New York and New Jersey  were not able to take down the Treasury Department's ban on programs letting residents of these states to circumvent the federal SALT cap by directing their tax payments to state-run charities and utilizing a larger deduction.

The Second Circuit said no to New York’s, New Jersey’s, and Connecticut’s arguments that the regulation went against the federal charitable deduction statute—IRC Section 170. The rule puts a limit on the availability of the federal charitable deduction where the donor earned equivalent SALT credits for their donation.

The three states have comparatively burdensome SALT obligations and rich residents who would benefit from larger deductions, each tried to utilize the federal charitable contribution deduction to work around the cap by allowing taxpayers to contribute to state-administered charitable funds and claim federal charitable, deduction instead of SALT deductions. Together, the three states sued the US Treasury for closing up that alternative.

However, Judge Robert D. Sack said that, for the US Court of Appeals for the Second Circuit, the rule is not arbitrary nor capricious and it was correct in its interpretation of the Tax Code.

The $10,000 deduction cap—that was established in 2017—was recently amended by the One Big Beautiful Bill signed Jul. 4 by President Donald Trump. The cap was, on a temporary basis, brought up to $40,000 annually for five-years, with a phase out for taxpayers who make over $500,000 annually.

The court went against the states’ arguments that a tax deduction must not be treated as a charitable event in the same manner as a tax credit given they lead to different financial results.

It also said no to the states’ arguments that the IRS was weighing financial considerations that Congress didn’t mean to consider. The IRS has to take into account the entire tax code and its different revenue-raising provisions when it comes up with a final rule while considering what Congress intended, Sack stated.