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.

Related content

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.

© 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.

Connect with us


Request for proposal



KPMG's new digital platform

KPMG's new digital platform