Concern Raised With Regs on Payments to Charitable Entities

January 30, 2020

Ms. Mon Lam
Attorney
Department of the Treasury
Internal Revenue Service
1111 Constitution Avenue NW.,
Washington, DC 20224

RE: IRS REG-107431-19, Treatment of Payments to Charitable Entities in Return for Consideration

Dear Ms. Lam:

Americans United for Separation of Church and State is a nonpartisan advocacy organization dedicated to preserving the constitutional principle of church-state separation, the foundation of religious freedom for all. We oppose private school vouchers because they violate fundamental principles of religious freedom by using taxpayer funds for religious education. They also undermine our public schools, which are a unifying force in our society and open to all students, regardless of race, religion, ability, or any other factor.

We write to provide comments on Regulation 107431-19,“Treatment of Payments to Charitable Entities in Return for Consideration,” because the language in this proposed rule could allow certain businesses to continue to turn a profit by donating to state tax credit voucher private school voucher programs. We appreciate the steps this Department has already taken with the promulgation of its rule last year to ensure taxpayers may not profit through this type of donation.¹ However, because this proposed rule still contains a loophole for pass-through businesses, we urge the Department to revise the proposed regulation to ensure that no donor may receive tax benefits by donating to private school voucher programs.

In particular, we are concerned that some owners of pass-through businesses may be able to circumvent the $10,000 State and Local Tax (SALT) deduction cap through donations to private school voucher programs. Example 2 provided in 1.162-15(a)(2)(ii) describes a situation where a business partnership (P) may deduct a $1,000 payment to a charity as a business expense even if it “expects to receive a $1,000 income tax credit on account of P's payment, and . . . the credit can be passed through to P's partners.” According to this example, business P may characterize the nondeductible portion of its state and local income tax payments as a deductible business expenses, and thus increase its business expense deductions by $1000 even though that “expense” was entirely offset by a state income tax credit.

The example also does not foreclose the possibility that the business's partners can increase their business expense deductions even in situations where their SALT deductions will remain unchanged because, both before and after the payment to the tax credit voucher program, they will continue deducting the maximum allowable amount of state income tax ($10,000). By failing to adequately distinguish between using a state income tax credit to offset taxes that would have been deducted for federal purposes, or using that credit to offset taxes that would have been nondeductible, the language in this proposed regulation could incentivize donations to private school voucher programs as a means to evade the SALT deduction cap.

We understand that businesses are becoming less interested in contributing to private school voucher programs because they fund discrimination: Both Wells Fargo and Fifth Third Bank have announced they are ending their financial support of Florida's voucher program due to participating schools' policies of discrimination against LGBTQ students and families.² But, this Department should still clarify that the SALT deduction cap cannot be circumvented for businesses that donate to school voucher programs in this manner. Preventing this type of benefit will uphold the integrity of the tax code and ensure that taxpayer dollars support our public schools, rather than being funneled to private school voucher programs.

Sincerely,

Maggie Garrett
Vice President for Public Policy
garrett@au.org

Elise Aguilar
Federal Policy Counsel
aguilar@au.org

Americans United
Washington, DC