Tax Court Rules State Disaster Grant Includible in Income
In CF Headquarters Corporation v. Commissioner, 164 T.C. No. 5 (2025), the Tax Court ruled that a financial services firm must include in gross income state grant proceeds it received following the September 11, 2001, terrorist attacks. The taxpayer argued that the funds provided by New York State as part of an economic recovery program should be excluded under various provisions of the Internal Revenue Code.
The court disagreed on all counts. First, the proceeds were not excludable under §118, which allows for the exclusion of capital contributions, because the taxpayer failed to prove that the funds became a permanent part of its working capital. Second, the funds did not qualify as non-taxable gifts under §102, as amounts transferred from a government to one of its constituents are not considered gifts for tax purposes. Finally, the court found that §139, which allows individuals to exclude qualified disaster relief payments, does not apply to corporations, but only to individuals.
This holding serves as a reminder that government grants to businesses, even if tied to major disasters, are generally taxable unless a specific Internal Revenue Code provision provides for different treatment.
Have questions about the taxability of government grants for your business? Contact Frost Law today at (202) 618-1873 for a confidential consultation to discuss your specific situation.
