In Ginsburg v. U.S., the U.S. Court of Appeals for the Federal Circuit held that a couple should have included their New York State refund of excess brownfield tax credits on their 2013 federal income tax return because the refund qualified as gross income.

Facts

New York State’s Brownfield Cleanup Program offers tax credits for remediating certain contaminated property, provided the program’s requirements are satisfied. The credits are refundable, so taxpayers whose credits exceed their New York State income tax liability for the tax year may receive a refund of the excess credit amount.

In 2005, Samuel and Joan Ginsburg purchased a contaminated shoe factory in Brooklyn, New York, through their company, Hawthorne Village LLC (Hawthorne), with the goal of converting the factory into residential property. Hawthorne applied and was approved for New York’s Brownfield Cleanup Program. Upon completing the program in 2011, Hawthorne applied for a brownfield tax credit of over $6.5 million, which ultimately resulted in a 2013 refund of over $1.9 million for the Ginsburgs.

The Ginsburgs did not report the New York State refund on their 2013 federal income tax return. On audit, the IRS determined that the couple should have included most of the refund on their 2013 return and assessed additional taxes of over $690,000. After paying the tax and exhausting their administrative remedies, the Ginsburgs sued for a refund in the U.S. Court of Federal Claims. On cross-motions for summary judgment, the Court sided with the Government and the couple appealed.

Law

The United States taxes a person’s “taxable income,” which the Internal Revenue Code defines as “gross income” minus permitted deductions. Subject to certain exceptions, gross income means “all income from whatever source derived.” As interpreted by the U.S. Supreme Court, the term means “undeniable accessions to wealth, clearly realized, and over which the taxpayers have complete dominion.” According to the Court, taxpayers have “complete dominion” if they have “some guarantee that [they] will be allowed to keep the money.”

Analysis

Before the Federal Circuit, the Ginsburgs argued that their 2013 state refund was not taxable because it represented a return of the capital they invested in their property’s remediation, not an “undeniable [accession] to wealth” or an economic gain. The Court rejected the Ginsburgs’ argument, noting that receipt of the brownfield tax credits eliminated the couple’s New York state income tax liability and gave them over $1.9 million in cash. These benefits, which were awarded for complying with the Brownfield Cleanup Program, qualified as an “undeniable accession to wealth,” making the refund taxable as gross income. Additionally, the Court noted, the refund did not qualify as a return of capital because Hawthorne, not the Ginsburgs, invested in the development and remediation of the brownfield property.

The Ginsburgs also argued that they lacked “complete dominion and control” over the tax credits due to the program requirements they had to satisfy. Rejecting this argument, the Court noted that New York placed no restrictions on the refund’s use. Although New York could revoke the credits and the refund if the Ginsburgs violated the program’s terms, the couple could avoid that outcome by satisfying the program’s requirements. As such, the Court concluded, the couple had complete dominion and control over the refund, making it taxable as gross income.

Finally, the Ginsburgs argued that the refund was a non-taxable inducement from New York State to remediate the contaminated property. The Court rejected this argument as well, agreeing with the Federal Court of Claims that the couple “freely chose to participate and take advantage of New York’s state tax credit program.”

Implications

Although ample case law and guidance supports the treatment of refundable or transferable state tax credits as gross income, we still see taxpayers using various tax arguments to treat those refunds as a basis reduction. As in this case, other federal courts have consistently taken the position that the refunded portion of a tax credit represents income, not a decrease in basis. Accordingly, taxpayers that receive refunds based on the application of state credits should include those refunds in their federal gross income.

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