Will the CA State Government Become Tax Protestors?

[Cobalt Shiva]

http://sd24.senate.ca.gov/news/2018-01- ... -taxpayers

Basically, the idea is to give a dollar-for-dollar tax credit if you "donate" to the state, and the citizen then takes the deduction on his or her "donation."

This is, at its heart, a scheme to defraud the Internal Revenue Service. Does that idiot really think that the IRS has never seen a charity scam before?

[Famspear]

http://sd24.senate.ca.gov/news/2018-01- ... -taxpayers

Basically, the idea is to give a dollar-for-dollar tax credit if you "donate" to the state, and the citizen then takes the deduction on his or her "donation."

This is, at its heart, a scheme to defraud the Internal Revenue Service. Does that idiot really think that the IRS has never seen a charity scam before?

Assuming that the donation to the California Excellence Fund qualifies for the deduction under Internal Revenue Code section 170, how would this be a "scheme to defraud the Internal Revenue Service"?

[wserra]

I dunno, but welcome back, Shiva! It's been a while.

[Cobalt Shiva]

http://sd24.senate.ca.gov/news/2018-01- ... -taxpayers

Basically, the idea is to give a dollar-for-dollar tax credit if you "donate" to the state, and the citizen then takes the deduction on his or her "donation."

This is, at its heart, a scheme to defraud the Internal Revenue Service. Does that idiot really think that the IRS has never seen a charity scam before?

Assuming that the donation to the California Excellence Fund qualifies for the deduction under Internal Revenue Code section 170, how would this be a "scheme to defraud the Internal Revenue Service"?

Basically, they would be giving a dollar-for-dollar tax credit--in other words, a thing of equivalent tangible value to the "donation," which Infernal Revenue frowns upon if you're taking a deduction on it.

It'd be really funny, though, to watch the Governor, the Board of Equalization, and the Franchise Tax Board getting perp-walked.

Or, even more fun . . . between this, the California "treaty" with China, and the sanctuary state mess, Congress decides to invoke the Insurrection Act.

[Famspear]

Basically, they would be giving a dollar-for-dollar tax credit--in other words, a thing of equivalent tangible value to the "donation," which Infernal Revenue frowns upon if you're taking a deduction on it.

I'm not aware of any "frowns" by the Internal Revenue Service in this regard. At any rate, the U.S. tax laws are not written for the purpose of making the Internal Revenue Service happy (whatever that would mean).

If the entity to which the "donation" were being made (the California Excellence Fund) were really just a front for the government of the State of California, and the "donations" ended up in the general funds of the State of California, that would be another matter. In such case, the economic substance of the "donation" might be, of course, a state income tax. That could bring up some interesting questions about the scope of the Economic Substance Doctrine. If the "donations" were deemed (under that Doctrine or some other legal doctrine) to be a state income tax for purposes of the Internal Revenue Code, then the scheme would not work if the matter were litigated and the courts rejected the scheme.

[Famspear]

From the article linked above:

Senator Ben Allen (D-Santa Monica) added, “I’m proud to join with Pro Tem de León and Senator Hill in authoring this proposal that seeks to preserve this important tax deduction for California taxpayers.”

Oops. If the scheme were actually enacted, comments like that in the media wouldn't look too good for a California resident fighting in Federal court over the applicable "charitable contribution" deduction.

[Arthur Rubin]

Basically, they would be giving a dollar-for-dollar tax credit--in other words, a thing of equivalent tangible value to the "donation," which Infernal Revenue frowns upon if you're taking a deduction on it.

I thought it questionable at first, but that's a phony argument. If California has a tax credit for certain charitable contributions, the IRS doesn't reduce the charitable contribution by the amount of the credit.

[Cobalt Shiva]

Basically, they would be giving a dollar-for-dollar tax credit--in other words, a thing of equivalent tangible value to the "donation," which Infernal Revenue frowns upon if you're taking a deduction on it.

I thought it questionable at first, but that's a phony argument. If California has a tax credit for certain charitable contributions, the IRS doesn't reduce the charitable contribution by the amount of the credit.

When it's explicitly presented as an alternative to paying actual taxes for people whose taxes exceed the SALT deduction limit, and the money ends up in the general fund?

Oh, yeah, the IRS is going to love this s***.

[Cpt Banjo]

The IRS’s position in similar cases was expressed in Chief Counsel Advice 201105010, where the taxpayer received state tax credits for contributing money to four entities each of which was described as “a government or charitable entity that is eligible to receive deductible charitable contributions under § 170”. In holding that the contributions were deductible as charitable contributions, the IRS analyzed earlier cases involving contributions to non-governmental charities in which the donor received state tax credits:

Based on our analysis of existing authorities, we conclude that the position reflected in McLennan, Browning, and similar case law generally applies. 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. Generally, however, a state or local tax benefit is treated for federal tax purposes as a reduction or potential reduction in tax liability. As such, it is reflected in a reduced deduction for the payment of state or local tax under § 164, not as consideration that might constitute a quid pro quo, for purposes of § 170, or an amount realized includible in income, for purposes of §§ 61 and 1001. See, e.g., Rev. Rul. 79-315, 1979-2 C.B. 27, Holding (3) (the amount of a state tax rebate credited against tax is neither included in income nor allowable as a deduction under § 164); Snyder v. Commissioner, 894 F.2d 1337 (6th Cir. 1990) (unpublished opinion), 1990 WL 6953, 1990 U.S. App. LEXIS 1603 (state tax reductions granted to horse-racing track that makes capital improvements are not income but simply reduce deductible tax liabilities). In this respect, we see no reason under McLennan, Browning, and similar case law to distinguish between the value of a state tax deduction, and the value of a state tax credit, or to draw a bright-line distinction based on the amount of the tax benefit in question.

Note the statement that the state tax credit “is reflected in a reduced deduction for the payment of state or local tax under § 164, not as consideration that might constitute a quid pro quo, for purposes of § 170”. The CCA was, of course, written at a time when there was no cap on the amount of state and local taxes that could be deducted. Query whether the Service’s position will change as a result of the new law's limitation on the deductibility of state and local taxes.

There’s something very unfair about allowing a taxpayer in a high-tax state to do an end run around the $10K cap by making a “charitable donation” to his State. I mean, if I were to donate $100 to my local PBS television station and receive as a gift a boxed CD set of Flatt & Scruggs’s Greatest Hits*, my charitable deduction would have to be reduced by the value of the boxed set. I can’t see why the same quid pro quo analysis shouldn’t apply to someone’s receiving a state tax credit.

* I was originally going to use an example in which Famspear was the donor and the gift was Porter Wagoner’s Greatest Hits, but knowing his opinion of Porter and the Wagonmasters he’d likely value the CD’s at zero, thereby getting a full deduction.

[NYGman]

What if CA offered a income deduction multiple when applying a qualifying donation. So a donation of $100 to CA fund, would net a reduction of say, $1000 from CA income. This would thus provide the benefit by effectively reducing state income, resulting in minimal to no CA tax, and would keep an otherwise valid Federal Deduction.

[Mider]

This morning they were saying that NY is also looking at this as well. I see the IRS really looking at this though where you are giving to the state in expectation of getting a deduction instead of a true donation where you give to a cause or at least are suppose to be doing that. It's almost like these gifting circles where you give money expecting to get gifted in return.

[Famspear]

.....I was originally going to use an example in which Famspear was the donor and the gift was Porter Wagoner’s Greatest Hits, but knowing his opinion of Porter and the Wagonmasters he’d likely value the CD’s at zero, thereby getting a full deduction.

On the other hand, give me some CDs of Willie Nelson, and I'd have to admit I received full value! No charitable contribution deduction there!

[Cobalt Shiva]

What if CA offered a income deduction multiple when applying a qualifying donation. So a donation of $100 to CA fund, would net a reduction of say, $1000 from CA income. This would thus provide the benefit by effectively reducing state income, resulting in minimal to no CA tax, and would keep an otherwise valid Federal Deduction.

California can't afford to do that.

[NYGman]

Isn't that what they are effectively doing, with the offer to credit taxes paid, to the extent a deduction is made to a specific CA charity. How is my suggestion any different? Just the mechanics of how it works differ, instead of a dollar for dollar credit against tax, which arguably may be income, into a super deduction, effectively reducing the income to a negligible amount.

Say CA tax is 10% and you earn $100. I. The CA example, you can offset the tax with a charitable donation, so you donate $10 and pay no state tax, and deduct the $10 on your fed return. Problem is you essentially received value, which would offset the deduction.

However, if CA gave a 10x credit in CA to encourage local donations, then I could donate $10 and receive 10x that in deductions, and have 0 state income, resulting in no tax.

Granted their may be a small overage with numbers outside 10, if you want to use a whole number multiple but I think it is more viable than the other option. This could also work in NY which is near and dear to me, stressing the dear now that I just lost a load of deductions.

[Cobalt Shiva]

Isn't that what they are effectively doing, with the offer to credit taxes paid, to the extent a deduction is made to a specific CA charity. How is my suggestion any different?

It ignores the whole point of the exercise, which is to continue the present high state tax rates in a fiscal environment where the federal government no longer makes those high state tax rates painless. Because if they don't, then people might start demanding serious consideration of such heresies as lowering the overall tax bite and maybe making tough choices about who does and who doesn't get money from the state. And if they ignore that, then people might leave California and take their money with them, even with the risk of a concealed exit tax (via state tax audit) hanging over them.

California isn't a political monolith like the legislature is. This issue is going to highlight the socioeconomic fault lines.

And given how the legislature is reacting so far, I'm wondering if they'll end up trying something really stupid, like opening fire on Fort Sumter Vandenberg AFB.

[grixit]

Isn't that what they are effectively doing, with the offer to credit taxes paid, to the extent a deduction is made to a specific CA charity. How is my suggestion any different?

It ignores the whole point of the exercise, which is to continue the present high state tax rates in a fiscal environment where the federal government no longer makes those high state tax rates painless. Because if they don't, then people might start demanding serious consideration of such heresies as lowering the overall tax bite and maybe making tough choices about who does and who doesn't get money from the state. And if they ignore that, then people might leave California and take their money with them, even with the risk of a concealed exit tax (via state tax audit) hanging over them.

California isn't a political monolith like the legislature is. This issue is going to highlight the socioeconomic fault lines.

And given how the legislature is reacting so far, I'm wondering if they'll end up trying something really stupid, like opening fire on Fort Sumter Vandenberg AFB.

Open fire with what? Our local national guard hq is just a storage barn for the county fair. Plus, it's really cool to watch them launch rockets from Vandenberg, at least on nights when the sky is clear. Most likely we'd just declare sanctuary for minority/disabled/transexual NESRA members and charge them a couple of gold bars as they enter.

[NYGman]

I will grant you, reducing tax rates at the state level, reducing spending accordingly, is the correct answer here, however reducing spending isn't something California wants to be forced to do, at least not this way. The proposal to offset tax due with a donation was proposed by California representatives, as a way to preserve both. Problem is I don't think a dollar for dollar tax credit strictly works. My "Super Deduction" idea is just another way about achieving the same result as proposed but in a way that may work. CA can designate certain CA charities as qualifying, they can specify or create a few. Prehaps a giant fund for many areas of support. Just spitballing here, easiest way to get deductions back, change governments.

[Cobalt Shiva]

Isn't that what they are effectively doing, with the offer to credit taxes paid, to the extent a deduction is made to a specific CA charity. How is my suggestion any different?

It ignores the whole point of the exercise, which is to continue the present high state tax rates in a fiscal environment where the federal government no longer makes those high state tax rates painless. Because if they don't, then people might start demanding serious consideration of such heresies as lowering the overall tax bite and maybe making tough choices about who does and who doesn't get money from the state. And if they ignore that, then people might leave California and take their money with them, even with the risk of a concealed exit tax (via state tax audit) hanging over them.

California isn't a political monolith like the legislature is. This issue is going to highlight the socioeconomic fault lines.

And given how the legislature is reacting so far, I'm wondering if they'll end up trying something really stupid, like opening fire on Fort Sumter Vandenberg AFB.

Open fire with what? Our local national guard hq is just a storage barn for the county fair. Plus, it's really cool to watch them launch rockets from Vandenberg, at least on nights when the sky is clear. Most likely we'd just declare sanctuary for minority/disabled/transexual NESRA members and charge them a couple of gold bars as they enter.

I am making a bit of a joke. I fully expect someone to actually try secession after discovering that nullification doesn't work.

And I fully expect secession to cause California to explode. You won't see guns turned on Vandy--they'll be turned on the grandees of Hollywood and Palo Alto, and you'll see Paris 1789 all over again.

[grixit]

Oh, we talk about secession all the time. And i always point out that all those statements that begin with "If California were an independent country, it would be #1 (or 2 or 3 or maybe 5) in the world for whatever", leave out the fact that these numbers partly depend on us being imbedded in a larger entity. Without the Union, there'd be a lot more lines in our budget.

Also, i'd hate to give up our cultural dominance.

[wserra]

you'll see Paris 1789 all over again.

So long as I get access to Louis XVI's wine cellar. I won't settle for Arnold's.