Scarsdale Agrees to Be Plaintiffs in Legal Challenge to IRS Rules Regarding Deductibility of Charitable Gift Reserves

State Assmeblywoman and Scarsdale resident Amy PaulinScarsdale made history on Tuesday night February 13, 2019 when the Village signed on as a plaintiff in a lawsuit to challenge IRS rules regarding the deductibility of state and local taxes in charitable gift reserves.Trustees voted yes to join a lawsuit that, if successful, could help states beleaguered by the new SALT provisions to recoup most of their lost tax revenues.

State Assemblywoman Amy Paulin is leading the charge to contest these rules which deny residents the right to pay into a charitable gift reserve and deduct local taxes from their federal tax returns. As Paulin explained at the meeting, “The US Congress decided to limit SALT deduction last December. At the time group of tax professors from around the country wrote a white paper about what they believed could be done if SALT was adopted. One of the options was establishing a charitable fund and we folded that proposal into the state budget, along with New Jersey and Connecticut. Dan Hemel, an SHS grad now at the University of Chicago was one of the authors of that white paper.”

She continued, “Scarsdale established a charitable fund along with Rye and Rye Brook. However the IRS came out with rules that created a chilling effect. Assemblyman David Buchwald and I brought a group of local leaders together and wrote comments on these IRS rules and regulations. We are still awaiting the final regulations. When they come out, we want to be in a position to challenge them. The best plaintiffs are towns that have already formed charitable trusts like Scarsdale and Rye. The state stands to lose $2.3 billion in local taxes. The potential harm to our communities is great.”

Why Scarsdale? The resolution says, “The implementation of these regulations as drafted would harm Scarsdale residents who have already made donations or who might seek to make donations in the future to the charitable gift reserve fund, and would directly harm the ability of the charitable gift reserve fund in its capital raising efforts as envisioned under New York State law.”

Paulin said, “Scarsdale will be taking an action to protect our residents. The liability to the village is nothing. We have formed a 501C4 to assume the liability.” She explained that tax attorneys from Baker and McKenzie of Chicago, Illinois would draft the papers pro bono and no work by the Village would be required.

The resolution before the board was to execute an engagement letter to provide no cost legal services in connection with participation as a plaintiff in challenging internal revenue service charitable gift reserve fund regulations.

Not everyone agreed that this was a good move for Scarsdale. During public comments Bob Berg discussed his concerns that the Village would be open to liability and ridicule and that meetings about the suit were held behind closed doors. He said, “Amy has convinced the BOT that joining this lawsuit is wise. … The discussions were not held publicly…. This puts the good name of Scarsdale in jeopardy. Can you imagine the scorn we will face? The pundits will drag our good name through the mud. She says the 501c4 will pay the legal fees of this litigation. Baker and McKenzie is one of the world’s largest law firms in the country. This will cost more than $1,000,000… The 501 c4 is headed in Scarsdale in Amy’s house. It’s a dark money political action committee. The odor of rotting fish is getting stronger. The red flags are wild – they mean danger.”

Anne Hintermeister of Chase Road agreed. She said, “What happens if we can’t cover the law firms fees? We need more information on this. Who is going to direct the litigation? Does the village have standing to challenge tax regulations?”

Bob Selvaggio of Rochambeau Road argued for a legislative solution and questioned the logic of deductible charitable funds. He said, “The only way to restore SALT deduction is to convince our legislators. The government that touches us most is our municipal government. Scarsdale should have first dibs on our taxes, followed by the state, and then the country. Few of us ask much of the federal government. President Trump should tighten his own belt so we can pursue our own happiness….Few of our state dollars are returned to our schools. Our tax payments are not charitable contributions. This only subjects us to ridicule. They are other avenues to pursue. Empty nesters could argue that there is no quid pro quo – and they should be able to deduct school taxes as charitable deductions. We need to convince senate house and legislators that we need our local deductions.”

Paulin responded to these objections. To Selvaggio’s call to overturn SALT, she said, “Good luck convincing the federal government. Though I hope one day it will get overturned I am not holding my breath. Once you give the money away its hard to get it back. It is going to be hard to reverse SALT. The President rejected Governor Cuomo’s effort to reverse SALT. The Republican Party is not in favor of reversing SALT. I believe the charitable deductions are the best way to mitigate the effects.”

She also explained that there was precedent, saying “There are already active programs across states for parochial schools that allow tax deductions. This is historical – and these arguments will be made. The IRS ruled that all of the tax programs – including all of the existing ones in many states -- are not valid either! It affected so many people – thousands of children. They pleaded with the IRS to reverse their position. If we’re not in the lawsuit, there could be a carve out that doesn’t affect us.”

“So I applaud the Village for being involved – I think this is the right thing to do – we are going to work together to make this the best effort we can going forward.”

Before the voting, Trustees shared their thoughts:

Trustee Justin Arest said, “This is an extension of acts already taken by this government …We can and should do this – we created a charitable fund. This is not a scheme that we are creating on our own. …This is not our only option – but this is our best option now. These tax changes were having a negative effect on our homeowners. It is not about partisan politics – it is what I can do as a trustee to fight for Scarsdale residents.” He voted Aye.

Trustee Matt Callaghan was the sole objector, saying “This represents an unacceptable risk. What happens if the funding stops? Who is going to monitor the activity of this fund and set timelines and milestones? Not many people in Westchester are involved in this. Consider the current political atmosphere in the nation. I vote No – “

Trustee Lena Crandall thanked Palin for the “great effort to protect local residents.” She voted yes.

Trustee Carl Finger said, “The agreement is clear – we have nothing to do with the funding. We will receive appropriate reports. I vote Aye.”

Trustee Seth Ross also thanked Paulin for her leadership and said, “We have an opportunity and responsibility to vindicate those rights. No funds are to be committed. I vote Aye.”

Trustee Jane Veron assured the public that there would be no liability to the village. She said, “We had the opportunity to speak with counsel. And we have no financial risk. We didn’t take decision lightly. We believe it is our duty to protect our residents and I vote Aye.”

Casting the last vote in favor of the resolution, Mayor Dan Hochvert said, “It is okay to take risk when we have so much to gain. Most will not see anything but an effort. I vote aye.”

The resolution passed by a vote of 6-1.