IRS Discusses Tax Treatment of State Tax Credits

On Nov. 25, the IRS released Chief Counsel Advice memorandum 201147024, which discusses the tax treatment of state tax credits. The memo applies to several transferable, nonrefundable Massachusetts tax credits, including low-income housing tax credits, historic tax credits, and brownfields tax credits. The memo specifically concerns the tax treatment of Massachusetts tax credits when the original recipient sells them to a third party. In the memo, the IRS says that the sale of certain Massachusetts tax credits is a taxable event.

Additionally, the IRS says that the original recipient has no tax cost basis in the tax credit and that the original recipient's gain on the sale of a nonrefundable credit is considered a capital gain. For the purchaser, basis for the tax credit is the cost of the tax credit, and the purchaser must recognize the apportioned gain, if the tax credit is purchased for less than its face value, when the tax credit is used to satisfy state tax liability.