Internal Revenue Bulletin 2018-37 (PDF rendition): IRS Notices

Preserve advance releases and the authoritative Internal Revenue Bulletin rendition; directory timestamps are file-publication metadata, not legal effective dates. HTML bulletins begin June 2003; earlier available issues require full PDF parsing. Whole bulletin rendition: numbered items are identified below; other legal material and publisher context remain included. This is not a new standalone advance release.

# INTERNAL REVENUE BULLETIN

IRS

## HIGHLIGHTS OF THIS ISSUE

These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.

## Employee Plans

Notice 2018-69, page 426.

Notice 2018-69 extends the temporary nondiscrimination re-
lief for closed defined benefit plans that is provided in Notice
2014-5, 2014-2 I.R.B. 276, by making that relief available for
plan years beginning before 2020 if the conditions of Notice
2014-5 are satisfied.

## Income Tax

### REV. PROC. 2018-44, page 426.

Rev. Proc. 2018-44 modifies Rev. Proc. 2018-31, 2018-22
I.R.B. 637, to provide that an eligible terminated S corporation,
as defined in § 481(d)(2), required to change from the overall
cash receipts and disbursements method of accounting (cash
method) to an overall accrual method of accounting (accrual
method) as a result of a revocation of its S corporation elec-
tion, and that makes this change in method of accounting for
the C corporation's first taxable year after such revocation, is
required to take into account the resulting positive or negative
adjustment required by § 481(a)(2) ratably during the six-year
period beginning with the year of change. This revenue proce-
dure also provides that an eligible terminated S corporation
that is permitted to continue to use the cash method after the
revocation of its S corporation election and that changes to an
overall accrual method for the C corporation's first taxable year
after such revocation, may take into account the resulting
positive or negative adjustment required by § 481(a)(2) ratably
during the six-year period beginning with the year of change.

### REV. PROC. 2018-45, page 428.

Revenue Procedure 2018-45 provides domestic asset/liabil-
ity percentages and domestic investment yields needed by
foreign life insurance companies and foreign property and
liability insurance companies to compute their minimum effec-

Bulletin No. 2018-37
September 10, 2018

tively connected net investment income under section 842(b)
of the Internal Revenue Code for taxable years beginning after
December 31, 2016.

### REG-112176-18, page 430.

This document contains proposed amendments to regulations
regarding under section 170 of the Internal Revenue Code
(Code). The proposed amendments provide rules governing
the availability of charitable contribution deductions under sec-
tion 170 when a taxpayer receives or expects to receive a
corresponding state or local tax credit. This document also
proposes amendments to the regulations under section 642(c)
to apply similar rules to payments made by a trust or dece-
dent's estate. This document provides notification of a public
hearing on these proposed regulations.

Finding Lists begin on page ii.

## The IRS Mission

Provide America's taxpayers top-quality service by helping
them understand and meet their tax responsibilities and en-
force the law with integrity and fairness to all.

## Introduction

The Internal Revenue Bulletin is the authoritative instrument of
the Commissioner of Internal Revenue for announcing official
rulings and procedures of the Internal Revenue Service and for
publishing Treasury Decisions, Executive Orders, Tax Conven-
tions, legislation, court decisions, and other items of general
interest. It is published weekly.

It is the policy of the Service to publish in the Bulletin all
substantive rulings necessary to promote a uniform application
of the tax laws, including all rulings that supersede, revoke,
modify, or amend any of those previously published in the
Bulletin. All published rulings apply retroactively unless other-
wise indicated. Procedures relating solely to matters of internal
management are not published; however, statements of inter-
nal practices and procedures that affect the rights and duties
of taxpayers are published.

Revenue rulings represent the conclusions of the Service on
the application of the law to the pivotal facts stated in the
revenue ruling. In those based on positions taken in rulings to
taxpayers or technical advice to Service field offices, identify-
ing details and information of a confidential nature are deleted
to prevent unwarranted invasions of privacy and to comply with
statutory requirements.

Rulings and procedures reported in the Bulletin do not have the
force and effect of Treasury Department Regulations, but they
may be used as precedents. Unpublished rulings will not be
relied on, used, or cited as precedents by Service personnel in
the disposition of other cases. In applying published rulings and
procedures, the effect of subsequent legislation, regulations,
court decisions, rulings, and procedures must be considered,
and Service personnel and others concerned are cautioned

against reaching the same conclusions in other cases unless
the facts and circumstances are substantially the same.

The Bulletin is divided into four parts as follows:

### Part I .- 1986 Code.

This part includes rulings and decisions based on provisions of
the Internal Revenue Code of 1986.

### Part II .- Treaties and Tax Legislation.

This part is divided into two subparts as follows: Subpart A, Tax
Conventions and Other Related Items, and Subpart B, Legisla-
tion and Related Committee Reports.

Part III .- Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to these
subjects are contained in the other Parts and Subparts. Also
included in this part are Bank Secrecy Act Administrative Rul-
ings. Bank Secrecy Act Administrative Rulings are issued by
the Department of the Treasury's Office of the Assistant Sec-
retary (Enforcement).

### Part IV .- Items of General Interest.

This part includes notices of proposed rulemakings, disbar-
ment and suspension lists, and announcements.

The last Bulletin for each month includes a cumulative index for
the matters published during the preceding months. These
monthly indexes are cumulated on a semiannual basis, and are
published in the last Bulletin of each semiannual period.

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.

## Part III. Administrative, Procedural, and Miscellaneous

### Extension of Temporary Nondiscrimination Relief for Closed Defined Benefit Plans through 2019

Notice 2018-69

#### I. PURPOSE

This notice extends the temporary non-
discrimination relief for closed defined
benefit plans that is provided in Notice
2014-5, 2014-2 I.R.B. 276, by making
that relief available for plan years begin-
ning before 2020 if the conditions of No-
tice 2014-5 are satisfied.

#### II. BACKGROUND

Notice 2014-5 provides temporary non-
discrimination relief for certain "closed" de-
fined benefit pension plans (i.e., defined
benefit plans that provide ongoing accruals
but that have been amended to limit those
accruals to some or all of the employees
who participated in the plan on a specified
date). Specifically, for plan years beginning
before 2016, Section III.B of Notice 2014-5
permits a DB/DC plan that includes a closed
defined benefit plan (that was closed before
December 13, 2013) and that satisfies cer-
tain conditions set forth in the notice to
demonstrate satisfaction of the nondiscrim-
ination in amount requirement of § 1.401(a)
(4)-1(b)(2) on the basis of equivalent bene-
fits even if the DB/DC plan does not meet
any of the existing eligibility conditions for
testing on that basis under § 1.401(a)(4)-
9(b)(2)(v).

Notice 2015-28, 2015-14 I.R.B. 848,
Notice 2016-57, 2016-40 I.R.B. 432,
and Notice 2017-45, 2017-38 I.R.B. 232,
extend the temporary nondiscrimination
relief provided in Notice 2014-5 by ap-
plying that relief to plan years beginning
before 2019 if the conditions of Notice
2014-5 are satisfied. Notice 2015-28 fur-
ther provides that, during the period for
which the extension applies, the remain-
ing provisions of the nondiscrimination
regulations under § 401(a)(4) continue to
apply.

Proposed regulations relating to non-
discrimination requirements for closed
plans were published in the Federal Reg-

ister on January 29, 2016 (81 FR 4976).
The proposed regulations set forth relief
for closed plans under §§ 1.401(a)(4)-4,
1.401(a)(4)-8, and 1.401(a)(4)-9 (subject
to satisfaction of certain conditions set
forth in the regulations), and contain other
proposed nondiscrimination rules. The
regulations are proposed to apply gener-
ally to plan years beginning on or after the
date of publication of the final regulations.
The proposed regulations provide that tax-
payers are permitted to apply certain pro-
visions of the proposed regulations (in-
cluding all of the provisions that apply
specifically to closed plans) for certain
plan years beginning before the proposed
applicability date.

Many comments have been submitted
on the proposed regulations, including
oral comments at a public hearing held
on May 19, 2016. The Internal Revenue
Service (IRS) and the Treasury Depart-
ment expect that the final regulations
will include a number of significant
changes in response to those comments.
However, it is anticipated that the final
regulations will not be published in time
for plan sponsors to make plan design
decisions based on the final regulations
before expiration of the relief provided
under Notice 2014-5 (as last extended
by Notice 2017-45). Accordingly, the
IRS and the Treasury Department have
determined that it is appropriate to ex-
tend the relief provided under Notice
2014-5 for an additional year.

## III. EXTENSION OF RELIEF FOR CLOSED PLANS

The temporary nondiscrimination re-
lief for closed plans that is provided in
Notice 2014-5 is hereby extended to plan
years beginning before 2020 if the condi-
tions of Notice 2014-5 are satisfied. This
extension is provided in anticipation of
the issuance of final amendments to the
§ 401(a)(4) regulations. In addition, it is
expected that the final regulations will
provide that the reliance granted in the
preamble to the proposed regulations may
be applied for plan years beginning before
2020.

## IV. EFFECT ON OTHER DOCUMENTS

Notice 2014-5, Notice 2015-28, No-
tice 2016-57, and Notice 2017-45 are
modified.

## DRAFTING INFORMATION

The principal author of this notice is
Diane S. Bloom of the Office of the As-
sociate Chief Counsel (Tax Exempt and
Government Entities). However, other
personnel from the IRS participated in
development of this guidance. For further
information regarding this notice, please
contact Ms. Bloom or Linda Marshall at
(202) 317-6700 (not a toll-free number).

26 CFR 601.204: Changes in accounting periods
and in methods of accounting.
(Also Part 1, § 481)

## Rev. Proc. 2018-44

## SECTION 1. PURPOSE

Section 13543 of "An Act to provide
for reconciliation pursuant to titles II and
V of the concurrent resolution on the bud-
get for fiscal year 2018," Pub. L. 115-97
(the Act) added § 481(d) to the Internal
Revenue Code (Code). Section 481(d)
provides rules relating to adjustments re-
quired by § 481(a)(2) that are attributable
to certain revocations of S corporation
elections under § 1362(a). This revenue
procedure modifies Rev. Proc. 2018-31,
2018-22 I.R.B. 637, to reflect the statu-
tory amendments made by the Act. Spe-
cifically, this revenue procedure requires
an eligible terminated S corporation, as de-
fined in § 481(d)(2), that is required to
change from the overall cash receipts and
disbursements method of accounting (cash
method) to an overall accrual method of
accounting (accrual method) as a result of a
revocation of its S corporation election, and
that makes this change in method of ac-
counting for the C corporation's first taxable
year after such revocation, to take into ac-
count the resulting positive or negative ad-
justment required by § 481(a)(2) ratably
during the six-year period beginning with
the year of change. This revenue procedure
also provides that an eligible terminated S

corporation that is permitted to continue to
use the cash method after the revocation of
its S corporation election and that changes
to an overall accrual method for the C cor-
poration's first taxable year after such revo-
cation, may take into account the resulting
positive or negative adjustment required by
§ 481(a)(2) ratably during the six-year pe-
riod beginning with the year of change.

## SECTION 2. BACKGROUND

.01 Section 13543 of the Act, added
§ 481(d) to the Code. Section 481(d)(1)
requires an eligible terminated S corpora-
tion, as defined in § 481(d)(2), to take into
account ratably during the six-year period
beginning with the year of change any
adjustment required by § 481(a)(2) that is
attributable to the corporation's revoca-
tion of its election under § 1362(a) (S
corporation election). Section § 481(d)(2)
provides that an eligible terminated S cor-
poration is any C corporation that: (1) was
an S corporation on December 21, 2017;
(2) revokes its S corporation election after
December 21, 2017, but before December
22, 2019; and (3) has the same owners of
stock in identical proportions on Decem-
ber 22, 2017, and the revocation date.

.02 Section 448 generally prohibits the
use of the cash method by a C corporation
(other than a farming business or a qual-
ified personal service corporation) unless
the C corporation meets the $25,000,000
gross receipts test of § 448(c). Section 448
also prohibits tax shelters from using the
cash method.

.03 Section 1362(d)(1)(A) provides
that a section 1362(a) election may be
terminated by revocation. Section 1362(d)
(1)(B) provides that an election under sec-
tion 1362(a) may be terminated by revo-
cation only if shareholders holding more
than one-half of the shares of stock of the
corporation on the day on which the revo-
cation is made consent to the revocation.
Section 1362(d)(1)(C) provides that ex-
cept as provided in section 1362(d)(1)(D),
a revocation made during the taxable year
and on or before the fifteenth day of the
third month thereof shall be effective on
the first day of such taxable year, and a
revocation made during the taxable year
but after such fifteenth day shall be effec-
tive on the first day of the following tax-
able year. Section 1362(d)(1)(D) provides
that if the revocation specifies a date for

revocation that is on or after the day on
which the revocation is made, the revoca-
tion shall be effective on and after the date
so specified.

.04 Section 1362(e)(1) provides that
generally in the case of an S termination
year, the portion of such year ending be-
fore the first day for which the termination
is effective shall be treated as a short
taxable year for which the corporation is
an S corporation, and the portion of such
year beginning on such first day shall be
treated as a short taxable year for which
the corporation is a C corporation. Section
1362(e)(4) generally provides that an S
termination year is any taxable year of a
corporation (determined without regard to
section 1362(e)) in which a termination of
a section 1362(a) election takes effect
(other than on the first day thereof).

.05 Section 481(a) requires those ad-
justments necessary to prevent amounts
from being duplicated or omitted to be
taken into account when the taxpayer's
taxable income is computed under a
method of accounting different from the
method of accounting used to compute
taxable income for the preceding taxable
year.

.06 Under § 446(e) and § 1.446-1(e),
except as otherwise provided, a taxpayer
must secure the consent of the Commis-
sioner of Internal Revenue before chang-
ing a method of accounting for federal
income tax purposes. Section 1.446-
1(e)(3)(ii) authorizes the Commissioner to
prescribe administrative procedures set-
ting forth the terms and conditions neces-
sary for a taxpayer to obtain consent to a
change in method of accounting in accor-
dance with § 446(e).

.07 Rev. Proc. 2015-13, 2015-5 I.R.B.
419, as clarified and modified by Rev.
Proc. 2015-33, 2015-24 I.R.B. 1067, as
modified by Rev. Proc. 2016-1, 2016-1
I.R.B. 1, and as modified by Rev. Proc.
2017-59, 2017-48 I.R.B. 543, provides
the general procedures by which a tax-
payer may obtain automatic consent of the
Commissioner to a change in method of
accounting described in the List of Auto-
matic Changes. Rev. Proc. 2018-31 con-
tains the current List of Automatic
Changes.

.08 Section 15.01 of Rev. Proc.
2018-31 provides automatic changes for
certain taxpayers that want to change their

overall method of accounting from the
cash method to an accrual method, includ-
ing taxpayers required to make this
change by § 448.

.09 This revenue procedure provides
that an eligible terminated S corporation
required to change from the cash method
to an accrual method as a result of a
revocation of its S corporation election,
and that makes this change in method of
accounting under section 15.01 of Rev.
Proc. 2018-31 for the first taxable year
that it is a C corporation, must take the
resulting positive or negative adjustment
required by § 481(a)(2) into account rat-
ably during the six-year period beginning
with the year of change. See § 481(d)(1).
This revenue procedure also allows an
eligible terminated S corporation that is
permitted to continue to use the cash
method after the revocation of its S cor-
poration election and that changes to an
accrual method under section 15.01 of
Rev. Proc. 2018-31 for the first taxable
year that it is a C corporation, to take the
resulting positive or negative adjustment
required by § 481(a)(2) into account rat-
ably during the six-year period beginning
with the year of change. See § 1.446-
1(e)(3)(ii).

.10 In addition to the change to an
accrual method described in section 15.01
of Rev. Proc. 2018-31, an eligible termi-
nated S corporation may have other
changes in method of accounting that re-
sult in adjustments required by § 481(a)
that are attributable to such corporation's
revocation of its S corporation election as
described in § 481(d)(2). Any such change
is not within the scope of this revenue
procedure.

## SECTION 3. MODIFICATION TO REV. PROC. 2018-31

.01 Section 15.01(3) of Rev. Proc.
2018-31 is modified to read as follows:

(3) Manner of making change.

(a) Section 481(a) adjustment.

(i) In general. A taxpayer changing
its method of accounting under this sec-
tion 15.01 must compute a § 481(a) ad-
justment. This adjustment must reflect the
account receivables, account payables, in-
ventory, and any other item determined to
be necessary in order to prevent items
from being duplicated or omitted. How-
ever, the adjustment does not include any

item of income accrued but not received
that was worthless or partially worthless
(within the meaning of § 166(a)) on the
last day of the year immediately prior to
the year of change.

(ii) Temporary rule for certain S
corporation revocations. The rules in this
section 15.01(3)(a)(ii) apply to an eligible
terminated S corporation, as defined in
§ 481(d)(2), that changes to an overall
accrual method of accounting in the C
corporation's first taxable year after its
revocation of its election under § 1362(a),
and such revocation occurs during the
two-year period beginning on December
22, 2017.

(A) Required spread period. Pur-
suant to § 481(d)(1), an eligible termi-
nated S corporation required to change to
an overall accrual method as a result of a
revocation of its S corporation election
that changes its method of accounting un-
der this section 15.01 in the C corpora-
tion's first taxable year after such revoca-
tion, takes into account the resulting
positive or negative adjustment required
by § 481(a)(2) ratably during the six-year
period beginning with the year of change.

(B) Optional six-year spread pe-
riod. An eligible terminated S corporation
that is permitted to continue to use the
overall cash method after the revocation
of its S corporation election, and that
changes to an overall accrual method un-
der this section 15.01 in the C corpora-
tion's first taxable year after such revoca-
tion, may take into account the resulting
positive or negative adjustment required
by § 481(a)(2) ratably during the six-year
period beginning with the year of change
instead of using the adjustment periods
provided in section 7.03(1) of Rev. Proc.
2015-13. An eligible terminated S corpo-
ration that wants to use this six-year
spread period must indicate in the state-
ment required by Line 26 of Form 3115
(Rev. December 2015) that it is making
the change in method of accounting with
the spread period permitted under this sec-
tion 15.01(3)(a)(ii)(B) on its timely filed
Form 3115.

## SECTION 4. EFFECT ON OTHER DOCUMENTS

Rev. Proc. 2018-31 is modified.

## SECTION 5. APPLICABILITY DATE

This revenue procedure is applicable to
adjustments under § 481(a)(2) that result
from an eligible terminated S corpora-
tion's change to an overall accrual method
of accounting in the C corporation's first
taxable year after the revocation of its
election under § 1362(a), when such re-
vocation occurs during the two-year pe-
riod beginning on December 22, 2017.

## DRAFTING INFORMATION

The principal author of this revenue
procedure is Natasha Mulleneaux of the
Office of Associate Chief Counsel (In-
come Tax and Accounting). For further
information regarding this revenue proce-
dure, contact Ms. Mulleneaux at (202)
317-7007 (not a toll-free number).

26 CFR 601.105: Examination of returns and claims
for refund, credit, or abatement; determination of
correct tax liability
(Also: 842(b))

## Rev. Proc. 2018-45

### SECTION 1. PURPOSE

This revenue procedure provides the
domestic asset/liability percentages and
domestic investment yields needed by for-
eign life insurance companies and foreign
property and liability insurance compa-
nies to compute their minimum effec-
tively connected net investment income
under section 842(b) of the Internal Rev-
enue Code for taxable years beginning
after December 31, 2016. Instructions are
provided for computing foreign insurance
companies' liabilities for the estimated tax
and installment payments of estimated tax
for taxable years beginning after Decem-
ber 31, 2016. For more specific guidance
regarding the computation of the amount
of net investment income to be included
by a foreign insurance company on its
U.S. income tax return, see Notice 89-96,
1989-2 C.B. 417. For the domestic asset/
liability percentage and domestic invest-
ment yield, as well as instructions for
computing foreign insurance companies'
liabilities for estimated tax and install-
ment payments of estimated tax for tax-
able years beginning after December 31,

2015, see Rev. Proc. 2017-44, 2017-35
I.R.B. 216.

## SECTION 2. PERCENTAGES AND YIELDS

.01 DOMESTIC ASSET/LIABILITY
PERCENTAGES FOR 2017. The Secre-
tary determines the domestic asset/lia-
bility percentage separately for foreign
insurance companies under Part I of
subchapter L and foreign insurance
companies under Part II of subchapter
L. See section 842(b)(2)(C). For the first
taxable year beginning after December
31, 2016, the relevant domestic asset/
liability percentages are:

126.3 percent for foreign insurance
companies under Part I of subchapter L,
and

194.5 percent for foreign insurance
companies under Part II of subchapter L.

.02 DOMESTIC INVESTMENT
YIELDS FOR 2017. The Secretary pre-
scribes separate domestic investment
yields for foreign insurance companies
under Part I of subchapter L and foreign
insurance companies under Part II of
subchapter L. See section 842(b)(3). For
the first taxable year beginning after De-
cember 31, 2016, the relevant domestic
investment yields are:

4.5 percent for foreign insurance com-
panies under Part I of subchapter L, and

3.8 percent for foreign insurance com-
panies under Part II of subchapter L.

.03 SOURCE OF DATA FOR 2017.
The section 842(b) percentages to be used
for the 2017 tax year are based on tax
return data following the same methodol-
ogy used for the 2016 year.

## SECTION 3. ESTIMATED TAXES

To compute estimated tax and the in-
stallment payments of estimated tax due
for taxable years beginning after Decem-
ber 31, 2016, a foreign insurance com-
pany must compute its estimated tax pay-
ments by adding to its income other than
net investment income the greater of (i) its
net investment income as determined un-
der section 842(b)(5) that is actually ef-
fectively connected with the conduct of a
trade or business within the United States
for the relevant period, or (ii) the mini-
mum effectively connected net investment
income under section 842(b) that would

result from using the most recently avail-
able domestic asset/liability percentage
and domestic investment yield. Thus, for
installment payments due after the publi-
cation of this revenue procedure, the do-
mestic asset/liability percentages and the
domestic investment yields provided in
this revenue procedure must be used to
compute the minimum effectively con-
nected net investment income. However,
if the due date of an installment is less
than 20 days after the date this revenue
procedure is published in the Internal

Revenue Bulletin, the asset/liability per-
centages and domestic investment yields
provided in Rev. Proc. 2017-44 may be
used to compute the minimum effectively
connected net investment income for such
installment. For further guidance in com-
puting estimated tax, see Notice 89-96.

## SECTION 4. EFFECTIVE DATE

This revenue procedure is effective for
taxable years beginning after December
31, 2016.

## SECTION 5. DRAFTING INFORMATION

The principal author of this revenue
procedure is Sheila Ramaswamy of the
Office of Associate Chief Counsel (Inter-
national). For further information regard-
ing this revenue procedure contact Sheila
Ramaswamy at (202) 317-6938 (not a toll
free number).

## Part IV. Items of General Interest

Notice of Proposed
Rulemaking and
Notification of Public
Hearing. Contributions in
Exchange for State or
Local Tax Credits

REG-112176-18

AGENCY: Internal Revenue Service
(IRS), Treasury.

ACTION: Notice of proposed rulemaking
and notification of public hearing.

SUMMARY: This document contains
proposed amendments to regulations un-
der section 170 of the Internal Revenue
Code (Code). The proposed amendments
provide 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. This document also pro-
poses amendments to the regulations un-
der section 642(c) to apply similar rules to
payments made by a trust or decedent's
estate. This document provides notifica-
tion of a public hearing on these proposed
regulations.

DATES: Written and electronic com-
ments must be received by October 11,
2018. Requests to speak and outlines of
topics to be discussed at the public hear-
ing scheduled for November 5, 2018,
must be received by October 11, 2018.

ADDRESSES: Send submissions to Inter-
nal Revenue Service, CC:PA:LPD:PR
(REG-112176-18), Room 5203, P.O.
Box 7604, Ben Franklin Station, Wash-
ington, DC 20044. Submissions may be
hand-delivered Monday through Friday
between the hours of 8:00 a.m. and 4:00
p.m. to CC:PA:LPD:PR (REG-112176-
18), Courier's Desk, 1111 Constitution
Avenue, N.W., Washington, DC 20224,
or sent electronically, via the Federal
eRulemaking Portal at www.regulations.gov
(indicate IRS and REG-112176-18). The
public hearing will be held in the IRS Audi-
torium, Internal Revenue Building, 1111 Con-
stitution Avenue, N.W., Washington, DC
20224.

FOR FURTHER INFORMATION CON-
TACT: Concerning the proposed regula-
tions, Merrill D. Feldstein and Mon Lam
at (202) 317-4059; concerning submission
of comments and requests for a public
hearing, Regina Johnson at (202) 317-
6901 (not toll-free numbers).

## SUPPLEMENTARY INFORMATION:

### Background

Section 170(a)(1) generally allows an
itemized deduction for any "charitable
contribution" paid within the taxable year.
Section 170(c) defines "charitable contri-
bution" as a "contribution or gift to or for
the use of" any entity listed in that sub-
section. Section 170(c)(1) includes a con-
tribution or gift to or for the use of a State,
a possession of the United States, or any
political subdivision of the foregoing, but
only if the contribution or gift is made
exclusively for public purposes. Section
170(c)(2) includes, in general, a contribu-
tion or gift to or for the use of certain cor-
porations, trusts, or community chests,
funds, or foundations, organized and oper-
ated 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 generally allows an item-
ized deduction for the payment of cer-
tain taxes, including state and local, and
foreign, real property taxes; state and
local personal property taxes; and state
and local, and foreign, income, war
profits, and excess profits taxes. Section
164(b)(6), as added by section 11042 of
"An Act to provide for reconciliation
pursuant to titles II and V of the con-
current resolution on the budget for fis-
cal year 2018" (the Act), Pub. L. 115-
97, limits an individual's deduction for
the aggregate amount of state and local
taxes paid during the calendar year to
$10,000 ($5,000 in the case of a married
individual filing a separate return). This
new limitation applies to taxable years
beginning after December 31, 2017, and
before January 1, 2026.

#### I. The Charitable Contribution Deduction

In 1986, the Supreme Court interpreted
the phrase "charitable contribution" in
section 170. See United States v. Ameri-
can Bar Endowment, 477 U.S. 105, 116-
118 (1986). The Court held that the "sine
qua non of a charitable contribution is a
transfer of money or property without ad-
equate consideration"-that is, without
the expectation of a quid pro quo. Id. at
118. A "payment of money generally can-
not constitute a charitable contribution if
the contributor expects a substantial ben-
efit in return." Id. at 116. The Court rec-
ognized that some payments may have a
"dual character"-part charitable contri-
bution and part quid pro quo-whereby
the taxpayer receives some "nominal ben-
efit" of lesser value than the payment. Id.
at 117. In such cases, the Court reasoned,
"it would not serve the purposes of § 170
to deny a deduction altogether." Id. In-
stead, the Court held, the charitable con-
tribution deduction is allowed, but only to
the extent the amount donated or the fair
market value of the property transferred
by the taxpayer exceeds the fair market
value of the benefit received in return, and
only if the excess amount was transferred
with the intent of making a gift. Id.

For the benefit received in return to
reduce the allowable charitable contribu-
tion deduction under section 170, the ben-
efits received, or expected to be received,
by a donor need only be greater than those
benefits that inure to the general public
from transfers for charitable purposes.
See, e.g., Singer Co. v. United States, 449
F.2d 413, 422-423 (Ct. Cl. 1971); Amer-
ican Bar Endowment, 477 U.S. at 116-17
(citing Singer); Hernandez v. Commis-
sioner, 490 U.S. 680 (1989). In addition,
the benefits received need not come di-
rectly from the donee to reduce the allow-
able deduction, nor do they need to be
specifically quantifiable at the time of
transfer. See, e.g., Singer, 449 F.2d at 422.
The Treasury Department and the IRS
have incorporated many of these princi-
ples into regulations under section 170.
Section 1.170A-1(h)(1) of the Income
Tax Regulations provides, for example,
that no part of a payment that a taxpayer

makes to or for the use of an organization
described in section 170(c) that is in con-
sideration for (as defined in § 1.170A-
13(f)(6)) goods or services (as defined in
§ 1.170A-13(f)(5)) is a contribution or gift
within the meaning of section 170(c) unless
the taxpayer (i) intends to make a payment
in an amount that exceeds the fair market
value of the goods or services; and (ii)
makes a payment in an amount that exceeds
the fair market value of the goods or
services. Section 1.170A-13(f)(5) defines
goods or services to include cash, property,
services, benefits, and privileges, and
§ 1.170A-13(f)(6) provides that a donee
provides goods or services in consideration
for a taxpayer's payment if, at the time the
taxpayer makes the payment to the donee
organization, the taxpayer receives or ex-
pects to receive goods or services in ex-
change for that payment.

##### II. State and Local Tax Credit Programs

In recent years, it has become increas-
ingly common for states and localities to
provide state or local tax credits in return
for contributions by taxpayers to or for the
use of certain entities listed in section
170(c). As the use of these tax credit pro-
grams by states and localities became more
common, the IRS Office of Chief Counsel
(IRS Chief Counsel), in multiple Chief
Counsel Advice memoranda (CCAs), con-
sidered whether the receipt of state tax cred-
its under these programs were quid pro quo
benefits that would affect the amount of
taxpayers' charitable contribution deduc-
tions under section 170(a). Although CCAs
are released to the public for information
purposes, it should be noted that CCAs are
not official rulings or positions of the IRS,
are not ordinarily reviewed by the Treasury
Department, and are not precedential.

In CCAs issued in 2002 and 2004, IRS
Chief Counsel reviewed programs involving
the issuance of state tax credits in return for
the transfer of conservation easements and
for payments to certain child care organiza-
tions. See CCA 200238041 (July 24, 2002);
CCA 200435001 (July 28, 2004). In these
CCAs, IRS Chief Counsel recognized that
these programs raised complex questions
and recommended that the tax credit issue
be addressed through official published
guidance.

In 2010, another CCA explained that
published guidance on the issue was not

contemplated at that time, but it offered
further advice. See CCA 201105010 (Oct.
27, 2010) (the 2010 CCA). This 2010
CCA observed that a payment to a state
agency or charitable organization in return
for a tax credit might be characterized as
either a charitable contribution deductible
under section 170 or a payment of state
tax possibly deductible under section 164.
The 2010 CCA advised that taxpayers
may take a deduction under section 170
for the full amount of a contribution made
in return for a state tax credit, without
subtracting the value of the credit received
in return. The analysis in the 2010 CCA
assumed that after the taxpayer applied
the state or local tax credit to reduce the
taxpayer's state or local tax liability, the
taxpayer would receive a smaller deduc-
tion for state and local taxes under section
164. The 2010 CCA cautioned, however,
that "there may be unusual circumstances
in which it would be appropriate to re-
characterize a payment of cash or property
that was, in form, a charitable contribution
as, in substance, a satisfaction of tax lia-
bility."

In addition to the CCAs, IRS Chief
Counsel has taken the position in the U.S.
Tax Court that the amount of a state or
local tax credit that reduces a tax liability
is not an accession to wealth under section
61 or an amount realized for purposes of
section 1001, and the Tax Court has ac-
cepted this view. See, e.g., Maines v.
Commissioner, 144 T.C. 123, 134 (2015)
(holding that the non-refundable portion
of a state income tax credit, the amount of
which was based on previously-paid prop-
erty taxes, reduced the current year's tax
liability and is not taxable or treated as an
item of income); Tempel v. Commis-
sioner, 136 T.C. 341, 351-354 (2011)
(holding that state income tax credits re-
ceived by a donor for the transfer of a
conservation easement and sold by the
donor were capital assets, but that the
donor had no adjusted basis in the credits),
aff'd sub nom. Esgar Corp. v. Commis-
sioner, 744 F.3d 648 (10th Cir. 2014).
However, the application of sections 61
and 1001 to state or local tax credits pres-
ents different issues than the application
of section 170, and none of these cases
addressed whether a taxpayer's expecta-
tion or receipt of a state or local tax credit
may reduce a taxpayer's charitable contri-

bution deduction under section 170. Nor
has the Treasury Department or the IRS
ever addressed this question in published
guidance.

##### III. New Limitation in Section 164

At the time the 2010 CCA was issued,
section 164 generally allowed an itemized
deduction-unlimited in amount-for the
payment of state and local taxes. Accord-
ingly, the question of how to characterize
transfers pursuant to state tax credit pro-
grams had little practical consequence
from a federal income tax perspective be-
cause, unless the taxpayer was subject to
the alternative minimum tax (AMT) under
section 55, a deduction was likely to be
available under either section 164 or sec-
tion 170. Permitting a charitable contribu-
tion deduction for a transfer made in ex-
change for a state or local tax credit
generally had no effect on federal income
tax liability because any increased deduc-
tion under section 170 would be offset by
a decreased deduction under section 164.

However, as a result of the new limit
on the deductibility of state and local
taxes under section 164(b)(6) (as added by
the Act), treating a transfer pursuant to a
state or local tax credit program as a char-
itable contribution for federal income tax
purposes may reduce a taxpayer's federal
income tax liability. When a charitable
contribution is made in return for a state
or local tax credit and the taxpayer has
pre-credit state and local tax liabilities in
excess of the $10,000 limitation in section
164(b)(6), a charitable contribution de-
duction under section 170 would no lon-
ger be offset by a reduction in the taxpay-
er's state and local tax deduction under
section 164. Thus, as a consequence, state
and local tax credit programs now give tax-
payers a potential means to circumvent the
$10,000 limitation in section 164(b)(6) by
substituting an increased charitable contri-
bution deduction for a disallowed state and
local tax deduction. State legislatures are
also now considering or have adopted pro-
posals to enact new state and local tax credit
programs with the aim of enabling taxpay-
ers to characterize their transfers as fully
deductible charitable contributions for fed-
eral income tax purposes, while using the
same transfers to satisfy or offset their state
or local tax liabilities.

In light of the tax consequences of sec-
tion 164(b)(6) and the resulting increased
interest in preexisting and new state tax
credit programs, the Treasury Department
and the IRS determined that it was appro-
priate to review the question of whether
amounts paid or property transferred in
exchange for state or local tax credits are
fully deductible as charitable contribu-
tions under section 170.

### IV. Notice 2018-54

Pursuant to this review, in Notice
2018-54, 2018-24 I.R.B. 750, the Trea-
sury Department and the IRS announced
on June 11, 2018, their intention to pro-
pose regulations addressing the federal in-
come tax treatment of payments made by
taxpayers for which the taxpayers receive
a credit against their state and local taxes.
The notice stated that federal tax law con-
trols the proper characterization of pay-
ments for federal income tax purposes and
that proposed regulations would assist
taxpayers in understanding the relation-
ship between the federal charitable contri-
bution deduction and the new limitation
on the deduction for state and local tax
payments.

Although Notice 2018-54 was issued
in response to state legislation proposed
after the enactment of the limitation on
state and local tax deductions under sec-
tion 164(b)(6), the rules in these proposed
regulations are based on longstanding fed-
eral tax law principles, which apply
equally to taxpayers regardless of whether
they are participating in a new state and
local tax credit program or a preexisting
one. Accordingly, the proposed regula-
tions, and the analysis underlying the pro-
posed regulations, are intended to apply to
transfers pursuant to state and local tax
credit programs established under the re-
cent state legislation as well as to transfers
pursuant to state and local tax credit pro-
grams that were in existence before the
enactment of section 164(b)(6).

### V. Proposed Regulations

After reviewing the issue, and in light
of the longstanding principles of the cases
and tax regulations discussed above, the
Treasury Department and the IRS believe
that when a taxpayer receives or expects
to receive a state or local tax credit in
return for a payment or transfer to an
entity listed in section 170(c), the receipt
of this tax benefit constitutes a quid pro
quo that may preclude a full deduction
under section 170(a). In applying section
170 and the quid pro quo doctrine, the
Treasury Department and the IRS do not
believe it is appropriate to categorically
exempt state or local tax benefits from the
normal rules that apply to other benefits
received by a taxpayer in exchange for a
contribution. Thus, the Treasury Depart-
ment and the IRS believe that the amount
otherwise deductible as a charitable con-
tribution must generally be reduced by the
amount of the state or local tax credit re-
ceived or expected to be received, just as it
is reduced for many other benefits. Accord-
ingly, the Treasury Department and the IRS
propose regulations proposing to amend ex-
isting regulations under section 170 to clar-
ify this general requirement, to provide for a
de minimis exception from the general rule,
and to make other conforming amendments.

Compelling policy considerations rein-
force the interpretation and application of
section 170 in this context. Disregarding
the value of all state tax benefits received
or expected to be received in return for
charitable contributions would precipitate
significant revenue losses that would un-
dermine and be inconsistent with the lim-
itation on the deduction for state and local
taxes adopted by Congress in section
164(b)(6).1 Such an approach would in-
centivize and enable taxpayers to charac-
terize payments as fully deductible chari-
table contributions for federal income tax
purposes, while using the same payments
to satisfy or offset their state or local tax
liabilities. Disregarding the tax benefit
would also undermine the intent of Con-
gress in enacting section 170, that is, to
provide a deduction for taxpayers' gratu-

itous payments to qualifying entities, not
for transfers that result in economic re-
turns. The Treasury Department and the
IRS believe that appropriate application of
the quid pro quo doctrine to substantial
state or local tax benefits is consistent
with the Code and sound tax administra-
tion.

### Explanation of Provisions

The proposed regulations generally
provide that if a taxpayer makes a pay-
ment or transfers property to or for the use
of an entity listed 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 charitable contribution
deduction.

In addition to credits, the proposed reg-
ulations also address state or local tax
deductions claimed in connection with a
taxpayer's payment or transfer. Although
deductions could be considered quid pro
quo benefits in the same manner as cred-
its, the Treasury Department and the IRS
believe that sound policy considerations
as well as considerations of efficient tax
administration warrant making an excep-
tion to quid pro quo principles in the case
of dollar-for-dollar state or local tax de-
ductions. Because the benefit of a dollar-
for-dollar deduction is limited to the tax-
payer's state and local marginal rate, the
risk of deductions being used to circum-
vent section 164(b)(6) is comparatively
low. In addition, if state and local tax
deductions for charitable contributions
were treated as quid pro quo benefits, it
would make the accurate calculation of
federal taxes and state and local taxes
difficult for both taxpayers and the IRS.
For example, the value of a deduction
could vary based on the taxpayer's mar-
ginal or effective state and local tax rates,
making for more complex computations
and adding to administrative and taxpayer
burden. The proposed regulations thus al-
low taxpayers to disregard dollar-for-
dollar state or local tax deductions. How-
ever, the proposed regulations state that, if

1The Joint Committee on Taxation estimated that the limitation on state and local tax deductions along with certain other reforms of itemized deductions would raise $668 billion over ten
years. A substantial amount of this revenue would be lost if state tax benefits received in exchange for charitable contributions were ignored in determining the charitable contribution
deduction. This estimate is not a revenue estimate of the proposed regulations, in part because it includes other reforms of itemized deductions but does not reflect certain other provisions
of the Act. See Joint Committee on Taxation, "Estimated Budget Effects of the Conference Agreement for H.R. 1, The "Tax Cuts and Jobs Act," JCX-67-17, December 18, 2017 available
at https://www.jct.gov/publications.html?func=startdown&id=5053.

the taxpayer receives or expects to receive
a state or local tax deduction that exceeds
the amount of the taxpayer's payment or
the fair market value of the property
transferred, the taxpayer's charitable
contribution deduction must be reduced.
The Treasury Department and the IRS
request comments on how to determine
the amount of this reduction.

To provide consistent treatment for
state or local tax deductions and state or
local tax credits that provide a benefit that
is generally equivalent to a deduction, the
proposed regulations include a de minimis
exception under which a taxpayer may
disregard a state or local tax credit if such
credit does not exceed 15 percent of the
taxpayer's payment or 15 percent of the
fair market value of the property trans-
ferred by the taxpayer. The de minimis
exception reflects that the combined value
of a state and local tax deduction, that is
the combined top marginal state and local
tax rate, currently does not exceed 15 per-
cent. Accordingly, under the proposed
regulations, a state or local tax credit that
does not exceed 15 percent does not re-
duce the taxpayer's federal deduction for
a charitable contribution. The Treasury
Department and the IRS request com-
ments on this proposed exception.

In drafting the proposed regulations,
the Treasury Department and the IRS also
considered whether a taxpayer may de-
cline the receipt or anticipated receipt of a
state or local tax credit by taking some
affirmative action at the time of the tax-
payer's payment or transfer. See Rev. Rul.
67-246, 1967-2 C.B. 104 (allowing a full
charitable contribution deduction if the
taxpayer does not accept or keep any in-
dicia of a return benefit). Because proce-
dures for declining the state or local tax
credit would depend on the procedures of
each state and locality in administering
the tax credits, the Treasury Department
and the IRS request comments regarding a
rule that would allow taxpayers to decline
state or local tax credits and receive full
deductions for charitable contributions
under section 170.

Trusts and decedents' estates may
claim an income tax deduction for chari-
table contributions under section 642(c).
For the same reasons provided above, the
proposed regulations amend § 1.642(c)-3
to provide that the proposed rules under

§ 1.170A-1(h)(3) apply to payments made
by a trust or decedent's estate in determin-
ing its charitable contribution deduction
under section 642(c).

### Proposed Applicability Date

The amendments to these regulations
are proposed to apply to contributions af-
ter August 27, 2018.

### Special Analyses

Executive Orders 12866 and 13563 di-
rect agencies to assess costs and benefits
of available regulatory alternatives and,
if regulation is necessary, to select reg-
ulatory approaches that maximize net
benefits (including potential economic,
environmental, public health and safety
effects, distributive impacts, and eq-
uity). Executive Order 13563 empha-
sizes the importance of quantifying both
costs and benefits, of reducing costs, of
harmonizing rules, and of promoting
flexibility. These proposed regulations
have been designated as subject to re-
view under Executive Order 12866 pur-
suant to the Memorandum of Agreement
(April 11, 2018) between the Treasury
Department and the Office of Manage-
ment and Budget (OMB) regarding re-
view of tax regulations. OMB has deter-
mined that the proposed regulations are
subject to review under section 1(b) of
the Memorandum of Agreement. These
proposed regulations have been re-
viewed by OMB. These proposed regu-
lations are anticipated to be regulatory
actions under EO 13771. The analysis
below can provide further detail on this
designation.

#### I. Need for Regulations

These proposed regulations provide
guidance on the deductibility of charitable
contributions when a taxpayer receives or
expects to receive a corresponding state or
local tax credit. These proposed regula-
tions are intended to clarify the relation-
ship between the federal charitable contri-
bution deduction and the recently-enacted
statutory limitation on deductions for state
and local taxes paid (the "SALT cap") and
to make the federal tax system more neu-
tral with respect to taxpayers' decisions
regarding donations. Compelling policy

considerations reinforce the interpretation
and application of section 170 in this con-
text. Disregarding the value of all state tax
benefits received or expected to be re-
ceived in return for charitable contribu-
tions would precipitate revenue losses that
would undermine and be inconsistent with
the limitation on the deduction for state
and local taxes adopted by Congress in
section 164(b)(6).

Pursuant to section 6(a)(3)(B) of Exec-
utive Order 12866, the following qualita-
tive analysis provides further details re-
garding the anticipated impact of the
proposed regulations. After identifying a
baseline in Part II, this analysis provides
illustrative scenarios in Part III. Part III.A
describes the tax effects of the contribu-
tions prior to enactment of the SALT cap
in the Act. Part III.B provides examples
comparing the enactment of the SALT cap
but absent the proposed rule (the baseline)
to the proposed rule. Finally, Part IV pro-
vides a qualitative assessment of the po-
tential costs and benefits of the proposed
rule compared to the baseline.

#### II. Baseline

Prior to this proposed rule, there was
no authoritative regulatory guidance on
the treatment of state or local tax credits
arising from charitable contributions to
entities listed in section 170(c), and
there was no guidance aside from Notice
2018-54 addressing the interaction be-
tween section 170 and the newly en-
acted SALT cap. As a result, there was a
degree of taxpayer uncertainty as to
whether state and local tax credits are a
return benefit that reduces a taxpayer's
charitable contribution deduction. For
informational and analytical purposes,
however, this analysis assumes as a
baseline that state and local tax credits
are generally not treated as a return ben-
efit or consideration and therefore do
not reduce the taxpayer's charitable
contribution deduction under section
170(a).

#### III. Illustrative Scenarios

For the following illustrative scenarios,
assume the following facts: Charitable or-
ganizations A and B are entities listed in
section 170(c) and provide similar public

goods. Contributions to charity A are eli-
gible for a dollar-for-dollar state tax
credit. Contributions to charity B are in-
eligible for this credit but are deductible
from state taxable income. A taxpayer
itemizes deductions, and these itemized
deductions in aggregate are at least $1,000
more than the standard deduction. The
taxpayer has the choice to contribute
$1,000 to charity A, and this $1,000 con-
tribution generates a state tax credit of
$1,000,2 that is, the tax credit is dollar-
for-dollar but does not otherwise figure
into the calculation of the taxpayer's state
tax liability. The taxpayer has more than
$1,000 of state tax liability, so that the
taxpayer's state tax liability is reduced by
the entire $1,000 of the state tax credit.
Finally, if the taxpayer makes the $1,000
contribution that generates a state tax
credit of $1,000, the taxpayer reduces by
$1,000 the withholdings or other pay-
ments of state taxes during the taxable
year in question. The state taxes paid by
the taxpayer are therefore reduced by the
full amount of the state tax credit in the
same taxable year as the contribution is
made.3 Further assume the taxpayer is in
the 24 percent federal tax bracket, item-
izes federal tax deductions, and has a state
tax rate of 5 percent. If the taxpayer is
subject to the AMT, assume an AMT mar-
ginal tax rate of 26 percent.

The Act and proposed regulations alter
the incentives taxpayers face about
whether and how much to give to organi-
zations that receive charitable contribu-
tions as well as to which organizations.
This is illustrated in the following scenar-
ios, which are also summarized in Table 1
(below).

##### A. Prior law: Section 170 charitable contributions prior to the Act

The tax effects of contributions prior to
enactment of the Act are illustrated in the
columns labeled "Prior Law" in Table 1.

###### 1. Taxpayer Not Subject to AMT

Prior to enactment of the Act, if the
taxpayer made a $1,000 contribution to
charity A that generated a state tax credit
of $1,000, the deduction for charitable
contributions under section 170(a) in-
creased by $1,000, and the deduction for
state and local taxes paid under section
164 decreased by $1,000. The taxpayer's
itemized deductions, taxable income, and
federal tax liability were unchanged from
what they would have been in the absence
of the contribution.4 The taxpayer's state
tax liability decreased by $1,000 because
of the state tax credit. The combined fed-
eral and state tax benefits of the $1,000
contribution were therefore $1,000, and
the cost to the taxpayer and to the federal
government of making the contribution
was $0. This is shown in column A under
Prior Law for Example 1 in Table 1 and
replicated in the same column for Exam-
ple 2.

###### 2. Taxpayer Subject to AMT

If the taxpayer were subject to the
AMT under section 55, however, there
was a net benefit to the taxpayer from
contributions to charity A, which provided
state tax credits. State and local taxes paid
are not deductible expenses in determin-
ing taxable income under the AMT, but
charitable contributions are deductible ex-
penses in determining taxable income un-
der the AMT. If the taxpayer contributed
$1,000, taxable income under the AMT
was reduced by $1,000 due to the chari-
table contribution deduction under section
170, but there was no corresponding re-
duction in the deduction for state and local
taxes. Under an AMT marginal tax rate of
26 percent, the federal tax benefit of this
$1,000 contribution would be $260. Be-
cause of the dollar-for-dollar state tax
credit, the taxpayer received a combined
federal and state tax benefit of $1,260 for
a $1,000 contribution, a net benefit of
$260. This is shown in column A under
Prior Law for Example 3 in Table 1.

## 3. Comparison of Contributions to Different Organizations under Prior Law

In combination, state and federal tax
laws generally provide a greater incentive
to contribute to organizations eligible for
state tax credits (charity A) than to other
organizations (charity B). The effect of a
contribution to charity A are described
above.

Prior to enactment of the Act, for a
taxpayer not subject to the AMT, a $1,000
contribution to charity B yielded a smaller
combined federal and state tax benefit
than to charity A. The state tax benefit was
$50 ($1,000 times the 5 percent state tax
rate). The taxpayer's itemized deductions
at the federal level increased by $950 (the
$1,000 charitable contribution deduction
less the $50 reduction in state taxes paid).
The federal tax benefit of this increase
was $228 ($950 times the 24 percent fed-
eral tax rate), resulting in a combined fed-
eral and state tax benefit of $278. The net
cost to the taxpayer of the $1,000 contri-
bution was $722. This is shown in column
B under Prior Law for Example 1 in Table
1 and replicated in the same column for
Example 2.

For a taxpayer subject to the AMT, a
$1,000 contribution to charity B yielded
a combined federal and state benefit of
$310-the $1,000 contribution multiplied
by the taxpayer's marginal tax rate under
the AMT of 26 percent, or $260, plus the
value of the deduction from state tax, or
$50 ($1,000 times the 5 percent state tax
rate). The net cost to the taxpayer of the
$1,000 contribution was $690. This is
shown in column B under Prior Law for
Example 3 in Table 1.

Contributing to either charity A or
charity B reduced the taxpayer's com-
bined federal and state tax liability, but the
existence of the state tax credit for contri-
butions to charity A made contributions to
that organization more attractive. This is
seen by comparing the Total Tax Benefit
in column A under Prior Law to the cor-
responding value in column B for each of
the three examples. For taxpayers not sub-

2Note that this analysis only addresses state tax credits offering a 100% benefit. The results may differ for credits offering a lower benefit, but the comparative results of the below illustrative
examples would be similar.

3The results of the examples are generally unchanged if the taxpayer instead receives the credit as a refund of state taxes paid that were deducted from federal taxable income, as such refund
would be includible in federal taxable income in the following year.

4This assumes the taxpayer was not subject to limitations such as the overall limitation on itemized deductions under section 68 or subject to a percentage limitation for the deduction under
section 170, an assumption that is maintained throughout the succeeding discussion.

ject to the AMT, contributions to charity
A yielded a combined federal and state tax
benefit of $1,000, compared to a com-
bined federal and state tax benefit of $278
for a contribution to charity B. The AMT
increased the disparity for contributions to
charity A versus charity B, resulting in a
combined federal and state tax benefit of
$1,260 for a contribution to charity A versus
$310 for a contribution to charity B.

### B. Examples under baseline (current law and practices under the Act) and proposed rule

The enactment of the SALT cap in the
Act has, in limited circumstances, altered
the federal tax effects of charitable contri-
butions as described in the following ex-
amples. These are illustrated in the col-
umns labeled "Baseline" and "Proposed
Rule" in Table 1.

1\. Example 1: Taxpayer Is Above the
SALT Cap and Not Subject to the AMT

#### a. Baseline

If a taxpayer that has a state tax liabil-
ity of more than $1,000 above the SALT
cap and is not subject to the AMT makes
a $1,000 contribution to charity A, the
deduction for charitable contributions un-
der section 170(a) increases by $1,000,
but the deduction for state and local taxes
paid under section 164 is unchanged. Con-
sequently, itemized deductions increase
by $1,000, and taxable income decreases
by $1,000. If the taxpayer is in the 24
percent bracket, federal liability will de-
crease by $240, and state tax liability will
decrease by the $1,000 state tax credit.
The combined federal and state tax bene-
fits of the $1,000 contribution are there-
fore $1,240, and the taxpayer receives a
$240 net benefit while the federal govern-
ment has a loss of $240. This is shown in
column A under Baseline for Example 1
in Table 1.

## b. Proposed rule

If the same taxpayer makes the $1,000
contribution to charity A under the pro-
posed rule, the entire $1,000 deduction is
not deductible under section 170(a), and
the deduction for state and local taxes paid
under section 164 is unchanged due to the

SALT cap. The taxpayer's itemized de-
ductions, taxable income, and federal tax
liability are unchanged from what they
would be in the absence of the contribu-
tion. The taxpayer's state tax liability de-
creases by $1,000 because of the state tax
credit. The combined federal and state tax
benefits of the $1,000 contribution are
therefore $1,000, or $240 less than under
the baseline. This is shown by comparing
the Total Tax Benefit in column A under
Proposed Rule with the corresponding
value in column A under Baseline for
Example 1 in Table 1. However, the ben-
efit of the contribution for this taxpayer is
the same as the taxpayer faced prior to
enactment of the Act. This is shown by
comparing the Total Tax Benefit under
column A under Proposed Rule with the
corresponding value in column A under
Prior Law for Example 1 in Table 1.

## c. Comparison of contributions to different organizations and proposed rule

Under the baseline and the proposed
rule, for a taxpayer with state and local
taxes paid over the SALT cap, the value
of a contribution to charity B, that is a
contribution that results in a one-for-one
state income tax deduction and not a
state tax credit, is slightly higher than it
was pre-Act. This increase is because
the state deduction does not reduce the
federal deduction for state and local
taxes for a taxpayer above the SALT
cap. As shown in the Total Tax Benefit
row under the B columns for Example 1,
under the baseline and the proposed
rule, the value of a $1,000 contribution
to charity B is $290-the charitable
contribution deduction from federal tax
($1,000 times the 24 percent federal tax
rate, or $240), plus the value of the
deduction from state tax ($1,000 times
the 5 percent state tax rate, or $50)-
compared to $278 for contributions un-
der prior law (described above). By
comparison, as shown in the Total Tax
Benefit row under the A columns for
Example 1, a contribution to charity A,
eligible for a state tax credit, yields a
$1,240 tax benefit under the baseline
and a $1,000 benefit under the proposed
rule.

2\. Example 2: Taxpayer Is Below the
SALT Cap and Not Subject to the AMT

### a. Baseline

If a taxpayer that has state and local
taxes paid below the SALT cap and is
not subject to the AMT makes the
$1,000 contribution to charity A, the
deduction for charitable contributions
under section 170(a) increases by
$1,000, and the deduction for state and
local taxes paid under section 164 de-
creases by $1,000. The taxpayer's item-
ized deductions, taxable income, and
federal tax liability are unchanged from
what they would be in the absence of the
contribution. The taxpayer's state tax
liability decreases by $1,000 because of
the state tax credit. The combined fed-
eral and state tax benefits of the $1,000
contribution are therefore $1,000, and
the cost to the taxpayer and to the fed-
eral government of making the contri-
bution was $0. This situation is identical
to prior law or what taxpayers faced
prior to enactment of the Act. This is
shown is column A under Baseline and
Prior Law for Example 2 in Table 1.

## b. Proposed rule

If the same taxpayer makes the $1,000
contribution to charity A under the pro-
posed rule, the entire $1,000 contribution
is not deductible under section 170(a), but
the deduction for state and local taxes paid
under section 164 still decreases by
$1,000 because of the $1,000 state tax
credit. If the taxpayer is in the 24 percent
bracket, the federal tax liability will in-
crease by $240. The taxpayer's state tax
liability decreases by the $1,000 state tax
credit. The combined federal and state
tax benefits of the $1,000 contribution are
therefore $760, or $240 less than the base-
line. This is shown by comparing the To-
tal Tax Benefit in column A under Pro-
posed Rule with the corresponding value
in column A under Baseline for Example
2. In this case, the proposed rule has the
effect of increasing the taxpayer's federal
taxable income compared to the baseline
if the taxpayer makes a contribution to
charity A.

### c. Comparison of contributions to different organizations, under prior Law, baseline, and proposed rule

Under prior law, and both the baseline
scenario and the proposed rule, the tax
benefit of charitable contributions to char-
ity B, which are not eligible for a state tax
credit but are deductible from both federal
and state taxable income, is unchanged
from prior law for taxpayers below the
SALT cap. Thus, in this example, the ben-
efit of making a contribution to charity B
remains $278, as described above for con-
tributions under prior law. This is shown
in the Total Tax Benefit row under the B
columns for Example 2. By comparison,
as shown in the Total Tax Benefit row
under the A columns for Example 2, a
$1,000 contribution to charity A, eligible
for a state tax credit, yields a $1,000 tax
benefit under the baseline and a $760 ben-
efit under the proposed rule.

3\. Example 3: Taxpayer is Subject to the
AMT5

### a. Baseline

If a taxpayer subject to the AMT makes
a $1,000 contribution to charity A, the
contribution reduces the taxpayer's tax-
able income under the AMT by $1,000.
Under an AMT marginal tax rate of 26
percent, the federal tax benefit of this
$1,000 contribution is $260. Because of
the dollar-for-dollar state tax credit, the
taxpayer would receive a combined fed-
eral and state tax benefit of $1,260 for a
$1,000 contribution, or a $260 net benefit.
This result is identical to the result under
prior law (prior to enactment of the Act).
This is shown in the A columns under
Baseline and Prior Law for Example 3 in
Table 1.

### b. Proposed rule

If the same taxpayer makes the $1,000
contribution to charity A under the pro-
posed rule, the entire $1,000 is not deduct-
ible under section 170(a). Therefore, the
taxpayer's taxable income and federal tax
liability under the AMT would be un-
changed from what they would be in the

absence of the contribution. The taxpay-
er's state tax liability decreases by $1,000
because of the state tax credit. The com-
bined federal and state tax benefits of the
$1,000 contribution are therefore $1,000,
or $260 less than under the baseline and
under the law prior to enactment of the
Act. This is shown by comparing the A
columns of Example 3 in Table 1. How-
ever, under the proposed rule, taxpayers
subject to the AMT are in the same posi-
tion as taxpayers with state and local taxes
paid above the SALT cap who are not
subject to the AMT. This is shown by
comparing the Total Tax Benefit amount
under column A for the Proposed Rule for
Example 3 to that for Example 1.

#### c. Comparison of contributions to different organizations, under prior law, baseline and proposed rule

Under the baseline and the proposed
rule, the treatment of charitable contribu-
tions that are deductible from both federal
and state taxable income is unchanged
from prior law for taxpayers subject to the
AMT. This is shown in the B columns for
Example 3 in Table 1. In this example, the
benefit of making a contribution to charity
B remains $310, as described above for
contributions under prior law. By compar-
ison, a contribution to a charity A, eligible
for a state tax credit, yields a $1,260 tax
benefit under the baseline and a $1,000
benefit under the proposed rule. This is
shown in column A under Baseline and
Proposed Rule for Example 3 in Table 1.

## IV. Expected Benefits and Costs

### A. Benefits

These proposed regulations likely re-
duce economically inefficient choices
motivated by the potential tax benefits de-
scribed above if these proposed regula-
tions were not promulgated. Under the
prior law and baseline scenarios, state and
local governments have an incentive to
fund governmental activities through in-
dependent entities that are eligible to re-
ceive deductible contributions and to
establish tax credits. This incentive is par-
ticularly strong under a SALT cap sce-

nario where state and local governments
may do so solely to enable some taxpayers
to circumvent the SALT cap. These pro-
posed regulations substantially diminish
this incentive to engage in socially waste-
ful tax-avoidance behavior. As a result, it
is expected that fewer such credit pro-
grams would be established in the future
under the proposed regulations than under
the baseline.

To the extent this result occurs, the
Treasury Department and IRS estimate
that the proposed regulations would re-
duce overall complexity and paperwork
burden for states and for taxpayers who
would otherwise engage in charitable con-
tributions solely for the purpose of reduc-
ing their state and local tax liability. In
addition to reducing paperwork burden,
the Treasury Department and IRS antici-
pate that the proposed regulations will
also spare some taxpayers compliance
costs associated with complex tax plan-
ning designed to avoid the SALT cap.

In addition, these proposed regulations
are expected to make the federal tax sys-
tem more neutral to taxpayers' decisions
regarding donations. Under the baseline
scenarios, the combined federal and state
tax benefits favor contributions to organi-
zations which give rise to a state tax credit
for taxpayers, particularly for taxpayers
above the SALT cap. Under the proposed
regulations, this economic distortion is ex-
pected to be reduced. The Treasury De-
partment and the IRS request comments
from the public on the potential extent of
this expected reduction in economic dis-
tortion.

Finally, these proposed regulations
provide more certainty to taxpayers by
clarifying the rules governing the amount
that they can claim as a charitable contri-
bution deduction when they receive a state
tax credit or a dollar-for-dollar state tax
deduction in exchange for the contribu-
tion.

### B. Costs

The proposed regulations may result in
some increase in compliance costs for tax-
payers who make contributions that gen-
erate state tax credits. Under the baseline,

5The Act increased the amount of income exempt from AMT. We estimate that only about 150,000 taxpayers will be subject to the AMT under the Act, compared to more than 4 million
under prior law.

for purposes of the charitable contribution
deduction under section 170(a), taxpayers
did not need to address state tax credits
received for purposes of claiming a char-
itable contribution; however, they would
know the amount of credits received as
part of the filing process for state returns.
In contrast, under the proposed regula-
tions, taxpayers making a contribution to
an organization listed in section 170(c)
will need to determine the amount of any
state tax credits they will receive or expect
to receive in order to reduce their charita-
ble contribution deduction under section
170(a). This additional step will generate
some additional compliance costs.

The compliance burden for recipient
organizations that directly issue tax cred-
its may increase under the proposed reg-
ulations. In order to take a charitable con-
tribution deduction of $250 or more, a
taxpayer must have a contemporaneous
written acknowledgment (CWA) from the
donee entity, usually provided in the form
of a letter. The CWA includes the amount
received by the entity or a description of
property received. The CWA must also
disclose whether the donee provided any
goods or services in consideration for the
contribution and a description and good
faith estimate of the value of those goods
or services provided. State and local tax
credits are not generally provided by the
donee entity, but there may be situations

in which the entity would be providing the
credit and would need to include it in the
CWA provided to the donor. The Treasury
Department and the IRS request com-
ments on whether additional guidance is
needed on substantiation and reporting re-
quirements for donors and donees making
or receiving payments or transfers of
property in return for state and local tax
credits and the extent to which entities do
provide tax credits under certain circum-
stances.

The Treasury Department and the IRS
request comments on other potential com-
pliance savings, compliance costs, costs
related to increased tax planning and other
avoidance behavior, or any effects on
charitable contribution decisions that may
occur as a result of these proposed regu-
lations. In particular, the Treasury Depart-
ment and the IRS request comments as to
how the proposed regulations might alter
incentives regarding contributions to state
and local tax credit programs.

Based on an analysis of confidential
taxpayer return data and forecasts using
that data, the Treasury Department and the
IRS note that these proposed regulations
will leave charitable giving incentives en-
tirely unchanged for the vast majority of
taxpayers. After passage of the Act, which
significantly increased the standard de-
duction, it is estimated that ninety percent
of taxpayers will not claim itemized de-

ductions of any kind. Those taxpayers are
entirely unaffected by these proposed reg-
ulations. It is estimated that approximately
five percent of taxpayers will itemize and
will have state and local income tax de-
ductions above the SALT cap; these tax-
payers will receive the same federal tax
benefits under the proposed regulations as
they received prior to the Act. See Exam-
ple 1 above. It is estimated that approxi-
mately five percent of taxpayers will item-
ize but will not have state and local
income tax deductions above the SALT
cap. The federal tax benefits available to
this fraction of taxpayers could be af-
fected by the proposed regulations only if
they contribute to programs that entitle
them to state tax credits of greater than 15
percent. See Example 2 above. The Trea-
sury Department and the IRS believe that
most taxpayers in this third category have
never used any state tax credit programs
affected by the proposed regulations, and
that the proposed regulations will have at
most a highly limited, marginal effect on
taxpayer decisions to donate to tax credit
programs that pre-date TCJA, including
educational scholarship programs.6 The
Treasury Department and the IRS request
comments on this important consideration
and any potential unintended conse-
quences of the proposed regulations not
addressed here.

Table 1: Tax Treatment of $1,000 Contribution to (A) Organization that Gives Rise to $1,000 State Tax Credit and (B) Organization for Which Contribution is Deductible at the State Level Example 1: Taxpayer Above the SALT Cap, Not Subject to the AMT

Change in

Prior Law

Baseline

Proposed Rule

State Income Tax Liability

-1,000

-50

-1,000

-50

-1,000

-50

Federal Income Tax

Charitable Contribution Deduction

1,000

Deduction for State and Local Taxes

-1,000

-50

Itemized Deductions

950

1,000

Taxable Income

-950

-1,000

Federal Tax Liability

-228

-240

Total Tax Benefit (Federal + State)

1,000

278

1,240

290

1,000

290

Net Cost to Taxpayer of $1,000 Contribution

722

-240

710

6The Treasury Department and the IRS are aware of potential concerns about educational scholarship programs in particular. Based on projections for 2018, most taxpayers in the third
category described above do not reside in states that offer educational scholarship tax credit programs affected by the proposed regulations, and the vast majority of them have never used
such programs.

Table 1: Tax Treatment of $1,000 Contribution to (A) Organization that Gives Rise to $1,000 State Tax Credit and (B) Organization for Which Contribution is Deductible at the State Level Example 2: Taxpayer Below the SALT Cap, Not Subject to the AMT

Change in

Prior Law

Baseline

Proposed Rule

State Income Tax Liability

-1,000

-50

-1,000

-50

-1,000

-50

Federal Income Tax

Charitable Contribution Deduction

1,000

Deduction for State and Local Taxes

-1,000

-50

-1,000

-50

-1,000

-50

Itemized Deductions

950

-1,000

950

Taxable Income

-950

1,000

-950

Federal Tax Liability

-228

240

-228

Total Tax Benefit (Federal + State)

1,000

278

1,000

278

760

278

Net Cost to Taxpayer of $1,000 Contribution

722

240

722

Example 3: Taxpayer Subject to the AMT

Change in

Prior Law

Baseline

Proposed Rule

State Income Tax Liability

-1,000

-50

-1,000

-50

-1,000

-50

Federal Income Tax

Alternative minimum taxable Income

-1,000

Federal Tax Liability

-260

Total Tax Benefit (Federal + State)

1,260

310

1,260

310

1,000

310

Net Cost to Taxpayer of $1,000 Contribution

-260

690

260

690

Assumptions: The taxpayer itemizes deductions and has more than $1,000 of state tax liability. Under prior law, the tax-
payer is not subject to the overall limitation on itemized deductions under section 68. The taxpayer faces a 24 percent
marginal rate under the federal income tax. If the taxpayer is subject to the AMT, the taxpayer faces a 26 percent mar-
ginal rate. A $1,000 contribution to charitable organization A generates a $1,000 state tax credit. A $1,000 contribution to
charitable organization B is ineligible for a state tax credit but is deductible under the state's income tax. The taxpayer
faces a 5 percent marginal rate under the state's income tax. The baseline assumes continuation of the IRS administrative
position that state and local tax credits are not reflected as a return benefit or consideration and therefore do not reduce the
taxpayer's charitable contribution deduction under section 170(a). Total Tax Benefit refers to the absolute value of the
reduction of the taxpayer's combined federal and state tax liability.

#### Regulatory Flexibility Act

The Regulatory Flexibility Act (5
U.S.C. chapter 6) does not apply because
the proposed regulations primarily affect
individuals and do not impose costs, in-
cluding a collection of information, on
small entities. Therefore, a regulatory
flexibility analysis is not required. Pursu-
ant to section 7805(f), this notice of pro-
posed rulemaking will be submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment on
its impact on small businesses.

## Comments and Public Hearing

Before the regulations proposed herein
are adopted as final regulations, consider-
ation will be given to any electronic and

written comments that are submitted
timely to the IRS as prescribed in this
preamble under the ADDRESSES head-
ing. The Treasury Department and the IRS
request comments on all aspects of the
proposed regulations including: (1)
Whether there should be recognition of
gain or loss when property is transferred
in consideration for state or local tax cred-
its that are not de minimis; (2) determina-
tion of the basis of a transferable tax credit
that a taxpayer sells or exchanges; (3)
procedures by which a taxpayer may es-
tablish that the taxpayer declined receipt
of the state or local tax credit; (4) substan-
tiation and reporting requirements for do-
nors and donees making or receiving pay-
ments or transfers of property in return for
state and local tax credits; (5) for a tax-

payer that receives or expects to receive a
state or local tax deduction in an amount
that exceeds the amount of the taxpayer's
payment or the fair market value of the
property transferred to an entity listed in
section 170(c), suggestions for calculating
the reduction to the charitable contribu-
tion deduction; and (6) whether and in
what manner the regulations should address
other state or local tax benefits, such as tax
exclusions, that may be provided as consid-
eration for certain payments or transfers to
an entity listed in section 170(c). Finally, the
Treasury Department and the IRS request
comments on alternative regulatory ap-
proaches that would effectively prevent cir-
cumvention of the new statutory limitation
on state and local tax deductions, consistent
with applicable law.

All comments submitted will be made
available at www.regulations.gov or upon
request. A public hearing has been sched-
uled for November 5, 2018, beginning at
10 a.m. in the Auditorium of the Internal
Revenue Building, 1111 Constitution Av-
enue, N.W., Washington, DC 20224. Due
to building security procedures, visitors
must enter at the Constitution Avenue en-
trance. In addition, all visitors must pres-
ent photo identification to enter the build-
ing. Because of access restrictions,
visitors will not be admitted beyond the
immediate entrance area more than 30
minutes before the hearing starts. For
more information about having your name
placed on the building access list to attend
the hearing, see the "FOR FURTHER IN-
FORMATION CONTACT" section of
this preamble.

The rules of 26 CFR 601.601(a)(3) ap-
ply to the hearing. Persons who wish to
present oral comments at the hearing must
submit an outline of the topics to be dis-
cussed and the time to be devoted to each
topic by October 11, 2018. Submit a
signed paper or electronic copy of the
outline as prescribed in this preamble un-
der the "Addresses" heading. An agenda
showing the scheduling of the speakers
will be prepared after the deadline for
receiving outlines has passed. Copies of
the agenda will be available free of charge
at the hearing.

### Drafting Information

The principal authors of these pro-
posed regulations are personnel from the
Office of the Associate Chief Counsel (In-
come Tax and Accounting). However,
other personnel from the IRS and the
Treasury Department participated in their
development.

### List of Subjects in 26 CFR Part 1

Income taxes, Reporting and record-
keeping requirements.

### Proposed Amendments to the Regulations

Accordingly, 26 CFR part 1 is pro-
posed to be amended as follows:

PART 1-INCOME TAXES

Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *

Par. 2. Section 1.170A-1 is amended
by redesignating paragraphs (h)(3)
through (h)(5) as paragraphs (h)(4)
through (h)(6), and adding a new para-
graph (h)(3) to read as follows:

§ 1.170A-1 Charitable, etc.,
contributions and gifts; allowance of
deduction.

* * * * *

(h) * * *

(3) Payments resulting in state or local
tax benefits. (i) State or local tax credits.
Except as provided in paragraph (h)(3)(v)
of this section, if a taxpayer makes a pay-
ment or transfers property to or for the use
of an entity listed in section 170(c), the
amount of the taxpayer's charitable con-
tribution deduction under section 170(a) is
reduced by the amount of any state or
local tax credit that the taxpayer receives
or expects to receive in consideration for
the taxpayer's payment or transfer.

(ii) State or local tax deductions. (A) In
general. If a taxpayer makes a payment or
transfers property to or for the use of an
entity listed in section 170(c), and the
taxpayer receives or expects to receive a
state or local tax deduction that does not
exceed the amount of the taxpayer's pay-
ment or the fair market value of the prop-
erty transferred by the taxpayer to such
entity, the taxpayer is not required to re-
duce its charitable contribution deduction
under section 170(a) on account of such
state or local tax deduction.

(B) Excess state or local tax deduc-
tions. If the taxpayer receives or expects
to receive a state or local tax deduction
that exceeds the amount of the taxpayer's
payment or the fair market value of the
property transferred, the taxpayer's chari-
table contribution deduction under section
170 is reduced.

(iii) In consideration for. For purposes
of paragraph (h)(3)(i) of this section, the
term in consideration for shall have the
meaning set forth in § 1.170A-13(f)(6),
except that the state or local tax credit
need not be provided by the donee orga-
nization.

(iv) Amount of reduction. For purposes
of paragraph (h)(3)(i) of this section, the
amount of any state or local tax credit is the
maximum credit allowable that corresponds
to the amount of the taxpayer's payment or
transfer to the entity listed in section 170(c).

(v) State or local tax. For purposes of
paragraph (h)(3) of this section, the term
state or local tax means a tax imposed by
a State, a possession of the United States,
or by a political subdivision of any of the
foregoing, or by the District of Columbia.

(vi) Exception. Paragraph (h)(3)(i) of
this section shall not apply to any payment
or transfer of property if the amount of the
state or local tax credit received or expected
to be received by the taxpayer does not
exceed 15 percent of the taxpayer's pay-
ment, or 15 percent of the fair market value
of the property transferred by the taxpayer.

(vii) Examples. The following exam-
ples illustrate the provisions of this para-
graph (h)(3). The examples in paragraph
(h)(6) of this section are not illustrative
for purposes of this paragraph (h)(3).

Example 1. A, an individual, makes a payment of
$1,000 to X, an entity listed in section 170(c). In
exchange for the payment, A receives or expects to
receive a state tax credit of 70% of the amount of A's
payment to X. Under paragraph (h)(3)(i) of this
section, A's charitable contribution deduction is re-
duced by $700 (70% x $1,000). This reduction oc-
curs regardless of whether A is able to claim the state
tax credit in that year. Thus, A's charitable contri-
bution deduction for the $1,000 payment to X may
not exceed $300.

Example 2. B, an individual, transfers a painting
to Y, an entity listed in section 170(c). At the time of
the transfer, the painting has a fair market value of
$100,000. In exchange for the painting, B receives or
expects to receive a state tax credit equal to 10% of
the fair market value of the painting. Under para-
graph (h)(3)(vi) of this section, B is not required to
apply the general rule of paragraph (h)(3)(i) of this
section because the amount of the tax credit received
or expected to be received by B does not exceed 15%
of the fair market value of the property transferred to
Y. Accordingly, the amount of B's charitable con-
tribution deduction for the transfer of the painting is
not reduced under paragraph (h)(3)(i) of this section.

Example 3. C, an individual, makes a payment of
$1,000 to Z, an entity listed in section 170(c). In
exchange for the payment, under state M law, C is
entitled to receive a state tax deduction equal to the
amount paid by C to Z. Under paragraph
(h)(3)(ii)(A) of this section, C is not required to
reduce its charitable contribution deduction under
section 170(a) on account of the state tax deduction.

(viii) Effective/applicability date. This paragraph
(h)(3) applies to amounts paid or property trans-
ferred by a taxpayer after August 27, 2018.
* * * * *

#### § 1.170A-13 [Amended]

Par. 3. Section 1.170A-13(f)(7) is
amended by removing the cross-reference
"§ 1.170A-1(h)(4)" and adding in its
place "§ 1.170A-1(h)(5)".

Par. 4. Section 1.642(c)-3 is amended
by adding paragraph (g) to read as fol-
lows:

§ 1.642(c)-3 Adjustments and other
special rules for determining unlimited
charitable contributions deduction.

(g) Payments resulting in state or local
tax benefits-(1) In general. If the trust or
decedent's estate makes a payment of
gross income for a purpose specified in
section 170(c), and the trust or decedent's
estate receives or expects to receive a state
or local tax benefit in consideration for
such payment, § 1.170A-1(h)(3) applies
in determining the charitable contribution
deduction under section 642(c).

(2) Effective/applicability date. Para-
graph (g)(1) of this section applies to pay-
ments of gross income after August 27,
2018.

Kirsten Wielobob,
Deputy Commissioner for Services and
Enforcement.

(Filed by the Office of the Federal Register on August 23,
2018, 4:15 p.m., and published in the issue of the Federal
Register for August 27, 2018, 83 F.R. 43563)

# Definition of Terms

Revenue rulings and revenue procedures
(hereinafter referred to as "rulings") that
have an effect on previous rulings use the
following defined terms to describe the
effect:

Amplified describes a situation where
no change is being made in a prior pub-
lished position, but the prior position is
being extended to apply to a variation of
the fact situation set forth therein. Thus, if
an earlier ruling held that a principle ap-
plied to A, and the new ruling holds that
the same principle also applies to B, the
earlier ruling is amplified. (Compare with
modified, below).

Clarified is used in those instances
where the language in a prior ruling is
being made clear because the language
has caused, or may cause, some confu-
sion. It is not used where a position in a
prior ruling is being changed.

Distinguished describes a situation
where a ruling mentions a previously pub-
lished ruling and points out an essential
difference between them.

Modified is used where the substance
of a previously published position is being
changed. Thus, if a prior ruling held that a
principle applied to A but not to B, and the
new ruling holds that it applies to both A

and B, the prior ruling is modified because
it corrects a published position. (Compare
with amplified and clarified, above).

Obsoleted describes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transac-
tions. This term is most commonly used in
a ruling that lists previously published rul-
ings that are obsoleted because of changes
in laws or regulations. A ruling may also
be obsoleted because the substance has
been included in regulations subsequently
adopted.

Revoked describes situations where the
position in the previously published ruling
is not correct and the correct position is
being stated in a new ruling.

Superseded describes a situation where
the new ruling does nothing more than
restate the substance and situation of a
previously published ruling (or rulings).
Thus, the term is used to republish under
the 1986 Code and regulations the same
position published under the 1939 Code
and regulations. The term is also used
when it is desired to republish in a single
ruling a series of situations, names, etc.,
that were previously published over a pe-
riod of time in separate rulings. If the new
ruling does more than restate the sub-

stance of a prior ruling, a combination of
terms is used. For example, modified and
superseded describes a situation where the
substance of a previously published ruling
is being changed in part and is continued
without change in part and it is desired to
restate the valid portion of the previously
published ruling in a new ruling that is
self contained. In this case, the previously
published ruling is first modified and then,
as modified, is superseded.

Supplemented is used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and that
list is expanded by adding further names
in subsequent rulings. After the original
ruling has been supplemented several
times, a new ruling may be published that
includes the list in the original ruling and
the additions, and supersedes all prior rul-
ings in the series.

Suspended is used in rare situations to
show that the previous published rulings
will not be applied pending some future
action such as the issuance of new or
amended regulations, the outcome of
cases in litigation, or the outcome of a
Service study.

# Abbreviations

The following abbreviations in current
use and formerly used will appear in ma-
terial published in the Bulletin.

A-Individual.

Acq .- Acquiescence.

B-Individual.

BE-Beneficiary.

F.R .- Federal Register.

FUTA-Federal Unemployment Tax Act.

FX-Foreign corporation.

G.C.M .- Chief Counsel's Memorandum.

GE-Grantee.

TFE-Transferee.

TFR-Transferor.

CI-City.

GR-Grantor.

IC-Insurance Company.

TP-Taxpayer.

TR-Trust.

CY-County.

LE-Lessee.

TT-Trustee.

D-Decedent.

LP-Limited Partner.

DC-Dummy Corporation.

LR-Lessor.

X-Corporation.

DE-Donee.

Del. Order-Delegation Order.

Nonacq .- Nonacquiescence.

O Organization.

P-Parent Corporation.

PHC-Personal Holding Company.

PO-Possession of the U.S.

PR-Partner.

PRS-Partnership.

PTE-Prohibited Transaction Exemption.
Pub. L .- Public Law.

REIT-Real Estate Investment Trust.

Rev. Proc .- Revenue Procedure.

Rev. Rul .- Revenue Ruling.

S-Subsidiary.

S.P.R .- Statement of Procedural Rules.

Stat .- Statutes at Large.

T-Target Corporation.

T.C .- Tax Court.

C-Individual.

C.B .- Cumulative Bulletin.

CFR-Code of Federal Regulations.

GP-General Partner.

T.I.R .- Technical Information Release.

COOP-Cooperative.

Ct.D .- Court Decision.

I.R.B .- Internal Revenue Bulletin.

M-Minor.

Y-Corporation.

Z-Corporation.

DISC-Domestic International Sales Corporation.

DR-Donor.

E-Estate.

EE-Employee.

E.O .- Executive Order.

ER-Employer.

ERISA-Employee Retirement Income Security Act.
EX-Executor.

F-Fiduciary.

FC-Foreign Country.

FICA-Federal Insurance Contributions Act.

FISC-Foreign International Sales Company.

FPH-Foreign Personal Holding Company.

BK-Bank.

B.T.A .- Board of Tax Appeals.

T.D .- Treasury Decision.

U.S.C .- United States Code.

## Numerical Finding List1

Bulletin 2018-27 through 2018-37

### Announcements:

2018-09, 2018-28 I.R.B. 206
2018-12, 2018-30 I.R.B. 232

### Notices:

2018-48, 2018-28 I.R.B. 9
2018-56, 2018-27 I.R.B. 3
2018-58, 2018-33 I.R.B. 305

2018-59, 2018-28 I.R.B. 196
2018-60, 2018-31 I.R.B. 275
2018-61, 2018-31 I.R.B. 278
2018-62, 2018-34 I.R.B. 316
2018-63, 2018-34 I.R.B. 318
2018-64, 2018-35 I.R.B. 347
2018-65, 2018-35 I.R.B. 350
2018-67, 2018-36 I.R.B. 409
2018-68, 2018-36 I.R.B. 418
2018-69, 2018-37 I.R.B. 426

### Proposed Regulations:

REG-103474-18, 2018-32 I.R.B. 284
REG-106977-18, 2018-27 I.R.B. 6

REG-107892-18, 2018-35 I.R.B. 353

REG-112176-18, 2018-37 I.R.B. 430

## Revenue Procedures:

2018-35, 2018-28 I.R.B. 204

2018-37, 2018-29 I.R.B. 210

2018-38, 2018-31

I.R.B. 280

2018-39, 2018-34

I.R.B. 319

2018-40, 2018-34

I.R.B. 320

2018-42, 2018-36

I.R.B. 424

2018-43, 2018-36

I.R.B. 425

2018-44, 2018-37 I.R.B. 426

2018-45, 2018-37 I.R.B. 428

## Revenue Rulings:

2018-19, 2018-27 I.R.B. 1
2018-20, 2018-28 I.R.B. 8

2018-21, 2018-32 I.R.B. 282
2018-22, 2018-34 I.R.B. 308

2018-23, 2018-36 I.R.B. 405

2018-24, 2018-36 I.R.B. 407

## Treasury Decisions:

9834, 2018-31 I.R.B. 233
9835, 2018-33 I.R.B. 288
9836, 2018-33 I.R.B. 291

9838, 2018-34 I.R.B. 309
9839, 2018-35 I.R.B. 325

1 A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2018-01 through 2018-26 is in Internal Revenue Bulletin
2018-26, dated June 27, 2018.

## Finding List of Current Actions on Previously Published Items1

Bulletin 2018-27 through 2018-37

Notices:

2014-5
Modified by
Notice 2018-69, 2018-37 I.R.B. 426

2015-28
Modified by
Notice 2018-69, 2018-37 I.R.B. 426

2016-57
Modified by
Notice 2018-69, 2018-37 I.R.B. 426

2017-45
Modified by
Notice 2018-69, 2018-37 I.R.B. 426

### Revenue Procedures:

2015-27
Amplified by
Rev. Proc. 2018-39, 2018-34 I.R.B. 319

2017-24
Amplified by
Rev. Proc. 2018-39, 2018-34 I.R.B. 319

2018-31
Modified by
Rev. Proc. 2018-44, 2018-37 I.R.B. 426

# Internal Revenue Service Washington, DC 20224

Official Business
Penalty for Private Use, $300

# INTERNAL REVENUE BULLETIN

The Introduction at the beginning of this issue describes the purpose and content of this publication. The weekly Internal Revenue
Bulletins are available at www.irs.gov/irb/.

# We Welcome Comments About the Internal Revenue Bulletin

If you have comments concerning the format or production of the Internal Revenue Bulletin or suggestions for improving it, we
would be pleased to hear from you. You can email us your suggestions or comments through the IRS Internet Home Page
(www.irs.gov) or write to the Internal Revenue Service, Publishing Division, IRB Publishing Program Desk, 1111 Constitution Ave.
NW, IR-6230 Washington, DC 20224.

Internal Revenue Bulletin 2018-37 (PDF rendition): IRS Notices

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