Following its ruling and logic in Tempel v. Commissioner, 136 T.C. No. 15 (2011) [refer to E-Flash 13:4], 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. Further the Tax Court again determined that the holding period for such credits begins upon receipt of the credit (i.e., after the donation of the conservation easement, not upon the acquisition of the real property underlying the conservation easement).
The Takeaway Relying on its recent precedent in Tempel, 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.