Attorneys Say States Did Homework on Federal Tax Act Challenge(1)

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By Gerald B. Silverman

Many tax practitioners say four northeastern states stand little chance of success with their recent lawsuit challenging the new federal tax law.

However, tax attorneys interviewed by Bloomberg Tax applauded the legal work that went into the complaint.

The case is “a stinker” but raises some interesting issues, Harry W. Drozdowski, an attorney with Anglin, Flewelling, Rasmussen, Campbell & Trytten LLP, told Bloomberg Tax.

“Could I see this making its way up a level or two?” he asked. “Potentially. But I do think ultimately this is a stinker.”

New York, New Jersey, Connecticut, and Maryland sued the Trump Administration July 17 to overturn the new $10,000 cap on the state and local tax deduction. They said the 2017 federal tax act ( Pub. L. No. 115-97) “targeted” the states and overturned more than 150 years of precedent.

Peter L. Faber, a partner at McDermott Will & Emery, said the lawsuit is a “long shot,” but “the drafters of the complaint have raised significant constitutional issues and they have put together an impressive work product.”

“There are, of course, many instances in which deductions for state and local taxes have been curtailed,” Faber told Bloomberg Tax in an email. “At one time, virtually all state taxes were deductible, but the list of deductible taxes has been reduced over the years and no one has complained.”

“Under present law, state and local income taxes are not deductible by people who do not itemize deductions or who are subject to the alternative minimum tax,” he said. “One can argue that a deduction for state income taxes is simply a subsidy paid indirectly to the states and that no state has a right to a federal subsidy.”

Legal Standing

Faber also raised the issue of legal standing, asking whether an individual taxpayer should have brought the suit, rather than the states.

One of the key issues facing the court is the matter of “intent,” according to Faber and Drozdowski. They both cited the recent immigration cases in which the courts ruled that the intent of the Trump administration’s immigration policy was to discriminate against Muslims.

“I do think there’s some of that here,” Drozdowski said. “Courts are going to look at that.”

Adam P. Beckerink, a partner at Morgan, Lewis & Bockius LLP, said the states view the SALT deduction as a constitutional right, while the federal government views it as more of a benefit.

The states’ arguments are “interesting,” but it will be difficult for the states to win, he told Bloomberg Tax. “I’m not saying it can’t be won.”

To contact the reporter on this story: Gerald B. Silverman in Albany, N.Y. at gsilverman@bloomberglaw.com

To contact the editor responsible for this story: Ryan C. Tuck at rtuck@bloombergtax.com

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