The historic Laurel building in downtown St. Louis
ST. LOUIS — The Missouri Court of Appeals’ Eastern District has affirmed a judgment requiring the City of St. Louis collector of revenue to refund earnings-tax payments tied to federal historic tax credits associated with the rehabilitation of the historic Laurel building in downtown St. Louis.
The court concluded that the credits received by Laurel Apartments Master Tenant and Laurel Hotel Master Tenant were not earned income subject to the city’s earnings tax.
The July 21 decision affirmed a St. Louis Circuit Court ruling in favor of the two master-tenant entities.
The trial court ordered refunds of $93,803 for the apartments and $103,890.26 for the hotel. The appellate court rejected three arguments raised by the city and Gregory F.X. Daly, collector of revenue for the City of St. Louis.
The case concerned the 2012 rehabilitation of the historic Laurel building at Washington Avenue and Seventh Street.
The building owners completed a project that qualified for federal historic tax credits, which are intended to encourage rehabilitation of historic buildings by allowing owners a credit equal to 20 percent of qualified rehabilitation expenses.
The owners leased the building to Laurel Apartments Master Tenant and Laurel Hotel Master Tenant, then transferred the credits to those lessees under a provision of the Internal Revenue Code that permits credits from a rehabilitated building to be transferred to a master-tenant entity.
Laurel Apartments Master Tenant operated an apartment complex of roughly 205 apartments and some ground-floor retail space, while Laurel Hotel Master Tenant operated hotel space through Embassy Suites.
On Jan. 15, 2019, the apartment and hotel entities made estimated earnings-tax payments of $93,803 and $107,247, respectively.
They did not deduct the historic tax credits at that time.
In October 2019, however, they filed city earnings-tax returns treating the credits as unearned income and seeking refunds. The apartments requested $93,803, and the hotel requested $102,731.
The collector responded in November 2019 that the historic tax credits were taxable earned income. On copies of the returns included with the response letters, the collector wrote “item is taxable” under Schedule K in response to the entities’ historic-credit computation.
The collector’s recalculation found the apartments owed $231.21, while the hotel’s refund was reduced to $3,356.74. The hotel received and deposited that refund check.
Laurel filed an amended petition in April 2024 seeking a declaratory judgment that the collector’s application of the city earnings-tax ordinances to the credits exceeded the scope of Missouri’s earnings-tax enabling statute. The entities also sought the refunds.
The appellate court held that Laurel was not barred from relief for failing to pay its estimated taxes under protest.
The court said the statutory protest procedure applies to disputed tax assessments, but no disputed assessment existed when Laurel made its estimated payments.
City earnings taxes are self-reporting, the court noted, and Laurel did not learn of the city’s contrary position until the collector responded to its returns.
The court also found that the returns qualified as written applications for refunds under Missouri law.
The returns were written, stated the requested refund amounts and identified the basis for the claims, the court said.
The collector’s handwritten response demonstrated that he understood Laurel’s position and request.
Finally, the court found that the historic tax credits were not earned income under the state statute authorizing the city earnings tax.
The statute covers salaries, wages, commissions and other compensation earned, as well as net profits from businesses and other activities.
The court concluded the credits were neither salaries, wages or commissions nor part of the businesses’ profits. It also cited a federal regulation stating that income under the applicable Internal Revenue Code provision is not earned and is a notional item with no economic effect.
Judge James M. Dowd wrote the opinion. Presiding Judge Rebeca Navarro-McKelvey and Judge Gary M. Gaertner Jr. concurred.
Missouri Court of Appeals, Eastern District, case number: ED113753
