State Challenge to SALT Cap Rule Should Be Barred, Treasury Says

New York, New Jersey, and Connecticut should be barred from challenging a Treasury Department rule that stops their attempted circumvention of the $10,000 cap on state and local tax deductions, the federal government told the Second Circuit.

Treasury’s rule limits federal deductions when residents donate to municipality and state-affiliated charities and earn equivalent credits on their state and local taxes, while also deducting the same charitable contribution from their federal taxes under IRC Section 170. Lawmakers in New York, New Jersey, and Connecticut—each having many residents whose SALT liability exceeds $10,000—sought to establish such credit programs after Congress capped SALT deductions in 2017.

The three states appealed when a New York federal judge dismissed Connecticut and New Jersey’s claims for lack of standing and sided with Treasury that the department had followed proper rulemaking procedures when changing its policy. Treasury asked the US Court of Appeals for the Second Circuit to affirm those judgments, arguing in its Wednesday brief that the Anti-Injunction Act barred their claims.

Enjoining the rule at the states’ request “would restrain assessment and collection of taxes that would otherwise be due,” Treasury’s brief said. “By its terms, the AIA prohibits this suit to prevent the government from assessing and collecting taxes prospectively.”

The regulation itself is also lawful because it applies the longstanding quid pro quo rule that the amount of a charitable payment taxpayers can deduction from their returns is equal to the payment minus the value of any received benefits, the Treasury Department said. In this case, SALT credits provide the taxpayer value in the same way other charities might offer gifts to donors.

The three states, and the co-plaintiff Village of Scarsdale, N.Y., urged the Second Circuit to hold the rule arbitrary and in violation of the Administrative Procedure Act. They argued that the US Supreme Court’s decision in Loper Bright Enterprises v. Raimondo “fully displaced” the lower court’s reasoning, while Treasury says the rule falls within delegated rulemaking authority delegated by Congress to the IRS.

Loper Bright overturned the Chevron doctrine, where lower courts would defer to agencies’ reasonable interpretation of ambiguous statutes.

The New York, New Jersey, and Connecticut attorneys general represent their respective states. Kostelanetz LLP and Baker & McKenzie LLP represent Scarsdale on appeal.

The case is New Jersey v. Yellen, 2d Cir., No. 24-1499, appellee’s brief filed 12/11/24.