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Noonan’s Notes Blog is written by a team of Hodgson Russ tax attorneys led by the blog’s namesake, Tim Noonan. Noonan’s Notes Blog regularly provides analysis of and commentary on developments in the world of New York and multistate tax law. Noonan's Notes Blog is a winner of CreditDonkey's Best Tax Blogs Award 2017.

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The SALT Cap Lawsuit Continues....

By on

Earlier this month, those who oppose the SALT cap must have been pleased to see the results in the mid-term elections. With Democrats taking over the house, there’s already talk (here and here) that the next Congress will take aim at the cap. But quietly, on the other side of the battle lines, shots were fired by the federal government, as attorneys for the United States Department of Treasury and IRS filed a Motion to Dismiss the Complaint in State of New York, State of Connecticut, State of Maryland, and State of New Jersey v. United States Department of Treasury, The Internal Revenue Service and The United States of America, 18-cv-6427 on November 2 as noted here in the corresponding Memorandum of Law Supporting the Government’s Motion to Dismiss.

This lawsuit is the result of The Tax Cuts & Jobs Act (“TCJA”) (P.L. 115-97) that capped the individual SALT deduction at $10,000 per year beginning January 1, 2018. Since that time, amid abounding commentary, some legislation, and the use of charitable deduction work-arounds, four states banded together and brought suit against the Treasury Department on July 17, challenging the cap as unconstitutional. Filed in the U.S. District Court for the Southern District of New York by Connecticut, Maryland, New York, and New Jersey (“the states”), the lawsuit alleges the cap overturns more than 150 years of precedent dating back to the first federal income tax enacted in 1861. I covered this suit here, when, in a 52 page complaint, the states said that the tax is unconstitutional, that it violates the 10th Amendment, the 16th Amendment, and Article 1, Section 8 of the U.S. Constitution.

In asking the federal district court to dismiss the case, the government lawyers outline a few different points:

    • Most interestingly, attorneys told the court that it doesn’t even need to consider whether the SALT deduction cap violates any of the constitutional challenges raised in the states’ complaint because of “threshold jurisdictional issues” barring the lawsuit. According to the government, the states do not have standing. The states are not the ones being aggrieved by the cap. Instead, the government contends the taxpayers are the ones who have standing to bring suit. Any volunteers?!
  • In a different twist on the issue of standing, based on the Anti-Injunction Act, before even weighing the merits of the states’ constitutional claims, the federal government attorneys argue that the states cannot pursue injunctive relief to prevent the payment of taxes or use of the SALT cap. As noted above, it is the actual individual taxpayer who should sue, not the states on behalf of the taxpayers residing therein. As an interesting alternative for relief, the Feds urge taxpayers to challenge the SALT cap themselves. Pay your taxes first and then sue for a refund. Seriously, who's coming with me?!
  • The government also posits that the TCJA made other changes to the IRC that positively affected individual taxpayers’ overall liabilities. So it’s not like taxpayers are going to be all that aggrieved by a SALT cap, federal lawyers estimate. The Treasury argues that the majority of residents would be paying fewer federal taxes given the lowered tax rates and larger standard deductions.

Next Steps

The states could be picking a fight they can’t win—at least one they probably can’t win in the federal courts. But again, this lawsuit is just one part of the fight. Workarounds like the charitable deduction play or entity-level taxes continue to percolate in some states. And as noted above, the new Congress could act as well. Indeed, newly re-elected NYS Governor Andrew Cuomo said in a November 11 interview with AM radio station WNYM that he will urge the Democrats of New York’s congressional delegation to “tell the president he has to repeal [the] SALT deduction cap.” “SALT was the ending of state and local deductibility,” Cuomo said. “It’s an arrow at the heart of New York.” So like many who oppose the SALT cap, he is not backing down. Stay tuned!

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