Sale of State Tax Credits


The Internal Revenue Service has, for at least eight years, taken the position that a person who receives transferrable state tax credits and sells them, rather than using them, has ordinary income. The United States Tax Court recently ruled against the government on the issue. The court held that taxpayers who received transferrable state tax credits and sold them realized a capital gain, not ordinary income.

It is likely that the Internal Revenue Service will appeal the decision to one of the federal Circuit Courts of Appeal, determined by the taxpayer's residence. Nevertheless, the United States Tax Court will continue to follow its decision in future cases until it is reversed by a Circuit Court of Appeals.

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