Background
The owners of the historic Laurel building in downtown St. Louis completed a qualifying rehabilitation in 2012 and transferred the resulting federal historic tax credits to their lessees, Laurel Apartments Master Tenant, LLC, and Laurel Hotel Master Tenant, LLC, under Internal Revenue Code section 50(d).
Laurel made estimated 2018 City earnings-tax payments without deducting the credits. Its later returns treated the credits as unearned income and requested refunds. The City’s Collector of Revenue instead deemed the credits taxable, substantially reduced the hotel’s refund, and determined that the apartment entity owed additional tax. Laurel sought declaratory relief and refunds, and the circuit court ruled in its favor after a bench trial.
The Court’s Holding
The Missouri Court of Appeals affirmed. It first held that Missouri’s pay-under-protest requirements did not apply because Laurel’s estimated payments were self-reported payments, not payments based on disputed tax assessments. When Laurel paid, the Collector had not yet imposed an assessment or taken a contrary position, so there was nothing for Laurel to protest.
The court also held that Laurel’s earnings-tax returns qualified as timely “written applications” for refunds under section 139.031.5. The written returns specified the requested refund amounts and explained their basis, and the Collector’s responses showed that he understood and rejected Laurel’s position.
Finally, the court held that the section 50(d) historic tax credits were not earned income taxable under section 92.111. They were neither compensation nor net profits from Laurel’s apartment or hotel operations, and federal tax guidance characterizes the corresponding section 50(d) income as an unearned, notional item without economic effect.
Key Takeaways
- A taxpayer need not comply with Missouri’s pay-under-protest procedure when making a self-reported estimated earnings-tax payment before the taxing authority issues a disputed assessment.
- A tax return can constitute a written refund application under section 139.031.5 when it identifies the refund amount and the basis for the request.
- Federal historic tax credits transferred to a master tenant under Internal Revenue Code section 50(d) are not earned income subject to the St. Louis earnings tax.
Why It Matters
The decision limits the City’s earnings tax to the compensation and business profits authorized by Missouri’s enabling statute. It also confirms that taxpayers may pursue the statutory refund remedy without having paid under protest when the dispute arose only after a self-reported payment.
For historic-rehabilitation transactions using master-tenant structures, the ruling establishes that section 50(d) credit income is not taxable as earnings merely because it appears in the entity’s federal tax reporting.