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Published date01 October 2020
Date01 October 2020
October 2020 3
Bruce R. Hopkins’ Nonpr ofit Counsel DOI:10.10 02/n pc
Safe Harbors for Individuals
The final regulations provide that an individual who
itemizes deductions and who makes a payment to a
charitable entity in exchange for a state or local tax credit
may treat as a payment of state or local tax (for purposes
of IRC § 164) the portion of the payment for which a
charitable contribution deduction is or will be disallowed
under the general rule (Reg. § 1.164-3(j)(1)). (This general
rule (Reg. § 1.170A-1(h)(3)) came into being as part of
the final regulations concerning charitable deductions and
the SALT cap (summarized in the September 2019 issue).)
This treatment is allowed in the tax year in which the
payment is made, but only to the extent that the resulting
credit is applied pursuant to state or local law to offset
the individual’s state or local tax liability for the year or the
preceding tax year (id.). Any unused credit permitted to
be carried forward may be treated as a payment of state
or local tax in the tax year or years for which the carryo-
ver credit is applied in accordance with state or local law
(Reg. § 1.164-3(j)(2)). This safe harbor applies only to pay-
ments of cash and cash equivalents (Reg. § 1.164-3(j)(4)).
This regulation presumably supersedes Notice 2019-12.
Limitations on Deductibility
The preamble to these regulations makes an obvi-
ous observation: The rules are not intended to permit
taxpayers to avoid the cap on deductibility of state and
local taxes (IRC § 164(b)(6)). Consequently, the final
regulations provide that any payment treated as a state
or local tax pursuant to the safe harbor for individuals is
subject to the SALT deduction cap (Reg. § 1.164-3(j)(3)).
Moreover, the final regulations are not intended to
permit deductions of the same payments under more
than one provision. Thus, the final regulations provided
that an individual who deducts qualifying payments as
taxes may not also deduct the same payments on any
other basis (Reg. § 1.164-3(j)(5)). [3.1(c), 10.7]
Commentary: The first of these law changes, concern-
ing substitution of the business expense deduction for
the income tax charitable contribution deduction, means
that any payment (or transfer) to a charitable organi-
zation where there is an advertising benefit in return
can be deducted as a business expense. Thus, in these
circumstances, the percentage limitations on deducti-
bility (IRC §70(b)) and the substantiation rules (e.g., IRC
§ 170(f)(8)) do not apply. Several resulting questions
arise. One concerns the tax treatment by the charitable
recipient of these payments — are they to be recorded
as contributions or advertising revenue (if the latter, pre-
sumably, unrelated business income)? Another question
is the interrelationship with the corporate sponsorship
rules (IRC § 513(i)) — is the concept of advertising the
same in both contexts or broader in this setting? That is,
does a mere “acknowledgment” of a payment (or trans-
fer) by a recipient charity provide the basis for business
expense treatment?
The Tax Section of the American Bar Association, on
July 23, submitted its comments as to the desired con-
tents of the 2020–2021 Treasury-IRS Priority Guidance
Plan. There are 13 recommendations in the field of the
law of tax-exempt organizations, ranked as to priority,
for inclusion in the plan:
Final regulations concerning the requirement that
unrelated business taxable income be computed sep-
arately by exempt organizations with more than one
unrelated business (IRC § 512(a)(6)) (high priority).
The proposed regulations are summarized in the July
2020 issue.
Final regulations regarding the payment of excess
compensation by exempt organizations (IRC § 4960)
(high priority). The proposed regulations are summa-
rized in the August 2020 issue.
Final regulations concerning taxation of the net
investment income of certain colleges and universi-
ties (IRC § 4968) (high priority). The proposed regu-
lations are summarized in the September 2019 issue.
Proposed regulations regarding the donor-advised
funds law (IRC §§ 4958, 4966, 4967) (high priority).
The Treasury-IRS notice in this regard is summarized
and discussed in the February and April 2018 issues.
Guidance concerning the temporary above-the-line
charitable contribution deduction (IRC § 62(a)(22),
(f)) (high priority). This deduction is summarized in
the June 2020 issue.
Guidance allowing public charities to treat grants
received in 2020 that are related to the COVID-19
pandemic as unusual grants (high priority).
Guidance concerning political campaign intervention
by exempt organizations (IRC §§ 501(c), 527), in the
(unlikely) event that the statutory prohibition on such
guidance is removed (high priority).
Revenue ruling regarding the qualification of an
equity investment in a limited liability company as a
program-related investment (IRC § 4944) (medium
Guidance regarding a private foundation’s invest-
ment in a partnership in which disqualified persons
are also partners (IRC § 4941) (low priority).
Regulations clarifying that, in certain circumstances,
Type I and Type II supporting organizations that des-
ignate their supported organizations by name are
permitted to make distributions to public charities
other than the designated ones (IRC § 509(a)(3))
(low priority).
Guidance regarding the exception in the excess busi-
ness holdings law for philanthropic businesses (IRC §
4943(g)) (low priority). This provision is summarized
in the January 2018 issue.

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