n-19-12.pdf

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Guidance Providing a Safe Harbor Under Section 164 for Certain 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

Notice 2019-12

SECTION 1. PURPOSE

This notice announces that the Department of the Treasury (Treasury
Department) and the Internal Revenue Service (IRS) intend to publish a proposed
regulation providing a safe harbor under section 164 of the Internal Revenue Code
(Code) for certain 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. Under the safe
harbor, an individual may treat as a payment of state or local tax for purposes of section
164 the portion of a payment for which a charitable contribution deduction under section
170 is or will be disallowed under Treas. Reg. § 1.170A-1(h)(3) (T.D. 9864). This
treatment as a payment of state or local tax under section 164 is allowed in the taxable
year in which the payment is made to the extent 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. In states and localities that
permit an individual to carry forward an excess credit amount to a subsequent taxable
year, an individual may treat the carryforward amount as a state or local tax payment
under section 164 for the taxable year or years to which the credit is applied, consistent
with applicable state or local law, to offset a state or local tax liability. Prior to issuance

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of the proposed regulation, taxpayers may rely on the provisions of this notice with
respect to payments described in this notice.
SECTION 2. BACKGROUND
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 any entity described in that
section. Under section 170(c)(1), such an entity includes a State, a possession of the
United States, or any political subdivision of the foregoing, including 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 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.
Section 164(b)(6), as added by section 11042(a) of “An Act to provide for reconciliation
pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018”
(“the Act”), Pub. L. 115-97, provides that deductions for foreign real property taxes are
not allowable under section 164(a)(1) and limits an individual’s deduction to $10,000
($5,000 in the case of a married individual filing a separate return) for the aggregate
amount of the following state and local taxes paid during the calendar year: (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

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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 and incurred in carrying on a trade or business or an activity described
in section 212. Section 164(b)(2) provides that for purposes of section 164, a “state or
local tax” includes only a tax imposed by a state, a United States territory, or a political
subdivision of any of the foregoing, or by the District of Columbia.
Due to the potential for taxpayers to use state or local tax credit programs to
avoid the limitation on the deductibility of state and local taxes, the Treasury
Department and the IRS have issued guidance on the federal income tax treatment of
transfers to entities described in section 170(c) when the taxpayer receives or expects
to receive a state or local tax credit in return. On June 11, 2018, the Treasury
Department and the IRS issued Notice 2018-54, 2018-24 I.R.B. 750, announcing the
intention to propose regulations addressing the federal income tax treatment of
transfers pursuant to state and local tax credit programs. On August 27, 2018,
proposed regulations under sections 170 and 642(c) were published in the Federal
Register (83 FR 43563). The proposed regulations generally state 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, the tax credit constitutes a return benefit, or quid pro quo
, to
the taxpayer and reduces the taxpayer’s charitable contribution deduction under section
170(a). On December 28, 2018, the Treasury Department and the IRS issued Rev.
Proc. 2019-12, 2019-04 I.R.B. 401, providing a safe harbor under section 162 for certain
payments made by C corporations and specified passthrough entities to or for the use

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of an organization described in section 170(c) if the C corporation or specified
passthrough entity receives or expects to receive a state or local tax credit in return for
such payment. On June 11, 2019, the Treasury Department and the IRS published T.D.
9864, Contributions in Exchange for State or Local Tax Credits, 2019-27 I.R.B.
(effective August 12, 2019 and applicable to amounts paid or property transferred by a
taxpayer after August 27, 2018), providing rules governing the availability of charitable
contribution deductions under section 170 when a taxpayer receives or expects to
receive a corresponding state or local tax credit, as well as providing similar rules under
section 642(c) for payments made by a trust or decedent’s estate.
In the Special Analyses section of the proposed regulations, the Treasury
Department and the IRS explained that the proposed regulations “will leave charitable
giving incentives entirely unchanged for the vast majority of taxpayers.” The Treasury
Department and the IRS acknowledged, however, that a small fraction of taxpayers
could see a reduction in their financial incentives to donate to state and local tax credit
programs compared to their pre-Act incentives and requested comments on this
important consideration. After the publication of the proposed regulations, stakeholders
expressed concern, through comments and through testimony at the public hearing, that
the proposed regulations would create unfair consequences for certain individuals who
receive state or local tax credits in return for payments to section 170(c) entities.
Specifically, donors to such tax credit programs who itemize deductions for federal
income tax purposes and have total state and local tax liability for the year under
$10,000 would be precluded from taking charitable contribution deductions for
payments to section 170(c) entities to the extent the donors receive state or local tax

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credits even though the donors would have been able to deduct equivalent payments of
state and local taxes offset by such credits. As a result of the proposed regulations, if
these individuals chose to make a payment to a section 170(c) entity instead of paying
tax to the state or local government, they would lose a deduction to which they would
otherwise have been entitled.
These state tax credit programs effectively offer taxpayers a choice of paying tax
to the state or local government or making a payment to a section 170(c) entity and
receiving a tax credit that offsets the taxpayer’s state or local tax liability. This situation
can be analogized to situations in which a party 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 party entitled to receive
payment. Cf. 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); Rev. Rul. 86-14, 1986-1 C.B. 304 (same).
SECTION 3. SAFE HARBOR FOR INDIVIDUALS
The Treasury Department and the IRS take seriously the concern that the
proposed regulations could create unfair consequences for individuals who (i) itemize
deductions for federal income tax purposes, (ii) make a payment to a section 170(c)
entity in return for a state or local tax credit, and (iii) would have been able to deduct a
payment of tax to the state or local government in the amount of the credit. A safe
harbor is appropriate to mitigate the consequences of the proposed regulations in the
situation described above.

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Accordingly, the Treasury Department and the IRS intend to publish a proposed
regulation amending Treasury Regulation § 1.164-3 to provide a safe harbor for certain
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. Under this safe harbor, an individual who
itemizes deductions and who makes a payment to a section 170(c) entity in return 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 final regulations. This treatment as a
payment of state or local tax under section 164 is allowed in the taxable year in which
the payment is made to the extent 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.
1
To the extent the resulting credit is not
applied to offset the individual’s state or local tax liability for the taxable year of the
payment or the preceding taxable year, any excess 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, consistent with applicable
state or local law, to offset the individual’s state or local tax liability. This safe harbor
shall not apply to a transfer of property.
Nothing in this notice may be construed as permitting a taxpayer who applies this
safe harbor to treat the amount of any payment as deductible under more than one
provision of the Code or Treasury regulations.

1
Some state or local tax credit programs allow an individual to apply the state or local tax credit to offset
a prior year’s state or local tax liability.

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Nothing in this notice 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 notice as a payment of tax.
SECTION 4. EXAMPLES
In the examples below, assume that the taxpayer’s application of the state or
local tax credit is consistent with applicable state or local law and that the taxpayer is an
individual who itemizes deductions for federal income tax purposes.
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 $500 or more; A applies the $500 credit to A’s year 1 state income tax
liability. Under section 3 of this notice, A treats the $500 payment as a payment of state
income tax in year 1 for purposes of section 164. 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 under section 164(b)(6).
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 section 3 of this notice, B treats $5,000 of the $7,000 payment as a payment of
state income tax in year 1 for purposes of section 164. Prior to application of the
remaining credit, B’s state income tax liability for year 2 exceeds $2,000; B applies the

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excess credit of $2,000 to B’s year 2 state income tax liability. For year 2, B treats the
$2,000 as a payment of state income tax for purposes of 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).
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 $3,500; C
applies the $1,750 credit to C’s year 1 local real property tax liability. Under section 3 of
this notice, for year 1, C treats $1,750 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).
SECTION 5. APPLICABILITY DATE
The proposed regulation setting forth the safe harbor described in this notice will
apply to payments made to section 170(c) entities after August 27, 2018. Prior to the
issuance of that proposed regulation, taxpayers may rely on the provisions of this notice
with respect to such payments.
SECTION 6. REQUEST FOR COMMENTS
The Treasury Department and the IRS request comments on the safe harbor
described in this notice by July 11, 2019. Taxpayers may submit comments
electronically via the Federal eRulemaking Portal at www.regulations.gov (type IRS-

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2019-0020 in the search field on the www.regulations.gov homepage to find this notice
and submit comments). Alternatively, taxpayers may submit comments to:
CC:PA:LPD:PR (Notice 2019-12), Room 5203, Internal Revenue Service, P.O. Box
7604, Ben Franklin Station, Washington, D.C., 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 (Notice 2019-12), Courier’s Desk, Internal Revenue Service, 1111
Constitution Avenue, N.W., Washington, D.C. 20224. All comments received will be
available for public inspection on www.regulations.gov.
SECTION 7. DRAFTING INFORMATION
The principal authors of this notice are personnel from the Office of the Associate
Chief Counsel (Income Tax and Accounting). However, other personnel from the
Treasury Department and the IRS participated in its development. For further
information regarding this notice, contact Mon L. Lam at (202) 317-4059 (not a toll-free
call).