Attorney General James Files Lawsuit Against IRS

 Attorney General Letitia James filed a lawsuit against the Internal Revenue Service (IRS), along with New Jersey, and Connecticut, that argued against the new IRS Rule that would prevent residents from obtaining charitable deductions for contributions to local governments.

“The IRS’s move to end tax benefits for charitable giving is yet another attempt by the Trump Administration to unfairly target the hardworking taxpayers of states like New York,” said Attorney General Letitia James. “We will not stand idly by as this Administration throws out decades of historic precedent putting our local economies, education systems, and other critical public programs at risk. My office stands firm against this unlawful attack, and will do everything in our power to ensure that state taxpayers are protected.”

Filed in the U.S. District Court for the Southern District of New York, the lawsuit seeks to strike down a new IRS rule that would prevent residents from obtaining a full federal charitable deduction whenever they contribute to local governments and other qualifying institutions and receive tax credits in return.

The federal government began targeting states like New York, New Jersey, and Connecticut two years ago when it enacted a 2017 tax overhaul that placed, for the first time, a $10,000 cap on the federal deduction for state and local taxes (SALT). The SALT cap disproportionately harmed taxpayers in New York, New Jersey, and Connecticut.

At the time, U.S. Treasury Secretary Steven Mnuchin — named as a defendant in today’s lawsuit — confirmed that the SALT deduction cap was intended to “send a message” to states like New York that they would need to change their tax policies.

At least 33 states have developed over 100 charitable contributions programs that provide a state or local tax benefit in return for a charitable contribution to a qualifying entity under Section 170(c) of the Internal Revenue Code.

These programs incentivize individuals to donate to causes ranging from natural resource preservation and aid for higher education to domestic violence shelters. The IRS consistently treated charitable contributions made pursuant to these programs as fully deductible under federal tax law.

But when New York, New Jersey, and Connecticut decided to establish such programs, the IRS changed its mind, and issued a new rule aimed at nullifying the tax benefit New York was making available to charitable givers. The Final Rule requires taxpayers to subtract the value of any state and local tax credits they receive for charitable giving from their federal charitable contribution deduction.

The requirement is unprecedented in the 101-year history of the charitable deduction, and flies in the face of prior IRS policy statements and tax court rulings on the issue.

This lawsuit, led by New York and New Jersey, describes IRS’s action as a “radical break” from historic precedent, and describes the rule as “arbitrary,” outside the agency’s statutory authority, and a violation of the federal Administrative Procedures Act.