Category Archives: Tax Credits

Replace 3rd Quarter Estimated Tax Payments With 2013 State Credit Purchases

Written by: on September 3, 2013

Most taxpayers are getting ready to calculate and make their third quarter estimated tax payments.  However, they should scale back, if not eliminate completely their payments and take advantage of purchases of state tax credits.  Taxpayers in Georgia, North Carolina and South Carolina all have available safe one-year tax credit programs.  Taxpayers will be significantly advantaged if they use tax credits rather than making estimated tax payments to satisfy their state estimated tax obligations.  This course of action is significantly better than making estimated tax payments and purchasing credits and then waiting for a tax refund.

As explained in a previous blog, taxpayers will also benefit by acquiring their 2013 state tax credits more than twelve months prior to filing their 2013 income tax returns.  While this has always been the case for transferrable credits, now virtually all purchases of one-year credits are treated in a manner similar to transferrable credits.  This is how it works.

Say a client buys 100 state credits for  $80 whether through a one-year credit fund or a transferrable credit.  That taxpayer is deemed to have acquired intangible property (ie the tax credits) which is a capital asset and has a basis in that property equal to $80.  When the taxpayer files their state 2013 income tax return and claims and uses the 100 state tax credits on their return, the IRS considers two things as having occurred.  First, the taxpayer is deemed to have sold their credits in exchange for the face value of the credit - $100 on the day the state return is filed and the credit is used on the return.  Since the taxpayer had a basis of $80 in the credits, the taxpayer recognizes a $20 capital gain from the use of the credits.  Second, the IRS considers the use of the credits as a tax payment of $100 to the state taxing authority qualifying for a federal itemized deduction as a state income tax payment.  With respect to the $20 gain, the taxpayer will pay tax under short term capital gains rates of 39.6%, or $8, if the credits were acquired within twelve months of the taxpayer filing their state return, or 20%, or $4, if the credits were acquired more than twelve months prior to the taxpayer filing their tax return.

This difference in the capital gains rate is why taxpayers should be buying their state tax credits now.  Many clients hesitate to do this because they don’t want to forgo the $80 any sooner than they have to.  But the tax savings of $4 on an $80 dollar investment represents at least a 5% after-tax rate of return to the taxpayer.    And that is before annualizing the rate of return.  In most instances it will represent an even higher annualized after-tax rate of return since state tax credits must be acquired before December 31 of the calendar year.  No one makes 5% after-tax on their cash balances in today’s economy!

Obviously, taxpayers owing significant state income taxes shouldn’t withhold state income tax or make state estimated income tax payments.  Rather, they should reduce their tax obligations buy acquiring state tax credits.  Its now clear that such acquisitions of state tax credits should be made prior to April 15 of the calendar year if the taxpayer cannot be persuaded to extend their state income tax return, or October 15 if the taxpayer extends and files their state return on October 15 of the following year.  But the prices are better the sooner you buy your state tax credits.  BUY YOUR 2013 TAX CREDITS NOW!!!!

In the vast majority of  cases the taxpayer’s cash-flow is improved by buying credits in lieu of third and fourth quarter state estimated tax payments

South Carolinian Taxpayers Should Consider SC Mill Tax Credits

Written by: on June 7, 2013

In preparing to file their second quarter estimated tax payments with the South Carolina Department of Revenue, South Carolinian taxpayers should seek out use of the SC Mill Tax Credits for immediate tax savings.

The South Carolina Textiles Communities and Other Communities Revitalization Act (the Act – Chapter 12, Title 65 of the 1976 Act) authorizes the issuance of state tax credits (“Mill Credits”) to taxpayers who rehabilitate, renovate or redevelop an abandoned textile mill located in South Carolina which was acquired after 2007. Unfortunately, until recently, there have been very few real estate projects of any nature financed since 2007. So very few Mill Credits have been created, though that is now changing.

Subject to certain certifications and ceilings, the amount of the credit is generally 25% of the actual qualified rehabilitation expenses made at the particular textile mill site. Qualified rehabilitation expenses include the expenses or capital expenditures incurred in the rehabilitation, renovation, or redevelopment of the textile mill site. This includes without limitations, the demolition of existing buildings, environmental remediation, site improvements, and the construction of new buildings and other improvements on the textile mill site. Qualified rehabilitation expenses do not include the cost of acquiring the textile mill site or the cost of personal property located at the site.

The entire credit is earned in the taxable year in which the applicable phase or portion of the textile mill site is placed in service, but it must be taken in equal installments over a five-year period, beginning with the taxable year in which the applicable phase or portion of the mill site is placed in service. Furthermore, the credit is limited to 50% of either the taxpayer’s income tax liability or corporate license fees for the taxable year. Unused credits may be carried forward up to five years. The credit cannot be carried back.

If the taxpayer is a partnership or limited liability company taxed as a partnership, the credit may be passed through to the partners or members and may be allocated by the taxpayer among any of its partners or members on an annual basis. This includes, without limitation, an allocation of the entire credit to any partner or member who was a member or partner at any time during the year in which the credit is allocated.

STCE has a fund which solely invests in partnerships which generate South Carolina Mill Tax Credits for the benefit of its investors. Investors will acquire the credit through admission to our Fund. They will receive a K-1 reflecting their ownership of the Fund and the K-1 will report the South Carolina mill credits to the Investor based on their level of investment. They will receive no federal profit/loss allocations. The Fund will redeem them out of the Fund after five years for $1. This is a one-year commitment only. If an Investor wants credits in a subsequent year they would need to re-subscribe at that point. There are no recapture provisions. The only compliance issue is the calculation of all the qualifying costs used in determining the appropriate credit.

But supply of these credits is limited, so taxpayers should aggressively work with their tax advisors to secure these credits.

NC Renewable Energy Credits Offer Significant Savings Opportunities

Written by: on June 2, 2013

North Carolina current offers a renewable energy equal to 35% of the cost of renewable energy property which the taxpayer has placed into service in North Carolina (see N.C. Gen. Stat. § 105-129.16A).  The total amount of credit for each project is capped at $2.5 million.

The credit may offset up to 50% of a taxpayer’s NC liability. These credits may be used to offset individual, trust or corporate income taxes, corporate franchise taxes, and insurance company gross premium taxes.  The entity which first earns the credits must elect which tax of the three taxes the credit will be used against.  The election must be made in the first year in which an installment of the credit is claimed and is binding for all future installments or carry-forwards of that credit.  We have two funds, one which uses the tax against income tax and another which invests in projects which have elected to use the credit against the insurance gross premiums tax. N.C. Gen. Stat. § 105-129.73(a).    We can also assist buyers who would like to use the credit  against the corporate franchise tax.

The credit is earned when the project is placed into service, but is allocated 20% a year for five years.  Should the project cease to operate in a successive year there is no recapture of credits allocated in previous years, but current and future year credits are lost.

If the credit is earned or flows to a pass-through entity it can pass to its owners for their use.  In the case of an S corporation the credit flows in proportion with the shareholders’ interest in the S Corporation.  With respect to entities taxable as partnerships, the credit may not be specially allocated but instead is allocated in proportion to the allocation required under Internal Revenue Sections 702 and 704.

Should a taxpayer receive more credits than they can use in a year, the excess credits may carry-forward for up to five years.

In general, pricing for the purchase of a one-year NC renewable energy credits is around 80 cents per credit, while the purchase of a five-year stream of NC renewable energy credits with one payment up front is about 65 cents per credit.

 Don’t hesitate to contact us should you have additional questions.

Coordinate 2nd Quarter Estimated Tax Payments With 2013 Credit Purchases

Written by: on June 1, 2013

Most taxpayers are getting ready to calculate and make their second quarter estimated tax payments.  However, they should scale back their payments and take into account their anticipated purchases of state tax credits.  Taxpayers will be significantly advantaged if they use tax credits rather than making estimated tax payments to satisfy their state estimated tax obligations.  This course of action is significantly better than making estimated tax payments and purchasing credits and then waiting for a tax refund.

As explained in a previous blog, taxpayers will also benefit by acquiring their 2013 state tax credits more than twelve months prior to filing their 2013 income tax returns.  While this has always been the case for transferrable credits, now virtually all purchases of one-year credits are treated in a manner similar to transferrable credits.  This is how it works.

Say a client buys 100 state credits for  $80 whether through a one-year credit fund or a transferrable credit.  That taxpayer is deemed to have acquired intangible property (ie the tax credits) which is a capital asset and has a basis in that property equal to $80.  When the taxpayer files their state 2013 income tax return and claims and uses the 100 state tax credits on their return, the IRS considers two things as having occurred.  First, the taxpayer is deemed to have sold their credits in exchange for the face value of the credit - $100 on the day the state return is filed and the credit is used on the return.  Since the taxpayer had a basis of $80 in the credits, the taxpayer recognizes a $20 capital gain from the use of the credits.  Second, the IRS considers the use of the credits as a tax payment of $100 to the state taxing authority qualifying for a federal itemized deduction as a state income tax payment.  With respect to the $20 gain, the taxpayer will pay tax under short term capital gains rates of 39.6%, or $8, if the credits were acquired within twelve months of the taxpayer filing their state return, or 20%, or $4, if the credits were acquired more than twelve months prior to the taxpayer filing their tax return.

This difference in the capital gains rate is why taxpayers should be buying their state tax credits now.  Many clients hesitate to do this because they don’t want to forgo the $80 any sooner than they have to.  But the tax savings of $4 on an $80 dollar investment represents at least a 5% after-tax rate of return to the taxpayer.    And that is before annualizing the rate of return.  In most instances it will represent an even higher annualized after-tax rate of return since state tax credits must be acquired before December 31 of the calendar year.  No one makes 5% after-tax on their cash balances in today’s economy!

Obviously, taxpayers owing significant state income taxes shouldn’t withhold state income tax or make state estimated income tax payments.  Rather, they should reduce their tax obligations buy acquiring state tax credits.  Its now clear that such acquisitions of state tax credits should be made prior to April 15 of the calendar year if the taxpayer cannot be persuaded to extend their state income tax return, or October 15 if the taxpayer extends and files their state return on October 15 of the following year.  But the prices are better the sooner you buy your state tax credits.  BUY YOUR 2013 TAX CREDITS NOW!!!!

State Tax Credits Become More Advantageous In 2013

Written by: on January 11, 2013

The American Taxpayer Relief Act was signed into law on January 4, 2013 by President Obama.  The main features affecting state tax credits are as follows:

  1. Income tax rates for married couples filing jointly on income in excess of $450,000 increase from 35% to 39.6%;
  2. Marginal income tax rates on capital gains and qualified dividends increase from 15% to 20% for married couples filing jointly to the extent their income is in excess of $450,000; and
  3. Itemized deductions are phased out for married couples filing jointly by 3% of every dollar of income in excess of $250,000 ($200,000 for heads of household and singles) limited to a maximum phaseout of 80% of itemized deductions.

In addition, 2013 begins the futile attempt to fund Obama Care by imposing a 3.8% Medicare tax on unearned income to the extent it exceeds $250,000 for married couples filing jointly ($200,000 for heads of household and singles).  The cumulative impact of these provisions is to significantly increase the complexity of the tax code and resulting planning.

In general[1], the beneficial impact of tax credits is unchanged for taxable incomes at or below $250,000.  For taxpayers with incomes between $250,000 and $450,000 their tax rates increase by the 3.8% new Medicare tax but only on unearned income.  However this is a Medicare Tax and since its not an income income it does not alter the cost or benefits of state tax payments or state tax credits.  On all taxpayers with incomes between $250,000 and $450,000 tax credits will be even more valuable because the cost of paying state income taxes goes up due to the 3% phaseout of itemized deductions.  This makes buying state tax credits even more advantageous.

The effects of the new tax rates on incomes above $450,000 becomes increasingly complex and beyond the scope of this discussion.  However, the net after-tax benefit to the taxpayer is roughly 55% of the discount on the purchased credits assuming the state tax deduction is fully deductible.  To the extent incremental current deductions are disallowed the benefit of purchasing credits will increase.  Often the benefits of acquiring state tax credits will be greater in situations where incomes are unusually high (for example when a large asset or business is sold) because the phaseout of the state tax deduction is higher in the current year, and since the federal taxation of single year state tax credits pushes the deduction for state income tax payments out to the subsequent year when the phase out will typically be significantly less, the net benefit of purchasing those credits is enhanced.

As always, the efficacy of the credits must also be assessed in light of the potential impact of the Alternative Minimum Tax (“AMT”) both in the current and subsequent years.  However, due to the phaseout of itemized deductions the impact of the AMT should be less now for taxpayers with incomes in excess of 250,000 and significantly less for taxpayers with incomes in excess of $450,000.



[1]The dollar thresholds used in this discussion are the ones applicable for taxpayers married filing jointly .

Tax Treatment of State Tax Credit Partnerships in the Fourth Circuit

Written by: on January 9, 2013

In light of the recent Virginia Historic Tax Credit Fund[i]  and Historic Boardwalk Hall[ii] it is clear  how investors should account for their investments in state tax credit funds.  In other circuits in remains unclear how such investments should be taxed because of the conflicting opinions of the Tax Court in both of those cases.  Presumably, this offers the potential for flexibility in tax treatment in jurisdictions other than the third and fourth circuit for these items.  But in the fourth circuit[iii] there is no ambiguity.

The structure of the proposed tax credit transfer in Virginia Historic was not uncommon, though its facts were horrible.  The basic structure involved a partnership holding the credit property which was owned by three members, the GP developer, the federal credit investor and the fund for the state credit investors.  The state credit investors basically enjoyed less than .01% of the economics of the project but 99.99% of the state tax credits.  This is fairly standard deal structure. With respect to some of the credits in question, state law provided that the credits could only be allocated to partners of the partnership.  In fact, under an unusual state law, some but not all of the credits in question could be transferred by the partnership to taxpayers who were not members of the partnership.

All of the contributions of the state credit investors were treated by the recipient fund as capital contributions.  Meanwhile the recipient fund expensed the contributions made to the fund holding the credit property to acquire the credits.  Not exactly sound accounting theory.  The state credits investors also possessed put rights, which they exercised, allowing them to put their interests for a nominal amount back to the partnership approximately a few months after their admission to the partnership but in the following calendar year.   The fund’s prospectus stated that the credit investors would expect to receive insignificant allocations of cash flow, profit and loss from the underlying historic tax  project. The state credit investors also received guaranties relating to the validity of the credits they were to receive and were not required to make the capital contributions until the credits were certified by the sate of Virginia.

The Tax Court in Virginia Historic found that the substance over form doctrine didn’t result in the credit investors not being partners under the analysis of Culbertson5 — whether ‘‘the parties in good faith and acting with a business purpose intended to join together in the present conduct of an enterprise.’’ In reaching those holdings, the Tax Court looked to several factors, including: (1) the agreement between the parties; (2) the conduct of the parties in executing its provisions; (3) the parties’ statements; (4) the testimony of disinterested persons; (5) the relationship of the parties; (6) the parties’ respective abilities and capital contributions; and (7) the actual control of income and the purposes for which the income was used. None of those factors were cited as controlling; The Tax Court looked at the totality and did not conduct a factor-by-factor analysis. The Tax Court found that the documents characterized the investors as partners and characterized their payments as capital contributions. The agreements gave the investors a right to share in the profits and liquidation rights.

 

In its analysis, the Fourth Circuit assumed that the credit investors were partners in the fund under state and federal tax law.  Its analysis focused on whether the relationship of the credit partners and the credit partnership fit under the notion of a disguised sale under Section 707 as the IRS had argued.  The Court noted that 707 applied when there is a transfer of property either shortly before or after the recipient transfer cash to the partnership.  It wasted little time in determining that state tax credits are property for tax purposes.  It didn’t matter to the Court that the property (i.e. the tax credits) could only be transferred by allocation by the partnership to its members.  The court felt this was sufficient transferability to constitute property.

Next, the Court turned to IRS regulations to shape its analysis. It stated that in determining the applicability of Section 707, Section 1.707-3 calls for an evaluation of “all the facts and circumstances” surrounding the transaction to determine whether (i) The transfer of money or other consideration would not have been made but for the transfer of property; and (ii) In cases in which the transfers are not made simultaneously, the subsequent transfer is not dependent on the entrepreneurial risks of partnership operations. Id. § 1.707-3(b)(1) (emphasis added). The regulation listed ten factors, five of which were determined to be of relevance here and were required to be considered: (i) the timing and amount of a subsequent transfer are determinable with reasonable certainty at the time of an earlier transfer; (ii) That the transferor has a legally enforceable right to the subsequent transfer; (iii) That the partner’s right to receive the transfer of money or other consideration is secured in any manner, taking into account the period during which it is secured; . .(ix) That the transfer of money or other consideration by the partnership to the partner is disproportionately large in relationship to the partner’s general and continuing interest in partnership profits; and (x) That the partner has no obligation to return or repay the money or other consideration to the partnership, or has such an obligation but it is likely to become due at such a distant point in the future that the present value of that obligation is small in relation to the amount of money or other consideration transferred by the partnership to the partner. Id. § 1.707-3(b)(2).

The Court followed up by stating that, § 1.707-3 also sets forth a presumption that all transfers “made within two years” of each other are sales, “unless the facts and circumstances clearly establish that the transfers do not constitute a sale.” Id. § 1.707-3(c). This presumption places a high burden on the partnership to establish the validity of any suspect partnership transfers. The Court then concluded that the transfers were effectively simultaneous or at least not dependent upon the entrepreneurial risks of the partnership.  The partnership guarantees and protections offered the state credit partners effectively eliminated any entrepreneurial risk of the state credit partners.  Finally, the value of the state tax credits dwarfed the value of the state credit partners’ share of the partnership’s income.  This latter amount was guaranteed to be virtually zero because of the minimal call right the partnership had on the interests held by the state credit partners.  Given this analysis, the Court concluded that the capital contribution be re-characterized as a disguised sale under Section 707.

The practical ramifications of this decision are limited but important.  The section 707 analysis is limited to scenarios where the credits are transferred within one or two years at most, otherwise, the transfer wouldn’t be simultaneous with the transfer to the contribution to the partnership.  The case would apply to most funds which attempt to transfer one-year credits.  In particular, in those scenarios where the value of the one-year credits are greatly disproportionate in value to the remaining economic interests the credit partner receives this analysis should apply.  This would further be reinforced to the extent of guaranties of the credits which extend to the credit investor or otherwise protect the credit investor minimizing the risks of the credit investor. The presence of partnership put and call rights resulting in the liquidation of the credit partners’ interests at minimal values further supports the analysis.  The absence of these put and call rights probably does not change the conclusion of the court.

However, if instead the issuing partnership allocates the capital contribution between 707 proceeds and capital contribution such allocation would likely be respected.  A 90-10 to 99-1 allocation should suffice.  The IRS’s beef in Virginia Historic was that the partnership didn’t recognize income upon the contribution, but did recognize an expense when it paid for the credits.  That would not be present if the aforementioned allocations were made.  Moreover, allocations in rough approximation with the value of the credits and the value of the partnership interest should be respected.  In many instances the partnership has value from an administrative, compliance and recapture avoidance perspective in addition to any cash flow or profit and loss allocations which may be derived.  So, in every case that value is not zero.

Structuring the transaction so the credit investor is recognized as a partner for tax purposes is crucial. In many state statutes, the allocation of credits must be to a partner of the partnership.  Many states also follow the federal tax characterization of the partner’s status as a partner.  By making a relatively small allocation to partnership capital and a disproportionately large allocation to Section 707 credit proceeds which better reflects the substance of the transaction where partnerships attempt to allocate one year credits to credit investors will result in the reporting of the transaction consistent with the Virginia Historic decision.

From the credit investor’s perspective, the IRS’ treatment of the transaction has been clear and consistent for many years.[iv]  For transferable credits, which includes those sold under Section 707, the IRS considers them an intangible asset.  It has also been established that transferable credits are a capital asset in the hands of the purchaser.[v]  The taxpayer’s basis is equal to the portion of the contribution which is allocated to the credits. The credit is deemed to be sold by the investor when the investor files a tax return which uses the credit to offset their state tax liability.  The investor is deemed to receive proceeds equal to the face value of the credits used on their return.  The investor then reports a capital gain equal to the difference between the deemed proceeds and their basis in the credits.  At that same point, the credit investor is deemed to have made a state income tax payment to the state equal to the deemed value of the proceeds (i.e. the face value of the credits used).  So, if you assume a state credit investor on August 1, acquires 100,000 credits for $80,000 in the Fourth Circuit, under this allocation approach $79,200 is allocated to the investor’s basis in the credits and $800 to its capital account in the credit partnership.  The following April 15 the investor claims and uses the credits on their state tax return.  On April 15 of the following year the investor recognizes a $20,800 (100,000 – 79,200) short-term capital gain.  On that same April 15, the investor is deemed to have made a state income tax payment of $100,000 deductible under Section 164.  Upon the ultimate liquidation of the partnership the credit investor would recover their remaining $800 basis in the credit partnership.



[i] Virginia Historic Tax Credit Fund 2001, LLP v. Commissioner, T.C. memo. 2009-295, Dec. 2009-28093, 2009 TNT 244-23, rev’d, 639 F.3d 129 (4th Cir. 2011).  The Fourth Circuit reversed the Tax Court’s ruling that the transaction did not constitute a disguised sale of tax credits, as recharacterized by the IRS under section 707.

[ii] Historic Boardwalk Hall, LLC v. Commissioner, 136 TC 1 (2011), rev;d, No. 11-1832 (3d Cir. 2012).

[iii] The Fourth Circuit includes the states of North Carolina, South Carolina, Virginia, West Virginia and Maryland.

[iv] See PLR 200348002, IRS AM 2007-002, CCA’s 200704028 and 200704030, IRS Memorandum 200445046, and IRS TAM No. 200126005.  Also see ILM 201147024.

[v] Tempel v. Comm., 136 TC No.15 (2011).

Georgia Taxpayers Benefit by Acquiring 2012 Credits Now!

Written by: on February 14, 2012

Most purchasers of Georgia tax credits will benefit by acquiring their 2012 Georgia tax credits more than twelve months prior to filing their 2012 income tax returns.  While this has always been the case for film credits, most Georgia low income housing credits are now treated in a manner similar to film credits.  This is how it works.

Say a client buys 100 2012 Georgia low income housing credits for  $80.  That taxpayer is deemed to have acquired intangible property (ie the tax credits) and has a basis in that property equal to $80.  When the taxpayer files their Georgia 2012 income tax return and claims and uses the 100 Georgia tax credits on their return, the IRS considers two things as having occurred.  First, the taxpayer is deemed to have sold their credits in exchange for eliminating $100 of Georgia tax liability on the day the return is filed with the state of Georgia.  Since the taxpayer had a basis of $80 in the credits, the taxpayer recognizes a $20 capital gain from the use of the credits.  Second, the IRS considers the use of the credits as a tax payment of $100 to the state of Georgia qualifying for a deduction as a state income tax payment.  With respect to the $20 gain, the taxpayer will pay tax under short term capital gains rates of 35%, or $7, if the credits were acquired within twelve months of the taxpayer filing their Georgia return, or 15%, or $3, if the credits were acquired more than twelve months prior to the taxpayer filing their tax return.

This difference in the capital gains rate is why taxpayers should be buying their Georgia tax credits now.  Many clients hesitate to do this because they don’t want to forgo the $80 any sooner than they have to.  But the tax savings of $4 on an $80 dollar investment represents at least a 5% after-tax rate of return to the taxpayer.    In most instances it will represent an even higher annualized after-tax rate of return since Georgia low income housing credits must be acquired before December 31 of the calendar year.  No one makes 5% after-tax on their cash balances in today’s economy!

Obviously, taxpayers owing significant amounts of Georgia income tax shouldn’t withhold Georgia income tax or make Georgia estimated income tax payments.  Rather, they should reduce their tax obligations buy acquiring Georgia tax credits.  Its now clear that such acquisitions of Georgia tax credits should be made prior to April 15 of the calendar year if the taxpayer cannot be persuaded to extend their Georgia income tax return, or October 15 if the taxpayer extends and files their Georgia return on October 15 of the following year.  BUY YOUR 2012 TAX CREDITS NOW!!!!

Georgia Liberalizes Sales Of Film Credits

Written by: on July 29, 2011

On May 23, 2011 the Georgia Department of Revenue revised their film credit regulations (560-7-8-.45) and those changes became effective as of June 12, 2011.  Consistent with the state’s policy of facilitating the use and value of these film credits, the regulations make the sale of Georgia film credits easier.

Prior to the the revised regulations, production companies could only sell film credits of a particular vintage once a year.  The transaction could have multiple buyers, but it had to be part of one consolidated transaction.  Paragraph 10 of the revised regulation now permits multiple sales of credits during the year.  Each sale of credits, other than the final sale of credits created in a particular year, must be sold in multiples of 100,000.  There can be multiple purchases of these blocks.  And the individual multiple purchasers don’t have to acquire credits in increments of 100,000 but the sum of their purchases in each sale must be a multiple of 100,000.  In the final sale of film credits from a vintage or year, the sum of the purchases in that final sale do not have to equal a multiple of 100,000.   The requirement remains that the seller must file Form IT-TRANS “Notice of Tax Credit Transfer” with both the Department of Economic Development and the Georgia Department of Revenue within 30 days of each transfer or sale of Georgia film credits.

This change in the regulations will significantly ease the sale of Georgia film credits.  Production companies will no longer have to corral multiple buyers into agreeing to purchase credits all at the same time.  This has proved difficult because buyers often want to file their tax returns at different times or have available funds to purchase credits at different times.

In a more subtle change, it is clear that Paragraph 10 and 11 to the revised regulations also make the purchase of credits more flexible for the purchaser.  It was previously thought, for example, that if someone bought 2008 Georgia film credits in 2011 and wanted to report them on their 2010 return that the purchaser first had to report the credit on their amended 2008 return and amend their 2009 and 2010 Georgia tax returns to use the credit on their 2010 return.  It is now clear that the purchaser can simply report the credit directly on their 2010 return.  The revised regulation makes it clear that the purchaser can claim and report the purchased Georgia film credits in the tax return which is the same year as the credit was created or any of the five succeeding years.  This eliminates the need to file amended returns to simply carry forward purchased credits to a year where they are needed.

Once more, The Georgia Department of Revenue has acted in a very constructive manner with respect to the Georgia film credits.  The revised regulation both makes it easier for production companies to sell film credits and for purchasers of Georgia film credits to report those credits on their tax returns.

Court Boosts the Use of Low Income Housing Credits to All Taxpayers

Written by: on July 22, 2011

In a sweeping decision, the Fourth Circuit Court of Appeals, in Virginia Historical Tax Credit Fund v. Comm., (2011) ruled that the tax treatment of state low income housing credits for one year funds should be identical to that already afforded state film credits.  This broadens the appeal of state low income housing credits beyond taxpayers subject to the Alternative Minimum Tax (“AMT”) to all taxpayers.  Prior to this ruling, credits which were received as a flow-through from a partnership or corporation were not treated as a tax payment deductible as an itemized deduction for state taxes paid on the recipient’s income tax return.  While this didn’t matter to individuals in the AMT (where you received no benefit for state income taxes paid) it made these credits unattractive to taxpayers not in the AMT.   That all changed with this decision.

What the court specifically ruled was as follows.  This case involved investors investing in a partnership whose sole assets were one-year Virginia historic tax credits or partnership interests where the only expected benefit was the flow-through of Virginia historic tax credits.  The investors were redeemed out of the fund within 2-3 months of their admission and in the same calendar year as their admission to the fund based on put rights contained in their subscription documents.  The Court  accepted the status of the investors as partners in the partnership.  However, since most of the value of the partnership was attributable to the credits and there was no expectation of other economic benefits, the Court ruled that the investors (outside of their status as partners) purchased the credits for federal income tax purposes from the partnership.

The Court ruled that the credits were tangible property (just like film credits) and the purchaser and seller would treat them according.  The Service will say that the seller has a capital gain at that point and the buyer has a tangible asset.  The IRS will then take the position that the investor has a state income tax deduction in the year a tax return is filled using the credits equal to the full value of the credit as well as a capital gain equal to the difference in the face value of the credit and what the investor paid for the credit.

This judicial rationale should apply to any short-term partnership where the sole asset is a state tax credit.  Arguably, its scope could be far broader.  While the decision is only binding on the Fourth Circuit, since it also represents the IRS’ position, it is expected to ultimately be the rule in every jurisdiction.  Certainly, taxpayers who adopt this position will be safe from challenge by the IRS since it’s the IRS’s position.  Consequently, all taxpayers will now find state low income housing credits an attractive alternative to other state credits.  Obviously, please contact your personal accountant to see how this decision impacts your state income tax liability payment options.