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Dismissal of SALT Deduction Lawsuit Guaranteed to be First Year Law Students’ Civil Procedure Final Exam

10.07.19 | SALT Chat

Way back when, July 22, 2019 to be exact, this writer informed his faithful readers of the battle of the Blue States vs. the newly enacted state and local tax cap [I Sue You, You Sue Me, They Sue Us, Here We Go Again].  Most experts predicted the plaintiffs didn’t have a chance and, on September 30, 2019, United States District Judge J. Paul Oetken agreed, by granting the Federal Government’s motion to dismiss the lawsuit[1].

In a thirty-seven-page opinion, Judge Oetken outlines the Plaintiffs’ (New York, Connecticut, Maryland, and New Jersey or the “States”) objections to the Tax Cuts and Jobs Act’s (TCJA) substantial restriction on the deductibility of state and local taxes— a limitation to a maximum of $10,000.

The Opinion begins with a history lesson delving into the financial hardships of the Civil War as well as the creation of the federal tax system in general, and how the SALT deduction was always a mainstay.  Without ever mentioning baseball, Judge Oetken does recognize that the 2017 TCJA “changed the ballgame.”

Judge Oetken guarantees his place in Law School exam history by spending the next twenty-five or so pages rejecting the Government’s three-pronged challenge to the Court’s subject-matter jurisdiction.  Surprisingly, the Court holds that the States do have standing to bring the claim, that the Anti-Injunction Act does not strip the Court of jurisdiction and outright rejects the claim that the case presents a nonjusticiable political question.

So, while at this point in the Opinion (page 11) the States are feeling true-blue anticipating a possible victory, all hope was ripped away by dismissing the case on the merits!  The Court sums up the controversy by saying “. . . the States raise a single claim: that the SALT cap exceeds the federal tax power by verging into territory that is constitutionally reserved to the states.”  The States argue the novelty of the SALT cap goes beyond the Constitutional powers of the federal government.

The Court’s response; “Mere legislative novelty, however, is not necessarily fatal.”  “Instead of looking at the SALT cap’s novelty alone, then, this Court must ask whether the fact that Congress has not previously imposed such a cap arises out of a structural limitation built into the constitutional plan.  And this is where the States run into trouble.”

Here is where the Court “changed the ballgame” by keeping its eye on the ball.  It looks like the SALT cap is here to stay, for at least a while longer.

If you have questions about this decision or the SALT cap contact me at wberkowitz@berdonllp.com or your Berdon Advisor.

Wayne Berkowitz, a tax partner and head of the State and Local Tax Group at Berdon LLP, advises on the unique requirements of governments and municipalities across the nation.

[1] State of New York, et al v. Mnuchin et al; 1:18-cv-06427 (U.S.D.C. S.D.N.Y September 30, 2019)