In a private letter ruling, the IRS determined a taxpayer/purchaser of transferable state tax credits issued by the state for a percentage of the costs incurred in renovating or rehabilitating certain historic structures, allowed against state income tax for the year that the renovated structure was placed in service and unused credits could be carried forward up to 10 years, was allowed an IRC § 164 deduction for state income taxes paid with the purchased credits.

The IRS noted that payment for the credit is not a payment of tax, nor a payment in lieu of tax, but reasoned that when purchased for value the credit is considered “property” in the purchaser’s hands, rather than a factor in the calculation of the purchaser’s tax due, and use of the credit to offset the taxpayer’s state income tax was analogous to the transfer of property (like cash) to the state in satisfaction of the purchaser’s tax liability.