Our client, Mr. Starstruck, is so enamored of Hollywood that, in 2019, he purchased $100,000 worth of the film production credit against his home state's income tax that had been earned by a production company for filming a movie in his home state.Unfortunately, he had a bad year and his 2019 home state income tax liability, before taking the credit, is only $40,000.The credit is not refundable, but he paid more than that $40,000 amount in estimated home state income tax in 2019, so using the credit to eliminate his home state liability will increase his refund by $40,000 over what it would have been otherwise.He paid $90,000 for the credit, and can sell some or all of it at any time for $.85 for each dollar of credit.

Mr. Starstruck has mot yet filed his federal and state 2019 returns, and so has not yet applied the credit. Mr. Starstruck is a cash basis taxpayer, who always itemizes deductions, but I do not know any other specific facts about his expected 2019 or 2020 state or federal tax items.

What are the federal income tax consequences for 2019 and 2020 if he uses $40,000 of the credit against his 2019 home state tax and receives the additional $40,000 refund in 2020?

What are the federal income tax consequences for 2020 if he sells some or all of the credit in 2020?

Mr. Starstruck is still enamored of Hollywood and intends to invest $800,000 in a film production in 2020 that will earn him another film production credit from his home state.The credit is 10% of the investment. This time, he will not be purchasing the credit, but rather will be one of the taxpayers who earns the credit for being an investor in a film being filmed in his home state.Also, the credit statute has been amended so that new credits are "refundable"; that is, if the credit earned for 2020 exceeds his 2020 home state liability, the excess will be "refunded" to him as if he had a negative income tax for the year.If he makes no estimated home state tax payments for 2020, and has a liability before credit of $50,000, but uses a credit of $80,000 , he will receive a $30,000 "refund" that will be paid in 2021.How will the issuance to him by the state of the new credit in 2020 be treated?How will use of the credit on his 2020 return (filed in 2021) to offset his $50,000 liability be treated?How will the $30,000 "refund" in 2021 be treated?