Where, in a sale of real estate, current taxes, which are a lien
on the property and for which the vendor is personally liable under
the State law, are apportioned, so that the vendee pays the part
proportionate to the fraction of the tax year ensuing after the
purchase, the payment is not deductible by the vendee in his income
tax return as "taxes paid" within the meaning of § 23(c) of the
Revenue Act of 1936, but is part of the purchase price. P.
316 U. S.
397.
123 F.2d 399 reversed.
Certiorari, 315 U.S. 794, to review the affirmance of a judgment
for a refund of income taxes, 36 F. Supp. 722.
MR. JUSTICE MURPHY delivered the opinion of the Court.
During the years 1936 and 1937, respondents purchased various
parcels of real estate in Baltimore, Maryland. In each instance,
the state and city taxes on the real estate for the current year
had not been paid at the time of
Page 316 U. S. 395
purchase. The various contracts provided for the apportionment
of these current real estate taxes, respondents agreeing to pay the
amount of the taxes, and the vendors undertaking to bear the burden
of that portion of the taxes arithmetically allocable to the
fraction of the year that had expired prior to the date of
purchase. Adjustments were accordingly made in the purchase prices
to reflect this arrangement.
Respondents paid the local authorities the full amounts
necessary to discharge the tax liability. In their 1936 and 1937
income tax returns, which were on the cash basis, they deducted
that portion of those taxes "allocable" to the periods after
purchase. The Commissioner of Internal Revenue ruled that the
amounts in question were not deductible under Section 23(c) of the
Revenue Act of 1936, 49 Stat. 1648, 1659, [
Footnote 1] but, instead, were merely part of the cost
of the properties. Accordingly, he made a deficiency assessment
which was paid under protest. This suit for refund followed. The
District Court held the amounts were deductible, [
Footnote 2] the Circuit Court of Appeals
affirmed [
Footnote 3] on the
authority of its previous decision in
Commissioner v. Rust's
Estate, 116 F.2d 636. We granted certiorari because of an
asserted conflict with
Lifson v. Commissioner, 98 F.2d
508.
The question for decision is whether the amounts apportioned by
respondents on the basis of the fractions of the taxable years
remaining after the several purchases constitute "taxes paid . . .
within the taxable year" within the
Page 316 U. S. 396
meaning of Section 23(c) of the Revenue Act of 1936, 49 Stat.
1648, 1659, and hence are deductible.
The guiding principle for determining whether a payment
satisfying a tax liability is a "tax paid" within the meaning of
Section 23(c) is furnished by the applicable Treasury regulation,
which states that, "[i]n general, taxes are deductible only by the
person upon whom they are imposed." [
Footnote 4]
See Colston v. Burnet, 61
App.D.C.192, 59 F.2d 867; Small v. Commissioner, 27 B.T.A. 1219;
Paul, Selected Studies in Federal Taxation, Second Series, p. 24.
Resort must be had here to the laws of Maryland and of the City of
Baltimore to determine upon whom the state and city real estate
taxes were imposed.
Walsh-McGuire Co. v. Commissioner, 97
F.2d 983, 984;
cf. Helvering v. Fuller, 310 U. S.
69,
310 U. S. 74-75,
and see Paul,
op. cit. supra, pp. 23, 24.
To illustrate concretely, the workings of the Maryland tax
system with respect to respondents' purchases the property bought
on May 10, 1936, may be taken as typical of all the other
transactions. The assessment date, or "date of finality," for both
state and city taxes was October 1, 1935. [
Footnote 5] These taxes were for the calendar year
1936, [
Footnote 6] and
Page 316 U. S. 397
became due and payable on January 1, 1936, [
Footnote 7] although the default date for city
taxes was not until July 1, 1936, and for state taxes January 1,
1937. [
Footnote 8] Both the
state and the city had liens against the property from the due
date, January 1, 1936. [
Footnote
9] And respondents' vendor became personally liable for these
taxes before the sale. An action of assumpsit could have been
brought against him for the taxes at any time after the due date.
[
Footnote 10] Had he sold
the property between October 1, 1935, and January 1, 1936, he
apparently would still have remained personally liable, and if he
had gone into bankruptcy after such sale, the taxing authorities
would have had a provable claim against him.
In re
Wells, 4 F. Supp.
329;
cf. City of Baltimore v. Perrin, 178 Md. 101,
107, 12 A.2d 261.
It is thus apparent that tax liens had attached against the
properties and that respondents' predecessors in title had become
personally liable for the taxes prior to any of the purchases. The
attachment of a lien for taxes against property before its sale has
been held to prohibit the vendee
Page 316 U. S. 398
from deducting as "taxes paid," amounts paid by him to discharge
this liability.
Lifson v. Commissioner, 98 F.2d 508;
Walsh-McGuire Co. v. Commissioner, 97 F.2d 983;
Merchants Bank Building Co. v. Helvering, 84 F.2d 478;
Helvering v. Missouri State Life Ins. Co., 78 F.2d 778,
781. A tax lien is an encumbrance upon the land, and payment,
subsequent to purchase, to discharge a preexisting lien is no more
the payment of a tax in any proper sense of the word than is a
payment to discharge any other encumbrance -- for instance, a
mortgage. It is true that respondents here could not have retained
the properties unless the taxes were paid, but it is also true that
they could not retain them without paying the purchase price. It is
no answer, therefore, to say that the property was burdened with
the taxes, and that respondents became obligated to pay them. There
was a burden, but it was contractually assumed. In discharging this
assumed obligation, respondents were not paying taxes imposed upon
them within the meaning of Section 23(c). For
"only the person owning the property at that time
[
i.e., when the tax lien attaches] is subjected to the
burden which the law imposes, and only the person who has been thus
subjected to the burden of the tax is entitled to a deduction for
paying it. Payment by a subsequent purchaser is not the discharge
of a burden which the law has placed upon him, but is actually, as
well as theoretically, a payment of purchase price; for, after the
lien attaches and the taxing authority becomes
pro tanto
an owner of an interest in the property, payment of the tax by a
purchaser is nothing but a part of the payment for unencumbered
title."
Judge Parker, dissenting in
Commissioner v. Rust's
Estate, 116 F.2d 636, 641.
Furthermore, respondents paid taxes for which their vendors were
personally liable. This was clearly the payment of a tax imposed
upon another, and therefore not deductible by respondents.
Cf.
Walsh-McGuire Co. v. Commissioner, 97 F.2d 983; Gatens
Investment Co. v.
Page 316 U. S. 399
Commissioner, 36 B.T.A. 309; Kohlsaat v. Commissioner, 40 B.T.A.
528.
And see Commissioner v. Coward, 110 F.2d 725,
727.
Thus, either a preexisting tax lien or personal liability for
the taxes on the part of a vendor is sufficient to foreclose a
subsequent purchaser, who pays the amount necessary to discharge
the tax liability, from deducting such payment as a "tax paid."
Where both lien and personal liability coincide, as here, there can
be no other conclusion than that the taxes were imposed on the
vendors. Respondents simply paid their vendors' taxes; they cannot
deduct the amounts or any portion thereof, paid to discharge
liabilities so firmly fixed against their predecessors in title by
the laws of Maryland.
The view of the court below that the parties' contractual
arrangement for apportionment of the tax burden was controlling is
untenable. [
Footnote 11]
Parties cannot change the incidence of local taxes by their
agreement. And it is misleading to speak of real estate taxes as
"applicable" to the fractional part of a tax period following
purchase. Such taxes are simply one form of raising revenue for the
support of government. They are not like rent, nor are they paid
for the privilege of occupying property for any given period of
time.
The judgment below is reversed.
[
Footnote 1]
"Sec. 23. DEDUCTIONS FROM GROSS INCOME."
"In computing net income, there shall be allowed as
deductions:"
"
* * * *"
"(c)
Taxes generally. Taxes paid or accrued within the
taxable year. . . ."
[
Footnote 2]
36 F. Supp. 722.
[
Footnote 3]
123 F.2d 399.
[
Footnote 4]
Article 23(c)-1 of Treasury Regulations 94, promulgated under
the Revenue Act of 1936. This is a regulation of longstanding.
See Treasury Regulations 86, promulgated under the Revenue
Act of 1934, Article 23(c)-1; Treasury Regulations 77, promulgated
under the Revenue Act of 1932, Article 151; Treasury Regulations
74, promulgated under the Revenue Act of 1928, Article 151;
Treasury Regulations 69, promulgated under the Revenue act of 1926,
Article 131; Treasury Regulations 65, promulgated under the Revenue
Act of 1924, Article 131.
[
Footnote 5]
Ann.Code of Maryland (Flack, 1939), Vol. 2, Art. 81, Sec. 26(b),
provides that state and local taxes shall have the same date of
finality as is provided by local law, and the date of finality for
Baltimore with respect to any tax year is October 1 of the
preceding year.
See Code, Public Local Laws of Maryland
(Flack, 1930), Art. 4, Sec. 40.
[
Footnote 6]
Taxes are imposed annually on a calendar year basis.
See Ann.Code of Maryland (Flack, 1939), Vol. 2, Art. 81,
Sec. 26(a) and (b); Code, Public Local Laws of Maryland (Flack,
1930), Art. 4, Sec. 40.
[
Footnote 7]
See Ann.Code of Maryland (Flack, 1939), Vol. 2, Art.
81, Sec. 46(b), which provides that state taxes are payable on
January 1. Sec. 46(a) provides that local taxes shall be payable in
accordance with local law, and, under local law, Baltimore taxes
are due on January 1. Code, Public Local Laws of Maryland (Flack,
1930), Art. 4, Sec. 40.
[
Footnote 8]
Code, Public Local Laws of Maryland (Flack, 1930), No. 4, Sec.
40; Ann.Code of Maryland (Flack, 1939) Vol. 2, Art. 81, Sec.
74.
[
Footnote 9]
Ann.Code of Maryland (Flack, 1939), Vol. 2, Art. 81, Sec.
72.
[
Footnote 10]
Ann.Code of Maryland (Flack, 1939), Vol. 2, Art. 81, Sec. 154.
See Frederick County Commissioners v. Clagett, 31 Md. 210;
Bassett v. Ocean City, 118 Md. 114, 119, 84 A. 262;
Free v. Greene, 175 Md. 36, 41, 199 A. 857.
[
Footnote 11]
The opinion below was a per curiam affirmance on the authority
of
Commissioner v. Rust's Estate, 116 F.2d 636. The Court
there relied on the fact that the parties had agreed to apportion
the tax obligation. 116 F.2d p. 640.