 26 CFR part 1 is 

proposed to be amended as follows: 

PART 1—INCOME TAXES 

■ Paragraph 1. The authority citation 

for part 1 continues to read in part as 

follows: 

Authority: 26 U.S.C. 7805 * * * 

■ Par. 2. Section 1.170A–1 is amended 

by redesignating paragraphs (h)(3) 

through (h)(5) as paragraphs (h)(4) 

through (h)(6), and adding a new 

paragraph (h)(3) to read as follows: 

§ 1.170A–1 Charitable, etc., contributions 

and gifts; allowance of deduction. 

* * * * * 

(h) * * * 

(3) Payments resulting in state or local 

tax benefits. (i) State or local tax credits. 

Except as provided in paragraph 

(h)(3)(v) of this section, if a taxpayer 

makes a payment or transfers property 

to or for the use of an entity listed in 

section 170(c), the amount of the 

taxpayer’s charitable contribution 

deduction under section 170(a) is 

reduced by the amount of any state or 

local tax credit that the taxpayer 

receives or expects to receive in 

consideration for the taxpayer’s 

payment or transfer. 

(ii) State or local tax deductions. (A) 

In general. If a taxpayer makes a 

payment or transfers property to or for 

the use of an entity listed in section 

170(c), and the taxpayer receives or 

expects to receive a state or local tax 

deduction that does not exceed the 

amount of the taxpayer’s payment or the 

fair market value of the property 

transferred by the taxpayer to such 

entity, the taxpayer is not required to 

reduce its charitable contribution 

deduction under section 170(a) on 

account of such state or local tax 

deduction. 

(B) Excess state or local tax 

deductions. If the taxpayer receives or 

expects to receive a state or local tax 

deduction that exceeds the amount of 

the taxpayer’s payment or the fair 

market value of the property transferred, 

the taxpayer’s charitable contribution 

deduction under section 170 is reduced. 

(iii) In consideration for. For purposes 

of paragraph (h)(3)(i) of this section, the 

term in consideration for shall have the 

meaning set forth in § 1.170A–13(f)(6), 

except that the state or local tax credit 

need not be provided by the donee 

organization. 

(iv) Amount of reduction. For 

purposes of paragraph (h)(3)(i) of this 

section, the amount of any state or local 

tax credit is the maximum credit 

allowable that corresponds to the 

amount of the taxpayer’s payment or 

transfer to the entity listed in section 

170(c). 

(v) State or local tax. For purposes of 

paragraph (h)(3) of this section, the term 

state or local tax means a tax imposed 

by a State, a possession of the United 

States, or by a political subdivision of 

any of the foregoing, or by the District 

of Columbia. 

(vi) Exception. Paragraph (h)(3)(i) of 

this section shall not apply to any 

payment or transfer of property if the 

amount of the state or local tax credit 

received or expected to be received by 

the taxpayer does not exceed 15 percent 

of the taxpayer’s payment, or 15 percent 

of the fair market value of the property 

transferred by the taxpayer. 

(vii) Examples. The following 

examples illustrate the provisions of 

this paragraph (h)(3). The examples in 

paragraph (h)(6) of this section are not 

illustrative for purposes of this 

paragraph (h)(3). 

Example 1. A, an individual, makes a 

payment of $1,000 to X, an entity listed in 

section 170(c). In exchange for the payment, 

A receives or expects to receive a state tax 

credit of 70% of the amount of A’s payment 

to X. Under paragraph (h)(3)(i) of this section, 

A’s charitable contribution deduction is 

reduced by $700 (70% × $1,000). This 

reduction occurs regardless of whether A is 

able to claim the state tax credit in that year. 

Thus, A’s charitable contribution deduction 

for the $1,000 payment to X may not exceed 

$300. 

Example 2. B, an individual, transfers a 

painting to Y, an entity listed in section 

170(c). At the time of the transfer, the 

painting has a fair market value of $100,000. 

In exchange for the painting, B receives or 

expects to receive a state tax credit equal to 

10% of the fair market value of the painting. 

Under paragraph (h)(3)(vi) of this section, B 

is not required to apply the general rule of 

paragraph (h)(3)(i) of this section because the 

amount of the tax credit received or expected 

to be received by B does not exceed 15% of 

the fair market value of the property 

transferred to Y. Accordingly, the amount of 

B’s charitable contribution deduction for the 

transfer of the painting is not reduced under 

paragraph (h)(3)(i) of this section. 

Example 3. C, an individual, makes a 

payment of $1,000 to Z, an entity listed in 

section 170(c). In exchange for the payment, 

under state M law, C is entitled to receive a 

state tax deduction equal to the amount paid 

by C to Z. Under paragraph (h)(3)(ii)(A) of 

this section, C is not required to reduce its 

charitable contribution deduction under 

section 170(a) on account of the state tax 

deduction. 

(viii) Effective/applicability date. This 

paragraph (h)(3) applies to amounts 

paid or property transferred by a 

taxpayer after August 27, 2018. 

* * * * * 

§ 1.170A–13 [Amended] 

■ Par. 3. Section 1.170A–13(f)(7) is 

amended by removing the crossreference ‘‘§ 1.170A–1(h)(4)’’ and adding 

in its place ‘‘§ 1.170A–1(h)(5)’’. 

■ Par. 4. Section 1.642(c)–3 is amended 

by adding paragraph (g) to read as 

follows: 

§ 1.642(c)–3 Adjustments and other 

special rules for determining unlimited 

charitable contributions deduction. 

* * * * * 

(g) Payments resulting in state or local 

tax benefits—(1) In general. If the trust 

or decedent’s estate makes a payment of 

gross income for a purpose specified in 

section 170(c), and the trust or 

decedent’s estate receives or expects to 

receive a state or local tax benefit in 

consideration for such payment, 

§ 1.170A–1(h)(3) applies in determining 

the charitable contribution deduction 

under section 642(c). 

(2) Effective/applicability date. 

Paragraph (g)(1) of this section applies 

to payments of gross income after 

August 27, 2018. 

Kristen Wielobob, 

Deputy Commissioner for Services and 

Enforcement. 

[FR Doc. 2018–18377 Filed 8–23–18; 4:15 pm] 

BILLING CODE 4830–01–P 

ENVIRONMENTAL PROTECTION 

AGENCY 

40 CFR Part 52 

[EPA–R03–OAR–2017–0598; FRL–9982– 

85—Region 3] 

Approval and Promulgation of Air 

Quality Implementation Plans; 

Maryland; Regional Haze Five-Year 

Progress Report 

AGENCY: Environmental Protection 

Agency (EPA). 

ACTION: Proposed rule. 

SUMMARY: The Environmental Protection 

Agency (EPA) is proposing to approve a 

state implementation plan (SIP) revision 

submitted by the State of Maryland. 

Maryland’s SIP revision, the Regional 

Haze Five-Year Progress Report, 

addresses Clean Air Act (CAA) 

provisions that require the State to 

submit periodic reports addressing 

reasonable progress goals (RPGs) 

established for regional haze and to 

make a determination of the adequacy of 


amozie on DSK3GDR082PROD with PROPOSALS1