Treatment of Payments to Charitable Entities in Return for Consideration
| Published date | 17 December 2019 |
| Citation | 84 FR 68833 |
| Record Number | 2019-26969 |
| Section | Proposed rules |
| Court | Internal Revenue Service,Treasury Department |
Federal Register, Volume 84 Issue 242 (Tuesday, December 17, 2019)
[Federal Register Volume 84, Number 242 (Tuesday, December 17, 2019)]
[Proposed Rules]
[Pages 68833-68842]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-26969]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-107431-19]
RIN 1545-BP40
Treatment of Payments to Charitable Entities in Return for
Consideration
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking and notification of public
hearing.
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SUMMARY: This document provides proposed amendments to the regulations
under sections 162, 164, and 170 of the Internal Revenue Code (Code).
First, the proposed amendments update the regulations under section 162
to reflect current law regarding the application of section 162 to a
taxpayer that makes a payment or transfer to an entity described in
section 170(c) for a business purpose. Second, the proposed amendments
provide safe harbors under section 162 to provide certainty with
respect to the treatment of payments made by business entities to an
entity described in section 170(c). Third, the proposed amendments
provide a safe harbor under section 164 for payments made to an entity
described in section 170(c) by individuals who itemize deductions and
receive or expect to receive a state or local tax credit in return.
Fourth, the proposed amendments update the regulations under section
170 to reflect past guidance and case law regarding the application of
the quid pro quo principle under section 170 to benefits received or
expected to be received by a donor from a third party.
DATES: Written or electronic comments must be received by January 31,
2020 Requests to speak and outlines of topics to be discussed at the
public hearing scheduled for February 20, 2020, must be received by
January 31, 2020.
ADDRESSES: Submit electronic submissions via the Federal eRulemaking
Portal at http://www.regulations.gov (indicate IRS and REG-107431-19)
by following the online instructions for submitting comments. Once
submitted to the Federal eRulemaking Portal, comments cannot be edited
or withdrawn. The Department of the Treasury (Treasury Department) and
the IRS will publish for public availability any comment received to
its public docket, whether submitted electronically or in hard copy.
Send hard copy submissions to: CC:PA:LPD:PR (REG-107431-19), Room 5203,
Internal Revenue Service, P.O. Box 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may be hand-delivered Monday through
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
107431-19), Courier's Desk, Internal Revenue Service, 1111 Constitution
Avenue NW, Washington, DC 20224.
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,
Mon L. Lam and Merrill D. Feldstein at (202) 317-4059; concerning
submission of comments and requests to speak at the public hearing,
Regina Johnson at (202) 317-6901 (not toll-free numbers) or
[email protected].
SUPPLEMENTARY INFORMATION:
Background and Explanation of Provisions
I. Contributions in Exchange for State and Local Tax Credits
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 '' an entity described in that section. Under
section 170(c)(1), such entities include a State, a possession of the
United States, or any political subdivision of the foregoing, or the
District of Columbia. Section 170(c)(2) includes 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 1.170A-1(c)(5) of the Income Tax Regulations provides
that transfers of property to an organization described in section
170(c) that bear a direct relationship to the taxpayer's trade or
business and that are made with a reasonable expectation of financial
return commensurate with the amount of the transfer may constitute
allowable
[[Page 68834]]
deductions as trade or business expenses rather than as charitable
contributions. Section 162(a) allows a deduction for all the ordinary
and necessary expenses paid or incurred during the taxable year in
carrying on any trade or business. Section 162(b) provides that no
deduction shall be allowed under subsection (a) for any contribution or
gift that would be allowable as a deduction under section 170 were it
not for the percentage limitations, the dollar limitations, or the
requirements as to the time of payment set forth in that section.
Section 1.162-15(a) applies to contributions to entities described
in section 170(c). Section 1.162-15(a)(1) currently provides that no
deduction is allowable under section 162(a) for a contribution or gift
by an individual or a corporation if any part thereof is deductible
under section 170. For example, if a taxpayer makes a contribution of
$5,000 and only $4,000 of this amount is deductible under section
170(a) (whether because of the percentage limitation under either
section 170(b)(1) or (2), the requirement as to time of payment, or
both), no deduction is allowable under section 162(a) for the remaining
$1,000. However, Sec. 1.162-15(a)(2) clarifies that the limitations
provided in section 162(b) and Sec. 1.162-15(a)(1) apply only to
payments that are in fact contributions or gifts to organizations
described in section 170. For example, payments by a transit company to
a local hospital (which is a charitable organization within the meaning
of section 170) in consideration of a binding obligation on the part of
the hospital to provide hospital services and facilities for the
company's employees are not contributions or gifts within the meaning
of section 170 and may be deductible under section 162(a) if the
requirements of section 162(a) are otherwise satisfied.
Section 164(a) allows a deduction for the payment of certain taxes,
including: (1) State and local, and foreign, real property taxes; (2)
state and local personal property taxes; and (3) state and local, and
foreign, income, war profits, and excess profits taxes. In addition,
section 164 allows a deduction for taxes not described in the preceding
sentence that are paid or accrued within the taxable year in carrying
on a trade or business or an activity described in section 212.
Moreover, under section 164(b)(5), taxpayers may elect to deduct state
and local general sales taxes in lieu of state and local income taxes.
Section 164(b)(6), as added by section 11042(a) of the Tax Cuts and
Jobs Act Public Law 115-97, (the ``TCJA'') provides that in the case of
an individual, deductions for foreign real property taxes are not
allowable under section 164(a)(1), and the deduction for the aggregate
amount of the following state and local taxes paid during the calendar
year is limited to $10,000 ($5,000 in the case of a married individual
filing a separate return): (1) Real property taxes; (2) personal
property taxes; (3) income, war profits, and excess profits taxes; and
(4) general sales taxes. This limitation applies to taxable years
beginning after December 31, 2017, and before January 1, 2026, and does
not apply to foreign taxes described in section 164(a)(3) or to any
taxes described in section 164(a)(1) and (2) that are paid or accrued
in carrying on a trade or business or an activity described in section
212.
In response to the limitation in section 164(b)(6), some taxpayers
have considered tax planning strategies to avoid or mitigate its
effects. Some of these strategies rely on state and local tax credit
programs under which states provide tax credits in return for
contributions by taxpayers to entities described in section 170(c), and
some state and local governments have created new programs intended to
facilitate use of these strategies.
On June 11, 2018, the Treasury Department and the IRS announced
their intention to propose regulations addressing the proper
application of sections 164 and 170 to taxpayers who make contributions
under state and local tax credit programs to entities described in
section 170(c). See Notice 2018-54, 2018-24 I.R.B. 750. On August 27,
2018, proposed regulations (REG-112176-18) under sections 170 and
642(c) were published in the Federal Register (83 FR 43563) (``2018
proposed regulations''). The 2018 proposed regulations proposed
amending Sec. 1.170A-1(h)(3) to provide, in general, that if a
taxpayer makes a payment or transfers property to or for the use of an
entity described in section 170(c), and the taxpayer receives or
expects to receive a state or local tax credit in return for such
payment or transfer, the tax credit constitutes a return benefit to the
taxpayer and reduces the taxpayer's charitable contribution deduction.
The 2018 proposed regulations were premised, in part, on the quid pro
quo principle articulated by the Supreme Court in United States v.
American Bar Endowment, 477 U.S. 105, 116 (1986), and its progeny that
``a payment of money generally cannot constitute a charitable deduction
if the contributor expects a substantial benefit in return.'' The 2018
proposed regulations also proposed amending regulations under section
642(c), to provide a similar rule for payments made by a trust or
decedent's estate.
The Treasury Department and the IRS received over 7,700 comments
responding to the 2018 proposed regulations and 25 requests to speak at
the public hearing, which was held on November 5, 2018. After taking
into account the comments received and the concerns expressed at the
public hearing, the Treasury Department and the IRS published final
regulations in the Federal Register on June 13, 2019 (T.D. 9864, 84 FR
27513) (``the final regulations''). The final regulations retained the
rules set out in the 2018 proposed regulations, with certain clarifying
and technical changes. Most significantly, the final regulations
retained the general rule that, if a taxpayer makes a payment or
transfers property to or for the use of an entity described in section
170(c), and the taxpayer receives or expects to receive a state or
local tax credit in return for such transfer, the tax credit
constitutes a return benefit to the taxpayer, or quid pro quo, reducing
the taxpayer's charitable contribution deduction. See Sec. 1.170A-
1(h)(3) of the final regulations.
In response to Notice 2018-54 and the 2018 proposed regulations,
commenters raised several ancillary issues. These issues involved: (1)
Treatment of business entity payments to entities described in section
170(c); (2) treatment of payments by individuals with total state and
local tax liabilities that were less than or equal to the section
164(b)(6) limitations; and (3) application of the quid pro quo
principle under section 170 to benefits received or expected to be
received by the donor from a party other than the donee.
Although the Treasury Department and the IRS have provided sub-
regulatory safe harbors related to the first two issues (in Rev. Proc.
2019-12, 2019-04 I.R.B. 401, and Notice 2019-12, 2019-27 I.R.B. 57),
the Treasury Department and the IRS believe that it is appropriate to
include these safe harbors in proposed regulations and to request
comments. Further, in the preamble to the final regulations, the
Treasury Department and the IRS extensively addressed the third issue--
whether a benefit received or expected to be received from a party
other than the donee may constitute a quid pro quo that reduces the
taxpayer's charitable contribution deduction under section 170. The
preamble to the final regulations stated that the Treasury Department
and the IRS would propose additional regulations setting forth a
general rule for benefits received or
[[Page 68835]]
expected to be received from third parties. Accordingly, the proposed
regulations, provided herein, would amend the regulations under
sections 162, 164, and 170 to provide guidance on these three issues.
II. Payments by Business Entities in Exchange for State or Local Tax
Credits
After the issuance of Notice 2018-54, and continuing after the
publication of the 2018 proposed regulations, the Treasury Department
and the IRS received inquiries from taxpayers regarding the application
of the proposed regulations to businesses that make payments to
entities described in section 170(c) pursuant to state and local tax
credit programs. The taxpayers sought guidance as to whether a business
entity may deduct these payments under section 162 as ordinary and
necessary business expenses incurred in carrying on a trade or
business. In response, on September 5, 2018, the IRS released a
frequently asked question (``FAQ'') stating that a business taxpayer
making a payment to an entity described in section 170(c) is generally
permitted to deduct such payment as an ordinary and necessary business
expense under section 162 if the payment is made with a business
purpose. However, after the release of the FAQ, taxpayers continued to
express concern about whether the business purpose requirement is met
for contributions that result in a tax credit. Specifically, taxpayers
asked whether payments by business entities in exchange for state and
local tax credits would bear a direct relationship to the taxpayer's
trade or business such that these payments would qualify as ordinary
and necessary business expenses of carrying on a trade or business
under section 162(a).
On December 28, 2018, the IRS issued Rev. Proc. 2019-12, providing
a safe harbor under section 162 for payments made by a business entity
that is a C corporation or specified passthrough entity to or for the
use of an organization described in section 170(c) if the C corporation
or specified passthrough entity receives or expects to receive state or
local tax credits in return. The revenue procedure states that, to the
extent that a C corporation receives or expects to receive a state or
local tax credit in return for a payment to an organization described
in section 170(c), it is reasonable to conclude that there is a direct
benefit and a reasonable expectation of commensurate financial return
to the C corporation's business in the form of a reduction in the state
or local taxes the C corporation would otherwise be required to pay.
Thus, the revenue procedure provides a safe harbor that allows a C
corporation engaged in a trade or business to treat the portion of the
payment that is equal to the amount of the credit received or expected
to be received as meeting the requirements of an ordinary and necessary
business expense under section 162.
The IRS determined that a similar analysis is appropriate in the
case of a business entity other than a C corporation if (1) the
business entity is regarded as separate from its owner for all Federal
tax purposes under Sec. 301.7701-3 of the Procedure and Administration
Regulations (``passthrough entity''); (2) the passthrough entity
operates a trade or business within the meaning of section 162; (3) the
passthrough entity is subject to a state or local tax incurred in
carrying on its trade or business that is imposed directly on the
entity; and (4) in return for a payment to an entity described in
section 170(c), the passthrough entity receives or expects to receive a
state or local tax credit that the entity applies or expects to apply
to offset a state or local tax other than a state or local income tax.
Thus, to the extent that a specified passthrough entity makes a payment
to an entity described in section 170(c) and receives or expects to
receive a state or local tax credit, Rev. Proc. 2019-12 permits the
passthrough entity to treat the payment as meeting the requirements of
an ordinary and necessary business expense under section 162. The safe
harbors for C corporations and specified passthrough entities apply
only to payments of cash and cash equivalents.
In the interest of providing certainty for taxpayers, the Treasury
Department and the IRS believe that it is appropriate to propose
regulations to incorporate the safe harbors set out in Rev. Proc. 2019-
12 and to request comments on these safe harbors. Thus, these proposed
regulations propose amending Sec. 1.162-15(a) to incorporate the Rev.
Proc. 2019-12 safe harbors. These proposed regulations also propose
amending Sec. 1.170A-1(c)(5) and (h)(3)(viii) to provide cross
references to Sec. 1.162-15(a). The Treasury Department and the IRS
specifically request comments on whether the safe harbors should be
expanded to apply to an individual who is carrying on a trade or
business or an activity described in section 212.
The proposed regulations propose additional revisions to Sec.
1.162-15(a) to more clearly reflect the current state of the law
regarding a taxpayer's payment or transfer to an entity described in
section 170(c). If the taxpayer's payment or transfer bears a direct
relationship to its trade or business, and the payment is made with a
reasonable expectation of commensurate financial return, the payment or
transfer to the section 170(c) entity may constitute an allowable
deduction as a trade or business expense under section 162, rather than
a charitable contribution under section 170. See Sec. 1.170A-1(c)(5);
Marquis v. Commissioner, 49 T.C. 695 (1968). A proposed example
illustrates that this rule applies regardless of whether the taxpayer
expects to receive a state or local tax credit in return.
The proposed revisions are also consistent with the decision in
American Bar Endowment, which states that a payment to an entity
described in section 170(c) may have a dual character--part charitable
contribution and part business expense. 477 U.S. at 117. Under American
Bar Endowment and Sec. 1.170A-1(h), if a taxpayer makes a payment to
an entity described under section 170(c) in an amount that exceeds the
fair market value of the benefit that the taxpayer receives or expects
to receive in return, and this excess amount is paid with charitable
intent, the taxpayer is allowed a charitable contribution deduction
under section 170 for this excess amount.
In addition, the proposed regulations propose to add a cross-
reference to Sec. 1.170A-1(h) (payments to section 170(c) entities in
exchange for consideration), which provides more detailed rules for
determining whether a payment, or a portion of a payment, to an entity
described in section 170(c) may be deducted under section 162(a) or
section 170.
III. Payments by Individuals in Exchange for State and Local Tax
Credits
After publication of the 2018 proposed regulations, commenters
expressed concerns that the proposed regulations would create unfair
consequences for certain individuals who receive state or local tax
credits in return for their payments. Specifically, commenters noted
that individuals who itemize deductions for Federal income tax purposes
and have total state and local tax liabilities for the taxable year of
$10,000 or less ($5,000 or less in the case of a married individual
filing a separate return) would be precluded from taking charitable
contribution deductions to the extent that they receive state or local
tax credits even though the individuals would have been able to deduct
equivalent payments of state and local taxes. Thus, if these
individuals chose to make a payment to a section 170(c) entity through
a state or local tax credit program instead of
[[Page 68836]]
paying tax to the state or local government, they would lose the
deduction to which they would otherwise have been entitled under
section 164 even after the application of the section 164(b)(6)
limitation.
These state and local tax credit programs effectively offer
taxpayers a choice of paying taxes to the state or local government or
making a payment to a section 170(c) entity and receiving a tax credit
that offsets a tax liability the taxpayer would otherwise owe to the
state or local government. This situation can be analogized to
situations in which an individual entitled to receive a payment from a
second party directs or permits the second party to satisfy its payment
obligation by making a payment to a third party. In such situations,
the payment may be treated, for Federal income tax purposes, as a
payment by the payor to the individual entitled to receive payment. Cf.
Rev. Rul. 86-14, 1986-1 C.B. 304, modifying Rev. Rul. 74-75, 1974-1
C.B. 19 (payment made by an employer to a third party to discharge an
obligation of an employee treated for Federal income tax purposes as
made by the employer to the employee).
For these reasons, on June 11, 2019, the IRS released Notice 2019-
12, announcing that the Treasury Department and the IRS intend to
publish proposed regulations with a safe harbor under section 164 for
individuals who make payments to section 170(c) entities in return for
state or local tax credits. Under this safe harbor, an individual who
itemizes deductions and who makes a payment to an entity described in
section 170(c) in exchange for a state or local tax credit may treat as
a payment of state or local tax for purposes of section 164 the portion
of such payment for which a charitable contribution deduction is or
will be disallowed under Sec. 1.170A-1(h)(3). This treatment is
allowed in the taxable year in which the payment is made, but only to
the extent that the individual applies the resulting credit pursuant to
applicable state or local law to offset the individual's state or local
tax liability for such taxable year or the preceding taxable year.
Notice 2019-12 requested comments for purposes of incorporating the
safe harbor in proposed regulations.
The Treasury Department and the IRS received several comments in
response to Notice 2019-12. Generally, commenters responded favorably
to the safe harbor in the notice, finding that its rationale was sound
and that the rule would effectively eliminate concerns that the final
regulations under Sec. 1.170A-1(h)(3) unfairly burden individuals who
itemize deductions and have state and local tax liabilities that are
less than the section 164(b)(6) limitation. One commenter noted that
Executive Order 12866, which directs the agency issuing a regulation to
identify the problem it intends to address and design the regulation in
the most cost-effective manner to achieve that objective with the least
amount of burden on society, further supports the safe harbor. See
Executive Order 12866, section 1(b). This commenter also suggested that
the IRS should track the effects of the safe harbor by requiring
taxpayers to disclose state tax and local tax credits on their Form
1040, Schedule A. Alternatively, the commenter suggested that the IRS
obtain this information directly from the states. Another commenter
generally supported the safe harbor, but suggested that the Treasury
Department and the IRS should avoid creating more safe harbor
exceptions to Sec. 1.170A-1(h)(3) of the final regulations. This
commenter also expressed concerns about the application of the safe
harbor when the state and local tax limitation under section 164(b)(6)
expires or is modified.
Other commenters were concerned that Notice 2019-12 did not fully
address the tax consequences to taxpayers who received or expected to
receive state or local tax credits. Specifically, these commenters
asked that the Treasury Department and the IRS provide guidance to
address the treatment of state or local tax credits for Federal income
tax purposes upon their sale or expiration. As noted in the preamble to
the final regulations, the Treasury Department and the IRS recognize
the significance and complexity of these questions. The Treasury
Department and the IRS continue to study these issues and invite
additional comment to inform potential future guidance on these issues.
The Treasury Department and the IRS continue to believe that the
notice provides a fair, reasonable, and legally sound basis for the
safe harbor for individual taxpayers, and that the safe harbor should
be added to the regulations under section 164. Accordingly, these
proposed regulations propose adding Sec. 1.164-3(j) to provide a safe
harbor for individuals who make a payment to or for the use of an
entity described in section 170(c) in return for a state or local tax
credit. These proposed regulations also propose adding Sec. 1.170A-
1(h)(3)(ix) to provide a cross reference to the safe harbor proposed
under Sec. 1.164-3(j) and to request comments.
Under these proposed regulations, an individual who itemizes
deductions and who makes a payment to a section 170(c) entity in
exchange for a state or local tax credit may treat as a payment of
state or local tax for purposes of section 164 the portion of such
payment for which a charitable contribution deduction under section 170
is or will be disallowed under Sec. 1.170A-1(h)(3). This treatment is
allowed in the taxable year in which the payment is made, but only to
the extent that the resulting credit is applied pursuant to applicable
state or local law to offset the individual's state or local tax
liability for such taxable year or the preceding taxable year. Any
unused credit permitted to be carried forward may be treated as a
payment of state or local tax under section 164 in the taxable year or
years for which the carryover credit is applied in accordance with
state or local law. The safe harbor for individuals applies only to
payments of cash and cash equivalents.
The proposed regulations are not intended to permit a taxpayer to
avoid the limitations of section 164(b)(6). Therefore, the proposed
regulations provide that any payment treated as a state or local tax
under section 164, pursuant to the safe harbor provided in Sec. 1.164-
3(j) of the proposed regulations, is subject to the limitations on
deductions in section 164(b)(6). Furthermore, the proposed regulations
are not intended to permit deductions of the same payments under more
than one provision. Thus, the proposed regulations provide that an
individual who relies on the safe harbor in Sec. 1.164-3(j) to deduct
qualifying payments under section 164 may not also deduct the same
payments under any other section of the Code.
IV. Consideration Provided by Party Other Than the Donee
Section 1.170A-1(h)(1) provides 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 Sec.
1.170A-13(f)(6)) goods or services (as defined in Sec. 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 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-1(h)(2) states that the charitable contribution
deduction under section 170(a) may not exceed the amount of cash paid
and the fair market value of property transferred to an organization
described in section 170(c) over the fair market value of goods or
[[Page 68837]]
services the organization provides in return. Section 1.170A-13(f)(5)
defines goods or services as cash, property, services, benefits, and
privileges. Section 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 a payment to the donee, the taxpayer receives
or expects to receive goods or services in exchange for that payment.
Section 1.170A-1(h)(3)(iii) defines ``in consideration for'' for
purposes of determining whether a state or local tax credit should
reduce a charitable contribution under section 170. This section
provides that the term ``in consideration for'' shall have the meaning
set forth in Sec. 1.170A-13(f)(6), except that the state or local tax
credit need not be provided by the donee organization.
Some commenters on the 2018 proposed regulations interpreted the
definition of ``in consideration for'' under Sec. 1.170A-13(f)(6) to
suggest that consideration provided by a third party is disregarded in
calculating the charitable contribution deduction, and that Sec.
1.170A-1(h)(3)(iii) of the proposed regulations provided an exception
from this rule solely for state or local tax credits provided by third
parties. Other commenters disagreed with this interpretation and
suggested that the final regulations should set forth a general rule
clarifying that consideration includes all benefits that a taxpayer
receives or expects to receive, regardless of whether they are provided
by the donee.
In the preamble to the final regulations, the Treasury Department
and the IRS acknowledged that the final regulations did not address all
situations in which a taxpayer makes a payment or transfers property
and receives or expect to receive benefits from a party that is not the
donee. Accordingly, the preamble to the final regulations indicated
that the Treasury Department and the IRS intended to propose amendments
to the regulations under section 170 to make clear that the quid pro
quo principle applies regardless of whether the party providing the
quid pro quo is the donee.
As noted in the preamble to the final regulations, in American Bar
Endowment, 477 U.S. at 116-17, and Hernandez v. Commissioner, 490 U.S.
680, 691-92 (1989), the Supreme Court made clear that a payment is not
a charitable contribution if the donor expects to receive a substantial
benefit in return. American Bar Endowment and Hernandez did not
directly address the question of benefits provided by third parties;
the return benefits at issue in those cases were provided by the
donees. However, the Court derived the quid pro quo principle in those
cases from a lower court decision and a revenue ruling that directly
addressed the question. See American Bar Endowment, 477 U.S. at 117
(citing Singer v. United States, 449 F.2d 413 (Ct. Cl. 1971), and Rev.
Rul. 67-246, 1967-2 C.B. 104); Hernandez, 490 U.S. at 691 (citing
Singer). In Singer, the appellate division of the Court of Claims (the
predecessor to the Court of Appeals for the Federal Circuit) held that
a sewing machine company was not eligible for a charitable contribution
deduction for selling sewing machines to schools at a discount because
the company ``expected a return in the nature of future increased
sales'' to students. Singer, 449 F.2d at 423-24. In so holding, the
court expressly rejected the company's argument that this expected
benefit should be ignored because it would come from the students
rather than from the schools. Id. at 422-23. The court stated,
``Obviously, we cannot agree with plaintiff's distinction.'' Id.
In Rev. Rul. 67-246, Example 11, a local store agreed to award a
transistor radio, worth $15, to each person who contributed $50 or more
to a specific charity. The ruling concluded that if a taxpayer received
a $15 radio as a result of a $100 payment to the charity, only $85
qualified as a charitable contribution deduction. It did not matter
that the donor received the $15 radio from the store, a third party,
rather than from the charity. This conclusion is reflected in the IRS's
audit practices. See IRS Conservation Easement Audit Techniques Guide
(Rev. Jan. 24, 2018, p. 16) (stating that a ``quid pro quo contribution
is a transfer of money or property . . . partly in exchange for goods
or services in return from the charity or a third party,'' and ``a quid
pro quo may also be in the form of an indirect benefit from a third
party'').
Moreover, courts have ruled that a taxpayer's expectation of
significant financial returns demonstrates a lack of charitable intent.
For example, in Ottawa Silica Co. v. United States, 699 F.2d 1124 (Fed.
Cir. 1983), the Federal Circuit denied a taxpayer's charitable
contribution deduction for the value of land the taxpayer donated for
construction of a school. The court's analysis focused on the
taxpayer's expectation of benefits, and not on the source of such
benefits. The court found that the taxpayer had reason to believe that
construction of a school would result in the construction of new roads
that would in turn increase the value of the taxpayer's retained land.
The court recognized that although the taxpayer did not receive an
agreement from any party that the roads would be built, the expectation
of this benefit was a sufficient reason to deny the charitable
contribution deduction. More recently, in Wendell Falls Development,
LLC v. Commissioner, T.C. Memo. 2018-45, a taxpayer contributed a
conservation easement that essentially restricted land for use as a
park. The taxpayer expected this restriction to increase the value of
the taxpayer's adjacent property. The Tax Court disallowed the
taxpayer's claimed charitable contribution deduction for the easement,
finding that the taxpayer contributed the easement with the expectation
of receiving a substantial benefit (increased value of taxpayer's
adjacent property) from the contribution, even though the expected
benefit would not come from the donee. In accordance with these
authorities, the source of the return benefit is immaterial in
determining whether the donee at the time of the contribution expects
to receive substantial benefits in return.
The quid pro quo principle is thus equally applicable regardless of
whether the donor expects to receive the benefit from the donee or from
a third party. In either case, the donor's payment is not a charitable
contribution or gift to the extent that the donor expects a substantial
benefit in return. Accordingly, the Treasury Department and the IRS
propose amendments to Sec. 1.170A-1(h) that address a donor's payments
in exchange for consideration in order for the regulation to reflect
existing law. Specifically, these proposed amendments revise paragraph
(h)(4) to provide definitions of ``in consideration for'' and ``goods
and services'' for purposes of applying the rules in Sec. 1.170A-1(h).
Under the proposed regulations, a taxpayer will be treated as receiving
goods and services in consideration for a taxpayer's payment or
transfer to an entity described in section 170(c) if, at the time the
taxpayer makes the payment or transfer, the taxpayer receives or
expects to receive goods or services in return.
The proposed regulations do not amend the language of Sec. 1.170A-
13(f)(6) which discusses ``in consideration for'' for purposes of
determining whether the taxpayer provides proper substantiation of its
charitable contribution. Section 1.170A-13(f) details the requirements
of a contemporaneous written acknowledgment, including a statement of
whether the donee organization provides any goods or services in
consideration for any cash or other property transferred to the donee
organization and a description and a
[[Page 68838]]
good faith estimate of the value of those goods or services. See Sec.
1.170A-13(f)(2)(ii) and (iii). These substantiation provisions refer
only to written acknowledgments from donee organizations and do not
address the application of quid pro quo principles to benefits received
from parties other than donees. The Treasury Department and the IRS
request comments on whether guidance concerning substantiation and
reporting of quid pro quo benefits provided or expected to be provided
by third parties, including state governments, would be beneficial to
taxpayers in demonstrating that they have given more than they received
or expected to receive and to the IRS in administering the proposed
regulation. In addition, the Treasury Department and the IRS request
comments regarding the manner by which donors, donees, or third parties
may report or provide substantiation for the value or type of
consideration received or expected to be received from third parties.
For additional clarity, the proposed regulation amends the language
in Sec. 1.170A-1(h)(2)(i)(B) to clarify that the fair market value of
goods and services includes the value of goods and services provided by
parties other than the donee. Also, the proposed regulation adds a
definition of ``goods and services'' that is the same as the definition
in Sec. 1.170A-13(f)(5). Finally, the proposed regulation revises the
cross-references defining ``in consideration for'' and ``goods and
services'' in paragraphs (h)(1) and (h)(3)(iii) to be consistent with
the proposed definitions provided in paragraph (h)(4).
Proposed Applicability Dates
The proposed amendments contained in Sec. Sec. 1.162-15(a)(1) and
(2) and 1.170A-1(c)(5), regarding the application of section 162 to
taxpayers that make payments or transfers to entities described in
section 170(c), are proposed to apply to payments or transfers on or
after December 17, 2019. However, a taxpayer may rely on these proposed
regulations for payments and transfers made on or after January 1, 2018
and before the date regulations finalizing these proposed regulations
are published in the Federal Register.
The proposed amendment contained in Sec. 1.162-15(a)(3), regarding
safe harbors for C corporations and specified passthrough entities
making payments to or for the use of section 170(c) entities in
exchange for state or local tax credits, is proposed to apply to
payments on or after December 17, 2019. However, prior to this date, a
taxpayer may continue to apply Rev. Proc. 2019-12, which applies to
payments made on or after January 1, 2018.
The proposed amendments contained in Sec. Sec. 1.164-3(j) and
1.170A-1(h)(3)(ix), regarding the safe harbor for payments by certain
individuals to or for the use of section 170(c) entities, are proposed
to apply to payments made on or after June 11, 2019, the date that the
IRS issued Notice 2019-12, announcing it intended to publish proposed
regulations with a safe harbor under section 164 for individuals who
make payments to section 170(c) entities in return for state or local
tax credits. However, individuals may rely on these proposed
regulations for payments made after August 27, 2018, the applicability
date of the final regulations, and before the date regulations
finalizing these proposed regulations are published in the Federal
Register.
Finally, the proposed amendments contained in Sec. Sec. 1.170A-
1(h)(1), (h)(2)(i)(B), (h)(3)(iii), and (h)(4)(i), and 1.170A-13(f)(7)
clarifying ``in consideration for'' for purposes of applying Sec.
1.170A-1(h) are proposed to apply to payments or transfers on or after
December 17, 2019.
Special Analyses
Regulatory Planning and Review--Economic Analysis
Executive Orders 13563 and 12866 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.
This proposed rule is expected to be an E.O. 13771 regulatory action.
Details on the estimated costs of this proposed rule can be found in
the rule's economic analysis.
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. The Office of Information and Regulatory Affairs has
designated these regulations as significant under section 1(b) of the
MOA. Accordingly, the OMB has reviewed these regulations.
A. Background
Section 164 of the Code allows a deduction for certain state and
local taxes paid, including state or local income and property taxes.
Section 164(b)(6), added by the TCJA, generally limits an individual's
deduction of these taxes to $10,000 ($5,000 in the case of a married
individual filing a separate return). The limitation does not apply to
foreign income taxes or to property taxes that are paid or incurred in
carrying on a trade or business or an activity described in section
212. Section 162 allows a deduction for ordinary and necessary expenses
paid or incurred in carrying on a trade or business. Section 170 allows
a deduction for charitable contributions, specifically for payments or
transfers to an entity described in section 170(c); however, the
deduction must be reduced by any quid pro quo benefit that the taxpayer
receives or expects to receive in return.
After the enactment of the TCJA, questions arose regarding the
interaction of these deductions. To clarify the application of these
provisions, the Treasury Department and the IRS issued guidance
including: (1) Final regulations (T.D. 9864, 84 FR 27513) providing
that a tax credit received or expected to be received in return for a
payment or transfer to an entity described in section 170(c) (hereafter
referred to as a charitable entity) is a return benefit to the
taxpayer, resulting in the reduction of the charitable contribution
deduction; (2) Notice 2019-12 announcing the intent to issue proposed
regulations providing a safe harbor for individuals under which a
charitable contribution that is disallowed because of a return benefit
of a state or local tax credit may be treated as a payment of state or
local tax; and (3) Rev. Proc. 2019-12 providing a safe harbor allowing
as a deductible business expense certain payments by businesses to
charitable organizations.
B. Need for the Proposed Regulations
The Treasury Department and the IRS believe that it is appropriate
to propose as regulations and seek additional public comment on the
safe harbors provided in Notice 2019-12 and Rev. Proc. 2019-12. In
addition, comments received in response to Notice 2018-54 and the 2018
proposed regulations (guidance preceding the final regulations T.D.
9864) indicate that taxpayers will benefit from additional guidance
regarding contributions to a charitable entity resulting in a return
benefit from a third party.
[[Page 68839]]
C. Overview of the Proposed Regulations
First, these proposed regulations reflect the guidance in Notice
2019-12. Under the safe harbor an individual who itemizes deductions
and who makes a payment to a charitable entity in exchange for a state
or local tax credit may be able to claim a state and local tax
deduction for the portion of the payment for which a charitable
contribution deduction is or will be disallowed as a return benefit.
The safe harbor for individuals applies only to payments of cash and
cash equivalents. In addition, these payments are subject to the
overall limitation on state and local deductions added by the TCJA.
Further, any payment may be deducted under only one provision of the
Code. Thus, an individual who has total state and local tax liability
of $10,000 or less, and who makes a payment to a charitable entity and
receives a state tax credit in return resulting in the disallowance of
a charitable contribution deduction, may claim an itemized deduction
for the disallowed amount, subject to other requirements of the Code.
Second, the proposed regulations incorporate into the regulations
under section 162 longstanding principles from case law and existing
section 170 regulations regarding a taxpayer's payment or transfer to a
charitable entity. Specifically, the proposed regulations confirm that,
when a taxpayer's transfer or payment bears a direct relationship to
its trade or business, and that transfer or payment is made with a
reasonable expectation of commensurate financial return, the transfer
or payment to the charitable entity may constitute an allowable
deduction under section 162, rather than under section 170. In
addition, the proposed regulations incorporate the safe harbors
provided by Rev. Proc. 2019-12 for certain payments by C corporations
and specified passthrough entities, for cases in which the financial
return is a tax credit. Thus, under the proposed regulations, a C
corporation may treat the portion of the payment to a charitable entity
that is equal to the amount of tax credit received or expected to be
received in return as a deductible business expense under section 162.
Consistent with Rev. Proc. 2019-12, the proposed regulations also
provide that a specified passthrough entity may treat a payment
resulting in a tax credit as a business expense if the business is
regarded as separate from its owner for Federal tax purposes, if it
operates a trade or business within the meaning of section 162, if it
is subject to state or local tax incurred in carrying on its trade or
business that is imposed directly on the passthrough entity, and if it
receives or expects to receive a state or local tax credit in return
for the payment.
Third, the proposed regulations clarify that a payment to a
charitable entity that results in a return benefit is a quid pro quo
for purposes of section 170, regardless of whether the donor expects to
receive the benefit from the donee or from a third party. As a result,
the contribution is reduced by the amount of the return benefit for
purposes of determining the amount allowable as a charitable
contribution deduction.
D. Economic Analysis
1. Baseline
The Treasury Department and the IRS have assessed the benefits and
costs of these proposed regulations compared to a no-action baseline
that reflects anticipated Federal income tax-related behavior in the
absence of these proposed regulations.
2. Summary of Economic Effects
The proposed regulations reflect existing, published, Treasury
Department and IRS policies. As a result, they provide some additional
clarity to taxpayers by clearly articulating these existing policies as
regulations. The Treasury Department does not expect any noticeable
change in taxpayer behavior resulting from these regulations, but
requests comments on their potential economic effects. The increased
clarity, in particular the provision of safe harbors, is expected to
reduce compliance burdens.
As described in the Special Analyses for the final regulations
(T.D. 9864), allowing a payment that is disallowed as a charitable
contribution deduction because of the receipt or expected receipt of a
tax credit to be deducted as a payment of state or local tax means that
payments by taxpayers with state and local tax liabilities of $10,000
or less are subject to the same tax treatment under these proposed
regulations as under the TCJA (in absence of any guidance) and as under
the law prior to the TCJA. (See Example 2, Table 1, T.D. 9864.) It also
means that such taxpayers are not treated less favorably than taxpayers
with state and local tax liabilities in excess of $10,000 or taxpayers
subject to the Alternative Minimum Tax. (See Examples 1 and 3 of Table
1, T.D. 9864.)
The Treasury Department and the IRS request comments on the
economic effects of the proposed regulations.
Regulatory Flexibility Act
Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), it
is hereby certified that this proposed rule will not have a significant
economic impact on a substantial number of small entities. Although
data are not readily available for the IRS and the Treasury Department
to assess the number of small entities that are likely to be directly
affected by the regulations, the economic impact is unlikely to be
significant.
As discussed elsewhere in this preamble, the proposed rule largely
updates the regulations to reflect existing law and policy. The
proposed amendments would update the section 162 and section 170
regulations to reflect current law. In addition, the proposed
amendments add to the regulations safe harbors under section 162 and
section 164, regarding deductions when payments are made to entities
described in section 170(c) and the donor receives or expects to
receive a state or local tax credit in return; these safe harbors were
provided previously in Internal Revenue Bulletin guidance. These
regulations are expected to provide some additional certainty to
taxpayers but are not expected to result in any noticeable change in
taxpayer behavior. The increased certainty, and in particular the
provision of safe harbors, is expected to reduce compliance burdens.
Accordingly, the Treasury Department and the IRS certify that the
proposed rule will not have a significant economic impact on a
substantial number of small entities.
Notwithstanding this certification, the Treasury Department and the
IRS invite comments about the potential impact of this proposed rule on
small entities.
Pursuant to section 7805(f), the proposed regulations will be
submitted to the Chief Counsel for Advocacy of the Small Business
Administration for comment on its impact on small businesses.
Comments and Requests 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. All comments submitted will be
made available at http://www.regulations.gov or upon request. A public
hearing has been scheduled for February, 20, 2020, beginning at 10 a.m.
in the Auditorium of the Internal Revenue Building, 1111 Constitution
Avenue NW, Washington, DC 20224. Due to building security
[[Page 68840]]
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 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
January 31, 2020. 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.
Statement of Availability of IRS Documents
IRS Revenue Procedures, Revenue Rulings, Notices, and other
guidance cited in this document are published in the Internal Revenue
Bulletin (or Cumulative Bulletin) and are available from the
Superintendent of Documents, U.S. Government Publishing Office,
Washington, DC 20402, or by visiting the IRS website at http://www.irs.gov.
Drafting Information
The principal author of these proposed regulations is the Office of
the Associate Chief Counsel (Income Tax and Accounting). However, other
personnel from the IRS 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
0
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
0
Par. 2. Section 1.162-15 is amended by revising paragraph (a) to read
as follows:
Sec. 1.162-15 Contributions, dues, etc.
(a) Payments and transfers to entities described in section
170(c)--(1) In general. A payment or transfer to or for the use of an
entity described in section 170(c) that bears a direct relationship to
the taxpayer's trade or business and that is made with a reasonable
expectation of financial return commensurate with the amount of the
payment or transfer may constitute an allowable deduction as a trade or
business expense rather than a charitable contribution deduction under
section 170. For payments or transfers in excess of the amount
deductible under section 162(a), see Sec. 1.170A-1(h).
(2) Examples. The following examples illustrate the rules of
paragraph (a)(1) of this section:
(i) Example 1. A, an individual, is a sole proprietor who
manufactures musical instruments and sells them through a website. A
makes a $1,000 payment to a local church (which is a charitable
organization described in section 170(c)) for a half-page
advertisement in the church's program for a concert. In the program,
the church thanks its concert sponsors, including A. A's
advertisement includes the URL for the website through which A sells
its instruments. A reasonably expects that the advertisement will
attract new customers to A's website and will help A to sell more
musical instruments. A may treat the $1,000 payment as an expense of
carrying on a trade or business under section 162.
(ii) Example 2. P, a partnership, operates a chain of
supermarkets, some of which are located in State N. P operates a
promotional program in which it sets aside the proceeds from one
percent of its sales each year, which it pays to one or more
charities described in section 170(c). The funds are earmarked for
use in projects that improve conditions in State N. P makes the
final determination on which charities receive payments. P
advertises the program. P reasonably believes the program will
generate a significant degree of name recognition and goodwill in
the communities where it operates and thereby increase its revenue.
As part of the program, P makes a $1,000 payment to a charity
described in section 170(c). P may treat the $1,000 payment as an
expense of carrying on a trade or business under section 162. This
result is unchanged if, under State N's tax credit program, P
expects to receive a $1,000 income tax credit on account of P's
payment, and under State N law, the credit can be passed through to
P's partners.
(3) Safe harbors for C corporations and specified passthrough
entities making payments in exchange for state or local tax credits--
(i) Safe harbor for C corporations. If a C corporation makes a payment
to or for the use of an entity described in section 170(c) and receives
or expects to receive in return a state or local tax credit that
reduces a state or local tax imposed on the C corporation, the C
corporation may treat such payment as meeting the requirements of an
ordinary and necessary business expense for purposes of section 162(a)
to the extent of the amount of the credit received or expected to be
received.
(ii) Safe harbor for specified passthrough entities--(A) Definition
of specified passthrough entity. For purposes of this paragraph
(a)(3)(ii), an entity is a specified passthrough entity if each of the
following requirements is satisfied--
(1) The entity is a business entity other than a C corporation and
is regarded for all Federal income tax purposes as separate from its
owners under Sec. 301.7701-3 of this chapter;
(2) The entity operates a trade or business within the meaning of
section 162;
(3) The entity is subject to a state or local tax incurred in
carrying on its trade or business that is imposed directly on the
entity; and
(4) In return for a payment to an entity described in section
170(c), the entity described in paragraph (a)(3)(ii)(A)(1) of this
section receives or expects to receive a state or local tax credit that
this entity applies or expects to apply to offset a state or local tax
described in paragraph (a)(3)(ii)(A)(3) of this section.
(B) Safe harbor. Except as provided in paragraph (a)(3)(ii)(C) of
this section, if a specified passthrough entity makes a payment to or
for the use of an entity described in section 170(c), and receives or
expects to receive in return a state or local tax credit that reduces a
state or local tax described in paragraph (a)(3)(ii)(A)(3) of this
section, the specified passthrough entity may treat such payment as
meeting the requirements of an ordinary and necessary business expense
for purposes of section 162(a) to the extent of the amount of credit
received or expected to be received.
(C) Exception. The safe harbor described in this paragraph
(a)(3)(ii) does not apply if the credit received or expected to be
received reduces a state or local income tax.
(iii) Definition of payment. For purposes of this paragraph (a)(3),
payment is defined as a payment of cash or cash equivalent.
(iv) Examples. The following examples illustrate the rules of
paragraph (a)(3) of this section.
(A) Example 1: C corporation that receives or expects to receive
dollar-for-dollar state or local tax credit. A, a C corporation
engaged in a trade or business, makes a payment of $1,000 to an
entity described in section 170(c). In return for the payment, A
expects to receive a dollar-for-dollar state tax credit to be
applied to A's state corporate income tax liability. Under paragraph
(a)(3)(i) of this section, A may treat the $1,000 payment as
[[Page 68841]]
an expense of carrying on a trade or business under section 162.
(B) Example 2: C corporation that receives or expects to receive
percentage-based state or local tax credit. B, a C corporation
engaged in a trade or business, makes a payment of $1,000 to an
entity described in section 170(c). In return for the payment, B
expects to receive a local tax credit equal to 80 percent of the
amount of this payment ($800) to be applied to B's local real
property tax liability. Under paragraph (a)(3)(i) of this section, B
may treat $800 as an expense of carrying on a trade or business
under section 162. The treatment of the remaining $200 will depend
upon the facts and circumstances and is not affected by paragraph
(a)(3)(i) of this section.
(C) Example 3: Partnership that receives or expects to receive
dollar-for-dollar state or local tax credit. P is a limited
liability company classified as a partnership for Federal income tax
purposes under Sec. 301.7701-3 of this chapter. P is engaged in a
trade or business and makes a payment of $1,000 to an entity
described in section 170(c). In return for the payment, P expects to
receive a dollar-for-dollar state tax credit to be applied to P's
state excise tax liability incurred by P in carrying on its trade or
business. Under applicable state law, the state's excise tax is
imposed at the entity level (not the owner level). Under paragraph
(a)(3)(ii) of this section, P may treat the $1,000 as an expense of
carrying on a trade or business under section 162.
(D) Example 4: S corporation that receives or expects to receive
percentage-based state or local tax credit. S is an S corporation
engaged in a trade or business and is owned by individuals C and D.
S makes a payment of $1,000 to an entity described in section
170(c). In return for the payment, S expects to receive a local tax
credit equal to 80 percent of the amount of this payment ($800) to
be applied to S's local real property tax liability incurred by S in
carrying on its trade or business. Under applicable state and local
law, the real property tax is imposed at the entity level (not the
owner level). Under paragraph (a)(3)(ii) of this section, S may
treat $800 of the payment as an expense of carrying on a trade or
business under section 162. The treatment of the remaining $200 will
depend upon the facts and circumstances and is not affected by
paragraph (a)(3)(ii) of this section.
(v) Applicability of section 170 to payments in exchange for state
or local tax benefits. For rules regarding the availability of a
charitable contribution deduction under section 170 where a taxpayer
makes a payment or transfers property to or for the use of an entity
described in section 170(c) and receives or expects to receive a state
or local tax benefit in return for such payment, see Sec. 1.170A-
1(h)(3).
(4) Applicability dates. Paragraphs (a)(1) and (2) of this section,
regarding the application of section 162 to taxpayers making payments
or transfers to entities described in section 170(c), apply to payments
or transfers on or after December 17, 2019. However, taxpayers may
choose to apply paragraphs (a)(1) and (2) to payments and transfers on
or after January 1, 2018. Paragraph (a)(3) of this section, regarding
the safe harbors for C corporations and specified passthrough entities
making payments to section 170(c) entities in exchange for state or
local tax credits applies to payments made by these entities on or
after December 17, 2019. However, taxpayers may choose to apply the
safe harbors of paragraph (a)(3) to payments on or after January 1,
2018.
* * * * *
0
Par. 3. Section 1.164-3 is amended by adding paragraph (j) to read as
follows:
Sec. 1.164-3 Definitions and special rules.
* * * * *
(j) Safe harbor for payments by individuals in exchange for state
or local tax credits--(1) In general. An individual who itemizes
deductions and who makes a payment to or for the use of an entity
described in section 170(c) in consideration for a state or local tax
credit may treat as a payment of state or local tax for purposes of
section 164 the portion of such payment for which a charitable
contribution deduction under section 170 is disallowed under Sec.
1.170A-1(h)(3). This treatment as payment of state or local tax under
section 164(a) is allowed in the taxable year in which the payment is
made to the extent that the resulting credit is applied, consistent
with applicable state or local law, to offset the individual's state or
local tax liability for such taxable year or the preceding taxable
year.
(2) Credits carried forward. To the extent that a state or local
tax credit described in paragraph (j)(1) of this section is not applied
to offset the individual's applicable state or local tax liability for
the taxable year of the payment or the preceding taxable year, any
excess state or local tax credit permitted to be carried forward may be
treated as a payment of state or local tax under section 164(a) in the
taxable year or years for which the carryover credit is applied in
accordance with state or local law.
(3) Limitation on individual deductions. Nothing in this paragraph
(j) may be construed as permitting a taxpayer who applies this safe
harbor to avoid the limitations of section 164(b)(6) for any amount
paid as a tax or treated under this paragraph (j) as a payment of tax.
(4) No safe harbor for transfers of property. The safe harbor
provided in this paragraph (j) applies only to a payment of cash or
cash equivalent.
(5) Coordination with other deductions. An individual who deducts a
payment under section 164 may not also deduct the same payment under
any other Code section.
(6) Examples. In the following examples, assume that the taxpayer
is an individual who itemizes deductions for Federal income tax
purposes.
(i) Example 1. In year 1, Taxpayer A makes a payment of $500 to
an entity described in section 170(c). In return for the payment, A
receives a dollar-for-dollar state income tax credit. Prior to
application of the credit, A's state income tax liability for year 1
was more than $500. A applies the $500 credit to A's year 1 state
income tax liability. Under paragraph (j)(1) of this section, A
treats the $500 payment as a payment of state income tax in year 1.
To determine A's deduction amount, A must apply the provisions of
section 164 applicable to payments of state and local taxes,
including the limitation in section 164(b)(6). See paragraph (j)(3)
of this section.
(ii) Example 2. In year 1, Taxpayer B makes a payment of $7,000
to an entity described in section 170(c). In return for the payment,
B receives a dollar-for-dollar state income tax credit, which under
state law may be carried forward for three taxable years. Prior to
application of the credit, B's state income tax liability for year 1
was $5,000; B applies $5,000 of the $7,000 credit to B's year 1
state income tax liability. Under paragraph (j)(1) of this section,
B treats $5,000 of the $7,000 payment as a payment of state income
tax in year 1. Prior to application of the remaining credit, B's
state income tax liability for year 2 exceeds $2,000. B applies the
excess credit of $2,000 to B's year 2 state income tax liability.
For year 2, under paragraph (j)(2) of this section, B treats the
$2,000 as a payment of state income tax under section 164. To
determine B's deduction amounts in years 1 and 2, B must apply the
provisions of section 164 applicable to payments of state and local
taxes, including the limitation under section 164(b)(6). See
paragraph (j)(3) of this section.
(iii) Example 3. In year 1, Taxpayer C makes a payment of $7,000
to an entity described in section 170(c). In return for the payment,
C receives a local real property tax credit equal to 25 percent of
the amount of this payment ($1,750). Prior to application of the
credit, C's local real property tax liability in year 1 was more
than $1,750. C applies the $1,750 credit to C's year 1 local real
property tax liability. Under paragraph (j)(1) of this section, for
year 1, C treats $1,750 of her $7,000 payment as a payment of local
real property tax for purposes of section 164. To determine C's
deduction amount, C must apply the provisions of section 164
applicable to payments of state and local taxes, including the
limitation under section 164(b)(6). See paragraph (j)(3) of this
section.
(7) Applicability date. This paragraph (j) applies to payments made
to section 170(c) entities on or after June 11, 2019. However, a
taxpayer may choose to apply this paragraph (j) to payments made to
section 170(c) entities after August 27, 2018.
[[Page 68842]]
0
Par. 4. Section 1.170A-1 is amended as follows:
0
1. Paragraph (c)(5) is revised.
0
2. In paragraph (h)(1), remove the cross-references to ``Sec. 1.170A-
13(f)(6)'' and ``Sec. 1.170A-13(f)(5)'' and add in their places
``paragraph (h)(4)(i) of this section'' and ``paragraph (h)(4)(ii) of
this section'', respectively.
0
3. Paragraphs (h)(2)(i)(B) and (h)(3)(iii) are revised.
0
4. Paragraph (h)(3)(viii) is redesignated as paragraph (h)(3)(x).
0
5. New paragraph (h)(3)(viii) and paragraph (h)(3)(ix) are added.
0
6. Paragraphs (h)(4) through (6) are redesignated as paragraphs (h)(5)
through (7).
0
7. New paragraph (h)(4) is added.
The revisions and additions read as follows:
Sec. 1.170A-1 Charitable, etc., contributions and gifts; allowance
of deduction.
* * * * *
(c) * * *
(5) For payments or transfers to an entity described in section
170(c) by a taxpayer carrying on a trade or business, see Sec. 1.162-
15(a).
* * * * *
(h) * * *
(2) * * *
(i) * * *
(B) The fair market value of the goods or services received or
expected to be received in return.
* * * * *
(3) * * *
(iii) In consideration for. For purposes of paragraph (h) of this
section, the term in consideration for has the meaning set forth in
paragraph (h)(4)(i) of this section.
* * * * *
(viii) Safe harbor for payments by C corporations and specified
passthrough entities. For payments by a C corporation or by a specified
passthrough entity to an entity described in section 170(c), where the
C corporation or specified passthrough entity receives or expects to
receive a state or local tax credit that reduces the charitable
contribution deduction for such payments under paragraph (h)(3) of this
section, see Sec. 1.162-15(a)(3) (providing safe harbors under section
162(a) to the extent of that reduction).
(ix) Safe harbor for individuals. Under certain circumstances, an
individual who itemizes deductions and makes a payment to an entity
described in section 170(c) in consideration for a state or local tax
credit may treat the portion of such payment for which a charitable
contribution deduction is disallowed under paragraph (h)(3) of this
section as a payment of state or local taxes under section 164. See
Sec. 1.164-3(j), providing a safe harbor for certain payments by
individuals in exchange for state or local tax.
* * * * *
(4) Definitions. For purposes of this paragraph (h), the following
definitions apply:
(i) In consideration for. A taxpayer receives goods or services in
consideration for a taxpayer's payment or transfer to an entity
described in section 170(c) if, at the time the taxpayer makes the
payment to such entity, the taxpayer receives or expects to receive
goods or services from that entity or any other party in return.
(ii) Goods or services. Goods or services means cash, property,
services, benefits, and privileges.
(iii) Applicability date. The definitions provided in this
paragraph (h)(4) are applicable for amounts paid or property
transferred on or after December 17, 2019.
* * * * *
Sec. 1.170A-13 [Amended]
0
Par. 5. Section 1.170A-13(f)(7) is amended by removing the cross-
reference to ``Sec. 1.170A-1(h)(5)'' and adding in its place ``Sec.
1.170A-1(h)(6).''
Sunita Lough,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2019-26969 Filed 12-13-19; 4:15 pm]
BILLING CODE 4830-01-P
