Federal class action lawsuit filed against Toyota for bait and switch tactics involving hybrid car tax credit

Effective January 1, 2006, a tax credit for taxpayers who buy hybrid cars became available. In 2004 and 2005, hybrid car buyers were limited to a $2,000 deduction. But, some hybrid car buyers have discovered that they cannot claim the credit on their tax return. That’s the problem that generated this lawsuit. The plaintiffs bought hybrid vehicles from Toyota that IRS had certified as eligible for the credit, but later found out that they couldn’t claim the full credit (and in some instances none of the credit) when their tax returns were prepared. They claim that Toyota promoted the sale of the vehicles by talking up the credit, but failed to tell them that they wouldn’t be able to claim the credit - the classic bait and switch.

Toyota manufactures several models that qualify buyers for the credit. The amount of the credit depends on the make and model of hybrid vehicle being purchased and the purchase date. Generally, the vehicle must be purchased after 2005 and before 2011, with the amount of the credit falling as the level of sales of qualified vehicles by a particular manufacturer rises. For example, a Toyota Prius qualified for a $3,150 credit if purchased before October 1, 2006, but only $1,575 after that date.

A lesser-known limitation on the credit is that taxpayers subject to the alternative minimum tax (AMT) may not be able to claim any of the credit on their tax returns. That is the basis of this lawsuit. The plaintiffs bought Toyota hybrids and claim that the tax credit is a selling point for Toyota hybrids - the Highlander Hybrid, Lexus RX400h and the Prius. The plaintiffs claim that Toyota advertised a $3,150 tax credit for the 2005 and 2006 Prius, helping it sell more than 212,000 hybrids in 2006. They allege that Toyota failed to tell hybrid buyers that the tax credit, because of the AMT, only applies to consumers with annual incomes of less than $80,000 and more than $750,000. The plaintiffs claim that they found out about the income restrictions only after they purchased the hybrids, basing their decisions to buy, at least in part, on the tax credit.

So, what is the AMT all about?  It dates back to the Tax Reform Act of 1969. Its goal was to prevent millionaires from exercising every possible credit and loophole, and thus entirely avoid paying income tax. But, because it was not adjusted for inflation, the AMT now affects a significant number of taxpayers. If present law isn’t changed, the AMT will impact an estimated 30 million taxpayers by 2010 (it caught about 3.5 million taxpayers in 2006). Concerning the hybrid vehicle tax credit, a taxpayer won’t be able to claim the full credit unless the taxpayer’s regular tax obligation exceeds their AMT obligation by at least that amount. For example, if a taxpayer’s regular tax liability is only $50 higher than the taxpayer’s AMT liability, the taxpayer doesn’t owe AMT, but the hybrid vehicle tax credit will be only $50.

How does the AMT computation work? Basically, a taxpayer computes their regular tax liability and then recomputes their tax liability without taking into account many of the deductions and credits that were used in determining their regular tax liability (including the hybrid vehicle tax credit). The three biggest items that result in AMT liability are state taxes, personal exemptions and the standard deduction. Also, interest from tax-exempt government bonds, incentive stock options and miscellaneous itemized deductions can create AMT problems.

  What type of taxpayer might be prone to AMT problems (and not be able to claim the hybrid vehicle credit in full or at all)?  Generally, the larger the taxpayer’s family, the more likely there will be an AMT problem. Homeowners with incomes between $150,000 and $400,000 probably trigger AMT. But, persons with incomes between $60,000 and $115,000 likely don’t have an AMT problem. Similarly, persons with incomes over $750,000 probably won’t have an AMT problem either - they pay enough in regular income tax to likely avoid the AMT. On the other hand, a family of four with income below the $60,000 range won’t be able to claim the vehicle credit either - they don’t have any regular tax liability. Single persons typically fare better than married persons - they can get the full credit with income in the $25,000-$115,000 range. There is a big marriage penalty in the AMT, and it is anti-family (the larger the family, the more likely there will be an AMT problem).   

A couple of other points about the hybrid vehicle tax credit. For taxpayers claiming multiple tax credits, the hybrid vehicle tax credit is taken after all the other credits (i.e., child care tax credit, mortgage credit, retirement savings credit) have been taken. Any tax liability remaining is the maximum dollar limit of the hybrid tax credit. Also, if the credit exceeds the taxpayer’s maximum dollar limit, the excess is not refundable and is lost - it can’t be carried over to another year.

It will be interesting to watch the case as it proceeds through the courts. Toyota claims it gave sufficient warning of the limitations of the credit due to the AMT. The real irony, though, is that the plaintiffs would have likely been better off under the previous tax incentive for hybrid vehicles - the deduction which applied through the end of 2005.

Note: The case is Girard v. Toyota Motor Sales U.S.A., Inc., No. 2:2007cv02281. Complaint filed (C.D. Cal. Apr. 5, 2007). The presiding judge is A. Howard Matz.