The sale of certain Massachusetts state tax credits from the original recipient to a third party creates a taxable event for both the Taxpayer and the Recipient. While the Memorandum only applies to Massachusetts state tax credits, the precedent that Chief Counsel relied upon could be applied to other state tax credit programs.
Massachusetts offers a number of state tax credits similar to those found throughout the United States, specifically, Brownfields Tax Credits, Motion Picture Tax Credits, Historic Rehabilitation Tax Credits, Low-Income Housing Tax Credits, and Medical Device Tax Credits.
In the Memorandum, the IRS found that the Taxpayer that qualifies for and receives the tax credit does not realize gross income. Instead, for federal income tax purposes, the receipt of the tax credit itself should simply be treated as a reduction or potential reduction in the recipient’s state tax liability.
However, in the event the tax credit is transferred to a third party for value, the Taxpayer must recognize a gain because the transaction is treated as a sale. The amount of the gain recognized by the Taxpayer is equal to the sale price of the tax credits, and because each of the nonrefundable Massachusetts tax credits qualifies as a “capital asset” the gain is deemed a capital gain.
For information and assistance on buying or selling Tax Credits, contact the Cherrytree Group.
Original article - Lexology