According to Tax Analysts, the Treasury and Service received more than 1,500 comments in response to the notice of proposed rulemaking ("proposed regs") on charitable contributions in exchange for state tax credits (see our previous commentary on Notice 2018-54 and proposed regs). Tax Analysts published several letters from representatives and nonprofit organizations of various states, urging the Service to modify the scope of the new SALT regulations to make exceptions for existing state tax credit programs.

A tax-exempt 501(c)(3) non-profit organization ("Nonbelief") filed a complaint ("Complaint") in a U.S. district court, requesting the Court to declare the annual report filing exemption for churches and other religious affiliates under Section 6033 violates the Establishment Clause of the First Amendment to the U.S. Constitution, and Nonbelief's Equal Protection rights.

In Felton v. CIR, the Tax Court sustained accuracy-related penalties imposed by the Service and held unsolicited donations from church congregants to their pastor were to be treated as income to the pastor, rather than gifts. The donations were (a) objectively provided in exchange for services; (b) part of a routinized, highly structured program; and (c) relatively higher than the pastor's separate salary from the church.

This case study illustrates the use of a donor advised fund to enable a donor to "test drive" a substantial gift to charities.