On April 25, 2019, the United States Court of Appeals for the Federal Circuit decided that refundable state tax brownfield credits are taxable income for federal purposes. The court held in Ginsburg v. United States, “The excess amount of the brownfield redevelopment tax credit received by the Ginsburgs in 2013 is taxable gross income because it is an undeniable accession to wealth over which the Ginsburgs have complete dominion and control.”

The case dealt with New York’s brownfield credits that may be used to reduce a taxpayer’s state tax obligations and, if there are excess credits beyond the state tax liabilities, can be refunded to the taxpayer. The court’s decision makes that refunded credit subject to federal tax. The taxpayers argued that the brownfield redevelopment tax credit “is a reimbursement of a portion of the capital costs,” i.e., costs relating to investments made by them for the cleanup and redevelopment of the property. Accordingly, the Ginsburgs claimed they “neither realized an undeniable accession to wealth nor an economic gain” because the payment was a reimbursement of expenses. They also argued they do not have complete dominion and control over the tax credits because there were many strings attached. The court was not persuaded and found that the Ginsburgs neither alleged a payment was made to New York nor explained why the payment of the excess amount of the brownfield redevelopment tax credit was a return of their basis to restore impaired capital.

While the holding in this case is not extraordinary, it has implications for taxpayers facing a choice to take the brownfield and similar credits as a reduction of state and local taxes or getting cash by electing the refundable credit. There are many tax credits providing for refundability in many states, including film tax credits, historic renovation credits, and various economic development incentives and tax credits. Even before the Ginsburg case, a taxpayer who sold state tax credits had income subject to federal tax.

Before the Tax Cuts and Jobs Act of 2017 (TCJA), the difference between taking the credit against state and local tax (SALT) liabilities or electing to make such a credit refundable was minimal. Taking the cash would make the cash subject to federal tax, and taking the credit to reduce the SALT obligation would reduce the SALT deduction on a federal tax return, making the result of the choice equivalent – get taxed on the income or reduce your deductions. However, the TCJA placed a limit of $10,000 on the deductibility of SALT for individual taxpayers. This alters the financial effect, making it more desirable for those subject to the federal SALT limitations to reduce their nondeductible SALT liabilities rather than take a refundable credit in cash that would be subject to federal tax.

For example, if a taxpayer has a refundable tax credit of $100,000 and takes the cash, there would be federal income tax due at the rate of 21% for a corporation or up to 37% for an individual for 2019. Using that same credit to reduce SALT obligations beyond the $10,000 annual limit eliminates the federal income tax on the refund and reduces the nondeductible SALT liabilities, providing a greater net tax benefit.

Of course, if the individual or entity expects to have little or no SALT liabilities over time due to losses or for other reasons, taking a credit would be worthless, and electing to take the refundable credit would make economic sense even if the credit is subject to federal tax. A careful and thorough examination of projections of income and forecasts of tax liability are essential to the effort of maximizing the benefits of these tax credit programs.

For more on brownfield redevelopment, click here.

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Photo of Glenn Newman Glenn Newman

Glenn is a shareholder at the law firm of Greenberg Traurig LLP in New York City where he handles tax planning and controversy matters involving state and local taxes including personal income tax, corporate tax, sales tax and real property transfer taxes as

Glenn is a shareholder at the law firm of Greenberg Traurig LLP in New York City where he handles tax planning and controversy matters involving state and local taxes including personal income tax, corporate tax, sales tax and real property transfer taxes as well as real estate tax and incentive programs.

Glenn’s practice includes handling audits and litigation involving income tax including residency matters, sales and use tax, hotel taxes and real estate transfer taxes in New York and other states.

Prior to re-entering private practice, Glenn was the president of the New York City Tax Commission and the NYC Tax Appeals Tribunal, the agencies that hear and determine disputes of New York City property and business income and excise taxes.

Before his nomination and confirmation to the Tax Commission, Glenn was in private practice. Previously, he was Deputy Commissioner for Audit & Enforcement at the New York City Department of Finance where he was responsible for developing policy and for the audit process. Before moving to the Finance Department, Glenn was chief of the Tax and Bankruptcy Division in the Office of the Corporation Counsel of the City of New York where he drafted legislation and regulations and litigated matters involving both New York City and State taxes in administrative proceedings and in the courts. He also handled scores of cases involving City taxes in federal courts including the U.S. Bankruptcy Courts.

Glenn was chair of the State and Local Tax Committee of the Association of the Bar of the City of New York (1999-2001). He wrote a regular column on New York tax appeals for the New York Law Journal (1996-2002) and is a co-author of the New York Sales Tax Portfolio published by the Bureau of National Affairs. He is active in the State & Local Tax Committee of the American Bar Association as well as the New York State and New York City Bar Associations state and local tax committees; he is also on the Board of the Real Estate Tax Review Bar Association in New York City.

He was honored as a recipient of the “Tax Judge of the Year” in 2007 awarded by the National Conference of State Tax Judges of which he was later the Chair.

Glenn received his J.D degree from Fordham Law School and undergraduate degree from SUNY Albany.