Professional Tax Research Solutions from the Founder of Kleinrock. tax and accounting research
Parker Tax Pro Library
Accounting News Tax Analysts professional tax research software Like us on Facebook Follow us on Twitter View our profile on LinkedIn Find us on Pinterest
federal tax research
Professional Tax Software
tax and accounting
Tax Research Articles Tax Research Parker's Tax Research Articles Accounting Research CPA Client Letters Tax Research Software Client Testimonials Tax Research Software Federal Tax Research tax research

Accounting Software for Accountants, CPA, Bookeepers, and Enrolled Agents

Federal Circuit Holds That Excess State Tax Credit Was Taxable Income

(Parker Tax Publishing May 2019)

The Federal Circuit affirmed the Court of Federal Claims and held that the excess of a state brownfield redevelopment tax credit over a married couple's state tax liability was taxable income and did not qualify for any exception or exclusion from the federal definition of income. The court found that the excess state tax credit was an economic gain the taxpayers received for compliance with the brownfield cleanup program and rejected the taxpayers' arguments that the payment was a nontaxable return of capital or inducement payment. Ginsburg v. U.S., 2019 PTC 158 (Fed. Cir. 2019).

In New York, a tax credit is available for the redevelopment of a brownfield site as part of a brownfield cleanup program. The purpose of the brownfield cleanup program is to encourage the voluntary remediation of brownfield sites for reuse and redevelopment. Participants must sign a brownfield site cleanup agreement and obtain a certificate of completion for satisfaction of the remediation requirements. The issuance of the certificate of completion qualifies the applicant for a tax credit under the New York tax law. If the amount of the credit exceeds the taxpayer's tax for the year, the excess is treated as an overpayment of tax to be credited or refunded to the taxpayer. A certificate of completion may be revoked where certain conditions are met, in which case the credit amount is added back in the tax year in which the revocation is final.

In 2005, Samuel and Joan Ginsburg, through an entity they owned called Hawthorne Village, LLC, acquired property in Brooklyn, New York, and entered the brownfield cleanup program. They completed the development of the property, converting an old shoe factory into a residential rental building. The state issued a certificate of completion in 2011. Hawthorne applied for a brownfield redevelopment tax credit of around $6.5 million, with the Ginsburgs' share of the credit equaling $4.9 million. In 2013, the Ginsburgs received a refund of $1.9 million attributable to the brownfield redevelopment tax credit. The Ginsburgs did not report the payment on their federal income tax return, claiming instead that it constituted a nontaxable refund. After an examination, the IRS proposed adjustments to the Ginsburgs' 2013 income taxes, by including the excess credit payment in their taxable income. As a result of the proposed adjustments, the IRS determined the Ginsburgs owed an additional $690,628 in federal income tax. The Ginsburgs paid the tax and then sued for a refund in the Court of Federal Claims.

The Court of Federal Claims held that the payment was subject to federal income tax as substantively an undeniable accession to wealth over which the Ginsburgs had complete control. It rejected the Ginsburgs' theory that the credit was a recovery of capital and thus not income because it found that the Ginsburgs had not sold or transferred any capital asset and their investment was still ongoing. The Court of Federal Claims similarly rejected the Ginsburgs' theory that the payment was a nontaxable inducement payment. The Court of Federal Claims stated that, while the brownfield program provided an investment incentive, no inducement occurred; rather, the Ginsburgs freely chose to participate and take advantage of the program.

The Ginsburgs appealed to the Federal Circuit, which affirmed the decision of the Court of Federal Claims. The Federal Circuit explained that gross income is broadly defined in Code Sec. 61 and noted the Supreme Court's definition of gross income in Comm'r v. Glenshaw Glass Co., 348 U.S. 426 (1955), as "undeniable accessions to wealth, clearly realized, and over which the taxpayers have complete dominion." The Federal Circuit noted that income exclusions are narrowly construed and that the taxpayer bears the burden of establishing the right to a refund.

The Federal Circuit found that the excess credit received by the Ginsburgs was taxable gross income because it was an undeniable accession to wealth over which the Ginsburgs had complete dominion and control. In the court's view, the excess amount of the state credit paid to the Ginsburgs, based on their outlays in redeveloping a brownfield site, was an economic gain made for compliance with the brownfield cleanup program. The court also found that the Ginsburgs had complete control over the payment because there were no restrictions on its use and revocation of the certificate of completion did not depend on events outside of their control, but rather could occur only through the Ginsburgs' misconduct.

The Federal Circuit rejected the Ginsburgs' argument that the payment was a nontaxable return of capital. The court found that the Ginsburgs did not allege that a payment was ever made to New York nor explain why the payment of the excess amount of the brownfield redevelopment tax credit was a return of their basis to restore impaired capital. The court found that Hawthorne, not the Ginsburgs, made the capital investment, and that its investment in the property was still ongoing.

The Federal Circuit also disagreed with the Ginsburgs' argument that, under the common law inducement doctrine, the brownfield development tax credit was indistinguishable from inducement payments, rebates, and reimbursements that have been treated as not includable in gross income. The court reasoned that, unlike in cases where the inducement doctrine applied, in this case the state of New York did not hold a financial interest in the Ginsburgs' purchase, nor did New York enter into negotiations with the Ginsburgs to induce them into cleaning up the brownfield site. The Federal Circuit agreed with the Court of Federal Claims that the Ginsburgs freely chose to participate and take advantage of the state tax credit program.

Observation: The Federal Circuit noted that, although the government questioned the continued validity of the common law inducement doctrine following Glenshaw Glass, it did not need to reach a decision on that issue because it found that the Ginsburgs failed to demonstrate that, even if valid, the inducement doctrine applied.

For a discussion of the general rule for including amounts in gross income, see Parker Tax ¶70,101.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

Parker Tax Pro Library - An Affordable Professional Tax Research Solution.

Professional tax research

We hope you find our professional tax research articles comprehensive and informative. Parker Tax Pro Library gives you unlimited online access all of our past Biweekly Tax Bulletins, 22 volumes of expert analysis, 250 Client Letters, Bob Jennings Practice Aids, time saving election statements and our comprehensive, fully updated primary source library.

Parker Tax Research

Try Our Easy, Powerful Search Engine

A Professional Tax Research Solution that gives you instant access to 22 volumes of expert analysis and 185,000 authoritative source documents. But having access won’t help if you can’t quickly and easily find the materials that answer your questions. That’s where Parker’s search engine – and it’s uncanny knack for finding the right documents – comes into play

Things that take half a dozen steps in other products take two steps in ours. Search results come up instantly and browsing them is a cinch. So is linking from Parker’s analysis to practice aids and cited primary source documents. Parker’s powerful, user-friendly search engine ensures that you quickly find what you need every time you visit Our Tax Research Library.

Parker Tax Research Library

Dear Tax Professional,

My name is James Levey, and a few years back I founded a company named Kleinrock Publishing. I started Kleinrock out of frustration with the prohibitively high prices and difficult search engines of BNA, CCH, and RIA tax research products ... kind of reminiscent of the situation practitioners face today.

Now that Kleinrock has disappeared into CCH, prices are soaring again and ease-of-use has fallen by the wayside. The needs of smaller firms and sole practitioners are simply not being met.

To address the problem, I’ve partnered with a group of highly talented tax writers to create Parker Tax Publishing ... a company dedicated to the idea that comprehensive, authoritative tax information service can be both easy-to-use and highly affordable.

Our product, the Parker Tax Pro Library, is breathtaking in its scope. Check out the contents listing to the left to get a sense of all the valuable material you'll have access to when you subscribe.

Or better yet, take a minute to sign yourself up for a free trial, so you can experience first-hand just how easy it is to get results with the Pro Library!


James Levey

Parker Tax Pro Library - An Affordable Professional Tax Research Solution.

    ®2012-2019 Parker Tax Publishing. Use of content subject to Website Terms and Conditions.

IRS Codes and Regs
Tax Court Cases IRS guidance