New York Couple Hit by Tax Benefit Rule

May 4, 2015

A New York couple who had received an enterprise zone credit for property taxes were required to pay taxes on the amount because of the tax benefit rule.

Yigal and Bonnie Elbaz were required to include in income $54,507 received in 2008 from a refund of New York state income taxes as a result of the tax benefit rule. The entities receiving the benefits were actually flow-through entities.

The Elbazes owned three different companies organized as flow-through entities – in which income passes on to the owners or investors.

They had a 50 percent interest in all three of the entities. Superflex Management, LLC, was treated as a partnership for federal income tax purposes. Superflex Realty, LLC, was treated as an LLC for federal income tax purposes. Superflex Ltd. is an S corporation for federal income tax purposes.

The state of New York provides tax benefits to businesses that invest in certain designated areas of the state. One of these benefits is the Qualified Empire Zone Enterprise credit for real property taxes.

In calculating this credit, the amount of property taxes paid or incurred by a business is a major factor. All three of the businesses owned by the Elbazes qualified for this credit.

The Elbazes’ three businesses deducted the share of property taxes that they had paid or incurred during 2007. These expenses decreased the amount of income allocated to them on their respective K-1 schedules. This is where the tax benefit comes in. The taxpayers report less income on their 1040 return as a result of the businesses having deducted the property taxes paid or incurred.

The $54,507 refund received in 2008 by the taxpayers was a direct result of the Qualified Empire Zone Enterprise credit. The credit was calculated using the property taxes paid or incurred by the three flow-through entities owned by the taxpayers.

Therefore, the $54,507 was the receipt of a refund of a previously deducted tax and was fundamentally inconsistent with the previous treatment to the extent that the Elbazes benefited from the decreased pass-through income. Thus, the $54,507 is considered to be taxable income (Yigal Elbaz and Bonnie Elbaz v. Commissioner, U.S. Tax Court, T.C. Memo 2015-49, March 17, 2015).