Cummings v. United States, 866 F. Supp. 2d 42

Plaintiffs William and Joyce Cummings filed suit in the District of Massachusetts on Dec 28, 2009 seeking federal income tax refunds for 2001–2003 related to deductions for real property taxes paid under a Massachusetts Tax Increment Financing (TIF) agreement for the Cummings Center.
BCPI developed the Cummings Center and entered a ten-year TIF with the City of Beverly on Dec 10, 1996, which exempted 100% of increased value for years 1–5 and 50% for years 6–10, contingent on satisfying job creation and investment requirements.
BCPT (the parent) owned BCPI and elected S-corp treatment so BCPT’s items passed through to William Cummings for federal tax purposes; BCPI paid the property taxes due for 2001–2003.
The taxpayers amended their 2001–2003 returns after discovering adjustments and claimed refunds for increased deductions due to the TIF exemption; IRS denied the refunds on Mar 18, 2009.
The court held the exempted amounts could not be treated as “taxes” under IRC § 164(a), so the deductions could not be taken; thus the United States’ motion for summary judgment should be granted and the Cummings’ motion denied.
Procedural posture: Magistrate judge’s Report and Recommendation recommended granting the United States’ summary judgment motions and entering judgment for the Government; district judge to review objections within 14 days.

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether TIF-exempted amounts are real property taxes under § 164(a)(1).	Cummings argues exempted taxes qualify as deductible real property taxes.	United States contends exempted amounts are not taxes because they are not assessed or imposed.	No; exempted amounts are not taxes under § 164(a)(1).
Whether, if exempted amounts are not taxes, they can be deducted as taxes or treated as income/capital contributions.	Cummings seeks deductions based on the exemption as if it were a tax benefit.	Exemption cannot be treated as taxes or as income/capital contributions.	Irrelevant; since not taxes, § 164(a) deductions fail as a matter of law.
Whether the TIF arrangement complies with Massachusetts law and federal tax treatment for purposes of § 164(a).	Plaintiffs rely on the general concept of deductible taxes.	TIF-exemptions cannot be taxed nor deducted under Massachusetts rules for § 164.	Massachusetts TIF exemptions cannot be deducted under § 164 as taxes.

Black v. Comm’r, 60 T.C. 108 (U.S. Tax Court 1973) (tax deductibility of real property taxes under § 164 depends on proper tax characterization)
Hynes v. Comm’r, 74 T.C. 1266 (U.S. Tax Court 1980) (deduction allowed only where taxes are imposed on the taxpayer)
Magruder v. Supplee, 316 U.S. 394 (Supreme Court 1942) (determines how to determine who is taxed by local property taxes)
Scott v. Harris, 550 U.S. 372 (U.S. 2007) (summary judgment standard—view record in light most favorable to nonmoving party)
Dobson v. Comm’r, 320 U.S. 489 (Supreme Court 1943) (uniform administration of decisions; respect to tax treatment)
Keating v. Secretary of Health and Human Services, 848 F.2d 271 (1st Cir. 1988) (rules governing objections to magistrate recommendations)