Tax Court holds refundable state tax credits must be included in income

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In Maines v. Commissioner, 144 T.C. No. 8 (March 11, 2015), the Tax Court considered whether certain state tax credits were required to be included in income for federal tax purposes.  

Several types of credits were discussed in the case, but the most notable involved refundable credits issued by New York state. The state labeled the credits as “overpayments” of past state income tax, although the amounts received were not refunds of past tax paid by the taxpayers.  

The taxpayers took the position that the IRS was required to respect the state’s characterization of the amounts as overpayments and therefore should treat the amounts as a return of capital. The Tax Court rejected the taxpayers’ position and held that the IRS wasn’t bound by the label used by the state. The court further held that because the amounts received as refundable credits weren’t a refund of tax paid, the amounts constituted an accession to wealth and were required to be included in the taxpayers’ income for federal tax purposes.


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