Professor Shanske weighs in on potential tax workarounds, in San Francisco Chronicle

Proposed legislation that would help Californians circumvent the new $10,000 limit on the federal deduction for state and local taxes could face an Internal Revenue Service challenge based on “substance-over-form principles,” the San Francisco Chronicle reported.

The IRS used this language in a May 23 notice in which it said it will issue regulations related to California’s proposed “workaround” laws – two bills currently before the Legislature that would let taxpayers who exceed the $10,000 limit work around it via designated state funds and charities.

“Substance over form” is a “complicated doctrine,” Professor Darien Shanske told the Chronicle. This doctrine is used in cases “where what the taxpayer has done is, strictly speaking correct, and yet there is something problematic about it. The classic case is a tax shelter.”

Shanske consulted on the two California bills and does not believe the bills are problematic under the economic substance doctrine. New York, New Jersey and Connecticut already have passed their own “workaround” laws in response the new federal deductions limit.

Darien Shanske is a Professor of Law at UC Davis. His academic interests include taxation, particularly state and local taxation, local government law, public finance, and political theory, particularly jurisprudence.