Tax Court: Refundable state tax credits

Tax Court: Refundable state tax credits

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.

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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.

Tax Court’s opinion

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:

  • Credits that were not dependent on past tax payments were not refunds of past “overpayments” but rather were like direct subsidies.
  • Credits that were depended on past property tax payments would be treated like a refund of past overpayments.
  • Portions of credits that only reduce a taxpayer’s state tax liabilities were not taxable accessions to wealth, but any excess portions of the credits that were refundable were taxable accessions to wealth.
  • Portions of credit payments that only reduce the taxpayer’s state tax liabilities were not taxable accessions to wealth, but refundable portions tax credit payments were includible in gross income under the tax-benefit rule to the extent that the taxpayers actually benefited from previous deductions for property tax payments.

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