The Tax Court determined that state income tax credits are capital assets and the sale of such credits should not be taxed as ordinary income. However, the Court also ruled that the petitioners had no basis in the tax credits. Further Tax Court determined that the gain on the sales should be treated as short-term capital gains because the sales of the credits occurred just days after their acquisition.
Following a well-established precedent, the Tax Court determined that reductions in tax liabilities are not accessions to wealth. As a result, the sale of state income tax credits cannot be taxed as ordinary income. Additionally, all property that does not meet one of the eight exceptions under IRC § 1221 or the substitute for ordinary income doctrine are capital assets.