The U.S. Tax Court today held that certain payments received by taxpayers pursuant to a state tax credit program were taxable income—cash subsidies—for federal income tax purposes, despite the fact that the state labeled the amounts as “overpayments” of tax.
The case is: Maines v. Commissioner, 144 T.C. No. 28 (March 11, 2015)
Read the Tax Court’s opinion [PDF 124 KB]
New York State uses targeted tax credits as incentives for targeted economic development in targeted locations. Those who receive these credits may be benefited—even if they do not owe any state income tax. New York calls the credits “overpayments of income tax” and makes them refundable.
The taxpayers received targeted economic development payments from the state of New York. All the credits required the taxpayers to make some amount of business expenditure or investment in targeted areas within the state. One credit was limited to the amount of past real property tax actually paid. The other credits were not limited to past tax actually paid.
All the credits first reduced a taxpayer’s state income tax liability; any excess credits could be carried forward to future years or partially refunded.
The Tax Court held that the state’s label of the credits as “overpayments” of past tax was not controlling for federal tax purposes.
The Tax Court found that:
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