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AG, Governor announce lawsuit against IRS

Internal Revenue Service federal building Washington DC USA

HARTFORD – Attorney General William Tong and Governor Ned Lamont announced Wednesday that the State is joining a multistate lawsuit against the Internal Revenue Service (IRS) and the U.S. Treasury Department.

The lawsuit, filed in the U.S. District Court for the Southern District of New York on Wednesday, seeks to strike down a new punitive IRS rule that would prevent Connecticut residents from obtaining a full federal charitable deduction whenever they contribute to charitable organizations established by local governments and receive tax credits in return.

“Connecticut won’t stand idly by while the Trump Administration harms our taxpayers. Our legislature sought to ease the financial burden this cap has on residents by passing a law to protect our taxpayers. The IRS final rule not only undermines those legislative efforts but it eliminates the state’s ability to mitigate the harmful effects of this law. Our office stands ready to protect Connecticut taxpayers,” said Tong.

The final rule, which takes effect Aug. 12, would – for the first time – require taxpayers to subtract the value of any state and local tax credits they receive for charitable giving from their federal charitable contribution deduction.

Two years ago, the federal government began targeting states like Connecticut when it enacted a 2017 tax overhaul that placed a $10,000 cap on the federal deduction for state and local taxes. The SALT cap disproportionately harmed taxpayers in the plaintiff states of Connecticut, New Jersey and New York.

At the time, U.S. Treasury Secretary Steven Mnuchin – named as a defendant in today’s lawsuit – confirmed that the SALT deduction cap was intended to “send a message” to states like Connecticut that they would need to change their tax policies.

To ease the burden on Connecticut taxpayers, the General Assembly passed legislation in 2018 that allowed municipalities to create “community supporting organizations” classified as charitable organizations. Taxpayers would make contributions to these organizations and most of that donation would be credited toward their local property tax liability.

The IRS consistently treated charitable contributions made pursuant to these programs as fully deductible under federal tax law.

But when Connecticut, New Jersey and New York decided to establish such programs, the IRS changed course, and issued a new rule aimed at nullifying the tax benefit Connecticut was making available to charitable givers.

Today’s lawsuit describes IRS’s action as a “radical break” from historic precedent, and describes the rule as arbitrary, outside the agency’s statutory authority, and a violation of the federal Administrative Procedures Act.

Assistant Attorneys General Dinah Bee and Joseph Chambers, head of the Finance Department assisted the Attorney General with this matter.

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